March 2020
Issue 15 Volume 11
UK £4 Europe ¤5.35
www.internationalfinance.com
US $6
WHO WILL
BRING THE WORLD TO
AFRICA? Two African airlines and their vastly varying fates
UK neobanks: Hype or real challengers?
Is Oman really ready to levy VAT?
Coronavirus: Reducing supply chain risks
EGYPT
KUWAIT UAE
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AT YOUR SERVICE ACROSS THE REGION
MARCH 2020 VOLUME 11 ISSUE 15
EDITOR’S NOTE SAMUEL ABRAHAM EDITOR, INTERNATIONAL FINANCE
Finding success amid universal failure
W
hat are the chances that a government owned carrier established in 1945 is still in service and that too with a revenue of $4.2 billion and a profit before tax of $326 million in 2019? What are the chances that the airline could be an African airline, in a continent known for its dysfunctional state-owned airlines? This is the remarkable achievement of Ethiopian Airlines, which over the last decade has become Africa’s most successful airline. With Ethiopian Airlines announcing plans to build Africa’s largest and busiest airport near Addis Ababa at a cost of $5 billion as part of its Vision 2035, we find out why Ethiopian Airlines is now the airline that will take the world to Africa. With Revolut, the UK neobank, raising $500 million at a valuation of $5.5 billion, we look at whether there is something more to the hype around the UK neobanks and whether they are actually starting to threaten high street banks. Meanwhile, Oman is making early moves to join the VAT bandwagon in the Middle East – we analyse how prepared is the Sultanate’s taxation system to start levying VAT. The UAE is in early stages of trialling out niche healthtech technologies and we find out how public private collaborations are key to the success of the programme. Finally, the Coronavirus pandemic that originated in China threatens to create a global recession after wiping out almost four years of gains on the global stock markets. Earlier, the SARS epidemic and the H1N1 viral infection outbreak had their origins in China. The Coronavirus pandemic has thrown out of gear the supply chains of global consumer electronics and hitech manufacturers. Our experts analyse how global electronics and hitech companies can build resiliency into their supply chains given China’s status as the world’s top manufacturing hub and its vulnerability to epidemics.
sabraham@ifinancemag.com www.internationalfinance.com
International Finance | March 2020 | 3
INSIDE
IF MARCH 2020
58
IN CONVERSATION THE NEW 92 BITCOIN: SAFE HAVEN ASSET? Asia’s first bitcoin mutual fund tries to provide stability
DOMINATING AFRICAN SKIES African governments can make or break state carriers. Ethiopia makes its national airline a global leader BANKING
HEALTHCARE
ANALYSIS
12 Why Hong Kong will still be
Asia’s financial hub
96 Epidemics in China: How to
18
52
PHILIPPINES DIGITAL BANKING: WILL SUPER APPS JOIN THE FRAY?
WILL UAE’S SMART HEALTHCARE PROGRAMME SUCCEED?
Technology-led customer experiences are the key differentiator for neobanks
Public-private collaborations are key to healthcare innovation in the UAE
reduce supply chain risks
88
What should Oman do for a Smooth VAT implementation?
INSIGHT
40 UK neobanks a challenge
INTERNATIONAL FINANCE AWARDS
ENERGY
AWARDS 2019
International Finance Awards 2019 recognise organisational and leadership excellence in MEA and Asia Pacific
50 4 | March 2020 | International Finance
for high-street banks?
PRODUCT FOCUS
36 Alinma’s new fund to distribute
74 ARE MINI-GRIDS THE FUTURE OF ENERGY IN AFRICA? Africa's energy future will see mini-grids co-exist with the national power grids
periodic income
BUSINESS DOSSIER
68 MOHSIN HAIDER DARWISH:
A SUCCESS STORY IN OMAN
www.internationalfinance.com
THOUGHT LEADERSHIP ADRIAN CANNON BANKS NEED THE RIGHT TECH
34
Banking is dehumanising - but the right technology platform draws customers closer to banks
48
WAEL AL NAHEDH WEALTH MANAGERS NEED ACCOUNTABILITY
The current wealth management model needs to be fixed to create client value
82
ANGELICA DONATI PROPTECH MAKES USERS PIVOTAL
Without technology, the real estate industry loses its service oriented edge
103
TIM WAKEFORD RECESSION PROOF YOUR BUSINESS
A three-pronged strategy can help you not only cope with recession but also thrive
Director & Publisher Sunil Bhat Editor Samuel Abraham Editorial Adriana Coopens, Jessica Smith, Lacy De Schmidt, Pritam Bordoloi, Sangeetha Deepak Production Merlin Cruz Design & Layout Vikas Kapoor Web Developer Prashanth V Acharya Business Analysts Sid Nathan, Sarah Jones, Christy John, Gwen Morgan, Alex Carter, Janet George, Maria Mamtha, Henry James, Indra Kala, Mohammed Alam, Chris Harris, Rohit Samuel, Priscilla Salt, Peter Berkman Business Development Manager Steve Martin Business Development Sunny Shah, Sid Jain, Ryan Cooper Accounts Angela Mathews Registered Office INTERNATIONAL FINANCE is the trading name of INTERNATIONAL FINANCE Publications Ltd 843 Finchley Road, London, NW11 8NA Phone +44 (0) 208 123 9436
REGULAR EDITOR'S NOTE
03 08 06
Succeeding amid failures
NEWS Dubai introduces banking KYC blockchain
TRENDING IMF plans $50 billion corona fund
Fax +44 (0) 208 181 6550 Email info@ifinancemag.com Press Contact editor@ifinancemag.com Associate Office Zredhi Solutions Pvt. Ltd. 5th Floor, Sai Complex, #114/1, M G Road, Bengaluru 560001 Ph: +91-80-409901144 International Finance | March 2020 | 5
# TRENDING ECONOMY
Photo by By Todd Church
What is the cost of Brexit?
Are Sanders’ policies feasible?
If Bernie Sanders’ policies are to be fully implemented, it could have major repercussions for the American economy. Sanders’ proposals could reduce US’ real GDP and consumption rate by almost 24 percent. The stock market might fall more than 50 percent. Free healthcare would mean payroll tax rates would increase 14 percentage points. Labour employed and real capital stock would fall 9 percent. The federal budget would expand by 13.25 percent of baseline consumption, also resulting in a 16 drop in the employment of labour and capital.
A UK government report says Prime Minister Boris Johnson’s Brexit deal could reduce growth by up to 6.7 percent over 15 years. The cost of Brexit could be 30 times higher than what the UK is expecting to gain from his trade deal with the US. A US-UK trade deal would boost UK’s economy by £3.4 billion which means an economic growth of 0.1 to 0.2 percent over 10 to 15 years.
At a Glance Fastest-growing economies in Africa 2019 Ethiopia
9%
Ivory Coast
Jack Dorsey’s days numbered?
Saudi Arabia launches instant visa
Jack Dorsey, who is currently the chief executive at Twitter, also serves as the head of Square. However, investors from Wall Street want Dorsey to step down from his posts managing both the companies. Activist investor firm Elliot Management recently bought $1 billion worth of shares in Twitter, and the firm believes Jack Dorsey stepping down would lead to a rise in Twitter’s value on Wall Street. A year ago Elliot bought stakes in eBay and since then, eBay’s chief executive resigned from his post citing a difference of opinion with the board.
The kingdom of Saudi Arabia has launched an instant visa programme to help new businesses establish themselves in the region. Ahmed Al Rajhi, Minister of Labour and Social Development made the announcement last year. According to the minister, the new service will help young Saudis undertake startup projects, open small businesses and simultaneously boost economic growth. The ministry has also launched a visa programme to help established businesses in the kingdom grow and expand in global markets.
TECHNOLOGY
6 | March 2020 | International Finance
7%
Rwanda
8%
E CO N O M Y
Senegal
7%
Ghana
8% Kenya
6% Source: IMF
NEWS | INSIGHTS | UPDATES | DATA
Ones to Watch
ECONOMY
IMF plans $50 bn corona fund The International Monetary Fund (IMF) has announced a $50 billion coronavirus relief fund for countries affected by the coronavirus. The purpose of the fund is to help poor and middle-income countries with weak health systems counter the epidemic. IMF Managing Director, Kristalina Georgieva further revealed that IMF has a $1 trillion relief package ready which will be dispatched if the need arises. She added that for low-income countries, IMF has rapid-disbursing emergency financing of up to $10 billion. IMF also has the Catastrophe Containment and Relief Trust (CCRT) which proved to be an effective tool during the 2014 Ebola outbreak. Kristalina Georgieva, however, revealed that the CCRT grant currently has around $200 million, which is well short of its $1 billion capacity, and called
out its member countries to contribute so that it can be easily made available especially to vulnerable members in case of an emergency. “What we’re doing right now is reviewing country by country what are the financial needs, and engaging with these countries to make sure they are aware of this resource and we can immediately respond to them,” Georgieva said. The IMF has slashed its growth forecast for the global economy this year and pointed out that it won’t achieve the 2.9 percent growth it achieved in 2019.
By the Numbers Dubai’s Top-5 Developers by Off Plan Sales
Emaar
DONALD TRUMP PRESIDENT OF THE UNITED STATES The US Fed’s interest rate cuts failed to restore confidence in the markets. With his re-election bid at stake, Donald Trump admitted that the coronavirus outbreak could hit the US economy.
XI JIN PING GENERAL SECRETARY COMMUNIST PARTY OF CHINA The global media and analysts hold the Chinese leadership responsible for the coronavirus outbreak. But Xi Jin Ping says that China has gained a ‘positive momentum’ from the outbreak.
Q1 2019 – Q3 2019
7000
Units sold
Damac
1500
Azizi
1000
Dubai Properties
800
MAG
500 Source: Deloitte – REIDIN
SHAKTIKANTA DAS GOVERNOR OF RESERVE BANK OF INDIA India’s supreme court allowed banks to provide cryptocurrency services setting aside a ban on them by India’s central bank. How will India regulate cryptocurrencies now?
International Finance | March 2020 | 7 Source: Deloitte – REIDIN
IN THE NEWS
FINANCE
BANKING
INDUSTRY
TECHNOLOGY
Ethiopian Airlines is planning to spend an estimated $5 billion to build Africa’s largest airport. It is expected to become the busiest airport in Africa
Dubai International Financial Centre (DIFC) in collaboration with Mashreq Bank has launched the first blockchain-based KYC platform in the Middle East
Ethiopia to build Africa's largest airport Ethiopian Airlines is planning to spend an estimated $5 billion to build Africa’s largest airport. It is expected to become the busiest airport in Africa, with the capacity to handle more passengers than the OR Tambo airport in Johannesburg, South Africa. The new airport will be known as Absera Airport. The new airport is anticipated to accommodate nearly 100 million passengers each year. This project is reported to be bigger than Ethiopia’s marque national project – the Grand Ethiopian Renaissance Dam. Ethiopian Airlines’ Absera Airport aims to establish itself as the ‘airport city’ comprising duty-free shopping malls, hotels, and training centres. In fact, it aims to rival the new Istanbul Airport in terms of scale and capabilities. Construction of the new airport is slated for later this year. Ethiopian Airlines had achieved its target set under its ambitious Vision 2025 by 2018. With that, the airline is focused on its vision 2035 which includes plans to scale up and
8 | March 2020 | International Finance
build the new airport. Currently, Ethiopian Airlines is operating flights out of Addis Ababa Bole International Airport. The Absera Airport will sprawl across 13 square miles in the town of Bishoftu, which is located in the south east of Addis Ababa. Ethiopia has become a major hub for both business and leisure in recent years. Its aviation sector is predicted to grow 226 percent and the passenger journeys are expected to increase to 23.5 million annually by 2037, according to the International Air Transport Association (IATA). Currently, its air transport infrastructure supports 5.7 percent of the nation’s GDP. The Ethiopian government has recognised air transport as an important factor propelling the nation’s economic growth. State-owned Ethiopian Airlines seeks to compete with carriers in the Middle East such as Qatar Airways and Emirates. These carriers provide connectivity between Africa and Asia. For our in-depth feature on how Ethiopian became the dominant African airline turn to page 58
Dubai launches first-ever ME blockchain KYC Dubai International Financial Centre (DIFC) in collaboration with Mashreq Bank has launched the first blockchain-based KYC platform in the Middle East. The blockchain KYC platform has evolved from a proof of concept to a robust blockchain powered data sharing platform to accelerate the KYC process of business establishments in the region. The platform was developed by a fintech firm Norbloc, which was incubated by DIFC. Multinational law firm Gowling WLG drafted the legal agreements and Deloitte assisted Mashreq Bank with governance and programme management. The new data-sharing platform will enable licenced businesses and corporations to instantly open digital bank accounts by verifying their identity. This will be achieved through an internal blockchain. As it appears, DIFC’s recent framework changes are what helped Mashreq Bank to launch the platform in the region. DIFC’s legal framework lays emphasis on data protection.
It will continue to maintain practices in line with all EU regulations and the Organisation for Economic Co-operation and Development (OECD) guidelines. The blockchain powered KYC platform supports the UAE Blockchain Strategy 2021. Customers can seamlessly share their KYC data leading to enhanced transparency and security. Other blockchain-driven initiatives are underway as part of the new KYC platform. These include the Digital Silk Road and a document exchange platform known as the Bank Trust Network. Digital Silk Road is a smart platform developed by Dubai Chamber in cooperation with DP World and Dubai customs. According to DIFC, this blockchain platform is a result of the consortium formed between DIFC and Mashreq Bank last year. The consortium took a strategic decision to harness the power of blockchain technology to improve customer experience. The platform is now live and will accelerate the processes for new businesses in the Middle East, without any paperwork for KYC verification.
International Finance | March 2020 | 9
IN THE NEWS
FINANCE
BANKING
INDUSTRY
TECHNOLOGY
While the merger between Indonesia-based Gojek and Singapore-based Grab has potential, it might have to overcome some major challenges for the deal to be successful
Vodacom plans to launch the next-generation 5G mobile services in South Africa using a network developed by Liquid Telecom
Photo credit: sia.nikkei.com/
Grab-Gojek tie up challenged
Beginning of airline collapses?
While the merger between Indonesia-based Gojek and Singapore-based Grab has potential, it might have to overcome some major challenges for the deal to be successful. A merger between the two would create the world's sixth-largest unicorn, however, cutthroat competition in different sectors among the two Southeast Asian firms could prove to be a hurdle. Some believe the cultures of both companies are very different too. A merger of such size would attract the attention of regulators as well in different sector and the merger could prove to be a costly affair. Also, media houses reported that while Gojek wants a 50 percent stake in the merged entity, Grab, on the other hand, wants to hold a controlling stake.
Flybe, which is owned by Connect Airways, has collapsed two months after the government announced a rescue deal. The airline has entered administration and all of its flights were cancelled. The airline, which was already in distress, faced the heat of the Covid-19 outbreak in China, which has impacted the global aviation sector. The UK Civil Aviation Authority (CAA) made the announcement and asked all its passengers to not travel to the airports. In a statement, its chief executive Mark Anderson also said that the carrier made every possible attempt to fight the crisis but the financial hurdles proved to be too challenging. The carrier is ending its operations after being active for nearly four decades.
Fall of major stock market indices on March 9
10 | March 2020 | International Finance
Italy
Germany
Saudi Arabia
UK
Australia
-10%
-7%
-7%
-7%
-7%
South Africa
India
Japan
South Korea
China
-6%
-5%
-5%
-4%
-3%
Vodacom 5G comes to South Africa
UAE banks chase Indian defaulters
Vodacom plans to launch the next-generation 5G mobile services in South Africa using a network developed by Liquid Telecom. Both telecom companies will capitalise on Liquid’s legacy spectrum assignment in the 3.5GHz band. Liquid Telecom is building a wholesale 5G network that would be available from early 2020. Vodacom is expected to manage the 5G network on behalf of Liquid Telecom. Africa’s telecom operators Vodacom and MTN have been carrying out pilot projects for 5G networks. Vodacom has also revised its agreement with Rain for 4G/LTE coverage to further expand its 4G capacity. Recently, Liquid launched affordable, superfast broadband in Rwanda known as Liquid Home.
Leading UAE banks are planning to take legal action against Indian loan defaulters in India. Several businessmen and salaried employees have left the UAE without repaying loans as a result of the strained small and medium enterprise (SME) sector. This has led to business closures and loss of jobs. The estimated amount of loans held by all Indian loan defaulters in the UAE reached Dh26 billion over the last five years. Majority of the defaults are attributed to business entities – accounting for more than 75 percent of the money owed to the UAE banks. The remaining percentage is made up of personal loans, mortgages, credit cards and auto loans. The UAE banks will file new cases against the defualters and enforce the UAE courts' verdicts in India.
Gold price in US dollar per troy ounce in last six months
Current price
$1665
Six-month high
$1703
Six-month low
Change
$1446 $171–11.5%
As of March 10, 2020
International Finance | March 2020 | 11
BANKING AND FINANCE
ANALYSIS
FINANCE HONG KONG FINANCIAL CENTRE
Hong Kong is China’s window to the wider world and its goose that lays golden eggs – China won’t risk losing it
Hong Kong will still be Asia's financial hub SANGEETHA DEEPAK
The recent protests in Hong Kong opposing a proposed law that would allow extradition to mainland China have plunged the region into its first recession in a decade. Hong Kong’s economy shrank 3.2 percent in the third quarter of 2019, after a contraction of 0.5 percent in the second quarter. The immediate aftermath The value of the protests and their of bilateral economic impact has set the stage for a series of questions trade between among financial observers. Hong Kong Will Hong Kong remain a and the Asean global financial hub? How countries will the protests impact increased by Hong Kong’s business role in 72 percent. As greater bay area? What will of 2016, there be the future of China-Hong were 547 Asean Kong relations? firms in Hong The common belief is Kong and 54 that Hong Kong has lost to of them were Singapore on the business headquartered front after it saw a major in the region escalation in violence. This itself is because the perception of the heightening risks to businessmen and investors, especially with the arrest of a Citigroup banker, an employee at BNP Paribas quitting the company after showing support to protestors on social media, and the assault of a JP Morgan banker outside the
12 | March 2020 | International Finance
company’s office. Also, the disruption of transport and normal day- to-day business functions have further stoked fear among the business class. Truth be told, Hong Kong’s highly integrated network of firms and financiers have pulled through wars and economic depression in the past. And it’s the tenacity and survival skills that make the region irreplaceable in the Asia-Pacific. The Hang Seng Index was up four percent for 2019 — and the IPO market remained resilient despite the political distress. In September, Anheuser-Busch InBev raised $5 billion in the second biggest IPO of the year on the Hong Kong Stock Exchange. That in turn has positioned the Hong Kong Stock Exchange the third largest in capital raised in the world after the New York Stock Exchange and the Nasdaq.
China’s response to Hong Kong’s water revolution After months of protests, China’s government signalled a forceful intervention that was anticipated to further drive political tensions in the Chinese territory. The National People’s Congress warned that it would use its power to overrule the territory’s judiciary. Although Chinese officials perceive the protestors as extremists — a large part of the crisis has been left to be handled by Hong Kong’s leader Carrie Lam. But to tighten control, China’s leader Xi Jinping
ANALYSIS RUSSIAN STOCK MARKET
in a meeting asserted that the first step toward the political crisis is to stop violence and ‘restore order’. For months, Hong Kong protestors have fought strongly demanding that the Chinese government to allow the region to enjoy its freedom that was granted after the end of British colonisation. Also, China has promised to take action against the US if it continues to show support for protestors in Hong Kong. This move stemmed from President Trump signing the Human Rights and Democracy Act into law. In essence, the act allows the US to monitor Beijing’s actions in Hong Kong and to ensure the latter’s autonomy is maintained. However, fears of Chinese military action and a US-China confrontation over Hong Kong amid the trade war have since then dissipated.
Hong Kong has become ever more essential to the Asia-Pacific In the 1970s, Hong Kong slowly evolved into a financial and trade centre in the Asia-Pacific and further strengthened its position in the region after returning to China. Its geographic proximity and long-term bilateral cooperation with Southeast Asia gives Hong Kong an irreplaceable advantage compared to other economies in the world. In the last decade, the value of bilateral trade between Hong Kong and the Asean countries increased by 72 percent. As of 2016, there were 547 Asean firms in Hong Kong and 54 of them
Major recent IPOs in Hong Kong Alibaba
$11 billion Anheuser-Busch InBev
$5 billion were headquartered in the region itself, observed the Census and Statistics Department of the Hong Kong Special Administrative Region. According to Li Xingyu, who is an executive director of the Socio-Economic Research Centre at the Associated Chinese Chambers of Commerce and Industry of Malaysia, Hong Kong shows the strongest international competitiveness in finance. It appears that investors in Hong Kong have created several job opportunities and generated heavy tax revenue in the 10 Asean countries. One of the most significant factors that highlight Hong Kong’s financial relevance to the Asia-Pacific is the fact that it is only a global finacial centre — and not a nation.
International Finance | March 2020 | 13
BANKING AND FINANCE
ANALYSIS
FINANCE HONG KONG FINANCIAL CENTRE
This means the ongoing protests might only undermine Hong Kong’s total economic output but not affect its financial ecosystem comprising firms, financiers, business services and regional corporate management. That in turn clearly suggests that the status of Hong Kong as a preeminent financial centre is likely to remain secure. Abhineet Kaul, who is the Senior Director of Public Sector and Government at Frost and Sullivan (Asia Pacific), said in an interview with International Finance, “Hong Kong has been the most vibrant market to raise capital due to strong fundamentals and differential regulatory regime as compared to the mainland. Although the political turmoil has created some spill overs to Singapore, the geographical location and presence of a dynamic financial industry will ensure Hong Kong will continue to be the primary market in East Asia.” Although many reports have been doing the rounds that the crisis will spoil Hong Kong’s appeal as a financial hub — it remains strongly protected by four factors. These factors include its ease of doing business, its link between China and the rest of the world, the rule of law, and the lack of other alternatives. On the positive side, the region’s financial markets are drawing confidence from the Chinese ecommerce firm Alibaba’s multibillion dollar public offering. Alibaba raised $11 billion through its share sale in Hong Kong — making it the year’s biggest listing so far. This implies that investors and firms are as of now not deeply disturbed by the current political crisis. “It will be
14 | March 2020 | International Finance
Top Global Stock Exchanges by number of IPOs In the period 1-1-2020 to 2-20-2020
22 Star Market 18 Nasdaq 15 Indonesia Stock Exchange 15 Shanghai 8 New York 6 Shenzhen ChiNext 5 Australia 5 Canadian National Stock Exchange 4 Mumbai (Bombay Stock Exchange) 4 Hong Kong (Mainboard)
Source: Refinitiv
interesting to keep an eye on future listings in Hong Kong to understand the real impact,” Kaul says. It is worth remembering that Hong Kong’s famed one country two systems model is a stronghold because it allows it to have a high degree of autonomy from China. And the reasons why reports repeatedly state that Hong Kong is gradually losing its financial centre status is due the potential risks to the high value of its stock market that is worth 12 times its gross domestic product. That said, there is a certain level of threat to its status as a financial hub with rivals such as Singapore, Tokyo
and Shanghai showing noticeable trends of gaining in terms of the growth of financial firms. With regards to banking, however, Hong Kong is still the single largest market for Standard Chartered, accounting for nearly a quarter of the bank’s $15 billion operating income in 2018. Also, it is the fourth largest market for Citigroup after the US, the UK and Mexico.
Hong Kong is China’s ‘window to global capital’ China’s centralised authority and heavy financial dependence on Hong Kong is what encouraged Xi
ANALYSIS HONG KONG FINANCIAL CENTRE
“We don’t expect China to overly rely on Hong Kong. With AIIB and the OBOR initiatives, China has diversified the geographical locations of its ambition of yuan being seen as a parallel to US dollar in international markets” Abhineet Kaul
Jinping to adopt a ‘take all approach’. Hong Kong is extremely important to China for two reasons. First, although China has an extensive capital control — Hong Kong is one of the biggest markets for equity and debt financing. The second reason is that even with Hong Kong’s economy size equivalent to 2.7 percent of China’s it outweighs Chinese cities as a financial centre due to its globalised financial and legal systems. And this is essential to China’s development. “While the development of Hong Kong has been tied to the Greater Bay Area over the last 22 years, we
expect the current political turmoil to create short-term diversions between the development stories,” Kaul says. “Over the longer term, the development narrative of Hong Kong and the Greater Bay Area are expected to converge again, as the fundamental reality and business linkages are difficult to replicate.” In terms of trade, Hong Kong’s port continues to handle a major portion of China’s exports and imports. In 2017, data showed that 90 percent of annual transit trade carried out by Southeast Asia through Hong Kong eventually reached the mainland. In 2018, Hong Kong became China’s largest trade partner with a market share of more than 20 percent surpassing the US at 17 percent. According to China’s Commerce Ministry, Hong Kong is vital to China’s long-term ambition to make the yuan compete with the US dollar, making it a widely-used international currency. But in Kaul’s view, “Due to political reasons, we don’t expect China to overly rely on Hong Kong. Anyway, with AIIB and the OBOR initiatives, China has diversified the geographical locations of its ambition of yuan being seen as a parallel to US dollar in international markets.” China’s ambitions for its currency is critical to its strategy to overtake the US as an economic power. Behind the scenes, China will not allow Hong Kong’s internal security to be affected. The Chinese government has issued a warning that it will analyse foreign financial firms that might be considering to relocate to another Asian city away from Hong Kong. Consequently,
those firms would lose any financial opportunities the region might bring to them in the future. Likewise, the Hong Kong government is responsible to maintain the one country two systems framework — and China will fully back the Hong Kong government’s efforts. The Chinese officials remain clear that Shanghai is their domestic international financial centre and Hong Kong is their global centre. Kaul points out that with regard to Shanghai, competitiveness depends on whether the mainland relaxes its regulatory regime. “At least till the year 2047, Hong Kong is expected to have an edge over Shanghai in terms of capital and financial markets,” he adds.
Why Hong Kong will remain resilient despite protests There is no equal alternative to Hong Kong in the Asia-Pacific. Tokyo is a global financial hub for Japanese and foreign firms eyeing the country’s market, but foreign financial firms including those in Asia have rarely used Tokyo as their platform for business development or raising capital. But some financiers consider Singapore a viable alternative to Hong Kong. In this context, it is important to note that Singapore’s financial firms largely focus on Southeast Asia and not Asia-Pacific region as a whole. With that, its network reach becomes weak in Asia. But it might be true that Singapore stands to benefit from Hong Kong’s recent troubles, primarily because they are both commerce-friendly. Singapore ranks second and Hong
International Finance | March 2020 | 15
BANKING AND FINANCE
ANALYSIS
FINANCE HONG KONG FINANCIAL CENTRE
Kong fourth in the World Bank’s ranking of 190 countries for the ease of doing business. The high-net worth individuals in Hong Kong and China have found Singapore to be attractive. In 2017, Chinese property buyers acquired more than 1,000 private homes in Singapore despite a 20 percent stamp duty charge to foreigners. In the big picture, however, one of the chief reasons Hong Kong should retain its status as the primary financial hub of Asia into the future is because of the “presence of an experienced financial or professional services talent pool, inertia in shifting regional headquarters in the short-term, and good liquidity at Hong Kong Exchange,” Kaul explains. In fact, some of the main financial firms and financiers who manage capital exchange in AsiaPacific between the region and the rest of the world are housed in Hong Kong — strengthening its position over its rivals.
The future of Hong Kong in the financial world is intact Rising concerns about Hong Kong losing its status as a global financial centre are misconstrued. On the contrary, Kual says advantages stemming from Hong Kong’s world-class legal and financial systems will continue into the future. “Hong Kong has been an attractive hub for talent from across the globe offering professional services such as legal, audit, and financial services. The restrictions in the mainland markets would mean that Hong Kong will continue to retain its prominence in these fields,” he explains.
16 | March 2020 | International Finance
“Hong Kong has been an attractive hub for talent from across the globe offering professional services such as legal, audit, and financial services. The restrictions in the mainland markets would mean that Hong Kong will continue to retain its prominence in these fields” Abhineet Kaul
Hong Kong’s financial ecosystem is vital to China’s access to financial markets around the world — and Chinese leaders will do everything in their power to secure the region’s position despite their denunciations. This is because Hong Kong has played a significant financial role for China over the last two decades. But the main question is whether Hong Kong will retain its role as financial firms and markets on the mainland evolve? Hong Kong is a major renmibi hub and financial centre but rivals such as Singapore, Sydney and other places have renmibi deals. Despite that, Kaul says “Hong Kong will remain a key hub for relationships between China and
the developed world in the West and in Asia.” Focusing on the regulatory ecosystem to remain competitive is extremely important to Hong Kong. Kaul explains that “One big area where Hong Kong lags behind Singapore and Shanghai is the lack of entrepreneurial ecosystem related to digital solutions in the financial industry,” — meaning that the region will have to innovate on new fintech solution approaches to maintain its relevance despite China’s backing.
editor@ifinancemag.com
International Finance | March 2020 | 17
BANKING AND FINANCE
FEATURE BANKING
PHILIPPINES DIGITAL BANKING
How long until the super apps join in? Experts predict fintech volume in Mexico to PRITAM BORDOLOI reach $68 billion by 2022 Southeast Asia’s digital banking wave has reached the Philippines and the super apps of the region are expected to enter the fray at some stage – the market is huge
N
eobanks or digital-only banks are being licenced in many places in Southeast Asia including Singapore and Hong Kong, and digital only banks have seen creditable success in South Korea. Malaysia and Philippines have announced their plans to licence digital only banks. Outside of Hong Kong and Singapore, Southeast Asia’s advantage is a large unbanked population which is also very digitally savvy. Digital banking in the sense of digitally delivered banking services already has a strong uptake in the region. Philippines stands out among these places because surveys carried out by
18 | March 2020 | International Finance
different entities have revealed that Philippines had, until recently, the lowest digital-banking penetration among all the Southeast Asian countries. So what do neobanks in the Philippines need to do to succeed? Have the new entrants and the incumbents got the fundamentals right? How will the digital banking landscape in the Philippines look like in the next five to ten years?
FEATURE PHILIPPINES DIGITAL BANKING
Traditional banks have an early mover advantage in Philippines digital banking Many traditional banks in the Philippines, both domestic and overseas, have made a smooth transition to digital banking, giving them an early mover advantage. Bangkokbased CIMB has established itself as one of the top digital banks in the Philippines over a short period of time. CIMB signed up over a million Filipinos to its all-digital mobile banking platform in its first 10 months of operation. This also established CIMB Bank Philippines as the fastest-
growing all-digital bank in the Asean region. The CIMB app utilises advanced facial recognition technology that allows a customer to open a bank account digitally under 10 minutes. Now, customers can carry out any banking transactions through their smartphone at any time. What CIMB brought to the table in digital banking in the Philippines seems to be differentiated technology-based customer experience. CIMB
International Finance | March 2020 | 19
BANKING AND FINANCE
FEATURE BANKING
has partnered with Jumio, a leading US-based identity verification company that provides card and ID scanning and validation products for mobile and web transactions. Jumio’s AI-driven digital identity verification solutions helps CIMB Bank PH’s mobile app integrate Jumio’s identity verification technology, leveraging informed AI, machine learning, certified liveness detection and face-based biometrics to provide a safe, secure, and fast digital onboarding experience that typically takes less than five minutes. Other overseas banks such as Malaysia’s MayBank and ING have also established digital banking units in the Philippines. MayBank launched the first digital-only savings account facility in the Philippines in 2018, as a part of its Maybank M.O.V.E (Mobile Optimised Virtual Experiences) programme. The product, which is called iSave, allows customers to open a digital savings account through the MayBank2U PH app. Similarly, Amsterdam headquartered ING, which has been operating in the Philippines as a wholesale bank for more than two decades, also launched a digital banking platform in the Philippines last year. The platform, which went online in June 1, 2019, offers an interest rate of 2.5 percent per annum, about 10 times higher than the rates typically offered by other savings products in the market. ING also became the first bank to be authorised by the Bangko Sentral ng Pilipinas (BSP) to allow end-to-end electronic on boarding of the customers through the mobile phone, by using the latest in facial recognition technology. Other notable players in the digital banking landscape in the Philippines include UnionBank, which opened the Philippines’ first fully
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PHILIPPINES DIGITAL BANKING
digital banking branch called The Ark. It enables customers to perform bank transactions using touchscreen devices.
The first neobanks use technology as the lynch pin Philippines is preparing for the introduction of its first set of neobanks or digital-only banks. Even though these digital-only banks are much smaller in size and do not have legacy data, their product offering often prove to be different from those of the traditional banks and they often rely on technology to compete with the traditional banks. Earlier this year, Singapore-based digital-only bank Tonik announced that it has acquired an operational licence from the Bangko Sentral ng Pilipinas (BSP), in order to offer financial services in the Philippines.
The bank is expected to go online this year and it will focus on retail deposits and consumer loans. In the month of February 2020, Tonik raised around $6 million in a funding round that saw participation from the likes of venture capital firm Insignia Ventures Partners and Credence Partners. Reportedly, the Philippines currently has a $140 billion retail deposit market, and also a $100 billion unsecured consumer lending opportunity. This provides a sizeable opportunity for digital banks such as Tonik. In the coming years, the probability of new neobanks or digital-only banks causing major digital disruption in the Philippines banking sector is quite high. Besides Tonik, Rizal Commercial Banking Corporation (RCBC) is also planning to set up a wholly owned rural
FEATURE PHILIPPINES DIGITAL BANKING
Digital banking prospects in the Philippines in a nutshell
70%
50%
of the country’s adult population is still unbanked
of existing bank customers would be willing to switch their deposits to an alldigital bank
bank that will engage in digital banking in the Philippines. Also, state-owned Overseas Filipino Bank — a subsidiary of the Land Bank of the Philippines is planning to become a fully digital bank in the Philippines. The bank is awaiting a licence from the central bank. According to its spokesperson Cecilia C. Borromeo, the digital bank will go online in June 2020.
overcome the issue of identity theft, which is still the largest fraud practiced as it is very hard to prove that an ID document captured through a camera is 100 percent genuine. Frederic Ho, who serves as the vice president at Jumio Asia Pacific told International Finance “Jumio integrated the world’s first iBeta Level 1 and Level 2 certified anti-spoofing technology into its online identity verification suite to capture and process the user’s face images taken from any 2D smartphone camera or webcam. These liveness detection algorithms must observe so many concurrent human traits that no spoof can recreate them all at once. This enables banks to better ensure that users are who they claim to be when new accounts are created and keep cybercriminals at bay."
What value proposition do Philippines digital banks offer? The ability to integrate technology to provide seamless banking services to customers that are accessible from the comfort of their home and at any time is what makes digital banks in the Philippines stand out from the rest of the banks. For example, CIMB is leveraging Jumio’s 3D mapping technology to
Frederic Ho said successful digital banks are delivering a differentiated onboarding process — often delivered through smartphone-based apps, as in the case of CIMB. Since they’re 100 percent digital, they put a much greater emphasis on the customer experience and build every online screen with the consumer in mind. This helps the digital banks steal market share from the incumbents. To launch its digital-only bank in the Philippines, Tonik has partnered with Finastra, a London-based financial technology company. Anand Subbaraman, General Manager, Digital and Retail Banking Products at Finastra told International Finance, “Finastra’s Fusion Essence Cloud meets strict cybersecurity compliance standards and regulations across markets. Tonik’s solution is also deployed out of the Microsoft Azure Southeast Asia Region (Singapore data centre), which is a highly-trusted platform allowing for both low latency and data residency as well as a high degree of security. Tonik’s rollout of the platform will enable it to bring the benefits of innovative and secure digital banking to customers in the Philippines.” Finastra’s technology is expected to help Tonik launch its retail deposit and customer loans services in the Philippines with a high degree of agility and efficiency. After launch, Tonik will also be able to use the solution’s in-built analytics capabilities to better understand customers’ digital banking needs in and introduce new products that will help customers better, based on that data. Anand Subbaraman revealed that in time, the bank will also have access to further innovation through Finastra’s signature FusionFabric.cloud solution.
International Finance | March 2020 | 21
BANKING AND FINANCE
FEATURE BANKING
PHILIPPINES DIGITAL BANKING
These combined capabilities will help power Tonik create differentiated products that create value for consumers in the market. Varun Mittal the Emerging Markets Fintech Leader at EY believes that the unique value propositions of digital banks are convenience, flexibility and trust. If a digital-only bank in the Philippines can offer these to the customers, it is very unlikely that they won’t be successful in the country.
Predominance of cash: A habit to change for digital banks A Mckinsey survey revealed that although smartphone and Internet penetration in the Philippines is similar when compared to other developing Southeast Asian countries, only a small section of the Filipinos had made the transition to digital banking. According to a study carried out by Asian Banker Research, 17 percent of Filipinos still prefer walking into a branch for a task as trivial as checking their account balances. This reluctance of Filipinos to use digital banking could be due to the lack of a compelling digital user experience that would encourage them to stop visiting branches to even carry out important financial transactions. Andrew Gilder, who is an Assurance Partner at Ernst and Young, based in Singapore, and an also EY Asia-Pacific Banking and Capital Markets Sector Leader, believes it has something to do with the country’s geography. He told International Finance, “Historically, the physical geography of the Philippines (being an archipelago made up of more than 7,500 islands) has hampered not only the expansion of traditional banking, but also mobile and internet network coverage. The Philippines has one of the lowest levels of financial inclusion in the
22 | March 2020 | International Finance
Asean region, with 70 percent of its adult population still unbanked.” One of the major reasons why a customer decides to put his money into the bank is it offers security. An average man in the Philippines puts money into the traditional banks because it provides security and results in trust over a period of time. Even though people across the globe are embracing the idea of a digital bank, many in Philippines still prefer a bank in brick and mortar form. Andrew Gilder of EY told International Finance, “Financial inclusion must precede digitisation. For example, to make an electronic payment, there must be both an originating and
destination account. While banks have been creating digital propositions, they are having a hard time converting consumers and merchants to the new products. Even now, with internet and social media use soaring in metropolitan areas like Manila, many customers still prefer face-to-face transactions and paying with physical cash.” The new entrants will face competition from traditional banks that enter the digital banking scene. While digital banks are relatively new and integrate technology to offer better products and services, traditional banks have existed for a longer period of time. Over this period, these banks have built
FEATURE PHILIPPINES DIGITAL BANKING
a brand, have increased their customer base substantially and accumulated huge amount of data about the banking system. These banks also have better capital compared to neobanks who enter the market in search of funds to run their business. Also, other reasons for the slower uptake up of digital banking include unclear profit models and a lack of compelling digital banking propositions.
What will determine the success of digital banks? The very fact that a majority of the Filipinos are unbanked provides a huge opportunity for the digital banks. For them to prosper in the country, it
needs the full-fledged support of the government. What the government in the Philippines needs to do is create an ecosystem for the digital banks to function seamlessly and not burden them with regulations and bureaucracies. A success of a digital bank depends a lot on external factors. For example, a digital-only bank would need favourable conditions for it to carry out banking practices such as KYC and credit scoring digitally. Such banks must have the freedom to pull customer data from social media or their utility bills in order to carry out their banking functions digitally. Also, according to an EY research, improving financial inclusion across AsiaPacific offers potential $5 billion uplift in personal banking revenues and a $83 billion potential uplift in MSME banking revenues. Andrew Gilder said, “For neobanks that can combine compelling, attractively-priced customer propositions with efficient and relatively low-cost operating models, the Philippines’ large unbanked population provides a significant growth opportunity.” He also believes the growth of a successful digital banking sector requires a continued commitment to providing a regulatory environment that supports financial services innovation and encourages the development of a vibrant start-up community. He said, “To ensure long term success, neobanks must focus on offering highly relevant and simple financial solutions that meet the specific needs of their customers, at an affordable cost. Among other things, this calls for the innovative use of new data sources (such as social media profiles) to provide greater behavioural analysis.” With regard to developing user’s trust in digital banks in the Philippines, Frederic Ho told International Finance,
“Trust needs to be at the heart of financial services, and banks like CIMB need to ensure that they are protecting their ecosystems and guarding against online fraud and account takeovers. This starts at the account opening stage and is where identity verification technologies have the potential to enable digital banks in the Philippines to break the trust barrier. Trust is a two-way street. Banks need to trust that new remote users are who they claim to be so they don’t inadvertently onboard bad actors, and consumers need to trust that the banks will protect their assets and personal information.” Many banks are starting to increasingly use biometric-based authentication to protect accounts, especially for high-risk transactions such as wire transfers or password resets. By requiring some form of biometric authentication, banks can be more certain that the person authorising the transaction is who they claim to be. The use of such technologies can help digital banks bring in the trust factor in digital banks in the Philippines. Varun Mittal, the EY Global Emerging Markets FinTech Leader believes for a digital bank to succeed anywhere, there are a couple of building blocks. If a bank only wants to serve a customer digitally, then they need digital know-your-customer (KYC) and the ability to do digital credit scoring. The building blocks are identity, service, and logistics to be able to deliver the banking needs. These factors need to be fulfilled for a digital bank to successful. Another important element to consider is a supportive ecosystem, where the different regulatory agencies in the country are supportive toward digital banking as well.
International Finance | March 2020 | 23
BANKING AND FINANCE
FEATURE BANKING
PHILIPPINES DIGITAL BANKING
Also, since digital-only banks don’t have physical branches, their cost structure is fundamentally different, Mittal adds. This often means they can offer higher interest rates, lower fees, cashbacks and other rewards and often place a greater emphasis on mobile and online banking. How the Philippines digital banks get these factors together will determine their success.
Super apps and telcos might join Philippines digital banking fray According to the Mckinsey survey, many financial services customers in the Philippines are researching banking products online. About 40 percent of survey respondents said they had been introduced to credit-card offers online and had also evaluated them online. This indicates a shift in approach and also an opportunity for new entrants. With their disruptive technologies, there is plenty of scope in the digital banking landscape for banks to carve a space for themselves. In the next five to 10 years, we will see many more digital banks entering the Philippines market, and also many traditional banks operating in Philippines go digital. Andrew Gilder told International Finance, “Over the next ten years, we expect to see reasonable growth in digital banking in the Philippines. This will be driven by a range of factors such as: improved technology infrastructure and continued uptake of mobile devices; commendable economic expansion and rising living standards; a young and increasingly urbanised, digital native population; and supportive regulatory and policy frameworks aimed at encouraging new market entrants and accelerating financial inclusion. We have already seen the regulator give the green light for three entities
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Looking ahead, some of the super apps, especially the globally dominant super apps, could enter Philippines digital banking with digital banking operations, with more likely to come. The Philippines’ maturing fintech sector, particularly in the payments and alternative lending space, will further boost inclusivity by facilitating easier access to basic banking services.” Anand Subbaraman of Finastra told International Finance that with the market riding the wave of digital disruption in various industries such as food delivery, ride hailing, e-commerce, this is a timely market opportunity for digital banks to enter the market, leveraging on a generation of bank customers who are expecting the same hyper-personalisation and seamless digital experience they’ve enjoyed in the other industries.
Looking ahead, Varun Mittal of EY expects many super apps to enter the Philippines’ digital banking market, particularly the super apps that have been dominating globally. There could be an opportunity for some of the telcos to get into that space as well. Of course, some of the existing banks may create their own digital banking arms to target different segments of consumers.
editor@ifinancemag.com
International Finance | March 2020 | 25
IF Advertorial - Bangkok Insurance
Bangkok Insurance delivering value to all stakeholders in Thailand’s insurance industry The firm has been consecutively ranked among the top three insurers in the domestic market Bangkok Insurance has established a strong financial presence in the country with over 72 years of industry expertise. The firm has demonstrated high performance in the last few years — and has been consecutively ranked among the top three insurance companies in the Thailand insurance market. Bangkok Insurance is continuously innovating its products and services — and has invested efforts to support the community in several ways. Its corporate policies, strategies, action plans and activities are in line with its concept of Your Caring Partner.
Providing value to shareholders
Bangkok Insurance strives to provide sustainable wealth to shareholders by striking a balance in business expansion and maintaining operational standards, in line with the risk management processes. In 2019, the firm achieved an impressive growth rate of 19.9 percent on direct written premium, compared to the market growth rate of 6.1 percent. It ranked first among SET-listed insurers in terms of attaining profits. Bangkok Insurance follows specific competition guidelines: Motor insurance: Several players have adopted pricing as a competition strategy on the back of price
wars in the industry. This in turn has led to losses and deterioration of shareholders’ wealth. However, Bangkok Insurance is focused on high quality services after sales rather than competitive pricing. This has enabled the firm to stay ahead of the competition in the market. In 2019, its share of the voluntary car insurance market increased to 6.8 percent from 5.5 percent in the previous year, with the average insurance premium rate per policy of 23 percent higher than the market rate. Non-motor insurance: Bangkok Insurance has emphasised the importance of risk survey to ensure appropriate insurance premium rates and advice on potential risk prevention. With prudent underwriting policy, the firm was able to achieve a satisfactory financial performance and pay dividends to shareholders every year. In 2019, it still maintained the corporate ratings at A- (stable) by S&P and A-(Excellent) Outlook Stable by A.M. Best.
Working as a partner to clients
Bangkok Insurance’s corporate vision To be the preferred non-life insurer in Thailand has helped the firm develop innovative products and services to meet customer needs. The firm has increased its employees’ awareness of working as a partner for clients, rather than just performing the role of an insurer. It has consistently invested in information technology solutions to ensure enhanced operational efficiency and risk mitigation. Last year, Bangkok
Insurance was certified to have met PCI DSS V3.2.1 standards, marking it the first and only one company in the insurance industry to do so. Being subject to such standards testifies its efforts against cyber threats and data security breaches. Also, Bangkok Insurance has developed a variety of mobile applications to provide better services to customers, including online insurance policy purchase, claims settlement and other useful data provisions. It has also deployed cutting-edge technologies: • Journeys by Bangkok Insurance is using AI to understand user behaviour patterns, assess risks and provide recommendations in the form of personalised content. It can further result in reduced risks and discounts on insurance premium rates • AI Motor Claims Contact Centre is using AI to draw information from customers who have made claim requests, particularly during the peak period before transferring to a relevant officer • Robotic Process Automation is used to provide routine service solutions that eliminate human decision making. This gives employees sufficient time for assignments that require critical thinking, analysis, and interpersonal skills with customers Bangkok Insurance is focused on ensuring quick turnaround time for claims payment. For example, a capsized boat incident in Phuket led to many casualties. In July 2018, the firm immediately dispatched a number of officers to coordinate with relevant parties at the incident’s site. In addition, Bangkok Insurance was able to make payments for travel insurance claims to heirs of the deceased within one week from the incident, with the total balance of over Baht 48 million. Based on the above operational policies and the regular care practices, the firm’s insurance policy renewal rate is as high as 77.1 percent in 2019.
Investing in employees
One of Bangkok Insurance’s goals is to enhance staff capability to become more specialised in the insurance business. For that reason, the firm is always committed to enhancing staffs’ skillsets through systematic learning processes and training programmes. Bangkok Insurance has realised the importance of retaining quality employees by enhancing their
morale and engagement with the organisation. This can be seen from the firm’s efforts to improve the performance evaluation system where work performance must be aligned with organisational goals. In addition, compensation must be granted in a fair and transparent manner. As a result, the employee turnover rate of the firm in 2019 was only 3.3 percent, which was lower than an average rate in the Thai labour market of 10.8 percent.
Supporting the society
Bangkok Insurance’s corporate social responsibility vision contributes to the firm’s sustainable growth. To date, it has integrated the principle of good corporate governance and social responsibility by integrating society, community and environment concerns into its business operations. The firm has conducted a number of activities supporting education, public health and community development. For example, Bangkok Insurance provided medical equipment worth $960,688 to over 50 hospitals across the country as well as installed water purifiers worth $120,498 at 74 schools in poverty-stricken areas. Bangkok Insurance’s relentless efforts have helped it to achieve a number of national and international awards. The firm won the International Finance Award for The Best Non-Life Insurance Company 2018-Thailand — which testifies to its immense contribution to Thailand’s insurance industry over the years.
IN CONVERSATION
BANKING AND FINANCE
MARTIN MARKIEWICZ CO-FOUNDER AND CEO, SILENT EIGHT
AI-based AML software that simply suggests or weights alerts is passé; Silent Eight’s solution gives plain English explanations for decisions
AML software that makes sense of alerts SAMUEL ABRAHAM
According to certain estimates, regulators across the world handed out $8.4 billion in anti-money laundering fines in 2019. Global KYC solutions provider Encompass Corporation estimates that authorities handed out a record 58 anti-money laundering penalties across the world. This is a 100 percent increase over the 29 penalties worth $4.27 billion imposed in 2018. Approximately, half of the companies that paid AML penalties last year were banks. Obviously, the losses for financial institutions that are hit with AML penalties are not limited to just the penalties themselves. They pay a heavy price in terms of declining revenues, customer dissatisfaction, collapsing stock prices, and loss of reputation and brand value. Rules-based software that used to be deployed by banks to detect money laundering are inefficient and leave analysts with too many alerts to deal with that could be positive or negative. Solutions based on artificial intelligence are much more efficient in detecting money laundering, compared to software based on rule-based approaches. Today deep neural networks can reveal complex interdependencies among money laundering activities across the world leading to fewer false alarms and more accurate recommendations. One such fintech startup that stands out for its artificial intelligence-based AML software is Silent Eight, which is also one of the many fintech companies founded in Singapore by European entrepreneurs. In the case of Silent Eight’s solution, the recommendations are supported by a written narrative explaining in plain English the decisions. Silent Eight’s machine continually learns as time goes by, and updates its algorithms to constantly improve the quality of
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FINTECH SINGAPORE REGTECH
its recommendations. The result is that it significantly reduces analysts’ time to review cases and arrive at correct conclusions. The rising number of global fintech entrepreneurs who are heading to Singapore to launch their fintech startups stands testimony to the allure of the city state’s world class business environment, regulatory framework, and global mindset. Coming from Poland, Martin Markiewicz is the co-founder and CEO of Silent Eight. Based in Singapore, which is now a major regtech hub, Martin provides the vision behind the company’s AI-based advancements in fighting financial crimes. Silent Eight is the winner of the FinTech Abu Dhabi Innovation Challenge and the Monetary Authority of Singapore’s 2017 Fintech Hackcelerator award. In 2018, it won a top fintech award in Australia. The same year, Standard Chartered announced that as part of its efforts to lead the way in the global fight against financial crime through the use of regtech, it had partnered with Silent Eight to deliver cutting edge capabilities to its Financial Crime Compliance (FCC) teams. In 2019, Standard Chartered’s fintech and ventures unit, SC
Ventures invested in Silent Eight’s oversubscribed Series A funding round, becoming a minority investor in Silent Eight and reaffirmingthe global banking giant’s trust in Silent Eight’s solution. With an educational qualification in mathematics, Martin is a serial entrepreneur. Before launching Silent Eight, Martin had made his mark, creating a few successful startups in Europe and Asia, which includes a startup that saw a successful IPO. In fact, Martin launched his first startup, Konsultant.it, which provided software and hardware development solutions for small and medium enterprises in 2001. In between, he was the strategic sales director of Wola Info, a leading European IT company. Later Martin established SevenFlow Investments – a multidisciplinary engineering company with a track record of landmark projects. SevenFlow Investments would finally become a part of a highly successful IPO. With his 16 years of experience in software and artificial intelligence solutions covering a wide range of applications, Martin has taken the challenge of helping banks outsmart financial criminals and money launderers, who are gaming their transaction systems,
International Finance | March 2020 | 29
BANKING AND FINANCE
IN CONVERSATION
MARTIN MARKIEWICZ CO-FOUNDER AND CEO, SILENT EIGHT
We help with false alerts. We investigate 100 percent of the alerts for our customers and solve them. We do not suppress them nor are they weighted or partially solved; they are either solved or not. This is one of our key differentiators
head long. In an exclusive interview with International Finance, Martin speaks about the Singapore fintech startup ecosystem, the value proposition that Silent Eight provides to its users, the Singapore fintech’s growth, and the future of AML software.
International Finance: Could you tell us more about the background of Silent Eight founders and the motivation to launch an anti-money laundering startup in Singapore? Martin Markiewicz: Before we started Silent Eight, we took a company from startup to publicly traded in Poland. Our track record of creating a publicly-traded company from an idea gave us the confidence to try something new. We were looking to do something significant, something that would help people. Our strengths are in engineering and problem solving, so we were looking for a global problem we could solve that would make the world better. It sounds a little cliched, but it's what we wanted to do. We kept coming across money laundering, financial crime, the challenges that institutions face to run their business and ensure exactly who they were doing that business with. In essence, we understood the global damage caused by all these activities. We saw the billions of dollars being spent every year to fight financial crime, and we also saw statistics after statistics that showed the bad guys won way too often. The way we build is from the bottom up, working with a customer to solve a problem. This led us to Singapore, a global financial centre, to launch our business in supporting banks combat a global financial crime.
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If you examine our clients, they are clients with a global scale and to match them, we are expanding globally with offices in Singapore, New York, Chicago, Seattle, London, Hyderabad, and Warsaw.
What are the key challenges that AML solutions face globally, especially the volume of false alerts? How do Silent Eight's solutions minimise this challenge? The false alerts are just one of the many problems. There are a lot of major law breakers and bad guys who are trying to get into the financial system and freely move around it. What financial institutions need to do is investigate existing and potential clients, vendors, and other partners in terms of their activities. We help with false alerts. We investigate 100 percent of the alerts for our customers and solve them. We do not suppress them nor are they weighted or partially solved; they are either solved or not. This is one of our key differentiators. Our IP does not decide whether an alert should be solved or not and which way it should be solved. Our AI acts according to the specifications of our clients. The removal of false alerts is the first step to achieve our purpose, which is finding true alerts. Solving false alerts is challenging, and it's important. Finding true positives is what we are here to do. We help our customers keep clear of terrorists, drug lords, and sanctioned people, and this way we also secure the interests of firms that protect our clients and the broader financial system. But ultimately, it's even bigger than that in scope. Each time we help a client refrain from financing a person with bad intent, we make it that much harder for the person with bad intent to hurt people at scale. That's what we are about; solving false alerts gets you to true alerts and solving true alerts saves lives, money, and jobs. This is exactly what we were looking to do.
So, what are the implications of Standard Chartered's investment in Silent Eight? Standard Chartered is one of our minority shareholders. One of the implications is that they have invested in us and that gives us a vote of confidence. It's always a good feeling when a client using your product says "hey, can I invest in your company?" I hope the implication of this is that we will do great in the future.
FINTECH SINGAPORE REGTECH
It's clear that the AI can process data and solve alerts at a velocity unreachable by humans. However, we do not view it as a clear choice between human or AI solved alerts. We see it as a very traditional AI-human relationship in that a human sets the rules, the AI does the work, and another human checks the work. It is symbiotic with each component in the chain responsible for the part they are best suited
I feel that our product is differentiated, and it's a great fillip for a global bank to invest with their capital in a company that provides them a critical product, not limit their commitment to just words.
With regard to regtech, ongoing developments like the US-China trade war are creating new sanctions lists. How is Silent Eight keeping up with these dynamic developments? We do not create or maintain sanctions lists. Our customers have other excellent providers for that. Our AI leverages those lists and learns and grows each time an input changes, including a sanctions list. This approach means no matter what new sanctions are added or changed we are ready to support our customers in abiding by their directives.
In terms of minimising human effort and maximising productivity, can you quantify the gains that organisations can make by using Silent Eight solutions? It's clear that the AI can process data and solve alerts at a velocity unreachable by humans. However, we do not view it as a clear choice between human or AI solved alerts. We see it as a very traditional AI-human relationship in that a human sets the rules, the AI does the work, and another human checks the work. It is symbiotic with each component in the chain responsible for the part they are best suited. The other key differentiator between AI and human solutions is the AI is incapable of making a mistake, either through poor training, or bias, or tiredness or any of the flaws that we are made of.
On a daily basis you may have thousands of alerts. So
how does Silent Eight system ensure that it scales to meet the hundreds of thousands of alerts? Our system is built under a scalable infrastructure with a capacity to handle hundreds of thousands of alerts every day. It's designed to work with the biggest financial organisations in the world across multiple jurisdictions and languages.
With the number of machine learning based AML solutions available in the market, what is the unique value proposition offered by Silent Eight to financial institutions? The first key differentiator is there is no opaqueness in how an alert is solved. We show clients each of the agent results that created the solution and which set of client rules it followed. And each alert is auditable. It's important to reiterate, we do not weight, or recommend, give probabilities, or suggest, and we definitely do not suppress. We follow the rules the clients give us. It is as simple as that. Each time we solve an alert we tell the overseeing analyst exactly why the alert was solved without any black box challenges. We provide the solution and the explanation how it is worked out. For example, it is harder for clients to trust a score generated by the machine stating that "this case has only 5 percent probability of something serious." In my opinion, that approach doesn't help very much. On the other hand, what helps is the machine saying "Hey this is a true case or a false case," and then further explaining the recommendation with supporting information. With that, clients can agree or disagree with the recommendation and justify their final decision. The idea is to ensure that
International Finance | March 2020 | 31
BANKING AND FINANCE
IN CONVERSATION
MARTIN MARKIEWICZ CO-FOUNDER AND CEO, SILENT EIGHT
We have big projects with European and US domiciled global banks underway and many regional banks especially in the US. We really see our target market as anyone who is worried about the accuracy and consistency of their AML processes and who could do with an AI-based helping hand
the machine generates transparent, reliable, and explainable information.
Which are your key markets and where do you see the most growth in the next five years? We have big projects with European and US domiciled global banks underway and many regional banks especially in the US. We really see our target market as anyone who is worried about the accuracy and consistency of their AML processes and who could do with an AI-based helping hand.
What are the advantages and challenges of scaling a regtech startup in Singapore? As I mentioned earlier, Singapore would be the best starting place for establishing a business. I think the fact that we started off in Singapore is an advantage because of its great regulatory and business environment. Singapore offers a great platform for us to build something like this. Also, it is a pretty small market unlike the US — so the mindset is to go global right from the start. We are currently surrounded by like-minded people with a similar approach. That’s definitely an advantage.
In terms of developing technology, what are your plans for the next five years? Our technology is receiving awards nearly every month, so we are very happy with the status quo. We, like any client-focused business, continue to develop based on client feedback and we have a full roadmap of client-driven requests.
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Right now, we are on a certain version of the product, and the next version will be much, much better than the current one. We will ensure that the product only gets better across all use cases.
What does the future of machine learning based AML solutions look like? How do you see the technology evolving in the future? I think machine-learning will be increasingly adopted as the benefits become more well known as opposed to the 'terminator complex' that tends to often to spring to mind when people hear about AI. The space we are in right now is complex. We are constantly stopping people from doing bad things. It is important to remember that these guys bring a lot of resources and power into play. They are also constantly trying to dodge our efforts. So, it only makes us believe that we should keep improving and getting better at using advanced technologies, such as artificial intelligence. I think the future in this space is tremendous. In the next five years, we are going to see a big shake up in terms of who are the new market leaders. More and more players are coming up — offering advanced solutions that can be used by financial institutions without sacrificing their gains. In my view, this is the way to go. Mostly, we look forward to supporting our clients in redefining what it best looks like when it comes to keeping criminals away from the global financial markets.
editor@ifinancemag.com
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BANKING AND FINANCE
THOUGHT LEADERSHIP
BANKING TECH PLATFORM
Non-banking firms have brought a bottom-up disruption to banking; banks need to catch up
ADRIAN CANNON CEO OF OMNIO
Why banks need the right tech Banking by its nature is a dehumanising experience. From its beginnings in the 17th Century right up to today’s fast-moving and disruptive banking market, banking is built on data and ledgers. Money in versus money out. Savings versus borrowings. Risk modelling and credit rating metrics. These are the fundamentals on which banking is built. The human customer can at times feel quite distant. A user of the service is not the focus for how it is built. Over the past 20 years, banks have attempted to change this and to humanise this narrow view of their customers. They have surrounded their core banking platforms with peripheral systems that deliver other products, trying to provide a holistic view of how their customers interact with their organisation. However, this approach is deeply limited by the underlying bank ledger and cannot address the complexity of a customer’s life and their product needs. In contrast, ‘non-bank’ businesses have taken a different view of their customers and are delivering lifestyle supporting outcomes that make their brand relevant in each moment of their customers’ lives. These non-banks are entering the market at a rapid rate, blurring the boundaries of the financial services sector and competing directly with banks in the process. Apple, Amazon and others have understood that by being hyper-relevant at a customer’s
34 | March 2020 | International Finance
single click, they can reinforce their brand value, becoming a trusted and knowledgeable customer partner. Building on that trust allows non-banks to extend their direct engagement with end-users and add new services that further deepen their daily relevance. The huge advantage that these non-bank organisations have is that they are aware of the value of data and by collating it methodically, they know their users intimately. They also know how to utilise this data best in a way that no traditional bank can compete with at the moment. Plus, unlike the banks, these businesses have made progress through digital platforms that take a holistic view of their customers and how they want to access their money and use the service, and not a limited ledger-like perspective. Faced with such fierce competition, most banks have come to realise that what sets them apart is their brand value (banks remain trusted as guardians of their customers’ money) – and that innovation within data-driven services is key to increasing brand loyalty. This realisation is fuelling innovation within established banks and also reinvigorating efforts to drive innovation in customer service, product quality, and the ability to use data to curate product offerings. In a nutshell: KYC (knowing your customer) is king, queen – and everything in between. To date however, the banks’ tech platforms have been ill-suited to payment processing and
to the demands of modern-day customers. Cumbersome legacy systems have also lacked the agility and rigour to be acceptable in a regulated context.
Modern platforms and low-cost financial services Because of these challenges, it is likely that the future of banking will couple modern platforms (designed to service a customer’s broad range of needs) with the ability to deliver compliant and low-cost financial services, including payments. On a practical level this means offering more services through mobile apps providing a tailored ‘bank in your pocket’ that understand users’ requirements and limits. Placing such a solution at the core of a bank, credit union or building society will transform it into an organisation that is highly relevant to its customers, both now and for the foreseeable future. While the core banking service remains broadly unchanged, the way that services are accessed and offered to the customer becomes hyper-personal. Banks are changing their legacy platforms to deliver this revolution, but they are not alone in doing so. The rise of the challenger banks was just the first stage in a far greater revolution that is being ushered in through the growth in the non-bank banks. Like the
banks, these brands have huge customer loyalty. They may not be the first places that customers would turn for banking services but if they can offer a credible, personalised banking service and platform then they will provide a strong challenge to established banking players. While banks may regard the non-banks as a threat, they can’t ignore the development. Whether a bank, credit union, building society or a growing enterprise, each one can offer its customers with an agile, personalised ‘Me Bank’ – they just need the right tech platform to do so. Adrian Cannon has been a board director, company strategist, and CEO for a range of financial services businesses. He has held senior roles as strategy and mergers and acquisitions director for Elavon Financial Services during its period of rapid growth in the European market; as the first independent managing director of Faster Payments and CEO of Valitor’s UK merchant acquiring business. As a director and partner in a number of leading consulting businesses he has led major national and international programmes designed to deliver changes to financial services such as the migration to Chip and PIN in Canada, Italy, Greece, UK, and for American Express. More recently he was appointed as the programme director for the UK’s national programme for the deployment of contactless (NFC) enabled applications including payment, loyalty, couponing and transport applications. editor@ifinancemag.com
International Finance | March 2020 | 35
PRODUCT FOCUS
ASSET MANAGEMENT ALINMA INVESTMENT
Alinma's new fund to distribute periodic income IF CORRESPONDENT
Such an investment vehicle will be of interest to asset managers and investors managing or interested in savings programmes that also promote a savings culture in Saudi Arabia
36 | March 2020 | International Finance
Alinma Investment Company (AIC) is a Saudi Arabian closed joint stock company wholly owned by Alinma Bank. AIC was established by Alinma Bank with a capital of SAR1 billion (about $266.7 million) and a paid-up capital of SAR250 million (about $66.7 million). The purpose of the fund is to be at the forefront of leading companies that provide a full range of Shariah-compliant investment products and services leveraging the best and latest financial services technologies. Alinma Investment Company obtained the CMA (Capital Market Authority in Saudi Arabia) licence No.09134-37 on April 14, 2009 and launched its operations on January 17, 2010. Alinma Investment Company is currently engaged in a number of activities, including dealing as a principal and agent, underwriter, investment funds manager, portfolio manager, and provider of advisory and custodial services for securities business.
ASSET MANAGEMENT
Alinma Saudi Government Sukuk ETF Fund Short Maturity
International Finance: What are the features of Alinma Saudi Government Sukuk ETF Fund - Short Maturity? Alinma Investment: Alinma Saudi Government Sukuk ETF Fund - Short Maturity was approved by the CMA on the first day of 2020 as an exchange-traded fund that aims to mimic the performance of a certain index. The fund invests passively into a basket of local government sukuks issued by the Saudi Arabian government with certain characteristics such as, that are listed on the main market and that are set to mature in five or less years from inclusion into the funds index. The term sukuk refers to an Islamic financial certificate like a bond but that complies with Islamic regulations commonly known as Shariah regulations. What are the Alinma Saudi Government Sukuk ETF Fund Short Maturity’s objectives? There are several objectives for the fund including periodic distribution of income. They also include enabling retail investors to invest in such type of an asset, reduction of cost compared to direct investment, as well as enhancing liquidity. In addition, such an investment vehicle will be of interest to asset managers and investors managing or interested in savings programmes that also promote a savings culture in Saudi Arabia, which is one of the key objectives of the Saudi Vision 2030. Who are the service providers to the Alinma Saudi Government Sukuk ETF Fund- Short Maturity ? Alinma Investment Company (AIC) strives to provide the best service quality to its clients. As such, the Alinma Saudi Government Sukuk ETF Fund - Short Maturity is managed by well-known international brands and experienced names such Credit Swiss, IHS Markit, and Apex among others.
The Alinma Saudi Government Sukuk ETF Fund - Short Maturity is the largest ETF investing in sukuks in the world with assets under management of more than $333 million What is the Alinma Saudi Government Sukuk ETF Fund’Short Maturity’s size? The Alinma Saudi Government Sukuk ETF Fund - Short Maturity is the largest ETF investing in sukuks in the world with assets under management of more than $333 million. What is the expected return and distribution on an investment into the fund? Based on current market prices, AIC expects a net return of about 2.5 percent on investing into the fund aside from changes in market price. Alinma Investment Company intends to make cash distributions to unit holders using proceeds from coupons received from the Alinma Saudi Government Sukuk ETF FundShort Maturity’s assets once a year, no later than the end of the fund’s financial year Who are eligible to subscribe to the Alinma Saudi Government Sukuk ETF Fund-Short Maturity? Eligible natural or legal persons and government bodies can invest in Alinma Saudi Government Sukuk ETF Fund-Short Maturity after considering the fund’s investment objectives and the risks associated with such an investment.
International Finance | March 2020 | 37
IF Advertorial - Zenith Bank
Zenith Bank Ghana
A brand built on excellence The bank will further use technology to deliver cutting edge solutions to clients
T
he disruptive power of technology has rendered most routine banking services almost archaic in just a decade. Indeed, the statement that the future of banking is digital is no longer a prediction but a reality now. Banks like Zenith Bank that sensed this shift and moved to adopt the latest technology have always stood out and provided customers with superior service delivery. As a financial institution, Zenith relies on its significant investment in technology solutions to satisfy the dynamic needs of its customers. Zenith Bank Ghana, which turns 15 years in September 2020, has delivered a number of solutions as it pursues its vision of being a reference point in providing prompt, flawless, and innovative banking products and services in the Ghanaian banking industry. Although the bank’s drive to deploy technology in the delivery of banking solutions started as far as when it was founded, its recent ‘Go Lite with Zenith Bank’ campaign highlights the offering it has painstakingly curated to meet customers’ satisfaction. ‘Go Lite with Zenith Bank’ presents a wide array of innovative digital banking products and services, developed over the years, to make banking transactions easier, safer, faster and smarter anytime, anywhere for customers and noncustomers of the Bank. Some of the products and services highlighted 38 | March 2020 | International Finance
under the ‘Go Lite with Zenith Bank’ campaign include the bank’s mobile banking application, Z-Mobile (available on Android and iOS), which was the first of its kind by a bank in Ghana, point of sale terminals, GlobalPAY, Scan to Pay as well as its USSD Code *966#, among others. The bank has a long-standing partnership with Mobile Network Operators (MNOs) to offer customers a seamless mobile money Bank2wallet experience across its various electronic channels such as internet banking, Z-Mobile App and GlobalPay web acquiring. The fact that the bank was among the first in the Ghanaian banking industry to launch an app-based mobile banking service (Z-Mobile) available for both Apple and Android devices is further testament to the bank’s approach to technology.
Pursuing financial inclusion as a strategy
In many ways, Zenith has contributed immensely to the Ghanaian banking landscape. It has ridden on the back of functional technology to deliver superior products that are easily accessible to its cherished customers. Zenith’s wide array of digital services enables access to financial services even in the remotest of areas, thereby enhancing Ghana’s inclusive growth agenda. By participating in the financial system, individuals are able to invest in their children’s education, start a business,
save, and better absorb financial shocks. Financial inclusion through the use of digital banking products and services continues to form a major part of Zenith Bank’s strategy year-on-year.
Performance wins global recognition
The bank’s exemplary performance over the past decade and four years is highlighted by the nearly 100 industry awards won by the bank. The bank’s recognitions include awards for excellence in customer service, superior technology solutions, as well as for its responsible corporate citizen role. Last year alone, the bank received 21 awards from different institutions. The year before that, it received 19 awards. While it seems the bank’s investments in people, technology and customer service is paying off, the bank remains even more committed to going the extra mile to maintain the smile on the face of its customers. There is
no doubt that the Zenith Bank, with its excellent service delivery is one of the few banks to watch out for this year. Zenith Bank (Ghana) Limited, a subsidiary of Zenith Bank Plc, was incorporated in April 2005 under the Banking Act 2004 (Act 673) as a private limited company and commenced universal banking operation in September 2005. The bank’s parent, Zenith Bank Plc, has built a reputation as one of Nigeria’s strongest banking brands and one of the country’s largest banks by market capitalisation, profitability and total assets. Zenith Bank Ghana has resolutely followed in the footprints of its parent and is currently one of the strongest and most profitable banking brands in Ghana. Zenith is also one of the largest banks by assets in the country. The bank's branding has been anchored on continuous investment in people, technology, and top-class customer service. International Finance | March 2020 | 39
BANKING AND FINANCE
INSIGHT
UK DIGITAL BANKING
A new dozen neobanks are broadening the competitive digital banking playing field in the UK with fintech experimentation and evolved customer experience
Do high-street banks have to fear the rise of neobanks? SANGEETHA DEEPAK
A new wave of neobanks have disrupted retail banking in the UK. Not only do they curate products based on consumer needs, but the structure of the business is making financial inclusion highly sustainable in the country. According to a study by market research firm Propeller Insights nearly three-quarter of UK consumers engage in online banking, 77 percent of them are considering switching over to a neobank and only 21 percent of them might continue to visit a bank branch. “In the UK especially, where the financial services market is quite developed, consumers are more willing to at least test banking alternatives. The culture of the UK consumer is vital to the success of new digital banks, says Koen Vanpraet, who is the CEO of PXP Financial, a complete end-to-end payments provider. To second Vanpraet’s view, Propeller Insights’ statistics showed that 65 percent of the country’s younger demographic between 18 years and 34 years use neobanks as alternate banking avenues. As it appears, neobanks have changed the era where retail consumers traditionally
40 | March 2020 | International Finance
preferred to visit bank branches for paperwork. “Over the past two years, we’ve seen an influx of consumers choosing neobanks or challenger banks as an alternative to traditional banks that we are all so familiar with,” Ian Wright CEO of SmallBusinessPrices.co.uk tells in a statement given to International Finance. Perhaps the growing popularity of neobanks suggest that they are filling the digital expectations gap in the country. “They are helped by the fact that many of their consumers fall under the bracket of ‘digital natives’ — those who have grown up using technology. And their digital services go a step beyond what many of the traditional banks are offering,” says Ian Bradbury, CTO for Financial Services, Fujitsu UK, in an email interview with International Finance. A study conducted by Finder on digital banking in the UK on how people might perceive banking in the future, found over one in 10 Brits have fully switched over to a neobank and 47 percent of them keep less than £1,000 in a neobank. Also, twothirds of consumers have expressed interest to fully
INSIGHT UK NEOBANKS
Neobanks’ trust score in the UK Revolut
2016
N26
2013
4
Monzo
2015
4
Monese
2013
4
Yolt
2017
4
Tandem
2015
4
Pockit
2014
4
Starling
2014
Tide
2015
Established Year
adopt neo banking services in the future. Certainly, the numbers highlight that neobanks are doing things differently. “They have agile ways of working, relatively cheap, stable to run and equipped with the latest technology,” Bradbury says.
Digital innovation: The hallmark of digital banks in the UK Last year The Forrester Banking Wave: UK Mobile Apps, Q3 2019 report reviewed four traditional banks and three neobanks, which attest to Bradbury’s view. The report found that neobanks are competing with traditional banks on the back of intuitive services and retail consumers are experiencing a paradigm shift in the country’s financial landscape. The first approach that neobanks have taken is to determine what financial tools and services consumers actually need, and then to find more meaningful ways to deliver on the potential. For example, Monzo, Revolut and Starling are making an impact on older consumers and those left vulnerable by bank branches closing down in the country.
4.7
5 4 Trust Score
Starling and Monzo have partnered with the Post Office and PayPoint respectively to allow consumers to deposit cash in person. Here the idea is to equally serve those who find it cumbersome to use digital technology. Revolut has launched a Plain English customer contract to ease the signing up process. For businesses, Amaiz is targeting sole traders and small business owners underserved by the banking industry. “Our research shows that this group has particular needs and we want to focus on that,” Steve Taklalsingh, managing director of Amaiz tells International Finance. While traditional banks are busy carrying big trading assets on their books, neobanks have become more consumer-centric across demographics and are fixated on technology innovation. “Ultimately, digital innovation will be crucial in an increasingly competitive market and neobanks will have to stay ahead of their rivals on this front,” Bradbury says. “So their overall success lies on how well they can innovate — and those who attract the most consumers are those who can differentiate their products in the most creative ways.”
International Finance | March 2020 | 41
INSIGHT
BANKING AND FINANCE
UK DIGITAL BANKING
Neobank customer growth in the UK (2018-19) Revolut
166.67%
N26
75.00%
Monzo
50.00%
Monese
100.00% 80.00%
Yolt Starling
100.00%
Pockit
25.00%
Tandem
0.00%
Tide
51.79% 0
1
2
3
4
5
6
7
8
Neobank Customers (millions)
Simplicity and transparency is what these neobanks have been tapping into in the last two years. Amaiz has developed a mobile banking app that provides a 24/7 phone service — a unique selling point in the market today. The app uses smart analytics to manage and track all payments. “We do that because our customers are not typically people who sit in front of a computer all day. They are serving their customers — and therefore, are more likely to want to talk to someone,” Taklalsingh says. “We’ve integrated voice recognition software for top level security and to give our customers the best experience.” Neobanks integrating human touch into their sophisticated digital services have an important stronghold that is missing from much of the traditional banks’ offerings.
Gen Z wants speed and convenience But what might seem like a quick win for startups is often a lot more to do with hype than substance, Vanpraet explains. The continuous and often advanced neo banking services are changing the traditional understanding of retail banking, but
42 | March 2020 | International Finance
they have a long way to go. “This comes down to the majority of customers who are still sticking with traditional banks. When a new digital bank is introduced, those interested in the industry may look at what they offer and switch services if they think it is beneficial, but the vast majority of ‘casuals’ will stick with what they know.” PXP Financial carried out a research on Gen Z payment habits in the high street and their top requirement was convenience. Today, customer experience necessitates transaction methods that are the most convenient and fastest. The research highlights that personal data security is of utmost importance for UK consumers. “Despite challengers providing a speedy and slick user experience through digital apps, many consumers still do not feel they are secure,” Bradbury says. This observation is compatible with statistics showing that 40 percent of UK consumers don’t trust neobanks to keep their data safe, and a further 49 percent plan to bank only with a traditional bank unless neobanks can demonstrate they have the right technology to protect them. This point is debatable. Globalwebindex’s
INSIGHT UK NEOBANKS
Market shares of UK neobanks
43%
19% 16% 5% 4% 4% Revolut
N26
Monzo
Starling
survey last year found that neobanks are more likely to be used by the country’s top income groups. The UK consumers who have used at least one service of Monzo, Starling, Revolut or Atom increased by 83 percent — an impressive growth rate since the third quarter of 2018. Together, the neobanks in the country are expected to triple customer count to 35 million over the next 12 months, compared to 12 million users last September, according to an Accenture report. In the first half of 2019, five million consumers opened an account with them — resulting in percentage gains in primary account holders. The average account balances increased five-fold to $422 in the first half, from $84, the report noted. Arguably, this trend could work against traditional banks if they are too slow in rendering advanced digital services. In fact, Vanpraet points out that “change can be slower for traditional banks.” The past two years have seen neobanks demonstrate robust financial performance broadening the competitive playing field of banking in the UK. Neobanks create significant cost advantage with the average operating cost per customer ranging
Monese
Starling and Monzo have partnered with the Post Office and PayPoint respectively to allow consumers to deposit cash in person. Here the idea is to equally serve those who find it cumbersome to use digital technology. Revolut has launched a Plain English customer contract to ease the signing up process
Yolt
between £20 and £50, compared to over £170 with a traditional bank.
Performance analysis of top neobanks in the UK Last year Monzo surpassed 2 million total users — and is expected to add 200,000 new accounts every month, compared to 60,000 a month in the previous year. Monzo crossed £40 million of annual run-rate revenue last May. Another top neobank Starling aims to breakeven by 2020 — targeting 6.7 percent share of the UK SME banking market in the next five years. Since November 2018, it has seen a rise of 110 percent in customer numbers and 200 percent in deposit base. Revolut, one of the world’s biggest fintech unicorns, was valued at £1.3 billion last year. In 2018, it recorded £58.2 million revenue and cost of sales grew at 247 percent, improving the gross profit margin. Recently, it raised $500 million in a series D funding with a $5.5 billion valuation — and has set an ambitious goal to onboard 100 million customers in the next five years.
International Finance | March 2020 | 43
BANKING AND FINANCE
INSIGHT
UK DIGITAL BANKING
Number of banks used by customers in the UK
34%
35%
18%
6% 1 bank
2 banks
3 banks
Revolut’s global expansion testifies the success of neobanks business model designed to take on big players in the industry, Bradbury says. “But they have a challenging future ahead of them — and it’s certainly an interesting space to watch.”
Neobanks are fighting layers of complexities Despite the numbers, their market share is low as they are relatively new. Consumers still require their banks to have a physical presence. In fact, 56 percent of consumers show concerns over bank branches closing down in the next five years, says Bradbury, reinstating that neobanks are under strain to build trust and value. The challenges for neobanks are not subtle. Many of them struggle to churn revenue from existing customers who are used to free services. Following that is their greatest test to prove to investors their ability to make profits — or they might not reach the level of funding received by traditional banks, Bradbury says.
4 banks
4% 5 banks
6 banks
1%
7+ banks
Traditional banks versus neobanks: Threat or hype? The creation of neobanks has the potential to challenge traditional banks, but for now, “they are still being seen as an add-on service, rather than a primary service,” Vanpraet says. It is impossible to turn a blind eye to the credibility and trust that traditional banks have established over the years. This should be worrying for neobanks, says Vanpraet, pointing to the fact that they are often used for smaller, less important payments. However, “neobanks proving themselves over a sustained period of time will lead to consumer trust on par with traditional banks,” Bradbury says. The allure of going digital has increased among UK traditional banks. “As neobanks become more popular, traditional banks will hit back,” Bradbury explains. And the big news is “traditional banks already see neobanks as competitors, and this competition will only grow as more UK consumers start to use them as their main current accounts,” he adds. Infographics from: SmallBuisnessPrices.co.uk editor@ifinancemag.com
44 | March 2020 | International Finance
1%
International Finance | March 2020 | 45
Emirates NBD Egypt wins International Finance’s best digital bank in Egypt 2019 award For the third consecutive year The bank is constantly improving its digital strategy to provide a more flexible yet comprehensive roster of banking solutions to customers
Emirates NBD Egypt was awarded the Best Digital Bank in Egypt 2019 by International Finance, the renowned global business and finance magazine published out of London. The bank has held this title for three consecutive years with this most recent award confirming the quality and the consumer appeal of the extensive digital and technological services provided by Emirates NBD Egypt in the local market. At the awards ceremony held on January 23 in Dubai, ENBD Egypt’s Head of Digitisation and Innovation, Digital Banking & Alternative Channels, Mourad Kassem received the award for 2019. International Finance emphasised that Emirates NBD Egypt has been selected for the award because of its continued excellence in providing innovative and technology-led digital banking services. These solutions are geared toward making the banking experience at Emirates NBD Egypt streamlined, facilitating a high level of convenience for its customers. A major stride in the use of technology by Emirates NBD Egypt is its branch pre-booking application that allows customers to pre-book time slots at any Emirates NBD Egypt branch. Additionally, the new Smart Touch feature on the bank’s mobile application enables customers to complete transactions and access other services using fingerprint recognition technology.
Emirates NBD Egypt CEO Mohamed Berro 46 | March 2020 | International Finance
These services distinguish Emirates NBD Egypt from its competitors and reaffirms the bank’s leading position in the market. Through innovation, Emirates NBD Egypt
Best Digital Bank in Egypt 2019
expressed its intent in making banking more convenient for customers by incorporating cutting-edge features and 24/7 service availability into its technology portfolio. This can also be seen with its APTRA Activate ATM system which provides remote branch services to ATM users. Commenting on this award, the Head of Retail Banking and Wealth Management at Emirates NBD Egypt, Mohamed Zakout stated that this title was “…his greatest happiness” mentioning, “Emirates NBD Egypt winning the title of Best Digital Bank in Egypt 2019 from International Finance enhances the bank’s position as a pioneer in technologyled banking services in the market.” Zakout noted that in 2018, the bank received four awards for excellence in mobile banking applications and the title of Best Bank in Egypt 2018 in large part due to Emirates NBD Egypt’s introduction of fingerprint technology as an alternative to traditional passwords. Highlighting the success of the ewallet service, Zakout stated that in response to this feature, the number of Emirates NBD Egypt’s clientele has risen to about three million, representing one third of ewallet users in the local market. Emirates NBD Egypt had also obtained an additional four awards during 2018 for being the best bank in retail banking, the most sophisticated and creative banking institution, the best bank to provide internet banking
services, and the best bank in digital services. The prestigious award wins make Emirates NBD Egypt a symbol of innovation in the digital banking and technologyled services market.
About ENBD Egypt First inaugurated in 1977 as Cairo Paris Bank, Emirates NBD was acquired by the Emirates NBD Group in 2013 and has since risen to become the leader in corporate banking in Egypt. Emirates NBD Egypt posted EGP1,700 million total revenues in December 2018 and employs approximately 2,100 individuals spread across 69 branches nationwide with more than 300 ATMs. Internationally renowned for its vast roster of banking services and commitment to sustainable innovation, Emirates NBD has won numerous accolades and industry awards including: Best eBanking 2017 and mobile banking in Egypt 2018 by International Finance. International Finance | March 2020 | 47
BANKING AND FINANCE
THOUGHT LEADERSHIP
FINANCE WEALTH MANAGEMENT
WAEL AL-NAHEDH CEO, SPEARVEST
Wealth managers must rise above the commission based approach to create value for investors
Wealth managers need accountability The wealth management industry provides the tools to preserve and steadily grow wealth, providing access to investment opportunity in financial markets, private businesses and real estate. For ultra-high net worth individuals, picking the right advisor to define suitable investment strategies and help manage their investments depends heavily on several factors, including diligence, alignment of interest and above all, trust. In an area as sensitive as the management of an individual’s wealth, ensuring the highest ethical standards and accountability is now more critical than ever. Clients have to be certain at all times their advisor is working with their best interests at heart. At a time when public and government scrutiny of
Technology can play an increasingly important role and giving clients the insights they need to see the status and performance of investments in real-time 48 | March 2020 | International Finance
the financial services industry is high, it is important that the wealth management industry improve its reputation by increasing the standards of the way it operates and reversing negative stereotypes that have long been associated with it. Unfortunately, many organisations that offer wealth management services have fallen into a formulaic way of working, whereby their clients are introduced to a network of traditional banks and asset managers, who, in turn, reward these introductions with commissions. This way of working, has led to an ‘auction culture,’ whereby wealth managers usher their clients’ assets to the highest bidder and collect a commission, instead of putting the client’s goals and suitability first. Clearly, this is not in the best interest of clients and does not lead to a sustainable wealth management relationship. Let’s be honest, the industry as a whole has not done itself any favours when managing its own reputation. Whether it’s the questionable incentive schemes that lead to biased advice or an apparent obsession with profit generation, for many people the industry is not always seen as a force for good. At the core of wealth management industries philosophy must be a culture of openness, transparency and accountability,
which in turn helps clients understand how their wealth managers operate and deliver lasting results for them. Organisations should always go the extra mile to ensure all potential investment managers are only the most suitable for clients, rejecting the culture of financial kickbacks and commission that can cloud the judgement of advisors. Developed on these lines, Spearvest was also founded with a promise to give 5 percent of our net profit to good causes, to prove that a wealth manager can make a difference. This means that Spearvest can have an impact with charities and community projects, giving our clients a sense of comfort that they are with a partner that cares about more than just the bottom line. Spearvest’s drive for alignment of interest with investors explains our co-investment projects, whereby we invest alongside our clients in certain opportunities, such as real estate. Additionally, technology can play an increasingly important role and giving clients the insights they need to see the status and performance of investments in real-time. That is why wealth managers must apply fintech to enable a truly holistic wealth management experience, putting the client in complete control
of their journey. This also addresses the increasing demand of investors for transparency and connectivity. Moving forward, without urgent reform and true accountability, the wealth management industry will struggle to secure the trust of clients in the future. The time has come for a new way of working, that comprises independent thinking, real collaboration and bias-free advice. Providers which heed the importance of change will thrive, those that fail to do so will struggle to survive. Wael M. Al-Nahedh is the chief executive officer of Spearvest, a Swiss investment advisory firm duly registered with OAR-G, recognised and supervised by FINMA. He is the company's chairman of the board of directors. He founded Spearvest in June 2018, bringing 12 years of financial industry leadership in mergers and acquisitions, asset management and wealth management to this role with the company. He has spent most of his career in Switzerland serving his clients from two of the world’s most renowned financial firms, J.P. Morgan and UBS
. editor@ifinancemag.com
International Finance | March 2020 | 49
AWARDS 2019
7 years recognising corporate excellence International Finance, a premium business and finance magazine published out of London, conducted the seventh annual International Finance Awards 2019 ceremonies in January in Bangkok and Dubai. International Finance recognised and felicitated top-performing corporates, government organisations, and industry and government leaders across EMEA and the Asia-Pacific region at the awards ceremonies for achieving excellence in their roles and annual performances. The much-awaited seventh annual International Finance Awards ceremony for the EMEA region was held at the Jumeirah Emirates Towers, Dubai, on January 23, 2020. For the Asia-Pacific region, the ceremony was held at the Waldorf Astoria in Bangkok, on January 31, 2020.
50 | March 2020 | International Finance
Special dignitaries at the International Finance Awards ceremony held in Dubai included H.E. Fahad Al Gergawi, CEO of Dubai FDI in the Department of Economic Development; H.E. Saud Salim Al Mazrouei, Director, Hamriyah Free Zone and Saif Zone, Sharjah; and H.E. Ms. Sania. A. Ansari, CEO, and chairperson of the Ansari Group. The special dignitaries felicitated the award winners in the EMEA region. Ms. Hind Al Youha, Director of Investment, Ministry of Economy, UAE, also attended the International Finance Awards as a VIP guest. At the awards ceremony for the Asia Pacific region in Bangkok, special dignitaries H.E. Dato Jojie Samuel, Malaysia’s ambassador to Thailand and a highly
IF AWARDS 2019
Top-performing corporates, government organisations, and industry and government leaders were awarded at the International Finance Awards 2019 experienced diplomat, and Mr Jullapong Thaveesri, Deputy Permanent Secretary, Ministry of Industry, Thailand felicitated the International Finance Asia Pacific award winners for 2019. The awards ceremonies were attended by nearly 500 C-suite executives and business and government leaders across the EMEA and Asia Pacific regions. International Finance Awards recognise top performing corporates, governmental organisations, and transformational business and government leaders for their performance excellence at the annual awards ceremonies. The presence of the esteemed dignitaries and the corporate and government leaders attest to the prestige attached to the awards.
The awards ceremonies also included an entertainment show and a gala dinner for all the guests. International Finance takes pride in bringing together top corporate, government organisations, and government and business leaders across the EMEA the Asia-Pacific regions to recognise their achievements every year. Previous editions of the International Finance Awards ceremonies have been held in Singapore, London, Dubai, and Bangkok. International Finance Awards 2020 is also scheduled to be presented next year in Dubai and Bangkok, and the process of screening nominees for this year’s awards has already begun.
International Finance | March 2020 | 51
INDUSTRY
FEATURE HEALTHCARE
UAE SMART HEALTHCARE
The country’s healthcare system is undergoing a structural shift with the accelerated adoption of sophisticated medical care technologies Experts predict fintech volume in Mexico to SANGEETHA DEEPAK reach $68 billion by 2022
W
hile governments in the developed world are looking at healthcare technologies or healthtech as a means to reduce costs, in the UAE, the government has stepped up its focus on leveraging healthtech and smart healthcare to promote on time and integrated healthcare delivery for improving patient outcomes. In particular, on top of the government’s agenda is the need to tackle an outbreak of lifestyle diseases that are putting stress on the nation’s healthcare systems.
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Public-private collaboration and coordination is key to the UAE achieving its strategic smart healthcare goals. Helping the government in the delivery of integrated healthcare delivery are a group of healthtech companies that are trying to leverage the latest technologies including artificial intelligence and machine learning in integrated healthcare delivery. Today, the UAE is in the early stages of extracting
FEATURE UAE HEALTHCARE SYSTEM
UAE smart healthcare: It takes two to tango
value from telemedicine, blockchain, artificial intelligence, cloud technology and mobile technology to bolster integrated healthcare delivery. Currently, the UAE accounts for 26 percent of the total healthcare spend by the GCC — and is ranked among the top 20 countries in the world in healthcare spending with $1,200 per capita spend on healthcare. “The UAE’s health regulators increasingly consider the adoption of new smart technologies to modernise its healthcare ecosystem,” says Richard Stolz, Associate
Director – Global Strategy Group, KPMG Lower Gulf in an interview with International Finance. The country is predicted to add an additional $182 billion to its economy by 2035 on the back of accelerated AI adoption, further adding to its goal of becoming a local medical tourism hub.
Tackling the lifestyle disease epidemic The incidence of chronic and lifestyle diseases
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are reaching epidemic levels in the Middle East and the UAE is not different. The UAE Artificial Intelligence Strategy 2031 is particularly focused on the use of AI tools to reduce chronic diseases in addition to developing algorithms to reduce the processing time for x-ray scans. Health experts have warned about a surge in lifestyle diseases in the UAE. According to the 360 Well-being Survey conducted by Cigna Corporation last year, heart disease and high blood pressure are set to increase in the country. The study showed that nearly 30 percent of the population suffers from heart disease, while 32 percent of them have high blood pressure attributed to stress. For that reason, 28 percent of respondents use wearable technology for heart health and 43 percent said that their companies have set up workplace wellness programmes In fact, the Dubai Health Authority has carried out many AI-driven proofs of concepts and the results have been impressive. For example, the DHAoperated Dubai Diabetes Centre conducted a proof of concept project using AI to detect diabetic retinopathy. The project was run in cooperation with a healthtech startup Artelus. It appears that the system requires only 10 minutes to detect diabetic retinopathy from the time of patient test until physician’s review of the test results, as opposed to four working days. According to international diabetes treatment standards, 14 retinal images are required per diabetic — and there are more than 1 million diabetics in the country. By numbers, it needs more than 50 eye specialists working fulltime to interpret 14 million images per year. But it is possible to accurately identify diabetic retinopathy and other ophthalmology-related issues with the
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help of a deep learning system (DLS) using AI. For that reason, the DHA launched its Innovation and Artificial Intelligence strategy which seeks to use AI and robotics to automate the healthcare process. This strategy will be the cornerstone of all DHA’s projects, initiatives and development programmes. The emirate is also testing neuro bands to detect strokes and flow cell sensors which are designed to alert sudden drops in vitals of critical patients. The implementation and outcomes of these transformational technologies is anticipated to impact thousands of people in the country creating a more sophisticated healthcare system — which is in line with the UAE Vision 2021.
Innovation jointly driven by public and private sectors While local governments in the UAE are interested in piloting niche smart healthcare technologies as soon as they become popular in the developed world,
the private sector, especially healthtech companies provide the key technology components and inputs to make integrated healthcare delivery a reality. Last year, Smart Dubai launched a new AI system in collaboration with the Dubai Health Authority and IBM. The system allows physicians to predict patients’ conditions by tracking blood pressure, temperature and the pulse among other vital signs. A pilot project was carried out on thousands of patients across Rashid Hospital, Latifa Hospital, Dubai Hospital, and Hatta Hospital. The AI system was found to have enhanced precision. It was trained to process those patients’ data and offer a comprehensive reading of their medical conditions. As part of the process, the data was fed into the system and then, it predicted the patient’s medical progress and suggested necessary precautions. The trial showed that the system detected patients’ deteriorating health conditions anywhere between an hour to 20 hours in advance — with 90 percent
FEATURE UAE HEALTHCARE SYSTEM
incisions, reduced pain and blood loss, lower need for blood transfusion and reduces basic scarring. The DHA also emphasises the importance of 3D printing technology. Early this year, it opened a 3D Printing Lab at its Innovation Centre to assist medical professionals with patientspecific anatomical models. In turn, these models will support extensive preoperative analysis and improve patient communication across all DHA hospitals.
Healthtech startups drive integrated healthcare
to 98 percent accuracy. The AI system demonstrated advanced capabilities of determining the exact moment when a patient’s health condition is likely to deteriorate from the time of exiting the intensive care unit. The Dubai Health Authority, the four hospitals, and most importantly the patients are set to benefit from this sophisticated AI system. First, its high potential to save patient lives by extracting data for pre-emptive detection of critical conditions is vital to medical care and patient care. Second, hospitals will be able to efficiently manage human resources, while enhancing the performance of medical teams. The data generated from the AI system is proved to offer profound insights into patients’ conditions which are usually produced from years of experience in the medical field. Healthcare robots are a revolution. In fact, the Ministry of Health and Prevention launched a robotic surgeries programme which is specialised
in gynaecology and obstetrics. The programme is the first of its kind in the UAE fostering scientific innovation in healthcare delivery. Because technological assistance in surgeries is vital, significant efforts have been made by both public and private sectors to introduce the latest robotics. Their enhanced visualisation and high degree of dexterity are anticipated to help surgeons conduct surgeries accurately. Rashid Hospital in collaboration with the DHA will start using robotic technology to perform knee replacement surgeries in the future. A specialised team of doctors from Rashid Hospital have undergone training in this field and are expected to use this technology in ortho trauma surgeries. The hospital has already deployed the three-in-one system, otherwise known as O-Arm, which is a 2D or 3D imaging system designed to suit surgical requirements. It is proven that the system enhances patient care during hospitalisation and post-surgical hospital stay, resulting in faster recovery, minimum
Healthtech startups in the UAE play a key role in bringing the delivery of integrated healthcare closer to patients while optimising costs. Specialised in telemedicine services, UAE healthtech startup Health at Hand has developed its own proprietary apps that allow patients and doctors to connect through videos. In an interview with International Finance, Dubai-based telehealth startup Health at Hand CEO Charlie Barlow points out that queuing algorithms will take patients into a virtual meeting room while doctors examine their medical notes. After the consultation comes to a close, the patients will receive their diagnosis report and a prescription if required, which can be delivered to their location in Dubai within an hour. For both payers and insurers, Health at Hand alleviates the need for unnecessary consultation visits and associated tests. “Being able to offer sick-notes, eprescriptions, ereferrals and laboratory tests through our apps has set us apart from our competitors. We have our own built-in Electronic Medical Record system to geolocate patients before offering drug delivery. This is what has led us to become one of the most sophisticated telehealth
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platforms in the MENA market,” Barlow explains. The UAE government has realised the need to support telehealth initiatives. “The UAE’s major health regulators are progressively developing an understanding of the value proposition telehealth solutions present and how they can be implemented most effectively throughout the UAE,” KPMG’s Stolz tells International Finance. The changes healthtech startups bring in the UAE are transforming the delivery of primary healthcare with a more integrated approach of healthcare delivery while closing loopholes for ethical malfeasance. “We intend to stop corruption that is inherent in healthcare systems including the overprescribing of medicine,” Barlow says. “As an independent company we have no vested interest in overtreating patients. We store patient data with the highest level of security as per the DHA guidelines.” Other startups are using AI-based models to create unified and intergrated platforms of healthcare delivery. For example, Dubai-based healthtech startup HeyDoc! is building a unified and integrated healthcare platform that uses AI to help with detection and triage which is also integrated with wearable devices. “This will help to understand the problem by continuously learning about patients’ health and proactively monitoring them,” says CEO and co-founder Ahmad Al-Hidiq tells International Finance. HeyDoc! is also democratising healthcare by increasing medical accessibility to patients despite their circumstances. “We have launched an initiative called Salamtak! that aims to provide people in refugee camps, developing countries and rural areas
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with free healthcare advice through our partner NGOs and government entities powered by an open source version of HeyDoc!,” Ahmad Al-Hidiq explains.
Dubai’s smart healthcare model and its subsequent effects Four years ago, Dubai launched the Dubai Health Strategy 2021 with four approaches, six objectives, 15 programmes and 93 initiatives. The profound effect of this strategy is that it is delivering the highest quality of medical care for chronic diseases, promoting early detection and raising awareness in the country. The effort began in 2013, when the DHA launched the Dubai Smart Healthcare Model to implement applications and advanced technology such as telemedicine in hospitals. “Since 2017 there have now been two updates to the DHA telehealth regulations and we have attended numerous roundtable discussions to help modernise the offering around telehealth,” Barlow tells International Finance. It is apparent that Dubai’s healthcare policy makers pursue a proactive agenda to seek collaboration with private sector participants through public private partnership models, adds Stolz of KPMG. The Smart Healthcare Model also offers guidelines to help healthcare providers to become more automated. Many hospitals in the UAE are embracing this model. In fact, it was reported that Dr. Sulaiman Habib Hospital in Dubai Healthcare City (DHCC) has started electronic collection and storage of patients’ biometric data. Also, the hospital’s pilot project used Google Glass to communicate with doctors in the field. This model helps hospitals to benefit from a prototype SmartDesk application
using touchscreen technology. The first facet of the model allows patients to check-in using an ID card, while doctors can fully access patients’ profile and history. The idea is to not only enhance customer experience but also deliver sophisticated healthcare services. The second facet constitutes smart apps with customer-centric features, while the third facet focuses on smart operations including use of advanced technologies to boost efficiency and facilitate internal operations. The demand for smart healthcare services is only seen rising in Dubai where the population reached 3.35 million last year — and is expected to reach between 4.96 million to 5.73 million by 2030.
FEATURE UAE HEALTHCARE SYSTEM
Public-private collaboration key to UAE’s smart healthcare future The private sector has a key role to play in meeting the demands of smart healthcare in the UAE as elsewhere in the Middle East. Meeting the demands of integrated healthcare for the population depends upon close collaboration between the government and the private sector. “It is of utmost importance to have “continuous collaboration between government policy makers and the private health sector to develop and implement advancements in healthcare technology in the UAE,” Stolz tells International Finance. However, healthtech startups in the UAE might, however, face challenges in scaling up because of challenges in
the healthcare and entrepreneurial ecosystem. According to Ahmad Al Hidiq, funding opportunities are sufficient in healthcare services and facilitations such as portals and booking platforms. However, they are inadequate when it comes to innovations around triage, patient records, wearable devices, vital analytics and other innovative technologies. This gap can be bridged if “investments and partnerships with hospital groups and research centres that closely work with governments and established investors open the door for entrepreneurs who are looking to solve key healthcare challenges,” he says. Barlow also shares a similar view on healthcare investment, emphasising that there is lack of sophistication across
the GCC region in terms of venture capital and private equity. “But if you have a strong value proposition and a path to scale outside the UAE, the opportunities for capital are greatly increased,” he adds. That said, UAE healthcare is still young and has the potential to lead to interesting opportunities for healthtech investors. In this regard, KPMG’s Stolz told International Finance, “Certain first movers in the UAE’s healthcare technology might enjoy greater influence with regard to healthcare policy specific to their technologies.”
editor@ifinancemag.com
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Who will bring the world to
Africa? 58 | March 2020 | International Finance
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With South African Airways collapsing into bankruptcy, the fight for dominance among African airlines has one clear winner – Ethiopian Airlines SAMUEL ABRAHAM Africa has more than one-tenth of the world’s population but only 2.5 percent of the world’s air travellers. With the global aviation industry facing instability and certain aviation markets staring at a decline, Africa should certainly be the next growth market for global aviation. Considering its fast-growing economies (albeit from a low base) as well as rising business and middle and upper class population Africa has a compelling case. In fact, according to IATA, in 15 years, Africa will see an additional 192 million air passengers a year which in turn will lead to a total of 303 million passengers travelling into and out of Africa. The opportunities to increase connectivity within Africa are also immense. For example, the majority of travellers who travel to Kinshasa in Congo from Accra in Ghana have to rely on a connecting
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flight. Similarly, there are no direct flights between Abidjan in Ivory Coast and Johannesburg in South Africa, despite the cities being centres of commerce and business in Sub Saharan Africa. In terms of passengers carried in and out of Africa, African skies are dominated by foreign carriers, with Middle Eastern carriers playing a key role. Among African carriers, bringing the world to Africa and taking Africa to the world was once the proud motto and catch line of Africa’s once biggest airline: South African Airways. Today, South African Airways is a pale shadow of its former self and the carrier is literally fighting for survival. Like South African Airways, most of Africa’s local airlines are state owned and struggling to achieve profitability. A team of business rescue practitioners are set to present a business rescue plan for South African Airways on March 31 this year. Today, it is clear that the title of Africa’s most successful local airline goes to Ethiopian Airlines. Established by a royal decree by Emperor Haile Selassie in the 1940s, Ethiopian Airlines is today the market leader in seat capacity in Africa with a 9 percent share. In terms of seat capacity alone, the airline is 50 percent larger than Morocco’s Royal Air Maroc and South African Airways. What’s interesting is that In 2010, Ethiopian was smaller than the aforementioned airlines and even smaller than Egypt Air. As the past decade saw South African Airways collapse into
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bankruptcy, it also saw Ethiopian airlines ascendancy to establish itself as Africa’s dominant local airline.
Ethiopian – a rare profitable African national carrier According to the latest figures from the Ethiopian Public Enterprises Assets and Administration Agency, to which the Ethiopian Airlines management reports to, Ethiopian Airlines Group generated total revenues of about $4.2 billion in the fiscal year concluded July 7, 2019 with a profit before tax of about $326 million. More than 90 percent of the revenue earned by Ethiopian Airlines Group is in the form of hard cash from customer bookings and services. Ethiopian Airlines aims to earn a revenue of about $5.7 billion with about $696 million in profit before tax in the fiscal year to July 7, 2020. The airline flew 10.6 million passengers in 2017-18. Ethiopians ambitions are literally sky high today. In addition to enhancing capacity at Addis Ababa’s Bole airport, which is its hub, the airline now plans to build Africa’s largest airport at a cost of $5 billion, 40 miles south of Addis Ababa, according to its Vision 2035. Ethiopian Airlines has helped revive other African airlines also, thereby positively impacting African aviation and increasing connectivity across Africa as a whole. The carrier owns 49 percent in Malawi Airlines and 45 percent in Zambia Airways. Following upon its Vision 2025, it spread its wings across Africa
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Top 5 African Airlines in Weekly Seat Share (Jan 14-20, 2019)
Ethiopian Airlines Results
8.4% Egypt Air 5.6% Royal Air Maroc 5.0% South African Airways 4.6% Air Algerie 4.2%
Revenue
Ethiopian Airlines
Source: Centre for Aviation
and established a subsidiary in Mozambique in 2018: Ethiopian Mozambique Airlines that connects destinations within Mozambique. Ethiopian Airlines’ achievements are highly impressive not only for an African airline but any government owned airline or national carrier in the world. South African Airways was supposed to be Ethiopian’s top African challenger. South Africa is still the largest aviation market on the continent. It has a large domestic aviation market and is a popular destination for tourism and business travellers. But South African Airways current status is dire and the stark opposite of that of Ethiopian. The airline last made a profit in 2011. Multiple attempts to revive it have failed. According to analysis done by Bain Capital in 2018, if the airline was to be liquidated, it had to cover liabilities of between R35 billion ($2.4 billion) and R48 billion. At the same time, from a fire sale of its assets, the airline would be able to generate only R5 billion to R6 billion. It also puts the national treasury under pressure as the treasury has to settle R15.3 billion in bank debt and creditor guarantees prior to the airline’s shutdown, in case it is being shut. While the South African minister for public enterprises Pravin Gordhan is of the opinion that the airline could be restructured and resurrected, the finance minister Tito Mboweni had once advocated shutting down the airline altogether. Meanwhile a team of business rescue practitioners working to salvage the
(Financial year ended July 7, 2019)
Profit before tax
$4.2 bn $326 mn
Projections for financial year ending July 7, 2020 Revenue Profit before tax
$5.7 bn $696 mn
Source: Ethiopian Airlines
airline have suggested eliminating a number of flights from South African Airways’s schedule, which can hit African aviation hard, since they included some of the key connections between leading African business destinations. Liquidation is among the wide range of interventions thought out by the business rescue practitioners Siviwe Dongwana and Les Matuson. Dongwana and Matuson expect around 8,900 job losses and an immediate liability of R6.3 billion to the government from settling South African Airways’s short and long term debt. The business rescue plan is not yet final and idea of liquidation might not at all be mentioned when Dongwana and Matuson present the final plan by March 31. Since 2008, South African Airways has survived on tax-payer funded government bailouts to the tune of R22 billion, because of which the finance minister has a point in saying that the airline must be shutdown. But any decision to shut down the airline will be influenced by the strong unions in South Africa. And, in his budget speech to Parliament at the end of February 2020, Finance Minister Tito Mboweni revealed the government would provide South African Airways R16.4-billion in government support across the next three years to cover debt and interest payments. How did South African Airways, the carrier that proudly boasted that its duty was to bring the world to Africa and take Africa to the world hit a
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nadir and how did Ethiopian become the dominant African airline in a decade of airline washouts in Africa? Also what does this development imply for African aviation? Has the hub of African aviation permanently shifted to the east?
Government control kills South African Airways As a matter of fact, South African airlines has outlived the utility for which it was established – the isolated Apartheid government started the airline to ensure that the country was connected to the outside world – to survive the isolation imposed by Apartheid sanctions. The airline never had to disclose its financial statements because it performed a strategic role providing necessary economic connectivity for South Africa to the rest of the world. And even when Africa closed its airspace to South African Airways, it could fly around the coastal route of West Africa. “Primarily because of these reasons, the airline could never really be profitable and did not indeed know the extent of the subsidy it was getting from the South African government,” Guy Leitch a prominent South African aviation analyst and the publisher of Africa’s largest aviation publication SA Flyer told International Finance. And after Apartheid, the ANC centralised government control over the airline, which was very much in line with the government’s or ANC’s policy of government control over key national assets. Although there was a period when the government seriously sought to privatise the airline, the airline’s privatisation has been mostly off the table, especially, during the the Jacob Zuma presidency. For South African Airways a ‘manageable’ loss of around a billion rand has been the norm since the end of the Apartheid except for a few years here and there. The taxpayers in South Africa got used to the idea of subsidising the airline for about a billion rand per annum for the sake of its developmental objectives such as the South African Airways pilot cadet scheme that was intended to support the development of pilots from previously disadvantaged groups. The airline made a number of attempts to break even, the most notable one in 2008, when it had two attempts with the first one failing badly. The second one was called the Bambanani programme by which the ANC recruited Khaya Ncqula
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as CEO to pare down a large part of the organistation that had become deadwood and the airline briefly returned to profitability for two years in 2010 and 2011. The airline entered a very dysfunctional period when one of Jacob Zuma’s acolytes Dudu Myeni was appointed to the board and she then became chairperson. Along with the notorious state capture saga that engulfed the whole Zuma government, South African Airways and the contracts from South African Airways became the focus of loot and corruption under Myeni and the losses of the airline soared from R1 billion to around R6 billion. Myeni is currently under investigation over the issue, but has denied personal responsibility. “The key difference here is that the R1 billion in losses per annum could have been sustainable, however, R6 billion in losses was never sustainable and yet the government continued to interfere,” according to Guy Leitch. Long protected from domestic and international competition by the state, the business can no longer compete on an equal footing with competition, especially with the Middle Eastern airlines. “The prominence of the Middle Eastern airlines in the last
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“South African Airways, essentially, no longer has a compelling economic case for survival as a business, and accumulated losses of over R28 billion over the last 13 years are a testament to this fact. It has been overtaken by changes in the aviation business. This is the basic problem it faces” Perry Munzwembiri
10 to 15 years, together with their business models anchored on hubs has laid an assault to the business model of not just South African Airways, but many other international airlines,” Perry Munzwembiri a Zimbabwean economic and financial analyst focusing on sub-Saharan Africa and also the head of research at advisory and consultancy firm GrowthPoint Capital Zimbabwe, told International Finance. “South African Airways no longer has the economies of scale in terms of route networks, passenger capacity, and cargo freight to compete internationally because of its poor geographic location. Simply put, it is outside the longitude necessary to achieve the efficiencies needed to survive as an airline. Of course, other factors such as mismanagement and corruption cannot be ignored in analysing how the airline is where it is today,” he added. “South African Airways, essentially, no longer has a compelling economic case for survival as a business, and accumulated losses of over R28 billion over the last 13 years are a testament to this fact. It has been overtaken by changes in the aviation business. This is the basic problem it faces. For long this reality has been masked by the endless government bailouts,
north of R16.5 billion in the past decade alone, for instance. Without these bailouts, South African Airways would long have ceased to exist as a business entity,” says Munzwembiri. Munzwembiri highlights other key issues plaguing the airline. For instance, as part of the business rescue programme initiated to try and save the airline, a proposal put forth is to cut all domestic routes except Johannesburg and Cape Town, in addition to other international routes. However, the government opposed this proposal, notwithstanding that the business rescue practitioners see this measure as key in ensuring the long-term survival of the airline. Another major factor is just the cost structure of South African Airways brought by overstaffing and rising jet fuel, and fleet management costs. For example, the average employees per passenger at South African Airways is around 200, against an international benchmark average of 100. This obviously means a drastic staff cuts have to be implemented. However this is likely to be opposed by the unions and government, which again brings us back to government interference in the airline.
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Can South African Airways be salvaged? Can the South African Airways be salvaged from its current predicament? Guy Leitch is of the opinion that it can be done. “There are plenty of examples of an airline being saved from a similar predicament,” says Leitch. “The first thing is to identify the fact that South African Airways is a business like any other business that is it has got a topline, a cost to sales, and other overheads. All it needs to do is get the figures in the right proportion and it’s not difficult.” According to Leitch, South African Airways is still quite capable of turning over revenue of around 20 to 25 billion rand per annum. “It needs to get its cost to sales correct and which is largely happening with the upgrade to a relatively modern and young fleet of A350s, the new A330s and even A320s . Thereafter, what it needs to do is tackle the fixed cost especially the higher overheads. Get those things in line, which is not difficult, and the airline can be turned around.” But Guy Leitch has a warning about the government interference “One another thing that is required to get the cost base in line is to fix up the malfeasance that has crept into the procurement,” says Leitch. Unfortunately, history has shown that politicians cannot keep their hands off South African Airways. “Despite the glaring evidence that this entity is a black hole that will keep draining the fiscus, government has kept throwing a lifeline to South African Airways at a huge cost to the taxpayer. The government often cites the need to preserve jobs, and the protect the tourism industry as mitigating reasons for South African Airways to remain in existence; however, the question that begs an answer is at what cost, especially given the quantum of money that has already been spent on this flailing airline. This is money that could have been better spent elsewhere,” says Munzwembiri. As to the alternative financing arrangements going forward, the recent R3.5billion loan from the Development Bank of South Africa, approved in just under five days, without the necessary due-diligence checks provides some clues, according to him. “DBSA`s mandate in no way whatsoever allows it to foray into financing entities like South African Airways, but instead is meant to fund infrastructure projects meant to reduce poverty and inequality. Unfortunately, such critical funding meant
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“The Ethiopian government has provided intense protection to its own airline. It is extremely difficult for other airlines to get landing rights in Addis Ababa and to get third and fourth air freedom rights which are the rights to fly to other places in Ethiopia and operate in Ethiopian airspace. The government is very jealous in protecting those air rights” Guy Leitch
for other developmental projects is likely going to be diverted toward propping up South African Airways going forward, says Munzwembiri. According to him, selling minority stakes is also not even a guarantee for survival, as evidenced by the recent collapse of Air Italy, partly owned by Qatar airlines, although this is a strategy that can be pursued.
What accounts for Ethiopian Airlines’ success? The success of Ethiopian Airlines can be attributed to two factors that clearly distinguish it from South African Airways: Clarity of vision and independence from the government in day-to-day operations. In fact, Ethiopian Airlines achieved its Vision 2025 targets in 2018 itself and is now working toward realising its Vision 2035. “The key to success for Ethiopian has been the approach of the Ethiopian government: In spite of government ownership, Ethiopian has been operating
its day-to-day business independently as a commercial entity, further helped by competent leadership and well-trained staff, who are held accountable for their actions,” Dr Sabine Reim, senior vice president airline network strategy, at InterVISTAS, a global aviation, transportation, and tourism consulting company told International Finance She notes a clear distinction which is highly relevant: while the government is the owner, it is not the manager of the business. Ethiopia’s geographical location helped it in no small measure in emerging as a hub connecting Africa with the Middle East, Asia, and Europe. Addis Ababa has become a hub, where it is able to attract and transfer much more traffic, particularly from Asia moving on to the American continents. While exploiting Addis Ababa as the hub gave Ethiopian a first mover advantage, the advantage of its success has really been made effective through a government policy that has enabled a coordinated aviation sector while allowing
the national carrier to take a commercial focus in day-to-day operations, said Dr Reim. “This is effectively a brief to fulfil a national strategy sustainably,” she added. Ethiopia is in a much more natural hub position for the African continent, compared to South Africa, and this makes a big difference for travellers, Marcel Langeslag, director of aviation, Netherlands Airport Consultants (NACO) told International Finance. “Ethiopian Airlines has a relatively young and fuel-efficient fleet. They have also partnered effectively with other African airlines to create a feeder network serving their hub in Addis Ababa,” he added. Another factor that distinguishes Ethiopian from South African Airways is the way the two countries approach the rights of foreign airlines over their airspace and airports. “The Ethiopian government has provided intense protection to its own airline. It is extremely difficult for other airlines to get landing rights in Addis Ababa and to get third and fourth air freedom rights which are the rights to fly to other places in Ethiopia and operate in Ethiopian
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airspace. The government is very jealous in protecting those air rights,” says Guy Leitch. Ethiopian Airlines’ most ambitious project is its recently announced $5 billion mega airport which it intends to make the hub of Africa. Economically, Ethiopia is on a relatively strong footing in Africa to execute such a project. “Ethiopia has much going for it when compared to some other countries – not only the many opportunities, and a solid domestic market potential, but also low corruption, a government that is committed to inclusive growth, and has demonstrated resolve and persistence in developing the country,” Frans Van Schaik, chairman and CEO of Africa Asset Finance Company (AAFC), which is an investor in the continent, told International Finance. AAFC’s subsidiary Ethio Lease recently won the first financial services licence given to a foreign-owned company in Ethiopia. Van Schaik takes hope from the fact that Ethiopia has the experience of executing mega projects of strategic national interest like the Great Renaissance Dam. But he sees two conditions that need to be met for the project to succeed – reducing the control of the bureaucracy and finding ways to finance the project itself. In this regard, Van Schaik says, “I have no doubt that there will be plenty of takers should the opportunity be offered to international investors to participate in a PPP (public private partnership), or BOT (build operate transfer), deal especially as and when the government relaxes currency controls.” Munzwembiri added that to the extent that the airline anticipates growth in its traffic volumes, the mega airport will be a worthwhile venture especially when viewed with a long-term lens. Also, Bole’s capacity is being stretched. “Bole`s capacity is likely to come under pressure, especially as Ethiopian Airlines seeks to compete with Middle Eastern airlines. There will likely be issues to do with time to complete the project, as well as the ultimate cost of the project. That said, benefits will accrue in the long run,” he added. Dr Sabine Reim of InterVISTAS says that for a competitive advantage in future, Ethiopian might need the Absera Airport. “In Africa, the growth and ambitions of RwandAir will see a brand-new hub with a growing network opening in Kigali within the next few years, and thus more competition for Ethiopian’s
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“The continued success of Ethiopian Airlines and the liberalisation of the Ethiopian economy can be an important catalyst for the further development of Addis Ababa as a hub – not just for travel and air cargo, but also for tourism, trade, business services and, even financial services” Frans Van Schaik
intra-African as well as core inter-continental connecting passenger base. A competitive hub will be key for Ethiopian not just to maintain its current position, but to execute its long-term growth strategy.”
Ethiopian Airlines is poised to dominate African aviation Will South African Airways be shutdown after March 31? A more likely scenario is that a stripped-down leaner version of South African will continue while shifting some of its local routes to regional airline Mango Airlines. But South African’s ability to boast of bringing the world to Africa and taking Africa to the world is thing of the past. With the decline of South African and the rise of Ethiopian has the hub of Africa shifted to the east from the south? Dr Sabine Reim tells International Finance that South Africa remains to be a very important economy both intra Africa, but also globally, with very unique trade links, also relative to other African countries. This is notably demonstrated by relatively large demand to and from South Africa relative to other African countries, including Ethiopia.
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However, its very southern location lends itself more for supporting a hub with domestic connectivity and airports as end-points in itineraries. On the other hand, Ethiopian has capitalised on its location, essentially competing with European and Middle East carriers for inter-continental traffic, exploiting the vacuum of an effective airlines in Africa as a first mover. South Africa is still the largest aviation market on the continent. It has a big domestic market and is a popular destination for tourism and business travellers. Addis Ababa, on the other hand, is more of a transfer hub. “Air traffic growth in East Africa has been particularly strong over the past decade and looks set for continued growth. Countries such as Ethiopia, Rwanda, Tanzania and Zambia are all investing heavily in their airport infrastructure and national carriers. It seems that the centre of gravity of African aviation is shifting from South Africa towards East Africa,” Marcel Langeslag of NACO tells International Finance. The continued success of Ethiopian Airlines and the liberalisation of the Ethiopian economy can be an important catalyst for the further development of Addis Ababa as a hub –
not just for travel and air cargo, but also for tourism, trade, business services and, even financial services, says Frans Van Schaik of AAFC. What is certain is that Ethiopian Airlines will continue to dominate the African skies into this decade and possibly in the distant future as well given its sound management and robust vision. The airline is moving very aggressively into entering into either joint ventures with other African airlines or buying majority stakes in struggling African airlines. It has a business model that allows it to spread its wings to West Africa, which is absolutely essential because the West African airline market is characterised by the universal failure of all its airlines, even the privately-owned ones. “We see Ethiopian join in with ASKY Airlines for instance and also down in the south with a couple of other airlines – Malawi and Mozambique for instance. It looks like it will continue to grow and dominate the African skies and perhaps and take over the role that South African Airways used to claim in its advertising which is to bring the world to Africa and take Africa to the world,” says Guy Leitch. editor@ifinancemag.com
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MOHSIN HAIDER DARWISH LLC TRADING
TRADING OMAN
Identifying market moving trends quickly and perseverance drives Oman trading giant Mohsin Haider Darwish’s business success
Mohsin Haider Darwish: Built to succeed
M
IF CORRESPONDENT
Mohsin Haider Darwish LLC is one of the Sultanate of Oman’s most renowned business houses. The origin of Mohsin Haider Darwish LLC dates back to over half a century. The proprietary family business was converted to its present form of a corporate entity in 1987. With determination and foresight, the Late Mohsin Haider Darwish established and steered the company to great heights, ensuring its evolution into a highly successful business group today. The company has witnessed phenomenal progress, helped by strategic planning and professional management and has kept pace with the tremendous progress the Sultanate of Oman has achieved under the wise and able leadership of His Majesty the late Sultan of Oman Sultan Qaboos bin Said. With diverse business interests and varied interests in trading, contracting, projects and manufacturing, Mohsin Haider Darwish LLC has built a strategic partnership with some of the most reputable and desirable brands from across the world which include Land Rover, Jaguar, McLaren, Dell, Michelin, KDK, Mitsubishi Forklift, Ford Trucks, Ashok Leyland, Huawei, Hitachi, CAME, YALE, and Avon among others. In an exclusive interview with International Finance, Areej Mohsin Haider Darwish, the chairperson of Mohsin Haider Darwish who is also one of the foremost women entrepreneurs in the Sultanate, speaks about her entrepreneurial journey, the business challenges facing the company today, succession planning, and her advice for women in business. International Finance: Tell us about your experience of growing up in an entrepreneurial family and how these experiences molded and shaped you into becoming the leader you are today?
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Areej Mohsin Haider Darwish: At the beginning, Mohsin Haider Darwish LLC was a proprietary business. While growing up, I have seen my father persevere to build the company. His attention to detail, determination, and his unique way of thinking out of the box were key lessons for me. I joined the family business in 1994 at the grass root level and gradually developed my career and worked my way up the organisational hierarchy under the tutelage of the founder of Mohsin Haider Darwish Group, my father the Late Mohsin Haider Darwish. Working under him, I learnt the business and gained invaluable real-world business experience and learnt lessons which I still use today in the day-to-day business operations. Having him as my example helped me build my ‘entrepreneurial spirit’ and taught me to manage difficult situations.
on oil and continuing its development plans and programmes that are important for the success of the economic diversification policy, achieving greater prosperity for the Omani society and sustainable economic growth. The focus is on key sectors namely tourism, manufacturing, logistics, fisheries, and education and we have seen significant growth in these sectors since the last few years. In line with the Sultanate’s vision, Mohsin Haider Darwish LLC too aims to move beyond niche segments. We have ventured into logistics, aviation, and education as part of our diversification strategy and besides these sectors, we have our focus on the future growth sectors such as the electric car industry and solar power.
Diversification in the Oman economy is an important factor toward achieving long-term sustainable growth. What are your thoughts on that? Oman has a great deal of potential to diversify and it is considered a strategic objective and a key to economic development in the years ahead. The country has been gradually shifting away from its dependence
What are the greatest challenges facing the business today? As the chairperson what is your strategy for the company? We live in rapidly changing and uncertain times and have to adapt to various challenges and compete on a global stage. However, how an organisation faces those challenges determines its success.
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"We have ventured into logistics, aviation, and education as part of our
diversification strategy and besides these sectors we have our focus on the future growth sectors such as the electric car industry and solar power" In addition to the challenges thrown up by the general slowdown in the economy and the dayto-day challenges in business operations, one of the key challenges that we or for that matter any organisation faces is competition. Due to increasing choices available to the customer and changing preferences, the competition is very intense. As the chairperson, my strategy and focus is to ensure that the company continues to be successful. We are always looking at improving the growth of the company by expanding our footprint and acquiring more agencies within our existing business areas while also selectively getting into new sectors. As consumers have the distinct advantage of choosing the products that they like at the moment, it is crucial that we remain connected with our customers and maximise our growth with them. At Mohsin Haider Darwish LLC, we analyse our business achievements and ongoing targets. At the strategic level, we have an in-house team which specialises in identifying and exploring opportunities, new business ventures, and pursuing them through high-level dialogues. At the operations level, our core business team is also tasked with
keeping a track of market movements and trends related to consumer choices, technological advancements, and new product development. What is your business succession plan considering that Mohsin Haider Darwish LLC is a family run business? Business succession planning is the key to preparing for the future and is a lengthy process. Succession planning keeps the business moving forward during the inevitable changes that come with running a business. At Mohsin Haider Darwish LLC, we realise the importance of this key aspect and we prepare for all contingencies by identifying, training, and preparing the next generation of leaders to move up. Since Mohsin Haider Darwish LLC is a family run business, we are grooming and developing our next generation, engaging them, helping them get the kind of skills and capabilities that they need to manage the business in the future. My son Mohsin has recently joined the family business after completing his Masters from King’s College. Since he is an automobile enthusiast, he is redefining the automotive operations and has brought new ideas to alleviate the automotive
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MOHSIN HAIDER DARWISH LLC
OMAN TRADING
business challenges. Our ultimate aim is to ensure that our family and business interests are well served Besides Mohsin Haider Darwish LLC, you have ventured into your own business ventures. Could you please tell us more about them? Oman’s retail industry is witnessing a change and it is being driven by the residents growing interest in luxury goods. Keeping this in mind, I launched two well-known brands which would cater to the Oman market. I first launched a unique concept chocolate shop which has over 50 varieties of chocolate, wedding invitation cards and baby shower gifts. The team at Blessing is committed to providing personal attention to each customer’s specific needs. We come up with a product that perfectly fits every occasion, and that has contributed to our popularity. My second venture is First Impression which captures the priceless fleeting moments of our life in mesmerising 3D and 2D hand and feet impressions. This is a unique concept as it’s the first in Oman. What advice would you give to women in business? It’s commendable to see women playing an active role in society, culture, and now also in business. Over the
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years, we have witnessed an increase in women entrepreneurs, with more and more women proving themselves in leadership positions across different sectors. My first and foremost advice to women in business would be that they should believe in themselves and in the goal which they have set to achieve. They should take advantage of all opportunities that come their way. Setting a realistic goal, working towards it with dedication, determination and passion are the critical factors for successful entrepreneurship. Being an entrepreneur entails taking risks, but they need to take calculated risks. Challenges and hindrances will always be around the corner, but they should not be deterred by them. Instead, they should be persistent and keep moving towards their goals. Women also tread a thin line as they have to balance their work and family life. It’s essential that they strike the right balance and set their priorities right.
editor@ifinancemag.com
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FEATURE ENERGY
RENEWABLE ENERGY AFRICA
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FEATURE RENEWABLE ENERGY AFRICA
Mini-grids: The future of African energy? Experts predict fintech volume in Mexico to PRITAM BORDOLOI reach $68 billion by 2022 Mini-grids have the benefit that they can at a later stage be linked to the national grid and become an integral part of it
R
eliable electricity supply has been a major problem in Africa for decades. Where the grid-based electricity supply is failing a fastgrowing Sub Saharan Africa, renewable energy sources are stepping in to fill some of the energy gaps. According to a report by the International Energy Agency (IEA), renewable energy will make up almost half of sub-Saharan Africa’s power generation growth by 2040. That said, the IEA Africa Energy Outlook 2019 also points out that Africa will fall well short of universal electrification and will be home to 9 out of 10 people living without electricity in 2030, from
almost 600 million people currently lacking electricity. This equates to 40 percent of the African population. Africa has an average electrification rate of 24 percent, compared to the global average of 40 percent. However, in the last decade, we have seen an explosion of renewable energy-based solutions in the African continent. In the last couple of years, we also seen a number of off-grid renewable energy startups pop up throughout Africa. With an estimated combined economy of $1.5 trillion, the African
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continent presents huge opportunities for businesses and investors alike across the renewable energy sector. While it is certain that renewable energy will be part and parcel of Africa’s energy mix, what role will renewable energy startups play in fixing Africa’s reliable energy supply deficit? And will they coexist or compete with the grid?
As Africa grows, so does its energy needs Africa’s economy is growing and it is growing fast. Also, its population is among the fastest-growing and youngest in the world. The adaptation of rapid technological changes, changing business environment and changing demographics will hugely contribute to the growth of the African economy. As Africa grows over time, so does its electricity needs. Seven African countries namely Nigeria, Ethiopia, the Democratic Republic of Congo, Egypt, Tanzania, Kenya, and South Africa will soon hold half of the continent’s population, and 43 percent of Africans across the continent will belong to the middle or upper classes. As the spending capacity of these socioeconomic groups increase, so will the demand for electricity. According to the IEA, electricity demand in Africa will increase to over 1 600 terawatt-hours (TWh) by 2040. The big question is ‘how can Africa meet its growing energy needs?’ The IEA report also indicates that by 2030, almost 530 million Africans could still lack access to electricity. The technology landscape in Africa is also booming and the operational prowess of the players in these sectors very much depends on the availability of reliable electricity. For Africa to achieve inclusive and sustainable development, the continent
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700,000 solar systems installed in Sub-Saharan Africa
5 million pay-as-you-go home solar systems sold in the continent in the last 4 years
1 million
pay-as-you-go systems sold over the first six months of 2019
would require tripling the average number of people gaining access to electricity every year from around 20 million today to over 60 million people. So what can solve Africa’s electricity problem? Given Africa is plagued by grid failures throughout the continent, the grid cannot be expected to meet Africa’s energy needs on its own. African grids need a major overhaul and huge investment for modernisation. So can renewable energy come into play in such a scenario, given Africa possesses huge potential when it comes to renewable energy sources such as wind, water and solar? Mikhail Nikomarov, an energy expert and the chief executive at Bushveld
Energy, believes at the current GDP growth rates, the Sub Saharan African electricity needs is going to double. He told International Finance, “Most African countries are facing high growth potential, both because of massive population growth and on average improved political and regulatory regimes. Policy rather than technology is going to determine how much of that is filled by non-State Owned Enterprises (SOE). It would seem logical to outsource to the private sector whatever could be funded by non-government firms. I believe that more than half of the growth will come outside the SOE structure and it may be much more than that.”
FEATURE RENEWABLE ENERGY AFRICA
Photo: C.Kropke, Brot für die Welt
So, to meet the growing demand of its economy, what Africa needs is to create a balanced and sustainable energy-mix that relies on its grids, biomass as well as on renewable energy. No doubt Africa needs to overhaul its power grids, which is a complex task, but economists and policy makers in Africa also need to understand the potential of renewable energy and consider it as a major source to meet its energy needs rather than an alternative.
Africa’s problem of grid failures According to the IEA report, electricity demand in Africa in 2019 stood at 700 terawatt-hours (TWh), with the economies in North and South Africa
accounting for over 70 percent of the total. According to the International Renewable Energy Agency (IRENA), Africa currently meets its energy needs from sources such as biomass and fossil fuels. While biomass meets around 50 percent of Africa’s primary energy needs, coal and natural gas account for 14 percent each and oil accounts for 22 percent. To become sustainable, Africa needs to increase its power generation capacity by 6-7 percent gigawatts a year, which is 10 percent of its current total capacity. But electricity grids across Africa continue to perform poorly and provide poor coverage, which inversely impacts the economy. South Africa’s state-owned
utility company Eskom is among one of the biggest in the world. The company accounts for almost 90 percent of South Africa’s power generating capacity from sources such as coal and nuclear. However, the company finds itself in the middle of a crisis as its debts continue to rise. Also, the operating cost of Eskom is too high. With debts of $30 billion, the company is on the verge of a total shutdown. In January 2020, the Nigerian national grid too collapsed leaving the whole country in a blackout. Even though only 40 percent of the Nigerian population is connected to the national grid, a collapse is still a matter of grave concern as it cripples the industrial sector. Grid failure across emerging economies in Africa is a common occurrence. Economies such as Kenya and Uganda too have been plagued by grid failures. In Uganda, its power grid reaches just 23 percent of the country’s 40 million people, according to power distributor UMEME. Mikhail Nikomarov said, “The grid is an issue, as in some markets there is more than enough generation, but evacuating that power and delivering it to distributors has proven a challenge. Part of that is technical capacity and part is financial. It will mean that some customers and communities may be better off never connecting to a ‘central, main grid’. Before, this was really not a cost effective-option.”
Off-grid renewable energy penetrates grid untouched areas Amid all the energy crisis, grid failure and blackouts in Africa, off-grid solar technology has come as a sign of relief for many Africans. In many parts of Africa, off-grid solar has reached people that reside in areas where the grid has not arrived yet. It helps many
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poor Africans in rural areas access electricity at a very reasonable rate. The global off-grid solar market has grown considerably over the years to be worth $1.75 billion serving 420 million users. In the last few years, many startups have raised funds in Africa in a bid to bring off-grid solar solutions to the non-electrified areas of their countries. While most of the startups were based in East Africa, it’s only recently that startups have started tapping into the potential in the Western side of the continent. According to the World Bank, more than 700,000 solar systems have been installed in Sub-Saharan Africa. The market is growing exponentially in Africa with over 5 million pay-as-you-go home solar systems sold in the continent in the last four years with over one million systems sold over the first six months of 2019, according to business consultancy Kleos Advisory. The report further reveals that the commercial opportunity for off-grid solar power in Africa is $24 billion per year. Liliane Munezero Ndabaneze, chief executive at Women’s Initiative for Delivering clean Energy to Africa (WidEnergy Africa) told International Finance, “The Pay-go model has tremendous potential especially if you look at how well it has performed in other parts on the continent, especially Eastern Africa where millions of households have now access to clean energy. For markets with vast territories such as Zambia, the grid access will simply not reach some of the areas we are targeting and this represents great opportunities for WidEnergy Africa and other players in the market.” In Africa, renewable energy possesses the potential to change the very energy landscape of Africa. However,
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much depends on how this potential is tapped into and also the value of investments made into the sector. Opio David, who co-founded Ugandan payas-you-go (PAYG) solar startup gnuGrid Africa told International Finance, “The efficiency of renewable technologies, the speed and cost with which they can be deployed and the continuous rise in investments in renewable energy make it a scalable solution to this problem.” According to Jan Albert, co-founder and chief executive at Solarise Africa, “The costs of solar have come down dramatically. Solar can now be offered as a cheaper supplement to the grid, under the condition that there are finance solutions available. The availability of adapted finance, as well as the availability of good quality Energy Performance Contracting (EPCs) are the elements that are crucial to make it truly scalable.”
How do the offgrid renewable startups fill energy gaps? WidEnergy Africa, is a Zambia-based women-led initiative focused on providing clean, reliable and affordable energy solutions. According to Liliane Munezero Ndabaneze, WidEnergy's vision is to become a regional strong women-led brand in household clean energy distribution. The Women in Energy hub (WeHub) project launched by WidEnergy is a multipurpose woman operated solar-powered store, serving as distribution hubs for its products while serving as a community microgrid where it’s located. WeHub unique value proposition is ‘Empowering women entrepreneur, with Energy’. In the next five years, the startup plans to reach between 70,000 to 100,000 households, thus impacting more than 400,000 lives, Liliane Munezero Ndabaneze added.
Another Uganda-based off-grid solar startup gnuGrid is disrupting the market by integrating technology to increase power efficiency. Launched by David Opio and James Dailey, gnuGrid has developed Solar Sentra, which is an amalgam of a PayGo platform and IoT enabled hardware. With the PayGo platform, transactions are swift and effortless through digital payments thus enabling instant access to power post payment by the end-user. Opio David, who serves as the chief executive said, “The PayGo platform also allows for installation mapping that facilitates seamless tracking and extension of maintenance and after sales services by the solar companies’ technical team to troubleshoot any
FEATURE RENEWABLE ENERGY AFRICA
and solving the financial problem faced by such projects. He told International Finance, “We offer finance products that are adapted to the needs of the end user. Our finance offering is integrated in the offering of the developers and EPCs. We jointly target the clients and come up with an integrated proposal and create a one stop shop for the end user.”
African renewable energy startups face funding squeeze
faults in the solar systems.” In short, Solar Sentra bridges the gap between solar companies and their clients and perpetuates timely service delivery. Solar Sentra can be integrated into a wide array of solar products which allows for a faster penetration into the solar power market. gnuGrid sees a growing PayGo solar home system market as well as new prepaid microgrid models and leasing or subscription models. Opio David believes gnuGrid Africa will be among the main drivers of energy inclusion to millions of households in and outside Uganda expanding into markets such as Kenya, Tanzania, Rwanda and Northwest Africa in the next five years. gnuGrid also signed a partnership with MTN and SolarWorx
in Liberia in a project to provide solar energy to 500,000 Liberians in a period of five years. Solarise Africa, a pan African energy leasing company, too is helping to bring clean, reliable, high quality and low-cost energy to Africa’s commercial and industrial sectors. The Kenya-based startup provides smart financing solutions through its partners to commercial and industrial (C&I) clients. Solarise aims to solve the financial hurdles for captive rooftop and ground-mounted solar projects ranging from 100kW to 3MW. According to Jan Albert, C&I projects are either too small for big financers or too complex for local banks or leasing companies. Also, this is where Solarise is coming in
Funding is a challenge for off-grid solar startups in Africa. Renewable energy startups are only able to raise 20 percent of the funding they need per year. Existing funding is insufficient and concentrated in other fields for instance only 11 percent of World Bank’s total energy access funding for Africa between 2011-2014 went to offgrid renewables. Mikhail Nikomarov said, “The successful ones get capital from overseas, so if you are an African entrepreneur without access to Silicon Valley, getting high risk capital is not easy. Another is creating a business that is scalable and one that can be carried across national borders. All too often, companies have business cases based on specific regulatory rules and in Africa, there are at least 54 sets of such rules.” Liliane Munezero Ndabaneze believes it is very difficult for off-grid solar startups to raise funds in Africa. She said, “One thing to remember is that more than $500 million have been raised by the industry in the last five years. What is the percentage of that went to the startups, founded and managed by the locals, especially women? The figure will tell you how ‘easy’ it is for African owned startups to raise funds. Yes, there is a need for more investment, but more investment by African investors is still equally challenging.”
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Manfred Hafner, professor of international energy studies who teaches at the Johns Hopkins University School of Advanced International Studies and Giacomo Falchetta from the Catholic University of Milan believe that in order to be successful and sustainable, renewable energy startups must take a set of actions aimed at tackling some of the greatest challenges of doing business in the sector in the context of developing countries of Africa. The first action is coordination and continuous interlocution with the government. Secondly, investments must be tailored to the specific setting such as potential supply variability and demand change is necessary. Finally, startups must ensure that their business model is encouraging a regular payment of customer bills or government agreements and subsidies that enable firms to repay costs and scale-up their infrastructure.
Mini-grids linked to national grids; the future The outlook for renewable energy as well as renewable energy startups is positive. In the next five years, Africa is expected to better understand its renewable energy potential and its resources and make good use of them. While Sub-Saharan regions have good potential for solar energy, the coastal regions hold potential for wind energy. Opio David said, “As technology costs are slowly reducing, with an increasing trend of investments in technology research and development plus attraction of renewable systems over diesel generators grows, there is bound to be exponential growth for off-grid renewable energy startups over the years.” Liliane Munezero Ndabaneze said, “If we look at last years’ Pay-go systems,
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WidEnergy Africa, a Zambian women-led initiative | Image: afrikanheroes.com
the southern African region is last on the chart, with less than 1 percent contribution. So increasing this to 5 or 10 percent is definitely achievable in the short term and should be an industry effort. Once again, factors such as mobile money penetration will determine how fast we can scale up.” According to Jan Albert, the outlook for off-grid solar startups is still positive. However, the only successful off-grid renewable energy startups will be the ones that are well managed and have sufficient capital to see them through. In the end, it is all about implementation. Mikhail Nikomarov, on the other hand, believes the future of renewable energy is the mini-grid. He said, “These small grids will likely feature multiple technologies, including solar PV, possible another generation source if it exists locally (mini-hydro, wind and gas) significant amount of energy storage (large batteries) and, in wealthier areas, some back-up
power support in the form of diesel and HFO generators.” Manfred Hafner and Giacomo Falchetta believe if properly planned, mini-grids have the benefit that they can at a later stage be linked to the national grid and become an integral part of it. In this scenario, the local renewable generation capacity can still continue on providing the baseload power needed locally, while the electricity from the central grid can step in to fill the demand-supply gaps.
editor@ifinancemag.com
MB Ageas Life is honorably awarded
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THOUGHT LEADERSHIP
REAL ESTATE PROPERTY TECHNOLOGY
ANGELICA DONATI CEO OF DONATI IMMOBILIARE GROUP, ITALY
Why is technology so significant to real estate today? The one-word answer to this question is: service
Proptech makes users the pivotal element 2020 has been off to a rough start. 2019 ended with the expectation that things would normalise – at least for the UK – with Boris Johnson winning a full mandate to carry out Brexit. Regardless of one’s personal opinion concerning the decision to leave the EU in the first place, the wait was over and we could finally move on. Then 2020 happened, with a series of setbacks both near and far from home, ranging from the Australian fires and massive flooding throughout the UK, through to the geopolitical turmoil in Libya that some were calling the start of World War III, to the coronavirus outbreak which is now threatening to seriously stall the global economy, if not push it all the way into recession. It is a grim backdrop against which to look optimistically at anything, but we still should. After all, though it is easy to succumb to the
Global proptech investment growth
$186 million in 2011 82 | March 2020 | International Finance
$24.6
billion in 2019
doom and gloom, these are nothing more than temporary glitches against what is ultimately a positive long-term outlook for the UK economy in general and for real estate in particular… despite everything that is happening. Real estate and construction stand to benefit significantly from the advent of proptech. For those not familiar with the term, proptech is the acronym used to describe any technology in the real estate space: from software to hardware, from materials to manufacturing. Although still dwarfed by its older cousin fintech, investment in proptech has soared sky high. Since data was first available in 2011, investment into the space has gone from $186 million globally to $24.6 billion in Q3 2019, with estimates for the year indicating that global venture investments into real estate technologies will have comfortably exceeded the $30 billion mark. So, why is technology so significant? Leaving construction aside for the time being, the one-word answer to this question is: service. Asset management is shifting away from the traditional transactional model, in which you buy building, collect rent, and hope your tenants won’t bother you too much and into what is known as the “service” of real estate. The asset has been replaced by its users as the pivotal element in real estate, and management has evolved from spreadsheets to
customer experience management-enabling end users, whether these be residents, employees in an office or shoppers, to have the best experience possible in an asset. Landlords have clued into the fact that happy end users equate to a stronger portfolio performance.
Why is technology essential? Technology has become an essential element in this equation because the goal is to fine-tune the services on offer down to the segment of one. As we become more and more engaged with spaces and their users, both through sensors and digital applications, we capture data. This increasingly big data, in turn, can “feed” the algorithms that power the artificial intelligence (AI) and machine learning (ML) based software that allows us to fine tune the real estate-asa-service offering to the segment of one. Off the back of this, owners and operators can confidently build more flexibility into their real estate business models. Here are some instances of how proptech can be deployed to better the customer’s experience – and increase the owner’s and operator’s bottom line – in the retail, office and residential space. There is a lot of tech being used in the retail space. Think of the algorithms behind layout optimisation,
that use a mixture of cameras and sensors to figure out how shoppers live a space and thus the best way to dynamically adapt it, and the product placement within it, to maximise sales. Many FMCG retailers use smart shelves to seamlessly manage logistics and restocking and some like Amazon are experimenting with automated checkouts as well. Retailers are also taking the shopping experience out of the store, with RFID beacons used to notify nearby potential shoppers and will them into the store. Then, there is the whole concept of flexible retail, where owners and operators have adopted new strategies, inclusive of tech, to adapt to a world in which the high street is slowly dying out. This ranges from pop ups to ops to online to offline models all the way through to offering co-working or co-living space in malls! Offices are probably the asset class that has most embraced tech, largely thanks to bigger portfolio sizes and lesser privacy concerns than in residential. Smart offices are not just a vision for the future any longer, and this comprises tenant facing apps that are devoted to maximising the use of the space you work in, access control systems that are often managed through the apps, and sensors. These sensors have
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REAL ESTATE PROPERTY TECHNOLOGY
an enormous range of uses – from helping residents figure out if a parking space or a meeting room is free, to helping building management monitor environmental parameters, or quite simply to efficiently schedule maintenance work. Finally, they help owners and operators to analyse granular data and determine how best to maximise the use of space while keeping the user experience at its optimal level. In the residential space, the use of technology is curtailed by legitimate privacy concerns. Nobody wants Big Brother in their home, and thus tech tends to mostly end at the front door and is limited to operations otherwise. Here, proptech can be easily split into front end and back end services. On the front end, you could get a tenant app for concierge services, bills payment and the like. On the back end, management can be optimised once again through sensors (for example for leak or energy usage monitoring) or through management platforms that bring efficiencies to maintenance and other services. Construction is a phase in the asset life cycle which must be considered separately and is particularly ripe for disruption. According to the McKinsey Global Institute, if construction sector productivity were just to catch up with that of the total economy, there would be a cumulative productivity boost of up to 60 percent, translating into a 2 percent global GDP boost. There are a host of startups looking to achieve just that at present. While some are working on highly-ambitious projects such as robotics that will change the sector forever when they eventually work, most are focusing on improving the construction process as we currently know it through design, workflow management and AI-driven sensor-based site safety. These, coupled with advances in offsite manufacturing methods, are industrialising the construction process and will deliver the productivity gains cited earlier, as long as it is the customer that drives this change. In fact, the construction industry is hampered by a traditionally adversarial relationship between customer and contractor, and tech can only become widespread if it is introduced from the top down, rather than proposed from the bottom up. Proptech is becoming ever more mainstream, with large real estate companies of all sorts deploying investment into the sector both through corporate
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According to the McKinsey Global Institute, if construction sector productivity were just to catch up with that of the total economy, there would be a cumulative productivity boost of up to 60 percent, translating into a 2 percent global GDP boost
venture vehicles and through proptech-specific venture capitalists. Despite the troubles that the beginning of this year has brought, the outlook for this this sector is overwhelmingly positive, and will bring great benefits to real estate and construction. Angelica Donati is a real estate entrepreneur and a proptech founder, investor, and thought leader. She holds a BSc from London School of Economics and an MBA from Oxford University's Said Business School. She started her career on the trading floor at Goldman Sachs. After her MBA, she entered the real estate sector and established Donati Immobiliare Group, an international development company of which she is CEO. She is also a G20 Young Entrepreneurs’ Alliance delegate. In 2019, she became an advisory partner at PropTech VC, Concrete, which deploys minority investment capital into early stage startups.
editor@ifinancemag.com
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TECHNOLOGY
ANALYSIS
CHINA ELECTRONICS SUPPLY CHAIN
How do you build resiliency into global electronics supply chains given China’s vulnerability to epidemics?
Epidemics in China: Reducing supply chain risks PRITAM BORDOLOI
The global supply chains of electronics and hitech companies are under serious threat from the coronavirus epidemic in China. Closed ports and delayed shipments are forcing different players in the global value chain to reconsider their targets for the year. The impact of the out-break, especially on the Lack of supply consumer electronic and telecom from China is equipment supply chain could also likely to prove to be disruptive for the have a huge industry, however, it is too early impact on to judge the full impact of the companies virus outbreak as of yet. who don’t The coronavirus outbreak, directly which has been compared purchase to the SARS outbreak in components 2003, could have a far greater from China effect on the global economy compared to SARS 17 years ago. Over the years, China has developed itself as a global manufacturing hub, its supply chain connecting its market to markets in all corners of the world. The logistics network over the years have also become more sophisticated and nowadays, demands are met at a very fast pace. The epidemic could result in China facing challenges such as shortage of labour and materials, travel restrictions as well as logistical challenges. The inability to meet demand could result in billion dollar losses throughout the supply value chain.
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Coronavirus disrupts global consumer electronics supply chain The supply chain networks for consumer electronics manufacturers or technology companies are the ones heavily affected by the Covid-19 outbreak. A majority of the components used to produce consumer electronics are manufactured in China. Foxconn, the world’s largest contract manufacturer of electronics, currently operates 12 factories across China. The Taiwan-based electronics giant also has a production unit in Wuhan. Foxcon serves global companies such as Apple, Dell, Amazon, Cisco and Hewlett-Packard. The outbreak has also forced Samsung to move the components for the latest galaxy phones from China to its manufacturing hub in Vietnam. Reportedly, Vietnam is also limiting the transport volume between the two countries. Vietnam too, has reported numerous cases of Covid-19 this year. South Korea-based LG electronics, which produces a major chunk of its mid-range in Vietnam is also facing disruption in its supply chain. Catalina Stefanescu-Cuntze, professor of management science at ESMT Berlin told International Finance that it is rather early to make a confident assessment of the extent of disruption, given that the virus is still spreading with new cases confirmed daily and with disruption still ongoing. She said, “But I think we can safely say that the impact of the coronavirus on supply chains will be larger than that due to the SARS outbreak in
ANALYSIS CORONAVIRUS SUPPLY CHAIN
2003. Since then, the Chinese economy has become much more deeply integrated into the global supply chains, and China overall accounts now for roughly one sixth of global economic output. So the potential for disruption has also increased significantly.” So far many suppliers in China have announced delay of around two to three week. They have also issued a warning that the delay could be longer than predicted depending on conditions. Some of the manufacturers in China have also reported shortage of labour. Apple has already revealed that it would miss its estimate for quarter end revenue due to the epidemic in China. Gianfranco Lanci, COO at Lenevo – the largest PC maker by unit sales, revealed that the entire industry will not have enough supply. Daikin Industries, a Japanese multinational air conditioning manufacturing company, which has a production unit in Wuhan, is mulling moving the unit to a nearby Southeast Asian country, notably Malaysia. However, the disruption caused will vary from companies and on how they operate. Some manufacturers may not have a plant in China, but it will depend on supply coming out of China in one way or another. Robert Boute, Professor of Operations Management at Vlerick Business School told International Finance, “The extent to which the coronavirus has disrupted supply chains really is dependent on how a company operates. Of course, companies who directly
Macro impact of coronavirus outbreak China’s GDP growth may slow down this year by
0.5% points
Global GDP growth may slow down by
0.1% points
Percentage of global businesses in Singapore that expect Covid-19 to impact their revenues
72%
Source: IMF, American Chamber of Commerce in Singapore
supply from China will be hugely affected by this, with a large amount of production coming to a halt in the country, which will directly affect the supply that these companies can obtain.” But, a lack of supply from China is also likely to
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have a huge impact on companies who don’t directly purchase components from China. This is because, many products have long lines of a supply chain, it is likely that at some point along this chain, there will be some interaction with Chinese companies. This is what we call ‘tier 2’ suppliers. There is a lot less transparency in this, and many companies may interact with Chinese companies through their supply chain without even realising – through this method a lot more companies will see disruption to their supply, and are likely to take longer to react to this also.
Coronavirus impact spreads to Southeast Asia and beyond The impact of the Covid-19 epidemic is not only limited to China. Before the virus could be contained in its place of origin, it has spread to other Southeast Asian countries and now it has reached Europe and the Middle East. With these countries also having a role to play in the global supply chain network, disruption is certain. According to The American Chamber of Commerce in Singapore, 72 percent of global businesses operating in Singapore expect the covid-19 to impact their revenue. A survey revealed that 43 percent of the logistics companies operating in APAC have been greatly affected by Covid-19. Around 37 percent of the manufacturing companies in the region have also been greatly affected by the epidemic. A majority of the respondents in the survey expect their revenue to drop in the margin of 1 percent to 10 percent. Vietnam too is set to suffer
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China and the global supply chain Percentage Share of Global Production in China, 2018
46%
27% Hi-tech Goods
14%
38% Machinery Source: Euromonitor International
billion dollar losses and its GDP growth rate is expected to drop by one percent for the year. Due to border closure, export and import business has taken massive hits in the country. Consumer electronics and automobile manufacturers in Vietnam rely heavily on Chinese supplies. Many factories in the country have either temporarily shut down or reduced production because of the reduced materials coming from China.
Is Wilbur Ross' wishful claim correct? US Commerce Secretary Wilbur Ross recently claimed that the US
will gain from the coronavirus outbreak in China. However, it may not be exactly true. Many US companies have production units in China or inversely rely on manufacturers in China. The Covid-19 outbreak will negatively affect companies in the US, according Catalina StefanescuCuntze. The impact of this will be more short-term than long-term, and it certainly isn’t as simple as Wilbur Ross states, added Robert Boute. It’s likely that some production, and therefore jobs, may return back to the US and the same for other countries, in the shortterm to deal with a production
ANALYSIS CORONAVIRUS SUPPLY CHAIN
Industry’s Exports Share, Percentage of total 2018
29%
8%
Pharmaceuticals and Medical Goods
42%
7%
Chemical Products
crisis, however long-term, it is likely that once production levels pick up again in China and neighboring countries that production will move back to these locations as they are a lot cheaper.
How do you hedge for China’s vulnerability to epidemics ? Given China’s vulnerability to epidemics, how can companies prepare to better deal in a situation like this? When International Finance asked the question to Robert Boute, he said that there are two specific ways in which companies can prepare and limit the impact of epidemics such as the
coronavirus on their supply chain – however neither are the holy grail and completely effective. He explained, “Firstly, one way is to implement a dual-sourcing method into the supply chain. This means that a company is not reliant on just one company or one location for its supply. This is likely to mitigate the risk of disruption in a supply chain, as if a company is unable, for some reason, to obtain components from one supply, then they are able to fall back onto the alternative supplier, to ensure they can continue to obtain their supply. However, there can be difficulties in this as the ‘tier 2’ supplier issues
may come in to play again. Take the coronavirus as an example, companies could have somewhere in Europe as an alternative supplier, however this company may also be reliant on a location or company affected by an epidemic at some point in their supply chain, meaning they may be halting or limiting production also. Another way in which this impact could be combatted is through greater transparency in global supply chains. As previously mentioned, many companies are aware of where their immediate supplies come from, but not the supplies of their suppliers, and so on. There are a vast amount of players that come into one supply chain, and many are not completely aware of every company they interact with throughout a chain. Increasing the transparency of these supply chains will ensure companies are completely aware of every single company involved in their supply chain, and exactly where all components come from.” This full transparency, of course, is very difficult to ensure. This can be increased however by companies collaborating together to improve the digitisation of their supply chains. In doing so, companies can track exactly how their supplies are arriving, therefore allowing companies to mitigating many risks on the way.” Replying to the same question, Catalina Stefanescu-Cuntze told International Finance that if the epidemics-led disruption is relatively short-term, building additional inventories in the critical points of the supply chain can
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help weather the supply shock by ensuring that demand can still be met (at least to some extent) until production returns to normal, as it eventually will. For mediumterm disruptions, likely the most effective strategy is to diversify away the supply chain risk by redistributing parts of production to alternative geographic regions. Either of these strategies will entail additional costs. Some manufacturers might try mitigating the impact of the virus by moving production elsewhere in Asia. Robert Boute believes it could be an option, but of course there many other countries, especially in Asia, that are also affected by the coronavirus, and are also halting production. Dual-sourcing production is the best way in which to counter act these breakouts, although as previously stated it is not a complete fix to the problem. Companies should look to have another source of production that is far away in location to their other source.
Contingency planning for virus outbreaks in China Be it SARS in 2002 or Covid-19 in 2020, there are many lessons to be learnt by corporates that can help better prepare for such an unprecedented situation in the future. Some companies do have continuity plan for scenarios such as earthquakes or floods. But currently, not many companies at all have continuity plans centered on epidemics such as outbreak of a virus as they are of course nowhere near as common or easy to predict as a potential earthquake or flood. Robert Boute said that not many
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firms will look to build further continuity plans around viruses such as the coronavirus, as they are still incredibly rare. He said, “What this has taught us however is just how vulnerable our supply chains really are in terms of unpredictable risks. It also shows us how vulnerable companies are when using single sourcing strategy, and illustrates the perils and knock on effects of these supply chains on almost all companies.” Another important lesson to learnt from this is that companies should be looking to improve the transparency of their supply chains, collaborating together to make each other away of exactly all the parties involved in making a certain product. By citing Boeing’s supply chain during the launch of its Dreamliner aircraft
as an example, Robert stresses that not being transparent in the supply chain could lead to delay in supply as in the case of Boeing, where production was three years late due to incredible numbers of outsourcing, and not knowing the specific details of their supplier’s suppliers and so on down the chain. Another important point to be noted is also supply chain’s reliance on China, or in fact its reliance on a single market is bound to increase risk one way or the other. Many companies have already carried out feasibility studies last year to move their units out of China, in light of the US-China trade war. Also, factors such as rising labor costs, increasing competition and political instability in China has already added to the uncertainty. Catalina StefanescuCuntze believes a re-balancing of
ANALYSIS CORONAVIRUS SUPPLY CHAIN
Supply chains have become more integrated, but at the same time less flexible. Ultimately, increasing supply chain resiliency depends on individual players’ decisions on the tradeoff between managing risk and lowering costs
the manufacturing base towards a broader range of economies can certainly help to hedge by diversifying the global supply chain risk. But there are also costs associated with this strategy – China has extensive transportation and logistics systems and a vast and skilled worker base, so re-distributing production away from China may entail higher costs or lower quality, at least in the short-run.
China’s vulnerability: Building supply chains resiliency Since an epidemic like the coronavirus is not a regular occurrence and hard to counter efficiently, it is also difficult for companies to design a model to protect itself from such instances in the future. There are epidemiological models of infectious disease spread that can provide some guidance as to
possible scenarios; computational disease modeling is well-established as a field. The challenge is, however, that the uncertainty related to these predictions is such that effective contingency planning is still difficult, in practice. For such models to be a success the availability and quality of this data, especially in the early stages of the outbreak are crucial. As international organisations and national health systems increase their coordination and information sharing in response to each outbreak, and as more data sources can be incorporated into the models, the increasing quality of the available data will hopefully also lead to more useful predictions for contingency planning. Catalina Stefanescu-Cuntze said that the focus over the last couple of decades on lean manufa-
cturing, offshoring, and supplier consolidation had the benefit of achieving substantial efficiency gains for global companies operating in very competitive markets. However, that same focus also had the effect of significantly increasing the overall global supply chain risk, by concentrating manufacturing facilities while also reducing inventory levels that limit the reactive capacity in case of a disruption. Supply chains have become more integrated, but at the same time less flexible. Ultimately, increasing supply chain resiliency depends on individual players’ decisions on the tradeoff between managing risk and lowering costs. Many companies prefer setting up production plants in China or other Asian countries due to its pricing factor. But since such countries are prone to epidemics, it is important for companies to look at production in a long-term model financially, and look to invest more in production to protect themselves from such risks, which will only be more costly in the long-term if they do occur. Robert Boute believes companies should not consider pricing as a major factor; instead the focus should be continuous production.
editor@ifinancemag.com
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TECHNOLOGY
IN CONVERSATION
MARTIN BAUMANN CO-FOUNDER AND MANAGING PARTNER, CMCC GLOBAL
Bitcoin investors only seek low price volatility and greater access to investment and that’s what Asia’s first bitcoin mutual fund promises to offer
Bitcoin: The new gold in a declining global economy? SAMUEL ABRAHAM AND SANGEETHA DEEPAK
In the last decade, bitcoin has emerged from a digital currency into a global asset class. As Martin Baumann, co-founder and managing partner at CMCC Global, the first blockchain technology focused venture capital fund in Hong Kong tells International Finance in an exclusive interview, it is a phenomenal invention with no borders, run by a decentralised network and effectively governed by a computing algorithm. And in a perpetually declining global economy, it might be the new gold – the last safe haven asset for global investors. By mid-March 2020, when the US Fed cut interest rates to 0 percent and announced a quantitative easing programme, bitcoin traded around $5,400. It started the year 2019 at at $3,717 and surpassed $11,000, trading at $11,815.04 on August 7. In January 2018, bitcoin was priced well over $13,343.71 The overall market cap of cryptocurrencies now stood at $154.7 billion and bitcoin’s dominance rate is 63.9%. It must be noted that bitcoin's price rose 87 percent in 2019. The only things that bitcoin investors seek are low price volatility and greater access to investment. After taking into account the persisting complexities in bitcoin investment such as purchasing and safekeeping, CMCC Global has launched Asia’s first bitcoin mutual fund Liberty Bitcoin Fund for accredited investors. Martin tells us how bitcoin investors can benefit from the fund’s provision of institutional-grade access to bitcoin. Also, a Hong Kong Stock Exchange-listed custodian protects all the bitcoins in the company’s custody and they are also covered by insurance. Martin speaks about the value proposition of a bitcoin mutual fund, the short term and long term bitcoin
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CRYPTOCURRENCY BITCOIN FUND
price outlooks, why bitcoin as just a store of value might itself be good thing, and the optimal approach governments and regulators can take toward bitcoin.
International Finance: For an investor is the fact that bitcoin prices are not correlated to other assets an advantage? Martin Baumann: Generally, investors are in search of uncorrelated assets that can hedge their existing portfolio. Bitcoin is often perceived as an emerging digital version of gold. Certainly, bitcoin prices not being correlated to other assets is an advantage for investors based on the belief that the current global financial system is not sustainable and healthy. The last major financial crisis of 2007-08 has been largely fixed through quantitative easing, that is central banks printing additional money. In fact, looking at a M3 money supply growth curve shows an exponential function that is steeper than the bitcoin price chart. Investors globally are worried of the next financial crisis — and they are looking for assets that are uncorrelated with existing assets in their portfolio. Considering empirical data from the past 10 years,
Bitcoin has been largely uncorrelated with equities, fixed income and oil. The thesis is that bitcoin is a hedge against a declining global economy. Only time will tell how much bitcoin will remain uncorrelated in a global financial meltdown, but the nature of it, being a truly decentralised asset, only run by code and not governed by any government or central bank, combined with the empirical data of the past 10 years, points towards a credible hedge against a declining global economy.
What is the typical profile of the investors for whom you have created the bitcoin mutual fund? The Liberty Bitcoin Fund is accessible only for professional investors. Mainly large family offices globally, but specifically since the outbreak of the Coronavirus, we are seeing stronger inbound interest also from large institutional investors who are exploring to add bitcoin exposure to their portfolio mix. The launch of the Liberty Bitcoin Fund was a demand-driven decision that stemmed from the interest of our existing limited partnership investors of the prior funds of CMCC Global. We have launched Hong
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TECHNOLOGY
IN CONVERSATION
MARTIN BAUMANN CO-FOUNDER AND MANAGING PARTNER, CMCC GLOBAL
Investors seem to like bitcoin because it is a phenomenal invention: it is the first time that a unique digital asset has ever been created, it has finite supply, is being stored and governed in a decentralised manner, and it is not dependent on any federal banking system, government or country
Kong’s first fund to take on external capital specifically for blockchain investments back in 2016. Over the years, our existing investors had approached us various times asking how to gain exposure to bitcoin as well. Before we launched the Liberty Bitcoin Fund, there was no such passive tracker of bitcoin available in Asia. All assets of the Liberty Bitcoin Fund are professionally custodied and covered by insurance. Family offices tend to think in very long time horizons. For them, it is about preserving capital for generations. Often they still hold meaningful stakes in operating companies. They understand that disruptive technologies, like the internet when it started to take off during the past 20 years, or in the coming 20 years blockchain technology as the next iteration of the internet (Web 3.0), will have a material impact on their core businesses and they tend to get some skin in the game early on to be on top of such new technological evolutions.
What are the advantages of investing in bitcoin through a mutual fund as opposed to direct investment? There are three key advantages. Firstly, investing through a mutual fund is a structure that professional investors are familiar with and therefore eases the decision making process. Secondly, all our assets are fully covered by insurance. They are professionally custodied through OSL Custody, a Hong Kong-listed custody provider that itself is backed by Fidelity. Getting insurance coverage for bitcoin is a tough task and this is a major differentiator for an investor who would otherwise self-custody their bitcoin. Lastly, we provide our investors with monthly NAV statements that can be used for their accounting and tax reporting.
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What is your long-term and short-term outlook of bitcoin? There are specific short and long term drivers for the demand and price of bitcoin that we foresee. In terms of short term drivers in the next 12 to 18 months, as part of the algorithm in the bitcoin protocol, block rewards for miners are reduced every four years by 50 percent, ending with the last bitcoin ever to be minted in the year 2140. This year in May, another halving event will take place and will result in a reduction from 12.5 BTC/block to 6.25 BTC/block (or at today's bitcoin price of around 9,000 USD/BTC, from $112.5K down to $56.25K USD per minted block every ten minutes). This reduced additional supply will lead to upward price pressure, assuming that the demand for bitcoin continues to grow. The first time such a halving event took place, in November 2012, the price of bitcoin multiplied by 79 times within a little over a year. The second time a halving event took place, in July 2016, the price of bitcoin multiplied by 30 times within less than 1.5 years. It is widely expected within the blockchain community that this upcoming bitcoin halving event will also result in an upward price movement within the 12 to 18 months following the halving. In anticipation of the upcoming halving event, the bitcoin price has already seen momentum since the beginning of the year. Longer term user statistics are looking promising: there are currently around 42 million wallets with a non-zero BTC balance in existence. According to a study conducted by the Global Blockchain Council, already around 5 percent of Americans hold bitcoin. These numbers have been growing steadily, with total wallets increasing 70 percent a year since 2016. Investors seem to like bitcoin because it is a phenomenal invention: it is the first time that a unique digital asset has ever been created, it has finite supply, is being stored and governed in a decentralised manner, and it is not dependent on any federal banking system, government or country. Bitcoin is effectively a digital version of gold that is accessible from any country globally — it is a borderless asset. It is being perceived by many investors as a hedge against a declining global economy.
CRYPTOCURRENCY BITCOIN FUND
Bitcoin today is more like gold in the early days when it was first listed on exchanges around a hundred years ago and its price back then could easily swing up or down 10 percent to 20 percent on a given day. Price volatility of bitcoin will come down as the asset matures. Then however, very likely the unit price will be substantially higher than it is today
Bitcoin critics say that it serves no purpose other than a store of value. Is this criticism valid?
Do you think that institutions are the primary investors in bitcoin now?
Being a store of value in today’s uncertain world is a worthy attribute. However, I would consider bitcoin not yet as a store of value, but rather as an emerging store of value. As of today, it is still too volatile. Bitcoin today is more like gold in the early days when it was first listed on exchanges around a hundred years ago and its price back then could easily swing up or down 10 percent to 20 percent on a given day. Price volatility of bitcoin will come down as the asset matures. Then however, very likely the unit price will be substantially higher than it is today. Because of its price volatility, Bitcoin is certainly not yet suitable as a currency, however, it could absolutely get there in the next decades. A bitcoin can be divided down to eight decimal places, the eighth digit behind the comma of a full bitcoin unit is called Satoshi. Many people believe that bitcoin will be used as ecash for daily commerce, once a Satoshi unit is valued at 1 US dollar — that would translate into the value of a full bitcoin unit of $1 million. So holding a bitcoin would make the owner some form of a digital millionaire should that scenario play out.
The question is how do you define institutions? I for one believe that institutional investors are, for example, the big asset managers like Blackrock and Fidelity. All those big institutions already have dedicated blockchain teams. For example, JP Morgan has a very strong blockchain team and develops its own blockchain Quorum. Fidelity is doing active investments in this space. In fact, they recently invested in the holding entity of our custody company, BC Group, which is listed on the Hong Kong stock exchange. So institutional investors are getting into the space but their investment focus today is more centred around equity of companies as opposed to direct investments into digital assets. CMCC Global, provides professional investors exposure to different areas within the blockchain space. We have three active digital asset focussed funds that invest into the core technical network infrastructure of the blockchain ecosystem, the Liberty Bitcoin Fund, and we are currently in the process of launching our flagship fund, the Titan Fund. The Titan Fund will provide investors access to growth opportunities within the blockchain ecosystem through a traditional equity venture capital investment strategy. It will invest primarily in seed and series A stage equity opportunities of blockchain companies and focuses on both, crypto related and non-crypto related blockchain companies, such as enterprise solutions, as we believe both areas will see substantial growth in the coming decades
What are the implications for Asia’s institutional investors in having a regulated bonafide bitcoin fund? The Liberty Bitcoin Fund appeals to professional investors globally. It is a safe, secure and regulated gateway to access this new asset class and get exposure. The fund is not an actively traded fund but a passive tracker of bitcoin. It buys and holds bitcoin for its investors and is professionally custodied and covered by insurance.
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IN CONVERSATION
MARTIN BAUMANN CO-FOUNDER AND MANAGING PARTNER, CMCC GLOBAL
As of now, institutions are more focused on getting equity exposure in blockchain companies because they are simply more familiar with those types of investments as opposed to investments into digital assets.
What is your advice for institutional investors in Asia who might be enticed to invest in bitcoin but are wary of the volatility risks? Bitcoin is a frontier technology. Investors will not be able to learn about it unless they actively invest in it. Our existing investors invest a small amount of their overall portfolio mix for two main reasons: Firstly, to have some skin in the game in order to familiarise with the technology and its developing applications and secondly, if bitcoin really plays out as expected it may well be the best performing asset class in the coming decade. So having a small allocation in it as part of a portfolio mix may make sense.
Regulators across different jurisdiction have taken vastly different approaches to bitcoin from outright hostility to welcoming it. What is the most appropriate path for regulators in their approach to bitcoin to preserve investor interests? A functional regulatory framework for bitcoin is important for the cryptocurrency to further evolve in the future. Bitcoin is a new asset class, it is merely 10 years in existence. As of today, regulators around the
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world are spinning their heads around how to regulate it appropriately to protect investor interest, without hindering innovation. As with every new disruptive technology, there are good and bad actors in the playing field making use of new features provided by those new technologies. That was the case with the first mobile phones or internet accessibility and is now the case with blockchain technology. I think we all agree, that for example mobile phones or the accessibility and use of the internet have benefitted society massively, despite the fact that some of the first users of both of those new technologies were drug traffickers and bad actors. A robust set of regulations can ensure to protect investors from sketchy activities and bad actors. We are in favour of regulators building a framework to protect from bad actors, but at the same time it needs to be balanced in order not to hinder the disruptive potential for society that this new technology brings — for example financial inclusion of the unbanked population in the world.
editor@ifinancemag.com
ECONOMY
ANALYSIS
TAXATION OMAN VAT
Although the Sultanate’s taxation system is largely unprepared for the implementation of VAT, VAT will benefit Oman’s economy
How prepared is Oman to levy VAT? PRITAM BORDOLOI
Oman recently announced that it will introduce value added tax (VAT) in its taxation system from 2021. The Sultanate’s government signed the Gulf Council Cooperation (GCC) VAT Framework or the Common VAT agreement back in 2017. The Ministry of Finance in Oman had planned to implement VAT in the Sultanate from The UAE and Saudi Arabia September 1 2019. Experts were the first believe Oman’s decision two members to delay the process of of the Gulf introducing the new tax Cooperation law could be based on slow Council (GCC) growth of its economy. Omani to honour the authorities might be fearful Common VAT of the unstable oil prices and agreement and global slowdown and the introduce addition of a new concept VAT such as VAT to its taxation system in the present time may only complicate things. The UAE and Saudi Arabia were the first two members of the Gulf Cooperation Council (GCC) to honour the Common VAT agreement and introduce VAT in their taxation systems. The Kingdom of Bahrain also introduced VAT recently. Discussions to levy VAT in the Middle East started back in 2012. However, back then, many of the members of the GCC weren’t onboard due to various reasons such as dissent from oppositions back home and
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resistance from tax payers and businesses. In 2016, finance ministers from the six Arab states agreed on the framework and the agreement was duly signed in 2017. The agreement however did not bind the member states to levy VAT at across the Middle East and at the same time. Oman had the option to delay the process and choose its own suitable time to bring in the changes. So, why did the Arab states, including Oman decide to levy VAT in the region? The decision is based on the depleting revenue from oil and to reduce their economies’ dependence on oil and hydrocarbons. In short, Oman wants to diversify its economy and not completely depend on oil. Experts believe, Oman’s decision to levy VAT would prove to be monumental. However, the process of its implementation, especially for small businesses could be a little tricky. VAT would help the kingdom diversify its revenue, and also protect the economy from an unstable oil market.
Experiences of the UAE and other nations that levied VAT Both Saudi Arabia and the UAE introduced VAT simultaneously on January 1, 2018 and the rate was set at 5 percent respectively. In the UAE, businesses that report annual revenue of over Dh3.75 million have to register for VAT. For businesses whose supplies and imports exceed Dh187500 for a year, the process of registering for VAT is optional. According to Younis
Al Khoury, the Undersecretary of the UAE Ministry of Finance, eventually it will become mandatory for all businesses to register under the system. After the implementation of the VAT system, businesses in the UAE are required to register, issue valid tax invoices, maintain records and file a periodic VAT return, either monthly or quarterly. The government of the UAE made it clear that food items, health, education, bicycles, and social services would be exempted from VAT so that the weaker sections of the society do not feel the burden of increasing prices. Since, the weaker sections spend most of their money on essentials and necessaries, the decision to leave out these items is vital. On the other hand, electronics goods such as smart phones, laptops, cars, jewelry and watches will be taxed. We may see Oman also follow a similar model and exempt items such as food, education and healthcare products and impose VAT on luxury goods and services. Also, under the unified VAT GCC Agreement, Oman has the discretion to zero rate the education sector, medical sector, local transport sector, real estate sector, certain food items, oil and oil derivatives and commercial transportation. Saudi Arabia too, zero rated and exempted the supplies it was required to zero rate in accordance with the unified GCC VAT agreement whereas Bahrain zero rated and exempted a number of additional supplies.
VAT is to start at
5 percent
and will be seen as a crucial budgetary reform for Oman to diversify its economy beyond oil and gas
However, since VAT is something new for the Middle East, many businesses in the UAE have still not understood its full application on good and services. While the authorities have spent a good amount of resources creating awareness and educating businesses when it comes to VAT, complications still exists often leading to compliance error. That said, a report by PwC Middle East Economy Watch revealed that revenues from VAT have exceeded expectations. So what can Oman learn from UAE’s experience when it comes to VAT in the kingdom? Shiraz Khan, head of Taxation at Al Tamimi & Company told International Finance, “With three other countries in the GCC having already implemented VAT, Oman can learn a great deal from the approach taken and challenges faced by the other GCC countries. Oman should hold a public consultation and take into account feedback provided by businesses and also establish dialogue with different industry groups to understand their specific industry issues before finalising and publish the VAT law
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and regulations. Oman should also conduct workshops and seminars for businesses to help them understand the impact of VAT on their business and what they need to do in order to be compliant. The possibility of phased introduction should also be considered to give smaller businesses more time.” What Oman can also do is study the implementation process of VAT both in the UAE and Saudi Arabia and make necessary amendments. By the time Oman levies VAT in the Sultanate, both the UAE and Saudi Arabia would have successfully completed three years with VAT in their taxation system. But everything would depend on Oman’s capability and its preparedness to levy VAT. In this regard, a spokesperson of CMS Oman, which is one of the largest law firms in Oman, told International Finance that, “Oman has not yet issued any Royal Decrees or Ministerial Decisions to govern the implementation of VAT, to that extent it appears to be unprepared. It has also delayed the implementation of VAT for from 2018 to 2021 suggesting that the Tax Institution is still working towards preparing Oman for the introduction of VAT.”
How prepared is Oman’s taxation system for VAT? Since VAT is relatively something new in the Middle East, the very process of dealing with the new tax system could prove to be challenging. The database or filing system previously followed by businesses or authorities could prove to be redundant. If an overhaul of the filing system is not
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done in time, filing VAT manually could also prove to be a gargantuan task especially for businesses in the FMCG sector. In the UAE and Saudi Arabia, when VAT was introduced, many local businesses did not have the proper filing systems. Even international businesses had to alter their ERP systems according to the new law. Another major problem faced by the two countries during the initial period was the failure of the businesses to issue tax invoices according to the new regulations. Delays and disputes with regard to pricing and invoicing also impacted their working capital.
It is very likely that Oman’s challenges will be similar, even if they are not identical. The challenges will depend on its taxation system and how responsive Omanis are to VAT. In this regard, Shiraz Khan said, “While a corporate tax system has been in place in Oman for some time, there has been no sales tax or similar taxes in Oman. Therefore, the introduction of VAT will be new for businesses in Oman as well as the tax authorities. The introduction of VAT will have a major impact on businesses and will require them to make changes to their IT systems, contracts, and business processes which will typically take at least
ANALYSIS TAXATION OMAN
“The Oman tax authority will also need to make the necessary changes to its IT systems, hire additional resources and train their staff on the implementation and application of VAT and the related processes to enable it to administer the VAT system and collect and enforce VAT” Shiraz Khan
three to six months for businesses to implement. “ Shiraz Khan said that accordingly, the Oman tax authority will need to ensure that businesses are informed about the Oman VAT system and rules in advance to give them sufficient time to prepare. “The Oman tax authority will also need to make the necessary changes to its IT systems, hire additional resources and train their staff on the implementation and application of VAT and the related processes to enable it to administer the VAT system and collect and enforce VAT. Oman will also need to make a number of policy decisions
taking into account socio-economic considerations, for example, the items that should be zero rated or exempt and any special schemes that should be introduced, “ added Khan It is noteworthy that Oman already has a corporate tax system in place and previously had no indirect taxes until the introduction of excise tax in 2019 on selective goods which are considered harmful for human consumption. The introduction of VAT will further expand the consumption tax base in Oman to include taxation on the supply and import of all goods and services unless the goods or services are exempt or zero rated under the VAT legislation. In this regard, a CMS Oman spokesperson told International Finance that, “We do not expect to see any further changes to Oman’s existing Tax Law (RD 09/2017) in the foreseeable future as it is relatively new (from 2017) and there have been no mention of such from the Omani government. However, we would expect that a new set of laws and regulations for the implementation of VAT will be published in time for
businesses to comply with any necessary requirements to register and implement system changes prior to the date that VAT will be introduced.” The CMS Oman spokesperson also told International Finance that Oman’s Tax Institution will most likely face challenges with the historic souk culture, as it will be difficult to implement the VAT requirement on small and unregistered and unregulated establishments. Shiraz Khan of Al Tamimi believes the time frame for the publication of the VAT law and regulations will be a major challenge. He calls for taxpayers being given sufficient time to prepare for the introduction of VAT. Therefore, the expectation is that the laws and regulations should be published in advance to facilitate the taxpayer’s preparation. Another challenge is the IT preparedness of the Oman tax authority as robust IT systems will need to be in place to facilitate efilling and ecommunication with taxpayers. The Oman tax authority has recently implemented a new IT
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system to enable efiling of corporate tax returns. However, the new IT system has not integrated the VAT requirements. Shiraz Khan believes changing the IT system is vital to ensure that the Oman tax authority can properly administer the VAT rules.
Is the current level of VAT enough for Oman? The current level of VAT has been set by the Common VAT agreement, which the six GCC members signed in 2017, at 5 percent. According to estimates made by the IMF, VAT is expected to account for around 1.5 percent to 2 percent of the Oman’s GDP. Even though this will help Oman generate additional revenue and diversify its revenue stream, VAT on its own will not be sufficient to cover deficits in revenue in the future. The CMS Oman spokesperson told International Finance that, “VAT is to start at 5 percent and will be seen as a crucial budgetary reform for Oman to diversify its economy beyond oil and gas. Oman’s oil and gas revenue in 2019 was approximately OMR 7.4 billion whereas VAT is expected to collect a sum that is small, but not insignificant to Oman’s economy.” Given revenue collected through VAT would be minimal; Oman along with the other Arab states might decide to increase the rate or even set different rates for different products and services. Also, there lies the possibility of the introduction of more indirect taxes. To put things into perspective, VAT is just one of the many fiscal strategies that the government of Oman will
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“The introduction of VAT will have a major impact on businesses and will require them to make changes to their IT systems, contracts, and business processes which will typically take at least three to six months for businesses to implement” Shiraz Khan
introduce to reduce the economy’s dependence on oil.
How will VAT benefit Oman’s economy? Besides broadening the revenue sources for Oman, VAT is expected to bring in greater transparency and accountability. The implementation process for VAT is quite simpler, though expensive, compared to other indirect taxes. Transparency will come from the fact that VAT is levied on each level of the supply chain and this facilitates authorities to track businesses and effectively monitor their compliance. The new law will also bind businesses in Oman to follow relevant processes and make sure their transactions are compliant, thus adding to accountability. From an administrative point of view, even though the implementation is expensive, VAT will facilitate the reduction in tax evasion. Since VAT is collected throughout the supply chain until the product reaches the consumer, the series of transactions create a trail which can be easily
revisited in case of a discrepancy. The higher level of transparency will also allow businesses in Oman to attract global investors. The added investments in the non-oil sectors will help the markets grow, which ultimately, will contribute to the revenue of the Omani government through VAT. The revenue raised by the government through VAT will only come back to the public as it will be invested for welfare projects and the development of Oman. Also, since VAT is a consumption tax, the revenue generated from it by the Omani government will not be a fluctuating one; rather it will be constant to a certain level. This will also allow the government better plan future projects and make necessary investments. Overall, the success of VAT will depend on its implementation and also partly on the public sentiment. Since the consumers will be the one paying the tax, it is important for Oman to maintain an upbeat public sentiment in this regard. editor@ifinancemag.com
CORPORATE UK RECESSION
It is hard to predict a recession and its outcome; but nevertheless businesses can be prepared for it
THOUGHT LEADERSHIP
ECONOMY
TIM WAKEFORD VP FINANCIALS PRODUCT STRATEGY, WORKDAY
2020: Recession proof your business Almost half of UK firms think the country will go into recession this year, according to the latest Stenn research. Climate change, politics and other global events are making it near impossible to predict when a recession will occur in the UK or elsewhere. This makes it all the more important that businesses in the UK use their time effectively to build a strategy that can cope with the threat of recession. The usual course of action for businesses during a recession in the UK is to cut down on costs where possible, wait for the waters to calm, or another fortunate turn of events. But how can businesses ensure growth during these tricky economic times? To help support organisations’ understanding of how to prepare in a time of market fluctuation, Workday conducted “Organisational Agility at Scale: The Key to Driving Digital Growth,” a global study of 998 business leaders across a number of industries. The study looked at a range of areas from finalising balance sheets to product offerings — and showed that, ultimately, flexibility across different departments is what set top-performing businesses apart in the months before a recession. The research findings also revealed that both cultural and technological factors hold back businesses when a recession hits. The temptation may be to look at where to reduce costs, however the C-suite should be asking
itself, "How do we continue to innovate regardless of what happens in the market?" Here’s my take on some tangible steps to prepare your business not only to cope in a recession, but thrive.
1. Upskill your workforce for the digital age As many top businesses have discovered, a vast portion of revenue is now linked directly to skill areas, such as the development of automation, that didn’t even exist five years ago. This technological disruption is unlikely to slow down anytime soon. Companies must take advantage of people analytics to identify where the existing skills are and what other skills they need to develop. In doing so, your employees will be empowered to deliver on plans for digital innovation, no matter what the state of the economy.
2. Incorporate continuous business planning to your strategy The traditional planning cycle for businesses takes on average 77 days, and is only updated annually. That is far too long for it to still be relevant to today’s rapidly changing business environment by the time it rolls out. The consequences of this are easy to imagine — take an app developer for example. If it took as long as 77 days to fix a bug or glitch, then not only
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would customers be extremely unsatisfied, but the apps reputation would face ruin, and revenue would drop dramatically. The same applies to businesses. They must take a comprehensive and continuous approach to their planning strategy to avoid being caught out by any unexpected turn of events. Bringing recent data from reports and transactions into planning cycles will speed up the process, and provides real time insights by mapping actual business performance against set goals and taking economic changes into account. This approach also allows companies to be much more effective with their time — if a plan isn’t working out, they can adjust it with enough time to avoid a negative impact. It puts planning in the hands of the people closest to the point of action.
hold extremely important, raw customer pain points. These employees need to be empowered with the right information, and with enough time, to be able to help make informed decisions for the business and the customer. This can be achieved by introducing tools to streamline analytics from interactions into an easyto-read system to aid better, faster decision making. In today’s rapidly changing economic and technological conditions, businesses need collaborative teams that can re-organise structures and processes, or even create completely new ones, at equal pace to overcome a recession. This organisational agility allows businesses to manage the changing environment, while still meeting their own objectives, becoming more robust, and using timely measurement to retain control.
3. Empower decision-making closer to the customer
Tim Wakeford is VP financials product strategy at Workday, an on-demand financial management and human capital management software company. Wakeford joined Workday after gaining 15 years' experience in financial management, and is responsible for building, maintaining, and growing the strategic direction of the Workday Financial Management products in the EMEA region.
In order to grow the business during times of recession in the UK or elsewhere, one of the most important things is to retain customer loyalty. This is achieved by providing a product that is truly reflective of their needs. However, the typical company hierarchy plans from the top down, and this can exclude a lot of insights from employees who
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editor@ifinancemag.com
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