20 minute read
Striding purposefully ahead despite the headwinds
For the first six months of 2020, GFH Financial Group made steady progress, despite the current challenges and the impact of COVID-19 on their business and global markets. While net profit for the first six months of the year was impacted by the current conditions, the Group’s achievements and underlying strong financial health and operational performance was reflected in ongoing investor and market confidence. For the period, the Group successfully placed more than US$120 million in investments with clients, issued Sukuk to regional and international investors and had its ratings reaffirmed by Fitch. Building on their strong momentum and liquidity, the remainder of 2020 will see the Group focus on continued value creation through further growth and diversification of their operations and investment portfolios.
Please give some insight into your latest quarterly results announcement. What factors do you think have been key in shaping the results?
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Our result were shaped by continued strong revenue generation from our diversified business lines and model. This included positive contributions from our core investment banking activities and investments that continued to deliver solid yields and returns. On the treasury side, a new and growing area of our business, we were also successful in identifying and acquiring Sukuk and other treasury products at reduced prices in light of current market conditions and the sharp drops that have resulted in prices of certain financial instruments. We also took important steps to clean up and streamline our balance sheet on the commercial banking side. We moved to restructure the business via a Tier 1 Sukuk issuance and realigned our activities in order to deliver stronger results and achieve more positive contributions to the Group from its business line in the future. In general and in light of current circumstances, we also remained very cost conscious, evaluating new ways to implement controls on spending and to achieve cost rationalisation across the Group and our subsidiaries where possible.
Why have you seen a growth in liquidity during the current scenario and what does this say to you about confidence levels of depositors and investors?
Since beginning of COVID crises, we focused on strengthening liquidity in anticipation of market cycles. We are extremely pleased with the growth in liquidity. It is a real reflection of the confidence the market continues to have in GFH and our strategy as well as our progress and prospects for the future as we continue to work hard to diversify and expand our business in strategic areas and geographies. Since the start of the
Hisham Alrayes, CEO of GFH Financial Group
year we have successfully completed the issuance of US$500 million Sukuk with the participation of international and regional investors.
Each of your business lines have been profitable despite the current circumstances. What characteristics of your business model has made this possible?
Diversification has been a key pillar in GFH’s strategy as we have transformed ourselves into a full-fledged financial group with multiple, profitable business lines and sources of income. Over the past years, we have focused on building our position in a number of key areas including investment banking, real estate, treasury, commercial banking and wealth management. We are extremely pleased that they are all operating soundly, achieving progress and contributing to the strong revenue growth we continue to witness. During different market cycles, performance can be up or down, but our model will be stronger due to diversification. We will continue to target to add more lines in future.
You have grown your assets under management, doing this largely inorganically. What does this
WE ARE PLEASED TO CONTINUE TO REPORT STRONG REVENUE GENERATION ESPECIALLY FROM OUR CORE INVESTMENT BANKING ACTIVITIES AND FROM THE STRATEGIC AND RESILIENT PORTFOLIO OF INVESTMENTS WE HAVE BUILT. DESPITE THE DAUNTING CHALLENGES PRESENTED BY COVID-19, WE HAVE SEEN OUR INVESTMENTS CONTINUE TO PERFORM WELL. WITH THE ISSUANCE OF SUKUKS IN THE FIRST HALF OF 2020, OUR LIQUIDITY POSITION HAS BEEN EVEN FURTHER ENHANCED AND OUR ABILITY TO CONTINUE TO EFFECTIVELY IMPLEMENT OF OUR STRATEGY REINFORCED .
- Hisham Alrayes CEO of GFH Financial Group
mean in terms of your ambition as a business and your appetite for growth?
Another important part of our strategy for expansion has been the growth of our assets under management through strategic acquisitions that complement our business and enable us to grow in a more quick and efficient way. Today we sit on USD 10bn in assets and assets under management as a result of the past five years growth on a consolidation basis. We have pursued both organic and inorganic growth and taken advantage of opportunities that would enable us to reach our objectives. We are actively evaluating opportunities and see a great deal of potential and scope for GFH to use our expertise and funds. One recent example was the acquisition of a further 21.8% stake in Global Banking Corporation. This transaction reflects our continued focus and ability to capture strategic opportunities for growth and revenue generation and nicely complements some of our other associated investments while increasing the size of our assets under management. The acquisition will also give us access to key portfolios and contribute to GFH’s profitability during the year. We will keep looking for similar opportunities as we go forward and keep expanding our AUMs and achieve the strategic growth we are seeking according to our plans.
What is your assessment of the outlook for investment in the regions’ markets?
There continue to be challenges for investors and the markets globally, including our region. However, despite current circumstances, we continue to see strong demand from our clients and investors for assets and opportunities that can provide solid income generation and cash flows. We have certainly demonstrated our ability to find such assets, acquire them, place them with our investors and investment managers, then successfully exit them. In the first half of the year, and despite the current
challenges, we have already placed US$120 million of investments with our clients and we will continue to undertake strategic new deals that we believe will be well received.
What do think will be the ongoing impact of the Corona virus pandemic on the region?
We believe that the pandemic has transformed many aspects of our personal and professional lives and, in particular, an increased use of technology in how we run our businesses, manage our employees and communicate and serve our clients. While making significant change was challenging in part at the outset, we believe that today we have become more nimble and run more efficiency and that technology is helping to further transform our businesses and lives in positive ways.
Lo o k i n g a t t h e i m p a ct of t h e pandemic on the economies of the region, certainly the changes we have seen and their impact has been unprecedented. This applies across the board, but very significantly to certain sectors such as hospitality and tourism which have been deeply affected. At the same time, governments are facing liquidity challenges as state revenues fall and this has resulted many having issued government debt to bridge the gap.
We believe these factors, among others, while challenging also create opportunities for skilled investors, like GFH, and we are looking to capitalise on them as we go forward in ways that will not only benefit the Group and our shareholders and investors but more generally the economies of the region where we are active.
How COVID-19 will bring transformational developments to the Islamic finance markets?
Dr. Mohamed Damak, Senior Director and Global Head of Islamic Finance for Standard & Poors, a global ratings agency, details the effects of the events of this year on the worlds’ Islamic Finance markets.
The COVID-19 pandemic and measures to contain the virus have hurt global and regional economic activities. Adding the drop in oil prices, the core Islamic finance economies such as Gulf Cooperation Council (GCC), Malaysia, Turkey and Indonesia are witnessing a significant slowdown. Therefore, we expect the global Islamic finance industry to observe a tepid growth in 2020-2021, following a strong performance in 2019, and underpinned by a more dynamic sukuk market.
Slow recovery a new normal
The $2.4 trillion Sharia-compliant finance industry is expected to record “low to midsingle-digit growth” this year and in 2021. The industry registered strong growth of 11.4 per cent last year on the back of higher than expected sukuk issuance. The volume of Islamic bond issuance is likely to drop this year from $162bn in 2019 when Turkey, GCC issuers, Malaysia and Indonesia supported the market. The strong global liquidity and investors’ increasing risk appetite are opening a window of opportunity, though.
We continue to see the takaful sector expanding at mid-single-to-high-digit rates, while the funds industry might see some negative effects from market volatility and low investor appetite in 2020. Overall, we believe low-to-mid-single-digit growth for the overall industry is a fair assumption over the next two years. Amid tougher conditions, we do not see core Islamic finance countries using sukuk as a primary source of funding despite their higher financing needs.
Inclusive standardisation and greater use of social instruments
However, there is an opportunity in the current environment to accelerate and unlock the long-term potential of the industry. In our view, COVID-19 offers a window for more integrated and multifaceted growth with higher standardization, stronger focus on the industry’s social role, and greater use of fintech. In the context of the pandemic, the industry players have been discussing the potential use of social instruments including Qard Hassan, Social Sukuk, Waqf, and Zakat to help the companies and individuals that have been economically affected. With the right coordination between different Islamic finance stakeholders, we believe that the industry could create new avenues of sustainable growth that serve the markets.
Inclusive standardization of Sharia interpretation and legal documentation and awareness of ESG factors are further examples of how the market
Dr. Mohamed Damak, Senior Director and Global Head of Islamic Finance
can be stimulated. In our view, inclusive standardization is achievable, and will also boost the industry and the volume of issuance. Ultimately, it will restore the attractiveness of the instrument to issuers through a smoother, faster issuance process and increased clarity on the underlying risks for investors.
Adoption of fintech enhances resilience
Lockdown measures have shown how the capacity of a company or a bank to shift its business online is critical for continuity. For Islamic banks and sukuk, higher digitalization and fintech collaboration could help strengthen their resilience in a more volatile environment and open new avenues for growth. Fintech could help by facilitating easier and faster transactions, improving the traceability and security of transactions using blockchain, enhancing the accessibility of Islamic financial services, and improving governance. This, together with smart-contract protocols, could create faster or even out-of-court sukuk dispute resolution.
The rise of foundations in the UAE
Foundations have become a popular option for regional wealth structuring and succession planning in the UAE. Here, Nina Auchoybur, Managing Director of Ocorian, a global leader in fund administration, capital markets, corporate, private client and fiduciary services, breaks down the structure of a foundation and details the benefits it can provide to both families and businesses.
What is a foundation?
A fo u n d a t i o n i s a n independent legal entity and is derived from civil law jurisdictions, as opposed to a trust which is a common law concept. It also has no members or shareholders, but is self-owned. The foundation’s founder bestows assets to the foundation and owing to its separate legal status, will hold those in its own name and separately from the founder’s personal wealth. Those assets are then managed by the foundation council (equivalent to a board of directors for a company) in accordance with the foundation’s charter and by-laws (reflecting the intentions of the founder) in support of a cause or a purpose, or for the benefit of beneficiaries.
What differentiates a foundation from a trust?
This a common question that we’re asked as a trust is often a more familiar concept. A trust is a legal obligation or relationship between the settlor (the person who creates the trust), the trustee (the person in charge of the trust) and the beneficiary (the person who receives benefits from the trust). Legal ownership of the trust sits with the trustees and beneficial ownership with the beneficiaries.
What are the main reasons for establishing a foundation in the uae and what advantages do the offer families and businesses?
At the moment we are seeing a variety of foundation structures being implemented to hold trading companies, real estate and liquid investments. It is an attractive vehicle for these purposes because it provides a number of benefits including:
Asset protection - Because the foundation’s assets do not belong to the founder, they are not readily accessible to creditors, governments or other family members, provided certain conditions are met.
Privacy - The beneficiaries of a foundation are private and so the founder’s family wealth can be managed more discreetly. This provides its own benefits including: • reduction of the risk of claims/ judicial actions from third parties against the founder and their family to extort a monetary benefit/ settlement; • better bargaining power when negotiating business deals and/or acquiring assets; • reduced risk of being targeted and befriended by unscrupulous individuals in order to access their wealth; and • less urgency for potentially uncomfortable discussions around
pre-nuptial agreements for the founder or heirs. Flexibility - With the separation of legal and beneficial ownership, a foundation enables families to facilitate their inter-generational legacy planning and wealth protection objectives, particularly where the family is internationally mobile with assets in multiple jurisdictions. Effective succession planning - Foundations provide assurance that the assets (or their benefits) will be distributed as per the wishes of the founder under the terms of the foundation, irrespective of succession laws. Even where enforceable wills are possible, they only work on death and do not protect assets against bankruptcy, incapacitation, imprisonment and divorce. A foundation can help with all of these issues as well as negating lengthy probate issues on death, giving much greater continuity.
Improves family governance
- Foundations provide an effective corporate governance framework (similar to a company or single-family office), which allows for wealth to be managed in a professional manner to benefit the founder and his or her family. Enables philanthropic giving - A foundation can evolve alongside the founder’s vision and ethical wishes and can be used to support issues close to the founder’s heart. Establishes a legacy - Through a foundation, the founder’s goals continue in perpetuity.
Do UAE inheritance laws affect the functionality of a foundation?
This is an area where we work with specialist local lawyers to ensure that the issues in relation to UAE inheritance laws - mainly referring to certain key provisions of the UAE Personal Status Law No. 28 of 2005 - are identified and the corresponding risks are mitigated to the extent allowed under applicable UAE laws. The approach taken will often depend on the religion of the founder and of his or her family, as the laws apply differently to Muslims and non-Muslims.
Although the assets still belong to the foundation after the founder’s death (unless otherwise stated in the foundation’s by-laws), no structure or legal mechanism can prevent a third party from bringing a challenge. Often the party most likely to be challenging would be disgruntled heirs who would be set to receive more under the UAE Personal Status Law than with the foundation.
Depending on the individual family dynamics and situation, in accordance
with the intentions of the founder and upon advice from specialist local lawyers, and potentially a Shariah scholar, and where there are significant concerns of a challenge, we would normally recommend the following:
All transfer of assets into the foundation be structured in a certain manner e.g. as a gift or acquisition. The timing and value of such transfers are also important.
If advisable, make the foundation Sharia compliant, both in terms of the investments/assets held by the
Nina Auchoybur, Managing Director of Ocorian
foundation and distribution to be made by the foundation. *
What information is accessible by the public?
All three UAE foundation regimes (DIFC - Dubai International Financial Centre, ADGM - Abu Dhabi Global Market and RAKICC - Ras Al Khaimah International Corporate Centre) provide for private foundations with very limited information in the public domain.
Only generic information such as the foundation’s name, address, date of incorporation and, for the ADGM, the name of the registered agent, is available on the ADGM and DIFC respective online registers. Neither do the DIFC nor the ADGM requires the filing of the foundation’s by-laws (which contain the details of the beneficiaries) and filing of accounts if a registered agent such as Ocorian is appointed and therefore the founder’s family wealth can be managed discreetly.
In the case of RAKICC, there is no equivalent online register and the by-laws are filed with its authority, who retain the information privately.
*[The author is not a legal or Sharia professional and their views expressed are their own and do not necessarily reflect official laws, not do their constitute advice]
Some truths about digital transformation
Mark Kerry, Vice President, Arqitek explains that an architectural approach and continuous transformation can simultaneously be both about what a business needs and how those needs can be fulfilled digitally so that business and technology are seen as co-existing and inseparable.
It remains the case that most financial institutions in the MEA region are struggling with the notion of digital transformation (DX). We mention MEA in particular but the struggle is a global one. According to IDC, Direct DX investment is growing at 17.5% CAGR and expected to approach $7.4 trillion over the years 2020 to 2023. Meanwhile, many observers note the high failure rates - typically stating failure rates in excess of 70%.
Failure is attributed to many factors. We might consider the importance of executive commitment or of internal alignment. But there are four factors which we suggest are more fundamental: 1/ Digital is not only about front-end services transformation. Digital is about end-end transformation to deliver seamless services at far lower costs of transaction. 2/ The enterprise must architect to realise this transformation. Only an enterprise which has optimized Business-IT alignment systematically and with a truly agile approach is ready for the digital era. 3/ Transformation can no longer be
Mark Kerry, Vice President, Arqitek
considered to be a one-off program of activity or even an annual planning activity. Transformation should be performed on a continuous basis. 4/ Once we recognize that transformation is a continuous process then we recognize that it should itself be automated.
Another way of thinking about this is to recognise that the paper-based digital transformation plan and the multi-year program of initiatives are themselves pre-digital artifacts.
Digital Canvas: The Foundation for the Digital Financial Institution
T h e d i g i ta l a p p ro a c h to d i g i ta l transformation is many respects already understood and documented. The issue is that the necessity of bringing these approaches into the transformation effort has not been realised. Transformation Management Offices (TMO) are focusing their effort on delivering the program (‘how’ do we build). However, these offices must also be in control of the architecture (‘what’ are we building).
From an architecture perspective the right starting point is the Digital Canvas. The Digital Canvas has its origins in the Business Capability Map. It is a mapping of what a business does to reach its objectives. However, the Digital Canvas mapping is presented through the lens of digital. A high level view of the Digital Canvas is shown in the figure. You will see that the figure identifies all the digital domains that might exist within the financial institution spanning from front-end channels to core business and the back office. However, it also identifies the digital ‘enablers’ which must also be established. The Digital Canvas recognises that for the enterprise to be digital, for example, the management of IT itself must be digital. Consider the fact that for most enterprises right now this is not the case. IT is typically managed through a collection of spreadsheets and manual processes!
When developed for a particular business we are able to identify what the business does. We can then layer a
view of how the identified capabilities are automated through technology. This representation of Business and IT becomes a vehicle for a new level of collaboration across the enterprise. For the first time we are simultaneously exposing both what the business needs and how those needs can be fulfilled digitally. Business and technology are seen as co-existing and inseparable. However, the approach goes far deeper than that.
If we now consider the idea of continuous transformation we recognize that we must turn to the Agile paradigm. We must transform using an Agile approach that evolves with the enterprise. The Scaled Agile Framework® (SAFe®) provides a basis for doing this.
When we examine SAFe we see that it recognizes the criticality of the architecture. It refers to the Architecture Runway wherein the idea is that new increments must land cleanly in the architecture. This is an important clue because in MEA we rarely see the TMO embracing Enterprise Architecture. SAFe rightly recognises that we must have a view of ‘what’ we are building although this basic concept is too often overlooked.
The idea is simply this. If we do not articulate what we are building then we arrive at an incoherent technology landscape that is complex, costly and that is certainly not agile. We arrive at multiple technology platforms with overlapping capabilities. We arrive at data silos and no coherent integration. Think of a building that was constructed with no architecture plan or a city that has evolved with no city planning. These are the results of the program of initiatives with no underlying architecture.
Meanwhile, a key emerging paradigm is that of the Digital Business Technology Platform (DBTP). This concept has been put forwards by Gartner. The concept can be considered as the technological realisation of the Digital Canvas: • An alignment of technologies into a single business-enabling solution that addresses the key architecture domains of the canvas. • A coherent approach to technology that standardises workflows, integrations, analytics and more to derive the agile framework that is required.
I like to think of it as the enterprise operating system. The technology components that manage systematic access to enterprise assets such as systems and data.
Major platform providers such as Microsoft, ServiceNow and others are moving in the direction of the DBTP. However, certainly at this stage a financial institution cannot simply purchase a DBTP. It has to be designed and realised incrementally. Those who set out now with a clear architecture map beneath them can realise this goal and all of the attendant benefits of agility and low cost of transaction.
Transformation Management Platform: Automating the Digital Transformation Process
The DBTP represents the ‘run-time’ technology foundation of the digital enterprise. However, we recognize that the DBTP must be designed and must itself evolve in line with the needs of the enterprise. We therefore need to consider the ‘plan-time’ technology platform that automates the ongoing transformation. We refer to the plan-time equivalent of the DBTP as the Transformation Management Platform (TMP).
The role of the TMP is to enable the continuous alignment of strategic goals and objectives with agile projects and with the underlying architecture. Currently, certain aspects of TMP are already recognised. Corporate Performance Management (CPM) exponents have long recognised the need to systematically link strategy and goals to projects and initiatives. However, as mentioned earlier this approach is myopic because it does not recognize how projects impact the architecture.
There are other key elements to consider in realising the TMP. The DTMP is rich with data and this data exists all the way from front end-channels to ERP systems in the back office. The TMP should therefore be capturing relevant data from the DTMP to help inform the strategy and to measure progress towards objectives.
Whilst the TMP concept may seem far reaching the building blocks are already in place. The role of the Digital Transformation Office should be to recognise these elements and to bring them together. This is entirely achievable and in our view is the only way of evolving the truly digital enterprise.
