International Finance Magazine Jan - Mar 2015

www.internationalfinancemagazine.com

January - March 2015 UK £4 | Europe €5.35 | USA $6

IFM AWARD WINNERS pg.68

Volume I Issue 2

THE M-PESA STORY

Safaricom CEO Bob Collymore on the runaway success of mobile banking in Kenya

pg.30 OIL PRICES: IT’S A MATTER OF WHO BLINKS FIRST

pg.42 ROUBLE WOES

pg.22 PAYPAL: A NEW BEGINNING

Note FROM EDITOR

M

obile phones have changed our way of life in a way that was unimaginable as recently as two decades ago. First, we began speaking without the limitations imposed by telephone cables. Then, we eliminated the need for an immediate response by sending messages - the SMS. The next revolution was chat.

The latest is mobile payments.

It is taking the connectivity that mobile phones provide to an entirely different level. Nowadays, companies are talking of enabling people to place their request even before they reach the coffee shop only to have their order paid for and waiting when they get there. Twenty years ago, this is exactly what millions were fantasising about while waiting in queue for their coffee.

Come to think of it, what would you be fantasising about next?

The interesting part is that the potential was not tapped in some tech-savvy nation, but in Kenya, which has never been in the news for mobile phone technology. Safaricom’s mobile payment solution has revolutionised not just the telecom sector, but left bankers gaping at their failure to anticipate. If you would like to understand how Safaricom took mobile payments to the next level, the person to call is Bob Collymore. Even now, bankers are treading slowly. Their customers, on the other hand, have adopted mobile payment wholeheartedly having realised that this is the closest they have come to the empowerment that they hear about only in speeches.

Meanwhile, others are stepping in to fill the gap.

For example, PayPal is offering credit — working capital — to its long-term customers. The products and services that mobile phones and the internet

are throwing up are mind-boggling.

But PayPal is fighting its own battles.

Having been taken over by eBay, it is lagging in innovations, leaving space for start-ups. They have not yet begun treading on PayPal’s toes, but at the rate at which they are coming out of the keyboard, they soon will. To correct this, PayPal and eBay will become separately listed public companies this year. This is expected to help PayPal more than eBay. The payments service provider will focus more on innovation, keep a sharp eye on the competition and stay as nimble as possible for a company its size.

You can expect to see and hear a lot of both — mobile payments and PayPal — in 2015. Best wishes for the year ahead.

Director & Publisher Sunil Bhat Editor Dhiraj Shetty Production Sarah Williams, Mark Miller, Karan Belani Editorial Adriana Coopens, Jessica Smith, Lacy De Schmidt, Suparna Goswami Bhattacharya Business Analysts Dave Jones, Adam Lobo, Sharon Mendis, Ashton Ray, Tanya Jones, Sean Thomas Business Development Manager Steve Martin Business Development Newton Gois, Sunny Shah, Ashish Shenoy Accounts Angela Mathews Head of Events Basant Das Registered office INTERNATIONAL FINANCE MAGAZINE is the trading name of INTERNATIONAL FINANCE Publications Ltd 843 Finchley Road, London, NW11 8NA Phone +44 (0) 208 123 9436 Fax +44 (0) 208 181 6550

Dhiraj Shetty

Email info@ifinancemag.com Press Contact press@ifinancemag.com

Editor editor@ifinancemag.com

Design & Layout Rahil Shaikh Miya

Jan - Mar 2015 International Finance Magazine

INDEX January - March 2015

04

46

Volume I Issue 2

78

Interview: Capital Bank CEO Lasha Khoperia

36

OIL PRICES: REFRESHING CHANGE

26

PayPal didn’t innovate fast enough: Anuj Nayar

73

Summit: Gateway to Islamic finance

You’re under cyber attack... should you pay the ransom?

Currency: Not so cool

International Finance Magazine Jan - Mar 2015

COVER STORY

08 The M-Pesa story

52

60

Interview: ‘You can bank on Landsbankinn’

118

Pictorial: Homes built on a thick wallet

88

Diamonds make Botswana shine

Column: Revolutionise or fail

137

Where’s the

DEMAND

100

Page-turners

Jan - Mar 2015 International Finance Magazine

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You are facing A cyber attack...

should you pay

the ransom?

The advice from law enforcement is, of course, never to pay up. But that’s not an easy decision Tim Ring

International Finance Magazine Jan - Mar 2015

byte by byte

I

n November, police forces across seven European countries combined to arrest a series of mainly teenagers and young adults suspected of serious cybercrimes, including extortion and socalled DDoS attacks.

The scale of the operation and the age of the suspects drew attention to this growing threat to businesses, both in Europe and worldwide: the rise in computer hackers seeking to extort your money.

The

online threat is now such that most businesses annually suffer a cyber attack: according to the latest PricewaterhouseCoopers ‘Global State of Information Security’ report, six in 10 companies experienced a security incident in 2014, up 48% over 2013.

But the most ‘in your face’ of these e-crime threats are the twin evils of DDoS attacks and ransomware, where the criminals seek to directly extort money, and will damage your business until or unless you pay up.

With ransomware, the hacker plants mali-

cious software on your individual business phones, laptops and computers and locks up the data on them until you pay a ransom, usually a few hundred dollars/ euros/pounds per device.

With the more wide-scale DDoS attacks, the hackers will stop your company trading online by bombarding your website with tons of traffic, only relenting when they receive payment of typically tens of thousands of dollars/euros/ pounds.

The burning question for businesses faced with these threats is: what can you do if you’re attacked, and should you pay the

money?

The advice from law enforcement is, of course, never to pay up. But that’s not an easy decision – borne out in November 2013, when the local police department in Swansea, Massachusetts, USA was infected with the notorious CryptoLocker ransomware; they opted to pay 2 bitcoins or roughly $750 to get their data back.

If even the police succumb to cyber-blackmail, ordinary businesses will justifiably be tempted. But is it right or wrong, commercially wise or commer-

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Jan - Mar 2015 International Finance Magazine

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cial suicide?

Raymond Ijsselstijn, a senior analyst with law enforcement agency Europol and one of the team behind the November arrests, insists: “Businesses should never pay the money.”

But even he accepts it might make commercial sense: “I can understand from the business perspective they’re tempted to do so, because of brand damage or they just want to have access again to their important business data, and to hopefully carry on business as usual. They take a commercial decision — but it’s not a decision a police officer would like to see.”

In luring you to pay, the cyber-criminals are clever: with ransomware, they pitch the sum at a relatively low level and make it easy to hand over, to a web address in just a few clicks. The latest ransomware, CoinVault, even lets you choose one file to rescue for free, to show

the hackers’ ‘good faith’ if you go ahead.

Likewise, with DDoS attacks, although the demand is for tens of thousands, the criminals know the ‘mitigation’ services needed to get a business back online cost even more, and every minute the company website is down and not trading, the pressure is mounting to pay up.

But experts point out the problems if you do succumb.

Ijsselstijn said: “With ransomware, even when you pay, it doesn’t guarantee that your files are unlocked.

The computer will still remain infected, you will still have to run your own anti-virus and clean your computer or mobile phone.”

And he points out: “Cyber criminals are opportunists.

If companies just pay up, the criminals will continue doing it.”

This view is shared by Charlie McMurdie, now a

International Finance Magazine Jan - Mar 2015

senior cyber-crime advisor with PwC, and previously head of the London Metropolitan Police’s Central e-Crime Unit.

She has seen what has happened to PwC clients who caved in to the DDoS or ransomware demands: “We’ve had phone calls from customers who have paid the ransom when they have come under attack or suffered ransomware thinking that would resolve things... and then it hasn’t, so they’ve then come to us.

“Once you take the bait and start paying these criminals, it’s just encouraging more of the same. There’s no guarantee when you pay that the attack’s going to stop or that you’re not going to get attacked again.”

But McMurdie has also seen first-hand the impact of these cyber-crimes: “The attacks can be completely devastating,” she said, “particularly to small businesses that just haven’t got the

“

Cyber criminals are opportunists. If companies just pay up, the criminals will continue doing it Raymond Ijsselstijn, a senior analyst with law enforcement agency Europol

byte by byte

luxury or money to fork out for substantial mitigation services, can’t afford that downtime, can’t afford that loss of trade.”

So she recognises the logic of paying to get the business back up-andrunning. “If it’s going to cost you 40,000 for mitigation services and the demand is only for 5,000, then companies sometimes are inclined to pay the lower amount.”

McMurdie says the best alternative is to be prepared for the attacks – although she warns few companies have a tried-and-tested ‘incident response’ plan in place.

Her advice? “Think through what you’ve got in place, where your dependencies are, and what the impact and what your response should be should you come under attack.

Don’t just look at internal infrastructure, but also the dependencies you’ve got in the supply chain around you.”

Ijsselstijn echoes this: “There’s a lot to do in the

prevention side. Back up your files, inform your staff of these potential threats and update your IT infrastructure. There’s no one golden rule, but report it to police and get their experts to try to find out who’s behind it.”

Likewise, cyber-security expert Tim ‘TK’ Keanini, chief technology officer at Lancope, refuses to rule out paying the money demanded, but says well-prepared companies are under less pressure to do so.

“Everyone should be in a state of readiness so that when this happens, paying the criminals is not the only option,” Keanini said.

“If you look at the business side of things, cloud backup solutions have gotten so good and so inexpensive that it is your best defence against ransomware.”

To counter DDoS attacks: “Smaller organisations should just go with a cloud provider that has their act together in terms of counter-measures. Larger

organisations don’t really have that choice and have to fend for themselves, but in the end it is about a design that has no ‘single point of failure’.”

However, all these experts accept that the number and severity of DDoS and ransomware attacks are growing fast, as the ‘tools of the trade’ become more sophisticated, and easier to use and get hold of through ‘dark web’ internet chat rooms.

So the success of any ‘defence’ measures you deploy may be limited, while the chances of being cyber-extorted continue to grow.

As McMurdie said: “Rehearse, practise what your response will be when you come under attack because if you haven’t come under attack or suffered a data breach as yet, then you certainly will.” IFM

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Once you take the bait and start paying these criminals, it’s just encouraging more of the same. There’s no guarantee when you pay that the attack’s going to stop or that you’re not going to get attacked again Charlie McMurdie, now a senior cyber-crime advisor with PwC, and previously head of the London Metropolitan Police’s Central e-Crime Unit

Jan - Mar 2015 International Finance Magazine

COVER STORY

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International Finance Magazine Jan - Mar 2015

COVER STORY

M-Pesa’s runaway success has thrust Kenya into the role of global leader in mobile money transfer Suparna Goswami Bhattacharya

COVER STORY

Amoxers Wachira

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Jan - Mar 2015 International Finance Magazine

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10

s the rest of the world strives to adopt cashless economies, Kenya is emerging as an unlikely leader in digital finance, thanks to a mobile phone-based money transfer platform which is spurring a cashless revolution in the East African nation (population: 44 million).

From paying for goods, services and utility bills, to fares in public transport systems to booking a flight or even remittances to people in far flung villages, M-Pesa offers Kenyans the convenience of making transactions at the touch of a button.

The pioneering product was the outcome of the collaboration between mobile telephony giant Vodafone and Safaricom, Kenya’s leading tele-communication

company. With the only requirement for participation being a basic mobile phone, the success of M-Pesa does not come as a surprise. It is currently being used by over 19 million Kenyans, an equivalent of two-thirds of the adult population.

Statistics indicate that the mobile payments platform handles well over $71.2 million (Kshs6.41 billion) daily, with transactions ranging from Kshs50 to Kshs70,000. M-Pesa has so far seen over $17billion in peer-to-peer transactions, estimated to be a third of the world’s mobile transactions, a clear demonstration of the system’s runaway success.

At inception, M-Pesa was marketed as an alternative remittance system for Kenyans who had moved to urban centres and were looking for ways of sending

International Finance Magazine Jan - Mar 2015

money back to their families in their village. There were two ways of doing that back then: the expensive but safe remittance service of the Kenya Postal Corporation or travel home to deliver the money — a cheap but risky alternative.

How M-Pesa works Using data preloaded on a SIM card, M-Pesa utilises an SMS based interface to transmit money virtually to other phones.

A user is required to sign up for the service at any of Safaricom’s 81,025 M-Pesa agents and put money into the system by handing cash, which is credited into the customer’s virtual account.

To withdraw, M-Pesa users visit an agent who checks that the customer has sufficient funds before debiting their account and handing over cash.

Users can also transfer money to another mobile phone user.

The virtual account can be used to pay for goods or services.

Meteoric growth The single most reason for M-Pesa‘s unprecedented rise has been attributed to Africa’s heavy adoption of mobile phones. More than 80 per cent of Kenyans own a mobile phone, or can easily access one.

M-Pesa’s huge adoption demonstrates how readily available technology and culture can be blended to deepen financial inclusion in Africa, where most people still remain unbanked or under banked.

Safaricom’s chief executive Bob Collymore says, “Electronic transfers save people time, freeing them to do other, more produc-

COVER STORY

tive things instead. We are happy with such growth and it definitely means Kenya is slowly moving towards a cashless society. Mobile money has become a way of life for more Kenyans and there is still big room for growth.”

But, it does not seem as easy as it sounds.

There are only a few success stories in other African countries.

Many say that the comparisons are unfair and it would be wrong

to expect every company to replicate the success the British telecom giant enjoyed in Kenya. The reason is each market grows at a variable rate and is based on factors which only partially include regulation, mobile network operator (MNO) market share, population density, willingness to engage in the business by banks among others.

David Klei-

man, Laos-based senior consultant for digital financial services and branchless banking, PHB Development, says, “To say that others have not been able to emulate M-Pesa is like saying that none of the world’s top tennis players can emulate Roger Federer. There is a lot happening in this space and

we should not let one player’s success obfuscate the basic truth that there is a strong field out there.”

It is also important to understand the market situation in 2007 when MPesa was launched. Romal Shetty, partner and head of telecom practice, KPMG in India, says, “One of the biggest differences

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Jan - Mar 2015 International Finance Magazine

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between Kenya and other African countries is that when Safaricom introduced M-Pesa, the company was able to capitalise on its near-monopoly in Kenya’s telecommunications market.”

Another reason for the slack uptick of mobile money in other countries is tough regulatory environment, which differs with each country as well as region.

For instance, though West Africa brought in regulations for mobile money in 2006, Central Africa is yet to come up with any. Even with West African countries, for some nations, it is a bank-led service while for others the service is led by mobile operators.

Nonetheless, regulators in many markets are paving the way for e-money and the entry of non-bank operators. Business models and systems for electronic remittances — both domestic and international — have already been well tested in other markets around the globe, say McKinsey analysts.

Scenting an opportunity, many financial providers are getting into collaboration with mobile companies.

A few months ago, Bank of Khartoum became the first to launch mobile payments in Sudan. The product is called Hassa which means ‘Now’ in Arabic. Kashif Mohammed Naeem, EVP & group head (Retail,

SME & Microfinance), Bank of Khartoum, says, “Banking penetration in Africa is around 20% and mobile money targets unbanked Africa. Sudan is no different from other African countries. We have just 0.27 bank branches per

International Finance Magazine Jan - Mar 2015

1000 km square and about 15% banking penetration.

However, mobile penetration is around 75%.” Hassa is targeting the unbanked and converting the existing un-official means of money transfer into a formal channel of mobile money.

How far they, and others, will succeed cannot be predicted, but one thing is for sure: Kenya has shown the world that a mobile phone is more than just a device meant for talking. IFM

“

Electronic transfers save people time, freeing them to do other, more productive things instead.

We are happy with such growth and it definitely means Kenya is slowly moving towards a cashless society. Mobile money has become a way of life for more Kenyans and there is still big room for growth Bob Collymore, chief executive, Safaricom

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What an idea

T

he idea of M-PESA was conceived by a London-based team within Vodafone, led by Nick Hughes and Susie Lonie. They believed that mobile phones could play an important role in lowering the cost of accessing financial services. The idea was seized by the Safaricom team in Kenya, led by then CEO Michael Joseph and product manager Pauline Vaughn.

The going, however, was not easy. Safaricom needed to set up a widespread network of agents to enable customers to access their cash. Susie Lonie, who was instrumental in launching and running the service, says, “The real challenge was convincing the agents. They were dealing with something that was completely new.” The company started with 185 agents for the whole country before ramping up the number to 2,000 at the time of the launch.

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Mobile money and MFIs

M

obile banking has come handy for microfinance institutions, whose clients are typically from the unbanked section. According to Global Mobile Money Adoption 2012, there are more mobile money accounts than regular bank accounts in Kenya, Madagascar, Tanzania and Uganda. Also, there are more mobile money James Onyutta, outlets than conventional bank branches in 25 CEO, countries.

Musoni M-banking has become an alternate delivery channel for many microfinance institutions.

Take the case of Musoni, the Kenyan MFI which is 100% cashless.

“Ours is the first microfinance institution in Kenya, which is 100% mobile. The concept is based on mobile banking. Clients receive loans and repay through M-Pesa,” says James Onyutta, CEO, Musoni, which started operations in April 2010. It now has about 20,000 customers.

“Thanks to mobile banking, we are able to reach out to clients far and wide with minimal investment in physical offices,” says Onyutta adding that Musoni manages with 50% of the cost it would incur were it to operate without mobile banking.

Jan - Mar 2015 International Finance Magazine

COVER STORY

Case Stu

Before Name: David Muturi Age: 32, Occupation: Tailor Location: Pangani, two kilometers outside the capital, Nairobi Marital status: Married, with three children.

Before M-Pesa came in 2007; I was a young family man

I had a bank account but it was not effective

The little money I saved used to get depleted fast due to hidden charges by banks

I had to visit the bank regularly to make deposits

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Those days, I used to close shop for an entire day to deposit my weekly earnings

Also, paying for electricity and water bills was hectic

I would spend a lot of time in the queue

Transferring money was a tedious affair. I used to send money to my wife who lives in the rural area by use of courier services, which were expensive

At times, I could send money with friends and neighbours whenever they were travelling.

But it was risky; some could not be trusted and ended up spending the money

The other players Mobikash is an independent mobile commerce platform, which consists of an integrated mobile banking, mobile money transfer and payment system. It operates across all mobile networks, banks and financial institutions, bill issuers, merchants and agents.

International Finance Magazine Jan - Mar 2015

JamboPay is an online payment gateway that allows users to securely make and receive payments through mobile phone. Shoppers can pay for goods and services online while sellers can receive payments for purchases made online.

Equitel, a subsidiary of Equity Bank, is set to give M-Pesa a run for their money, as it integrates a banking model and a mobile phone money transfer platform to make payments even more seamless.

COVER STORY

dy

After As a tailor, I get many orders, especially during the festive season.

My customers give me orders for specific fabrics that they like. I have to source these fabrics from the nearby Gikomba market, then sit down and work on the suits. One suit takes me an average of two days to sew. Most often, I have very tight schedules. This is where M-Pesa comes in handy

Some of my clients pay me via M-Pesa

M-Pesa came in

2007

This way, I have been able to better utilise my time and make more money. I can concentrate on sewing rather than wasting time to fetch fabrics

Nowadays, I don’t have to visit the busy market to get the fabrics. I check whether the material I want is available. I then send money via M-Pesa. The fabrics are delivered at my shop

Tangaza Pesa enables anyone with or without a mobile phone to send or receive money. Users can make peer to peer domestic transfers, pay bills, make bulk payments, buy airtime, or disburse or repay loans.

Tigo Pesa allows corporates to receive funds from their customers or subscribers for goods and services. It targets organisations that receive many payments from the public, or anyone seeking convenience and timely payments for their customers.

Currently, I do not have a bank account as my needs are met

by M-Pesa. It is my bank. I can save money on my phone, send money to my family upcountry, pay for goods and services and do much with my small phone, anywhere, anytime

I can also lock my savings for up to six months via M-Shwari, another service linked with M-Pesa

Lipuka integrates bank and payment channels to enable music downloads, bill payments, and information services via WAP. It is powered by Cellulant, a company that serves over 60 million subscribers throughout Sub-Saharan Africa.

Jan - Mar 2015 International Finance Magazine

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COVER STORY

Key statistics

M-Pesa

Safaricom ownership

19.3 mn customers have signed up

35% Govt. of

40%

Kenya

Vodafone

for M Pesa. Of these,

11.6 mn are active users.

81,025 15,478 The number of M-Pesa outlets in Kenya

16

25% free float

new outlets opened in 2014

M-Pesa 34% Named biggest of airtime

top-ups are done directly through M-Pesa

tax payer by the Kenya revenue authority

Contributes about Kshs

26.56 bn of Safaricom’s annual revenue of Kshs

144.67 bn International Finance Magazine Jan - Mar 2015

COVER STORY

M-Pesa spin offs Lipa Na M-Pesa

allows people to pay fares for public transport, locally known as Matatus, with mobile devices instead of cash. The plan was announced at the end of last year. Over 36,749 merchants have signed up for Lipa Na M-Pesa. Over 140 fast moving consumer goods (FMCG) distributors use M-Pesa. It competes with Google's Beba Pay, an electronic card compatible with several bus systems. Other competitors include Kenya Commercial Bank’s Abiria Card and Kenya Bus Services’s Beba Card.

Lipa Karo

Diaspora remittances

were most recently added to the list of Safaricom's services.

The company partners with Skrill, a UK-based online payment company. All the customer needs is a full name and M-Pesa account number to transfer money back home to family or friends in Kenya.

Skrill charges a 1 percent fee for each transfer.

BUY SELL PAY SAVE

allows customers to pay for school fees through mobile phones by depositing money through one of the outlets and sending it to the school administrators via a specific code.

Lipa Kodi

lets Kenyans manage and pay rent through mobile transactions among banks, landlords, tenants, and homeowners.

M-Shwari

is a partnership between Safaricom and the Commercial Bank of Africa (CBA). It allows customers to take out loans and save money on their mobile phones. The program has had success since its launch in 2012, boosting the number of bank accounts in Kenya. M-Shwari now has over 2.4 million active customers with KES 1.8 billion in deposits, KES 0.8 Billion in loans, with NonPerforming Loans standing at 3.8%. # At the end of November 2013, the number of mobile money agents stood at 112,947, a 50 per cent increase from 75,226 in the same period the previous year.

# In 2013, the Central Bank proposed to open the money transfer system under the draft National Payment System (NPS) regulations to allow for interoperability of mobile money services among the four telecom providers — Safaricom, Orange, Yu and Airtel. If passed, this would mean that other mobile operators will access Safaricom’s M-Pesa platform, increasing the options for customers.

Source: Central Bank of Kenya

Jan - Mar 2015 International Finance Magazine

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COVER STORY

INTERVIEW

‘M-Pesa is the single largest contributing 18

factor to financial inclusion in Kenya’ Safaricom CEO Bob Collymore tells IFM that M-Pesa continues to transform lives even nearly a decade after its launch Suparna Goswami Bhattacharya

International Finance Magazine Jan - Mar 2015

COVER STORY

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Bob Collymore, CEO, Safaricom

Jan - Mar 2015 International Finance Magazine

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Tell us about M-Pesa M-Pesa is a revolutionary mobile money transfer solution that was initially developed by Vodafone and launched in Kenya eight years ago as a Person- toPerson (P2P) transaction service. Initially, we conceptualised M-Pesa as a tool that would primarily be used by rural women to pay for loans. Over time, we quickly realised that it could be used to transfer small amounts of money between subscribers, and the service was commercially launched in March 2007, enabling them to send and receive money, top-up airtime and make bill payments.

M-Pesa has now become a household name in Kenya and is the most successful service of its kind globally. It has emerged as the most efficient, safe and convenient way to send money across the country, and now, beyond. It has transformed into a products and services facility necessitating the need for us to develop an interface for business to consumer (B2C) transactions.

What would you attribute the success of M-Pesa to?

There are four key factors that you could point to that contributed to the growth of M-Pesa.

First is the fact that the service offered users a

safe and quick means of transferring cash across distances, without the need for a formal bank account. This shift meant that consumers would not have to wait for public service vehicles to send money upcountry.

They could do it from the comfort of their neighbourhood outlet and be assured that the money would arrive safely and instantly.

International Finance Magazine Jan - Mar 2015

MOBILE BANKING

We can attribute this to the reliability and trust that was formed in our agent network, which now covers 85,000 agents spread across the country.

Secondly, M-Pesa emerged as a cheaper option to send money faster, thereby solving needs within the shortest possible time. For exam-

financial product has been able to in this market.

Fourth would be the fact that Safaricom, and the team that was running the product at the time, were so willing to test this new product and had the passion to see it to its launch. The regulatory environment was extremely instrumental in the growth

ple, if you need to send money to a relative who is sick, you can actually advise them to start their journey to a hospital and before they get there you will have sent the funds.

Third is the dynamism of the product. M-Pesa keeps evolving, and it taps into new pockets of customer needs much faster than any other

of the product, as policy makers were willing to observe and oversee the growth of the service and let it grow organically.

Personally, I think the service has grown at the pace that it has purely as a result of the Kenyan spirit.

Workers in the cities are typically from rural towns that are quite some distance away. Having a tool that allowed them to meet their familial obligations and securely send money back home is really what gave this product its impetus.

It is said that M-Pesa transactions have an impact on the Kenyan economy. Can you elaborate?

It is true that M-Pesa has had an impact on the Kenyan economy. Allow me to illustrate: • More than 12.8 million Kenyans use M-Pesa each month for at least one transaction • There are 85,000 MPesa agents in the country who employ thousands

COVER STORY

more.

• More than 90% of all utility bill payments are made using M-Pesa.

• M-Pesa is the single largest contributing factor to financial inclusion in Kenya. If you remove M-Pesa’s contribution, the level of financial inclusion drops from 70% to under 30%.

How has M-Pesa grown vis-à-vis the Kenyan economy?

M-Pesa has enjoyed double digit growth since it was launched, illustrating that it has been growing at a faster rate than the Kenyan economy.

Has M-Pesa reached saturation point? What new features are in the pipeline to maintain your leadership position in the telecom sector?

Currently, we are seeing an average Sh121.3 billon in real time payments per month, with person to person payments growing by 20%; person to business transfers growing at 64%; and business to person payments growing at 83%.

We would like to encourage more growth amongst our active users who currently carry out just over five chargeable transactions per month – so there is still room to grow. We see that growth coming as more

businesses start to use our services for individual as well as bulk payments.

The overriding benefit for businesses as they join this growing ecosystem is the fact that M-Pesa has numerous benefits over cash and other payment modes, key among them being security, speed of moving cash, and the fact that mobile penetration in Kenya is high.

Have you got operations outside Kenya?

What are your plans for expansion?

Safaricom’s M-Pesa does not have operations outside Kenya. We do, however, have strategic partnerships with Western Union and MoneyGram International that have enabled customers to send money directly to M-Pesa customers. There remains a lot of room for growth in Kenya, particularly given that 9 out of 10 transactions in Kenya are still made using cash.

(Under the Vodafone brand, a similar mobile money transfer product is offered in Egypt, India, Lesotho, Mozambique, Romania and Tanzania) Have you been able to replicate the success that you achieved in Kenya?

Kenya pioneered in the launch and adoption of M-Pesa globally. Kenya’s case has, therefore, been the

benchmark in the rollout of M-Pesa in other countries, bearing in mind that markets may be different.

What attracted you to Safaricom?

When I joined in 2010, I was attracted by the challenge that it presented as a mobile business that was entering the second phase of its growth in a market that was maturing.

I continue to be amazed at how transformative the company is on a daily basis and the opportunity for new facets of growth that are so ripe in this market. There are great prospects for our business in Kenya, and I am privileged to be part of the country’s continued journey towards becoming a world leader in mobile innovations. At the end of the day, what drives me and the rest of the more than 4,000 employees at Safaricom is the desire to transform lives through everything we do. IFM

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Four key factors contributed to the growth of M-Pesa Bob Collymore

Jan - Mar 2015 International Finance Magazine

PAYPAL: A NEW 22

BEGINNING Analysts expect faster growth once the payment services provider becomes independent of eBay this year Tom Groenfeldt

International Finance Magazine Jan - Mar 2015

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s PayPal becomes independent of eBay — the two will become separately listed public companies this year — it will have better opportunity to direct its investments and grow, perhaps by providing payment services to eBay rivals such as Alibaba and Amazon, and Apple Pay competitors like Samsung and Microsoft, while still maintaining a business relationship with eBay. The spinoff, which corporate raider/activist Carl Icahn had been advocating since early this year, had faced strong resistance from eBay and its CEO John J. Donahoe. The dynamics of the e-commerce marketplace and users, such as the car service Uber, which uses PayPal for its payments, are moving so fast that a pay-

ments system tied to the corporate structure of an online auction/sales company couldn’t move fast enough, said analysts. Both eBay and PayPal have been criticised for being slow and bureaucratic. Icahn, who called

eBay among the worst-run companies he had ever seen, said Mr. Donahoe was “either incompetent or negligent.”

“PayPal is an admirable company and it has been a true innovator and pioneer for many years,” said Zilvinas Bareisis, a senior analyst in Celent’s banking practice. “But it is no longer seen as an innovator. However, its position is very, very strong. They have relationships with online merchants, their wallet is heavily used and through acquisitions, they have added various different assets that are quite interesting.”

Since eBay bought it in 2002 for $1.5 billion as a way for buyers to pay

eBay sellers online, PayPal has grown impressively and now accounts for more than 40 percent of eBay’s revenues.

It processed payments of more than $200 billion in

the last 12 months from more than 152 million active users in 26 currencies in 203 markets globally. The company says it facilitates one in every six dollars spent online and is the number one payments processor for business-to-consumer exports for Chinese merchants.

As a soon-to-be separate company, PayPal will have as CEO Daniel H. Schulman, who led the alternative and mobile payments at American Express, including the Bluebird product launched with Walmart, which drew more than one million users in its first year. He has been a leader in looking to cards, mobile phones and ATMs

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Coming out of the eBay auction world, which recently accounted for less than one-third of its total dollar volume, PayPal will have to develop some new skills in mobile and also think about its pricing model Andrew Copeman, industry analyst for banking at Aité Group

at drug stores and convenience stores as a way to provide banking services without a physical bank.

(David Marcus, the former

Jan - Mar 2015 International Finance Magazine

Since eBay bought it in 2002 for $1.5 billion, PayPal accounts for more than 40 percent of eBay’s revenues. It processed payments of more than $200 billion in the last 12 months from more than 152 million active users in 26 currencies in 203 markets globally

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president of PayPal, left in early June for Facebook, leading to speculation about the social media giant’s plans for payments.)

Andrew Copeman, industry analyst for banking at Aité Group, said that an independent PayPal has the opportunity to pursue more alliances with firms like Alibaba. The company has lagged in innovation, creating few new products of its own but making some smart acquisitions, including Bill Me Later (now PayPal Credit).

Last September, PayPal bought Braintree, for $800 million, landing a company which did $12 billion in payments, including $4 billion with users such as Uber, Airbnb, LivingSocial and GitHub. “They had this vision that payment is only one small step in the purchase experience,” said Bareisis. “Apps like Bill Me Later, Braintree and Venmo propel them into contextual payments.

They have made it easy to make payments from a merchant app where companies like Stripe have made good strides.”

Chris Morse, a PayPal spokesperson, said that PayPal users can browse businesses in the area, order something like a banana

berry smoothie, have it waiting for them 10 minutes later and it’s already paid for.

“At a restaurant you can sit down, tell the server you are paying with PayPal and you can see the whole process. You can order a drink while you wait, then order another glass of wine, and it will alert the POS and your drink will come up. We are reducing complexity in payments; the payment almost disappears.”

Shops can send offers out to PayPal users in the vicinity; a baby store in Austin has developed new business by sending out offers to customers of Dominican Joe, a coffee shop next door.

Coperman said that PayPal has had to rejuvenate its offerings, particularly around mobile.

“Coming out of the eBay auction world, which recently accounted for less than one-third of its total dollar volume, PayPal will have to develop some new skills in mobile and also think about its pricing model. They will struggle unless they can figure out a breakout strategy around pricing. There’s a lot of pressure from regulators on banks and service providers to reduce merchant pricing “They are very, very ex-

International Finance Magazine Jan - Mar 2015

pensive from a merchant acceptance view. If a merchant is shopping around for the best deals on acceptance, unless he is desperate to get the PayPal community on board, he will prefer to pass.”

PayPal charges 30 cents per transaction plus 2.9 percent on accounts doing up to $2,000 monthly, dropping to 2.2 percent on accounts doing $10,000 to $100,000.

PayPal has been strong with SMEs but is eager to get large merchants on board, Coperman added.

Meanwhile, the SMEs are looking around for other options as the ecommerce market matures and other payment solutions become available.

“Braintree’s One Touch technology opens up new doors for them in the mobile area,” said Coperman. “I think they have struggled with plans to develop a meaningful mobile application.”

The company has grown beyond payments to providing credit to both consumers, which it was able to do through Bill Me Later, and now providing credit to merchants, said Morse.

“We offer merchant credit, PayPal working capital, for small businesses.

PayPal is an admirable company and it has been a true innovator and pioneer for many years. But it is no longer seen as an innovator Zilvinas Bareisis, a senior analyst in Celent’s banking practice

A whole neW world The Braintree’s acquisition also landed PayPal Venmo, a mobile payments company acquired the year before for $26.2 million, and one that is highly popular with millennials.

If you are a PayPal merchant, you can apply for up to a $60,000 line of credit.

You pay only when you make a sale, and you can determine how much from each transaction goes to the credit. We can assume the risk because we have a 10-14 year relationship with the merchants.”

A seller of computer peripherals borrowed $20,000 for holiday inventory, paid $800 in fees and has been back three times for new loans, Morse said.

Unlike bank loans, which can take weeks and stacks of paper, PayPal can supply credit in seconds, faster than the user can toggle over to see the transfer of funds into his account.

“It gives merchant the capability to get access to capital quickly so they can capitalise on trends. If you are selling T-shirts and a design goes viral, and you could sell 10.000, you might not have the capital to fulfill those orders. We can do it, and do it very quickly. We loan out about $1 million a day.”

Coperman thinks PayPal has great potential, although

the payments world will be highly competitive in the next couple of years.

The payments business is like an annuity, he said, with high fixed costs, but once you have them accounted for, it makes significant money.

“You need to feed in as much as you can until you get past the breakeven point,” he added. “The lay of the land in two or three years will be fascinating.”

In the UK PayPal faces competition from VocaLink’s Zapp, which supports payment from any mobile banking application. Coperman said Zapp pays merchants in 10 to 15 minutes and he expects its price will be below PayPal’s.

Zapp has 20 to 25 merchants and utilities and a wide range of high street retailers are prepared to accept it. PayPal needs to avoid being bypassed by recent startups and existing players using their scale and connections to develop businesses, he added. IFM

Venmo has a social aspect to person-to-person payments because the payment can be accompanied by a description of what it is for — such as a share of the rent, drinks, or taxi fares. Bareisis found a funny discussion online where the break between 30-year olds and under — who were happy to share payment information — was a stark contrast to those in the office over 35 who shuddered at the lack of privacy.

Zach I actually think these apps are the greatest things ever I use venmo several times a week, for typical things like splitting checks but also splitting bills with my roommates etc. venmo is great also because it is sort of a social network too, like you have to put in a sort of “memo” field and so you see a news feed of what your friends paid each other for…people write funny things.

Like if my lazy roommate didn’t pay his hunk of the power bill, I can charge him on the app and it’ll push onto his phone That’s more useful than the social part The older folks in the office expressed horror at this casual sharing of personal information.

Chris Morse, PayPal spokesman, said Venmo appeals to millennials who make up a large share of PayPal’s customers.

“Eighteen percent of the US is considered a millennial and 25 percent of our customers are millennials.

Venmo is smart, innovative and it has found a niche with millennials who use it to split bills and share money”.

Jan - Mar 2015 International Finance Magazine

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innovate ‘We didn’t

fast enough…’

PayPal is making up for it and will strive to be the best option for consumers, says Anuj Nayar, senior director of global initiatives Tom Groenfeldt

International Finance Magazine Jan - Mar 2015

T

he payments world in the last two years has gone through nothing short of a revolution,” said Anuj Nayar, senior director of global initiatives at PayPal. And the revolution is still growing, judging by the number of new firms targeting payments. Silicon Valley’s AngelList, an online resource for Silicon Valley startups, venture capital firms and developers, lists 1,522 new innovators in payments.

“In a month and a half, over 10 new companies have launched thinking they have nailed payments innovation,” Nayar added. “It is definitely a hot space.”

PayPal was founded in 1998, went public in 2002 and was acquired by eBay the same year to make it easier for people to buy and sell on the ecommerce site. It will be spun off as an independent company this

year with Dan Schulman, a former American Express vice-president who ran its Serve and Bluebird programs, as CEO. After a few years of drifting, PayPal has been moving aggressively to grow its position, especially in mobile payments.

Industry analysts have said that PayPal lost some of its drive to innovate, and Nayar admits, “We didn’t innovate fast enough in the developer space and let a gap open up that smaller, nimbler fellows like Braintree stepped into in the mobile payment business.”

PayPal responded by buying Braintree in September 2013, acquiring its end-toend payments processing business that had already signed up Airbnb, Fab, LivingSocial, Uber, Twilio and GitHub as clients.

PayPal also got Venmo, a P2P mobile one-touch payments system and social platform popular with mil-

lennials, which Braintree had bought in August 2012.

Venmo lets users split payments during a night out while adding comments about how their friends behaved, or didn’t, or users can harangue their friends online for overdue rent contributions. By bringing together the three platforms, PayPal made up for a lag in its development and innovation while Braintree and Venmo suddenly could reach 160 million existing PayPal users.

The acquisition was timely, just as mobile payments were taking off. In November, said Nayar, mobile payments accounted for 20 percent of PayPal’s business. In 2010, it was less than 1 percent.

“Mobile went from a rounding error in our business to a fifth of our volume.

Acquiring Braintree was a massive accelerant for Braintree and we got into

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In a month and a half, over 10 new companies have launched thinking they have nailed payments innovation Anuj Nayar, Senior Director, global initiatives, PayPal

Jan - Mar 2015 International Finance Magazine

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a space we hadn’t nailed as well as we could have done.”

Industry observers were initially concerned that PayPal would dumb down Braintree and Venmo and slow their innovation. The opposite seems to have occurred.

Bill Ready, the CEO of Braintree, has been placed in charge of all next generation development, ending the fiefdoms and duplication of development projects that had plagued PayPal. In September, PayPal launched One Touch, extending the Venmo easy payment process to all of PayPal. One of the biggest problems for online, and especially mobile payments made on a small screen, is that users drop off, leaving their shopping carts behind because the payment process is too slow, too compli-

cated or too hard to navigate on a phone’s screen.

Now Braintree offers merchants a software development kit (SDK) that lets them integrate One Touch in 10 to 15 minutes. Then they can accept payments from PayPal, Braintree, Venmo, Apple Pay, credit cards, debit cards and soon even bitcoins. Merchants have reported double-digit growth in conversion rates — the percentage of shoppers who complete their transactions.

That’s because they can enter their credentials with a merchant once and then buy without entering their name and passwords again.

Braintree reported that its transactions on Thanksgiving — traditionally the beginning of the American Christmas shopping season — were 3.1x last year’s and

International Finance Magazine Jan - Mar 2015

the company’s mobile transactions were up 4.2 times.

[One Touch is] “removing friction from the mobile buying experience and eliminating the need for things like user names and passwords and instead letting customers pay in a single touch,” wrote Ready in a blog post.

StubHub, an online ticket marketplace, reported a 13 percent increase in order value through PayPal as well as a nearly a 50 percent increase in total sales and transactions through PayPal on iOS with One Touch, the company said. It is rolling out One Touch with PayPal in in Australia, Canada, France, Germany, Italy, the Netherlands, Spain, Sweden and the UK. Tim Clem, product director at GitHub, told the Braintree web site: “GitHub

has been using Braintree to process credit card payments since we launched in 2008, and the new APIs supporting PayPal fit seamlessly into our existing billing system. Thanks to the Braintree integration, it’s easy for us to offer PayPal as a payment option to the more than six million developers who use GitHub already, and to reach new users who prefer to use PayPal.” “Now a lot of our new customers are mobile first,” said Nayar, “and the paradigm is shifting where their first interaction with the internet, let alone with retail or shopping, is from a mobile device.”

Integrating Online and Point of Sale (POS) PayPal is also expanding from a mostly online pay-

ments service to promoting point-of-sale (POS) in physical retail stores. In 2010 and 2011, it made a big push into stores like Home Depot and worked with Discover to roll out PayPal at POS locations around the world.

PayPal has realised that many retailers have a difficult time integrating their online and physical businesses.

Nayar has seen the retail challenges himself with a national clothing chain which sends him online discount coupons because he buys a lot from the store.

But he doesn’t shop at the online store; he goes to a branch that is on his way to work. To use the coupons, he has to go online and redeem them at the physical store. But if he wants to return an item, he can’t go to the store he drives every

day, he has to ship it back.

The retailer hasn’t integrated the two channels.

PayPal offers a single way to pay online or in stores, using credit cards or PayPal credit, debit, prepaid cards or loyalty points, all stored on a phone.

Chris Marcus, a spokesman for PayPal, said that PayPal can offer its large merchants, like Foot Locker and Abercrombie & Fitch, a comprehensive payment method for online and at physical store checkout.

PayPal also makes it easy for customers to redeem coupons in either place, he said.

Helping retailers with integration is a core focus at PayPal. “{Bill} Ready is driving real integration for developers and the merchants those developers serve,” said Nayar. “We provide

integration with multiple ways to pay, which is a huge step forward. We provide consumers options and we make PayPal the best option for them.”

Speaking from rural Vermont where he was visiting his in-laws over Christmas, Nayar was pleased to see he could pay with his phone at local stores, even in an area where people are outnumbered by cows.

“There’s a lot more interest and a lot more people testing what is possible from a consumer point of view.”

Mobile payments grow fastest in cities, though, especially when people become accustomed to using their phones to pay for trains and buses.

Nayar said Japan has had mobile payments for subways and the convenience stores around them, for more than a decade.

“We are seeing a lot of mobile phones adoption in developing markets. For users there, this is their first access to all these things mobile, including payments and the internet. They don’t have the same level of reticence because they haven’t moved from desktop to laptop to mobile. They are coming to mobile to start.”

One of the most popular uses of mobile is ordering and paying for coffee and then just swooping in and picking it up with no wait in line — filling a need most people didn’t know they had.

“We have been doing a lot of work on order ahead with independent coffee houses in Sydney,” Nayar said. “Now there are more than 2,000 coffee shops where you can order your coffee ahead. It clearly was fixing a consumer need. One coffee shop would adopt and they would see a boost in sales, while other neighbouring coffee shops would see a drop, so merchants clamoured for it. While consumers liked that they could go to the front of the line and grab their coffee.”

Similar services are also available in some sports stadiums where the lines at concession stands can be long.

Mobile payments are just taking off and PayPal is well positioned with its Braintree and Venmo acquisitions, and the expansion of One Touch across its whole product line, to maintain a leadership position. IFM

Jan - Mar 2015 International Finance Magazine

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International Finance Magazine Jan - Mar 2015

It’s a matter of who

blinks first Either one of big oil producers will cut supply or a non-conventional producer will go bust Peter Taberner

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Jan - Mar 2015 International Finance Magazine

OIL PRICES

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s oil prices continue to fall precipitously, the economic fallout can be felt across Europe, in what is a game-changing development.

Brent crude oil per barrel has dipped below the symbolic $50 per barrel, and has been trading for as relatively little as $45.75, the lowest in the past 10 years.

The price of WTI crude has fallen even further, beneath the $45 per barrel mark, and has only been lower over the past decade in 2009, in the midst of the severe global recession.

Bank of America Merrill Lynch’s latest Global Energy Weekly Report states that the supply side is the main driver of the reductions in the price of Brent crude oil.

According to the report, Libyan oil production is making a comeback while

Saudi Arabia has failed so far to react to the changed circumstances.

OPEC has all but given up its traditional role of keeping supply and demand in check, and the policy to continue oil production at the same level has been

backed by the United Arab Emirates, who believe that shale oil producers are necessary, and that the market will stabilise.

Sabine Schels, head of fundamental commodities research, for the Bank of America Merrill Lynch’s

Graph 1: World economic growth,% change y-o-y World

“

There has been an increase in production from sources such as the shale oil boom in the US. This ensures that the crude oil process is not as sustainable for the non-conventional oil producers.

Diego Valiante,

2014E*

US Euro-zone Japan OECD

head of capital markets and a research fellow at the Brussels based Centre for European Policy Studies

2015F*

China India Brazil Russia 0.0

2.0

* E = estimate and F = forecast.

Source: OPEC.

International Finance Magazine Jan - Mar 2015

4.0

6.0

8.0

OIL PRICES

global research department, said: “Cuts in the non-OPEC supply of oil will not come very easily, as the operating cash costs are below $40 per barrel.”

“Despite lower prices, due to fuel efficiencies, we expect a six month lag and a limited response from OECD countries. It will be

up to China and India to deliver the bulk of global oil consumption for this year and next year.

“50% of the demand for oil over the past 10 years came from oil producing countries, a worrying trend when economic growth in the Middle East is slipping and Russia is heading for

recession.”

The Bank of America and Merrill Lynch report says that the market can be rebalanced, only by destroying market based supply, or if incremental demand increases as prices continue to fall.

Even though they see a growing risk that prices

could drop even further to $35 a barrel for WTI crude, and $45 for Brent, for 2015 they forecast average prices of $72 and $77 per barrel, respectively.

Diego Valiante, head of capital markets and a research fellow at the Brussels based Centre for European Policy Studies, reflected:

Graph 1.1: Crude oil price movement, 2014

US$/b

US$/b

OPEC Basket

WTI

02 Dec

25 Nov

18 Nov

11 Nov

04 Nov

28 Oct

21 Oct

14 Oct

07 Oct

30 Sep

60

23 Sep

60

16 Sep

70

09 Sep

70

02 Sep

80

26 Aug

80

19 Aug

90

12 Aug

90

05 Aug

100

29 Jul

100

22 Jul

110

15 Jul

110

08 Jul

120

01 Jul

120

Brent Dated

source: OPEC

Jan - Mar 2015 International Finance Magazine

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OIL PRICES

Graph 2: World oil demand and non-OPEC supply growth, y-o-y mb/d 1.90 1.70 1.50 1.30 1.10 0.90

2014E

2015F

2015F

Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14

2014E

World oil demand

Non-OPEC supply

E = estimate and F = forecast.

Source: OPEC. 34

Table 5.2: Non-OPEC oil supply in 2015, mb/d

Americas of which US Europe Asia Pacific Total OECD

2014 19.67 12.67 3.56 0.50 23.72

1Q15 20.29 13.20 3.68 0.53 24.50

2Q15 20.65 13.65 3.53 0.54 24.72

3Q15 21.11 13.95 3.42 0.53 25.07

4Q15 21.38 14.06 3.64 0.50 25.52

2015 20.86 13.72 3.57 0.53 24.96

Change 15/14 1.20 1.05 0.01 0.02 1.23

Other Asia Latin America Middle East Africa Total DCs

3.51 5.01 1.34 2.41 12.26

3.59 5.18 1.37 2.44 12.58

3.55 5.12 1.36 2.40 12.42

3.51 5.14 1.34 2.38 12.37

3.46 5.07 1.33 2.35 12.22

3.53 5.13 1.35 2.39 12.40

0.02 0.12 0.01 -0.02 0.13

FSU of which Russia Other Europe China Total "Other regions" Total Non-OPEC production Processing gains

13.41 10.56 0.14 4.24 17.80 53.78 2.16

13.41 10.56 0.14 4.29 17.84 54.92 2.17

13.32 10.54 0.14 4.27 17.73 54.87 2.17

13.29 10.53 0.14 4.29 17.72 55.16 2.17

13.34 10.55 0.14 4.35 17.83 55.58 2.17

13.34 10.54 0.14 4.30 17.78 55.13 2.17

-0.08 -0.02 0.00 0.06 -0.02 1.35 0.01

Total Non-OPEC supply Previous estimate Revision

55.95 55.91 0.04

57.10 57.07 0.03

57.05 56.85 0.20

57.33 57.04 0.28

57.75 57.65 0.09

57.31 57.16 0.15

1.36 1.24 0.12

Non-OPEC oil supply is forecast to grow by 1.36 mb/d in 2015 to average 57.31 mb/d, representing an upward revision by 0.12 mb/d from the previous MOMR. There have been various upward and downward revisions to the 2015 supply forecast, coming from changes to the 2014 supply forecast and historical revisions from 2013. Non-OPEC supply is expected to experience increases in all quarters of 2015 on a y-o-y basis.

International Finance Magazine Jan - Mar 2015

“The reason why the prices have fallen is down to the dynamics of supply and demand. It’s a retaliation from conventional sources of oil production, countries like the US or Saudi Arabia, against the less conventional producers, which place oil in the market.

“There has been an increase in production from sources such as the shale oil boom in the US. This ensures that the crude oil process is not as sustainable for the non-conventional oil producers.”

Valiante believes that oil prices will remain as low as they are for the next few months, but is unsure whether the current low per barrel prices can stretch into most of this year.

He is certain it will not fall further to £40 a barrel, as that would spell disaster

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Table 5.4: OPEC crude oil production based on secondary sources, tb/d 2012 1,210 1,738 499 2,977 2,979 2,793 1,393 2,073 753 9,737 2,624 2,359

Total OPEC OPEC excl. Iraq

2013 1,159 1,738 516 2,673 3,037 2,822 928 1,912 732 9,586 2,741 2,356

1Q14 1,128 1,600 537 2,774 3,217 2,797 371 1,898 733 9,702 2,745 2,341

2Q14 1,158 1,646 541 2,768 3,266 2,786 222 1,895 729 9,675 2,749 2,337

3Q14 Sep 14 Oct 14 Nov 14 1,167 1,161 1,157 1,154 1,688 1,724 1,703 1,661 544 543 539 541 2,758 2,754 2,750 2,750 3,150 3,326 3,308 3,359 2,794 2,805 2,758 2,699 614 783 887 638 1,954 1,960 1,926 1,936 733 722 714 691 9,747 9,673 9,650 9,590 2,791 2,773 2,721 2,705 2,329 2,336 2,331 2,331

Nov/Oct -3.3 -41.8 1.7 0.0 50.8 -59.4 -248.3 9.8 -22.7 -60.1 -16.6 0.0

31,135 30,198 29,841 29,772 30,268 30,560 30,443 30,053 28,155 27,161 26,624 26,506 27,118 27,234 27,135 26,695

-390.1 -440.9

Algeria Angola Ecuador Iran, I.R. Iraq Kuwait Libya Nigeria Qatar Saudi Arabia UAE Venezuela

Totals may not add up due to independent rounding.

According to secondary sources, OPEC crude oil production, not including Iraq, stood at 26.69 mb/d in November, down by 0.44 mb/d over the previous month. source: OPEC

for the oil industry.

The reduction in prices is not a full indication of economic activity slowing down in Europe he says, and is a less significant factor compared to the fall in 2008 and 2009.

“There is little doubt that the economic culture at the moment is more risk adverse, there is a negative outlook. It is difficult to make an assessment on how oil prices will affect the job market, as there will be more disposable income in the economy, but again the negative outlook will affect the investment needed to create more employment,” Valiante added.

One drastic effect of the oil price situation is the contribution that it has made to deflation in the Euro zone, as confirmed by recent Eurostat figures.

In December last year, annual inflation slipped

to -0.2%, compared to the same month last year, a significant fall from the 0.3% inflation that was recorded in November.

Energy prices were the sole main driver of deflation, with a 6.3% decrease, while there was an increase of 1.2% for the value of services; food, alcohol and tobacco prices, alongside non-industrial goods, remained unchanged.

The consequence of deflation for the Euro zone is clear, especially as for the second quarter of 2014, the collective public debt to GDP rose to 92.7%; deflation will result in more resources being directed to service debts.

In response, the ECB might also be provoked into action sooner than what they expected over the deflation risk, where government bonds may be purchased in a bid to boost the inflation

rate.

The ECB is monitoring the oil prices closely, especially as the plummeting value of oil has significantly contributed to deflation in the Euro zone.

The Harmonised Index of Consumer Prices (HCIP) inflation has been increasingly forecast downwards by the ECB, due to the oil prices.

From information available up to mid-November last year, HCIP inflation was pegged at 0.5% for 2014, a reduction from previous predictions.

Lower inflation is a positive upshot from the downward spiralling of oil prices, as consumers should feel the benefits, which potentially could act as a boon to some industry sectors, including vehicle manufacturers.

Daimler, one of the largest vehicle manufacturers in the world, believes it is too

early to say if there has been a positive effect on sales following the fall in oil prices, and the future of oil prices remains unpredictable.

There is the possibility that car sales could increase due to the rise in real disposable incomes. Although it’s likely to be a different story for their truck production line, as many of their markets are also oil exporting countries, which will be affected negatively by the current conditions.

How the oil market reacts to the existing situation is uncertain. Action for price stimulation could include a cut in production. Policymakers and consumers alike will be keeping a close eye on ongoing developments to see who blinks first. IFM

Jan - Mar 2015 International Finance Magazine

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Falling gas prices mean more money in the pockets of Americans, which could boost the economy Tom Groenfeldt

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International Finance Magazine Jan - Mar 2015

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ulf Brothers Heating & Cooling, with 30 trucks on the road in Door County, Wisconsin, has enjoyed the savings of dropping gas prices.

“It’s made a huge difference,” said Cap Wulf, president of the company, which operates 250 miles north of Chicago. “We’ve seen a steady decline in the cost of fuel; it’s down a buck and a half, which is a refreshing change.”

Gasoline (petrol) prices in the US have dropped to less than $2 a gallon (3.78 litre), including state and federal taxes. For most Americans, it is great news — Wells Fargo estimates families could save $250 to more than $800 a year, depending on their driving. AAA, the American Automobile Association, says the 102 days of declining gas prices put $14 billion into the pockets of American consumers.

At the same time, a continued low price would threaten more than

200,000 jobs in oil producing states. In the 1980s, a drop in oil prices devastated some of the Texan economy, but economists say the state is much more diversified now and a prolonged reduction in oil prices won’t have such a huge impact on its economy.

Causes are debated Energy forecasters are cautious about predicting when and where the price will settle. Partly, that reflects some confusion about what is driving the drop in oil prices — are low oil prices just a function of Saudi Arabia’s determination to maintain its market share; an effort by a USSaudi alliance to hit Iran and/or Russia by depressing the oil income they desperately need; a Saudi effort to drive high-cost shale oil producers out of the market; or all three?

Others point to a surplus in oil production, 1-2 million barrels a day, without seeking to determine players’ motivations. A stalled economy in Europe, slower

than predicted growth in China and reduced demand in Japan have contributed to the price reductions.

Although the US economy added 252,000 jobs in December, and unemployment fell to 5.6 percent, many of those new employees are in low wage jobs. In addition, US labour participation was only 62.7 percent in December, down from 65.9 percent in December 2004, suggesting a lot of workers have simply given up on finding jobs and dropped out of the labour force. If those workers were still counted in the job force, American unemployment would be more than 10 percent.

Demand for gas has declined also because American cars and trucks are getting better fuel economy, or at least they were until gas prices dropped. Bloomberg reported that “gasoline consumption has dropped 3.7 percent since 2010 even as the number of miles traveled on US highways rose 0.8 percent.”

Low prices may change

those stats — Detroit has been happy to see buyers coming back looking for pickup trucks and large SUVs, which have very high margins and higher gas consumption.

“Pricing is strong across most of the industry with the exception of the hybrid/ alternative energy segment, which dropped 1.2 percent as gas prices hit a five-year low,” said Alec Gutierrez, senior analyst for Kelley Blue Book, an auto pricing and information service.

“Lower gas prices will further help the market for trucks and utilities, which are traditionally popular in December.”

Millennials are also playing a role in reducing gasoline consumption. Many are moving to cities and using mass transit, which doesn’t interfere with their right to text. While it used to be common for young people to practice driving and get a licence as soon as they turned 16, now many are waiting to drive or not planning to get a licence at

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all. The percentage of high school seniors with a driver’s licence dropped from 85 percent in 1996 to 73 percent in 2012. Some academics have suggested that teens find they can hang out with friends through their phones, eliminating the need to drive to meet in person. Cars, and insurance, are expensive, and between Zip Car and Uber, the need to own a car of your own has declined, at least in cities where the services are available. (Warning: these trends are sometimes subject to wishful reporting by urban journalists who often think everyone should live the way they do.)

Oil stockpiles grow The FT reported that Chinese oil imports in December topped 7 million barrels per day for the first time, suggesting the country is taking advantage of low prices to build up its reserves. Reuters has reported that some major trading

firms are leasing supertankers for up to 12 months to hold oil in the expectations of better prices in the future.

“Brent crude is now around $8 a barrel higher for delivery at the end of 2015, with its premium rising sharply over spot prices this week due to forecasts for a large surplus in the first half of this year, in a market structure known as contango,” Reuters said.

The oil markets are in contango, the term for when future prices are higher than current spot prices. The FT recently reported ICE February Brent was $48.80, more than $12 a barrel below prices for delivery a year from now. Even at $44,000 a day, a 2 million barrel tanker would generate a profit of $16-plus million if prices rose just $8, providing what George Johnson at KPMG said is an “almost risk-free profit.”

But futures markets are nothing without hedging, so note the “almost”.

International Finance Magazine Jan - Mar 2015

Even a quick Google search provides reason for caution. In the New York Times, veteran financial columnist James B. Stewart quoted Denton Cinquegrana, chief oil analyst for the Oil Price Information Service: “The national average for a gallon of gas is already below $3 and headed lower.” That was December 5. A month later that projection seemed quaint — gas was an average of $2.13 across the country and below $2 in 18 states.

The pace of the decline, as Google citations show, has been stunning and may well continue as more capacity comes on-line in Libya and the Western hemisphere while Iraq maintains its production levels.

The role of politics The US has banned the export of crude oil since the mid-1970s, but a recent announcement from the Bureau of Industry and Security authorised the export

of condensate, a very light oil, which could amount of 640,000 barrels a day now and go up to 1.8 million by 2020. A limited amount of condensate is used to blend with heavier oils, but mostly it is used as petrochemical feedstock, more in South America, Japan and China than in the US where petrochemical plants mostly use ethane, a cheaper natural gas liquid.

Texas Sen. Ted Cruz, who is expected to run for President, has been pushing for an end to the crude oil export ban, a position supported by the American Petroleum Institute, and majors like ExxonMobil and ConocoPhillips. Refiners oppose lifting the ban and surveys show many Americans fear that lifting it will lead to higher gas prices.

The oil price drop isn’t universally welcomed, of course. Big oil companies, like ExxonMobil, have been investing in development of new fields expecting oil to

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sell at $100 a barrel, so they face the question of continuing with developments — often very long-term — or shutting them down and restarting after oil prices rise. Even when oil was over $100 a barrel, major oil companies consistently needed to borrow to cover their exploration and developments costs, the Wall Street Journal reported.

Some of the smaller production companies issued high-yield bonds; JPMorgan Securities has estimated that 40 percent of the high yield energy securities could

default by 2017 if oil prices remain below $65. Bankruptcy of some shale producers would accomplish one of the goals attributed to the Saudis.

Downside of low oil prices The energy web site, oilprice.com, noted: “According to an assessment from the Federal Reserve Bank of Dallas, an estimated 250,000 jobs across eight US states could be lost in 2015 if oil prices don’t rise.

More than 50 percent of those job losses would occur

in Texas, which leads the nation in oil production.

“Conversely, the jobs created within the energy space are some of the highest wage paying opportunities available in engineering, technology, accounting, legal, etc. In fact, each job created in energy-related areas has had a ‘ripple effect’ of creating 2.8 jobs elsewhere in the economy from piping to coatings, trucking and transportation, restaurants and retail…”

For those who aren’t from Texas, the sharp drop in gas prices makes this an

excellent time to raise taxes.

The New York Times notes the federal tax on gas is 18.4 cents and hasn’t changed since 1993, leaving the federal government’s highway fund in danger of running out of money by May. Easy for New York Times editorial writers to say — they ride subway cars to work and don’t have to worry about getting re-elected, but an increase in the gas tax is also being proposed by a few Republican senators and several Republican governors. IFM

Intricacies of the oil business

T

he oil business is complicated. Jesse Thompson, a business economist at the Dallas Federal Reserve Bank, wrote about the plans to export condensate whose production has been boosted by new supplies from the Eagle Ford Shale region of South Texas for the bank’s quarterly magazine. In “Producers, Refiners View Strategies to Trim Texas’ Glut of Ultralight Condensate Oil,” he notes that some exporters have skirted the ban on crude exports and regulators have allowed condensate exports by two firms.

Firms can invest in splitters that “cut the condensate into lighter and heavier parts that then qualified as ‘refined’ products under the law.”

So they can be exported. His article noted that Kinder Morgan Energy Partners is building a $360 million complex on the Houston Ship Channel to store, split and export products derived from condensate. It is expected to be operating by the second half of this year.

“Indeed, some firms have taken it

upon themselves to export stabilised condensate from Texas without an export permit, both testing regulators’ will to enforce the ban and, perhaps, forcing a clarification of the rules.”

Texas has, after all, often thought it is a law unto itself.

‘Refiners are getting as much of the light stuff as they wanted,” explained Thompson. “The refiners’ agility is limited by cost — if you go too light on your oil mix coming into a refinery, then components of your refinery for heavy stuff stop being used optimally and the marginal cost for their total throughput goes up.”

Some firms have been asking whether they should invest in a condensate splitter — BHP Billiton has theirs up and running. Argus, an industry publication, reported the company “said it is planning to export condensate without seeking preapproval, believing its process meets the standards approved for the other companies.”

If the condensate isn’t exported, it could lead to lower prices for Ameri-

can producers, Thompson said.

“Trapped oil depresses prices.” But if it is exported and used in petrochemical plants abroad, the condensate could help foreign producers compete with US petrochemical plants.

“Our big advantage is ethane, which is very, very cheap, and probably will stay that way for a long time,” said Thompson. “Oil is more expensive than natural gas and ethane, so we have a significant cost advantage that we didn’t have before shale. As a result, there has been lots of investment to build petrochemical plants for exports based on ethane. Exports of US condensate could cause a lot of that production to see increased competition from foreign producers who use petrochemical naphthas or ultra light crude.”

The primary market for Texas exporters of condensate is South America and Asia; South America because it is so close and Asia because the demand is so great, he added.

Jan - Mar 2015 International Finance Magazine

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Mixed possibilities FOR

Nigeria

While the government is struggling due to lower revenue, the weak naira offers an opportunity for foreign investors Samuel Okocha

International Finance Magazine Jan - Mar 2015

OIL PRICES

T

he global slump in oil price presents both challenges and opportunities for Africa’s biggest economy, according to analysts. As Africa’s largest oil producer, Nigeria depends on crude exports for 70% of government revenue while oil accounts for nearly 90% of its foreign exchange earnings. But falling oil prices has put pressure on the national currency and affected revenue projection.

The increasing pressure arising from the defence of the naira forced the Central Bank of Nigeria to devalue the currency by 8%, fixing the official exchange rate at N168 to $1 instead of the old rate of N155 to $1. But the currency continues to tumble in the free market, exchanging for as much as around N190 to 1$.

Lower oil prices forced Nigeria to trim its 2015 budget by 12 percent after it slashed its benchmark oil price to $65 from an earlier $78. Oil has, however, continued to trade below $50, more than 60% drop since June and the lowest in more than five years. ‘’If oil price remains at this price, the government will find it difficult to meet its obligations such that it may be forced to increase its domestic borrowing,” Ayodeji Ebo, head of research at Afrinvest West Africa Ltd in Lagos, said by phone. “This year, we expect borrowings to cross over N1tn because of the need to finance the recurrent expenditure.’’

Nigeria’s budget estimate for 2015 shows the recurrent expenditure increased by about 6.5% while capital

expenditure declined by 43%. As a percentage of aggregate expenditure, capital expenditure accounts for only 14.5%, a sharp decline from 2014 when capital expenditure amounted to 23.7%.

“We expect that with the challenged revenue, the government may not be able to embark on significant capital expenditure,” Ebo notes. “That means less infrastructural development this year.’’

With the ‘weak macroeconomic structure’, Ebo says, the country’s risk premium (CRP) has increased. ‘’Overall, things will be challenging, especially because of the projection that oil price may go as low as $30 per barrel,’’ he adds.

Despite the challenges, however, an increasing proportion of multinationals continue to put Nigeria on their watch list for potential future investment. That’s according to the latest Wall

Street Journal Frontiers/ FSG Frontier Market Sentiment Index.

The index tracks frontier markets major European and American firms are focusing their attention on and reveals trends in corporate thinking by tracking the rate of change in corporate sentiment among clients of the Washingtonbased consultancy Frontier Strategy Group. Nigeria strengthened its position as the most-watched frontier market holding the top spot since the index was launched in June 2014.

According to WSJ, the country’s problems may provide an opportunity for corporations looking beyond the short-term turmoil to buy into Africa’s biggest economy at a discount.

“Nigeria is about to enter a world of hurt but these are the times when you can really make a difference – both from investors’ point of view and corporates’,” says

Matt Lasov, FSG’s global head of advisory and analytics, in a report in WSJ. The sharp devaluation of the naira, according to the report, will increase prices of imported products and allow companies that produce locally capture a huge amount of market share while the currency’s decline will make the acquisition of Nigerian assets cheaper for foreign firms. IFM

“

If oil price remains at this price, the government will find it difficult to meet its obligations such that it may be forced to increase its domestic borrowing Ayodeji Ebo, head of research at Afrinvest West Africa Ltd in Lagos

Jan - Mar 2015 International Finance Magazine

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Rouble woes International Finance Magazine Jan - Mar 2015

The fall in oil prices could not have come at a worse time for Russia, which was already reeling under the effect of Western sanctions Tim Evershed

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Jan - Mar 2015 International Finance Magazine

ECONOMY

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44

fter staging a brief rally at the end of last year, the woes of the Russian rouble have returned this year as oil prices continue to tumble.

In early trading on January 14, Brent crude had dropped 79 cents to $45.80 a barrel, a level that poses serious problems for the Russian economy. The falling oil price has seen the rouble drop to 66 to the US dollar.

Now investors and analysts are bracing for a cut in Russia’s rating to below investment grade status.

Fitch has already cut the country’s rating just to the brink of junk.

Russia is currently rated BBB by Fitch, BBB

by S&P, both one notch above junk, and Baa2

by Moody’s, two notches above.

Regis Chatellier, director of EM sovereign credit strategy at Société Générale, says: “Russia is currently rated BBB by S&P, but the country was put under negative watch two weeks ago, hinting at a likely downgrade in the next few weeks.

“A downgrade from Moody’s may come pretty much at the same time: statistically, nearly 60% of the rating actions are taken within the three to nine months after being placed under negative outlook status; as Moody’s put Russia in negative outlook back in October last year, a rating

BBB- from BBB last week.

In the statement explaining its downgrade, Fitch noted that the economic outlook has deteriorated significantly since mid-2014 following sharp falls in the oil price and the rouble, coupled with a steep rise in interest rates.

action from Moody’s is therefore likely to come roughly at the same time as that of S&P.” In December 2014, S&P said it was reviewing Russia’s credit rating, with at least a 50% chance that it would lower the rating within the next 90 days.

A Moody’s spokeswoman said it “keeps the market updated with the likely direction of an issuer’s rating, either through outlooks that we assign or placing ratings on review as credit conditions warrant”.

Fitch downgraded Russia’s long-term foreign and local currency Issuer Default Ratings (IDR) to

International Finance Magazine Jan - Mar 2015

Western sanctions, first imposed in March 2014, are continuing to weigh on the economy by blocking access to external markets for Russian banks and corporates.

“Having grown by just 0.6% in 2014, Fitch now expects the economy to contract by 4% in 2015, compared with our previous forecast of minus 1.5%, as steep falls in consumption and investment are only partially offset by an improvement in net exports, driven by a sharp drop in imports.

“Growth may not return until 2017. Plunging oil prices have exposed the

close link between growth and oil prices, notwithstanding the impact of a more flexible exchange rate.

For 2015, Fitch is assuming oil prices average $70/ bbl, markedly lower than the $100/bbl we assumed in July 2014. If the oil price stays well below this, it could precipitate a deeper recession and put further strain on public finances, severely limiting the authorities’ room for manoeuvre.”

The depreciation of the rouble combined with intense market volatility and sharp hikes in policy rates to 17% from 10% have given the Russian banking sector a major shock. The authorities have stepped in to preserve financial stability, doubling the cap on insured deposits.

Inflation ended 2014 at 11.4% yearon-year and is likely to remain in double digits throughout the first quarter of January 2015.

Fitch also noted a serious depletion of Russia’s international reserves, which ended the year at less than $390bn, down more than $120bn from end-2013 and lower than our previous forecasts of $450bn by end-2014 and $400bn by end-2015.

Fitch said: “Economic policy coherence and credibility in the face of external shocks remain important supports for the rating. The authorities have acted swiftly in raising interest rates and supporting the financial sector and plan early revisions to the 2015 budget.

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However, Fitch expects the policy framework to come under growing pressure as external vulnerabilities weigh on the macroeconomic outlook.”

The key to the woes of both Russia and its battered currency is the slump in oil prices although Western sanctions over the Ukraine crisis have also deterred foreign investment and spurred capital flight.

Russian finance minister Anton Siluanov has said that the Russian economy could shrink by 4% in 2015 and the country would run a budget deficit next year if the oil price did not rise.

“We need to have our budget break even at $70 per barrel by 2017,” said Siluanov, who also admitted that the country might have to use its rainy day Reserve Funds to prop up the economy if the crisis continues.

The rouble had dropped to all-time lows of 80 to the dollar before Christmas.

A rally in January saw it reclaim some lost ground before it fell back to 66 to the dollar. That is about half

Nasdaq

the level it traded at during the first half of 2014.

Russians consumers are being hard hit by the falling rouble particularly those purchasing imported goods.

Even before the fall in the oil price, the International Monetary Fund had predicted Russia would grow only 0.2% this year and 0.5% next year. This makes the country by far the slowest growing of the BRIC economies. Economic growth next year is now likely to be even lower than forecast.

Gavin Keeton of the economics department at Rhodes University in South Africa, says: “Oil and gas sales make up 68 percent of Russia’s exports and more than half its tax revenue.

Export earnings have plummeted in dollar terms and, because of the weaker rouble, the cost of imports has soared.”

In 1998, Russia defaulted on its debt, setting off a chain reaction that became a crisis for emerging markets. It had begun the previous year in East Asia, when foreigners started withdrawing their investments from

Thailand and South Korea when it became clear these countries could not repay their foreign borrowings.

Keeton says: “When Russia defaulted on its debt, investors began treating all emerging markets as equally risky, regardless of their differing economic circumstances or levels of foreign debt. This lead to the joke ‘Emerging markets are markets from which you cannot emerge in an emergency’.

“Fortunately, few commentators are predicting that recent events in Russia will precipitate a similar global crisis. Important lessons were learnt in 1998, including the need to let exchange rates adjust in response to large capital outflows. Hopefully, in similar circumstances, the mistakes, which in 1998 led to localised problems escalating globally, would be avoided.” IFM

“

Oil and gas sales make up 68 percent of Russia’s exports and more than half its tax revenue.

Export earnings have plummeted in dollar terms and, because of the weaker rouble, the cost of imports has soared.

Gavin Keeton, economics department at Rhodes University in South Africa

Jan - Mar 2015 International Finance Magazine

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International Finance Magazine Jan - Mar 2015

Not so cool Impact of the removal of the cap on the Swiss franc is being felt across Europe and beyond

Tim Evershed

T

he surprise decision by Swiss National Bank (SNB) to abandon its cap on the Swiss franc has had far-reaching consequences across Europe.

From banks to spread betting firms, currency traders to borrowers, tour operators to jewellers, the affects have been widely felt and have often been quite serious The SNB caught the financial markets off guard with the announcement on January 15 that it was discontinuing its exchange-rate “ceiling”, which had been set at CHF1.20 to

€1. In the wake of the decision, and reflecting the franc’s ongoing appeal as a safe haven asset, the currency spiked to CHF0.87 to the Euro but has since settled to around one to one with the single currency.

The 1.20 francs per Euro cap, introduced at the height of the euro zone financial crisis in 2011, was always regarded as a temporary measure. However, markets have grown accustomed to the control. The swiftness of its removal and the SNB’s failure to communicate its intention or soften the

Jan - Mar 2015 International Finance Magazine

47

CURRENCY

The 1.20 francs per Euro cap, introduced at the height of the euro zone financial crisis in 2011, was always regarded as a temporary measure. However, markets have grown accustomed to the control. The swiftness of its removal and the SNB’s failure to communicate its intention or soften the impact has

48

T

he surprise decision by Swiss National Bank (SNB) to abandon its cap on the Swiss franc has had far-reaching consequences across Europe. From banks to spread betting firms, currency traders to borrowers, tour operators to jewellers, the affects have been widely felt and have often been quite serious The SNB caught the financial markets off guard with the announcement on January 15 that it was discontinuing its exchange-rate “ceiling”, which had been set at CHF1.20 to €1. In the wake of the decision, and reflecting the franc’s ongo-

ing appeal as a safe haven asset, the currency spiked to CHF0.87 to the Euro but has since settled to around one to one with the single currency.

International Finance Magazine Jan - Mar 2015

caused consternation in many quarters.

The SNB justified its policy change on the grounds that the degree of overvaluation in the Swiss franc is now less than when the ceiling was first imposed back in late 2011, at the height of the euro zone sovereign debt crisis.

Although the precise reason

for the policy shift seems likely to remain a secret, it looks as if the bank timed its decision to abandon the ceiling to broadly coincide with prospective sovereign bond purchases by the ECB. This was due to the assumption that the euro would fall further in value with these purchases and take the Swiss franc with it.

The decision certainly took investors and currency traders by surprise. Bets by speculators that the Swiss franc would weaken were at their highest level in nearly two years and many investors were left frantically trying to close positions as the franc soared in value.

Major banks were hit, with the losses suffered by Citigroup, Deutsche Bank and Barclays estimated to total around $400 million while Credit Suisse and Saxo Bank warned their profits would be down.

However, Morgan Stanley said it expects the impact to be minimal while Bank of America (BofA) bucked the trend by making money for itself and its customers.

BofA would not have been the only winners with foreign depositors in Swiss

CURRENCY

bank accounts seeing a significant rise in the value of their deposits compared to local currencies.

The big losers were hedge funds, forex brokers and spread-betting firms that were much harder hit.

UK-based foreign exchange broker Alpari became one of the biggest casualties after filing for administration on January 19 due to its clients sustaining heavy losses while US-based foreign exchange broker FXCM had to accept a $300m lifeline from Leucadia National after concerns that it would breach capital requirements.

Meanwhile, hedge fund Blue Crest has closed down the trading books of one of its senior currency traders.

And spread-betting firm IG Group warned investors to expect a dent in the company’s profits resulting from £12 million of market losses and £18 million of client credit exposure.

There were also repercus-

sions in Eastern Europe, as the rise in the Swiss franc against the value of their local currencies means an increase in mortgage repayments. Franc-denominated loans are popular across Poland, Hungary, Austria and Croatia.

Hungary has already forced banks to convert Swiss franc loans into local currency credit at favourable rates and there are growing calls for similar moves in Poland and Croatia.

For years, banks in Poland advised customers to take out a mortgage in a foreign currency, mostly the Swiss franc, because the interest rate was much lower than on a Polish zloty loan, and the expectation was that the zloty would appreciate.

An estimated 566,000 Poles have taken out Swiss franc-denominated loans, which accounts for almost 40% of the Polish mortgage market. Those borrowers were hit in 2009 when the

zloty lost value against the franc and this week, the Polish currency fell another 21% against the franc.

Switzerland is far from immune to the consequences of the SNB’s decision and Swiss companies are already warning of a plunge in exports, tourist revenues and profits.

Exports make up 70% of Switzerland’s GDP with almost half of that coming from trade with the Eurozone. The Economist Intelligence Unit has lowered its growth forecast for exports of goods and services in Switzerland to 2% next year.

Overall economic activity in Switzerland is also likely to be compromised by weaker business investment, as companies — especially exporters — potentially cancel new capital spending plans and/or postpone replacement of existing capital stock in response to the additional uncertainty.

The famous Cartier brand, which is owned by

49

“

Clearly, this is acutely damaging for Swiss tourism and will price many people out of Switzerland for their ski holidays Craig Burton, managing director of the tour operator Ski Solutions

Jan - Mar 2015 International Finance Magazine

CURRENCY

The country’s economy is dominated by the service sector, which includes banking, financial services, retail and tourism.

Foreign tourists will find that prices in Switzerland could rise sharply along with the value of the local currency.

The rising strength of the Swiss franc will further dent the country’s share of the UK ski market. British holidaymakers heading out to

Richemont, has announced that it will increase prices for watches and jewellery by five percent in the euro zone to limit the damage to its margins following the surge in the Swiss franc.

“We are going to raise prices by 5% in the Eurozone. This applies to both jewellery and watches, but we are keeping prices in Switzerland stable,” said Cartier Chief Executive Stanislas de Quercize.

hit by the economic issues faced by Russia, as wealthy Russians stay at home because of the plummeting rouble.

The reasons for the SNB’s removal of currency controls may remain a mystery outside of the bank’s walls, but the impact of its decision is being felt across Europe and beyond. IFM

Swiss ski resorts this season now face increased in-resort costs in a country where prices are already steep.

“Clearly, this is acutely damaging for Swiss tourism and will price many people out of Switzerland for their ski holidays,” said Craig Burton, the managing director of the tour operator Ski Solutions.

It is another blow for the country’s top ski resorts, which have already been

C

A5

72.5 % 457,693,371,548

A5

50

B

O

10.4 % 65,857,483,332

O

A

631,183,475,908

631,183,475,908

A

89.6 % 565,325,992,576

B

A3

26.8 % 168,874,388,714

68.6 % 432,880,216,679

A4

57.4 % 362,366,045267

O GDP (current US$} A Gross national expenditure

O

GDP (current US$)

A

Agriculture, value added : 0.7 % 4,615,715,646

A5 % 70,514,171,412

B

Industry, value added

A6 Gross capital formation : 21.0 % 132,445,775,897

C

Services, etc., value added

A3 Final consumption expenditure, etc.

A4 Household final consumption expenditure AS : General government final consumption expenditure :11.2

B External balance on goods and services Help : How to read and make sense of the Circloid?

Each slice of a circle is the summation of the sub-slices in the layer on top of it. i.e.

O=A+B A=A3+A6 A3=A4+A5

International Finance Magazine Jan - Mar 2015

Help : How to read and make sense of the Circloid?

Each slice of a circle is the summation of the sub-slices in the layer on top of it. i.e.

O=A+B+C

Data Source: Worldbank: World Development Indicators

Jan - Mar 2015 International Finance Magazine

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COLUMN

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International Finance Magazine Jan - Mar 2015

COLUMN

COLUMN

Peter Ku

Revolutionise or fail Tougher stress tests bring banks to an impasse

J

ust before Christmas the results of the first stress testing exercise for the UK banking system were revealed. The test scenarios modelled a financial doomsday in which the housing market crashes, unemployment spikes and inflation rises. The aim of the exercise was to determine which banks had the capital adequacy to survive extreme fluctuations in market conditions.

Despite the Co-operative Bank failing — and both Lloyds and RBS narrowly escaping a similar black mark — the supervising bodies are confident that the UK banking system has become significantly more resilient. However, with fears around the Eurozone rising, fluctuating oil prices

and uncertainty over interest rates, financial institutions cannot rest on their laurels and assume that they’ll pass the same tests again next year.

Regulators have already set out their intentions to widen the remit of stress testing and will use the next year to probe even deeper for cracks in the defences of UK banks. For those banks that girded themselves strongly enough to withstand the first round of stress testing, the threat of tougher test conditions and scenarios are just around the corner.

Searching for stress fractures UK banks are already gearing up for these tougher tests. Santander passed this year’s tests with flying colours

but the possibility of stress testing against leverage ratio, a measure of the banks’ ability to meet financial obligations, could cause concern. As a result, Santander UK has been handed £300m by its Spanish parent to bolster the bank’s capital position further.

However, the advent of more robust tests will heap pressure on those banks whose approach to compliance is now more puncture-patch than tyre. In the last banking crisis, a lot of banks were unaware of their exposure to risk.

As a result, it’s no surprise that Mark Carney, the governor of the Bank of England, has already indicated that overseas risk could also be a factor of the next test. This scenario could prove to be much more challenging for banks

Jan - Mar 2015 International Finance Magazine

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who do a lot of their business in Asia.

Today’s financial institutions must be able to determine exposures across the business in real-time. To do this, they have to have the right information when lending to new customers and understand how much risk they are exposed to across different divisions. The latter can only be achieved by being able to bring together data from multiple sources.

For example, a mortgage loan packaged as a mortgage bank security is traded on the public market. Banks need the ability to understand who that mortgage belongs to and their credibility so that they have an accurate view of counterparty risk exposure. In turn, this means that banks need to understand: what are the credit conditions locally? What are the interest rate fluctuations in other countries?

Who is the customer?

lowing firms to take advantage of best practices and technology that allows for efficient and effective execution. However, the amount of data being produced versus the amount that needs to be captured, consumed, analysed and understood is a challenge.

Banks can no longer just continue appointing more people or building specific systems for each regulation.

The increased pressure from regulators is already beginning to uproot the existing gaps between people, technology and architectures across traditional business silos that have prevented an enterprise wide view of risk.

With each round of regulation and impeding deadlines

Reaching an impasse Bank stress testing is a fact of life for the global financial industry to help regulators monitor and measure systemic risk across markets. Satisfying these demands requires banks to have adequate means of accessing and utilising the right data for ongoing risk management and compliance. More importantly, al-

International Finance Magazine Jan - Mar 2015

has come another tackedon solution and another patched-up process. This approach has built a creaking, siloed and unwieldy infrastructure for managing data, reporting and compliance. A system that means stress tests are as much a test of reporting process as they are of actual ability to withstand tough economic conditions. This chronic underinvestment in people and rudimentary tools has brought banks to an impasse: revolutionise or fail, extremely publicly.

The meta-data trail In light of this, managing data must be taken seriously and regulators are forcing the board’s hand in this matter. An organisation can’t continue to blame their risk and compliance applications for not being able to meet stress-testing demands. The root of all pains is often the underlying foundation for managing the data which feeds those systems.

Regulators require detailed explanations about the lineage of data and how information is captured, transformed, and calculated so that they can understand the amount of capital

set aside to cover market, credit, operational, and liquidity volatility and risk.

Increasingly, the regulators are defining how data should be managed and governed, as evidenced in BCBS 239. This could mark the beginning of more stringent audits and requirements for firms globally. If banks are to satisfy regulator demands, a comprehensive, scalable, enterprise wide data management platform will be a crucial investment to create the transparency, trust, speed and data audit trail required. The success of such a platform has a number of technological and process driven dependencies. To deliver on its promise, it must be supported with access to all enterprise data, have rigorous data quality management enabled by data governance and master data management, as well as integrating with business and technical metadata.

The difference in approach comes down to not treating the regulations as yet another separate IT project or system. Instead, banks must establish a common framework for risk, compliance, sales, marketing, and customer facing systems and operations.

Adopting this approach will help provide insights into where risk exposure is and ensures transparency in how data is handled from the source all the way to the reporting function. This will also help reduce the costs and risks of managing a ‘hairball’ of separate systems and integrations.

Overhauling a data infrastructure may seem a

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55 daunting prospect to banks built on a creaking tower of legacy technology. However, the persistence and growing power of the regulators mean that the current patchwork and siloed approach cannot continue.

Financial institutions need to look at the underlying systems to ensure that they can give the regulators the information they need on an ongoing basis. If they are to achieve this, banks can no longer manage risk behind the Chinese walls of business unit siloes.

The good news is that support for data management projects is gathering pace at the board level. Even better news is that such a project delivers above and beyond the short-term needs of providing better

access to data. Investment in a common data management platform can provide the means of avoiding patchwork systems and oneoff processes of the past.

Through this, banks can establish a foundation to serve the data needs of the enterprise for compliance, growth, and cost reduction.

2015 will be a year of change for banks and their data strategies, but one thing’s for certain; the puncture-patch approach to compliance has reached the end of the road. IFM

About Peter Ku Peter Ku is Senior Director of Global Financial Services at Informatica and is responsible for Global Industry Marketing. He has 20 years’ experience evangelising, educating and promoting enterprise data management solutions to help drive business success across financial services.

He is an expert in enterprise information management strategy, architecture, and best practices and a regular speaker, blogger, and presenter to the global financial services industry.

About Informatica Informatica (NASDAQ: INFA) is the world’s number one independent leader of data integration, data quality, master data management, data security, and cloud data management solutions. Over 4,200 organisations, including 600+ financial service companies, around the world are gaining a competitive advantage with comprehensive, timely, consistent, and certifiably accurate data to improve risk management, combat fraud, ensure compliance, attract and retain customers, accelerate mergers and improve operational efficiencies.

Jan - Mar 2015 International Finance Magazine

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Competitive advantage

is the key

The Mediolanum Asset Management Limited team believes that how your business is positioned relative to your competitors will ultimately determine your success

International Finance Magazine Jan - Mar 2015

ADVERTORIAL

M

ediolanum Asset Management Limited (MAML) is the asset management arm the Italian Mediolanum Banking Group, who has had operations based in Dublin for over 16 years.

At the recent International Finance Magazine Awards, MAML were presented with the ‘Best Asset Management Company Ireland 2014’ and the ‘Most Innovative Investment Management Company Ireland 2014’. These awards are a testament to the continued hard work of everyone involved at MAML with regards to innovation and product quality.

Identifying, establishing and maintaining key competitive advantages within the asset management industry is key to the survival of a business and provides a means to which the business can evolve and adapt quickly to dynamic financial markets and to changing customer needs. Sustainable competitive advantages cannot be implemented overnight and often take years to implement successfully.

They should be unique to your business and not easily duplicated by competitors.

Predicting future trends, constantly researching competitors, adapting to your customers’ needs and wants whilst incorporating the entire ‘customer journey’ will cement a brand’s position.

Competition is a natural and integral part of doing business. How your business is positioned relative to your competitors will ultimately determine your success. Competing on product alone in a fiercely competi-

tive, saturated market, is often difficult. The relationship you build with your customers before, during and after the purchase, offers tremendous opportunities to differentiate yourself in the market.

MAML’s key differentiator is their continued focus on client centricity. This focus on client centricity must be embedded into the DNA of the organisation to be successful. MAML has established a culture that is based on their core brand values of investment quality, execution excellence and client centricity and delivering them consistently to our customers. This means focusing on what customers value most, in line with their business strategy and brand promise.

In such a dynamic marketplace, businesses that place such an emphasis on the customer will thrive by delivering ontarget solutions that satisfy client expectations every time. MAML has a clear understanding that no two customers are the same and that each has varying

needs and expectations.

This understanding has allowed MAML to establish the building blocks upon which client solutions can be developed and evolved.

Products evolution Products evolution is key and Mediolanum’s client solutions are developed, evolved and supported through their proprietary product development process MedInSynC®, which embeds their core brand values at the heart of all of the investment solutions and services that they deliver. This process is not static, it is constantly evolving. This continuous evolution is due to the recognition that financial markets and customer needs are constantly changing. And as such, so is the need for product evolution. This is achieved by listening to and incorporating feedback from not only their customers, but from their distributors, instilling confidence in both that Mediolanum will deliver and continue to deliver investment solutions that are superior to their

competitors and will remain relevant to their customers over the long run.

MedInSynC® is complemented by MAML’s investment management process, Med3®, which ensures that MAML’s products specifically meet the needs of investors and deliver on the commercial promise upon which they were originally proposed. Med3® is based on an active management approach whereby investment opportunities are identified through the use of fundamental and technical analysis, combined with an appreciation of investor sentiment and behavioural biases.

Customer satisfaction It is not a difficult concept for product or service providers or their customers to understand. If the customer is 100% satisfied, then the highest level of quality has been achieved. Unfortunately, this is not possible all of the time. As such, customer satisfaction needs a constant focus to ensure an improved overall customer experience. This again involves the

Jan - Mar 2015 International Finance Magazine

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ADVERTORIAL

platforms can best be described by IBM themselves, “The introduction of data warehousing and analytics platforms support the company’s customer-centric strategy – enabling more active, agile product management and faster delivery of information to clients.”

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entire customer journey — from the very first time that a customer engages with your brand, right through to the advice, the investment stage and beyond! Many firms tend to associate client satisfaction based solely on their product performance and disregard the rest of the journey. This can be rather short-sighted and one that can have serious repercussions for brand loyalty, as returns and alpha are very volatile even for the most successful and competent managers.

It is essential to constantly modify the current thinking on client satisfaction and quality. Clients expect investment solutions that address their needs now and into the future; distributors expect investment solutions that consistently deliver on their commercial promise and are of a higher quality than those of competitors.

To build a truly customer centric business, the central starting point should always be your customer. The customer journey and lifecycle should be mapped out from the outset. Its operating model must enable customer centricity; technologies and processes should be aligned so that they support and drive customer engagement. It is critical to incorporate customer feedback into processes and behaviours, and it must engage staff as well as executives and leaders from both inside and outside the organisation.

In this context, the choice of your product distributors are key as they play a fundamental role in the client experience. As such, a focus on client centricity must be engrained within their DNA and not just in glossy marketing materials.

International Finance Magazine Jan - Mar 2015

Technology factor Investment in technology, such as digital media, analytics, cognitive computing and ‘big data’ has become a key basis of competition and growth for businesses today. A recent collaboration with IBM has allowed Mediolanum to collect and analyse quality-related data that has guided their action in the key areas of client centricity, investment quality, execution excellence and innovation. This has ensured a constant focus on delivering on the expectations of both clients and distributors. Investment in technology and ‘big data’ has enabled Mediolanum to unlock significant value by making information more transparent. It also allows for narrower segmentation of customers and therefore more precisely tailored products and services.

The importance of such

Benefits of location Ireland has proven to be an invaluable hub of global intelligence through its special mix of leading IT companies and financial services organisations. Its innovation ecosystem has been 20 years in the making with the country now renowned globally as one of the key drivers of R&D and innovation. MAML has recognised this and has leveraged internal capabilities, which complement Mediolanum’s internal strengths.

Over the years, MAML’s business model has evolved to such an extent that we have now built an established network of key industry partners and contributors, which has allowed the company to essentially ‘crowd-source’ ideas from a professional network that can then plug into Mediolanum’s own organisational know-how. The contributions received from this network of ‘industry disrupters’, when combined with MedInSynC® and Med3®, has not only supported their innovation and product development initiatives, they have also complemented their asset management capabilities. IFM

Jan - Mar 2015 International Finance Magazine

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INTERVIEW

‘You can bank on us’ IFM spoke to Steinthor Palsson, the CEO of Landsbankinn whose resurgence is mirroring the positive outlook for Iceland Tim Evershed

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International Finance Magazine Jan - Mar 2015

Steinthor Palsson, CEO, Landsbankinn

Jan - Mar 2015 International Finance Magazine

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INTERVIEW INTERVIEW

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How would you evaluate Landsbankinn’s position today?

Landsbankinn’s performance and financial position are sound. A comparison of 1,000 banks from every corner of the globe made by The Banker – the FT owned magazine – last summer found that Landsbankinn is well positioned as regards equity position and return on assets.

According to the analysis undertaken by The Banker, no bank in Western Europe has a stronger equity position and only a few dozen banks show a stronger return on assets. In January 2014, international rating agency Standard and Poor’s (S&P) issued Landsbankinn the rating grade BB+ with a stable outlook but revised the outlook to positive in October. S&P states that they see a positive trend for economic risk in the Icelandic banking sector and would expect to upgrade the bank if its view on the sector continued to improve.

We have, over the last few years, enjoyed a turnaround, mainly by streamlining operations, increasing revenue and cutting costs and by setting very ambitious yet clear goals. But we, as do all banks, certainly still face challenges. The years from 2008 to 2010 were difficult in Icelandic banking but we have managed to reverse the situation, mainly because, as of late 2010, we put great emphasis on rebuilding the financial strength of our customers, both on an individual and corporate level. So all in all, the bank’s position is strong and allows it to support

growth in the economy and meet the increasing demand for financial services from households and companies.

How has Landsbankinn rebuilt its reputation and trust with its customers?

A reach-out by the bank in 2011 was fairly successful.

We hosted open meetings with the public and meetings on job creation in municipalities around the country. The overall change in attitude in-house and the bank’s corporate culture has made a notable difference.

Other important changes include restructuring of household and corporate debt, best practice in corporate governance, improved risk management, a new code of conduct and last but not the least, the effort we have put into always emphasising customer interests.

Trust is slowly growing, but it will take time to regain what was lost. We believe that a sustainable operation based on a service-minded, humble approach to customer relations is the right way forward.

Will the firm list on a stock exchange? If so,

International Finance Magazine Jan - Mar 2015

which one and when?

We expect the Icelandic state, which holds 98% of shares in the bank, to sell up to 30% of its holding in 2015 and 2016. We also expect that following such a sale, the bank will be listed on a stock exchange, which would certainly be very important for Landsbankinn.

Please explain the bank’s new agreement with LBI. Landsbankinn and Winding-up Board of LBI reached a settlement in December 2009 under which the bank agreed to issue a bond to LBI denominated in foreign currency.

The principal amount of the bonds was compensation for the net assets and liabilities transferred to Landsbankinn from LBI. In May 2014, Landsbankinn hf. and LBI agreed to amend the settlement, which means that the final payment of the bond will now take place in October 2026 instead of October 2018, lessening the burden of repayment considerably. This new agreement was widely regarded as excellent news for the Icelandic economy, as it also

significantly lightened the overall repayment burden of the country in foreign currency. As such, it represents an important step towards resolving national debt issues and lifting capital controls. The terms of the new bond are very manageable for Landsbankinn and will facilitate its efforts to secure financing in international markets. This is therefore an extremely important milestone for Landsbankinn, one we have worked tirelessly to achieve in recent years.

What is the economic outlook for Iceland?

The latest macroeconomic forecast of Landsbankinn Economic Research suggests that economic growth will average 3.5% from 2014 to 2017. This is slightly more positive than the forecasts previously published

by Statistics Iceland and the Central Bank of Iceland.

Economic Research expects unemployment levels to continue to fall; real estate prices to rise and inflation will be 3.2% on average.

While economic growth in 2015 is expected to be driven largely by increased

INTERVIEW

Iceland and the 2008 crash

private consumption, capital formation is expected to grow by almost 7.6% on average through 2017. On the other hand, new numbers from Statistics Iceland indicate that headline inflation is now lower than expected, even believed to be below 1%, leading to suggestions that economic growth in 2014 might be overestimated. All things considered, we are, however, justifiably optimistic about 2015.

The bank takes corporate social responsibilities (CSR) very seri-

ously; please explain its activities in this area.

As a financial undertaking, Landsbankinn wishes to lead the development of a sustainable society in Iceland by integrating economic, social and environmental concerns in its operations and to ensure that both its owners and society at large benefit from its activities.

Landsbankinn was the first company in Iceland to hire a fulltime CSR Officer and is actively working on CSR issues domestically and on the international stage. The

bank is a signatory to Global Compact, the UN Principles for Responsible Investment and is member of the UNEP Financial Initiative.

We are also proud of several smaller yet equally important projects on the CSR front and the bank has in recent years actively been collaborating with stakeholders like the Federation of Icelandic Industries and Tourism Iceland on how the financial sector can help these industries grow in a responsible manner. IFM

History of Landsbankinn Landsbankinn was born out of the wreckage left by the failure of its predecessor Landsbanki, one of the largest banks in Iceland, during the crash of 2008. It has been state owned since inception. Icelandic State Financial Investments holds 81.33% of the shares while the rest is owned by the winding-up receivership for Landsbanki.

It was created after the government had taken control of the insolvent Landsbanki and decided to split all domestic operations into a new version of the bank while leaving the foreign operations for bankruptcy and winding-up proceedings.

Key to the demise of Landsbanki was a UK deposit scheme called Icesave. It was an easy-access, on-line savings account, Icesave became an instant success, transforming Landsbanki’s balance sheet and funding profile. After launch, Icesave grew rapidly, due to its attractive interest rate, and soon deposits totalled £2.8 billion with over 80,000 accounts opened.

After the bank announced in October 2008 that Icesave was no longer processing withdrawals or deposits, Icesave was declared in default on October 8, 2008, taking Landsbanki with it in its fall.

The banking crisis of 2008 was a truly international event, but it hit Iceland harder than just about any other nation.

The country, which has a population of just 325,000 and a small GDP, was dominated by a bloated banking sector. At the time of the crash, the banking sector’s total balance sheet was over 10 times larger than Iceland’s GDP. This combined with a property bubble, overvalued local currency and an overheating economy proved a near-lethal cocktail when the crisis hit.

The country’s three largest banks, Giltnir, Landsbanki and Kaupthing, went into receivership within days of each other.

The Icelandic economy was plunged into a sharp recession. Stock prices fell by 85%, housing prices fell by 38% in real terms, private consumption fell by 16% and capital formation by 58%, while exports grew by 11%.

Prime Minister Geir Haarde said: “There was a very real danger... that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could have been national bankruptcy.”

It took three years for the impact of the crisis to abate and the country’s economy to start growing again. Now, after much hard work and pain, the current economic outlook is at last favourable once again.

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ADVERTORIAL

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Despite global slowdown,

ICD saw healthy growth In the first half of 2014 alone, it approved 14 projects for a sum of $138.77 million

International Finance Magazine Jan - Mar 2015

ADVERTORIAL

I

slamic Corporation for the Development of the Private Sector (ICD) provides financing and financial services in accordance with Islamic banking and finance principles as well as advisory services for a range of client requirements. Its mission is to complement the role played by Islamic Development Bank (IDB) through the development and promotion of the private sector as a vehicle for economic growth and prosperity.

Its authorised capital stands at $2bn, of which $1bn is available for subscription. Headquartered in Jeddah, it was established by the IDB board of governors during its 24th annual meeting held in Jeddah in November 1999. Its share-

holders consist of the IDB, 52 member countries and five public financial institutions. Its vision is to become a premier Islamic multilateral financial institution for the development of the private sector.

The mandate of ICD is to support the economic development of its member countries through provision of finance to private sector projects in accordance with the principles of the shari’a law.

ICD finances projects that are specifically geared to creating employment opportunities and boosting exports. Furthermore, it mobilises additional resources for projects and encourages the development of Islamic financing and capital markets. It also

attracts co-financiers for its projects and provides advice to governments and private sector groups on policies aimed at encouraging the establishment, expansion and modernisation of private enterprises, development of capital markets, best management practices and enhancing the role of market economy.

The board of directors (BOD) is mainly responsible for the adoption of policies, operations strategy, budgets, and the general conduct of the operations of ICD within the powers delegated to it by the general assembly. The BOD consists of 10 members and is chaired by the president of the IDB Group. It also includes the CEO & general manager of ICD along with

representatives of IDB, member country group from Africa, Asia, Arab Asia, public financial institutions and a permanent member from Saudi Arabia.

ICD mainly focuses on activities where they can make the highest impact in promoting the private sector in its member countries. It also plays the role of catalyst for other project sponsors to invest in its member countries.

In sum, 2013 was yet another successful year for ICD to substantially expand its support for private sector growth to meet increasing demand for infrastructure, economic modernisation, and financing for small- and medium-sized businesses.

Despite the global downturn and persistence of uncer-

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Âť

H&D Industrie S.A, Dakar – Senegal

Jan - Mar 2015 International Finance Magazine

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»

Mukalla Iron & Steel Company, Hadhramout – Yemen

tainties, ICD approved 28 projects, 4 Qard Hasan and 3 capital increase for total amount of $508.18 million. These added value to the economic and social development of member countries through new job creation, technology transfer and through crossborder investments.

The year 2014 has turned out to be fruitful year. It launched an ijara company in Palestine while an ijara company in Malaysia is under establishment. In the first half of 2014, it approved 14 projects for a sum of $138.77mn. The new approvals have increased ICD’s gross approvals since

inception to 279 projects in addition to 46 approvals to increase ICD’s participation in the equity of investee companies, thus increasing ICD’s total amount of gross approvals to $3,301.6 mn.

By the end of second quarter, ICD has catered to nine different sectors, wherein the finance sector has the largest share of the exposure with 60.6% followed by industry and mining sector.

ICD’s presence stretches to over 33 countries and five regional projects.

Furthermore, ICD extends lines of financing to commercial banks and national development financing institutions in member

International Finance Magazine Jan - Mar 2015

countries to indirectly finance their small and medium enterprises (SMEs).

ICD sponsors, manages (as mudarib) and participates in mutual funds and other special purpose investment vehicles designed to invest or finance projects in accordance with its mandate. At the same time, it structures, arranges, and underwrites syndications.

Furthermore, it manages shares and securities issues, makes private placements and carries out securitisations for its clients.

Most recently, it agreed to a joint venture with the Republic of Chad to create a local leasing company

and a local Islamic bank.

The organisation has also extended a $6 million line of finance to Tajikstan’s Orienbank and is helping to fund a specialist bank in Bangladesh.

More broadly, it has recently worked with Thomson Reuters to develop and launch the ICD Islamic Finance Development Indicator, a numerical measure representing the overall health and growth of the Islamic finance industry worldwide. IFM

Jan - Mar 2015 International Finance Magazine

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A

n award is a celebration of hard work, innovation and success. Everyone seeks recognition, at least a pat on the back for their efforts. But recognition is not easy to come by.

Hard work does not always convert to success. Good numbers do not always translate into awards. After all, most often, you are not the only one in the field.

As if coming up with new products was not tough enough, there is the additional challenge of making them better than that being offered by competitors.

Competition breeds more competition, which translates into better products for customers. When customers choose your products or services over that of the competition, it shows in your balance sheet. But the feeling to cherish is the look of awe in the eyes of the competition. No award can possibly make you feel any better.

IFM is honoured when such companies are nominated for our awards, which seek to celebrate achievers and highlight their achievements in the larger business community. Achievements include innovative products or marketing strategies, new standards in corporate governance, path-breaking initiatives in social or charitable causes, and other activities that have an impact on the everyday lives of people worldwide.

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International Finance Magazine Jan - Mar 2015

The aim of every business is to touch the lives of people in such a way that they turn into customers. The next benchmark is to make that customer come back for more. By then, you should have the customer talking to others about your product or services, which is the ultimate compliment for any company.

With a population of over seven billion, there is no dearth of people. It is for companies to come up with products and services that can convert people into customers.

Despite the huge population, competition is tough because there is no shortage of innovative minds or enterprising business persons. Which is what makes the job of our team of analysts that much tougher. No surprises then that winners like to celebrate their victory at the IFM awards.

And, why not! An award means that you have set a benchmark for the industry. It also means that you have raised the bar for yourself.

We respect and admire this desire to constantly improve yourselves, your products, your companies, your employees. Those who set themselves on this path are eventually going to be the companies whose standards others will have to either match or surpass.

Let us raise a toast to the ones who set new benchmarks.

Financial Awards Fastest Growing Insurance company Angola

Aon Angola HQ: London, UK Aon is the leading global provider of risk management, insurance and reinsurance brokerage, human resources solutions and outsourcing services. Through its more than 66,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions. Aon has been named repeatedly as the world’s best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources.

Best Commercial Bank Austria

Best Corporate Bank Australia

Australia and New Zealand Banking Group Limited (ANZ) HQ: Melbourne, Australia ANZ traces its origins to the Bank of Australasia, which opened its first office in Sydney in 1835. It is a publicly listed company, and was incorporated on July 14, 1977 in Australia. Australia and New Zealand Banking Group Limited is the main holding and operating company for the group and they are one of the five largest listed companies in Australia and the number one bank in New Zealand.

Best Corporate Bank & Best Customer Service Bank Belgium

69 UniCredit Bank Austria AG

ING Belgium SA/NV

HQ: Vienna, Austria

Brussels, Belgium Amsterdam, Netherlands - GLOBAL

Bank Austria has been a member of UniCredit, one of the largest European banking groups since 2005. Among the large banks in Austria, it has one of the strongest capital bases. The bank strives to maintain the highest level of customer satisfaction as it looks back on more than 150 years of tradition and experience. The bank maintains an extensive network in Austria, with about 7,300 employees serving customers in some 280 branches.

Best Wealth Management Bank Canada

ING is a global financial institution of Dutch origin with its headquarters in Amsterdam. The group supplies products and services in the areas of banking, investment, life insurance and retirement services to 47 million customers in over 40 countries in Europe, North and Latin America, Asia and Australia. ING’s 75,000 employees are fully committed to helping their customers provide for their financial future.

Best SME Bank China

BMO Harris Private Banking

Agricultural Development Bank of China - ADBC

HQ:Chicago, USA

HQ: Beijing, China

Established in 1817 as Bank of Montreal, BMO Financial Group is a highly diversified financial services organisation. It provides a range of retail banking, wealth management and investment banking products and solutions. In the US, clients are served through BMO Harris Bank, BMP Private Bank and BMO Capital MarketsTM.

Agricultural Development Bank of China (referred to as ADBC) is a state-owned agricultural policy bank. The mission and purpose of the bank is to promote development of agriculture and rural areas through the activities like raising funds for agricultural policy businesses and undertaking agricultural policy credit businesses specified by the central government.

Jan - Mar 2015 International Finance Magazine

Financial Awards Best Private Bank Colombia

Best Investment Bank Czech Republic

GRUPO BANCOLOMBIA

Ceskoslovenska obchodni banka (CSOB)

HQ: Medellin, Colombia

HQ: Prague, Czech Republic

Bancolombia is the largest commercial bank in Colombia and one of the biggest in Latin America. Founded in 1945, the bank is headquartered Medellín, the second largest city in Colombia. It is a full-service financial institution that provides a range of financial products and services to a diversified individual and corporate customer base throughout Colombia, as well as in other jurisdictions, such as Panama, El Salvador, Puerto Rico, the Cayman Islands, Peru, Brazil, the United States and Spain

Ceskoslovenska obchodni banka, a. s. is a universal bank operating in the Czech Republic. CSOB was established by the state in 1964 as a bank to provide foreign trade financing and convertible currency operations. After the purchase of CSOB shares from minority shareholders in June 2007, KBC Bank became the sole shareholder of CSOB. ČSOB provides its services to all groups of clients, i.e. retail as well as SME, corporate and institutional clients

Best Retail bank Egypt

Best insurance Company France

70 National Bank Of Egypt

Axa France

HQ: Cairo, Egypt

HQ: Paris, France

National Bank of Egypt is the oldest commercial bank in Egypt. It was established on June 25, 1898 with a capital of £ 1 million. Throughout its long history, NBE’s functions and roles have continually developed to meet the different economic and political phases in Egypt. Since mid-1960s, NBE has been in charge of issuing and managing saving certificates on behalf of the government

Present in 56 countries, the bank’s areas of expertise are reflected in a range of products and services adapted to the needs of each client in three major business lines: propertycasualty insurance, life & savings, and asset management. Well established in the markets of Europe, North America and Asia Pacific, the group will strengthen its growth in the coming years through presence in high growth markets.

Best Investment Bank Hong Kong

The Hongkong and Shanghai Banking Corporation Limited - HSBC HQ: Hong Kong Island, Hong Kong The HSBC Group is one of the world’s largest banking and financial services organisations. The group has around 8,000 offices in 87 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. HSBC provides a comprehensive range of financial services through four customer groups and global businesses: retail banking and wealth management; commercial banking; corporate, investment banking and markets; and private banking.

International Finance Magazine Jan - Mar 2015

Best Banking Group Japan

Mitsubishi UFJ Financial Group HQ: Tokyo, Japan Mitsubishi UFJ Financial Group, Inc. is a Japanese bank holding / financial services company headquartered in Chiyoda, Tokyo, Japan. It is Japan’s largest financial group and the world’s second largest bank holding company holding around $1.8 trillion (JPY 148 trillion) in deposits as of March 2011. The group’s management control functions have been strengthened to improve capital efficiency.

Best Islamic Bank Malaysia

Best Insurance Company Netherlands

Maybank Islamic Berhad

Aegon

HQ: Kuala Lumpur, Malaysia

HQ: The Hague, Netherlands

Malayan Banking Berhad (trading as Maybank) is the largest bank and financial group in Malaysia, with significant banking operations in Singapore, Indonesia and the Philippines. The bank also has large interests in Islamic banking through Maybank Islamic Berhad and insurance via its Etiqa subsidiary. In 2014, Maybank ranked 326th in the Forbes Global 2000 Leading Companies.

Aegon provides insurance, pensions and asset management in more than 25 countries. Listed on the Amsterdam and New York stock exchanges, Aegon has A-level ratings from the three main credit rating agencies. They aim to be the most-recommended life insurance and pension provider by customers and business partners, as well as the most preferred employer in the sector.

Best Life Insurance Company Poland

Best Private bank Singapore

71 Generali Poland

DBS Bank LTD

HQ: Trieste, Italy

HQ: Singapore, Singapore

The Generali Group is one of the most significant players in the global insurance and financial products market. Assicurazioni Generali, founded in 1831 in Trieste, is the group’s parent and principal operating company.

Generali in Poland was first founded in 1837 and continued its operations till the Second World War. Generali came back to Poland again in 1999. It offers financial security to over 1 million Poles and hundreds of companies.

DBS is a leading financial services group in Asia. They are headquartered in Singapore, with a growing presence in Greater China, Southeast Asia and South Asia. DBS is uniquely placed to deliver banking the Asian way. As a bank that specialises in Asia, they leverage their deep understanding of the region, local culture and insights to serve customers.

Best Insurance Company Spain

Mapfre Spain HQ: Madrid, Spain MAPFRE is a global group operating in 47 countries across five continents and lead the Spanish insurance market. They are also the number one multinational insurer in Latin America. MAPFRE has over 23 million clients, employs 36,600 people and has a network of 5,500 offices all over the world. In 2013, the group generated total revenue in excess of 25.88 billion euros and posted net income of more than 790 million.

Best Commercial Bank Thailand

The Siam Commercial Bank Public Company Limited HQ: Bangkok, Thailand The Siam Commercial Bank PCL was Thailand’s first indigenous bank, established in 1906 under a Royal Charter. The bank was Thailand’s largest commercial bank in terms of total assets, as on September 30, 2014. It provides a range of financial services including corporate and personal lending, retail and wholesale banking, foreign currency operations, international trade financing, custodial services, credit and charge card services, and investment banking services in Thailand.

Jan - Mar 2015 International Finance Magazine

Financial Awards Best Islamic Bank USA

Fastest Growing Equity Fund GCC

American Finance House LARIBA

LHV Asset Management (AS LHV Varahaldus)

HQ: Pasadena, USA

HQ: Tallinn, Estonia

American Finance House LARIBA is the oldest community-owned, riba-free and shari’a compliant finance company serving the community in the US since 1987. The bank claims to have a different style of approach when compared to other riba-free models. .

LHV Asset Management (AS LHV Varahaldus) is a fund management company supervised by the financial supervision authority of Estonia. LHV Asset Management is owned by AS LHV Group, which is a holding company for LHV Asset Management as well as LHV Bank. LHV was founded in 1999 and offers its services in Estonia, Latvia, Lithuania and Finland.

Best Fund Management Company Estonia

Best Asset Management Company Turkey

72 LHV Asset Management (AS LHV Varahaldus)

YapiKredi Asset Management

HQ: Tallinn, Estonia

HQ: Istanbul, Turkey

LHV Asset Management (AS LHV Varahaldus) is a fund management company supervised by the financial supervision authority of Estonia. LHV Asset Management is owned by AS LHV Group, which is a holding company for LHV Asset Management as well as LHV Bank. LHV was founded in 1999 and offers its services in Estonia, Latvia, Lithuania and Finland.

Yapı Kredi Asset Management is one of the leading asset managers in Turkey, administering a wide range of products in various asset classes. With a solid track record in investment management, business performance and efficient CRM and sales management services, Yapı Kredi Asset Management aims to become the indispensable business partner of its clients, establishing a consistent foundation of long-term values.

Best Re-Engineering and Re-Branding Bank Best Wealth Management Bank Georgia

UK

JSC Capital Bank

Coutts and Co

HQ: Tbilisi, Georgia

HQ: London, UK

JSC ‘Capital Bank’ (former JSC ‘Investbank’) was founded in 2003. The bank was granted a license by the National Bank of Georgia allowing it to provide full range of banking services. The bank is a principle member of Visa International, MasterCard & China UnionPay.

With more than 300 years of experience, Coutts understands the dedication and experience required to provide advice to its clients. The Coutts experience is not just one of unsurpassed service, but is comprehensive in its commitment to providing exceptional advice.

International Finance Magazine Jan - Mar 2015

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Gateway to Islamic finance That is what the UK is aiming for, Lord Sheikh, Baron Sheikh of Cornhill, House of Lords, told delegates at the IFM’s EU Islamic Finance and Banking Summit in London Tim Evershed

Jan - Mar 2015 International Finance Magazine

SUMMIT

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he time has come for Islamic finance to move into the mainstream in Europe, and the UK is leading the way, Lord Sheikh told delegates at International Finance Magazine’s EU Islamic Finance and Banking Summit that took place in London on November 18-19, 2014.

Modern Islamic finance emerged in the mid-1970s with the founding of Islamic banks, but the growth has been very rapid since the 1990s. It is forecast to grow to $2.5 trillion by the end of 2015.

Globally, the market has grown 50% faster than the traditional banking sector.

Sharia compliant assets rose more than 160% between 2009 and 2011.

Savings and protection

schemes launched by the sector bear many similarities to the mutual insurers and friendly savings societies that have come back into vogue since the crash of 2008 that caused so much disdain for the big High Street banks.

Delegates were also told that the ethical movement, which is growing fast in the West, is starting to work with Islamic finance to share risk and return.

And governments across Europe are showing support for the sector by levelling the playing field around tax and regulation.

The UK is the biggest centre for Islamic finance outside the Islamic world with sharia compliant assets in excess of $18 billion.

Lord Sheikh, Baron Sheikh of Cornhill, House of

A panel discussion at the summit

International Finance Magazine Jan - Mar 2015

Lords, says: “Islamic finance presents an exciting highgrowth market opportunity.

It is the British government’s intention to establish and maintain Britain as the gateway to international Islamic finance. The British government would like to ensure that principles of fairness, collaboration and commitment will apply to Islamic financial arrangements and is actively encouraging sharia compliant transactions.”

The Muslim population of Europe now numbers 20 million people but Lord Sheikh believes it is time for Islamic finance to reach out to the 450 million nonMuslims of the EU too.

He says: “Islamic finance should not remain a niche, but through its appeal to everyone irrespective of reli-

gion, its market should be part of the mainstream market, increasing its potential manifold.

“Islamic financial institutions should target not only Muslims but also non-Muslims, particularly in Western countries, and their products and the pricing should be such that it appeals to a wider audience.

“To enable us to succeed in achieving our expansion for Islamic finance, we need to develop and market a range of products which will fulfil the needs of people and cater for local conditions in the relevant country where we would like to write business.”

Islamic finance is all to do with ethical forms of investment, and also investing in businesses and industries that are good for society and

SUMMIT

the environment at large.

Its financial arrangements work for the benefit of society. For example, there are opportunities to invest in the generation of energy by renewable means in UK and overseas.

As such, Islamic finance should be making strides across Europe due to friendly regulatory environments, agreed Sheikh Bilal Khan, Co-Chair of Dome Advisory.

He pointed out that Luxembourg, France, Paris, Strasbourg, Brussels, Germany, The Hague and Turin were among those welcoming Islamic finance with rule changes and events.

Khan says: “It is a great time because we now have so many countries and jurisdictions that have enabled Islamic finance. The ethical

movement in the West is starting to work with Islamic finance to share risk and return.”

He highlighted the UK’s first sovereign sukuk bond of £200mn, which was over-subscribed on the first morning by over £2 billion.

Then bond has a maturity of five years and use the Al-Ijara structure. This is a sale-and-lease back mechanism that means investors get paid a fixed rental income on properties placed in the structure rather than conventional interest.

And in addition to the UK bond, Luxembourg issued the first sovereign sukuk in Euros. It was €200mn and was also hugely oversubscribed.

Lord Sheikh says: “The government has made it very clear of their intent to

cement Britain’s position as a Western hub for Islamic finance. With the recent issuing of the sovereign sukuk, this ambition has been realised. We are the first country outside of the Islamic world to issue sukuk, a feat I believe we should be very proud of.

“The Muslim community has for some time longed for changes that would offer a level playing field between conventional and Islamic products. These recent developments have provided them with just that.”

The conference was told that the UK has the political will to ensure a level playing field for Islamic finance by Omar Sheikh, Executive Board Member, Islamic Finance Council UK. He said that regulators need to consider that

Islamic finance is a very young sector. “It operates in secular areas and in ethical areas. There should be a focus on shared values, which will allow Islamic finance to cross over into the mainstream finance markets.”

The low-carbon sector, social impact bonds, life and mutual companies are all natural partners for Islamic finance and areas where the sector could make a big contribution.

And it should be noted that the crash of 2008 had given these areas a boost, as more traditional banking had failed in the eyes of many consumers.

Omar Sheikh said: “There has been a big moral bankruptcy in our banking system. It is something many people have commented on.

Islamic finance can contrib-

Saker Nusseibeh, chief executive officer, Hermes Fund Managers participating in a panel discussion

Jan - Mar 2015 International Finance Magazine

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ute to solving this crisis of capitalism.”

Lord Sheikh said: “The problems in the financial sector made people realise the importance of Islamic finance, which is based on ethical principles and transparency.

“In context of its infancy, Islamic finance may not have all the answers today. However, it is clear that many of its values are shared amongst the other great faith traditions where a ban or strong aversion to interest is a common theme.”

Khan noted that political will is one of four cornerstones that are necessary for the furtherance of Islamic finance in the West. Institution building, human capital and regulatory progress are the other three.

However, he noted that the area was sometimes

perceived as complex with its terminology that includes names like sukuk, takaful, zakat, riba and sharia.

Khan said: “Sometimes, we have complicated Islamic finance. We need to demystify it.”

The term sharia itself is problematic in the West as what is simply a system of Islamic law has become inextricably linked with extremist regimes such as the Taliban or ISIS that are known for their brutality, in the Western mind.

It is naturally hard to sell something in the retail market if the consumer links it with a group that forbids women an education. So, on the retail side, the role of education and awareness will play a key role in helping Islamic finance grow.

Islamic finance also faces other issues such as the inevitable rise in interest rates

across Europe. Rock bottom interest rates, as we have seen across the continent since 2008, do something to level the playing field for Islamic banks.

However, a rise in the base rate would see them struggle to compete with savings rates being offered by mainstream competitors.

Dennis Cox, CEO of Risk Reward points out that Islamic banks did not exist in Europe pre-1982 when base rates were at 15% and above.

He says: “If you’re a depositor with an Islamic financial institution, you’re going to get a very low rate of interest. At the moment everyone is getting a low rate of interest, so it doesn’t matter but how would you feel if interest rates were at 15%?

“Many Islamic customers are also customers of

The summit was held at the Jumeirah Carlton Tower - London on November 18-19

International Finance Magazine Jan - Mar 2015

traditional banks. What will they do? Will there be a herd mentality… causing a strain on liquidity? The honest answer is we just don’t know.”

Another point is that Islamic financial institutions must work in conjunction with a sharia board in order to ensure they conform to Islamic law. This is obviously an extra set of rules and regulations and an extra cost that must be borne and eventually passed on to customers.

Cox says: “We have a higher requirement on ethics and a higher requirement on making sure we are sharia compliant. When a firm says what they have done is not sharia compliant, that is a horrible own goal and that really hits reputational risk. Reputational risk is even more important to an Islamic bank.” IFM

Awards Ceremony 2014

IFM AWARDS

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Jan - Mar 2015 International Finance Magazine

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INTERVIEW

‘Our goal is to get 1% of total banking sector assets by

2020’

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International Finance Magazine Jan - Mar 2015

Lasha Khoperia, CEO, Capital Bank, Georgia

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INTERVIEW INTERVIEW

Lasha Khoperia, CEO, Capital Bank, Georgia spoke to IFM about their plans to increase market share What does your bank focus on: retail or investment banking?

Every single customer is very important and valuable for JSC Capital Bank. We are focused on universalism and flexibility; the bank’s mission is to offer and provide our private & corporate clients universal and diverse banking products. Also the bank has high hopes for the development of e-commerce and has significantly succeeded during the last months in this field.

How has the economy

developed since 2003 when your bank was established? What was the size of the economy then? How much has the economy grown since then?

Over the past 10 years, Georgia has seen a remarkable amount of economic progress. Twenty years ago, it was one of the Soviet republics, and struggled economically after the break-up of the Soviet Union. Its economic turnaround came with the changes beginning from 2004.

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The impressive rise of Georgia’s economic freedom has been propelled by broad-based score improvements in such critical areas as regulatory efficiency and market openness. Notable structural reforms have included trade liberalisation, privatisation, implementation of competitive flat tax rates, and modernisation of the regulatory environment.

With the success in keeping inflation low, greater monetary stability has been achieved.

How has your journey

been during this time?

JSC Capital Bank is a relatively new financial institution in the Georgian financial sector. The bank has recently undergone a re-branding process and received an award from International Finance Magazine as the “Best Re-engineering and Re-branding Bank in Georgia in 2014”. We have ambitious goals and plans for the future.

How many branches do you have now? How many employees?

The year 2014 has been

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81 very important for JSC Capital Bank, as the full process of re-branding was carried out. Technologies appropriate for modern standards of services were introduced and the bank offered its clients services based on individual approach. We offer online/distance services, loans, deposits, money transfer and other bank products.

Today, we have about one hundred employees.

Currently, we have three service centers in Tbilisi, of which one is at Tbilisi International Airport. For the next year, plans are on to open a new service centre in Batumi, which happens to be the most popular sea resort in Georgia.

What is the size of your retail banking portfo-

lio & what is the size of your investment portfolio?

Our goal is to get 1% of total banking sector assets by 2020 and total portfolio should be 400 ml. Gel by that time (approximately $200 million). According to those figures, corporate and private portfolios should be divided 50/50%.

Which sectors in Georgia are witnessing good growth? Which sectors are showing signs of potential for the future?

The country’s main economic activities include agriculture, manufacturing, wholesale and retail trade, transport & communication, and construction. In 2014, the largest contributor to the GDP was agriculture, making up 18% of the total

GDP. Likewise, for retail and wholesale, the figure stood at 14%, while transport & communications made up another 14% of the economy as a whole. The share of manufacturing was 9%.

In the long term, for the economy as a whole, trade, tourism, manufacturing and construction are expected to be the main drivers of sustained growth. The growth in trade, especially, will bolster the SME sector, as will growth in tourism, made up of small restaurants and hotels How do you plan to take advantage of this potential?

JSC Capital Bank tries to finance and take part in many significant and important state and private

projects, which are aimed at developing the country’s economy and make it mutually beneficial for both the private sector as well as the whole of Georgia.

In 2015, we are going to open new service centers in different regions, launch new products for specially targeted audiences and to carry out a huge PR and marketing campaign. IFM

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Consumer International Finance Magazine Jan - Mar 2015

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Increasing opportunities in Africa’s biggest economy Samuel Okocha

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ith a growing population and rising middle class, Nigeria is experiencing a boom in consumer spending. To keep pace with this trend, retail outlets are springing up while ecommerce companies are redefining the way Nigerians shop. Despite a huge infrastructure deficit and an Islamic insurgency that has left thousands dead across the county’s north, analysts say opportunities abound in Africa’s biggest economy.

“The most interesting trend that we have come to notice is that people will always shop and this cuts across every class because there is always a need to fill,” Hassan Uthman, community manager at e-commerce company MallforAfrica, said.

MallforAfrica recently joined the list of companies exploring business opportunities by providing direct access to various international brands from market places and discount stores such

as Amazon & Wal-Mart, to departmental stores such as Macy’s and Nordstrom and high-end merchants like Net-a-Porter.

“The Nigerian population is predominantly young, meaning we are generally very aspirational. In addition, global cultural convergence makes it easy to relate and endorse international brands. This need is inadequately met by local retailers. MallforAfrica has seized the opportunity to fulfill this need,” Uthman explained. “Access to international brands is no longer restricted to those who can afford to travel abroad.”

Retail industry and ecommerce Nigeria’s leading online stores record $2m worth of transactions on average each week, according to an online shopping report by Philips Consulting. Based on a survey of consumers and major online retailers such as Jumia and Konga, the report identified fashion products, mobile phones

International Finance Magazine Jan - Mar 2015

and services (including restaurant and spa deals) as the top selling items.

Although many Nigerians are yet to embrace online shopping, increasing internet penetration and e-payment solutions are encouraging more Nigerians to shop online.

Earlier this year, PayPal launched in Nigeria. In its first week of operation, consumers were reported to have purchased items from Britain, China and the United States via its online platform.

A recent report by global consulting firm McKinsey & Company reveals that there are almost 40 million Nigerians with income exceeding $7,500 per year.

According to the firm’s growth estimates for the economy, annual sales in consumer goods could more than triple to $1.4 trillion by 2030 from the current $388 billion.

Brick-and-mortar stores are also cashing in. Multinational companies such as Unilever Plc, Nestle Plc and

There’s a big opportunity for companies which can formalise the informal retail sector Melissa Cook, CEO, African Sunrise Partners LLC

Shoprite Holdings continue to deepen their operations in Nigeria. ‘’Retailing is an interesting category,” says Melissa Cook, CEO at African Sunrise Partners LLC, an investment strategy firm focused on the sub-Sahara African market.

“Mega-shopping malls are a tough economic proposition in Nigeria. Costs are high for land, power and security. People are used to shopping based on their existing commuting patterns, and it can be very timeconsuming to drive to a mall that’s out of the way. We think there’s a big opportunity for companies which can formalise the informal retail sector. Once there is improved access to power, companies can upgrade stores with refrigeration and lights. Convenient and

modern retail outlets can be built on a smaller scale in locations that are already being used for retail.”

Where the growth comes from The growth stems from a decade of strong economic growth ranked as one of the highest in the world at an annual average of 7%. Oil, Nigeria’s major source of revenue, has been a driver of this growth. However, a rebased GDP in 2014 showed that the economy enjoys far more diversity than previously thought.

The major contribution to growth came from manufacturing and various services, which added more than 50 % to the GDP. Although the World Bank puts the poverty rate at more than 60% of Nigeria’s population, the country’s

growth has promoted a culture of entrepreneurship that could create more jobs and add more people into the growing middle class.

The African Development Bank describes stable middle class Africans as those who spend between $4 and $20 a day. “These people are not middle class in developed country terms, or even by the standards of emerging markets,” notes Calistus Juma, Professor of the Practice of International Development and Director of the Science, Technology and Globalisation Project at Harvard Kennedy School, in a 2011 Finance and Development report.

“But in African terms, they have disposable income and are demanding an increasing amount of goods and services that contribute to

85 On October 20, 2014, the World Health Organization declared Nigeria free of Ebola. The Nigerian response to the outbreak was greatly aided by the rapid utilisation of a national public institution (NCDC) and the prompt establishment of an Emergency Operations Centre, supported by the Disease Prevention and Control Cluster within the WHO country office.

The WHO declared the outbreak was over 42 days after the last confirmed case.

Jan - Mar 2015 International Finance Magazine

86 the overall well-being of society.”

Nigeria is leading the growth of new middle-class households (consuming from $15 to $115 a day) in Africa with an estimated 7.6 million to be added in the next 16 years, according to a Standard Bank research report, which surveyed 11 key sub-Saharan African countries. Between 2000 and 2014, the report says, Nigeria’s middle class grew 600% to 4.1 million middleclass households.

“Middle-class Nigerians are very brand- and statusconscious,” notes Cook, who led a team from African Sunrise Partners LLC on a power trip to Nigeria last August. “Brands which are just a bit out of reach — or which represent an image of a better life — are in strong

demand. This can range from KFC for special occasions to a Heineken beer on a hot Friday night.”

Nigerian travel business consultant Ikechi Uko agrees. “Lifestyle is a driving motivation for Nigerians,” he told IFM at the10th edition of his Akwaaba African Travel Market fair held last October in Lagos. “They have admired the lifestyle of other people and these are the things that have given them motivation. So the first time they have disposable income, they want to spend and live like the people they have always admired. They move their children to more expensive schools, change neighbourhood and travel abroad.”

More opportunities “We also see plenty of

International Finance Magazine Jan - Mar 2015

opportunity for companies to sell to consumers who are just now earning disposable income for the first time,” Cook said. “We’re watching agriculture and power sector reforms very closely to see how much new spending power they create, and how many more Nigerians they help bring into the middle class. As people have more income, they’ll buy small quantities of items which improve their lives — toothpaste, shampoo, diapers and laundry detergent.”

Other sectors that should benefit from the expanding middle class, according to Cook, include housing and all that goes with it — furniture, kitchen and bathroom fixtures, lighting, electrical equipment and consumer electronics. IFM

Lifestyle is a driving motivation for Nigerians Ikechi Uko, Nigerian travel business consultant

NIGERIA Population 173 million (2013) is equal to 1 million

GDP

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$509 billion

is equal to 100 billion dollar

(2012-2013)

Major cities Kano Zaria Kaduna Ilorin Ogbomosho Ibadan Lagos Abuja

Enugu Benin city Onitsha Warri Aba

Ratio of urban to rural 2013 54

rural

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Porthacourt

urban Boko Haram, a group fighting to enforce its version of sharia law across northern Nigeria, has waged a five-year insurgency, which, according to Human Rights Watch, has claimed more than 5,000 lives. Its activities gained global attention following an attack on a school dormitory in Borno and abduction of more than 200 girls.

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Diamonds make Botswana shine However, these precious stones happen to have a darker side Miriam Mannak

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The African nation is home to some of the world’s richest diamond fields, which have pushed the country from one of the poorest nations to one of the best performing economies in the world

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lmost 50 years have passed since De Beers stumbled onto massive diamond reserves in Botswana. It took the company a good couple of years to get the Orapa mine, 400km from the country’s capital of Gaborone, ready for extraction of the first stones, which kicked off in 1971. Since then, diamonds have played a key role in Botswana’s economy.

More discoveries followed, heralding a brand new chapter for Botswana, which in 1967 – the year of De Beers’s first diamond finding – was known as one of the world’s poorest nations. The income per capita soon shot up, from $80 per year in the mid-1960s to $435 in 1976. Trade Economics figures furthermore show how Botswana’s national GDP went up from $0.05 billion in 1967 to $14.79 billion last year.

More importantly, the average real economic growth has been set at 4.6% per year, every year, between 1995 and 2011. Last but not least, Botswana’s Gross Domestic Product per capita currently stands at $7,100, which is significantly higher than neighbouring South Africa ($6,600).

One of the major diamond finds in Botswana in the

last three decades revolves around the Central Kalahari Game Reserve (CKGR).

Situated in the heart of the country, this arid wilderness encompasses over 52.000m2 of plains, pans, camel thorns, and stretches of savannah-like vegetation. It is roughly the size of Switzerland.

The reserve, which was founded in the 1960s, harbours not only an abundance of wildlife, including lions,

International Finance Magazine Jan - Mar 2015

cheetahs and elephants, but also some of the richest diamond fields in the world.

The value of the diamond deposits at one of the mines, the Orapa open cast mine, which started producing in September last year, has been estimated at $5 billion.

This means good news for the economy, and for exports. Diamonds, both rough and polished stone, are an im-

portant source of income, as they account for some 85% of Botswana’s total exports.

However, the sparkly wealth hidden below the earth’s surface has a dark side too:

the CKGR discoveries, for instance, have gone hand in hand with the forced relocation of the Kalahari’s indigenous inhabitants.

Known as the Bushmen, these traditional hunters have roamed the region, which is now known as the CKGR, for 20,000 years, possibly longer, living off the land and in harmony with wildlife and the elements. As a matter of fact, the reserve was even established for the purpose of conserving and preserving the Bushmen culture and way of life.

The tide changed in 1997, when over 1,700 Bushmen were moved off the reserve. Two more rounds followed, in 2002 and 2005. According to the government, these measures were necessary to stop Botswana’s indigenous people from disrupting the park’s wildlife.

Nonsense, says activist Jumanda Gakelebone, born and bred in the CKGR. He was forced to leave his ancestral land in 2002, together with the bulk of his family, “The resettlement of my people was directly linked to the diamonds,” he explains. “They don’t

want us to lay claim to the wealth.”

Those who have been thrown out of the CKGR are struggling, as life in the various relocation settlements, such as New Xade and Dekar, is very difficult. “There is a lot of poverty, alcoholism, unemployment and most people rely on government handouts,” Gakelebone says. “We are marginalised and oppressed, and have no land rights. Over the past years, we have been forced to abandon our traditional way of life, that whilst we are the country’s indigenous people.”

Gakelebone, who secured New Xade seat in the local Gantsi District council, adds that the few hundred Bushmen who are still residing in the reserve – thanks to various successful court cases against the government – don’t have it easy either. “As a result of the hunting ban they can’t survive. People in the reserve are starving and suffering,” he says, explaining that without being able to hunt one can’t possibly survive in the CKGR, technically a semi-dessert where temperature easily surpass the 45 degree-mark. “The police and special forces are monitoring them to prevent them from hunting.

Every day, they are being harassed. The Bushmen are afraid of what might happen if they do kill an animal.

I know three people who were tortured to death after shooting a Gemsbok for food.”

A recent report by Survival International, an organisation which fights for the rights of indigenous and tribal people worldwide,

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There is a lot of poverty, alcoholism, unemployment and most people rely on government handouts Jumanda Gakelebone activist

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amplifies Gakelebone’s statements. ‘They have killed me: the persecution of Botswana’s Bushmen 19922014’ has revealed some 200 cases of assault, arrests, abuse and torture allegedly committed by government officials. “The government crackdown on the Kalahari Bushmen continues, and has possibly worsened,” says the organisation’s Rachel Stenham. “The hunting ban is the most recent development. We saw plans for this being ramped up

last year, when paramilitary police – which is known as the special support group – started to go into the CKGR in large numbers, raided their huts for animal skins, and threatened them with violence and expulsion if they’re caught killing animals.”

Despite the controversy, diamond extraction in the CKGR is going full steam ahead. Last September, the first underground diamond mine in the country opened its doors in the southeastern

International Finance Magazine Jan - Mar 2015

part of the reserve. Operated by UK company Gem Diamonds Limited, the deposits of the Ghaghoo mine are estimated at 20 million carats.

Apart from mining the diamonds, Botswana has embarked on value-add activities, including polishing. That is makes Botswana a strong economic player in Africa, and an even more important diamond country, says Francois Stofberg, economist at the South African financial services

firm The Efficient Group. ”Botswana is one of the few countries in Africa, which has diversified its diamond sector,” he says. “They did so in 2009, during the financial crisis. As a result, the country bounced back quicker than others. When the world’s economy has fully recovered and the demand for diamonds normalises, I suspect Botswana will do very well because it will benefit from mining and value-add activities.” IFM

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INTERVIEW INTERVIEW

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‘There is a lot of potential in

South Africa’ Vinny Lingham discovered computers as a child and went on to become one of the world’s most prolific internet entrepreneurs. IFM spoke to him about the past, present and why he decided to sell his hyper-successful digital gifting app Gyft Miriam Mannak

International Finance Magazine Jan - Mar 2015

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Vinny Lingham, Entrepreneur

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ast July, US-based South African businessman Vinny Lingham made international headlines when he sold the majority share of Gyft to FirstData. Price tag: $54 million. The deal came as a surprise to most, and left everyone wondering: “Why sell a company that was just two years old and incredibly successful, with the definite potential to become even more successful?”

The decision seems to have been a purely strategic one. “FirstData is one of the largest credit card processing companies in the world, one with 25,000 employees,” explains the entrepreneur from the sleepy South African seaside town of East London. “The company, therefore, has the right infrastructure to help Gyft grow into a global company.”

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No exit strategy Lingham stresses that the sale doesn’t, in any way, mean the end of his own involvement in the company: “We don’t see this deal as an exit strategy. The equity structure has changed, but the team has remained the same. I will remain involved in it.”

Gyft isn’t Lingham’s first successful online venture that started out humble and grew to become a multimillion dollar enterprise.

His e-crusade started some 11 years ago while he was still living in South Africa, and it did so with Clicks2Customers. This company, which still exists, was the

first of its kind that helped companies and organisations to improve their search engine rankings through all sorts of innovative solutions. “I ran this venture from my bedroom in my townhouse for the first few years” Lingham recalls.

Because South Africa at the time was lagging behind the rest of the world in terms of internet usage and infrastructure, Lingham’s brainchild initially relied mainly on international clients. “We were popular overseas because we were doing something very unique. We only had one South African client for the

International Finance Magazine Jan - Mar 2015

first few years,” Lingham says.

One-bedroom enterprise Four years after its inception, Lingham decided to partially sell Clicks2Customers to HBD, a South African company founded by billionaire technology maverick and South Africa’s first space tourist Mark Shuttleworth. HBD invests in early stage, innovative businesses. The reason to sell was simple: increased competition. “More players had moved into the arena. It had become harder to keep our edge. I am still proud of that company. In four years, we went from a bedroom

enterprise to a $10-million revenue firm,” Lingham says.

Barely a year after selling his very first e-venture, he packed his bags, left his Motherland, and moved to the United States. He founded various companies, including web development platform Yola.com, which helps small businesses build websites. The platform has currently over 10 million users globally. Then there was incuBeta Holdings, and eventually Gyft. The idea for the latter – an app with which one can buy, redeem, and send digital gift cards – came about while purchasing a coffee at a local Starbucks with a gift card on his phone. “This made me wonder whether this would work for every merchant,” Lingham says.

Fostering innovation back home His concept, which received backing from Google Ventures, did work. Two years after opening shop, Gyft had taken the United States by storm. The aim is now to turn it into a global company.

While Gyft and Clicks2Company can be considered highlights on Lingham’s CV, his professional track record comprises more interesting elements. Take the founding of Silicon Cape, a collaboration

INTERVIEW

More players had moved into the arena. It had become harder to keep our edge. I am still proud of that company. In four years, we went from a bedroom enterprise to a $10-million revenue firm with fellow South African entrepreneur Justin Stanford. The objective was, and still is, to turn Cape Town into South Africa’s very own Silicon Valley by fostering innovation and helping techies to set up, run and grow their businesses.

This one too did well. The organisation’s database, over the past five years, has grown from zero to 8,500 members.

“There is so much talent in South Africa, and particularly in Cape Town,” he says, noting that some have taken the global stage.

“South African digital advertising agency Quirk has, for instance, been bought by global advertising firm WPP. It is good to see companies from my home country disrupting the landscape and coming up with innovative products and solutions.”

Working harder than anyone else Without wanting to downplay his successes, Lingham stresses that what he has achieved has been the result of con-

tinuous hard work. If there is one tip for aspiring entrepreneurs, it is just that: work as hard as you can.

“Starting a new company and making it work is very hard. It requires everything that you have. If you are serious about your business, you should be willing to work 24/7. You have to work harder than anyone else,” he says.

Eleven years have passed since Clicks2Customers opened its doors, and much has happened since then, including an ava-

lanche of recognitions and awards. In 2006, he took home the award for Top Young ICT Entrepreneur in Africa whilst Clicks2Customers won the Top Technology Company in South Africa award.

They’re all children of mine In 2009, Lingham was one of the finalists of the Men’s Health Best Man awards, after which he was appointed one of the World Economic Forum’s Young Global Leaders. And then there is the ongoing business success. The question is which venture is his favourite. “I don’t really have a favourite,” he responds without thinking too long. “All the companies I set up are children of mine.

They are all special. I still have people working for me who started in 2003. I am very proud of that. Gyft was, for instance, built in Cape Town. There is a lot of potential in South Africa.” IFM

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I ran this venture from my bedroom in my townhouse for the first few years Vinny Lingham

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ADVERTORIAL

COMPARATIVE ADVANTAGE

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Comparison websites have proven to be a valuable tool in helping employees reach their quarterly sales targets more efficiently

International Finance Magazine Jan - Mar 2015

ADVERTORIAL

»

Jon Richards, CEO, Compareit4me.com

F

rom their modest, experimental beginnings in the 1990s to the reliable tool they have transformed into today, comparison websites have boomed into a fully-fledged industry. In fact, in the United Kingdom (UK) alone, the price comparison industry – which includes everything from bank deals to retail – is estimated to be worth a staggering $1.5 billion.

While there’s no doubt that the UK is a global market leader in finance comparison, there’s another territory that’s definitely worth keeping an eye on — the Middle East.

When we launched Compareit4me.com in the United Arab Emirates (UAE) in 2011, there were a number of banks and providers that were not confident about the finance comparison industry. Many had expressed concern over having to part

with precious advertising/marketing spend on a product that didn’t have any local research to back it up. Plus, there was also the question of whether banks felt comfortable having their deals advertised alongside competitors on one page.

However, within the space of just under four years, Compareit4me.com has become the leading finance comparison site in the Middle East, helping users to search and compare a plethora of products, including credit cards, personal loans, mortgages, car loans, insurance and bank accounts. We are now live in four countries: the UAE, Qatar, Bahrain and Kuwait, while Saudi Arabia is expected to debut by the end of this month.

So what changed? Well, it’s all down to the users.

As of the end of 2014, Nielsen estimates that there were around 125 million Internet users in the Middle East, which is 37% of the total population. While the penetration rate may be relatively low, it still lies above the global average of 35%.

But what separates the Middle East from the rest of the world is that over the last 15 years, the region has witnessed phenomenal growth, changing the

way its countries govern, shop and do business. The Middle East’s extremely young demographic (44% of the regional population are under 20 years old) is a major driving factor for the increasing levels of digital engagement. Over 53 million actively use social media every day.

What’s even better is that the growth rate of internet users continues to increase by over 30% on average each year. This is great news for the finance comparison industry as we can offer an ever expanding range of opportunities for banks to interact digitally with one of the world’s major emerging markets. And it’s all free for users.

In 2015, banks and financial institutions are rushing to take advantage of the exposure they receive on being on a website like ours. We consider ourselves to be an extension of banks’ marketing teams – and they welcome that we are completely impartial and not affiliated to any one corporation. We work with everyone to ensure that we have the most accurate, up-to-date product information and access to promotions not otherwise available to the general public. It’s a win-win situation: banks sign on for a small fee (better value for money

than a banner advert, for example), users gain access to all of their deals in one easy-to-navigate page, and banks win and retain new, happy customers. At a time when the majority of banks are scaling back on staff, comparison websites have proven to be a valuable tool in helping employees reach their quarterly sales targets more efficiently.

So what’s next for the industry? A number of global comparison providers are already beginning to develop mobile applications to allow users to access their services on the move. And it’s only a matter of time before the Middle East follows suit. The region has one of the highest mobile penetration rates in the world and leads when it comes to smartphone adoption. According to a recent report by Google Our Mobile Planet, the UAE has the highest smartphone penetration in the world – an impressive 73% (to compare, that’s 20% more than that of the United States), followed by Saudi Arabia (72%). Countries such as Qatar, Kuwait and Bahrain aren’t far behind either. Considering these are some of our biggest markets in the region, it makes sense to look have users connected at all times. IFM

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Where’s the

DEMAND Peter Taberner

That’s the biggest worry for SMEs according to the European Central Bank’s latest “Survey on the Access to Finance of Enterprises”

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International Finance Magazine Jan - Mar 2015

SME

T

services, with 20% believing this was their main issue.

Next came the availability of skilled labour, which polled 16%, followed by regulations and competition issues, where 15% and 14% respectively, said that these areas provided their businesses with the biggest headaches.

When inspecting the survey results more closely, the divergences between Euro Area countries were palpable.

Access to finance in Greece for SMEs was their biggest obstacle, as 32% said that borrowing capital to grow businesses was proving difficult.

he European Central Bank’s latest “Survey on the Access to Finance of Enterprises” report has revealed mixed results for SMEs in the Euro Area (18 member states), as they try to grow from the current bleak economic conditions.

In a study that included 10,750 enterprises, where 91% of the respondents had fewer than 250 employees, access to finance was the fifth most pressing problem that SMEs face with 13% saying that it caused them the most concern.

The biggest worry for SMEs was finding the consumer demand for their

Unsurprisingly, the other Euro Area members, which suffered the most during the peak of the 2008 financial crash, followed the Greeks in complaining over finance availability.

Out of the SMEs who were questioned in Ireland, 18% said that access to finance was their worst issue, and enterprises in Spain and Portugal were not far behind, with 17% viewing finance as the most troublesome area.

In Germany and Austria, 9% and 7% of their SMEs respectively revealed that obtaining finance was the main problem, exposing how experiences are differ-

ing in the current financial conditions.

External sources of financing were also focused on in the survey. SMEs reported a 1% net increase in the need for a bank loan, with SMEs in Italy and France especially needing the loans, out of the traditionally larger economies in the Euro Area.

This was an improvement from the 5% increase recorded in the previous survey, conducted between October 2013 and March 2014.

A total of 11% of the respondents believe that they had an increased need for a bank loan, and there was

The most pressing problem faced by euro area enterprises (percentage of respondents)

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40

30

20

10

0

’12

’14

Finding customers

’12

’14

Competition

micro

’12

’14

Access to finance small

’12

’14

Costs of production or labour

’12

’14

Availability of skilled staff or experienced managers medium large

’12

’14

Regulation

Base: All enterprises. Figures refer to rounds four (October 2010-March 2011) to 11 (April-September 2014) of the survey.

Note: The formulation of the question has changed over the survey rounds. Initially, respondents were asked to select one of the categories as the most pressing problem. From round eight, respondents were asked to indicate how pressing a specific problem was on a scale from 1 (not pressing) to 10 (extremely pressing). In round seven, the formulation of the question followed the initial phrasing for half of the sample and the new phrasing for the other half. Additionally, if two or more items had the highest score in question Q0B on the “pressingness” of the problems, a follow-up question (Q0C) was asked to resolve this, i.e. which of the problems was more pressing, even if only by a small margin. This follow-up question was removed from the questionnaire in round 11. The past results from round seven onwards were recalculated, disregarding the replies to question Q0C. Please see Annex 4 for more clarification and information on how the current formulation is related to previously collected data.

Jan - Mar 2015 International Finance Magazine

SME

Change in external financing needs of euro enterprises (over the preceding six months; net percentage of respondents) 30 25 20 15 10 5 0 -5

’12

Bank loans

’14 micro

102

’12

Trade credit

small

’14

’12 ’14 Bank overdrafts

medium

large

Base: Enterprises for which the respective instrument is relevant. Figures refer to rounds four (October 2010-March 2011) to 11 (April-September 2014) of the survey.

Note: See the note to Chart 1. In round 11, the question was not put to those respondents who reported that a particular financing instrument was not relevant to their enterprise (in short, “filtering based on Q4”). Past data have been revised accordingly. A financing instrument is “relevant” if the enterprise used the instrument in the past six months or did not use it but has experience of it (for rounds one to ten). In round 11, the respondents were asked whether the instrument was relevant, i.e. whether the enterprise had used it in the past or considered using it in the future. Given that the current concept of a “relevant” financing instrument differs from in the past, this might have an impact on the comparability over time for the following questions, and caution should be exercised when comparing the recent results with those of the previous rounds (see Annex 4 for more information on the filters introduced in the questionnaire and their potential impact).

also an net increase of 2% of Euro Area SMEs, who said they required more trade credit.

From all of the sources of external funding, fixed investments and inventory and working capital, were identified as the main areas to spend the money on.

The importance of SMEs for the entire European economy is highlighted by the findings of the European Commission’s annual SME performance review.

Across all of the 28 European Union (EU) member states, in 2013, 88.8 million people were employed in an estimated 21.6 million SMEs in the non-financial business sector, which generated €3,666 trillion

in value added for their products.

That is two in every three people employed by an SME in the EU, and out of every Euro, 58 cents of value added is created by the SME sector.

Ben Butters, director of EU Affairs for EUROCHAMBRES, who represent over 20 million businesses in Europe, and focuses sharply on finance and SMEs, said: “First and foremost, the many remaining barriers to finance for SMEs within the EU must be removed.“ The EU’s financing environment is extremely divergent: in Ireland, Italy, Portugal and Spain, businesses report being offered lending rates that are 400 to

International Finance Magazine Jan - Mar 2015

600 basis points higher than those reported by German SMEs, rather than the 150 to 250 point spreads registered by the ECB on agreed and disbursed credits.”

The ongoing fragmentation of EU rules for lenders and borrowers, perpetuates this divergence and exacerbates its negative impact on SMEs.” Butters suggest pursuing the completion of an internal market that is fit for facilitating SMEs in the digital era, and access to developing economies must be the priority for the 2014-19 political term under European Commission President Jean-Claude Juncker.

Although it must not be forgotten that revenue from

sales is and must remain the main source of financing.

He also acknowledges that in many European countries, the smaller and regional bank lenders, who provide a higher share of lending to SMEs, in comparison to large banks that operate on a global scale, are now deleveraging faster, leaving their customers struggling to find credit.

“In addition to these changes, rapid restructuring of entire banking sectors has left fewer players on the market. This consolidation has undermined smaller businesses’ ability to discuss their financing needs faceto-face with bank representatives, and many complain of centralised, automated

SME

Purpose of the external financing as perceived by euro area enterprises (over the preceding six months; percentage of respondents) 60 50 40 30 20 10 0 Fixed investment

Inventory and working capital

micro

Hiring and training of employees

small

Developing and launching new products or services medium

Refinancing or paying off obligations large

Base: All enterprises. Figures refer to round 11 (April-September 2014) of the survey.

Note: The figures are based on the new question introduced in round 11 (April-September 2014) (please see Annex 4 for more clarification and information on how the question is related to previously collected data).

loan request processing,” Butters added.

The latest international trade in goods figures compiled by Eurostat, estimated that the Euro Area commanded an €18.5 billion trade surplus for September 2014 with the rest of the world.

Compared with the same month last year, the surplus has increased by €7.7 billion, whereas for the EU as a whole, the surplus was €2.6 billion, a rise from September 2013 of €1.9 billion.

The export market to China accelerated the most from the EU, with a 10% upsurge of goods from January to August, the flow of goods to the Far East was exacerbated as the South Koreans also expanded with an 8% export increase, and the USA market grew by 4%.

The EU trade surplus with the USA has now increased by €4.3 billion to € 65.1 bil-

lion, while the trade deficit with China remains virtually unchanged, rising by €100 million to €85.4 billion.

Germany celebrated the largest trade surplus in the EU totalling €138.8 billion, while the United Kingdom suffered the worse deficit of - €89.8 billion, followed

by France (-€49.3 billion), Spain (-€16.6 billion), then Greece (-€13.6 bn).

Fredrix Erikon, senior economist and director of the European Centre for International Political Economy, said: “The Euro Area is expanding its trade surplus while the EU is moving into a trade deficit.”

“It reflects broader changes in labour costs and that some crisis economies have seen an uptick in their exports. Generally, trade volumes are declining, which is more worrying news. If the trade pie does not grow, there will be more

conflicts on how to redistribute trade shares, which is never a good thing.”

“Germany is in a league of its own. Its strong trade performance reflects two simple things: the country has competitive firms in these sectors where demand is heavy due to emerging market growth, especially investment goods; and second, the country’s aging population leads to increased savings rather than consumption, which pushes down imports.”

He now believes that the EU needs to focus on clinching trade deals with the largest markets around the world, to change the direction of the overall trade performance.

To achieve this, it would be the way forward to conclude the trade talks with the USA and Japan, and move for better trade conditions with China. IFM

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First and foremost, the many remaining barriers to finance for SMEs within the EU must be removed Ben Butters, director, EU Affairs for EUROCHAMBRES

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William Yonge

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Overhaul of

market regulation An introduction to future changes to the European market abuse regime

International Finance Magazine Jan - Mar 2015

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n June 12, 2014, the European Commission published the Market Abuse Regulation (MAR) and the Market Abuse Directive on criminal sanctions for market abuse (CSMAD), together MAD II. This will replace the existing market abuse directive, MAD I and become directly applicable in EU countries from July 3, 2016.

MAD I was perceived as having certain deficiencies, which became apparent after the onset of the financial crisis in 2008 and particularly after the LIBOR manipulation revelations in 2012. According to the Commission, the new rules on market abuse update and strengthen the exist-

ing framework in MAD I to ensure market integrity and investor protection. MAR will help keep pace with market developments such as the growth of new trading platforms, including over the counter (OTC) trading, and new technology, such as high frequency trading, and the upcoming overhaul of market regulation under MiFID 2.

MAD II will broaden the scope of the market abuse rules and strengthen regulation to capture these new markets, notably the spot commodities market, multilateral trading facilities (MTFs) and related derivative markets and explicitly bans the manipulation of benchmarks (such as LIBOR).

MAR is intended to create a single, directly applicable EU market abuse rule book for regulators that will increase their enforcement powers in contrast to the patchwork that arose from national implementation of MAD I. CSMAD will require Member States to provide harmonised legislation on criminal offences for insider dealing and market manipulation, and to impose criminal penalties, including up to four years’ imprisonment, for the most serious market abuse offences. The manipulation of benchmarks will be considered criminal behaviour across all EU countries. The UK has exercised its discretion to opt out of CSMAD on the basis of already having an

established market abuse regime, which goes beyond CSMAD standards.

Like MAD I, MAR prohibits insider dealing, improper disclosure of inside information and market manipulation. The concept of “inside information� is central to the prohibitions on insider dealing and improper disclosure. Inside information is non-public information which is precise in nature, relates directly or indirectly to an issuer or financial instrument, and which, if it were made public, would likely have a significant effect on the price of the financial instrument or the price of related derivatives.

MAR has expanded the definition to include

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Jan - Mar 2015 International Finance Magazine

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information on commodity derivatives, spot commodity contracts and emission allowances, where the information is “required to be or reasonably expected to be disclosed”. Whilst “inside information” is defined in MAR similarly to MAD I, there are some changes.

Information relating to an intermediate step leading up to a particular event can itself be precise and constitute inside information. There is a rebuttable presumption that a person in possession of inside information, who carries out transactions connected with that information, will be deemed to have used it.

The scope of MAR is wider than that of the existing rules to reflect an increasing

trend toward off-market trades. MAR will apply to financial instruments admitted to trading on an EU regulated market for which a request for admission to trading has been made as per the current regime.

In addition, it will capture behaviour regarding financial instruments: (i) traded (or for which a request for admission to trade has been made) on MTFs and OTFs and any other conduct or action, which can have an effect on such an instrument regardless of whether it takes place on a trading venue or OTC. MAR covers abusive trading in spot commodity contracts whose price or value is based on a derivative financial instrument,

International Finance Magazine Jan - Mar 2015

as well as spot commodity contracts to which financial instruments are referenced.

MAR captures attempted insider dealing and market manipulation activity, where a transaction is intended for “abusive” purposes but is not actually executed.

MAR clarifies that the use of one’s own knowledge of one’s intention to acquire or dispose of financial instruments does not constitute use of inside information.

This clarification will facilitate stake building ahead of public takeovers or mergers provided the information is not obtained through access to the target or its management. It is also legitimate under MAR for a legal person to deal with securities while possessing inside

information as long as systems are in place whereby the natural person making the decision to acquire or dispose of the instrument was not in possession of the inside information.

MAR retains the current safe harbour for share buy-backs and stabilisation.

It does not apply to shares bought back for the purpose of reducing share capital or redistribution of stock options or call options in debt instruments despite a company buy-back of its own capital being prima facie trading in possession of inside information. Stabilisation is where investment banks maintain securities prices artificially after an initial public offering (IPO).

This may only be done

COLUMN

within limits and within a predetermined period. Buy backs and stabilisation need to be notified to the competent authority, publicly disclosed and conducted in accordance with applicable standards.

There will be a new prescriptive procedure and safe harbour for communication of information, prior to the announcement of a transaction, in order to gauge the interest of potential investors in a possible transaction and the conditions relating to it, such as its potential size or pricing, to one or more potential investors, known as “market soundings�.

For a disclosure to qualify as a market sounding, the disclosing market participant (DMP) must obtain prior consent from the disclosee and warn them that

the information they receive must remain confidential and not be used to inform a decision to acquire or dispose of the related financial instrument for his own account or on the account of others. In particular, the information may not be used to cancel or amend an order already placed, which concerns a financial instrument to which the information relates.

The DMP should inform the disclosee that it considers the information inside information before it proceeds with the market sounding and has the responsibility to characterise the information as inside information or not, and keep a record of any due diligence made, which includes an explanation justifying the conclusion regarding the nature of the information.

The information should include the disclosee’s opinion on whether it believes the information is inside information.

The DMP must inform potential investors, who have been wall crossed, when the information received is no longer inside information, which allows the disclosee to deal again.

However, it is up to the disclosee to decide whether or not they consider the information inside information and they must put the provided information together with other information they hold in order to decide whether the information is inside information or not.

Asset managers, including those outside the EU, who manage funds or portfolios containing instruments captured by MAR will need

to consider a revision of policies and practices. Any instrument admitted to trading on an MTF in the EU will be subject to MAR. New requirements under MiFID II for OTC derivatives to be traded on OTFs will mean that managers will need to consider inside information issues. IFM William Yonge is a partner in the Investment Management Practice of global law firm Morgan Lewis

Jan - Mar 2015 International Finance Magazine

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ADVERTORIAL

On the path towards 108

excellence Within a short timeframe of only seven years, Bank Sohar has emerged as one of Oman’s leading lending institutions

International Finance Magazine Jan - Mar 2015

ADVERTORIAL

B

ank Sohar was established in 2007 following a successful initial public offer and listing as an SAOG Bank on the Muscat Securities Market. It started operations in April 2007.

Within a short timeframe of only seven years, Bank Sohar has emerged as one of Oman’s leading lending institutions. Its vision is to be a one-stop financial ‘super mall’ offering tailored financial products and services across various segments, each with a unique set of propositions, customised to meet the evolving requirements of the different customer segments.

Working towards this vision and with a customer centric approach, the bank has a broad range of financial products and services spread across four primary divisions, catering to the specific requirements of every possible customer – Retail Banking, Corporate Banking, Treasury and Financial Institutions Services.

The Retail Banking Division offers an extensive range of products and services that are customised to meet the various life cycle stages of its customers.

It offers a comprehensive range of products and services under its ‘Al Mumayaz’ brand that includes savings, deposits, special deposits, flexi-deposits, personal loans, mortgage, education loans, housing finance, online banking and anybranch banking as well as an array of innovative cards that are tailor-made to client requirements.

The Corporate Banking

Division, on the other hand, serves large, medium and small corporates as well as government entities with products and services ranging from loans, overdrafts, project finance, syndications and advisory, LCs, BGs, and other trade finance services to risk management services. Customer requirements are met by specialised Relationship Managers who are equipped to understand the specific needs of the customer and to provide customised solutions.

The Treasury offers a wide spectrum of services ranging from foreign exchange, fixed income, interest rate products and derivatives.

It provides regular up to date information on various markets and products to our large corporate clients, small and medium enterprises and various government departments and fund managers. Having access to global money and foreign exchange markets, it provides comprehensive

cash management and risk management solutions to clients.

The primary focus of the Financial Institutions Services division is to set up an extensive global banking network. This is to facilitate free flow of trade transactions across borders to help clients not only facilitate their business, but also to access superior facilities across the globe and thereby enhance their trade volumes. This group studies ‘Country and Bank’ risks across the world and sets prudent exposure levels in tune with the risk appetite for such exposures.

In order to ensure its customers are provided with the best possible customer service and to guarantee 24/7 access to their accounts, the bank has an extensive network of 26 branches and 50 ATMs across Oman. Bank Sohar customers also continue to enjoy the privilege of freeof-charge transactions in

over 1,000 ATMs under the ‘OmanNet’ platform. The bank’s ATMs at Buraimi and Wajajah borders continue to operate with the ‘Dirhams Dispensing’ facility; thus adding immense convenience to businessmen who travel and transact business across the border on a regular basis, as well as to customers who visit the United Arab Emirates. The bank’s customers also enjoy the advantage of a cash deposit facility at all branch ATMs as another value-added service. In addition, the bank’s e-channels, encompassing SMS and internet banking services, allow customers to access their bank any time and from anywhere.

With the advent of Islamic banking in the region, Bank Sohar gained a licence to launch ‘Sohar Islamic’ — its Islamic Banking window — and opened its doors to customers in April 2013.

Subsequently, four Islamic window branches were opened during the same

Jan - Mar 2015 International Finance Magazine

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ADVERTORIAL

110

year. The bank formed a Shari’ah Advisory committee and set up the requisite systems and procedures to offer 100% shari’ah compliant banking services to its clients. Sohar Islamic offers a full range of services and products, with activities that include accepting shari’ah compliant customer deposits, providing shari’ah compliant financing based on murabaha, mudaraba, musharaka, ijarah, istisna’a, salam and providing commercial banking services, investment and other activities permitted under Islamic Banking Regulatory Framework. This window has complete segregation of systems, people, branches and processes to maintain the sanctity of Islamic banking.

The bank’s customerfocused approach and dedication towards banking excellence has over the years garnered numerous awards locally, regionally, and internationally for a wide spectrum of achievements. In 2014 alone, the bank received six awards for its financial performance

encompassing the ‘Business Excellence Award’ by Texasbased World Confederation for Business (WORLDCOB) at the Bizz Arabic 2014 Awards, ‘Best Financial Brand Oman 2014’ award by renowned UK based Global Brands Magazine, ‘The Diamond Eye Award for Quality, Commitment & Excellence’ from the Francebased Otherways Management & Consulting Association, ‘Fastest Growing Bank in Oman 2014’ by UK-based International Finance Magazine (IFM), the ‘Best Bank for Fast Growth / Middle East’ Award from Milanbased IAIR Magazine and was recognised as one of the ‘Top 5 Large Corporate Enterprises in the Sultanate’ for the third consecutive year at the Alam Al Iktisad Wal Amaal (AIWA) Awards.

In addition, the bank was also the only financial institution from Oman to have won three individual awards from the Banker Middle East Product Awards 2014 organised by CPI Financial, based in UAE, for its Retail Division consisting of ‘Best Customer Service – Retail

International Finance Magazine Jan - Mar 2015

Banking’, ‘Best Cash Management’ and ‘Best Corporate Card’. The bank also received a ‘Strategic Award’ for its corporate website (www.banksohar.net) from the Lebanon-based Pan Arab Excellence Awards Academy as well as from Oman Web Awards.

2014 also marked the first time that Sohar Islamic received an award, winning the ‘Best Branding Award’ at the recently held CPI Financial - Islamic Business and Finance Awards 2014.

On the Corporate Social Responsibility (CSR) front, the bank’s year-long environment awareness campaign ‘Saving Water Electricity…And Our Planet’ was recognised at the ‘Oman Green Award 2014’ resulting in the bank receiving the ‘Green Campaign of the Year’ award. In addition, the bank recently received ‘Most Socially Responsible Bank Oman 2014’ Award from International Finance Magazine (IFM) & ‘Golden Order of Merit in the field of CSR’ by The Tatweej Academy for Excellence Awards in Lebanon.

The bank is rated by FITCH Ratings with a Long Term Issuer Default Rating of BBB+ (Stable Outlook).

Similarly, Capital Intelligence has affirmed Long Term Foreign Currency Rating at BBB+ with a Stable Outlook and Short Term Foreign Currency Rating at A3.

Despite its achievements, the bank has no intention of resting on its laurels. It has already chalked out plans to pursue vigorous growth in 2015 and subsequent years, both in terms of its

market share and diversity of financial products and services available to its rapidly growing customer base.

Also based on the strength of the rapid growth since its inception and with its long-term strategy in place, the bank is well equipped to meet the intense competition in the financial services sector. The growth strategies include expansion of branch network, introduction of new products and services and scaling up of business with existing clientele and developing requisite infrastructure to meet the expanding and widening needs of the clients. IFM

CSR initiative Bank Sohar launched an initiative for conservation of water and electricity A calendar was launched entitled ‘Saving Water, Electricity… And Our Planet’, in association with the Environment Society of Oman It was designed to create awareness among all segments of society in a creative way The company ran social media campaign giving tips to conserve water and electricity They ran an ad campaign to ensure the message has the maximum possible reach

Jan - Mar 2015 International Finance Magazine

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INTERVIEW

‘Our guests are travellers looking for a very

authentic experience’ ‘Our guests are travellers looking for a very

authentic experience’ Visy Valsan

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International Finance Magazine Jan - Mar 2015

Kristin Intress, CEO, Worldhotels

Jan - Mar 2015 International Finance Magazine

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INTERVIEW INTERVIEW

With a portfolio of 500 independent hotels worldwide, Kristin Intress, CEO, Worldhotels says that finding tailor-made solutions for each can be very challenging at times

Kube Saint Tropez

International Finance Magazine Jan - Mar 2015

understand that they are far more than just order takers — that is when success starts to kick in.

What did you bring from that experience to your job at Worldhotels?

To always keep the global perspective in mind: Each market is driven by local influences, and solutions that are right for one region aren’t necessarily the best choice for another one. At

Worldhotels, we understand this very well and offer our hotels solutions that are tailored for their individual needs and market demands.

What clientele is Worldhotels home to?

Our guests are travellers looking for a very authentic experience. They might be travelling on business or for pleasure, but they all want to stay at a hotel that connects them to the place they are visiting.

China Changsha Worldhotel Grand Jiaxing Corridor

»

international cuisine, the second (40 seats) specialised in American comfort food and the smallest one (30 seats) was a pub-style restaurant offering traditional Scottish dishes.

What are the lessons that you hold on to from that experience?

First of all, I learned that in order to run a business in a foreign country you need to understand its people — and learn to see things through their point of view. Customer needs are inseparably linked to culture and values. It was also during this time that I came to realise the power of sales.

When you get your team to

»

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Tell us about your experience of running a restaurant?

I opened and operated three restaurants in Scotland – and I would say starting your own business in a foreign country is always a unique experience.

As an example, one very distinctive difference between the US and Scotland are the covers. In the US, I could easily do three covers, whereas in Scotland I ended up with two maximum, due to cultural differences. In regards to cuisine, I was offering different food in each of the three restaurants: the biggest one (up to 80 guests) was serving five-star

INTERVIEW

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China Changsha Worldhotel Grand Jiaxing Exterior

Jan - Mar 2015 International Finance Magazine

INTERVIEW INTERVIEW

Maldives Amilla Fushi Ocean house deck

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What are the challenges of managing a portfolio of independent properties? What are the attractions of having such a portfolio?

Finding tailor-made solutions for each of our hotels and their individual needs can be very challenging at times. On the other hand, it is very rewarding to manage a portfolio that is so unique and authentic.

Our hotels are owned and run by people who live and breathe hospitality. They love their hotels and it really shows. When you stay in one of our hotels, you are

not staying at yet another hotel that could be in any city of the world – you feel the local flavour throughout your stay. Like we say in one of our slogans – “When you stay in Singapore, it should feel like Singapore”.

When you buy a new property, do you tap into the existing brand or go for complete rebranding?

We don’t buy properties.

Our hoteliers know just how they want to run their hotel – we’re just here to help them achieve their full potential.

How do you maintain

International Finance Magazine Jan - Mar 2015

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Maldives Amilla Fushi Ocean House

Tivoli Palacio De Setais exterior

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Maldives Amilla Fushi Lagoon house deck

INTERVIEW

uniformity in standards at all properties, especially since they are spread over different geographies and cultures?

We have very high standards for our hotels. There are over 1,000 criteria on a list that we check every year during a mystery shop.

These ensure that each of our guests can expect a certain level of comfort and service during their stay.

These standards do not interfere with the hotel’s operations, meaning that we do not dictate colour palettes, furniture styles, sprinkler systems, and so on. So the hotel is free to be who they are – which makes them so special in the first place.

With 500 properties worldwide, how do you keep in touch with customer needs and their feedback?

We connect with our guests through various channels and at all stages of

their travels: before, during and after their stay. We do this via pre- and post-stayemails, our Social Media Channels, newsletter communications and our brandnew loyalty programme, Worldhotels Peakpoints.

In addition to that, we also cooperate with guest review sites such as TripAdvisor and Trust You to stay on top of our guest reviews and feedback.

What are the latest trends in travel that you are tapping into?

I’d say it is experiential travel. Guests today dream bigger – they don’t look for an accommodation when selecting a hotel, they look for local and authentic experiences and seek to fulfill their dreams. This is true for all generations, from baby boomers to Millennials. Hotels today are ‘dream-catchers’ and need to provide unique experiences in order to stand out.

What are the challenges that you are facing while expanding into SubSaharan Africa?

We are obviously facing the same challenges as most businesses that are looking to expand into this emerging market: non-uniform political systems, inconsistent infrastructure as well as security challenges, just to name the major ones. However, this market also bears great potential for our distinctive business model: Local operators are looking for global partners like Worldhotels to help them increase their international exposure – as greater visibility gives travellers re-assurance and confidence to book local brands, and makes them

The Worldhotels way

Through a comprehensive range of services that includes global marketing, sales, training, e-commerce and state-of-the-art distribution and technology, Worldhotels backs independent hotels with the power of a global brand while allowing them to retain their individual character and identity. chose authenticity over standardised international chain products.

If you were to take a two-week break with your family, which destination would you all choose to visit?

Somewhere we’ve never been in Asia-Pacific. The region is very rich in culture and history and differs from our Western world — be in architecture, cuisine or values. There are so many places to discover!

Any hobbies that you picked up in the course of your work?

I enjoy cooking and rebuilding/redecorating houses. I get to see lots of great hotels with great design and interior decoration.

This is my greatest source of inspiration when it comes to making the best out of my own home. The same applies to cooking. I love visiting hotel restaurants and then trying to replicate their dishes in my kitchen. IFM

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“

Guests today dream bigger – they don’t look for an accommodation when selecting a hotel, they look for local and authentic experiences and seek to fulfill their dreams Kristin Intress

Jan - Mar 2015 International Finance Magazine

Homes built

on a thick

wallet Billionaire.com lays out the world’s top 10 most expensive listed properties for sale 118

International Finance Magazine Jan - Mar 2015

The houses in the world’s most expensive properties list compiled

by Billionaire.com take luxury real estate to the next level. The list is the result of extensive in-house research by the lifestyle resource for ultra-high net worth individuals and consultations with the world’s top property firms.

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PICTORIAL

1 Penthouse at the Tour Odéon Monaco, Monaco Price: $388 million

S

cheduled for completion in early 2015, the Tour Odéon Monaco will be the secondlargest building on the Mediterranean coastline and home to the world’s most expensive apartment — a five-floor penthouse costing $388 million. With 35,000 square foot of space, ready to be designed according to the buyer’s taste, the penthouse is a mini-mansion. Outside, a waterslide connects the dance floor to a circular infinity pool, which looks like an enormous floating glass. As for other apartments, prices start at $36 million. www.knightfrank.com

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The Manor, Los Angeles, US Price: $150 million

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uilt in 1988 by entertainment tycoon Aaron Spelling and his wife Candy, The Manor was bought three years ago by Petra Stunt (Ecclestone).

Since then, she has spent $20 million on refurbishments and now has 123 rooms, including a gym, bowling alley and screening room. The Manor sits within 4.7 acres of LA’s most exclusive land and would be the most expensive house ever sold in the US should it meet the asking price.

To be sold privately.

International Finance Magazine Jan - Mar 2015

PICTORIAL

3 Beverly House, Los Angeles, US Price: $135 million

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t famously appeared in the movie The Godfather and was the honeymoon spot for JF Kennedy and his wife Jackie.

With almost 365 days of sunshine a year, the house is purpose built to take advantage of the Californian temperature, with floor-to-ceiling windows, large cool rooms, an outdoor tennis court, swimming pool and cascading waterfalls. The terrace seats 400 and, given that there is also a nightclub in the house, it has all the ingredients for a successful party. www.christiesrealestate.com

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Rancho San Carlos, California, US Price: $125 million

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his 30-room Monterey Colonial mansion, designed in 1929 by American architect Reginald Johnson, is surrounded by 237 acres of land in one of America’s most sought-after addresses; Montecito, Santa Barbara.

After 100 years, the Jackson family estate, with 10 residential cottages, horse paddocks and arenas, and 100 acres of cultivated orchards, is finally likely to change hands. Oak-paneled walls in the formal room, imported from the Jackson’s Manor House in England, are still intact, as is the English whisky pub with a secret door. The house is built on two natural terraces with views down the valley, across the estate and over the Pacific. www.sothebys.com

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PICTORIAL

5 One Hyde Park, London, UK Price: $103 million

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he Candy brothers launched this billion-dollar complex mid-way through the recession. Occupying an entire floor, this apartment divides into two wings, known as ‘The City’ and ‘The Park’. A 65m hallway connects both wings. The Mandarin Oriental hotel provides prospective owners with a 24-hour hotel concierge, spa and recreation facilities, parking and valet, use of a private wine cellar and room service. www.aylesford.com

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The SherryNetherland, New York, US Price: $95 million

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uilt in 1927, The SherryNetherland in Manhattan is a luxury residential hotel co-op with apartments for sale. Apartment 17 occupies an entire floor with seven bedrooms, eight bathrooms and a huge terrace overlooking Central Park and downtown Manhattan. Would-be owners have access to all the hotel amenities, including room service from the Harry Cipriani restaurant downstairs. Caveat emptor: the hotel requires up to US$60,000 of maintenance fees — per month. www.knightfrank.com

International Finance Magazine Jan - Mar 2015

PICTORIAL

7 The Penthouse at The Pierre Hotel, New York, US Price: $95 million

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nce owned by Martin Zweig, a financial analyst who famously predicted the stock-market crash of 1987, this palatial Manhattan penthouse sprawls over three floors. But even if you’ve got a spare $95 million, interested buyers must be first vetted by the hotel committee. With 16 bedrooms, a grand salon (formerly the Pierre ballroom) and 360-degree views over Manhattan, this has justifiably been called the most spectacular penthouse in the world. www.sothebysrealty.com

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Du Parc Penthouse, Geneva, Switzerland Price: $94 million

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n the shores of Lake Geneva, surrounded by the Dents du Midi mountain range in the UNESCOprotected vineyards of the Lavaux, is the former Palace Mont-Pèlerin. This was renovated into 24 über-modern apartments, the penthouse of which costs $94 million. A key to one of these apartments also offers lifetime membership for the Lavaux Golf Club, a 10-year membership for the Mirador Country Club and the services of lifestyle group Quintessentially for one year. Kempinski Hotel services, the use of a Rolls-Royce, butler, wine cellar, Davidoff cigar lounge and Givenchy Spa come included in the price tag. www.knightfrank.com

Jan - Mar 2015 International Finance Magazine

PICTORIAL

9 Private Island Paradise, Exuma Cays, Bahamas Price: $85 million

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his house comes with its own private island. With space for 22 guests and 29 staff, it’s the place to relax in the hands of others. A self-generating power source, fuel, telecommunications system and a large vegetable garden make the house almost entirely self-sufficient. It is a one-hour flight away from Palm Beach and completely tax-free. www.sothebysrealty.com

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Lyndhurst Road Mansion, London, UK Price: $77 million

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he front door of this North London redbrick mansion opens to a grand entrance hall with an overhanging chandelier, balustrade and marble fireplace. The decor is bleeding-edge ‘nouveau’, with every conceivable luxury, including indoor pools, steam rooms and a cinema. Upstairs, the master bedroom with adjoined dressing room has a large half-moon-shaped window, which opens up to a view down the garden and across London. www.knightfrank.com IFM

International Finance Magazine Jan - Mar 2015

The main catalyst at this level is want, not need Suparna Goswami Bhattacharya discussed the properties on the list with Christian Barker, CEO and Editor-in-Chief of Billionaire.com

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PICTORIAL

How long does it take for such high-priced properties to get sold?

It can take many, many years or just a few months, but it comes down to pricing, opportunity and luck. The main catalyst at this level of the market is want, not need. The reality is, there are plenty of UHNWIs in the world who can afford assets of this nature but in terms of UHNWIs actively looking specifically for these assets, there is a much smaller number.

Do the properties fetch the price that is sought?

Buyers looking to spend upwards of $100m are very savvy and have a number of advisors working for them.

Whilst, of course, a number will act on impulse, the majority of buyers like to justify their investments, even if just from a lifestyle point of view.

If the guide price is sensible and the asset sits in a prime location, such as Cap Ferrat, Tuscany, Courchevel 1850, West Coast Barbados or the private island of Mustique, you will undoubtedly get interest and sales at or very near the guide price.

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When such a property is up for sale, how many people are in the fray to buy it?

That really is the billion dollar question. In the current market, confidence is still low given the economic turmoil over the past number of years. This being said; agents are beginning to see an increasing number of active buyers happy to consider spending this sort of money again. IFM

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Cut to

If bespoke tailoring can be the mark of a gentleman, custom-made shoes are no less. In fact, the two pretty much go hand in hand Priyadarshini Nandy

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size Jan - Mar 2015 International Finance Magazine

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Alessandro Sartori Berluti Creative Director at Berluti

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131 Dimitri Bottier

have your shoes made from: Dimitri Bottier (Gomez), France Considered to be one of the most talented bespoke shoemakers

in the world, Dimitri Bottier (Gomez) works out of the Crockett & Jones boutique in Paris. With access to rare hides from the best tanneries, his designs

Berluti shoes

»

famous Lobb customers.

The story of bespoke footwear is as fascinating as the history of the world. And with time, the mastery behind the craft has only improved.

And while ready to wear shoes inundate markets across the globe, a handful of craftsmen continue to make a pair of shoes, by hand, painstakingly giving form to an idea that can only be compared to a piece of art. However, you should be willing to pay for it, and how, because a pair of bespoke shoes can cost you anything from £600 upwards.

If you have the patience, and the money, to wait for that perfect pair, here are some stores across the globe you ought to

»

n the 1960s, American singer/actor Dean Martin walked into a Berluti store on Rule Marbeuf in Paris with his friend, Frank Sinatra, in tow. He was a regular and wanted Sinatra to get a pair of handmade Berlutis as well. Sinatra was informed that he’d have to wait for a year till his shoes were ready. The My Way singer was, of course, not willing to wait that long and walked away with a pair of loafers from one of the first off-theshelf collections that Talbinio Berluti had designed a few years earlier.

While on Martin and Sinatra, the two were famous as patrons to another brand – the British John Lobb. The founder John Lobb (1829-1895) was known for his shoemaking skills and was the holder of a Royal Warrant as bootmaker to Edward, Prince of Wales. And it was during his time that Lobb shoes begun to be known as a symbol of elegance. And while over the years John Lobb began to design ready-to-wear shoes, the family owned store at St James Street, London, continues to make shoes only by hand and are known to make only one pair at a time. Diana Spencer, Andy Warhol, Louis Mountbatten, Laurence Olivier, Duke Wellington, and David Niven were some of the

Jan Jan -- Mar Mar 2015 2015 International International Finance Finance Magazine Magazine

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and craftsmanship are enviable. Located at Rue Chauveau-Lagarde, you can see him only by appointment.

John Lobb, UK Quintessentially English, The John Lobb store at St James’s Street, London, continues to make shoes by hand. You will, of course, have to be patient if you want that perfect pair.

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Klemann shoes

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Anello & Davide, UK They’re known for their work for dance, theatrical and bridal footwear. For bespoke shoes, you have to write to them for an appointment, or call their store at Kensington, London. Anello & Davide was awarded the Royal Warrant for the Queen Mother in 1997 and Her Majesty the Queen in 2001.

Berluti, France While you can buy Berluti’s ready-to-wear shoes, a bespoke pair is what you ought to save up for. Their stores in London, Paris, Italy, Singapore, Japan, New York City, among others, offer bespoke shoemaking services. Some of these countries have more than

International Finance Magazine Jan - Mar 2015

one store and not all have the facility to custom make.

The Berluti website is a good place to start looking.

owned business, Foster & Son travels to the United States of America and Japan about twice a year.

Foster & Son, UK With more than 170 years of experience in custom making shoes, Foster & Son in London are known to be one of the world’s most preferred bespoke shoemakers. They are known for their low-key presence, a distinguished clientele and top-of-the-line craft.

Still a family-

Klemann, Germany A store in Hamburg is what Benjamin Klemann works out of. His custom-made shoes are however bought by people from across the world. They use the traditional English and Hungarian methods of shoe-making, and if you’re willing to wait about six months for a pair, which is perhaps better than having to wait a year, you could have your own Klemann shoes. Klemann often visits Berlin, Düsseldorf

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Benjamin Klemann

Jan - Mar 2015 International Finance Magazine

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Why bespoke

When it comes to buying shoes, odd feet aren’t a rarity. While most retail brands cater to a wide variety of shapes and sizes, there are always a few exceptions.

And that is precisely when bespoke shoes come handy.

Yes, it is way more expensive than what’s available in retail. After all, someone is making your pair by hand.

But once it’s done, and you’ve slipped your foot in, we doubt you’ll ever go back to off-the-rack footwear.

»

Andrew Mcdonald

and Münster as well.

Roberto Ugolini, Italy Ugolini works out of a small workshop in Florence.

The Roberto Ugolini shoes are made completely by hand, using a Florentine artisan tradition. Incidentally, the shoemaker came into the limelight after hosting shows in Japan.

Andrew McDonald, Australia One of Sydney’s most famous shoemakers, Andrew

Most bespoke shoemakers take immense trouble to put your pair together. It takes anything from a few months to a year to get these handcrafted shoes out. If you go through Dimitri Bottier’s shoemaking process, you’ll know why. From taking the measurements, to creating the last, cutting a pattern, designing a trial shoe, to Cutting, Closing, Lasting, and then finally finishing the product to suit your feet and create a wonderful piece of design – bespoke shoes are truly a work of art.

Then there are always the made-to-order shoes, where you pick an existing design, and it’s made according to your size – a true gift for those with slightly odd measurements.

Roberto Ugolini shoes

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Masaru Okuyama, Japan A student of the famous Japanese shoes craftsman, Chihiro Yamaguchi, Masaru Okuyama makes bespoke shoes because he believes that shoes are the way to express your seriousness about life. He’s a gold medal winner in the Custom-Made Shoes Category of German International Shoemakers’ Competition, Inter-SchuhService, in 2010.

McDonald has been making shoes since the 90s.

McDonald visited London to study photography and also ended up training at John Lobb, which is when he decided to become a shoemaker. He gives photography the credit, though, for his eye for detail. IFM

International Finance Magazine Jan - Mar 2015

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‘If you have five good custom-made shoes, you don’t really have to buy shoes anymore’ Masuru Okuyama talks to IFM about bespoke shoemaking, and where it stands today

While the affluent across the globe invest in high-end clothing, are they aware of bespoke shoes?

People still hesitate to invest a lot of money in shoes, especially when you compare them with other fashion products. I’d say it’s because people don’t know what bespoke shoes are all about, and that you can literally wear them forever, with proper care and repair, of course. If

you have five good custommade shoes, you don’t really have to buy shoes anymore.

I remember this quote, which explains what I am trying to say: “I’m not rich enough to buy cheap shoes.”

Do we need for a few more schools when it comes to de-

signing shoes?

I am not sure if schools will really help the industry.

Most good shoe designers I know, or known of, were doing different things before they ended up as shoe designers. And what’s really interesting is that they are first attracted to the craft of making the shoes, and not the designs.

Shoes by most highend brands cost the moon, and yet they sell fairly

well all over the world?

Then why aren’t there as many bespoke shoe designers?

The bespoke business has to be very intimate with its clients. So you can’t expand quickly. You have to be able to know what the client wants exactly, by trying to read between their lines. It requires extreme concentration, and all the time, and making those bespoke shoes is physically tough as well.

It cannot be just a job; it has to become your life.

What are the five thumb rules for aspiring shoe designers?

•

•

• • •

Learn the beauty of curves and lines from nature. And remember, there are no awkward lines in nature.

Know how to make shoes yourself. You should know the technique and the craft, and not how to design shoes.

Understand material.

Have a good sense of business.

And lastly, always dream big. IFM

Masaru Okuyama shoes

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Who do fashion weeks around the world focus a lot on couture clothes, but rarely on shoes?

Shoes have nothing to do with the short cycle of fashion, that’s why. And you’re talking about bespoke shoes – they don’t come with an expiry date. Men’s dress shoes have to be universal in design, and it is not something where you come up with a new design every season.

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Calendar

CALENDAR INTERVIEW

136

11-13 March 2015 Australasian Oil & Gas Exhibition & Conference

Power, Renewable Energy & Energy Conservation industry

http://www.eventseye.com/fairs/ f-aog-australasian-oil-gas-expo-11983-1.html

http://10times.com/solarexpo

Perth, Australia

Shanghai , China

http://10times.com/china-international-optics-fair

Milan, Italy

19-21 March 2015 Golf Fair

Paris, France

http://www.eventseye.com/fairs/ f-salon-du-golf-a-paris-9084-1.html

8-11 April 2015 Railway, Shipping & Aviation Products industry Dallas, USA

http://10times.com/aea-international-convention-trade-show

24-25 March 2015 Power Generation Conference Johannesburg, South Africa

http://www.eventseye.com/fairs/ f-power-generation-world-africa-14784-1.html

14-17 April 2015 International Trade Fair for Electronics Manufacturers and Suppliers Guangzhou City, China

http://www.eventseye.com/fairs/f-aleex-20050-1.html

24-26 March 2015 Arab Oil & Gas Dubai, UAE

http://10times.com/arab-oil-gas

21-29 April 2015 International Automobile & Manufacturing Technology Exhibition Shanghai , China

http://www.eventseye.com/fairs/ f-auto-shanghai-8089-1.html

1-3 March 2015

Medical & Pharmaceutical industry

8-10 April 2015

25-26 March 2015

29-30 April 2015Â

Intermodal Africa is the largest Ports, Minerals, Metals & Ores, Logistics & Shipping and Logistics Exhibition & Transportation industries Australia Conference event on the African continent Townsville, http://10times.com/nq-expo Lagos, Nigeria

http://www.eventseye.com/fairs/ f-intermodal-africa-north-17955-1.html

2-4 March 2015

25-26 March 2015

5-8 May 2015

Solar Middle East

North Sea oil & gas conference

MTB Shipyards

http://10times.com/solar-middleeast

http://www.eventseye.com/fairs/ f-oil-gas-outlook-north-sea-14797-1.html

http://10times.com/mtb-shipyards-dubai

Dubai, UAE

3-5 March 2015 Industrial Products, Minerals, Metals & Ores, Real Estate Agents industries London, UK

Aberdeen, UK

Dubai, UAE

30 March-01 April 2015

6-8 May 2015

International Property Show

Mining Australia

http://10times.com/international-property-show-dubai

http://10times.com/mining-australia-perth

Dubai, UAE

Perth, Australia

http://10times.com/appex-london

7-8 March 2015Â

1-3 April 2015

14-16 May 2015

The Listed Property Show

Solar Thermal

Renewable Energy

http://10times.com/listed-property-show

http://10times.com/solar-thermal-china

http://10times.com/renewable-energyworld-india

Harrogate, UK

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Beijing, China

New Delhi, India

Page-turners

America’s Bitter Pill

By Steven Brill This is one of the most-awaited books by Steven Brill, who discusses the Affordable Care Act, popularly known as Obamacare, how it’s been executed and whether it is changing the exploitation in the healthcare industry of the United States of America.

The author, who had won the 2014 National Magazine Award for Public Interest for digging into the country’s healthcare crisis, goes a step forward in this new book.

From the perspective of an observer, he writes an account of the fight, amid an onslaught of lobbying, to pass a 961-page law aimed at fixing America’s largest, most dysfunctional industry—an industry larger than the entire economy of France. It’s a hard-hitting chronicle of how the profiteering that Brill first identified in his Time cover story continues, despite Obamacare. And it is the first complete, inside account of how President Obama persevered to push through the law, but then failed to deal with staff incompetence and turf wars that crippled its implementation. Brill questions all the participants in the drama, including the president, to find out what happened and why.

Jan - Mar 2015 International Finance Magazine

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Page-turners

The Innovators

By Walter Issacson After his biography on Steve Jobs, Issacson goes into the world of the people who created the computer and the Internet. It is destined to be a standard for the history of the digital revolution and an indispensable guide to how innovation really happens. What were the talents that allowed certain inventors and entrepreneurs to turn their visionary ideas into disruptive realities? What led to their creative leaps? Why did some succeed and others fail? In this book, Isaacson begins with Ada Lovelace, Lord Byron’s daughter, who pioneered computer programming in the 1840s. He explores the fascinating personalities that created our current digital revolution, such as Vannevar Bush, Alan Turing, John von Neumann, J.C.R. Licklider, Doug Engelbart, Robert Noyce, Bill Gates, Steve Wozniak, Steve Jobs, Tim Berners-Lee and Larry Page. This is the story of how their minds worked and what made them so inventive. It’s also a narrative of how their ability to collaborate and to master the art of teamwork made them even more creative.

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Digital Destiny: How the New Age of Data Will Change the Way We Live, Work, and Communicate

By Shawn DuBravac In Digital Destiny, DuBravac, chief economist and senior director of research at the Consumer Electronics Association (CEA), argues that the groundswell of digital ownership unfolding in our lives signals the beginning of a new era for humanity.

Beyond just hardware acquisition, the next decade will be defined by an all-digital lifestyle and the “Internet of Everything” where everything, from the dishwasher to the wristwatch, is not only online, but acquiring, analysing and utilising the data that surrounds us. But what does this mean in practice? It means that some of mankind’s most pressing problems, such as hunger, disease, and security, will finally have a solution. It means that the rise of driverless cars could save thousands of American lives each year, and perhaps hundreds of thousands more around the planet. It means a departure from millennia-old practices, such as the need for urban centres. It means that massive inefficiencies, such as the supply chains in Africa allowing food to rot before it can be fed to the hungry, can be overcome. It means that individuals will have more freedom in action, work, health and pursuits than ever before.

International Finance Magazine Jan - Mar 2015

Page-turners

Blue Ocean Strategy

By W. Chan Kim, Renee Mauborgne This global bestseller, embraced by organisations and industries worldwide, challenges everything you thought you knew about the requirements for strategic success. Now updated with fresh content from the authors, Blue Ocean Strategy argues that cutthroat competition results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. Based on a study of 150 strategic moves (spanning more than 100 years across 30 industries), the authors argue that lasting success comes not from battling competitors but from creating “blue oceans”— untapped new market spaces ripe for growth. The book presents a systematic approach to making the competition irrelevant and outlines principles and tools any organisation can use to create and capture their own blue oceans. A landmark work that upends traditional thinking about strategy, this bestselling book charts a bold new path to winning the future.

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The Last Stalinist

By Paul Preston From 1939 to 1975, the Spanish Communist Party, effectively led for two decades by Santiago Carrillo, was the most determined opponent of General Franco’s Nationalist regime. Admired by many on the left as a revolutionary and a pillar of the antiFranco struggle, and hated by others as a Stalinist gravedigger of the revolution, Santiago Carrillo was arguably the dictator’s most consistent left-wing enemy. For many on the right, Carrillo was a monster to be vilified as a mass murderer for his activities during the Civil War. But his survival owed to certain qualities that he had in abundance – a capacity for hard work, stamina and endurance, writing and oratorical skills, intelligence and cunning – though honesty and loyalty were not among them. One by one he turned on those who helped him in his desire for advancement, revealing the ruthless streak that he shared with Franco, and a zeal for rewriting his past. Drawing on the numerous, continuously revised accounts Carrillo created of his life, and contrasting them with those produced by his friends and enemies, Spain’s greatest modern historian Paul Preston unravels the legend of a devastating and controversial figure at the heart of 20th-century Spanish politics.

Jan - Mar 2015 International Finance Magazine

OUT OF OFFICE COLUMN

Spending time with family and friends is my preferred way of unwinding Rino Sabatino is CEO at RAK Investment Authority. He is based in Ras Al Khaimah, an emirate in the UAE Suparna Goswami Bhattacharya

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What do you look forward to doing when you are not in office – weekends or even weekdays?

The top-most thing is spending time with my wife, Lucia, who is my pillar of strength. Since my work hours can be very long with frequent travel commitments, I do my best to maximise the time my wife and I spend together. The two of us make it a point to hit the gym every day on weekdays and spend time outdoors on weekends.

What do you prefer — eating out in a restaurant, catching a movie in a hall or spending time with family/ friends?

Spending time with family and friends is my preferred way of unwinding. Doing so gives me the opportunity to look at life from different perspectives – from that of my family. There is definitely more to life than just work, but if you love your job as I do then work/life balance is hardly an issue. I am fortunate to be blessed with a very supportive family and I do everything possible to make time for them.

You stay in Ras Al Khaimah. What is one unique characteristic of the place?

Ras Al Khaimah is easily one of the most beautiful places in which I have lived.

I wake up every day to the sight of the majestic Hajjar mountains in the distance and a beautiful creek flowing by my residence. Ras Al Khaimah is the only emirate in the UAE with sand, sea and mountains within close proximity.

Do you buy the latest gadgets/books?

I am not really into gadgets but I do keep my eyes on developments in the fast-changing technology world. Not only is technology an industry in itself, it has completely transformed the way business leaders make decisions. To make up for my lack of interest in gadgets, I indulge myself generously in books.

Which book did you pick up recently?

I recently bought Give and Take: Why Helping Others Drives Our Success,

by Adam Grant. Anyone who knows me well understands that I am not a

International Finance Magazine Jan - Mar 2015

reader of fiction. I prefer books that address issues at the intersection of business, philosophy and social science. Give and Take examines why some people are successful while others are not; the author is a highly rated professor at The Wharton School.

Which book is on your wish list? Why? Lean In: Women, Work and the Will to Lead, by Sheryl Sandberg, is on my wish list. I am a huge proponent of promoting women in the workplace and firmly believe that women can successfully balance careers and household commitments. On the other hand, male leaders have to empathise and understand what it takes to retain women and help them grow in their careers. Although written for women professionals, I look forward to reading this book by the COO of Facebook to gain greater insight into the topic.

What are your hobbies?

I am so regular with my work-outs that I really do like spending time in the gym. I have found exercise

to be a great way to unwind and de-stress. Besides reading books, I also love to travel. The UAE is such a wonderful country to explore with each of the seven emirates an eye-opener in its own unique way. Right across from Ras Al Khaimah is the Sultanate of Oman, another beautiful country worth exploring.

What was your last holiday destination?

Why did you choose that place?

My wife and I visited Istanbul in Turkey over a year ago. I had heard from many people that Istanbul is a fascinating city. I thought Rome was stunning but when I visited Istanbul, I could see why it is known as the melting pot of the East and the West.

What is your favourite dish?

Although a proud Canadian, I must admit that my weakness is Italian lasagna.

I guess it must have something to do with my Italian roots! Besides, it is one dish that I have mastered to perfection. IFM

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