Nov 2021
Issue 25 Volume 18
UK £4 Europe ¤5.35
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China to roll out new property tax
5 years since Brexit, and it's still not over
US $6
Blockchain is revolutionising International Finance | NovemberKYC 2021 |
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NOVEMBER 2021 VOLUME 18 ISSUE 25
EDITOR’S NOTE SAMUEL ABRAHAM EDITOR, INTERNATIONAL FINANCE
A crisis like never before
T
he world is going through an energy crisis that is primarily driven by the increase in the price of gas and an economy that is still reeling from the adverse effects of the Covid-19 pandemic. Natural gas prices in Europe have soared by over 400 percent since the beginning of the year. Electricity prices have also increased by over 250 percent during the same period. While in the UK, fuel pumps went dry causing panic among the masses. In China, several factories had to shut down operations due to power disruptions caused by a shortage of coal supply. In Asia, thermal coal prices also keep hitting record high. The situation is made worse by the consistent rise in wholesale gas prices that have made utilities unprofitable, with no ability to pass costs on, and broader shortages have placed increasing demand on energy infrastructure. Europe's energy crunch is expected to further worsen as the northern hemisphere winter approaches. With natural gas prices skyrocketing, many fear the EU's integrated energy system could be on the verge of a breakdown. This issue of International Finance explores the effect of digital regulators and their impact on the digital economy, how Africa’s healthcare system has been impacted by the pandemic. Further, we explore China’s decision to roll out a new property tax and how the decision has faced strong resistance from China’s political elite. We will also be talking about how the global supply chain turned out to be the savior when the world went into lockdown and the present condition of the UK after five years of Brexit. This issue also features an exclusive interview with HearX Group CEO Nic Klopper.
sabraham@ifinancemag.com www.internationalfinance.com
International Finance | November 2021 | 3
INSIDE
IF NOVEMBER 2021
IN CONVERSATION AFFORDABLE & 58 PROVIDING ACCESSIBLE HEARING HEALTHCARE
hearX providing new ways to overcome traditional barriers in diagnosis and treatment of disabling hearing loss
26
GLOBAL ENERGY SUPPLY IS RUNNING CRITICALLY LOW Energy prices in Europe are soaring as supply takes a hit BANKING AND FINANCE
REAL ESTATE
ANALYSIS
12 The changing landscape
of Islamic bonds
22 The pandemic's impact on
16
34
COVID-19'S IMPACT ON GLOBAL BANKING
CHINA'S NEW PROPERTY TAX
One of the biggest effects of the covid-19 pandemic on the banking sector is its rapid shift to digitisation
Xi Jinping agrees to implement the property tax by doing test tax runs in undisclosed cities of the country
ECONOMY
TECHNOLOGY
46
54
5 YEARS OF BREXIT
IOB AND WHY ITS IMPORTANT?
The impact of Brexit on the UK economy will be far more disastrous in the long run compared to the pandemic.
IoB uses data from customers and uses it to provide its customers with a better user experience
4 | November 2021 | International Finance
Africa's healthcare
42
The rise of digital regulators
50
Blockchain is revolutionsing KYC
www.internationalfinance.com
Director & Publisher Sunil Bhat
38
Editor Samuel Abraham Editorial Adriana Coopens, Jessica Smith, Lacy De Schmidt, Pritam Bordoloi, Moumita Basu Production Merlin Cruz Design & Layout Vikas Kapoor Technical Team Prashanth V Acharya, Bharath Kumar
INSIGHT GLOBAL SUPPLY CHAIN IS IN A CRISIS The Covid-19 pandemic added further woes to the supply chain industry, making the bottleneck worse
Business Analysts Alice Parker, Sid Nathan, Sarah Jones, Christy John, Gwen Morgan, Alex Carter, Janet George, Indra Kala, Rohit Samuel, Priscilla Salt Business Development Manager Steve Martin Business Development Sunny Shah, Sid Jain, Ryan Cooper Accounts Angela Mathews Registered Office INTERNATIONAL FINANCE is the trading name of INTERNATIONAL FINANCE Publications Ltd 843 Finchley Road, London, NW11 8NA Phone +44 (0) 208 123 9436 Fax +44 (0) 208 181 6550
REGULAR EDITOR'S NOTE
03 06 08
A CRISIS LIKE NEVER BEFORE
TRENDING Brazil raises $8.6 bn in the 5G spectrum sale
NEWS The UK announces call for booster doses
Email info@ifinancemag.com Press Contact editor@ifinancemag.com Associate Office Zredhi Solutions Pvt. Ltd. 5th Floor, Sai Complex, #114/1, M G Road, Bengaluru 560001 Ph: +91-80-409901144
International Finance | November 2021 | 5
# TRENDING TELEC OM
Goldman Sachs partners with AWS for financial cloud
Brazil raises $8.6 bn in the 5G spectrum sale Brazil has raised a total of $8.5 billion in its recent 5G spectrum auction, making it the second-largest auction of assets in the country’s history, according to media reports. The Brazilian government has offered spectrum in the 700 MHz, 2.3 GHz, 3.5 GHz and 26 GHz bands through this auction. The government also noted that the total amount raised includes the prices for the right to use licenses, and investment commitments tied to each band as well as the premium paid. Vivo, Claro and TIM; the country’s three primary telecom operators secured 5G spectrum as well as telecoms operators Algar Telecom and Sercomtel.
Banking giant Goldman Sachs is partnering with Amazon Web Services (AWS) where it will open up its financial data resources and analytics to third party institutions, according to media reports. The new service is named GS Financial Cloud for Data with Amazon Web Services and it aims to help the bank's hedge fund and asset management clients find, organise and analyse the data in the cloud.
At a Glance Highest unit pricing of 5G spectrum India
$70
Italy
$25 Microsoft and Zip announce partnership
$100 mn Islamic finance programme
giant TECHNOLOGY Technology Microsoft recently announced its partnership with Australian buy now pay later (BNPL) provider Zip where the company will embed the BNPL option in its Edge browser and users can enter an online checkout page for any purchase between $35-$1000, according to media reports. Customers will be able to sign up through the Zip App for single-use digital credit cards, which can be used to purchase Microsoft products. The single-use credit cards will offer customers a 12-month interest-free payment solution.
Chartered’s BAN K I N G Standard international Islamic banking network Saadiq has launched a $100 million Islamic financial programme along with the Malaysian Halal Development Corporation to support small and medium-sized businesses (SMEs) in Asia, the Middle East and Africa, according to media reports. It will focus on some key halal markets in the world like the UAE, Saudi Arabia, Malaysia, Bahrain, Bangladesh and Pakistan. The announcement was made during the Halal Week taking place at the UAE Expo.
6 | November 2021 | International Finance
South Korea
$18
The UK
$10
Australia
$5
Spain
$2
Source- Statista
NEWS | INSIGHTS | UPDATES | DATA
Ones to Watch
REAL ESTATE
Dubai Expo 2020 boost real estate sales Real estate deals recorded in Dubai this year have increased by 88.89 percent year-on-year to reach $36.8 billion as a result of Dubai Expo 2020, according to a report by Property Finder. Around 12,000 units have been sold since the Expo began. The report on Dubai real estate further states that a total of 12,352 properties with a combined value of Dh31.08 billion were sold during October and November. The sold units include around 7,000 secondary or ready residential units worth Dh19.84 billion and 5,352 off-plan units worth Dh11.24 billion. A Reuters poll of property analysts revealed that housing prices in Dubai will extend their rise into next year at twice the rate expected three months ago. The growth will mostly be driven by demand from foreign investors. Dubai’s rental market also showed an
upward trajectory in the third quarter of 2021. However, the trend could be shortlived as thousands of new residential units are expected to hit the market by the end of this year. Foreign investors’ activities in the Dubai real estate market have increased over time as the government has introduced various visa reforms and successfully managed the Covid-19 pandemic. Investors mostly from India and Pakistan have invested heavily in Dubai’s real estate market this year.
By the Numbers
TOBY XU CFO, ALIBABA GROUP Under his leadership, Xu has helped lead three company public listings as deputy CFO on the Hong Kong Stock Exchange in 2007 and Alibaba Group Holding on the New York Stock Exchange in 2014.
MICHAEL MURPHY CTO, ERICSSON Ericsson has appointed Michael Murphy Nokia's longtime North American CTO as its own CTO for North America. He recently represented Ericsson in a presentation to the FCC.
Countries with the highest per capita carbon emissions Saudi Arabia 17.6 The US 17.6 Canada 15.7 Australia 14.9 South Korea 13.3 Japan 10.4 Germany 10.4
DAVID SOLOMON CEO, GOLDMAN SACHS Solomon, during the Financial Times' Global Banking Summit mentioned that New York City’s future is not guaranteed and high taxes threaten its status as the global business destination.
Source- Statista International Finance | November 2021 | 7
IN THE NEWS
FINANCE
BANKING
INDUSTRY
TECHNOLOGY
The UK issued a call to get booster doses to the citizens to fight against the Omicron variant of Covid-19
Data and analytics firm GlobalData says the general insurance industry in Singapore will reach $4.2 bn by 2025
The UK announces call for booster doses The UK Prime Minister Boris Johnson has issued a call to get booster doses to the citizens as the country prepares to fight against the Omicron variant of Covid-19. As of this writing, Britain has recorded 22 cases of the new variant and it appears to be more transmissible. The UK also announced its plans to inoculate all adults with booster shots by the end of January and plans to amp up its booster programme by an extra million doses a week. Johnson also mentioned that Britain has delivered the fastest vaccine rollout in Europe earlier this year, and with the concerning news of the Omicron variant, the citizens need to come together again. The Omicron variant of Covid-19 was first reported in South Africa a week ago, and since then, it has spread to more than a dozen countries, which has also rung alarm bells in the financial sector. British Health Secretary Sajid Javid said booster vaccines would help protect against severe disease from Omicron, in case it turns out the prior vaccines don’t provide enough
8 | November 2021 | International Finance
protection against the latest strain. According to the data released by the UK government, 81 percent of the population aged over 12 have had two doses of vaccine, while 32 percent have had a booster shot or third dose. Johnson also mentioned that vaccination campaigns will be amped up to previous levels, which were observed earlier this year when 3.5 million shots were being delivered a week. In the last week, Britain vaccinated about 2.4 million people. The government also announced that payments to the local doctors, community pharmacies and hospitals will increase to $20, but doctors have raised concerns, saying that the focus on boosters could divert "We are going to throw everything at it, to ensure that everyone eligible for that booster will be vaccinated within two months. Vaccination is our best single defence against Omicron." Johnson said. "What we're doing is taking some proportionate precautionary measures while our scientists crack the Omicron code. And while we get the added protection of those boosters into the arms of those who need them most."
Singapore GI market to reach $4.2 bn The general insurance industry in Singapore will skyrocket to $4.2 billion by 2025 according to a forecast by data and analytics firm GlobalData. The forecast also mentioned that general insurance will grow at a compound annual growth rate of 5 percent, helping the industry reach its predicted potential, compared to the previous $3.2 billion in 2020, in terms of gross written premiums (GWP). The data and analytics firm mentioned that the reason for this growth is because economic activities resumed, a successful Covid-19 vaccination program and the relaxation of travel restrictions. Manogna Vangari, an insurance analyst at Global Data said that Singapore’s economy is expected to grow by 7 percent in 2021 after suffering a 5.4 percent decline in 2020 because of the pandemic. Motor insurance is the largest general insurance line in Singapore with a GWP share of 25.8 percent in 2020. The motor insurance line is also expected to grow by 1.2 percent in 2021 after getting stuck at 0.9 percent in 2020 due to
travel restrictions and the low sale of motor vehicles. Electric vehicle sales grew by over 80 percent before September and it will contribute to higher demand for motor insurance. Personal accident and health (PA&H) and property insurance were the second and third-largest general insurance segments and constituted a share of 19 percent and 18.4 percent respectively in 2020. This insurance sector is expected to grow by 3.4 percent in 2021 and 3.8 percent in 2022, primarily driven by the demand for a popular hospitalisation insurance plan – Integrated Shield Plan (IP). IP plans cover additional hospitalization expenses and benefits like private hospital bills, access to specialist doctors that are not covered under the universal government scheme known as MediShield Life. Reports suggest that around 67 percent of the population has an IP insurance plan, which is offered by seven insurance companies. Property insurance also saw a rise and is expected to grow by 7 percent in 2021 and will be supported by a recovery in construction output, which is expected to reach $20.3 billion in 2021.
International Finance | November 2021 | 9
IN THE NEWS
FINANCE
BANKING
INDUSTRY
TECHNOLOGY
Chinese cryptocurrency exchange Huobi has chosen Singapore as its new regional headquarters
Parag Agarwal, who was the chief technology officer replaces Jack Dorsey as CEO
Huobi selects Singapore as new HQ
ACWA Power & Natixis sign MoU
Major Chinese cryptocurrency exchange Huobi has chosen Singapore as its new regional headquarters after moving most of its business operations to the country, according to media reports. Additionally, the company also plans to mark its presence in the European market after establishing a regional presence in the UK and France by 2023. After China banned crypto exchanges in 2017, Huobi set up an entity in Singapore and the latest launch of their new headquarters in the country cements the fact that there is no going back from here. Earlier this year, Beijing also imposed stricter regulations on cryptocurrencies by purging local Bitcoin miners and declaring cryptocurrency transactions illegal in late September.
Dubai-based ACWA Power, which is partly owned by Saudi Arabia's sovereign Public Investment Fund, recently announced that it has signed a memorandum of understanding (MoU) with Natixis Corporate & Investment Banking to finance ACWA projects worth $2 billion over two years, according to media reports. Prior to signing this MoU, Natixis has previously underwritten several other ACWA deals, including the Sakaka photovoltaic project. In October this year, ACWA Power was among one of the bidders for the 1,200 MW Saudi renewable energy projects, consisting of four independent generation projects (IPP), according to an announcement made by the Ministry of Energy.
Top IPOs of 2021
(wrt company valuation)
Braze
Expensify
GlobalFoundries
Gitlab
Toast
Blackblaze
Udemy
Informatica
Amplitude
Freshworks
$8.4 bn $650 mn
10 | November 2021 | International Finance
Source: www.statista.com
$2.2 bn $3.7 bn
$25 bn
$7.9 bn
$15.9 bn $7.9 bn
$31 bn $12 bn
Jack Dorsey steps down as Twitter CEO
Thai insurer to sell majority stake
Twitter CEO Jack Dorsey is stepping down as chief of the social media company, effective immediately. Parag Agarwal, chief technology officer (CTO) will be replacing Dorsey. After Dorsey announced the news, Twitter’s stock fell by 2.4 percent. Until now, Dorsey was the CEO for both Twitter and Square, his digital payments company. Dorsey will remain a member of the board until his term expires at the 2022 meeting of stockholders. Bret Taylor, COO and President of Salesforce will become the chairman of the board, succeeding Patrick Pichette, a former Google executive, who will remain on the board as chair of the audit committee.
The Syn Mun Kong Insurance company in Thailand is mulling over the idea of selling a majority stake in the insurer and have picked several strategic players to advance into the next round of bidding, according to media reports. Additionally, the insurer is also trying to raise funds in order to improve its liquidity position to pay COVID-19 claims that have surged. Currently, the company is working with an adviser on the deal, which could be valued at about $200m. This sale could also mean a fresh investment of around $100 million for the company. Syn Mun Kong is one of three general insurers which have received the approval of the Office of Insurance Commission (OIC) to implement liquidity enhancement measures.
Market share of top Singapore life Insurers Great Eastern Life
AIA Singapore
NTUC Income Insurance
Prudential Assurance
ManuLife
Aviva
25.5% 16.9%
14.1% 13%
9.2% 6.8%
Etiqa
3.6%
International Finance | November 2021 | 11
BANKING AND FINANCE
ANALYSIS
ISLAMIC FINANCE SUKUK ISSUANCE UAE
The global Sukuk industry is worth more than $2.4 tn and grew by 11.4% in 2019
The changing landscape of Islamic bonds JESSICA SMITH
The global financial landscape has gone through some dramatic changes in the last few years. The lessons we have learned from the 2008 recession point to the fact that we need to have an innovative financial architecture that is not only capable of supporting governments and businesses but also Even though is effective, timely and the growth in the sector predictable so that it can will be slow, help enhance the stability, there is still wealth, social well-being and enough room environmental sustainability, for the sector thereby securing longto support time growth of the local countries economy. The last 12 months impacted by have seen developments in the Covid-19 the global Islamic finance pandemic industry which is fueled by a dynamic Sukuk market and a significant investment in fintech and innovation. The Middle East, Africa and South Asia (MEASA) region continue to be a significant contributor to an industry, which is worth more than $2.4 trillion and grew by 11.4 percent in 2019. After a strong performance in 2019 due to higher-than-expected Sukuk issuance, experts believe that Islamic finance industry growth will slow in 2020- 2021 due to lockdown measures. The primary reason why the Sukuk market performed so well during 2019 is because of
12 | November 2021 | International Finance
the good performance in the Gulf Cooperation Council (GCC), Malaysia, Turkey and Indonesia. In 2020, these numbers slowed down primarily due to the government-imposed restrictions to contain the spread of Covid-19. This slowdown has been counterbalanced by economic support from various central banks to help their banking systems navigate the difficult environment. Before the world economy was devastated by the Covid-19 pandemic and oil prices skyrocketed, the market was poised to perform really well in 2020. Due to the stretched financial conditions, it is expected that Islamic finance countries won’t be using Sukuk as a primary source of funding despite their higher financing needs. However, some other experts have predicted that the Covid-19 pandemic offers an opportunity for more integrated and multifaceted growth with higher standardisation, a stronger focus on the industry’s social role, and greater use of fintech. This can be achieved through better coordination between the industry’s different stakeholders. ESG principals have become more and more relevant both globally and in the Middle East specifically. While the modern formula for Sukuk has been present for decades, recently, the markets have registered growth of innovative Shariahcompliant financing structures that align with ESG principles. It is known that Shariah-compliant assets have a lot of potentials to be ESG-compliant,
green or sustainable Sukuk. The proceeds from the green Sukuk are used exclusively for the funding of eligible sustainability projects or to finance investments in renewable energy or other environmental projects.
the other hand, can help compensate for lost household income because of the pandemic. All these factors, along with green Sukuk could help put the industry more prominently on ESG investors’ radar.
Streamlining the issuance of Sukuk Social Islamic Finance can cause a difference It’s no secret that the Covid-19 pandemic has caused a significant slowdown of the global economy and its effect can be felt in core Islamic finance markets, which has seen a spike in unemployment. Initially, the shock was well-absorbed by migrant population structure in the Gulf and governments’ support packages, but a large number of stakeholders lost a portion of their income. Experts have predicted that four Islamic finance social instruments, in particular, can help core Islamic countries, banks, and corporations; which are, Qard Hassan, Social Sukuk, Waqf and Zakat. Qard Hassan can provide a breathing space until everything resumes its stability. One example of this is when the GCC countries’ central banks provided free liquidity lines to financial institutions to provide subsidized lending to their corporate and small and midsize enterprise clients. Social Sukuk can help support the educational system amid the current slump and attract ESG and Islamic investors. Waqf can provide affordable housing solutions or access to health care and education for people who have lost a significant portion of their income. Zakat, on
For issuers, Sukuk issuance remains more complex and time-consuming because of conventional bonds. When oil prices crashed in 2014, the core Islamic finance issuers needed faster access to capital markets compared to what they typically use. During the first five months of 2020, the total volume of Sukuk issuance dropped 38 percent compared to the same period in the previous year. The only exception noted were the ones that already had established programs or can tap a recent issuance. Even though the market has developed a certain way of doing transactions, but a global standard of doing transaction rules that would be acceptable to all stakeholders is still missing. The various standard setters of the industry like -the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Islamic Financial Service Board (IFSB), and the International Islamic Financial Market (IIFM) have come together to drive this agenda. Recently, the UAE Ministry of Finance, the Islamic Development Bank, and the Dubai Islamic Economy Development Centre (DIEDC) came together to develop an international legislative framework for Islamic finance that has the primary goal of speeding up and reducing discrepancies around the globe.
International Finance | November 2021 | 13
BANKING AND FINANCE
ANALYSIS
ISLAMIC FINANCE SUKUK ISSUANCE UAE
Countries that have adopted the AAOIFI standards might think that some Sukuk structures are primarily used in core Islamic finance countries. This points to the necessity for a urgent review of some of the existing standards and the adoption of an inclusive approach. Many have mentioned that the adoption of the above mentioned process would ultimately lead to the standardization of the full spectrum of Sukuk. It will also factor in the requirements of regulators, Sukuk issuers, and investors. Once Sukuk issuance becomes comparable with conventional instruments from a cost and effort perspective, it will easily find its place on issuers’ and investors’ books. Central banks from around the world have already taken necessary steps to boost banks’ liquidity in core Islamic finance countries. Therefore they are unlikely to issue Sukuk as liquidity management instruments in 2021. Instead, they want banks’ increased liquidity to reach corporates which will decrease the risk of a long-lasting economic downturn resulting from Covid-19 and rising oil prices. Since the world economy is still volatile, it has led to higher financing needs for sovereigns, but most of them are turning to conventional markets due to the complexity of issuing Sukuk. Reports suggests that Sukuk issuance volume fell by 27 percent in the first half of 2021. In the current environment, the defaults among the latest Sukuk issuers that have low credit quality will most likely increase. Additionally, over the next few months, some Sukuk may be issued to help economic
14 | November 2021 | International Finance
Global Islamic Finance Market (2019)
1. Islamic Banking 2. Sukuk 3. Other IFI 4. Islamic Funds 5. Takaful
recovery rather than solely to serve investors’ financial interests.
Issuance is likely to remain low until economies recover As the Covid-19 continues to spread in many Islamic countries, it is a known fact that policymakers will prioritise restarting the economy and limiting the overall impact of restrictions on productive capacity and employment. Even then, the major events of 2020 will remain a massive issue for all primary Islamic finance countries. During the first six months of 2020, the market saw a 27 percent drop and issuance volume is expected to reach $100 billion at best this year compared with $162 billion in 2019, constituting a 40 percent decline. Due to rising oil prices and the impact of the Covid-19 pandemic, several central banks launched liquidity programs to help corporations to preserve the productive capacity of their economies. Due to this, local banks were able to meet most of the economies financing needs. Additionally, the need for corporate financing has been reduced, since
1993.69% 538.19% 153.5% 140.5% 51.2%
they are delaying investments and reducing capital expenditure in the uncertain environment.
Investors are becoming increasingly interested Over the past few months, market conditions have been extremely fragile because of the Covid-19 pandemic. Looking at the brighter side, several countries have been successful in containing the virus. This, along with lifting major restrictions has contributed to some stability to global capital markets that has seen an uptick in issuance. For example, the Indonesian government issued a $2.5 billion global Sukuk in June 2020, including a $750 million “green” tranche. One of the tranches has a 30year maturity and received positive responses from investors based on its pricing. The Sukuk issuance was heavily oversubscribed, proving that even during an extremely volatile market, issuers with a good credit rating can still have access to the market. Additionally, the volume of foreign-currency-denominated
Global Suluk issuance by country
1. Malaysia 2. Indonesia 3. Saudi Arabia 4. Qatar 5. UAE
6% 5% 3% 3%
issuance has increased by 11.3 percent mainly due to increased issuance from the Islamic Development Bank as part of its planned increase in lending. Reports suggest that Bahrain also stepped up its foreign currency issuances to support liquidity and favours Sukuk to help raise funds. Experts suggest that this will continue unless the sector encounters an unexpected setback. Experts have wondered why governments in the Gulf and other core Islamic finance markets favoured conventional capital markets instead of issuing Sukuk. That is primarily because Sukuk issuance is still more complicated than issuing conventional bonds. Only when the processing of both become broadly comparable, especially from a time, cost and offer perspective, then only would governments view Sukuk as an efficient source of funding on a regular basis. Given the current shocks faced by the global economy, analysts have identified that credit risk is also rising. As a result, we might get to see higher default rates among
78%
Source- ResearchGate
Sukuk issuers, especially those who have lower credit quality or come with business plans that depend on supportive economies and market conditions. This will also test the capabilities of the legal documentation process used during Sukuk issuance and will also provide insight into the outcome for investors. Usually, investors don’t have access to the Sukuk’s underlying assets when a default takes place, except when those assets were sold to the special purpose, which, needless to say, is more of an exception than a norm. The defaults happening from the side of investors will bring the debate on the standardization of legal documents back to the forefront. Another interesting trend that has been observed is the use of innovative structures to finance economic recovery. One of them is the issuance of $1.5 billion worth of Sukuk by the Islamic Development Bank (IsDB). Reports suggest that the proceeds from this Sukuk will directly go to the IsDB’s member countries to help them cope with the impact of the pandemic,
particularly focusing on sectors like healthcare and small and mediumsized enterprises (SMEs). Another example is the issuance of Prihatin Sukuk in Malaysia. Going by some market sources, the closest conventional instrument to this Sukuk would be a war bond and the main idea behind this is to issue a zero periodic-distributionrate Sukuk and use the proceeds to help restart the economy. Not only will this be majorly attractive to investors from a financial perspective, but it also will appeal to the local investors that are keen to contribute to the economic recovery. It is also expected to appeal to many local or foreign investors that have ESG objectives and the proceeds from this Sukuk will support microenterprises run by women, improve broadband internet coverage for schools in rural areas, and provide research grants for the treatment of infectious diseases. These recent trends show that the pandemic is opening up a channel that will help put the S back in ESG into the Islamic finance and show the social aspect built into the core of Sharia goals. Even though it is a part of sustainable finance, green Sukuk will likely remain on the sidelines while governments in core Islamic finance countries deal with the impact of the pandemic. But if there is any indication that green Sukuk can help accelerate the economic recovery, then there is a good chance that we may see a resurgence in issuance.
editor@ifinancemag.com
International Finance | November 2021 | 15
BANKING AND FINANCE
FEATURE BANKING SECTOR DIGITISATION
16 | November 2021 | International Finance
COVID-19 EFFECT BANKING SECTOR
FEATURE COVID-19 EFFECT BANKING SECTOR
Covid-19 and its impact on the global banking IF CORRESPONDENT
One of the biggest effects of the Covid-19 pandemic on the banking sector is its rapid shift to digitisation
F
or most of us around the world, life has changed beyond recognition compared to how it was a year and a half ago due to the catastrophic effects of the Covid-19 pandemic. One of the biggest changes that we had to adapt to was the increased use of electronic devices. As we all stayed at home and continued with our jobs, the remote working situation meant that video conferencing for meetings and socialising, shopping online, digital banking, and so on went digital. The biggest question currently in front of us is how much of this change will prove to be permanent and which ones will turn out to be temporary ones? When it comes to the banking industry, the change seems to be inclining more towards the permanent side. Considering where we are standing currently, experts say that digital experiences will rewrite the rules of retail and corporate banking. In a volatile world with rising customer expectations, it is important for the banking sector to be agile. Experts suggest that dynamic teams and systems must ensure banking delivers a seamless experience to every customer. While banking services can be provided remotely and don’t depend on direct customer contact, the banking sector plays an important role in supporting firms and households during this period of lower revenues and incomes. This has triggered important
International Finance | November 2021 | 17
BANKING AND FINANCE
FEATURE BANKING SECTOR DIGITISATION
COVID-19 EFFECT BANKING SECTOR
Countries home to most leading banks
policy actions by financial supervisors and governments. There has been a lot of news coverage regarding the effects of Covid-19 on the banking industry and how the pandemic has driven established banks to swiftly accelerate their digital programs in order to retain customers. As demand for digital features among customers increases, banks have prioritised enabling customers to complete the most common service journeys remotely, such as resetting PINs, changing loan terms, paying for groceries or filling in forms electronically. According to a report by RFI Group, 71 percent of global customers are now using digital banking channels weekly, which is a 3 percent year-on-year increase and daily use registered an increase of 6 percent. In the UK, 73 percent of the users are using digital banking channels weekly, which is way above the global average. Additionally, there was also an increase in mobile banking, which rose from 52 to 57 percent between the second quarter of 2019 and the first quarter of 2020. From the above data, it can be easily inferred that the Covid-19 pandemic alone isn’t responsible for the sudden shift to digital banking. Instead, it has only accelerated the process since more people have access to digital ecosystems. The ones who are familiar with this topic would know that the change from cash towards digital payment methods has been building gradually for years. Going by the data provided by UK finance, only 23 percent of all purchases made in the UK in 2019 were paid by cash and in 2020, more than 70 percent of the population shopped online. Even if we take the Covid-19 pandemic out of the equation, these trends were expected to pick up in the next few years. Recently, The World Economic Forum predicted
18 | November 2021 | International Finance
1. 2. 3. 4. 5.
France The UK Germany Spain Italy
£ 7,286 bn £5,935 bn £3,205 £2,943 £2,358
Source: Statista
Banks might also reduce credit provision to the economy and it will have a negative impact on the firms relying on such buffers, thereby making it difficult for them to survive
that 50 percent of the consumption of the total goods can be made online in major developed markets by 2030. Meanwhile, UK Finance expects only 9 percent of payments in the UK to be made using physical currency by 2028.
How did the Covid-19 crisis affect the banking sector? When it comes to the banking sector, firms that stopped working started missing out on revenues and were unable to pay their loans. People who lost their jobs during the crisis were furloughed or had less income and therefore, might not be able to repay their loans. Not only will this result in loss of revenues, but it also negatively affects the profits and banking capitals, resulting in the need for additional provisions. Banks were also negatively affected when bonds and other traded financial instruments
lost value, resulting in further losses. During any period of national or global crisis, banks face increasing demand for credit since most of the firms require an additional cash flow to meet their costs even in times of no or reduced revenues. In certain cases, higher demand has resulted in the drawdown of credit lines by borrowers. The Covid-19 pandemic also led the banks to face lower noninterest revenues because of less demand from various services. Lower capital buffers in banks can result in making the bank’s solvency problem even worse and might also undermine the recovery of a broader economy. In order to recuperate from the losses, banks might start selling bonds and other traded financial instruments to make up for their losses or maintain their liquidity position in the market. Banks might also reduce
FEATURE COVID-19 EFFECT BANKING SECTOR
credit provision to the economy and it will have a negative impact on the firms relying on such buffers, thereby making it difficult for them to survive in an already volatile and fragile market.
What has been the policy response? The potentially negative impact on the banking sector has motivated concerned authorities in and across Europe to take precautionary measures and mitigate risks as much as possible. Authorities in the UK and Europe have reduced certain mandatory capital buffers which were present before the Covid-19 crisis and helped reduce the minimum capital ratio that banks have to observe. The authorities have also urged and encouraged banks not to pay out dividends or buy back their own shares during the crisis since it would
further reduce their capital position. Additionally, the regulators have also delayed the implementation of new loan loss provisioning rules that would force banks to create provisions for loans that are currently impaired due to the crisis. Central banks have already reduced interest rates and extended the purchase of bonds. This makes the financing of the banks cheaper and it also provides necessary liquidity for banks to continue providing loans to the real economy. Some governments have provided firms and workers with direct payments to substitute for their lost revenues. Even though this doesn’t have any direct effect on banks in terms of loss or gain, but it lets borrowers continue with their loan payments, which, in turn, help banks to avoid losses. Some governments have also provided direct support that helps
banks, including loan guarantees which imply that part or all of the loan losses would be covered by the government if the borrower fails to repay their debt.
Developing smart governance When a bank falls prey to cyber theft, it incurs a major loss in terms of revenue and customer base. Protecting customer information against cyber theft is one of the primary duties of the bank towards its customers. While cyber breaches started increasing, especially during the peak of the Covid-19 crisis, it is expected that this model will be adopted by numerous banks in future. This makes it increasingly important for financial institutions to raise their guards through the implementation of smart governance practices. Currently, more than 50 percent of data from banks are stored on the cloud, the transition to 100 percent will happen
International Finance | November 2021 | 19
BANKING AND FINANCE
FEATURE BANKING SECTOR DIGITISATION
by 2023. But there are some crucial points that need to be kept in mind. Firstly, banks have to ensure that they stop using personal or rented devices. But this step alone is not enough. Banks and financial institutions have to implement a series of controls and frameworks to monitor employee and user activity, transactions through authentication. Additionally, banks also need to start educating employees and customers regarding safe banking habits so that threats can be minimised. Without proper training, it is easier to fall prey to financial fraud, hence, it’s best to ensure the bank is ready to face any challenge thrown its way. The evolving digital landscape requires our utmost attention. It has already helped disrupt customer behaviour, preferences, and attitude, and very soon, it will change the entire banking ecosystem as we know it. In order to truly embrace new measures while looking for innovative solutions to better the existing operations, we can fulfil the changing requirements.
What needs to be done during the recovery phase? Banks have been greatly benefitted from different supervisory and fiscal policy measures that have helped to avoid any bank failures over recent months. It has also provided support to the sector during the time when it was critical to keep the economy running. But these measures will not avoid losses that will result from the failure of some businesses and the inability of some households to repay their debts. So the important question is, who will bear these losses? In certain cases, the government takes care of the losses and for others, banks might incur these losses directly. Since banks played a critical role not only
20 | November 2021 | International Finance
COVID-19 EFFECT BANKING SECTOR
during the Covid-19 pandemic but also during the economic recovery phase, therefore, sufficient capitalisation will be important as economies will have to reallocate resources across sectors. Sectors that rely heavily on physical client-provider services will slowly cease being important, but the sectors that shift their focus on remote or digital services will grow. Here, banks will have an important role to play where they can choose which sectors to give funding to. But, banks can only do so if loans provided to comparatively unsuccessful sectors doesn’t affect their lending capacity. Experts say that once economies have well-adjusted to the new normal, and it becomes clearer which firms are viable, it is imperative that nonviable firms are liquidated quickly.
What are some of the long-term effects of the Covid-19 crisis on the banking industry? Since the world is still going through a tumultuous phase, it’s still early to predict what kind of long-term effects the Covid-19 recession will have on the banking industry. But there are some of the trends that are already clear. The most popular trend that we have observed is low-interest rates and they are here to stay and it will certainly put pressure on banks’ profitability. Another trend that we have observed is that most banks are trying to move towards digitisation and it is predicted that this trend will only grow with time. As social distancing becomes common, the regular personal interaction between banks and clients become increasingly
FEATURE COVID-19 EFFECT BANKING SECTOR
Transaction value in the UK digital payments
1. 2017 2. 2018 3. 2019 4. 2020 5. 2021 6. 2022 7. 2023
$120, 406 mn $135, 056 mn $154,897 mn $164,410 mn $205,193 mn $253,179 mn $310,037 mn
Source: Outsourcing portal
costlier. This might result in the closure of branches. Industry experts have also predicted that all these factors will increase competition from the fintech and the other tech companies like Alibaba, Tencent, Apple and Google to name a few. These tech giants are likely to come out of the crisis with a strong position to expand their presence further. This might put further pressure on banks that are in the core line of the business. Even though these trends started before the pandemic, but they have been accelerated for sure.
The road ahead During the first phase of the crisis, the banking industry was able to provide the appropriate response. The regulatory response was rather quick and to a large
extent, quite effective. But it has also opened some shortcomings of the latest regulatory framework. Additionally, the use of blunt policy instruments such as industry-wide restrictions on dividend distribution is understandable during the time of an extreme crisis, but it comes with its own set of shortcomings. Therefore, it should only be used in extreme circumstances to avoid any additional loss. Going forward, it is extremely important that authorities strike the right balance between banks prepared to tackle the expected increase in non-performing exposures along with their role in financing household and non-financial corporations. While it is understandable that some regulators might want to ensure that individual banks are sound and solvent, but is
equally important to keep in mind the aggregate, systemic perspective. Erring too much on the side of caution may hinder credit extension to the economy and have a negative impact on the perception of the industry by capital markets. In the end, a banking sector that was previously healthier and more solvent helped the industry to absorb the initial shock of the pandemic and helped keep credit flowing to the economy, thereby preventing systemic risks from materialising. But the ultimate impact of the Covid-19 crisis on the banking sector will depend on the scale and duration of the pandemic and how effective the economic policies are in alleviating the effect of the pandemic on regular households and firms. Experts suggest that economic policies should continue to support the economy targeting the hardest-hit firms and population groups. It is especially important to support viable firms whose solvency has deteriorated after a year of crisis in order to prevent productive systems and employment from being destroyed. This would further allow the banking sector to remain part of the solution to the crisis by lending to households and firms and also contribute to the economic recovery once the pandemic is over. Lastly, the banking sector should also focus on tackling the challenges it faced before the pandemic, such as low profitability, along with new risks that come from intensive technology use and climate change.
editor@ifinancemag.com
International Finance | November 2021 | 21
INDUSTRY
ANALYSIS
HEALTHCARE AFRICA HEALTHCARE
The pandemic has undermined the progress made when it comes to fighting deadly diseases that have plagued Africa over the years
The pandemic’s impact on healthcare services in Africa ADRIANA COOPENS
The Covid-19 pandemic has proven to be a defining moment in the 21st century. As of November 2nd, 2021, around 5,023,000 deaths have been reported worldwide as a result of the virus. Pandemics or epidemics are not new, but it was the first time that a health crisis has brought the entire world to The a standstill. The pandemic pandemic has undermined clearly demonstrated that the progress our healthcare systems were made when not designed to deal with a it comes to crisis like this. It also proved fighting deadly the healthcare sector was diseases that ill-equipped to deal with an have plagued unpredictable and largeAfrica over the scale health challenge like years. the Covid-19 pandemic. To put things into perspective, no healthcare systems across the world, including the ones in developed nations, were prepared for something like this. Covid-19 has further exposed the cracks that exist in the healthcare sectors in countries like Africa. According to the World Bank, Africa requires around $100 billion to successfully tackle Covid-19 impact across all verticals. The World Bank said, “Since the start of the Covid-19 crisis, the Bank Group has committed over $157 billion to fight the impacts of the pandemic. Provided from April 2020 to June 2021, it includes over $50 billion of IDA
22 | November 2021 | International Finance
resources on grant and highly concessional terms. Our support is tailored to the health, economic, and social shocks that countries are facing.” The impact of Covid-19 is not just limited to healthcare. African nations such as Kenya and Nigeria have been also impacted. The lockdowns and stay-home orders issued to curb the spread of the virus has had implications on food security. The Covid-19 pandemic has also taken a toll on the mental health of many Africans. Many cases of healthcare workers, Covid-19 patients, youth, or even the elderly suffering anxiety and depression have been recorded. It has become of utmost importance to integrate mental health education and counselling with psychosocial support during these testing times. The World Health Organisation said, “This unprecedented public health emergency has demonstrated that health facilities, medical transport, patients as well as health care workers and their families can – and do – become targets everywhere. This alarming trend reinforces the need for improved measures to protect health care from acts of violence. During the Covid-19 pandemic more than ever, protecting the health and lives of health care providers on the frontline is critical to enabling a better global response.” Vaccination drives in Africa were slow to start with. Most of the African nations rely on the COVAX programme, whereas some have managed to get
vaccines as donations or through bilateral trades. Africa's aim is to vaccinate at least 40 percent of its population by the end of this year, however, most of the nations will fail to hit the target, unless the vaccination drives pick up rapidly in the remaining days of this year.
Covid-19 in Africa Around 8.5 million cases of Covid-19 were reported in African countries till since the beginning of the outbreak, as per official data. The World Health Organisation found that less than 15 percent of the Covid-19 cases in Africa were reported correctly. It is estimated that nearly 60 million people contracted the virus in Africa. Dr Matshidiso Moeti, WHO Regional Director for Africa said, “With limited testing, we’re still flying blind in far too many communities in Africa. Most tests are carried out on people with symptoms, but much of the transmission is driven by asymptomatic people, so what we see could just be the tip of the iceberg.” She said that test numbers have been rising in Africa, but this community-based initiative is a radically new approach that should help significantly raise detection rates. “More testing means rapid isolation, less transmission and more lives saved through targeted action,” she added. Besides infecting people, the Covid-19 pandemic is also disrupting health services in Africa. The pandemic has undermined the progress made
when it comes to fighting deadly diseases that have plagued Africa for years. The fight against diseases such as human immunodeficiency virus (HIV), tuberculosis (TB), and malaria, which continue to be the leading causes of death in the region have taken a back seat. A study revealed that mortality rate has increased too. It was reported that there has been an increase of up to 10 percent, 20 percent, and 36 percent due to HIV, tuberculosis (TB), and malaria respectively during the pandemic. The pandemic has also disrupted the fight against HIV in Sub-Saharan Africa. During the pandemic, adding to the HIV death burden. An analysis on HIV treatment forecasted that a disruption in treatment as a result of the pandemic could lead to an additional 500,000 HIV deaths in Africa. In 2020, access to healthcare services declined significantly not only in Africa but throughout the world as a result of the pandemic. This is because people were afraid of contracting Covid-19 from their visits to hospitals. Other factors such as patients’ inability to reach healthcare facilities due to lockdown measures, disruptions in public transportation, and stay-at-home orders also played a part. Africa’s healthcare system over the years has faced multiple challenges be it lack of funds, poor infrastructure, inadequate healthcare workforce, or its high burden of disease. The pandemic has only made matters worse by adding to the existing double burden of communicable and non-communicable diseases.
International Finance | November 2021 | 23
INDUSTRY
ANALYSIS
HEALTHCARE AFRICA HEALTHCARE
Other factors contributing to this are the higher poverty rate in African countries and poor health literacy. Like many other regions across the globe, Africa too saw an aggressive second wave. Far more cases were registered by the end of 2020 as compared to the first wave. One of the long-term impacts of Covid-19 will be that the gains made when it comes to increasing child mortality and poverty in Africa 2025 and 2030 will be lost. Hospitals and healthcare facilities across are facing financial challenges as a result of the Covid-19 pandemic. This is attributed to unexpected changes in demand for health services. Due to the pandemic, many people have stopped visiting hospitals and many surgeries have been postponed. Significant declines in demand for routine services have impacted revenue. Also, the virus has increased demand for specialised acute care that has imposed unexpected or have taken a financial toll on the healthcare service providers.
Covid-19’s impact goes beyond healthcare Women and children across the globe have been affected by the pandemic, especially in the African continent. It is estimated that Covid-19 has pushed around 150 million people around the world into poverty. African nations such as Kenya and Nigeria have been also impacted. The lockdowns and stay-home orders issued to curb the spread of the virus has had implications on food security. In Africa, many children are provided with food in their respective
24 | November 2021 | International Finance
African nations struggled to get their hands on vaccines initially, but the situation slightly improved since September as vaccine production was ramped up everywhere. Wealthier countries or vaccinemaking nations pledged to make donations to the COVAX programme or even directly to African nations during the G7 summit held in the month of June in the UK.
schools. Such programmes are designed to provide children from marginalised communities with nutrition. The closure of schools due to the pandemic has impacted these children’s nutrition. The pandemic has also impacted many daily wage earners, thus leading to the loss of human capital. The pandemic has also affected the mental health of many Africans, be it a daily wage earner, a mother, or a healthcare worker. Many cases of healthcare workers, Covid-19 patients, youth, or even the elderly suffering anxiety and depression have been recorded. It has become of utmost importance to integrate mental health education and counselling with psychosocial support during these testing times. A survey by WHO revealed that the Covid-19 pandemic has disrupted or halted critical mental health services in 93 percent of countries worldwide while the demand for mental health is increasing. “The survey of 130 countries provides
the first global data showing the devastating impact of Covid-19 on access to mental health services and underscores the urgent need for increased funding,” the World Health Organisation said. In many African nations, the indirect health effects of Covid-19 showed disruptions in essential health services. Even though the pandemic has negatively impacted the healthcare sector and the economy across the globe, it also presents an opportunity to reshape healthcare systems. The pandemic highlighted the shortcomings of the African healthcare system. Now, the government in these African nations can plan accordingly and direct funds to bolster their respective healthcare systems. “Doctors’ associations across the world have also initiated talks with authorities to make their work environment safe from infections and to better protect health care providers outside
the hospital. Through its Health Care in Danger initiative, the International Committee of the Red Cross published a checklist for a safer Covid-19 response addressed to managers of healthcare services, individual practitioners and health policymakers. WHO and partners are also conducting communication and outreach campaigns at countrylevel to support governments in addressing attacks on health care,” the WHO said.
Vaccination in Africa The Covid-19 vaccination drive has been slow in Africa since it began on March 1st,2021. According to WHO, just five African countries, less than 10 percent of Africa’s 54 nations, are projected to hit the year-end target of fully vaccinating 40 percent of their population. African nations struggled to get their hands on vaccines initially, but the situation slightly improved since September as vaccine production was ramped
up everywhere. Wealthier countries or vaccine-making nations pledged to make donations to the COVAX programme or even directly to African nations during the G7 summit held in the month of June in the UK. WHO said, “This comes as the region grapples to meet the rising demand for essential vaccination commodities, such as syringes. It also said that three African countries- Seychelles, Mauritius and Morocco have already met the goal that was set in May by the World Health Assembly, the world’s highest health policy-setting body. At the current pace just two more countries, Tunisia and Cabo Verde, will also hit the target. The vaccination rollout has been uneven across Africa because of the unsteady supply of vaccines and financial crunch. Most of the African nations are relying on the COVAX programme by WHO and on donations and bilateral
deals. According to a World Bank report published in early October, “Of the 6.4 billion vaccine doses administered globally, only 2.5 percent have been administered in Africa – even though the continent accounts for a little over 17 percent of the world’s population.” G20 countries have received 15 times more Covid-19 vaccine doses per capita than countries in sub-Saharan Africa, according to an analysis conducted by science analytics company Airfinity. With most of Africa relying on the COVAX programme, a delay in shipment or a supply chain crisis further adds to Africa’s woes. Another reason for the slow rate of vaccination is vaccine hesitancy or skepticism. WHO has further revealed that more than 50 nations have missed their target of vaccinating around 10 percent of their population by the end of September. Most are these countries are in fact in Africa. According to WHO, only 4.4 percent of Africa was fully vaccinated in October. Comparatively, nearly 66 percent of the whole population has been fully vaccinated. In the EU, 62 percent of the population has been fully vaccinated and 55 percent of the population in the US. “The looming threat of a vaccine commodities crisis hangs over the continent. Early next year Covid-19 vaccines will start pouring into Africa, but a scarcity of syringes could paralyze progress. Drastic measures must be taken to boost syringe production, fast. Countless African lives depend on it,” Dr. Matshidiso Moeti said. editor@ifinancemag.com
International Finance | November 2021 | 25
Are we headed for a
global energy crisis?
Energy prices in Europe are soaring as supply takes a hit
26 | November 2021 | International Finance
COVER STORY GLOBAL ENERGY CRISIS
JESSICA SMITH
The world is still recovering from the coronavirus pandemic and we are now facing a new challenge- an energy crisis. What we are witnessing is a supply crunch for natural gas, coal and other energy sources in different parts of the world. Natural gas prices soared in Europe this year, while fuel pumps in the UK went dry causing panic among the masses. In China, several factories had to shut down operations due to power disruptions caused by a shortage of coal supply. Many in India too raised concerns that the country’s power plants were running on critically low coal stocks. Natural gas prices in Europe have soared by over 400 percent since the beginning of the year. Electricity prices have also increased by over 250 percent during the same period. Meanwhile, in the US natural gas price has more than doubled. Natural gas is mostly used for electricity and to generate heat in the UK during the winter season. Furthermore, the price of coal in the US has soared by nearly 400 percent this year to reach $270 per ton. The crisis is as we understand is considerably worse in Europe. Electricity prices in the continent have soared significantly as well. Natural gas prices have surged as well to $30/mm Btu.
International Finance | November 2021 | 27
INDUSTRY
COVERSTORY ENERGY
GLOBAL ENERGY CRISIS
This is resulting in inflation which means prices for energy-intensive metals are also increasing. For example, prices of metals such as nickel, steel, silicon have increased due to the energy crisis. Besides metals, prices of fertilizers have ramped past 2008 record highs to nearly $1,000 a ton. It is noteworthy that the prices were around the $300 to $450/ton mark in the last couple of years. The price for copper too has increased to a record high of $4.50 per pound. Copper is an important metal and raw material for the solar or wind energy industry, which emphasis is growing day by day as and is seen as an important factor to tackle climate change. In Britain, renewable power production this year was much lower than normal as a result of a windless summer. The region meets around 24 percent of its energy needs through the wind. However, due to low production this year, it means the UK has to rely on coal. Over the years, Britain has transitioned away from coal as an electricity source. Prime Minister Boris Johnson said that the UK remains committed to wind power generation. He went on to say that he wants the UK to become the ‘Saudi Arabia of wind power’ with offshore wind farms generating enough electricity to power every home in the UK in the next 10 years. However, the landscape is pretty different in the present time. Soaring electricity prices is a matter of growing concern for politicians across Europe. The crunch in the gas market is forcing countries to revert to coal. This goes against Europe’s fight against climate change and that the fact that the UK hosted the 2021 United Nations Climate Change Conference, more commonly referred to as COP26 at the SEC Centre in Glasgow. In Asia, thermal coal prices also keep hitting record highs. In short, there isn’t enough coal to meet demand. Economies in the region are slowly resuming activities and are in the process of an economic revival, be
28 | November 2021 | International Finance
it China, Malaysia or India. It has led to greater demand and is one of the primary causes of an emerging electricity crisis in China. Coal stockpiles are running low in India too, however, the government claimed there are enough stockpiles to keep the wheels running. The International Energy Agency said in a report, "Record coal and gas prices, as well as rolling blackouts, are prompting the power sector and energy-intensive industries to turn to oil to keep the lights on and operations humming. Higher energy prices are also adding to inflationary pressures that, along with power outages, could lead to lower industrial activity and a slowdown in the economic recovery." The agency further added that global energy demand is set to increase by 4.6 percent in 2021. This will be led by emerging markets and developing economies – pushing it above its 2019 level. Demand for all fossil fuels is on course to grow significantly in 2021, with both coal and gas set to rise above their 2019 levels.
Europe’s energy crisis Even though there isn’t a simple answer to this, a natural gas supply shortage in the region for the energy crisis in Europe. But why is there a shortage in the supply of natural gas? There
COVERSTORY GLOBAL ENERGY CRISIS
Total energy demand for EU in 2019 Oil and petroleum
502,159.99 Natural gas
335,717.62 Renewables and biofuel
229,699.39 Nuclear heat
196,927.85 Solid fossil fuel
169,040.77 Source: Eurostat
Natural gas exports to EU are many factors that are also contributing to the crisis. To understand this crisis better, we must understand that nations across the globe are pledging to reduce emissions and become carbon neutral in the next few decades. Reduction in the usage of coal is an important factor when it comes to tackling climate change. As nations are transitioning away from coal, they are meeting their energy demands with other sources such as natural gas or renewable energy sources. According to the bloc's statistical office, Eurostat, the EU imported around 90 percent of its natural gas from outside the bloc in 2019. As a result of the pandemic, the whole world entered into a state of lockdown and global energy demand fell significantly. This led to a drop in natural gas prices. With the Covid-19 vaccination drive ongoing, nations are resuming economic activities and as a result, energy demand has also increased significantly. However, supply has struggled to keep pace. Given natural gas prices are higher in Asia, it is quite normal for producers to prioritise Asian markets over Europe. This is normally not problematic for Egypt, however, since the demand for natural gas in Asia
Russia
45.5% 43.4% Norway
22.7% 20% Algeria
11.6% 12% Qatar
6.1% Nil UK
Nil 5.5% Others
9.2% 14% Source: Eurostat
2019
2020
International Finance | November 2021 | 29
INDUSTRY
COVERSTORY ENERGY
GLOBAL ENERGY CRISIS
began skyrocketing this year, supply has become extremely constrained. Normally, what Europe does is stockpile gas reserves when prices are low. But this year, it was not possible due to constrained supply. With the winter seasons approaching, people in Europe are rightfully concerned over their low gas supply. The pandemic has also made matters complicated or in short, have played a part in the crisis. Due to the lockdown measures and other Covid-19 related restrictions, the production of coal in countries such as Indonesia, Australia, and India have taken a hit. This has forced countries in Asia to rely even more on natural gas to meet their energy needs further reducing the available supply for Europe. To fully understand the energy crisis, we must also understand the role of Russia. As per reports, Russia supplies about 50 percent of the EU’s natural gas imports. Many Russian gas pipelines do flow into Europe through Poland and Ukraine, but most of them have been inactive. As the energy crisis deepens, many pointed the finger towards Russia and blamed the country for being an opportunist and benefitting from the crisis. This is because Russia is pushing for German approval of its Nord Stream 2 pipeline. Also, Russia is hesitant to sell Russian gas on the spot market. Russia's state-owned energy giant Gazprom has been accused by the likes of the International Energy Agency (IEA) and European lawmakers of purposely not boosting its natural gas supply to Europe. In a statement, the IEA said, "The IEA believes that Russia could do more to increase gas availability to Europe and ensure storage is filled to adequate levels in preparation for the coming winter heating season."
Global energy crisis The energy crisis is not just limited to Europe
30 | November 2021 | International Finance
The rise in energy prices is a result of increasing restrictions announced by governments on traditional energy sources such as coal. In their bid to tackle climate change, regulators across the globe are discouraging the use of traditional energy sources and simultaneously encouraging the use of renewable energy
at this moment. In China, energy prices are soaring because of increasing consumer demand as economic activities return to normal after the pandemic. Production to meet the increasing demand, however, has failed to bounce back. This has led to a supply and demand imbalance. Similarly, in the UK, a shortage of truck drivers who ferry fuel to pumps has led to the fuel crisis. The shortage is attributed to Brexit and also restrictions imposed due to the pandemic. Many also believe the rise in energy prices is a result of increasing restrictions announced by governments on traditional energy sources such as coal. In their bid to tackle climate change, regulators across the globe are discouraging the use of traditional energy sources and simultaneously encouraging the use of renewable energy. China, which is one of the biggest polluters, pledged to reduce emissions by 65 percent by the end of 2030 and has cracked down heavily on coal mining. The UK generates around 24 percent of its energy needs
COVERSTORY GLOBAL ENERGY CRISIS
Global energy consumption (2019) Oil
33%
Natural Gas
24% Coal
27% Nuclear
4%
Hydroelectric
6%
Renewables
5%
Source: BP Statistical Review 2020
Companies using the most fossil fuels from wind. However, due to low production this year, it means the UK has to rely on coal. Many also argue that shifting focus too quickly on renewable energy is also a reason for the energy crisis. What we need is a proper transition from traditional sources to renewable energy. An aggressive push may have led investors to underinvest in traditional energy sources. A report released by Rystad Energy supports this. The report revealed that investments in traditional sources by European or US-based oil companies shrunk by more than half between 2015 and 2021.
What lies ahead? Europe's energy crunch is expected to further worsen as the northern hemisphere winter approaches. With natural gas prices skyrocketing, many fear the EU's integrated energy system could be on the verge of
ExxonMobil
$167 bn Shell
$149 bn Gazprom
$132 bn Total
$81 bn Pemex
$76 bn Source: Eurostat
Source: Statista
International Finance | November 2021 | 31
INDUSTRY
COVERSTORY ENERGY
GLOBAL ENERGY CRISIS
breakdown. To sustain the winter, many member nations are already resorting to hoarding what supplies they have. This only adds to the trouble as it provides a platform for an intra-EU political squabble. As of now, it looks like energy supplies are likely to remain constrained. Boosting production in a short period of time is not easy. Also, the rise in prices is not helping either. In fact, the crunch is expected to worsen depending on the weather conditions. A much severe winter means higher energy demand. It will be interesting to see how the EU and leaders across the continent respond to the crisis. While there are calls for measures to control prices, it can only make matter worse. Even if regulators do introduce measures to control prices for natural gas, it will discourage producers who will think twice before deciding to boost production. While a limited supply means energy must be used efficiently, a price cap could potentially lead to consumers overusing energy and only adding to the crisis. A lot of Chinese thermal
32 | November 2021 | International Finance
plants are shutting down because of the introduction of measures to control prices. During the winter, energy sources such as solar or wind energy often turn out to be unreliable, especially in Europe. With prices of natural gas increasing, Europe may be forced to rely on traditional fossil fuels. This means governments across Europe will have to rethink their energy policy. The IEA’s Global Energy Review 2021 estimates that CO2 emissions will increase by almost 5 percent this year to 33 billion tonnes, based on the latest national data from around the world as well as real-time analysis of economic growth trends and new energy projects that are set to come online. The key driver is coal demand, which is set to grow by 4.5 percent, surpassing its 2019 level and approaching its all-time peak from 2014, with the electricity sector accounting for threequarters of this increase. Natural gas prices in Europe have soared by over 400 percent since the beginning of the year. Electricity prices have also increased by over 250 percent during the same period. In October, the UK recorded a stellar 37 percent spike in UK wholesale gas prices within a period of 24 hours. As a consequence of the rise in prices and the overall crisis, manufacturers of steel, chemical and fertilizer businesses are calling on the government for support as well. The prices of natural gas, oil and coal have hit highs that
COVERSTORY GLOBAL ENERGY CRISIS
Renewable energy demand (in gigawatts) 2015
158.4 2016
171 2017
174.4 2018
179.1 2019
191.8 2020
278.3
Source: Statista
were not seen in recent years. Coal supply disruption in China has also led to factories being shut down. This has halted the country’s recovery from the Covid-19 pandemic, which started in Wuhan in late 2019. Energy prices do affect economic decisions across the supply chain. Furthermore, soaring energy prices have had a significant impact on economic policies. Many European, as well as Asian companies, are shutting down operations due to increasing energy costs. The IEA said that global energy demand is set to increase by 4.6 percent in 2021. This will be led by emerging markets and developing economies – pushing it above its 2019 level. Demand for all fossil fuels is on course to grow significantly in 2021, with both coal and gas set to rise above their 2019 levels. Oil is also rebounding strongly but is expected to stay below its 2019 peak, as the aviation sector remains under pressure.
Long winter in Europe During the start of this year, the northern hemisphere witnessed a series of very cold and extreme weather events. If the same is repeated this year, it will put additional pressure on the energy stock which is already depleted and stretched severely. Chartering ships to transport LNG has also taken a hit due to a lack of
shipping capacity. Daily spot LNG vessel charter rates have spiked above $100,000 in each of the last three northern hemisphere winters and hit an all-time high of well above $200,000 during the unexpected cold spell in northeast Asia in January 2021 – amid physical shortages of available shipping capacity, according to the IEA. Governments are doing their bid to deal with the crisis. For instance, the Italian government has announced a €3.4 billion budget to support low-income households in the country. Italy has suspended grid charges for private residents and has promised to further subsidise electricity costs. In France, the French government has decided to let gas prices rise by 12.6 percent before freezing prices at least till the end of April. The government is handing out energy vouchers to the vulnerable to help them deal with the energy crisis. The Spanish government has decided to suspend supply cuts in the country for vulnerable residents until 2023.
editor@ifinancemag.com
International Finance | November 2021 | 33
INDUSTRY
FEATURE REAL ESTATE
CHINA PROPERTY TAX
China to roll out new property tax IF CORRESPONDENT
Xi Jinping agrees to implement the property tax by doing test tax runs in undisclosed cities of the country
C
hina is the only major global economy that effectively has no real estate tax. But the country is currently closer than ever to taxing property owners, nearly two decades after authorities started to hint at the idea. And the timing couldn’t be more suitable to implement this rule. President Xi Jinping now has the political momentum to get the ball rolling on property tax as he emphasised on authorities’ commitment to delivering ‘common prosperity’ or moderate wealth for all, rather than keeping it restricted to only a few. Earlier this month, Jinping called for regulating excessively high incomes, with measures such as tests of a property tax. Following this announcement, the State Council was authorised to conduct a similar test for five years in undisclosed regions.
34 | November 2021 | International Finance
Reports suggested that these developments come after years of trying to limit speculation in China’s property market, which accounts for the bulk of the household wealth. Reports suggest that almost 80 percent of China’s household wealth is tied up in real estate. Therefore, a decrease in property value could make homeowners feel poorer and less willing to spend. Press offices in China’s state council and the ministries of finance, housing and taxation haven’t made any comments on this topic as of this writing. But this news was met with widespread protests from some retired senior party members, saying they themselves couldn’t afford to pay any additional taxes. It was also mentioned that the tax proposal is becoming a potential social-stability
FEATURE IOB APPLICATION
issue. Fearing a fallout on a larger scale, Han Zheng, senior vice-premier of the state council advised against imposing the levy too widely for now to Xi Jinping. To make the process smoother, the test tax run in some regions has been scaled back to 10 from 30 cities and officials are still trying to decide
how to set the tax rate for the pilot initiative and whether to offer discounts and exemption areas. A new law aimed at advancing the tax across the country is not going to be finalised until around 2025, as mentioned in some reports.
International Finance | November 2021 | 35
INDUSTRY
FEATURE REAL ESTATE
CHINA PROPERTY TAX
Hong Kong China implementing test runs before rolling out property tax One of the ideas making rounds is to gradually test the tax implementation and reaction of people in big cities, including Shanghai and the municipality of Chongqing in central China, which both have levied an annual charge on second homes or high-priced houses since 2011. Some other places that are under discussion are the southern boomtown Shenzhen and the province of Hainan, both of which are designated by Xi Jinping as the testing grounds for building a socialist market economy. The city of Hangzhou, in Zhejiang is also expected to join the tax-pilot program. The eastern province is home to the business empire of Jack Ma and it has already been named as a place to pilot Xi Jinping's policy aimed at reducing inequality. On the other hand, local governments, which get roughly a third of their revenue from selling land to property developers, are worrying that a property tax would cause demand for land to drop and hurt their revenues that amount to around $1 trillion in 2020. Richer regions are expected to implement property taxes first and experts have also recently identified that the property tax will be first implemented in some cities that are not too bad at the moment, in terms of their property market. The cities that are not so well to do will also have to follow this after the top-tier ones. Experts say that it is expected that China is likely to take a tiered approach with differentiated rates depending on the city. In the US, some wealthy regions have property tax rates of 2-3 percent while in others it is much lower. A property tax will also give local authorities a new source of income. They can start by reinvesting in public
36 | November 2021 | International Finance
services and infrastructure investment which could very likely generate fiscal revenue equal to 70-80 percent of and sales revenues. If this sustains, it has the potential to help local governments slowly cut their reliance on land sales. If local governments use these funds locally, it would go against the idea of general prosperity. Additionally, the implementation of property tax will increase investors' holding costs of real estate assets, which will help channel some housing stocks into the market from homeowners. It goes without saying that developers will face a slowdown in the inventory, which will put further pressure on their cash flow and stress their liquidity. But the implementation of property tax will also boost the cost of holding real estate. In China, around 60 percent of urban household assets are tied up in real estate with only 20.4 percent property accounting for financial assets including stocks and bonds. Comparatively, in the US households hold over 40 percent of their wealth in financial assets.
Effect on other sectors According to a report by Rhodium Group, land transactions and sales revenues in China are falling by record margins. In the southern city of Guangzhou, the local government sold less than half of the 48 parcels of land offered in a late September auction, with only five parcels sold above their asking price. Going by the data collected from 100 cities, Rhodium Group’s report suggested that land sales dropped by 43 percent in the first three weeks of September since last year, and the decrease only added to the worry of the financial strains on many localities across the country. In other sectors, Xi Jinping's
$125,000,00 Munich
$1000,000
campaign to squeeze what he views as capitalist excess out of the Chinese system has already impacted growth. Sales, employment and other activities in the service sector are hit hard because of the policy tightening, resulting in a reduction in growth. State banks and funds are facing intense scrutiny regarding their ties with big private sector companies and are also pulling back. Experts say that Beijing is clearly willing to risk rising economic costs. This, in turn, begs the question, how far authorities will push the property sector. Xi Jinping has also hinted that this could be caused due to his economic cleanup effort. In a recent speech, the Chinese President mentioned that daring to struggle is the distinct character of their party and the beginning of a new journey of building a modern socialist country is bound to be met with tests and risks. For the past four decades, Chinese society moved from people living in housing provided by their work units to a broad open
FEATURE CHINA REAL ESTATE
Most expensive residential property markets in the world (in $1,000)
Singapore
$905,000 Shanghai
$783,000
Shenzhen
$763,000 Beijing
$754,000
$300 billion in liabilities. According to official data, October registered the first month-on-month decline in new home prices across 70 of China’s biggest cities for the first time in over six years, which indicated that a slowdown is already creeping in the housing market.
The road ahead
market. A less controversial alternative to the tax proposal centres on affordable housing provided by state firms. Going by this ideal, China would essentially start following the dual-track system again where the government offered to house. This was the beginning of China’s housing reform that started in the late 1990s. But recently, it has been observed that the focus was exclusively on commercialisation. According to some officials and advisers, returning to our previous tax system could help the leadership make China more equal. The dual-track housing system will help state-owned enterprises and companies controlled by the central government return to affordable housing. A financing firm owned by the provincial government of Yunnan, in southwestern China is one of the very first ones to spring into action. Last month, the Yunnan government announced that Yunnan Construction Investment Group will team up with state banks to expand the supply of affordable housing.
Challenges faced on the way There are a lot of people who believe that earlier attempts to implement property tax in China failed because of resistance from wealthy and politically connected elites, particularly in cities such as Beijing, Guangzhou, Shenzhen and Hangzhou along with local government officials across the country. Experts have also pointed out that a potentially bigger problem for the government to implement property tax is the fear of the instability that could be caused by a market crash. It has been speculated in the markets that once prices stop going up, they tend to go down. If something similar happens to Chinese property prices, not only will this terribly affect the banking system, but it would also reverse the major source of wealth accumulation among Chinese households. Recently, China’s real estate sector has been making global headlines because of Evergrande, the world’s most indebted property developer is in debt of
Eventually, Xi Jinping plans on imposing a nationwide property tax, but this decision has been faced with strong resistance from China’s political elite, who argue that implementing it could crash China’s economy. Some experts have noted that the upper class might want to keep their worth of personal property fortunes away from the knowledge of tax collectors. Despite potential pushback from the rich and powerful, property tax plans are gaining traction at the top levels of China's government. As mentioned earlier, China’s top legislative body has already approved the plan of going through a test run before implementing property tax in undisclosed urban areas of the country. It is important to keep in mind that the absence of property tax in China is not a quirk in the legal system. It is a policy that is responsible for fundamentally shaping and distorting China’s economic boom. For a while now, experts have agreed that imposing a real estate tax is necessary to stamp out the most unsustainable elements of China’s economic rise; pointing towards the immense real estate prices. Nevertheless, overcoming the hurdles necessary to transition to a nationwide property tax has proved insurmountable to China’s leaders for well over a decade.
editor@ifinancemag.com
International Finance | November 2021 | 37
INDUSTRY
INSIGHT
LOGISTICS SUPPLY CHAIN CRISIS
The Covid-19 pandemic added further woes to the supply chain industry, making the bottleneck worse
Global supply chain is in a crisis LACY DE SCHMIDT
Last year, the global economy came to a shaking halt due to the impact of the Covid-19 pandemic. This year, thanks to the global rollout of the Covid-19 vaccine, the world economy is beginning to revive and come back to its prior form slowly. But the pandemic has left a devastating economic issue in its wake, which is the disruption to the global supply chains. Since the virus spread at an unprecedented rate, it forced industries to shut down all across the globe. Since the world essentially came to a halt, there was lower consumer demand and reduced industrial activity. Currently, with lockdowns being lifted from almost all countries, the demand is back, and it is back with a force unreckoned previously. Supply chains that were disrupted previously during the Covid-19 pandemic are still facing huge challenges and are still trying to bounce back. But this has resulted in chaos between the manufacturers and distributors of goods who cannot produce or supply the same volume as they did during the pre-pandemic era for a lot of reasons; including worker shortages and a lack of key com-
38 | November 2021 | International Finance
ponents and raw materials. The supply chain crisis has been observed in different parts of the world for various reasons. For example, the recent power shortages in China due to increased energy prices have affected production recently. In the UK, a shortage of truck drivers has been observed after Brexit. The US has also been going through a shortage of truckers, and Germany has also observed a large backlog at its ports. Experts have predicted that the situation of the global supply chain will first get worse before it gets better. As the global economy continues to recover, there is a chance it might be impeded by the supply chain disruptions that are now popping up frequently. Additionally, other factors like unavailability of the equal distribution of the Covid-19 vaccine globally, demand for goods, border control and travel restrictions have resulted in the perfect storm where global productions are predicted to be hampered since deliveries are not being made in time. As a result, cost and prices will rise, and the global GDP growth might not be as robust resultantly. Experts have also mentioned that supply might also play
INSIGHT LOGISTICS
Top obstacles in improving supply chain processes 1. Regulation making change difficult 2. Lack of support across fuctions
46.6% 44%
Source: Supply chain management review
catch-up for a while, especially since there have been bottlenecks in every link in the supply chain, but the same has also been observed in containers, shipping, ports, trucks, railroads, air and warehouses. The bottleneck observed in the supply chain has affected a large number of sectors, services and goods. This has resulted in shortages of electronics and auto, with difficulties in the supply of meat, medicines and household products. As consumer demand for goods that are in short supply continues to rise, freight rates for merchandise coming from China; to the US and Europe have skyrocketed. This has been further exacerbated due to a lack of truck drivers from the US and Europe has increased the problem of delivering the goods to its final destination, which has been one of the reasons for the high prices in stores. The pandemic has only begun highlighting how easily supply chains can be disrupted and how interconnected every sector is.
Supply chain crisis affecting growth As world economies start getting back to their old rhythm, the global supply chain crisis has now be-
3. Technology gets in the way 4. Too much change 5. Limited workforce engagement
40.6% 37.2% 35%
come one of the biggest challenges to overcome for the government. While people are ready to spend for their own choice of products and services, they have been observing that either the products are unavailable or are priced too expensive. This issue has also been worrying people ahead of Christmas and the White House representatives told the media that US citizens might have to pay higher prices and may see sparse shelves this festive season, with the Biden administration trying their best to solve the backlog at the ports. China and Europe are also experiencing growth problems due to the disruption in the global supply chain. Recently, China reported that its gross domestic product (GDP) grew only 4.9 percent during the third quarter of 2021 as industrial activities rose less than expected in September. Experts have warned that supply chain disruptions are likely to continue since freight rates are still high and chip shortages are still a critical issue for industries like equipment, automobiles and telecommunication devices. In Vietnam, manufacturing plants that make Nike shoes had to cut down their production since
International Finance | November 2021 | 39
INDUSTRY
LOGISTICS SUPPLY CHAIN CRISIS
INSIGHT
Top 5 supply chain companies in 2021 and their composite score 1. Cisco systems 2. Colgate-Palmolive 3. Johnson & Johnson 4. Schneider Electric 5. Nestle
6.37 5.88 5.22 5.07 4.41
Source- Gartner
migrant workers had moved back to their homes due to the Covid-19 pandemic. China, which is the world’s manufacturing powerhouse has also observed another episode of the Covid-19 outbreak which has resulted in targeted lockdowns. Reports have indicated that factory prices are rising by 10 percent annually, which is the fastest since 1990. But, on a brighter note, shipping conditions are expected to get better after the Chinese New Year in early February 2022, but the problems might continue till the middle of next year. So what comes next? The road ahead is an uncharted territory primarily because of the massive bottleneck created all along the way. The logistics system usually rides the ups and downs of the global economy and mostly follows a predictable pattern. Needless to say, that predictable pattern has also been thrown out of balance because of the pandemic. Even with the signs of the supply chain slowing down, the pipeline of international commerce has never been so blocked. And a long-term fix for this means getting the virus completely under control, building suitable infrastructures like ports with better efficiency and faster communication.
40 | November 2021 | International Finance
Impact on earnings One of the most serious impacts of the global disruption of the supply chain is the direct effect it has on earnings. Invesco’s chief global market strategist, Kristina Hooper mentioned that the supply chain fears are brewing as a large number of US companies are raising warnings about the increasing costs related to supply chain disruptions and potentially lower earnings. Hooper also mentioned that factors contributing to global supply chain disruptions such as shortage of labor will be resolved in some time, but this could have a long-lasting effect on some other sectors. No matter where the companies are, it’s more than likely that they are also experiencing supply disruptions because of higher input costs and some other problems with finding sufficient labourers. But some companies will be far more impacted than others. An increase in the overall cost will have a greater impact on the low margin companies usually present in sectors like transportation, general retail, construction and automobile. Companies that are expected to have the least impact are those with wide profit margins, limited raw mate-
INSIGHT LOGISTICS
World’s largest ports (volume of trade in millions of TEU) 1. Shanghai 2. Singapore 3. Shenzhen 4. Ningbo Zhoushan 5. Busan
37.1 30.9 24.0 21.6 19.9
Source- The World Economic Forum
Organisations’ 2020 priorities for supply chain planning 1. Implement new technologies and capabilities 65.9% 2. Identify and implement best practices 3. Standardise processes
62.5% 59.6%
4 Evaluate and compare performance through benchmarking 57.2% 5. Improve collaboration and competition 6. Improve forecast accuracy 7. Shorten cycle time
55.3% 51% 42.8%
Source: McKinsey
rial costs and small workforces. It includes sectors like tech and healthcare. But even they won’t go unscathed since their stock prices may temporarily suffer as bond yields rise. Hooper also noted that shortages of some products like semiconductors could return to normal soon with normal levels of production projected to return by the second quarter of 2022. But some other general supply chain disruptions are likely to continue in the shorter term, especially if there are additional waves of Covid-19. Even though on the surface, supply chain disruptions and higher input costs may seem relatively transitory, it is important to keep attention to the present quarter’s earnings. Inflation has already increased more than monetary policymakers previously anticipated. In the US, inflation stands at a soaring 5.4 percent and it is predicted to stay between the bracket of 4-5 percent till next year if supply constraints don’t ease. But this doesn’t necessarily mean that the world has entered into a re-run of what happened during the 1970s. It took a decade of bad decisions and mistakes to drive the US inflation rate to 10 percent. It is unlikely that the same mistakes will happen
again. The unemployment rate is far below what was observed in the 1970s and it is continuing to drop. Keeping the current low rates would allow the recovery to continue, but the risk still remains high if households and businesses come to expect more of the same.
Building a better road ahead While the current supply chain crisis might be temporary, but its volatile nature could very well leave a permanent mark on the global trade markets as climate change and other disruptions take place. Digital transformation is a part of the solution, but it is even more important that we bring forward a revolution in the way we think of international trade. It is imperative that we move away from vulnerable chains where one broken link causes chaos. We should rather focus on building a global community of trade that supports the agility and end-to-end resilience required to meet future crises with confidence.
editor@ifinancemag.com
International Finance | November 2021 | 41
ECONOMY
ANALYSIS
DIGITAL REGULATION AND ECONOMY
Currently, most digital platforms enjoy unregulated freedom of expression and economic benefits with very less social responsibility, but how long will this trend last?
Digital regulators and the digital economy MOUMITA BASU
About a decade earlier, when digital platforms started gaining popularity, both regulators and the public took it for granted that its promise to remove bottlenecks and intermediaries is going to come with added benefits like new economic opportunities to the population, especially the ones who have been shut With the rise down by the already existing of social media incumbents. Currently, only a taking place few companies are there that around the control the massive portions same time, it of the world’s economic brought about activity and investment capital. With the rise of social a new era of media taking place around journalism the same time, it brought and proabout a new era of journalism democracy and pro-democracy movemove-ments ments around the globe. around the Currently, we see the same globe platforms being used to spread conspiracy theories, fake news and hate speech to undermine democracies and tragedies that have taken place, which, in turn, sows distrust in fundamental government institutions. Seeing the panic and the level of distrust increasing among the public, a sense of urgency, bordering on panic has set in among the national and global regulators. Very quickly, we have
42 | November 2021 | International Finance
changed our decisions to keep these digital platforms unregulated to demanding that digital regulators control these unchecked platforms from abusing their unlimited power by either breaking them down into smaller groups or by strictly regulating their content and services provided by these digital platforms. Recently, the European Parliament passed a law saying that digital platforms have to take down ‘terrorist content’ within an hour of being notified. Similarly, the US has also called for breaking up digital platforms into separate retail and platform-hosting businesses. But there will always be others who will continue to push the status quo. Their argument is that whatever harm is being done on the digital platforms are outweighed by the benefits they offer. They believe that imposing strict governmental regulations on digital platforms will deprive us of the possible future benefits these platforms promise. A large amount of the world’s commerce and communications take place on these digital platforms. Therefore, according to them, a radical change in the already existing regulatory framework will only result in more disruption and harm compared to all the negative aspects identified by the regulators. Additionally, they have also argued that the cost of regulation is going to cement the position of already existing market power and won’t let anyone new enter that space. They maintain that the efforts of blocking fake news and hate speech will hamper
and dampen the free exchange of ideas, which is the backbone of a free and democratic society. Both the parties in this debate accuse the other of bad faith and believing in dystopian and over-thetop rhetoric. Both groups have provided a seemingly endless supply of real-world examples, like the manipulation of the 2020 US Presidential election, the manipulation of Facebook by the Myanmar government to promote ethnic cleansing. In contrast, there have also been examples like documenting police brutality and gun violence with the help of digital platforms like Facebook and Reddit. The ones who support deregulation point towards the independent businesses that are enabled by these platforms. The ones who support economic regulation highlight the ability of these companies to crush their competitors and decide the rules of international commerce that favour them.
New avenues in today’s economy Emerging technologies like artificial intelligence (AI), machine learning, big data analytics, blockchain technology and the internet of things (IoT) are coming up with new ways for consumers to interact and they are disrupting the existing business
models. We are living in an era where machines are self-taught, autonomous vehicles communicate with one other and the transportation infrastructure; and smart devices respond to and anticipate consumer needs. Keeping these developments in mind, regulatory leaders are faced with one key challenge; how do they make sure that they keep the best interest of the citizens, ensure a fair market and enforce regulations while allowing new and emerging technologies to flourish. The idea that regulations can be crafted slowly and methodically and then stay unchanged for a long period of time cannot be further from the truth currently. As more and more new business models and technologies like ridesharing services and initial coin offerings come into existence, government bodies are challenged with creating or modifying regulations, enforcing them, and communicating them to the public at a pace they have previously not dreamed of. As we have seen and learned from the early automobile regulation, the restrictions on motor vehicles, thrones that were made keeping in mind the safety of pedestrians, horse-drawn carriages and even cattle have hindered the growth of automobile development by decades. Currently, regulators are facing a similar challenge. They must find a middle
International Finance | November 2021 | 43
ECONOMY
ANALYSIS
DIGITAL REGULATION AND ECONOMY
ground where they can look after the interests of citizens while resisting the urge to overregulate.
Challenges faced by traditional regulation Experts have identified various challenges that new and emerging technologies pose towards traditional regulations. Some of these challenges are coordination problems to regulatory silos, and of course, the massive volume of outdated rules. Current regulators face questions like can they keep up with fintech? Drone regulators struggle to keep up with the rapidly growing technology. Regulatory scramble to stay ahead of self-driving cars. Digital health dilemma. So on and so forth. The existing regulatory structures are often slow to adapt to the ever-changing societal and economic circumstances, and therefore, they come with their own set of hurdles that are difficult to overcome. Experts have mentioned that if the volume and pace of digital transformation remain the same the way it is currently, the existing approach will cease to work. The gap between technological advancements and the mechanisms intended to regulate them are known as ‘pacing problems’ and it is only growing wider with time. It has also been observed that there is a disconnect between the speed, development and ubiquitous of digital health technologies and the existing regulatory structures and processes. According to a bigger consensus, the present regulatory approach is not well-suited at all to support fast-paced development. Additionally, placing tight regulations for new, high-visibility industries brings new political and shareholder pressures. It’s one
44 | November 2021 | International Finance
thing if regulations in place slow down the launch of new firms or industries, but it’s a different ballgame altogether if it stops the company from growing. Fintech companies are expected to attract massive amounts of investment, but again, this depends on regulations. Industry regulatory challenges are further exacerbated by the existing patchwork of regulations. A lot of national regulatory systems are complex and fragmented, with many responsible agencies having overlapping authorities.
Recent developments in the EU and the UK The European Commission (EC) has published key legislative proposals, which is a part of its digital strategy. The Digital Services Act (DSA) sets up a common set of rules for online intermediaries where users have their place of main establishment or residence in the EU to promote a safe and accountable online environment. The other related acts talk about major gatekeeper platforms that aim to deliver fair and open digital markets. Additionally, the Data Governance Act (DGA), which is a part of the European Data Strategy
proposes a voluntary framework for trustworthy data sharing for both private and public sectors. In the UK, the planned online safety bill aims to protect users from harmful content online and put forwards a new duty for companies that provide online services. In order to prevent potential harm to businesses and consumers and worrisome market features, the UK government is also considering taking the advice of the Digital Markets Taskforce to introduce a new pre-competition regime. Additionally, the government is also preparing data used by the government and businesses for the benefit of the economy. These developments in the UL should be considered along with other initiatives related to digital strategy sustainable journalism, online advertising, and the work of the Centre for Data Ethics and Innovation (CDEI).
Emerging themes in digital regulations One of the most popular themes in digital regulation is ensuring a fair and effective digital market with rules in place to address any harms that may arise from concentrated market
power. These set new standards for operators and allow market intervention benefits competitors and business users of some platforms with access to data, greater interoperability and transparency. Another objective observed in this space is the effort to create online spaces that respect the space for all users, especially those who are vulnerable and underage. This includes debates over what kind of content is lawful and unlawful and to which extent private conversations should be monitored, and the rules that decide when the intermediaries must take down offensive content. Some other concerns related to the digital economy are connected to asymmetries in information and power connected to the massive concentration of data. Some of the established platforms in the market might find themselves in a fix as they might be required to grant access to their data and platforms to competitors while trying to prevent sharing data with the affiliated business. When it comes to digital advertising, it is considered to be the key area of reform. The proposal seeks to improve fairness in the space and reduce the possibility of social harm. The primary concerns are centred around privacy, user profiling and monetisation of personal data. There is still a long way to go before these proposals become law and it is too early to know what kind of new opportunities and responsibilities the organisations will be faced with. As organisations are forced to accelerate towards greater digitisation, it is imperative that they follow these
developments, along with proposals anticipated in sectors such as data sharing and AI governance.
Technological challenges Governments from all around the world have been struggling to regulate evolving and new industries in almost all industrial sectors, while trying to safeguard against potential risks. When it comes to technological innovation, regulation can either be cataclysmic or can become a hindrance. As emerging technology keeps evolving, digital regulators all around the globe also rethink their approach. Currently, they are adopting models that are agile and collaborative that are ready to face challenges posed by emerging and evolving technologies in the face of the fourth industrial revolution. To promote innovation, digital regulators are also moving towards creating new models and outcomebased regulation. With the absence of a uniform global agreement on data protection, regulators around the world have different stances on these issues. Almost 30 percent of world nations don’t have data protection laws, and for those who do, their laws are often conflicting and contradictory. The EU’s General Data Protection Regulation (GDPR) talks about privacy and provides strict rules regarding cross-border data transmissions and giving citizens the right to be forgotten. According to a survey, 82 percent of Europeans say they plan to use their new rights to see, limit, or erase their data. On the contrary, the US approach focuses on sector-specific rules and state laws.
One of the emerging sectors that have been directly affected by data regulation is digital health. A major contributor in the digital health sector is the Software as a Medical Device (SaMD) which aids in diagnosing medical conditions, suggesting treatment and informing clinical management. SaMD allows patients to play a more active role in their own healthcare. Off late, regulatory agencies generally have regulated SaMD in much the same way as traditional medical devices such as heart stents. As mentioned by the FDA, this approach isn’t “well-suited for the faster, iterative design, development, and type of validation used for software-based medical technologies.” While the stent remains untouched by the device makers once it’s released in the markets, developers still possess the ability to make continuous changes to their products remotely, after release. These changes may be related to security, feature updates, or improvements based on the data collected from users. Another key regulatory challenge in the digital arena is cybersecurity. Experts have mentioned that malicious activity all over the internet has increased and it has increasingly become more brazen, sophisticated and complicated. In several sectors such as fintech, digital health and infrastructure and intelligent transportation system, cybersecurity has massive importance. Going by the data, cybersecurity attacks in the fintech sectors rose by 51 percent since 2019.
editor@ifinancemag.com
International Finance | November 2021 | 45
ECONOMY
FEATURE BREXIT
UK ECONOMY BREXIT FIVE YEARS
Five years since Brexit, and it's still not over 46 | November 2021 | International Finance
FEATURE BREXIT FIVE YEARS
The impact of Brexit on the UK economy will be far more disastrous in the long run compared to the pandemic.
IF CORRESPONDENT
I
Change in UK trade from December 2020 to January 21 EU
Non-EU
Imports -28.8% Imports -12.7% Exports -40.7% Source: Office for National Statistics
* Excluding precious metals
t has been five years since the UK went to the polls to decide whether be a part of the European Union (EU) or not. On June 23, 2016, the UK voted to leave the EU with a slim majority of 51.9 percent to 48.1 percent. It’s been more than five years now since that fateful day and it's still very difficult to decide how has Brexit helped the UK. With Brexit, the UK became the first member and the only sovereign country to have left the union after being a member for nearly half a century. However, the transition has not been smooth. Over the years, the EU-UK relations have deteriorated as both parties clashed over issues from diplomatic representation to Covid-19 vaccine exports and above all, new arrangements for Northern Ireland. Negotiations were tense to such an extent that the UK issued a warning to the EU leaders that it will move away from the terms agreed during the Brexit deal in case there is no flexibility shown by them when it comes to North Ireland. Even though Northern Ireland is a part of the UK, it continues to follow some EU rules under the divorce deal. This was agreed upon to keep an open land border with the Irish Republic, which is a member of the EU. Over the years, negotiations over the status of Northern Ireland have turned out to be the thorniest legacy of Brexit. In
International Finance | November 2021 | 47
ECONOMY
FEATURE BREXIT
UK ECONOMY BREXIT FIVE YEARS
response, the EU proposed to ease border bureaucracy between Britain and Northern Ireland. However, it has ruled out a renegotiation of the treaty which is being called for the UK. Also, post-Brexit tensions continue to trouble Scotland, as separatist parties won a majority of seats in the 2021 elections. This led to calls being made for another independence referendum.
Brexit so far Since Brexit, the UK has signed trade agreements with 69 nations across the world and one with the EU. However, a majority of them are rollover deals, meaning, it’s the exact same deals the UK already had in place prior to its exit from the EU. The latest trade deal signed by the UK was with New Zealand, which was signed on October 20, 2021. According to British Prime Minister Boris Johnson, the deal will prove to be beneficial for exporters as it will reduce costs and at the same time open up New Zealand's job market to UK professionals. Besides removing tariffs on goods such as clothing and machinery, the deal will also cut red tape for businesses. Currently, New Zealand is a very small UK trading partner and trade accounts for less than 0.2 percent of GDP. The Johnson-led administration hopes it is a step towards joining a trade club with Canada and Japan. However, according to government estimates, the New Zealand deal itself is unlikely to boost UK growth. There is also skepticism from different stakeholders such as the Labour and the National Farmers Union (NFU). They feel the trade deal with New Zealand could prove to be detrimental for farmers in the UK and lower food standards. A UK-EU trade deal came into force on January 1st this year after months of
48 | November 2021 | International Finance
negotiations. After the Brexit transition period came to an end on 31 January 2020, it was important for both parties to decide the rules to continue their trading relationship as the EU is the UK's largest trading partner. The deal helped prevent new tariffs or quotas from being introduced as it would have made trade between the EU and UK more expensive. But not everything is the same as it was prior to Brexit. However, since the UK no longer abides by EU rules, new rules are being drafted in terms of product standards and new checks are being introduced. Given the strict rules in place in the EU for animal products, the UK can no longer export its animal products to the EU. The deal neither completely eliminates the possibility of tariffs in the future. Both parties will need to find common grounds when it comes to workers' rights and environmental protection. This is
because a greater shift in rule either by the UK or the EU will force the other side to introduce tariffs. Some rules that existed prior to January 2020 no longer exist. Such rules include those on freedom of movement, cross-border travel and personal rights. Now, EU citizens can no longer travel or move to the UK to work and settle, and vice versa. Now, the rules are similar to citizens of non-EU countries.
Five years later, Brexit continues to divide Even though it has been over five years, Brexit continues to divide Britain. A report published by the National Centre for Social Research and whatukthinks.org revealed that Britain still remains deeply divided over the issue. Professor Sir John Curtice, Senior Fellow at the National Centre for Social Research and at The UK in a Changing Europe, said “While some voters would now vote to stay out of the
FEATURE BREXIT FIVE YEARS
EU, there is still relatively little evidence that they are coming to accept the decision to leave. Rather, Britain still looks like a country that is divided down the middle on the merits of that decision. Unless this picture changes, the debate about Brexit is likely to continue well after the transition period concludes at the end of next month.” This debate over the relative merits of Brexit rages on. Some diplomats from both sides worry that the politics being played when it comes to Brexit could, unfortunately, seal the faith of UK-EU relations for the foreseeable future. The country is also split on whether Brexit has been a success. In 2016, Brexit was campaigned with two vital claims. Firstly, it would restore British sovereignty and save the country a lot of money. It was also claimed that Brexit would save the UK an extra $486 million a week, which can be diverted towards its national health service.
Five years on, the scars of Brexit still remain fresh. Even though people are finally accepting it, there are many who remain dissatisfied with how it ended. Truth be told, no version of Brexit would please all the parties involved. We all remember the Boris Johnson moment where he vowed to get Brexit done. We are about to enter 2022 in a month or so and Brexit is far from over. As it stands, negotiations are likely to go on for years or even decades. It is getting very difficult to predict what the end game will be. One of the issues that are expected to be dragged on for a long time is the Northern Ireland protocol, based on which Johnson won an election. Until the UK and the EU reach an agreement on its implementation, Brexit will not be put to bed. As far as the future relationship between the EU and the UK is concerned, it is a work in progress and hangs in the balance.
Brexit, pandemic and the economy Both Brexit and the Covid-19 pandemic had a damaging impact on the British economy. Recently, the chairman of the Office for Budget Responsibility, Richard Hughes said that the impact of Brexit on the UK economy will be far more disastrous in the long run compared to the pandemic. He believes exiting the EU could shrink the UK gross domestic product (GDP) by nearly 4 percent in the long term. "In the long term, it is the case that Brexit has a bigger impact than the pandemic. We think that the effect of the pandemic will reduce that (GDP) output by a further 2 percent,” he told BBC. According to the Office for National Statistics (ONS), gross domestic product (GDP) dropped by a quarterly 2.2 percent between January and March last year, the largest quarterly fall since
1979. The economy also contracted by 1.5 percent during the first quarter of 2021. This year, the economy is forecasted to grow by 6.5 percent in 2021, according to a report published by the ‘Office for Budget Responsibility.’ The report read, “Over the medium term, we have revised up real GDP as we now expect post-pandemic scarring of potential output to be 2 percent – rather than the 3 percent we assumed in March. Uncertainty around this judgment remains large, however, with limited evidence as yet regarding how smoothly furloughed workers will be reabsorbed into employment, whether those workers who became inactive or left the country during the pandemic will re-enter the labour force, and how fully shortfalls in capital investment, innovation, and the acquisition of skills will be made up. “With inflation also higher and more persistent, we have revised up nominal GDP – the key driver of tax revenues – by 4.1 percent in 2025-26 relative to March, boosting our pre-measures revenue forecast by 4.5 percent in that year. While higher inflation also boosts public spending, overall, our pre-measures forecast for borrowing is lower by £38 billion a year on average relative to our March forecast.” Both the pandemic and Brexit have also played their role in current supply chain issues across the UK. Recently, a broad coalition of business groups warned, that the UK supply chain crisis would continue at least 2023 and maybe beyond the threshold. The policy head of the UK’s Road Haulage Association also issued a warning that things are not visibly getting better for the UK’s supply chains in the run-up to Christmas. editor@ifinancemag.com
International Finance | November 2021 | 49
TECHNOLOGY
ANALYSIS
KYC BLOCKCHAIN BLOCKCHAIN TECHNOLOGY IMPLICATIONS
The introduction of blockchain technology in the KYC process can amount to a 10% reduction in headcount
How can blockchain revolutionise the KYC process? JESSICA SMITH
Know Your Customer (KYC) is regarded as the backbone of a financial institution’s anti-money laundering efforts. Recently, industries have experienced a massive shift to digital transformation in the last ten years, and the change was more accelerated 60 percent of as companies started banks showed prioritising cost savings, interest in efficiency and security. One using their particular industry that funds to benefitted most from the drive digital digital shift is the financial adoption sector. According to a study technologies published in 2020 by Ernst like AI, and Young, 60 percent of blockchain, banks showed interest in analytics and using their funds to drive robo-advisors digital adoption technologies like AI, blockchain, analytics and robo-advisors. KYC is regarded as the backbone of a financial institution’s antimoney laundering efforts (AML). Hence it is commendable to see global spending on AML and KYC solutions reaching the $1.2 billion mark. The signifies how institutions are investing in rgtech, which is the management of regulatory processes within the financial industry with the help of technology. This is done so that regulations
50 | November 2021 | International Finance
become more efficient and accurate. The adoption of the emerging technologies for KYC processes has been increasingly spearheaded by regulators and governments. For example, Dubai’s Department of Economic Development and International Finance Centre announced the expansion of a KYC tool for financial institutions that is powered by blockchain technology and it will help process more than half of all KYC checks in the city. KYC is a regulatory requirement that underpins our current global economy, but many believe that its current processes are inefficient and outdated. It is imperative that financial institutions from all over the world must conduct time-consuming, costheavy checks in order to verify their customers’ identities. If not complied with existing regulations, not only will they face fines but they often have to navigate between many different regulatory borders, along with storing and protecting their huge amount of users’ data. But, no matter how much entities strive to keep up with digitisation, evolving processes do not happen all at once and change is not linear. And this is exactly what we are seeing in the KYC space. While organisations have taken steps to innovate and improve, KYC processes still remain lengthy and inefficient, primarily because of a lopsided focus on information gathering and processing
instead of conducting risk assessments. Banks have been doing their best by introducing technology into the elements of the KYC process. For example, live identity verification automates the processing of KYC documents in order to save some manhours. But one of the biggest obstacles that are currently standing in the way of efficiency in KYC is the lack of efficient information processing between two parties.
The flaws of the existing KYC process Financial institutions have been battling with inefficient and labour-intensive KYC processes for a long time now. Even with the help of technology, a study found that banks are still struggling with issues like lack of data accuracy and sufficiency, along with a rise in false-positive screening results. Additionally, 64 percent of banks believe that focusing on better customer due diligence (CDD) is the key to these problems. Traditionally, when financial institutions decide to onboard clients, they would require the company to share information as a part of the KYC process, which
usually involves going back and forth between banks and customers, and multiple rounds of questioning. After that, banks are required to systematically update client information to ensure that data is stored in the most detailed manner possible. But there are two major problems with this. Firstly, only when suspicious activity takes place in their account, entities might be alerted. they are also required to conduct frequent media searches to keep the customer profile up-to-date. Talking from a regulatory perspective, most regions believe that customers, be it individuals or businesses have to take responsibility for their own data. This translates to the fact that client information is kept confidential and only the customer is allowed to share their information with chosen parties. However, this stretches the information gathering process since the information has to be separately received and validated by the banks and contributes to the overall inefficiency of existing KYC workflows. This could result in customers feeling frustrated with the lengthy approval process and prospects might miss opportunities during the delay or might back away due to the complex nature of KYC checks.
International Finance | November 2021 | 51
TECHNOLOGY
ANALYSIS
KYC BLOCKCHAIN BLOCKCHAIN TECHNOLOGY IMPLICATIONS
Blockchain in banking In 2020 alone, global institutions were fined $10.4 billion related to AML, KYC and data privacy violations and issues. While this may seem huge, but if you start unpicking the complex and relentless requirements, it becomes quite clear that there are many regulatory loopholes for institutions to jump through. KYC checks are not done after institutions can verify a person's identity and then continue to provide services. Instead, it’s a long-drawn process where banks and other financial institutions are required to conduct checks and monitor customer transactions on a regular basis that takes up substantial time and resources. Banks and other financial institutions will also have to make sure they adhere to all applicable regulations, which can be cumbersome when facilitating transactions across borders and regulatory zones. The Covid-19 pandemic has also accelerated criminal activities and they are slowly becoming sophisticated. Attackers are coming up with a lot of innovative methods which is often faster than the speed at which organizations are digitizing their KYC processes and are also exploiting the unstable economy to take advantage of the system. to fight this, it is important for institutions to support the existing KYC procedures. To fight against the fraudulent landscape, it is essential that banks leverage the diverse data points and come up with a comprehensive risk profile for their clients. In essence, the risks are far-reaching and have severe consequences. To understand the
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magnitude of the problem, we only need to take one look at the Facebook data leak of 500 million users to see the serious economic and social implications of not adequately protecting user data. Business owners are usually very protective of their information or hide the source of assets in the likes of offshore bank accounts and shell companies. All these factors add to make the KYC process even more difficult.
Blockchain helping revolutionise the KYC process More than anything, the data industry now requires a solution that will guarantee transparency, security, efficiency and scalability. Currently, KYC processes are extremely expensive and resourceintensive. Finding a solution to this will actually streamline the redundant and slow data gathering processes that is currently present which will result in cost-saving for the industry while boosting the confidence of market participants and regulators. Blockchain technology is actually the perfect solution here. It is anti-fraud by design and makes sure that records are encrypted and immutable. By implementing blockchain technology, there will be no need for an intermediary providing assurance. Shared data can also come with the customer’s digital signature, and it can completely remove the need for third parties to be involved in the process and to validate data manually. Blockchain can also be used to scale and process massive volumes of data. Given the enormous number of banks and
Payments
66%
Securities settlements
56%
Fraud detection and security
41%
Trade finance
33%
Source- Business Insider
clients present on a global scale, this is indeed a blessing. With the help of permissioned enterprise blockchain platforms, customers can be assured that their sensitive data and personal information is only shared on a need-to-know basis, which will happen under strict authentication requirements. All the parties involved will be present in a closed ecosystem and members involved decide to whom to grant access. Keeping this in mind, creating such a platform will also bring added benefits for regulators and customers alike. Working on the same concept, regulators would be able to review KYC processes, data, and accurately evaluate the risk profile of their clients, all while staying within the regulatory framework. Integration of blockchain technology will also be able to save time that goes behind consolidating and validating data. Customers will be able to liaise
with their respective banks on KYC related queries.
Blockchain shaping future of regulated industries KYC processes are essential to fight money laundering schemes, and banks will definitely benefit from the integration of blockchain technology into existing KYC methods. But the application of blockchain technology in highly regulated industries does not stop here. It has been witnessed previously that the public sector has continued to embrace new and evolving technologies. Seeing the advantages, they are now demanding more efficient and reliable systems to cut down on costs, realising that they can reap the benefits of blockchain technology in more than one way. From how to manage governments, allocating and granting funds in governments’ procurement processes, land
registries, in providing citizens’ services, blockchain technology brings a plethora of benefits. SWIFT, a global provider of secured financial messaging services has established a KYC registry with 1,125 member banks sharing KYC documentation. But this is only 16 percent of the 7,000 banks on their network. SWIFT’s KYC registry is an efficient and shared platform that helps manage and exchange standardized KYC data. Users can upload their documents for free to the registry and share them with other institutions. SWIFT validates the data rigorously, informs the client if it’s incomplete or needs updating, and sends out alerts to correspondents whenever the data changes. There is no denying that there will be issues regarding the security of customers’ KYC information but, as long as all KYC is held on a private blockchain rather than a public one, these issues can be heavily
minimised from a customer’s point of view. Experts say that data stored on the blockchain will merely be a reference point with a digital signature or cryptographic hash. This would give individuals access to the relevant client information in a repository separate from the blockchain, which will ensure a secure and private way of conducting and storing a customer’s KYC information. Given all that we have discussed above, it is clear that blockchain could have a major role in streamlining these KYC and AML processes. But this may require cross-border consensus regarding what is acceptable and what needs to be done in terms of acceptable document verification. According to a report published by Goldman Sachs, the banking sector can achieve 10 percent reduction in headcount with the introduction of blockchain in the KYC procedures. This amounts to around $160 million in cost-saving annually. Blockchain is also expected to reduce budgetary resources allocated for employee training nu 30 percent, thereby saving $420 million. Overall operational cost savings are estimated to be around $2.5 billion dollars. The introduction of blockchain technology will also reduce AML penalties by $0.5 to $2 billion.
editor@ifinancemag.com
International Finance | November 2021 | 53
TECHNOLOGY
FEATURE IOB
IOB IMPORTANCE
54 | November 2021 | International Finance
FEATURE IOB APPLICATION
Internet of Behavior and why it is important MOUMITA BASU
IoB uses data from customers and uses it to provide its customers with a better user experience
J
ust as we were trying to understand the role of the internet of things (IoT) in small businesses, a new player has entered the market and it is the internet of behaviour (IoB). We have come to understand that it is essential to study and gain insight into the growing importance of this latest addition. and how it will affect business and everyday life in the near future. So what is IoB? In short, the IoB refers to the analysis of all the behavioural data collected from the IoT and other sources, also taking the number of attempts was made to make use of it. The data is collected through personal wearable technologies as well as household electrical devices and individual's
online activity. Needless to say, this provides valuable insights and information about users’ behaviour and interests. With the help of the IoT and IoB, it is now possible to track, collect, and interpret the massive amount of data that is amassed from personal behaviour and online activities including commercial transactions and social media habits. The concept of IoB revolves around the correct analysis and understanding of behavioural data, and how it can be applied to create and promote customized products and services which will be of more value to customers. Given the plethora of advantages, corporates and organizations have already started investing heavily in this technology to improve their
International Finance | November 2021 | 55
TECHNOLOGY
FEATURE IOB
IOB IMPORTANCE
bottom lines. Additionally, IoB also benefits its customers by providing better tailoring goods and services to their needs and desires.
Growth prediction of IoB According to experts, the future of both the IoB and IoT is bright and it will continue to have more growth and influence in the future. Gartner, in its report, has predicted that there will be more than 25 billion connected devices by the end of 2021, with the majority of the IoT is currently made up of smartphones and other devices are also becoming increasingly common. The Gartner report also predicted that by 2025, there will be 75 billion connected devices all over the globe. Additionally, by 2023, more than 40 percent of the global population’s individual activity will be tracked digitally in order to influence their behaviour using the IoB concept. This translates into the fact that more than three billion people globally will be tracked by their behaviour. Theoretically, the IoB is capable of revealing crucial insights to organizations that allow them to increase productivity, monitor compliance with COVID-19 safety protocols, and more. But, as we all know, the collection of data can be quite problematic. The use of the IoB begs questions like how we gather, navigate, and use data, especially as we collect more of it. Something as common as smartphones can be used to track your online movements and real-life geographic position. Now companies also know an individual’s interests, dislikes, and the way they purchase. There is also the risk that cybercriminals can hack and use the data for nefarious means. This information could be stolen and sold to other criminals and has the risk of
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revealing. This information could be stolen and sold to other criminals. Hence it is important to keep in mind that IoB is an important trend for companies to take notice of, but they also need to be equally careful in the ways they are protecting the data they collect.
How can the IoB benefit businesses? For a while now, a large number of digital marketing companies have been using analytics tools to find insights that reveal common consumer behaviours. With the help of IoB, marketers are able to analyze customer buying habits across platforms, gain access to previously unattainable data, redefine the value chain, and provide real-time point-of-sale notifications and targeted advertisements. Additionally, an appealing UX is an important part of sales. With the help of the data provided by the IoB, companies now can understand people’s attitudes toward specific products or services. This makes the process of resolving customer issues and complaints even easier. The companies that come under the manufacturing sector are already using sensors and RFID tags to determine if on-site employees are washing their hands regularly. And with the help of computer vision, it is also possible to make sure employees are complying with mask protocol or social distancing directives. With the help of IoB, health providers can measure the activation and engagement efforts made by patients. IoB also helps improve public safety by monitoring exciting new opportunities across industries.
The importance of IoB IoB in businesses provides the ability to analyse a wide range of consumer
more than
25 billion
connected devices by the end of 2021 By 2023, more than
40 percent
of the global population’s individual activity will be tracked digitally in order to influence their behaviour using the IoB concept
behaviour and then effectively respond to it for their benefit. Commonly, businesses will use the IoB to market their products and services more effectively to current and potential customers and to influence them further to buy their products. It may seem like IoB only benefit businesses, but there are a lot of ways how IoB can benefit customers. For example, an insurance company working on a premium based on an individual’s positive or negative health habits or driving records. In another example, a fintech company can use user data to encourage different types of savings or investing plans after analyzing the customers’ spending habits. Additionally, individual health and lifestyle applications can assist customers with important daily variables like sleep, diet, heart rate, weight, and blood sugar. The collection and tracking of this personal health data can help us as well as the healthcare system formulate more targeted and effective treatments and recommendations for better physical
FEATURE IOB APPLICATION
and psychological health. For example, Netflix uses user data to forecast what they might like or dislike, by providing suggestions based on their personal preferences and ratings for a specific film or series. Another example is where Uber or any other cab aggregator uses IoT to track drivers and passengers. They offer a survey after each journey to review the guests' experience. Additionally, with the help of IoB, companies can also provide a service to individuals with access to this more insightful personal data which will help them resolve potential problems before time and provide improved products and services that will keep their customers happy. There is no doubt that data has been absolutely essential for businesses to flourish and stay in the market since the inception of the internet. IoB ensures that businesses continue their growth, even in the face of a global pandemic and changing climate of the world’s economy. But the main purpose of IoB is to collect, analyze, respond and
understand all types of behaviours to improve customer/user experience. It is a known fact that psychology and marketing go side-by-side from the beginning of advertising. This way, businesses can get new insights into the data that’s collected by IoT. Currently, the IoB is a new but powerful tool for businesses’ sales and marketing worldwide. IoB can help businesses get a better understanding of their customers to keep them happy. Not only IoB affects customer choice, but it also restructures the supply chain. It helps insurance companies and banks to improve their profile. IoB can help change violent behaviour without special medical advice and can also forecast responses to shopping ads or social media messages.
Concerns surrounding IoB As is the case with any growing interconnectedness, there is an increasing concern regarding finding the legal and socially acceptable balance when it comes to IoB. According to
security experts, while most customers are concerned about companies having too much access to their personal data, but it has also been observed that they are agreeing to trade off an acceptable amount of privacy in order to get access to the best deals on products and services they want. It has also been observed that many job seekers will accept some online investigation and analysis of their background by a potential employer. For example, a lot of people in the logistics industry would be okay with their employers accessing their driving history so that they could determine if there are any issues that need to be addressed. But the same set of people will have an issue if their employer starts snooping their social media activities to determine if they fit for the role. Similarly, most consumers will not object to a company reviewing and analyzing their latest searches and purchases from the company website, but it’s safe to say that this could easily flip if the company misuses their access and start analysing their social media behaviour. Given the rapid growth of IoB, coupled with the rising number of smart devices, it definitely presents a cybersecurity concern. Most of the portals we access are connected to either our personal or business network, which, in turn, presents a threat for sensitive data that has the risk of being compromised or stolen. As IoT and IoB gain more and more popularity, experts say that it is essential to pay more attention to our cybersecurity efforts and to remember to follow good cybersecurity practices both at work and at home. editor@ifinancemag.com
International Finance | November 2021 | 57
IN CONVERSATION
TECHNOLOGY
NIC KLOPPER CEO OF HEARX GROUP
hearX takes pride in providing new ways to overcome traditional barriers in detection, diagnosis and treatment of disabling hearing loss
Providing accessible hearing healthcare solutions PRITAM BORDOLOI
In recent years, we have seen the integration of revolutionary technologies such as AI to offer better services in various sectors be it banking, logistics or healthcare. AI is changing how we deliver healthcare in the modern-day. It has countless applications when it comes to healthcare. According to the report ‘Artificial Intelligence (AI) in Healthcare Market 20202026', the global market for AI in healthcare is projected to grow at a Compound Annual Growth Rate (CAGR) of around 51.5 percent. AI is being used to detect diseases such as cancer more accurately nowadays and at an early age. AI is also being used in fields such as primary care, telemedicine, dermatology, and radiology among others. PwC said in a report, “AI is getting increasingly sophisticated at doing what humans do, but more efficiently, more quickly and at a lower cost. The potential for both AI and robotics in healthcare is vast. Just like in our everyday lives, AI and robotics are increasingly a part of our healthcare eco-system.” AI has been used to also overcome traditional barriers in detection, diagnosis and treatment of disabling hearing loss across the globe. South Africa-based HearX Group has developed what is being dubbed as the ‘world-first AI system advance ear care’. HearScope is a digital otoscope for affordable access to ear care using a smartphone. According to its website, HearScope captures high-quality images and videos from a smartphone or desktop. This innovative product includes the world’s first AI image classification feature to support categorising eardrum images. It enables health providers across primary to tertiary levels to accurately diagnose patients with ear disease to ensure the right treatment is provided. In an exclusive interview with International Finance Magazine, hearX Group
58 | November 2021 | International Finance
TECHNOLOGY HEALTHCARE
chief executive officer Nic Klopper discusses the firm’s innovative products and services, technology and his vision for the company among other things.
IFM: Can you tell us a bit about hearScope? Nic Klopper: Chronic middle ear infection affects more than 300 million people worldwide. Ear disease is the leading cause of hearing loss and the second most common reason for children to visit a doctor. The need for accurate solutions that can assist with detection of ear diseases, triage patients to receive the required healthcare service and be used within telehealth systems, is constantly growing. hearScope is a digital video otoscope that solves all of these needs. It can connect to a smartphone or desktop, running the free hearScope application, to capture high-quality images or videos of the eardrum and ear canal. This innovative solution offers an Artificial Intelligence image classification feature that accurately and instantaneously categorises captured images. hearScope can be used within any telehealth system where the video or images are used by healthcare professionals to diagnose patients. hearScope can be used by people with minimal healthcare training
and enables healthcare assistants to capture images prior to examinations, attach otoscopy images to patient records and allow the healthcare practitioner to formulate a diagnosis easily and quickly. hearScope is a cost-effective and innovative solution that changes the way ear examinations are performed and contributes toward affordable hearing care for everyone, everywhere.
Can you elaborate on the different products and services hearX Group is offering across the markets it operates in? Passionate about affordable access to healthy hearing for everyone, everywhere; hearX® takes pride in providing an entirely new way to overcome traditional barriers to the detection, diagnosis and treatment of disabling hearing loss across the globe. hearX Group has two divisions with core focuses on either the clinical business approach, or on the consumer approach. The B2B division has a product range which is split into two categories: Screening and clinical hearing tests, and hearing assessments for occupational health. The screening test solutions consist of innovative digital hearing and vision screening technologies
International Finance | November 2021 | 59
TECHNOLOGY
IN CONVERSATION
NIC KLOPPER CEO OF HEARX GROUP
for use by hearing healthcare providers. Our flagship product hearScreen®, is an innovative pure tone screening audiometer on a smartphone for clinically valid, time-efficient and low-cost screening. hearDigits allows for free online hearing screening from a professional’s website and Vula Vision offers a quick eye screening on a smartphone/tablet to screen a patient’s visual acuity at a distance. hearX Group also provides affordable, evidence-based clinical solutions for hearing healthcare. hearTest is a certified pure tone diagnostic audiometer on a tablet; and combined with calibrated headphones the solution also supports extended high-frequency testing. hearScope is a digital video otoscope with AI image classification, enabling the capturing of high-quality images and videos of the eardrum and the ear canal during examination. hearTest Occ Health is hearX’s tablet-based occupational health audiometry solution, used by hearing conservation professionals, to make occupational health compliance easy and affordable. The hearX Self Test Kit is a low- and no- touch audiology solution for accurate, comprehensive and remote diagnostic assessments outside a booth. The B2C division centres around Lexie Hearing®, which introduced a revolutionary way of ensuring that hearing aids are accessible to everyone through a first-of-its-kind subscription model. Customers subscribe to Lexie Hearing for all inclusive hearing care for a pair of Bluetooth enabled hearing aids and access to the Lexie mobile app. The subscription includes the regular delivery of batteries and other hearing aid accessories, a protection plan for breakages and losses, and Lexie Care - unlimited, real-time video or voice support from a team of hearing experts, six days a week. Through the use of smart technology and remote care, Lexie Hearing has brought medical-grade, direct-to-consumer hearing aids to the US market, at 80 percent less than the average cost of hearing aids.
Can you tell us about the technology behind your innovative products? The audiology industry has seen very little innovation over the last century. hearX® has revolutionised and disrupted the industry by creating technologies that use smart algorithms, artificial intelligence and big
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The current beta version can classify normal tympanic membranes with an accuracy of 99 percent, wax obstruction with 100 percent accuracy and chronic perforations with a 98 percent accuracy
data to detect, diagnose and treat hearing loss around the globe, making cost-effective hearing accessible to those who need it most. hearX® is an ISO certified company and we pride ourselves in developing both CE and FDA certified medical devices. Our technology enables the use of smartphones/tablets and headsets for evidence-based hearing screening, which dramatically reduces the cost and simultaneously makes the process more efficient. All our solutions have been clinically-validated to produce accurate and reliable test results and there have been numerous peer-reviewed publications on the clinical accuracy of the applications. The headphones are calibrated annually to further ensure the accuracy of test results. Results are uploaded to our cloud-based server called mHealth Studio Cloud where it is securely stored in accordance with the data protection regulations within each region in which we operate. The results can also be downloaded for further data reporting requirements, if required, and the system can automatically generate and send messages to patients (or parents) on outcomes of the tests or instructions for any follow-up triage services.
How can technologies such as AI be integrated to offer quality hearing care? A lack of trained healthcare personnel and diagnostic low-cost video-otoscopes in low- and middle income countries, means ear disease more often than not remains undiagnosed or incorrectly diagnosed. Otoscopy is the most common diagnostic tool and starting point to identify and address ear disease. hearX® designed the hearScope digital video otoscope, to impact access to ear and hearing health by making the tool affordable, easy-to-use and innovative in providing Artificial Intelligence (AI) support. The hearScope AI image classification feature
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TECHNOLOGY
IN CONVERSATION
NIC KLOPPER CEO OF HEARX GROUP
enables health practitioners to receive instantaneous classification results on images taken by the digital otoscope. The AI system is trained on thousands of tympanic membrane images diagnosed by ENT specialists and applies machine learning to provide an accurate image classification. The current beta version can classify normal tympanic membranes with an accuracy of 99 percent, wax obstruction with 100 percent accuracy and chronic perforations with a 98 percent accuracy. The abnormal classification indicates a high probability of a pathology present in the ear and suggests that the individual should opt for a professional examination of the tympanic membrane. This advanced AI classification feature supports clinicians in their diagnosis of ear conditions and plays an important role when triaging patients. The image classification result enables a clinic nurse or healthcare assistant to make decisions on appropriate referral paths and specialist consultations where needed. This solution not only adds value with regards to classification of ear disease for timely intervention and prevention of complications like hearing loss, but is also extremely valuable in prevention of ear disease.
How did Covid-19 impact you? What are some of the major challenges faced by the company during the Covid-19 pandemic? Prior to the global Covid-19 pandemic, ‘remote care’ was only made use of as a matter of convenience and personal preference. During the pandemic it rapidly escalated as a matter of safety first and foremost. The Covid-19 pandemic and social distancing has severely affected hearing healthcare and retailer clinics globally and has made it increasingly difficult for professionals to provide their patients with treatment and support. It has changed the way in which they need technology and the way in which they consume
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it, to future-proof their clinic and ensure a continuous income stream. hearX® has been able to use the challenges posed by Covid-19 as an opportunity to springboard changes and advancements in the audiology industry, by releasing the hearX Self Test Kit, a breakthrough remote hearing care solution. The hearX Self Test Kit is a tablet-based hearing test solution that allows patients to take a hearing test remotely, receive counseling, buy and receive hearing aids and have them adjusted, without having to physically consult a professional. We also released a retailer solution that allows people to take a hearing test remotely from the retailer’s website or by themselves in-store and buy hearing aids should they wish to, when receiving their results. The disruptions caused by Covid-19 continue to be a challenge, but it also provided unexpected opportunities. Now that people are used to the “new normal” these technologies that hearX® offer to clients have become the new standard.
Are there new products from hearX that are in the pipeline? As a leading audiological tech company, there are always exciting developments in the pipeline. You’ll need to watch this space to see.
You have launched Lexie Hearing in the US recently. Do you plan to enter new markets in the near future? As an industry leader, we are always looking at new markets and assessing them on merit.
Can you tell us about your vision for the company? Where do you see hearX in the next five years? hearX® has managed to grow from strength to strength since commercialising technology from a local University back in 2016. While we have touched the lives of 1.4 million people to date, we plan on connecting over 10 million people with hearing services globally by 2026, by scaling our technologies into new markets, and also by releasing a handful of new technologies too.
editor@ifinancemag.com
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