SME Advisor Issue 122

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ISSUE 122

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MANAGEMENT Dominic De Sousa Chairman Nadeem Hood Group CEO Georgina O’Hara Publishing Director Paul Godfrey Head of Content – SME paul.godfrey@cpimediagroup.com +971 4 440 9105 Editor Rushika Bhatia rushika.bhatia@cpimediagroup.com +971 4 440 9115 ADVERTISING Business Development Executive Mohamed Kerrouchi mohamed.kerrouchi@cpimediagroup.com +971 4 440 9162 Account Executive Freshia Mistry freshia.mistry@cpimediagroup.com +971 4 440 9161 Account Manager Mrudula Vempuluru mrudula.vempuluru@cpimediagroup.com +971 4 440 9137 DESIGN Head of Design Glenn Roxas Art Director Sam Birouty Senior Designer Froilan Cosgafa IV Production Manager James Tharian Data Manager Rajeesh Melath Printed by Al Ghurair Printing & Publishing LLC

Head Office PO Box 13700, Dubai, UAE Tel: +971 (0) 4 440 9100 Fax: +971 (0) 4 447 2409

© Copyright 2016 CPI. All rights reserved. While the publishers have made every effort to ensure the accuracy of all information in this magazine, they will not be held responsible for any errors therein.

A strong dose of financial management Organic business growth is an obvious priority for SMEs in the region, but something that often stands in the way of moving to the next level is lack of prudent management of finances. An effective financial management system is a fundamental factor to ensure that a business remains financially stable while continuing to grow.

Editor

With upcoming mega-initiatives such as Expo 2020, the new Wholesale City and the Etihad Rail in the pipeline, the issue of financial management is more pressing than ever. This shift towards globalisation means that SMEs are now looking at a more complex multi-currency, multi-stakeholder environment. SMEs will need to revisit their financial management strategies (of course, don’t forget the all-important cash flow!) to adapt to this evolving landscape, minimise losses and continue to make profits despite market fluctuations.

In this issue, we’ve spoken to global economists, financial experts and industry leaders to give SMEs compelling advice on the way moving forward. Here’s a quick snapshot of what we learnt a) SMEs will need to put in place financial systems and processes such as the calculation of key profitability ratios, which help determine the company’s current financial standing and avoid any cash flow crunches. b) SMEs will have to be crystal clear about the business and financial risks affecting their company. A top expert from the prestigious Institute of Risk Management rightly remarks, “Leaders who think critically about the future, anticipate disruption to their sectors, while building resilience and agility in their models, will be in a better position to tackle a challenging risk environment in 2016 and thrive.” c) Building strategic alliances or working with reputable partners can help SMEs gain a collaborative advantage. This increases their capabilities, while reducing costs, risks and financial uncertainties.

For instance, SMEs looking to expand overseas will need to partner with regional banking partners such as NBAD to be equipped with tailor-made trade financing solutions, which will give them a significant competitive advantage. Find out more in our detailed analysis on page. 28.

Finally, one thing is for sure: the SME space needs financial management protocols more than ever, because they are the road to better procurement of finance, better efficiency and cost-effectiveness. In 2016, the financial management challenge is tougher and steeper than ever. Is your business ready to face it?

Enjoy reading this issue of SME Advisor!

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PRESENTING PARTNER

STRATEGIC SME PARTNER

OFFICIAL GOVERNMENT PARTNER

CONTENTS

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09 EDITOR’S NOTE A strong dose of financial management – Does your business have all the vital boxes ticked?

12 SME CONTENT CURATORS Presenting this month’s portfolio of industry specialists and thought-leaders, who played a critical role in the content of the magazine.

The Economist’s View 12 OIL, US DOLLAR AND GOLD. Top industry practitioner Nour Amache discusses fluctuations in the oil and gold markets, their impact on the dollar, and the way moving forward.

18 RISING TO THE CHALLENGE – ANTI-BRIBERY AND CORRUPTION. Nicholas Cameron, Head of Forensic, KPMG, highlights the growing need for sturdy compliance structures.

22 THIS WAY FORWARD: 5 STEPS TO ORGANIC GROWTH.

SME ADVISOR ISSUE 122

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46 PIONEERING FINANCIAL LITERACY: SOUQALMAL.COM. Ambareen Musa, Founder and CEO of the fast-growing brand speaks to SME Advisor.

Data & Analysis 52 ASSESSING YOUR SME’S KEY PROFITABILITY RATIOS. A practical analysis presented

by Stuart Leung, SEO Manager, Salesforce.com.

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Emerging Middle East 58 DIGITAL FINANCIAL SERVICES IN EGYPT. We explore this growing trend in SME financing.

Organisation & Structure 62 DEVELOPING A ROBUST FINANCIAL RISK MANAGEMENT FRAMEWORK. It’s more important than ever to identify risks and develop a working plan, says Carolyn Williams, Director of Corporate Relations, Institute of Risk Management.

Business Banking 38 THE EVOLVING LANDSCAPE OF TRADE FINANCE. What are the global drivers of trade finance and what are the opportunities that are emerging?

Digitally Disruptive 34 YOUR GATEWAY TO SUCCESS: ETISALAT’S NEW BUSINESS ULTIMATE. Unveiling a mobile offering that will boost SME data connectivity!

Infographic of the month 38 E-commerce trends in the Middle East. Editor Rushika Bhatia presents a snapshot of key trends shaping the SME marketplace.

Movers & Shakers 40 “WHAT MATTERS TO THE CLIENT” An exclusive interview with the dynamic leaders of UHY Saxena…

68 EXPLORING POLICY UPDATES ON FINANCIAL ASSISTANCE. A top expert from Clyde & Co. evaluates the implications.

Contributor’s blog 74 IMPROVING MANPOWER PLANNING TO BOOST STAFF PERFORMANCE. Professor Shandre Thangavelu, Research Fellow at the Singapore Productivity Centre sets the scene.

The Big Debate 78 P2P LENDING VS. EQUITY CROWDFUNDING. We explore two sides of the finance debate, advocated by the professional entities Beehive and Eureeca.

SME Unplugged 80 DECODING BEHAVIOURAL FINANCE SME Advisor takes a closer look at this emerging science.

Content Curators

“Data analytics is an increasingly important and cost-effective way tool to assess anti-bribery and corruption controls but many companies aren’t using it effectively.”

Nicholas Cameron Head of Forensic, KPMG

CONTENT CURATORS Presenting this month’s portfolio of industry specialists and thought leaders, who played a critical role in producing the feature content of our magazine and ensuring that we were more topical than ever.

“The better you understand your options, the more educated you are, the more sound financial decisions you make. It is as simple as that.”

Ambareen Musa Founder and CEO, Souqalmal.com

“Technology-enabled financial services allow customers to use tools such as mobile phones, the Internet and payment cards to access and manage their accounts.”

Margarete Biallas Digital Finance Services, IFC

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Content Curators

“UNDERSTANDING THE PERCENTAGE OF PROFITABILITY IN A COMPANY IS ONLY VALUABLE IF AN ORGANISATION CAN THEN USE THAT DATA TO AFFECT POSITIVE CHANGE.”

Stuart Leung SEO Manager, Salesforce.com

“We can guide SMEs to take a prudent, wellinformed approach, while giving them the market intelligence and strategic depth to source profitable solutions that will build a firm platform for more vibrant times ahead.”

“LEAN MANPOWER ISN’T ABOUT DOWNSIZING OR CREATING UNEMPLOYMENT – INSTEAD, IT’S ABOUT MAXIMISING THE USE OF RESOURCES AND REDUCING WASTE IN PRODUCTS, SERVICES AND PROCESSES TO INCREASE PRODUCTIVITY.”

Professor Shandre Thangavelu Research Fellow at the Singapore Productivity Centre

“Corporate governance requirements are becoming more prescriptive in requiring risk management arrangements to be clearly in place.”

Carolyn Williams Director of Corporate Relations, Institute of Risk Management

“It should be noted that equity crowdfunding and peer-to-peer lending are merely different pieces of the same financing puzzle.”

Rajiv Saxena

Chris Thomas

Founder and Managing Partner, UHY Saxena

Co-CEO and Co-Founder, Eureeca

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The Economist’s View

Oil, US Dollar and Gold The correlations between Dollar-Oil and Dollar-Gold have always been a topic of ongoing discussion and debate. In following feature, top industry practitioner Nour Amache discusses fluctuations in the oil and gold markets, their impact on the dollar, and the way moving forward…

A lot of speculation exists about the future of oil prices and the consequent effect on the global markets, investment levels, aggregate demand and employment, especially as it pertains to the GCC region. This is what instigates countries such as the UAE to promote an economy not dependent on oil revenues for its growth and sustainability. This is seen through the UAE’s recent plan to celebrate exporting the last barrel of oil and build an economy independent on oil and market fluctuations, by adding new growth areas, creating efficiencies, and building productivity.

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So what are the causes of this fluctuation in the gold and oil markets? Moreover, what is the relationship between these commodities and the US Dollar?

Why is there an inverse relationship between their demands?

A rise in the price of oil tends to increase inflation (cost-push inflation- this has been the experience of many countries that bear high costs of production due to the gasoline hikes and the higher cost of operating machinery etc.). That said, when people anticipate a higher inflation rate, they worry about the value of their money since inflation erodes the purchasing povwer of the currency, which is what leads people to increase the demand for gold and hence pulling the gold price up.

The experience of many countries prove this phenomenon: consider how people suffered and lost most of their lifetime savings through the Brazilian and the South American currency crises from 1992 to 1994, the South East Asia crisis of 1997 or the Russian crises in 1998, when their respective currencies’ collapsed.

Gold, on the other hand, cannot suffer

When unemployment is low, the value of the dollar tends to appreciate, which leads to a decline in the price of gold.

such a failure because it is not created by a government at will, as it is the case with ‘fiat’ currencies created by decisions of central banks.

Oil, which is priced in dollars after the Petrodollar system was created in 1973, is not the only catalyst that drives the gold market. The status and health of the economy, as seen through the rate of unemployment, significantly affect the price of gold.

When unemployment is low, the value of the dollar tends to appreciate, which leads to a decline in the price of gold. This is the case with the

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The Economist’s View

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The Economist’s View

United States: the latest job report released on February 5 showed that the unemployment rate dropped to its lowest levels in eight years, dipping to 4.9 per cent below the five per cent rate, which many economists consider as the ‘full-employment’ rate.

In parallel, wages are increasing at a steady rate of 2.5 per cent, higher than the projected rate of 2.2 per cent.

The overall picture seems promising; consequently, the gold price dropped sharply from US$1,161 to US$1,146 per ounce, just minutes after the release of the US jobs report.

Nonetheless, this remains higher than the six-year low of US$1,1049 reached by the end of 2015. But since the number of jobs added in January in the United States according to the released report was only 151,000 jobs, which is below the predicted forecast of 190,000, then this suggests a possible delay in another interest raise rise, and hence imply that the gold price might pick up again as economic fears come again into the picture.

In a nutshell, “All other things being equal, a rising dollar means a falling gold price,” said Brien Lundin, editor of Gold Newsletter. So, “over the short term, and especially during periods where monetary or price inflation isn’t a concern, then gold and the dollar do trade in a generally inverse way.”

Hence, ceteris paribus, the US dollar is moves inversely with commodities in general and gold in particular. Oil, on the other hand, tends to move proportionally with Gold. With rising oil prices, we expect to see a hike in inflation and as a result people rush to buy Gold which drives its price up.

So, what is the relationship between the Gold and the Dollar and why is their demand inversely related?

The origin of the relationship between the gold and the dollar goes back to the Bretton Woods Conference that was held in July 1944 14

in the final days of the Second World War, which firmly established the US dollar as the global reserve currency.

This conference was held to create a new global economic order in the wake of a global economy demolished by the war, whereby the United States emerged as a first substitute to the bankrupt and war-torn former global economic power Britain.

It was, in fact, during this conference that a number of global financial agencies were created. They were: • The International Bank of Reconstruction and Development (IBRD), which became later known as the World Bank);

• The International Monetary Fund (IMF); • The General Agreement on Tariffs and Trade (GATT), which was later known as the World Trade Organisation (WTO); Most importantly, a new fixed exchange rate regime with the US Dollar was established, such that all global currencies were pegged to the US dollar. The US dollar would hence be fully convertible into gold at a fixed rate of US$35 per ounce, which created a sense of security among the nations in pegging their currencies’ value to the US Dollar and

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The Economist’s View

this assisted in bringing back stability into the financial system. What this created was a strong demand for the US dollar as a preferred medium of exchange and to accommodate for this growing global demand, the US Federal Reserve would increase the supply of dollars by printing money.

This is profitable for the Federal Reserve since it creates these dollars and then earns profit from them with the interest rate they set on it.

With the United States holding almost 80 per cent of the world’s gold reserves by the end of WWII, the US Dollar became the strongest reserve currency. This gave way

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to a massive economic expansion phase. Later by the late 1960s, the American government was spending tremendously, especially for funding the war in Vietnam. This record deficit spending worried many nations that started doubting the economic decisions of the US government, specifically with the increasing imbalance between US gold reserves and the US debt level, especially that the gold reserves were declining as many governments started demanding gold in return for their excess dollars.

In 1971, more nations were exchanging their excess dollars for the safety of gold and consequently trust in the American government to soundly manage its finances was declining.

Amid this situation, Washington ought to fix its financial problem of massive spending and reduce its existing debt to restore trust in the US dollar; instead on August 15, 1971, President Nixon decided to abolish the International Gold Standard system and hence the convertibility of the gold to the US dollar. Accordingly, the US dollar was declared a ‘fiat’ currency that ‘derives its value from its sponsoring government- it would be issued and accepted by decree’.

By becoming a ‘floating’ currency i.e. not pegged to gold, the dollar would be susceptible to the market forces of supply and demand just like any other commodity.

Furthermore, with the dollar becoming a ‘floating’ currency, so did the other currencies that were fixed to the dollar. This gave way to the rise of currency speculation and hedge funds. Under this new system, the Federal Reserve could print money at will without having to back it up by enough gold reserves, which provided monetary freedom. This, however, instigated a significant concern that the global demand for US dollars and US debt securities would drop considerably.

To counteract this, President Nixon

The origin of the relationship between the gold and the dollar goes back to the Bretton Woods Conference that was held in July 1944 in the final days of the Second World War.

1975

all oil producing nations of OPEC agreed to price the oil in US dollars

Fracking firms in US have boosted output to

9 million

barrels per day from five million barrels per day in 2008

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The Economist’s View

and his Secretary of State Henry Kissinger, developed the Petrodollar system- that is ‘dollars for oil’.

According to this agreement made between the United States and the Saudi Arabia, the Saudis agreed to price all oil sales in US dollars only and the Saudis would invest their surplus in oil revenues in US debt securities. In return, the United States would provide protection for Saudi Arabia’s oil fields, specifically military protection from Israel. By 1975, all oil producing nations of OPEC agreed to price the oil in US dollars and hold their surplus dollar revenues in US debt securities. This implied that the global demand for US dollars would not decline after the collapse of the Bretton Woods agreement; in fact, it would increase with the high rise in demand for oil worldwide.

This arrangement stimulated countries to search for ways to obtain US dollars that would enable them to pay for their oil imports. Hence, many 16

countries opted to develop export goods for the US market, in order to exchange their goods for US dollars.

While there is a debate concerning the benefits versus costs of this system to the United States versus the rest of the world, the focus now is to understand how the price of gold is susceptible to changes in the price of oil and in the value of the dollar.

The price of oil is declining for a multitude of factors, including political reasons such as the lifting of the sanctions on Iran, which means a higher supply of oil in the global market, as Iran plans to increase supply immediately by 500,000 million barrels per day, with the potential of three to four million barrels per day. In addition, KSA and Iraq are currently pumping at record levels while the fracking firms in the US have boosted output from five million barrels per day in 2008 to nine million barrels per day now.

Moreover, the depreciation against the dollar of troubled economies

such as Russia, Brazil and Venezuela helped maintain their output levels by increasing their local currency revenues relative to their costs.

Furthermore, the growing fear about action against climate change especially after the World Climate Summit 2015 has led some producers to increase their supply as hard as possible while they can, before the deployment of alternative energy technologies.

This rising supply coupled with a relatively lower demand leads to lower oil prices and consequently lower revenues for oil producing countries.

This has many political and economic implications including a decline in projected revenues and a lower aggregate demand.

For this reason, and to avoid falling in the trap of market fluctuations, countries with a sound economic outlook are looking toward adopting policies that promote sustainable growth based on productive sectors independent of oil production.

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The Economist’s View

Rising to the challenge Anti-bribery and corruption

Nicholas Cameron, Head of Forensic at KPMG, says that companies across the Middle East need to face up to increasing anti-bribery and corruption (ABC) challenges.

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The Economist’s View

Globalisation is posing greater challenges for anti-bribery and corruption (ABC) compliance than ever before. Two factors are key, according to a recent KPMG report.

A growing number of governments around the world are tightening ABC regulations or introducing new ones.

Equally, as companies globalise operations, they are increasingly reliant on third parties to do business in parts of the world where there may be a higher risk of corruption. The global survey shows that companies are trying to rise to the challenge but clearly suggests that a great deal more needs to be done to create sturdy ABC compliance structures.

Despite greater efforts by leading companies across the Middle East to build ABC frameworks, it’s clear that there are still gaping holes. One problem area is the management of third parties. Another is that certain sectors have historically been susceptible to, and scrutinised by foreign regulators for, corruption issues, such as the pharmaceutical and oil and gas sectors.

Companies in both sectors often use distribution models and a variety of other agency agreements. There can also be a reluctance by some companies to strongly demand and monitor compliance by their third parties, due to the importance they play in ensuring access to the Middle Eastern market. Respondents to the KPMG survey admit it’s their biggest ABC challenge, and also admit they are not doing enough to develop a culture of compliance among either their employees or their vendors and other business associates.

The survey shows a sharp increase in the proportion of respondents who say they are highly challenged by the issue of ABC, compared with KPMG’s 2011 global survey. Despite the difficulty of monitoring business dealings with third parties, nearly half of the respondents do not clear out – or at least identify – high-risk

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The Economist’s View

third parties. Failing to put in place mechanisms to identify higher risk third parties and either weed them out before issues arise, or apply additional safeguards to monitor and mitigate the risks they pose, is a perennial issue for companies operating in the Middle East.

In order to create “slush” funds to pay bribes off the books, funds can be extracted through invoices from susceptible vendors, such as general trading companies, consultants and agents. The services supposedly covered by these invoices either do not take place or the value of the goods and services provided are worth far less than what was paid. Knowing which third parties might require additional scrutiny and controls is therefore an essential first step to controlling fraud and corruption issues.

Another relatively common ruse across the Middle East to extract value used to pay bribes is the abuse by sales teams of discounts and rebate schemes offered to customers. These impact the many companies who rely on local distributors and re-sellers to get their products to market. To compete for larger, more strategic customers, large consumer goods brands, including technology and pharmaceutical companies, often offer discounts and rebates on a selective basis to incentivise end customers, hoping to persuade them to select their brand and increase purchase volumes.

These companies trust their third party business partners (such as distributors and re-sellers) to pass on discounts to end customers. Discounts and rebates therefore can quite easily be justified internally by sales teams. Unfortunately, there may be insufficient monitoring to ensure that any discounts and rebates are actually passed on to the end customer by the third party. Instead, this additional value - provided in credit or free 20

goods – can be used to pay bribes.

The survey also highlights that nearly two thirds of global companies indicated that mergers and acquisitions are part of their growth strategy but many respondents seem to be unaware of the consequences of failing to identify ABC risks during the acquisition phase. Many Middle Eastern companies also do not consider these risks or fail to realise the true impact a significant event may have, potentially exposing themselves to financial and reputational losses.

There have been a number of incidents where acquired Middle Eastern businesses experience dramatic downturns in revenues under new management. In one recent example, KPMG was engaged to review the performance of a recently acquired construction services business whose turnover suddenly declined following acquisition. The acquiring company was disturbed to find that the downturn seemed to be strongly connected to the previous management’s culture of paying

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The Economist’s View

bribes to win contracts.

The tighter compliance environment brought in by the new management prohibited such misbehaviour. As a result, the acquired company was no longer able to compete in a competitive marketplace. Had a more thorough ABC due diligence been conducted pre-acquisition, the transaction could have been aborted, or the price of the company negotiated to a more reasonable level.

Data analytics is an increasingly important and cost-effective tool

to assess ABC controls but many respondents are not using it effectively. Even with better controls and stronger ABC policies, companies continue to fail to comply with the tougher regulations, and are fined heavily as a result. Much has been said about ‘tone at the top’, yet we continually see failings at middle and lower management level, which suggests that there is not enough focus on ‘tone in the middle’. Companies can have perfect ABC programmes but will continue to fall short if they do not improve the way they do business.

Nicholas Cameron, Head of Forensic at KPMG

Data analytics is an increasingly important and cost-effective tool to assess ABC controls but many respondents are not using it effectively. www.smeadvisor.com

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The Economist’s View

This way forward: 5 steps to organic growth

Top economist and financial expert Margarete Biallas of IFC takes a hardened look at the fundamentals of doing business and gives critical advice to the region’s growing SME sector…

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SMEs all over the world face similar issues, typically a restrictive business enabling environment, difficulty obtaining financing, and weak management or business skills.

But such challenges, though global, vary by region. In recent years, and especially after Arab Spring, SMEs in the Middle East and North Africa have faced significant challenges.

The ongoing war in Syria and Iraq, widespread political instability, and weakening economies are taking their toll. SMEs are largely unable to control factors impacting them, such as the global economic crisis, the collapse in the number of international tourists in some countries, such as Egypt and Tunisia, or the impact on oil-producing countries as their economies reel from low, sustained oil prices.

These problems appear to be a “new normal,” which is alarming because small businesses form the backbone of the economies of the Middle East and North Africa: they have long been significant contributors to both

employment and GDP. Although figures vary from country to country, SMEs represent approximately 80 per cent of all businesses in the region and account for 70 per cent of the workforce. If SMEs in the region are under duress, it impacts entire economies as well as their societies.

At the same time developments in technology open new opportunities to SMEs which may offer some respite at least when it comes to improved access to finance. Also, innovations in supply chain automation, working capital optimisation, electronic invoices, no real-time cash visibility and data analytics provide growth opportunities and new business models.

Getting Prepared Governments can do much to improve the environment so that SMEs are more likely to thrive, for example, by cutting red tape, improving financial regulations or helping SMEs participate in public procurement.

But there is much that SME owners

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The Economist’s View

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The Economist’s View

A good business plan shows that every aspect of running a business has been understood and thought through.

and managers can do to increase their chances of coming out on top in the marketplace. Here are five things small business owners and managers should consider as they peer into an uncertain future.

1. Develop a first-class business plan and have a management team committed to implementing it Many entrepreneurs think a business plan is simply a document required for loan applications. But business plans do more than that — they shine a light on the viability of businesses and the management savvy of managers. A good business plan shows that every aspect of running a business has been understood and thought through, for example: the market, competition, cash flow forecasts, organisation and 24

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The Economist’s View

management. Even if a bank never lays eyes on an SME’s business plan, the process of preparing it will help management be proactive rather than reactive. The SME will better understand opportunities and challenges and prepare for them. A critical success factor is a committed management team and owner all buying into the business plan to ensure it is implemented; with adjustments as needed along the way.

2. Try innovative approaches to finance Many people and businesses use cash to conduct their business transactions or look to collateralised loans as a source for financing — in fact, only 18 per cent of adults in the Middle East and North Africa region have bank accounts and a formal banking institution. But in recent years more and more alternatives have become available. For example, in many countries entrepreneurs and SMEs can use mobile phones to receive payments from customers, pay suppliers or manage their bank accounts. This approach is convenient, safe, quick and cheap, which provides an attractive option for SMEs that have exclusively relied on cash in the past, thereby increasing the flow of business transactions.

Conducting financial transactions electronically helps the SME to build a track record, which financial services providers can analyse to assess the credit worthiness of an SME. Utilising traditional data; such as supply chain data further enhances the ability of SMEs to access loans.

Digital financial services also benefit financial institutions, which can reach new markets without the need for costly expansion of its branch networks, as well as retail businesses in the agent network.

SMEs can also obtain equipment through non-bank solutions, such as leasing. Leasing providers look to SME cash flow rather than collateral, and can always recover the equipment

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if their business expectations fall short. The analysis contained within a business plan, if done thoroughly, provides much of the information necessary for a leasing transaction.

3. Improve business and technical skills A common problem facing small businesses and entrepreneurs is a lack of business and management skills.

Fortunately, many of these skills can be developed. Sharp SME managers will recognise that honing their skills will make them more effective in a challenging environment and give them an edge on their competition.

Desirable management skills cover a broad range of topics, include human resource management, market analysis, financial accounting, and marketing. Many free or affordable tools exist for helping SMEs build their capacity, including IFC’s SME Toolkit (smetoolkit.org), which exists in local edition for Algeria, Egypt, Jordan, Lebanon, Pakistan, Qatar, Saudi Arabia and UAE. Many banks and micro-finance institutions have discovered that clients with better business skills are also more likely to pay back their loans. Advisory services that build the capacity of SMEs and entrepreneurs are proving to be a good complement to providing financial services.

4. Advocate for constructive change Individual businesses have little sway over regulations, even though they are heavily impacted by them.

Burdensome licensing requirements, for example, can seriously constrain entrepreneurship, as can onerous business inspections. Legislation regarding micro-finance or leasing can also limit access to finance. But SMEs can participate in associations or work with NGOs to provide momentum for reform. SME experiences, effectively communicated, can provide the ammunition needed to sway policymakers and national leaders.

Sharp SME managers will recognise that honing their skills will make them more effective in a challenging environment and give them an edge on their competition.

5. Improve governance Good governance is becoming increasingly important for small businesses, particularly those seeking solid business partnerships with suppliers, financial institutions, or others. It also impacts the bottom line: SMEs with good governance typically improve their operational performance and are better positioned to keep their growth sustainable and on track. Where credit scoring is used to making lending decisions, good governance smooth the way for obtaining financing.

Upon examination, the cause and effect is not difficult to see. Better governance, for example, leads to improved internal controls, better financial management reduced opportunities for fraud, and less dependency on single individuals 25

The Economist’s View

With good preparation, innovative thinking, and access to the right tools, small businesses in the region can brace themselves for continuing economic hardship.

Governments, financial institutions.

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for business success. These characteristics make a wellgoverned SME more likely to obtain financing. Not surprisingly, more and more financial institutions help their SME clients improve their governance.

Summing Up SMEs, almost by definition, are resourceful and resilient. With good preparation, innovative thinking, and access to the right tools, small businesses in the region can brace themselves for continuing economic hardship. Governments, financial institutions, NGOs and developmental organisations have important parts to play, but there’s no reason for SME owners and managers to sit and wait.

The potential payoff could be significant for both SMEs themselves and the economies they operate in. Those countries where SMEs stay strong will be among the first to recover. Innovations and technology offer opportunities to SMEs to not only grow their business, but more importantly enable access to finance.

Meet the author...

Margarete Biallas leads IFC’s work in Digital Financial Services and has worked for IFC since 2006. Previously, she managed IFC’s Access to Finance program in the Mekong and was responsible for financial markets advisory services in Vietnam, Cambodia, and Lao PDR. Prior to joining IFC she worked for KfW as Senior Risk Manager and Senior Investment Officer.

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Business Banking

The evolving landscape of trade finance

What are the global drivers of trade finance and what are the new opportunities that are emerging? In this timely and comprehensive article, we present a compelling survey of market data‌

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Business Banking

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Business Banking

In 2015, four major economic factors impacted global trade flows: the decline in commodity prices; economic and political volatility across key trading markets; China’s economic slowdown; and the widening gap between the US dollar and other major currencies.

Trade financing in current economic conditions In 2015, four major economic factors impacted global trade flows: the decline in commodity prices; economic and political volatility across key trading markets; China’s economic slowdown; and the widening gap between the US dollar and other major currencies.

Set against this backdrop of uncertainty, interestingly, a survey by the International Chamber of Commerce (ICC) reveals that 63.3 per cent of businesses report an increase in trade financing activity.

Given that global trade has been experiencing slower growth in recent times, this outcome is quite surprising. However, experts explain that this could be due to the fact that the rising volatility in international trade markets has led to an increased demand for trade finance to cover potential default risks.

Furthermore, experts point out that as a result of the global economic crisis, there is now an increased focus on implementing corrective measures and policies within the trade sector in order to help fuel economic growth and recovery. This has led to a specialised focus on trade financing, which is essential for the lubrication of global trade. Estimates suggest that trade finance enables about 80 per cent of global trade flows – with bank-intermediated trade finance supporting 30 to 40 per cent of global trade flows.

Opportunities in the UAE Let’s take a look closer to home.

Post-crisis, UAE has shown strong signs of growth in the last couple of years, and the country is predicted to further expand with particular focus on sectors such as transport, trade, tourism and real estate. There is immense opportunity for partnering in infrastructure expansion in the UAE, in light of several large-scale developments including:

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• The prospective economic growth coupled with the World-Expo 2020 – Mahmoud Al Bastaki, CEO of Dubai Trade has earlier remarked that Dubai’s foreign trade is expected to touch AED four trillion by virtue of hosting Expo 2020.

• The recent announcement of the Wholesale City project in Dubai – Earlier this month, plans were unveiled to build a market worth AED 30 billion close to the city’s new Al Maktoum International Airport. Termed as the ‘Wholesale City’, this mega project will link three continents and will house about 15,000 traders spanning from Malaysia to Germany.

Given its favourable geographical position, Dubai is already at the heart of prominent trade route – generating immense opportunities in cross-border transactions.

However, the Wholesale City will play a pivotal role in positioning Dubai as the centre for trade and will further help achieve the country’s goals for economic diversification. In fact, the Dubai Wholesale City aims to raise the UAE’s share of the global wholesale trade sector, which is expected to grow from US$4.3 trillion to US$4.9 trillion over the next five years.

• Economic diversification agenda in a climate of low oil prices – the UAE has been one of the first GCC countries to shift its focus from an oil-dependent economy; this remit looks at alternative sectors such as tourism and trade to boost economic development. As a result, several trade reforms and initiatives are being undertaken to encourage businesses to expand overseas.

Trends shaping global trade finance • Digitisation of trade finance – This is perhaps one of the

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Business Banking

3.9%

Trade reached AED

534bn

Estimated world trade growth in 2016

in the first half of 2015

The global trade finance gap is about US$

1.4tr US$693bn

of which is in developing Asia – presenting a vast opportunity for banks

1.59%

The Middle East was the only region where trade finance messaging traffic grew in 2014

AED

792bn Non-oil trade in the UAE in the first nine months of last year remained stable

biggest – and the most obvious – trends impacting the world of trade finance. A report released

by Accenture on trade finance gives an example: “Bank Payment Obligation (BPO) is the other new kid on the block. It represents an irrevocable undertaking on the part of an importer’s bank to pay (or incur a deferred payment obligation) at maturity a specified amount to an exporter’s bank.

Although the BPO product is not different from traditional trade finance products in its intent to mitigate the risks of international trade, it does so in a fully digital way, thus offering significant advantages in speed, flexibility and reduced complexity.”

• Blockchain disrupting finance – This is by far the most interesting trend in the world of trade

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finance as it ties in innovation with digitisation. With the pace of change the world is currently experiencing – especially with technologies such as Blockchain, it is only a matter of time before we see trade being completely redefined.

• Implementation of the Basel III banking standards – With stricter compliances in place , banks have redoubled their efforts to continue providing value added products to businesses to offset the effect of reducing availability of credit and potential increase in pricing of trade financing products.

The critical role of banks Traditionally, banks – and the overall banking sector – have played a pivotal role in providing access to finance and managing risks for businesses.

(Sources: Federal Customs Authority, WTO, Swift, Asian Development Bank)

This is particularly true when it comes to trade as it exposes businesses to significant risks, especially if trading partners are based overseas and contracts fall under more than one country’s jurisdiction. Such risks are best mitigated with the help of trade finance solutions provided by a bank or financial partner. Traditionally, large global banks have been the natural choice for trade finance solutions, owing to their cross-border expertise, vast amounts of trading data and market intelligence. In fact, reports suggest that banks account for a quarter to a third of global trade finance.

Regionally, leading banks such as National Bank of Abu Dhabi (NBAD) offer a range of trade finance services, from traditional trade financing to more advanced solutions such as structured 31

Business Banking

As an SME, it’s imperative to work with a reliable banking partner using a technique designed to meet the unique needs of the business; this will give you a considerable competitive advantage. trade financing that enable the purchase and sale of goods on an international scale. In addition, the global markets experts provide advanced hedging solutions to businesses exposed to different currency transactions. NBAD experts can provide tailor made solutions after assessing your trade business mechanisms and its key areas of risk as well as liability to the third parties.

What does this mean for SMEs? A large part of the renewed focus on trade financing has been on the imperative to allow access to adequate levels of trade financing to SMEs. It is a well-known fact that SMEs play an integral role in international trade (particularly within developing markets) and their wellbeing is essential to promoting economic development in a sustainable fashion.

While banks and financial institutions are committed to meeting the increasing demand for trade finance solutions, SMEs haven’t fully been able to reap the benefits – primarily due to strict compliance 32

measures. The same survey by ICC reports that SMEs comprise of nearly 53 per cent of all rejected trade finance transactions. So make sure you can present audited financial statements (minimum last three financial years), your trade licence, MOA and trade related details (trading terms with suppliers/buyers and statistical trade information).

At the same time, leading banks are also seen investing in increased awareness, enhanced end-to-end customer experiences, renewed technologies and improved transparency through active data management, ultimately leading to productive solutions for their clients.

All in all, as an SME, it’s imperative to work with a reliable banking partner using a technique designed to meet the unique needs of the business; this will give you a considerable competitive advantage. This can also result in a more robust operation that reaps the benefits of releasing cash into the system as and when required, without resorting to requests for stand-alone loans at a premature stage of your SME’s lifecycle!

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Digitally Disruptive

Your gateway to success: Etisalat’s New Business Ultimate A mobile offering that prides itself on four significant USPs: great value, more data, flexibility and a choice of latest smart phones at zero upfront. SME Advisor explores different facets of the solution and highlights the key opportunities it presents to SMBs…

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In today’s competitive business landscape, SMBs are constantly looking out for new solutions to help make their business faster, more efficient and cost-effective. Achieving full mobility and connectivity is a primary goal for every SMB. This gives them a range of benefits such as on-the-go access to internal procedures, privileged data through bespoke apps and so on. With high levels of data connectivity, SMBs can access relevant information and will be enabled to tap into new revenue streams and markets.

The region’s leading telecoms provider Etisalat, who works with a large number of SMBs, is dedicated to providing SMBs with packages that help bring them fully up to speed. In its quest to stay on top of things and continue developing value added solutions for its customers, Etisalat carried out a thorough study of its marketplace and came up with the following realities:

• Digital is becoming the next key thing in the market and customer would expect more data centric products and offers.

• SMBs that are early adopters of digital medium are quick to react to the market as they are more aware about market dynamics due to using digital technology.

• Digital advertisement and adoption is increasing day by day.

• The entry of high speed LTE devices has led to an increased demand for high end data plans subscriptions.

• Increasingly, SMBs are looking for the convenience of having data benefits built-in their smart phone plan.

Etisalat has given these trends a good deal of thought and came up with an idea that is something of a breakthrough for businesses wanting data connectivity and flexibility on a budget. It’s this: New Business Ultimate.

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Digitally Disruptive

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Digitally Disruptive

The reality is that SMBs require an always-on communications network, 24×7 expert support and competitively priced services and solutions that are critical to their business performance and growth.

Etisalat has unveiled a fresh set of business mobile plans as part of its business mobile offering, which are more data centric and meet the requirements of evolving businesses.

The telecoms provider has been quick to identify that the market dynamics are changing very quickly and customers require solutions that are primarily data centric rather than voice centric.

New Business Ultimate is a first of its kind mobile plan from Etisalat that will have more data benefits than voice. Of course, customers that are looking for more voice minutes will have the option to choose from a range of add-ons. That’s not all, with New Business Ultimate plan, customers can opt for the latest, trendy smart phones at zero upfront cost.

All the data to run your business In the current business climate, excellent levels of connectivity are an essential, not a luxury. For the great majority of business sectors, the days are gone when a business can be competitive without an online profile. The reality is that SMBs require an always-on communications network, 24×7 expert support and competitively priced services and solutions that are critical to their business performance and growth. Etisalat offers a set of comprehensive features with its New Business Ultimate, and here’s a checklist of the key benefits it includes:– • Choose from a range of plans starting from as low as AED 100 per month and with data up to 12GB. Customers can choose a data plan that suits the unique needs of their business.

• Customers have the choice to opt for either a Flexi or National bundled minutes – depending on their unique requirements.

• Customers have the option to top up their voice or data

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requirements from the available flexible add-ons.

• Free calling within the same company account with bundled minutes.

Moreover, customers can also get the option of owning a latest smart phone with easy installments at zero upfront costs. Smart phones start from as low as AED 27 per month.

Working to your needs Let’s take a look at an example of Etisalat’s latest New Business Ultimate package. With a monthly fee of only AED 200 per month and a commitment of 24 months, customer can enjoy 12GB data, 650 local calling minutes and 200 minutes worth of free calls within the same company.

In addition to the above mentioned benefits, what is particularly appealing about the New Business Ultimate is its flexibility. For instance, customers that have a low data requirement can easily opt for the 2GB plan. On the other hand, customers that have a longterm data need can look at an 18 or 24 month solution. Customers can also assess their business requirements and further customise their New Business Ultimate Plan with additional addons, and also set their preferred usage limit (voice and data) on exceeding the selected package.

Overall, the idea of the New Business Ultimate is to reduce cost and optimise communication. Apart from connectivity – and the ability to speed up business processes – access to affordable data packages helps in mobilising your workforce to be truly ‘on-the-go’. It enables your business to effectively lower its costs, sparks creativity within employees, improves operational efficiency, enhances collaboration and puts you in a position of complete control!

To find a package suitable to you and for more information, please call Etisalat’s dedicated SMB Call Centre at 8005800.

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Give your business an easy start. Call us now!

800 5800 etisalat.ae/hellobusiness

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Get on board and experience a smooth start to your business with a personalised visit within 24 hours, exclusive offers on telecom services, priority helpline any day and at any time, and much more.

Infographic of the month

E-commerce trends in the Middle East The global landscape

E-commerce activity in the Middle East

1 in 3

Saudi Arabia is the second largest B2C E-Commerce market in the region

transactions take place on a mobile device

Over 50%

In Qatar, the country with the third highest per capita GDP worldwide, less than 20% of Internet users made purchases online

of e-commerce traffic is routed through mobile devices

Biggest challenges for firms Acquiring market share

28%

Inventory management

9%

Returns

9%

Sources: State of payments 2015 by Payfort, Frost & Sullivan

47%

Delivery

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Infographic of the month

Best marketing channels to push e-commerce sales

Comparison of market sizes in 2014 and 2020 Overall Arab World

US$ 7 billion

Social media

2014

US$ 2.3 bn

16%

UAE

US$ 1.5 bn KSA

US$ 1.4 bn EGYPT

Paid search

SEO

9%

16%

US$ 0.56 bn KUWAIT

US$ 0.28 bn LEBANON

US$ 0.21 bn JORDAN

E-mail marketing

Overall Arab World

US$ 13.4 billion

2020

13%

US$ 4.4 bn UAE

US$ 2.9 bn KSA

US$ 2.7 bn EGYPT

US$ 1.07 bn KUWAIT

US$ 0.53 bn LEBANON

US$ 0.4 bn JORDAN

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Movers & Shakers

Rajiv Saxena

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Movers & Shakers

“What matters to the client” AN EXCLUSIVE INTERVIEW WITH UHY SAXENA

In a climate where the emphasis for economic development is very much on the role of the SME, it’s chastening to remember that - regionally - only 28 per cent of businesses keep any kind of written accounts. The result? Leading practices are at the core of the nation’s ability to build SME performance - and here we profile the comments of three professionals at the helm of a business central to the debate. UHY Saxena has undergone a dramatic transformation from family-owned firm to a dynamic and structured modern enterprise. Rajiv Saxena, Founder and Managing Partner; Shivani Rajiv Saxena, Senior Partner; and Sumeet Nayyar, CEO explain the journey and the USPs defining a new competitive advantage…

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Movers & Shakers

How do you see the key benefits that a Chartered accountant can bring to the performance and outlook of an SME? Rajiv: It’s important to remember that most companies consult a Chartered practitioner for cosmetic reasons, typically when they are looking to show credibility to a bank or finance provider. For example it’s a requirement that their books have been audited by an approved firm, and so the company needs to show willing and go to a Chartered name. Yet it’s also the case that a Chartered professional can advise on a host of other factors, especially areas connected with the strategic expansion of a business. At a time when traditional markets may be challenging, this expert input can give invaluable advice on how to maximise market presence and grow in the most cost-effective ways.

Shivani: Another key factor is that consulting a Chartered professional helps bring fiscal discipline to the business and is an invaluable aid to proper financial planning. These are the critical elements for correct and effective business management.

What would you see as the key reason for UHY Saxena’s success in the region?

Rajiv: There’s no doubt that it’s because we get to know the client and really understand his business inside-out. We become part of the company’s DNA and know the style and culture of the firm - and hence, what are the right strategies for it to follow. We also offer a diversified portfolio of services, not being rigid or narrow in our approach, but offering skills across a very broad bandwidth of expertise.

Sumeet: If I may say, I also believe that our pure experience is very important here: we have been in this region a good many years and we 42

Shivani Rajiv Saxena

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Movers & Shakers

know what works in this market and what doesn’t. We know as well what is appropriate for each different market sector. This experience also means that we have worked with businesses at every stage of growth, and we won’t force a solution that is too advanced or too basic for the competence and standing of the business.

Do you believe that more businesses are becoming aware of the need to work with a qualified and credible accountancy as a matter of course?

Rajiv: Yes - but it’s not necessarily a rapid process. As we see the introduction of a tighter regulatory framework, more businesses will be required to underpin their operations by using the skills of a Chartered professional. Certainly, we are already seeing considerable improvements in this respect.

across the majority of sectors. We don’t tend to find that there’s a weighting toward one market more than another.

What do you see as the key skillsets offered by UHY Saxena, and how do these differentiate the company from so many others in the market?

Sumeet: In addition to our market experience and emphasis on understanding the client’s business, I would say that one of our key differentiators is the ability to work across the entire regional demographic and speak to clients in the language they feel most comfortable with. We have staff with fluency in 11 different languages, for example, and we also have a real appreciation for the different business protocols.

Can you provide a spectrum of bespoke consultancy guidance as well as classic accountancy and audit services? (For example, guidance on M&A activity, LBOs and market expansion?)

Sumeet: This comprehensive style of service is really at the heart of our brand. We offer very tailored services around key areas such as Inheritance Planning, Succession Planning and Asset Protection, as well as a host of services dedicated to securing the structure and efficiency of the organisation and the wellbeing of its personnel. It’s actually the case that today, pure audit and accountancy services are really only responsible for about 40 per cent of our turnover.

How about your own role in the business? Are you now devolving core responsibilities, or still very much hands-on?

Rajiv: For some time, there has been a detailed succession plan in place, and even the longest-standing client relationships - once delivered and championed by me - are now handled by a younger team. We have managed this handover in a series of steps, so clients see complete continuity. Everything has been made crystal clear in terms of what each member of our team does and what their responsibilities are - all spelled out in a written contract.

In summary, we’ve successfully made the move from being personality-centric to being personality-mentored.

Do your clients tend to represent a particular sector more than any other, or are they evenly spread across industry verticals?

Shivani: They are very evenly spread. We work across the entire spectrum of SMEs - companies of almost every shape and size - and

Shivani: Part of our growth strategy has been to create a very open culture. It’s not a dictatorial place to work, but one where people feel part of a family and have constant access to senior management. A true test of this is our open-forum sessions, held every week, where any member

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of the team (no matter how junior) can speak out and state exactly what they feel about their work and assignments, or throw new, exciting ideas into the ring.

Does membership of an international network facilitate a broader vision and perspective, that, eg, is of value to clients looking to expand their overseas operations?

Sumeet: Absolutely! Let’s pause for a moment and look at the kind of resources that this international network actually makes available.

UHY is world leader in audit, accounting, tax and business advisory services. There are more than 7,660 professionals across 300 business centres operating in 93 countries. That means we have tremendous outreach and market understanding. If you as a local client have a need to explore a fresh market opportunity we not only have the market intelligence in place, but a footprint on the ground that will give you a real point of contact and guidance.

Shivani: The UHY network is also extremely understanding of local needs, while putting in place very discerning quality benchmarks and codes of Best Practice.

Many argue that 2016 will be a challenging year. How can working with a firm like UHY Saxena help smooth a company’s progress?

Rajiv: By understanding the pitfalls of taking risks when the focus should be on the core business. We can guide SMEs to take a prudent, well-informed approach, while giving them the market intelligence and strategic depth to source profitable solutions that will build a firm platform for more vibrant times ahead.

Do you believe that an enhanced regulatory framework will be 43

Movers & Shakers

There has been a crucial need for an effective system of credit checks - this will underpin a business’ credibility and make financial growth more straightforward.

Sumeet Nayyar

beneficial for business in the UAE? Rajiv: Undoubtedly, yes. Look at some of the larger outstanding issues that have been an impediment to both company growth and the ability of lenders to make informed choices.

There has been a crucial need for an effective system of credit checks - this will underpin a business’ credibility and make financial growth more straightforward.

Sumeet: Other aspects that stand to gain enormously include financial instruments such as cross-border exchange of information and a raft of compliance issues that, when fully regulated, will give SMEs much clearer operational benchmarks.

What do you see as the key next steps in the development of UHY Saxena?

Sumeet: We are moving towards a much more comprehensive online interface with our clients 44

- a paperless environment where information is transferred and managed instantly. We are also working with market leader CPI Media Group to enhance our social media initiatives, and give us a more fluid interaction with the business community. Part of this new online commitment is the launch of a new website with stronger functionality and a number of features introduced directly in response to customer comments.

Rajiv: In terms of market development, we have recently been appointed as a DMCC registered service provider, and we are increasing collaborations with third party business centres in the UAE and overseas. Again, though, I would add that we believe first and foremost in measured change and development - evolution - and whatever we will do has at its heart the desire to further improve the core client offer.

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Movers & Shakers

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Movers & Shakers

EXCLUSIVE INTERVIEW

Pioneering financial literacy: Souqalmal.com

The financial comparison website Souqalmal.com’s reputation for transparency and sound financial advice has helped it flourish in the region. With a domineering presence in the UAE and KSA, the concept has come a long way since its inception in the year 2012. Ambareen Musa, Founder and CEO of the fast-growing brand speaks exclusively to SME Advisor‌

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Movers & Shakers

Tell us about Souqalmal.com as a concept.

“Souqalmal.com is the region’s first banking and insurance comparison website; the concept of course exists in other parts of the world, particularly in UK and the US, where financial mechanisms are more mature. In Arabic, ‘Souqalmal’ stands for ‘money market’. The website allows users to compare a range of products and services, such as insurance, credit cards, loans, Islamic finance and so on.”

How did it all start?

“When I came to Dubai in 2008, I was looking for a certain financial product and had to call several banks to compare their offerings.

That’s when I realised a gap in the market – there was a need for a single portal that would do this comparison for me, rather than having to physically visit or call over 50 banks!

Before Souqalmal.com, I worked extensively in the banking and finance industry including

launching the GE Money brand in the UK; it was the experience I gained while working with multinationals in this field for so many years that gave me the confidence to start something like Souqalmal.com. The company itself started in 2012; we were initially two people in the team!

Today, we’ve grown to become a team of 30.”

You’ve slowly built your reputation for providing sound financial advice to users. How important is the financial education aspect of your initiative?

“It is such an integral part of our offering. We’ve done our homework and we know what users are looking for. Let me give you an example – eighty per cent of UAE residents don’t know how to calculate their debt burden ratio, and four out of ten residents don’t have a clue about the difference between reducing rate and flat rate while taking out loans. In fact, this is exactly why we developed personal finance

MARKET INSIGHTS FROM SOUQALMAL.COM

calculators on our portal to help our users to understand what kind of impact taking a loan will have on their income level.”

Was it easy to get banks on board and convince them of the concept?

“At first, it was slightly difficult because the concept was new to this market. In fact, many banks would question if it was legal to share their information on a portal like that! They didn’t realise that it was already public information.

So it did take a lot of reassuring and confidence building. However, the transformation has been absolutely amazing. Today, banks are extremely supportive and are keen to partner with us as they understand that our channel is one of the most targeted way of reaching potential customers; people that are actively looking for certain kinds of financial products.

Moreover, there has been a major shift to digital, and a rising number of banks are looking to strengthen their presence online – this is where we can help them. The most important part of our offering is that we are saving time to the consumer and to the bank.”

From a user’s perspective, how does Souqalmal.com help me save money?

“Look, the better you understand your options, the more educated you are, the more sound financial decisions you make. It is as simple as that. More importantly, users often neglect the fine print and end up paying fines or choosing an expensive option. Souqalmal.com helps you compare like-for-like, allowing you to find not just the best deal, but one that best suits your needs. At all times, we make sure we tell you the facts the figures including what to be aware of on each product from high annual fees to high level of foreign exchange fees.”

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Movers & Shakers

How does Souqalmal.com stand out from its competitors?

“There are two factors: content and transparency. Firstly, we have a team dedicated to ensuring that we are sharing valuable content with our users. We continually assess user needs and learn from their feedback – it is so important to guide them on critical financial topics. We publish about 50 articles per month, all of which are very carefully and thoughtfully put together. Secondly, we are extremely transparent with our users and respect them; we tell them how it is and give them the options that they are eligible for.

We differentiate ourselves by respecting our user’s request and privacy by only connecting them with the banks they asked for and not sending their details to all other banks in the background. That is critical for us and is how we run the business. These are two factors that have contributed significantly towards the credibility of our brand and helped us be ahead of competition.”

What has been your biggest challenge so far?

“I think the biggest challenge has been building and sustaining a portal that keeps our users engaged on a daily basis. We are constantly looking for ways to create rich content on relevant topics; this is our USP and we pride ourselves on it. So, it is imperative for us to continually innovate ourselves!

The second biggest challenge, as an entrepreneur, is to hire a team that is as passionate as you. At first, it was really hard to find people that wanted to be part of a start-up, and people who were able to wrap their heads around the concept. We made a few hiring mistakes, but in the end it all worked out. Today, I have a team that I’m extremely proud of.

As you can see, our office is buzzing

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Movers & Shakers

MARKET INSIGHTS BY SOUQALMAL.COM

Meet the entrepreneur Mauritian born Ambareen, with an undergraduate business degree from RMIT University in Australia was always driven to make life easier through e-commerce. Her first business set up at the age of 21 was an online property portal for international students in the country. Since then, she had worked for GE Money, Bain & Company Middle East and even set up the consulting arm, of MasterCard Middle East and Africa, where she stayed for two years before founding Souqalmal.com in 2012.

Souqalmal.com’s journey to the top May 2012 Souqalmal.com launched – credit cards, personal loans, mortgages, bank accounts and car loans in UAE and Saudi Arabia (KSA) October 2012 Souqalmal.com expanded into insurance and telecoms comparisons: car, health and content insurance, mobile phone plans and broadband plans December 2012 Seed round of USD300,000 January 2013 Launched schools and nurseries comparison section November 2013 Launched a section to allow users to review only Islamic banking products December 2013 Hummingbird Ventures invests US$1.2 million in Souqalmal.com May 2014 Responsive site launched October 2014 Site redesigned and relaunched, UAE SME section launched August 2015 Hummingbird Ventures and Nile Capital invest US$3 million in Souqalmal.com October 2015 Souqalmal wins the online business of year award

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with energy and excitement! That’s not all – I can confidently leave many important strategic decisions to my team; knowing that they are more than capable of steering Souqalmal. com in the right direction.”

What are your plans for expansion in the region?

“We’ve made inroads into Saudi Arabia, where we’ve received an overwhelming response. Let me tell you – in KSA, we’ve managed to organically grow to 100,000 members in five months. We are also eying other Gulf countries and you should hear more about it in due course. But, our expansion strategy is about focus and market knowledge. We test and learn in depth the market before setting ourselves us and we focus proving a successful expansion. There is no point making the same mistake in five countries at the same time when you can test and learn in one market and eventually expand much quicker with the learnings in other markets.

We are also expanding into the insurance sector and launching our end-to-end car insurance vertical in the next few weeks.

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Data & Analysis

Assessing your SME’s key profitability ratios Profitability ratios can help you analyse your company’s ability to generate earnings, in relation to sales, assets and equity. In addition to giving you valuable information on profits and cash flows, these metrics highlight how effectively your company is being managed. Stuart Leung, SEO Manager, Salesforce.com, shares his practical analysis…

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Data & Analysis

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Data & Analysis

Understanding the percentage of profitability in a company is only valuable if an organisation can then use that data to affect positive change.

Stuart Leung, SEO Manager, Salesforce.com

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To stay profitable and competitive in a crowded business landscape, organisations must constantly try to maximise earnings and minimise expenses. However, accurately determining how well organisational assets are being used to generate profits can be a formidable task.

That’s where profitability ratios come in – a group of financial metrics that organisations can use to become more efficient and profitable. To that end, here’s a look at several key profitability ratios and what organisations can do to improve them.

Gross Margin How profitable is a company in selling its inventory or merchandise?

The gross margin ratio provides an answer by comparing the gross margin of a company to net sales.

Another way to think of the gross margin ratio is the percentage mark-up on merchandise from its cost—calculated by dividing gross profit dollars by net sales dollars. For example, a company with net sales of US$600,000 over a given period and a cost of goods sold of US$400,000 would have a gross profit of US$200,000 (a figure reached by

subtracting the latter amount from the former). Dividing the gross profit (US$200,000) by the net sales (US$600,000) yields a gross margin ratio of 25 per cent. The larger this percentage, the more profitable the company should be.

Of course, understanding the percentage of profitability in a company is only valuable if an organisation can then use that data to affect positive change. Thankfully, there are a number of ways to increase the gross margin ratio.

For example, building brand value through effective marketing in order to convince customers to pay more for products, even while acquisition costs stay the same, can be a very successful approach.

An added benefit of upping the perceived value of a brand is higher customer retention, which also improves the bottom line.

Most businesses rely on sales to generate revenue. Unfortunately, 67 per cent of all sales people fall short of reaching their quotas. The development of a more-efficient sales process and a higher-quality sales force can help organisations increase overall sales effectiveness.

Better internal communications within the sales department is a good start and can be highly beneficial, as it allows for a more efficient use of time and resources.

When employees and leaders across different levels and departments within the organisation communicate effectively, many potential problems may be averted.

Advanced CRM tools such as the Salesforce’s Community Cloud provide a platform for members of an organisation – as well as customers, partners, and others – to form online communities, and interact, troubleshoot, and gain access to data. In addition to facilitating clear communication within a company, these CRM tools also help increase customer satisfaction.

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Data & Analysis

Analytics finds its way into every corner of the business Driving operational efficiencies and facilitating growth are baseline analytics-driven priorities for business today. As companies improve performance, they begin to focus on more advanced use cases such as automating business operations, enabling new business models, and predicting customer behaviour.

Driving operational processes Facilitating growth Optimizing operational processes Improving existing products, services, and features

37% 37% 35% 35%

Identifying new revenue streams

33%

Generating new ideas and innovating

33%

Monitoring customer loyalty

33%

Predicting customer behavior

32%

Improving employee collaboration

31%

Improving the speed and accuracy of decisions

31%

The use of analytics tools to gain a better picture of each step in the sales funnel, as well as promote B2C and B2B lead generation and qualification, is also a powerful driver of higher gross margin ratios, as companies that excel at lead nurturing generate 50 per cent more sales ready leads at 33 per cent lower cost.

Operating Margin The operating margin ratio takes gross profit margin one step further by factoring in overheads—such as selling, administrative expenses, and depreciation—along with the cost of goods sold. As a result, the operating

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margin directly reflects the income associated with the company’s core business and operations. Think of it as a measure of the money flowing into a company from sales, and flowing out for day-to-day expenses.

A high operating margin ratio is a strong indicator that the business is being run efficiently, which translates into higher profitability overall.

Organisations looking to increase operating margins should focus on finding ways to either spend less money by reducing operating expenses, or bring in more money by increasing sales. Owning equipment instead of leasing or renting, cutting out unnecessary expenses, and

possibly downsizing are all proven ways for companies to spend less.

However, in the push to increase operating margins, businesses should be wary of potential dangers of cutting costs.

Purchased equipment often requires a sizable initial expense, and may result in a company getting ‘locked’ into technology that quickly becomes obsolete. Downsizing may result in lower employee morale among those who retain their jobs.

Increasing sales, however, is doubly beneficial, as more sales bring in more revenue and achieve efficiencies through economies of scale, which can translate into lower production costs and supplier discounts.

Profit Margin Profit margin (or net profit margin) is a ratio that takes a simple and straightforward approach to evaluating a company’s profitability.

Along with incorporating all the elements used to calculate operating margin, profit margin ratio also factors in non-operating income, interest expense, and income taxes.

While the simplicity of this ratio allows organisations to evaluate how much of every dollar in sales is actually retained as earnings, the ratio includes expenses and income that aren’t directly related to the company’s core business (making profit margin more of a second-tier financial metric). Still, it’s very useful for companies looking to see how they stack up with others in their industry. A higher profit margin for a company means it’s more lucrative and has a better handle on costs than competitors. When it comes to finding ways to improve profit margins, the commercial airline industry serves as a good case study.

Faced with shrinking revenues in a highly competitive arena, JetBlue is taking a cue from its competitors.

In the past, JetBlue hasn’t charged 55

Data & Analysis

force training, a more efficient sales process, and implementing a “lean” business model—which may include outsourcing non-vital business functions to third parties.

Given today’s competitive business landscape, companies need to raise all contributors to profitability from levels of sufficiency to efficiency. By focusing on the above key financial ratios and the concrete ways to achieve greater profitability, such as pricing, reducing waste and costs, boosting sales volume, and improving customer service and customer retention, companies stand a much better chance of reaching long-term profitability and sustainability.

passengers to check second bags. But now the popular carrier is seriously considering it, as other carriers that charge for the first bag have enjoyed significant increases in revenue. In addition, JetBlue plans on packing more seats on its planes to increase per-plane profit while all other factors remain the same.

Return on Assets A company’s annual income is derived from business assets in use throughout the year, including any assets added on during the year. Like ROI, return on assets – the ratio of net income over total assets – is a good measure of a management’s ability to use corporate assets to generate profit. The higher a company’s return on assets, the more money it can make with less equipment, inventory, etc.

To improve return on assets, companies need to either increase net income or decrease total assets. Ways to do that include raising the price of products and services without dropping demand, boosting sales volume (without increasing asset base) through effective marketing, better sales 56

http://www.salesforce.com/crm/roi/

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Corporate Financial Training

www.tadawul.academy - 04 443 0188

Emerging Middle East

Digital Financial Services in Egypt:

A Growing Trend in SME Financing Margarete Biallas of IFC believes that there is a transformation happening within Egypt’s financial sector, as new technology is being integrated within traditional financing. Here, she presents her compelling insights…

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SMEs in Egypt face many of the same challenges that SMEs do all over the world: particularly a lack of financing.

The problem is exacerbated by political and economic turmoil, as well as a slowdown in foreign investment and tourism. Obtaining financing is a serious challenge that hobbles this important business segment.

According to the Central Bank of Egypt (CBE), 83 per cent of SMEs have capital bases below US$3,300.

The problem has far-reaching consequences: Egypt’s 350,000 SMEs account for approximately 25 per cent of the country’s GDP and 75 per cent of employment.

CBE has taken steps to address this issue. On January 10, 2016, it required that local banks increase lending to SMEs to 20 per cent of their portfolios over the next four years. Currently, SME loans represent only five to ten per cent of total lending. Egyptian banks need to explore more innovative approaches if they are to meet SME demand for financing and CBE requirements.

International development institutions such as the International Finance Corporation (IFC), a member of the World Bank Group, also put a priority on the SME segment. IFC supports the banking sector in Egypt through an integrated investment and advisory approach. Working through partner financial institutions, it works to strengthen their capacity to support SMEs through medium and longterm funding, trade finance, and advisory services. Its support is not insignificant: between 2011 and 2014, it committed over US$1 billion in 20 projects targeting SMEs. Increasing volume of traditional loans and advisory support helps address SME financing needs, but banks have other avenues to explore. New, innovative approaches that employ technology can also make a difference. Enter digital financial services, which have been taking off globally in the last decade.

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Emerging Middle East

What are Digital Financial Services?

Digital Financial Services, or DFS, provide financial services to customers and businesses that have limited access to traditional branchbased banking. Technology-enabled financial services enable customers to use tools such as mobile phones, the Internet, and payment cards to access and manage their accounts. Crucially, DFS greatly simplifies payments between SMEs, their customers and suppliers by offering safe, quick, transparent transactions. Other benefits of DFS include: • ●Opportunities to expand the customer base • ●Reduced operating costs • ●More efficient delivery channel for financial services • ●Lower cost of funds enabled by mobilising lower-cost deposits • ●Greater convenience and safety for customers Developing a robust DFS system requires more than money. In

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addition to the technology, DFS requires a number of factors to make it possible to implement. These are: 1. Regulations that enable DFS: These are rarely ideal in any country. Players must understand how to work within the existing framework and develop strategies for improving it over time.

2. Market demand: The scale of unmet demand must be measured and understood. This includes knowing the specific needs of potential customers and SMEs. Stakeholders need to conduct a thorough diagnostic.

3. A solid business model: Based on the above, stakeholders need to build a business case and a business plan with a sound revenue model for each potential market segment. Appropriate channels must be identified as well as a plan for managing them. The value proposition must be solid.

Technology-enabled financial services allow customers to use tools such as mobile phones, the Internet and payment cards to access and manage their accounts.

83%

of SMEs have capital bases below US$3,300 According to the Central Bank of Egypt (CBE)

350,000

SMEs account for approximately 25 per cent of the country’s GDP and 75 per cent of employment

59

Emerging Middle East

A good strategic communications plan is a critical part of any rollout of DFS.

4. Development of a strong distribution network: An agent network enables many services typically provided by bank branches to be carried out by agents -- for example, local, trusted, retail agents that can take deposits, transfer funds, make payments, and even make cash pay-outs. Agents need to be identified, trained, and managed to fulfil this role effectively.

5. Customer adoption: Potential customers need to understand how DFS can benefit them and once convinced, how to access and use the system. A good strategic communications plan is a critical part of any rollout of DFS. Progression of DFS Development DFS can be delivered by different leaders, for example, banks, mobile operators or payment service providers. IFC’s experience suggests that the best way forward is through partnerships between these stakeholders, which helps DFS models achieve financial inclusion and sustainability. Regardless of the

60

driver, there are typically certain phases for introducing DFS to a new market.

• First (and least profitable), is the introduction of e-wallet or branchless banking. This is the stage where Egypt is now. It enables customers to reduce use of cash, send and receive payments through individual transaction, and provides a transaction history.

• Second come bulk payments, such as salaries, commissions, supplier payments. Bill collection, supply chain management, and improved cash management also become possible, easing the administrative burden of financial management functions.

• Finally, and most profitably in the DFS evolutionary chain, are savings products, loan disbursement and instalments, credit Insurance products, integration with accounting software, and new services such as leasing or factoring.

These features are highly advantageous to both SMEs and

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Emerging Middle East

With mobile phone penetration in Egypt exceeding 100 per cent, and with a young population emerging that has embraced technology, the potential for DFS is tremendous.

financial institutions alike. Banks, for example, can offer more than loans to SMEs: they can offer services such as business accounts, savings plans, and payroll. SMEs can also use DFS for accounts receivable and accounts payable.

Transactions are safe and traceable.

These benefits ultimately translate into better value for end users of SME services.

Mobile Banking in Egypt Today Both the market and demand in Egypt is strong. Disposable income per capita is US$3,000 and rising rapidly. Meanwhile, banking services have only reached about 14 per cent of the total adult population.

With mobile phone penetration in Egypt exceeding 100 per cent, and with a young population emerging that has embraced technology, the potential for DFS is tremendous.

Given that DFS enables access to banking services without the need to build, staff and manage branches – a costly endeavour – DFS has considerable appeal to financial

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Meet the author...

Margarete Biallas leads IFC’s work in Digital Financial Services and has worked for IFC since 2006. Previously, she managed IFC’s Access to Finance program in the Mekong and was responsible for financial markets advisory services in Vietnam, Cambodia, and Lao PDR. Prior to joining IFC she worked for KfW as Senior Risk Manager and Senior Investment Officer.

US$3,000

disposable income per capita and rising rapidly

institutions and mobile service operators. As of early 2015, 500,000 of Egypt’s estimated 102 million cell phone subscribers were already using them.

This is a welcome development, but regulatory obstacles are preventing greater growth of the sector. For example, Central Bank regulations only allows individuals, not businesses, to make mobile transfers, and subscribers cannot exceed LE 5,000 worth of transactions per month with a per transaction limit of LE 1,000 and a daily limit of LE 3,000.

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Organisation & Structure

Developing a robust financial risk management framework 62

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Organisation & Structure

With every day business challenges, coupled with significant regulatory, social and technological variations, organisations are subject to myriad risks.

As a result, it’s more important than ever to identify risks and develop a work plan to address and mitigate them.

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63

Organisation & Structure

Corporate governance requirements are becoming more prescriptive in requiring risk management arrangements to be clearly in place.

You can’t be in any sort of business without taking risk, for without risk there can be no reward, no profit and no achievement. But there is a difference between blundering blindly or complacently into an uncertain future and setting off confidently, knowing that you have the best information, the best skills and the best plans to cope with whatever the world throws at you.

The past decade has seen some spectacular business failures and disasters, from Lehman Brothers through to Volkswagen.

At the other end of the scale, half of the start-up businesses in the UK fail within the first two years. Corporate governance requirements are becoming more prescriptive in requiring risk management arrangements to be clearly in place. Even for smaller businesses, evidence of effective risk management is increasingly

demanded by suppliers, investors, insurers and other stakeholders.

IRM’s own Risk Predictions for 2016 indicate that volatility and uncertainty will continue to increase.

“The impact of current macro trends and risks, such as cybersecurity, a new geopolitical landscape and an endemic low global growth environment will continue to put pressure on, and potentially change, entire business sectors,” said IRM Chairman Jose Morago.

“Leaders who think critically about the future, anticipate disruption to their sectors, while building resilience and agility in their models, will be in a better position to tackle a challenging risk environment in 2016 and thrive.”

So how can businesses manage their risks better? The first requirement is to take the

What do we do next?

We set out below the steps that need to be taken to start on a programme of risk culture change.

Evaluate the current risk culture • Look for hidden and sub cultures • Use several techniques to surface ll cultures

What is the impact of the current culture?

Cultural change requires a sustained effort as the culture needs time to adapt new norms.

• What are its strengths and weaknesses?

• Is this the right culture for our future?

What would improve our risk culture?

How easily can we adapt this culture change approach to international situations?

• Are there regulatory or other external drivers to consider?

• What changes do we have to make?

Plan and implement our cultural change

Continuous review is essential

• What do we need in place to grow and sustain our new risk culture?

• What changes do we have to make?

Steps to change your risk culture 64

Monitor and adapt to changes • Are we achieving the outcome as we expect?

• What do we need to change now in light of our progress so far?

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Organisation & Structure

management of risk seriously throughout the enterprise, from the boardroom downwards. Enterprise risk management (ERM) should be a systematic, organised process with clear responsibilities and integrated into other business functions like HR and audit. There are tools and techniques available to help (for example the ISO 31000 Risk Management Principles and Guidelines or the IRM’s own Risk Management Standard) and businesses must choose and use those most applicable and, most importantly, in proportion to the scale of their operations.

Those responsible for leading the management of risk within the business must have the right skills, qualifications and experience.

You wouldn’t put your financial management under the charge of someone not qualified for the job so it is strange that some organisations think that risk management is something that anyone can make up as they go along. Yes, it does need common sense, and a lot of it, but it also needs expertise and knowledge of best practice if the result is to be effective and credible.

We all know that the world is changing fast and that we need to keep abreast with new risks, as well as old ones that can still cause trouble. Alongside serious issues like fraud and cyber security businesses must also pay increasing attention to non-physical risks associated with reputation, protection of intellectual assets, human factors and behaviour, strategy, market and competition risks and regulatory risks. These risks are frequently interconnected, cannot be easily transferred via insurance and so require more sophisticated forms of assessment and control. Some raise challenging questions about ethical decision-making where short term ‘performance culture’ may clash with longer term business integrity. Often

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Risk culture

Organisational culture

Behaviours

Personal ethics

Personal predisposition to risk

Risk Culture Framework

the signals given out by emerging risk are weak (who picked up, until it was totally obvious and too late to do anything, that what appeared to be a little local difficulty in the US mortgage market would have such broad repercussions for the global economy?). Those responsible for business risk today must network widely, read widely and draw on broad sources of information, and must also have the personal communications and influencing skills to transfer this knowledge into the language of business to make a real difference to company fortunes.

Businesses must actively seek risk - it’s what they do. But they must approach the management of that risk with competence, and therefore confidence.

Enterprise risk management (ERM) should be a systematic, organised process with clear responsibilities and integrated into other business functions like HR and audit.

Top tips for managing business risk • Don’t make it up as you go along - skills, knowledge, training and experience are important 65

Organisation & Structure

consideration to the financial risks associated with the business? Have these been mapped?

5. Do you understand your reliance on outsourced IT and cloud based services and the risks that these may bring to the organisation, both financial and practical?

• Think beyond insurable risk to some of the more intangible problems that can bring businesses down • Think beyond the boundaries of your own company and look at your ‘extended enterprise’ – risks can arise from the activities of suppliers, partners and neighbours • Build a risk-aware organisation - don’t just bolt on risk management as a once a year exercise And, five key questions you should be asking yourself: 1. Which key components, processes, functions or people could, if they fail, stop you operating?

Carolyn Williams, Director of Corporate Relations, Institute of Risk Management

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2. What scenarios could trigger a systemic reaction that could cause widespread financial damage?

Have you plans in place to counter this?

3. Has the board/MD devoted sufficient resources to creating and maintaining an adequate risk management and assurance framework that functions across the business?

4. Do you give sufficient

Regional outlook “As SMEs continue to gain market share across the Middle East, for example up to 40 per cent of Dubai’s GDP derives from these enterprises, it is important that these organisations recognise the contribution that sound, if simple, risk management practices can contribute to the long term resilience of their business. If you take HR consultancy and training organsiations as a good example of companies well represented in the SME space, the temptation could be to consider long term reduction in oil price as a ‘macroeconomic, external risk’ however if the companies can put some simple mitigations in place, such as ensuring a pipeline of prospective clients who are not reliant on this sector, then this would be time well spent. Of course before you manage risk, you need to understand which are key to the business strategy. Regardless of size, we would recommend companies at the smaller end of the SME sector understand their top ten risks and that the CEO/MD is actively involved in managing these, or monitoring the delegated management of these, as part of his or hers day to day duties,” explains Kenneth McKeown, IRM Director based in the UAE. IRM has worked closely with leading industry experts on producing guidance on various aspects of managing risk that can be found here: www.theirm.org/knowledge-andresources/thought-leadership

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Organisation & Structure

Exploring policy updates on financial assistance

Amongst the most talked about new concepts of the UAE Commercial Companies Law is the prohibition on financial assistance. Here, we asked experts at Clyde & Co. to look at the likely policy reasons for the introduction of a financial assistance prohibition, and at which entities and transactions are most likely to be affected.

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The new Commercial Companies Law (Federal Law No. 2 of 2015) (the Companies Law) brought into force, for the first time in the UAE, the concept of financial assistance.

Article 222 relating to shares, bonds and sukuk of Public Joint Stock Companies (PJSCs), states the following: The company or any of its subsidiaries may not provide financial assistance to any shareholder to enable the shareholder to hold any shares, bonds or sukuk issued by the company. In particular, financial assistance shall include: 1. Providing loans; 2. Providing gifts or donations; 3. Providing the assets of the company as security; and 4. Providing a security or guarantee of the obligations of another person

Using the most straightforward example, a PJSC may not lend the acquisition price to a third party to allow that third party to acquire shares in the PJSC. However, the transactions and scenarios which are captured by financial assistance are often more complex or less obvious than this example, such as upstreaming cash from the target group to help meet debt repayments by the purchaser.

Public policy reasons behind financial assistance To date, the Ministry of Economy has not issued guidance on the UAE public policy reasons behind prohibiting financial assistance. One of the general aims of the Companies Law, however, is to improve corporate governance in the UAE. Other

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Organisation & Structure

countries have successfully used restrictions on financial assistance to support this aim. A prohibition on financial assistance is designed to protect creditors and shareholders from a depletion in, or misuse of, the company’s assets.

Protection of shareholders In the case of shareholder protection, there may be many small, minority shareholders holding listed shares in a PJSC. The interests of these shareholders may be prejudiced if the PJSC used its cash reserves or other assets, not to build the company’s business, but to (for example): • Facilitate a new shareholder acquiring shares in a placing; or • Permit an existing shareholder to consolidate control by acquiring additional shares in the market.

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Set against other new provisions of the Companies Law, such as the possibility of non-pre-emptive offers of new shares by a PJSC to a strategic partner (Articles 223 and 224), and the decrease in the minimum percentage of the share capital of a PJSC which must be offered publicly (the free float) from 55 per cent to 30 per cent (allowing a stronger capital holding by one shareholder), it is clearer how controls on financial assistance may be necessary within the new company law regime.

Protection of creditors Generally, all creditors of a company have an interest to ensure that the assets of the company with which it deals are used in the ordinary course of business and are not subject to abuse by the company in favour of

specific third parties. If the company’s assets are depleted to the extent that the company may not continue as a going concern, this would prejudice creditors, particularly if they are unsecured in an insolvency situation.

In a number of countries globally, a ban on financial assistance has applied to private companies as well as publicly listed companies. In this scenario, the protection of creditors is the paramount concern. This is because it is often the shareholders in a closely held company which would benefit, directly or indirectly, from the financial assistance.

Financial assistance in relation to private companies may be permitted, in other countries, under certain conditions designed to ensure the protection of creditor interests. For example, under the UK Companies Act 1985, financial assistance was permitted if the directors of the private company made a legally binding statutory declaration that the company would be solvent for a prescribed period after the assistance was given. The company’s auditors also provided a report on the company’s ability to pay its debts for the next 12 months. In the DIFC, where the Companies Law is based on the UK 1985 Companies Act, financial assistance is prohibited by private companies. However, there are express exemptions from the ban, including that the financial assistance does not materially prejudice the interests of the company (or its shareholders, who must vote in favour of the assistance by at least a 90 per cent majority) or, crucially, the company’s ability to discharge its liabilities as they fall due.

Which companies are caught by the UAE financial assistance ban? PJSCs and PrJSCs It is clear that the UAE ban on financial assistance applies to PJSCs. Because the provisions which apply 69

Organisation & Structure

It is interesting to note that the Companies Law does not set out a specific offence for breaching the financial assistance ban.

to PJSCs also apply to private joint stock companies (PrJSCs), assistance by a PrJSC will also be prohibited.

This is not surprising from a public policy perspective because PrJSCs are subject to stricter regulation than LLCs, and are frequently used as a “stepping stone” on route to a public listing as a PJSC. LLCs It is more difficult to say whether the ban on financial assistance also applies to limited liability companies (an LLC). LLCs are closely held companies (and may now be wholly owned by one national shareholder).

They may be best categorised as a quasi-partnership in the sense that the holdings in an LLC are more similar to ownership “interests”, than freely transferable instruments (“shares”).

Article 104 of the Companies Law provides that the provisions relating to PJSCs apply to LLCs unless otherwise provided by the Companies Law. There is no express provision ‘dis-applying’ Article 222 on financial assistance to LLCs and therefore some market uncertainty has arisen. It is beyond doubt that the Arabic language of Article 222 makes reference to the term which translates as “share”, not “interest”.

When looking at whether an LLC is caught by the Article 222 provisions there are two questions to consider: • Is an LLC prohibited, as a subsidiary of a PJSC or PrJSC, from providing assistance for the acquisition of shares or other securities of the PJSC or PrJSC – so called “upstream financial assistance”?

• Is an LLC (or one of its subsidiaries) prohibited from providing assistance for the acquisition of an interest in the LLC? In our view (and notwithstanding the limitations of the language used in

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Article 222), it is likely that upstream financial assistance is prohibited under UAE law. This view is partly based on the fact that Article 222 in itself allows for this prohibition, without needing to also apply Article 104. In addition, on public policy grounds, this ban makes sense. To allow otherwise would be an obvious loophole for PJSCs to exploit by using its LLC subsidiary to make the assistance available. Overall, the interests of shareholders and creditors in the PJSC’s group may be damaged by such financial assistance.

The application of Article 222 to direct financial assistance by an LLC in respect of its own interests is more doubtful. Firstly, as we mention above, this type of direct financial assistance is only prohibited if you apply Article 104 to Article 222, and change the term for “shares” into “interests” to make the provisions operable for an LLC. The general public policy reasons behind Article 104 are not certain, but this seems to be a “stretch” in the application.

It has been argued that the fact that an interest in an LLC may be pledged (or mortgaged) means that such an interest is a “negotiable instrument” and therefore similar to a share in a PJSC. However, in our view, the ability to create financial security over a PJSC share or LLC interest does not, in itself, make them the same type of right or asset. In the UAE, it is possible to mortgage many different types of tangible and intangible assets which may include goodwill, perishable items in a warehouse and (in recent practice) an interest in an LLC, under a notarised commercial mortgage permitted by the Commercial Code, in favour of a UAE financial institution and registered in the Commercial Register. There are separate provisions of the Companies Law for the creation of a pledge over PJSC shares. There is little market experience at present in relation to

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Organisation & Structure

The UAE market is also expecting a new Insolvency Law shortly and we expect that this will deal with penalties for certain actions

by LLCs and their managers involving a company’s solvency.

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a mortgage of an LLC interest, but it appears that the process differs to a PJSC pledge, not least because it continues to include registration in the Commercial Register as part of the perfection of the mortgage.

It is also worth noting that the term “negotiable instrument” is, under English law (from where the term derives), used to describe a document which may be transferred from one party to another by endorsement and delivery, and by which the right to be paid is transferred unconditionally (such as a cheque or a promissory note, or bearer securities). The term will not apply to any instrument where title is passed by registration or similar external process, such as an interest in an LLC. This is the case regardless of whether an LLC issues a share certificate because that document does not represent title to the LLC interest and transfer of that certificate does not bring with it title. It is only at the end of a process, involving a notarised share transfer, and culminating in an amendment to the company’s commercial licence by the local DED, that title to an LLC’s shares is transferred.

Equally compelling for the view that direct financial assistance is not outlawed for LLCs is the public policy argument. As we explain below, financial assistance is commonly found in M&A transactions. A ban on financial assistance for all companies in the UAE, with no ability for an LLC to provide it if creditors’ interests have been protected, would make the UAE company law regime very restrictive. Furthermore, we believe that there are a number of new concepts in the Companies Law which make the ban on LLC financial assistance unnecessary in terms of creditor protection. For example, the Companies Law introduced a new statutory standard of directors’ duties (Article 22). This includes a duty to preserve the rights of the company – similar to acting in its

best interests. In addition, Article 84 contains, for the first time, a specific right for concerned third parties in relation to an LLC to take action against its managers for breach of the Companies Law (which would include breach of directors’ duties).

In other words, it is difficult to see how a manager may permit financial assistance which would imperil the solvency of the company he manages, against the interests of creditors, without those creditors having other actionable remedies under the Companies Law. The UAE market is also expecting a new Insolvency Law shortly and we expect that this will deal with penalties for certain actions

by LLCs and their managers involving a company’s solvency.

Cross border financial assistance The UAE is a place in which many multinationals choose to do business in the Middle East. Therefore, it is important to understand the extent to which financial assistance applies across an international group which includes UAE companies.

Article 222 applies to “companies” which is not defined.

However, we think that this will be linked to the description of a company in Article 9 of the Companies Law which sets out the types of entity which may be incorporated in the UAE, and that there is no intention that the financial assistance ban will have extra-territorial effect in relation to assistance provided by a foreign company in respect of that foreign company’s shares.

The position in relation to a “subsidiary” is less clear because there is no definition of subsidiary which applies generally to all provisions of the Companies Law. This gives rise to two questions: • Can a UAE subsidiary provide financial assistance in respect of its foreign parent’s shares?

• Can a foreign subsidiary provide 71

Organisation & Structure

financial assistance in respect of its UAE parent’s shares?

In relation to the first question, we think that the better view is that this not prohibited financial assistance, because the company in respect of which the assistance is being provided is not a UAE company caught by Article 222.

The answer to the second question is more uncertain – the assistance is being provided in respect of an acquisition of a UAE company’s shares and therefore it would seem to be prohibited. However, it would be difficult to take enforcement action against a foreign incorporated subsidiary and, therefore, from a jurisdictional and practical perspective, this may not fall within the scope of Article 222 either.

Drawing parallels to the UK position on financial assistance, the provision of assistance by a foreign subsidiary in respect of a UK company’s shares is not prohibited. However, under UAE law, it is possible that the UAE company, although itself not providing financial assistance, may be penalised for allowing its foreign subsidiary (over which it exercises control) to provide the assistance.

The forms of financial assistance As mentioned in the introduction, the simplest form of financial assistance is a loan from the company whose shares are being acquired to the prospective purchaser of the shares.

However, under UK law, there was a long history, before the financial assistance ban in relation to private companies was abolished in 2006, of considering and “whitewashing” financial assistance in a wider range of scenarios. The following may be captured under the UAE financial assistance prohibition: • acquisition finance (and the postacquisition refinancing of such debt) under which the assets of the target (and its subsidiaries) are 72

•

•

•

•

•

•

part of the financial security “net”, following the acquisition by the purchaser; an “upstreaming” of revenue from the target group to the purchaser by way of loan to repay the purchaser’s acquisition finance debt; other actions taken by the target group in support of the purchaser (to “stand behind” its acquisition finance debt) such as indemnities and guarantees; an accelerated repayment of an existing loan by the target to its parent at the time of an acquisition of the target’s shares (depending on the terms of the loan); a sale of assets by the target or its subsidiaries to the purchaser at the time of the acquisition of the target’s shares by the same purchaser (depending on the terms of the sale, for example at less than market value); the payment by the target company of the transaction fees and expenses of a prospective purchaser in an acquisition process, such as the payment of a break fee; the funding of the preparation of an information memorandum or a vendor due diligence process by the target in relation to the marketing of its shares.

If financial assistance is unconditionally prohibited in relation to private companies, the impact on the market in private M&A will be significant, with the effect being felt most keenly by local companies because of the likely territorial effect of Article 222.

which offence will be committed by providing unlawful financial assistance. The “sweep up” offence in Article 360 of the Companies Law may apply which specifies a fine of between AED10, 000 and AED100, 000 for any violation of the Companies Law for which there is no specific penalty provided.

However, managers should carefully consider their own duties and potential civil liabilities under the Companies Law and other laws as well. Furthermore, there is a risk that any resolution approving the relevant transaction may be unlawful and therefore potentially invalid under Article 170 of the Companies Law – potential purchasers, lenders and other interested third parties may be unwilling to proceed with a transaction in these circumstances.

Further information If you would like further information on any issue raised in this update please contact: Adrian Low Partner, Clyde & Co Justine Reeves Clyde & Co Clyde & Co LLP PO Box 7001 Level 15, Rolex Tower Sheikh Zayed Road Dubai, United Arab Emirates T: +971 4 384 4000 F: +971 4 384 4004 Clyde & Co accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary. www.clydeco.com

Penalties for UAE financial assistance As a final comment, it is interesting to note that the Companies Law does not set out a specific offence for breaching the financial assistance ban. The Ministry of Economy has not yet provided guidance as to

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Contributor’s Blog

Improving manpower planning to boost staff performance 74

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Contributor’s Blog

What is ‘lean manpower’ and how can it help SMEs improve their productivity? SME Advisor caught up with Professor Shandre Thangavelu, Research Fellow at the Singapore Productivity Centre (SPC) to find out more.

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Contributor’s Blog

Tell us more about the ‘lean manpower’ concept.

People often jump to the conclusion that ‘lean’ equals lay-offs and cutting manpower costs. ‘Lean manpower’ isn’t about downsizing or creating unemployment – instead, it’s about maximising the use of resources and reducing waste in products, services and processes to increase productivity.

This includes developing staff skills and redeploying them to more efficient and value-added roles, which will help to attract and retain them.

After all, increasing productivity means using the least amount of resources, including people, to do more.

How can SMEs implement lean manpower?

Professor Shandre Thangavelu, Research Fellow at the Singapore Productivity Centre (SPC)

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The applied research studies conducted by SPC have found that SMEs have problems with high staff turnover and rising operating costs, which make them reluctant to invest in their employees and adopt lean manpower. The studies identified three basic steps for an SME to implement lean manpower effectively.

First, Assess – an SME must recognise its productivity gaps, and decide what changes – such as redeployment of staff or moving from manual to automated processes – need to be made, while taking its employees’ skills and interests into account. Once the company knows what it wants to change and what outcomes it is aiming for, it should reframe its business targets. At the same time, the SME needs to assess current and future trends, and see how these, too, could be integrated into the company’s business model for better growth.

Second, Integrate – the SME has to take into consideration the impact and consequences of an action on the other parts of the business operations. Lean manpower must be

implemented in a holistic manner.

For example, if a business decides to upgrade its technology so it can move to e-commerce – it should add this to its revised business model before training staff to use the necessary technology and perhaps redeploying others to set the foundations for the new IT and web-based processes. Once all staff are in place, it’s possible to calibrate workflow processes, which includes making sure its people, processes and technology are properly aligned.

Lastly, Review – an SME should put in place a system to continuously review its processes, business model and key performance indicators to ensure that it remains productive in the face of the ever-changing business landscape.

How might lean manpower help businesses increase productivity ‘Lean’ is a people-focused improvement methodology. With the right ‘lean’ training, staff will be able to do their jobs better and faster, and help a company identify ‘waste’ – whether in administration, operations or delivery – and eliminate unnecessary delays.

In doing so, they will help a company increase overall productivity, reduce operating costs and ensure business sustainability and continuity – all without having to reduce headcount.

How much money and effort will SMEs need to invest to effectively apply this concept?

Staff at every level need to be encouraged to get involved in value creation for the company. This means being trained to identify waste as well as areas where productivity can be improved and involves a concerted motivational effort by management. Management also needs to develop an understanding of new technologies

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Contributor’s Blog

‘Lean’ is a people-focused improvement methodology. With the right ‘lean’ training, staff will be able to do their jobs better and faster.

that can be used to automate manual processes, reduce downtime and boost productivity, and then use this information to plan for future manpower upskilling or redeployment.

Of course, the cost of sending staff for continuous training and giving them time off work is not in the budget of most SMEs, which is where the SPC comes in. SMEs can leverage SPC’s expertise, business links and resources – its productivity consultants and overseas business learning trips, for instance – to learn and implement best practices to improve productivity and develop new business models to drive productivity growth. In this way, SME owners can ensure all staff are equipped with the right knowledge and skills to physically drive and implement change.

How can lean manpower help ensure staff satisfaction and productivity?

As ‘going lean’ is a continuous process, it is important to incentivise

staff to encourage them to fully participate in a company’s ‘lean’ journey. One way to do this is to share company profits with those who make ‘lean’ happen. SMEs can do this in the form of periodic bonus payments, as savings are realised. Such initiatives will not only lead to higher staff satisfaction and productivity, but it will also create a culture of ownership and commitment.

At the same time, regular training helps to make staff feel valued and more motivated to contribute ideas to creating value for the firm.

Can staff productivity be measured?

Measuring staff productivity in a manufacturing setting is easier – a staff has high productivity if more products are produced with fewer labour hours of input. But things are not as simple in the services sector. How do you use factors such as customer loyalty and staff satisfaction to measure productivity?

These are called ‘intangibles.’ They often go unnoticed because most companies have a very mechanical way of measuring staff productivity – taking into account only factors such as number of billable hours or sales. But what about after-work phone calls and e-mails to clients?

Companies should instead consider both quantitative and qualitative factors – such as an employee’s ability to work in a team or ensure customer satisfaction – when measuring staff productivity. And of course, measurements should always be aligned to individual business’ specific objectives.

Reproduced with permission from SPRINGnews November 2015 Issue. Published by SPRING Singapore.

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77

The Big Debate

Chris Thomas, Co-CEO and Co-Founder,

Eureeca

C

Equity crowdfunding

rowdfunding is an umbrella term for a number of alternative finance models that enable individuals to pool money together to fund a project, cause, endeavour or business. The general classifications of crowdfunding models are rewards/donation, debt (typically peer-to-peer or P2P lending) and equity.

Everyone knows the rewards/ donation model made famous by Kickstarter and Indiegogo so I will jump right into equity and P2P lending.

For operational businesses raising capital, equity crowdfunding and peer-to-peer lending offer access to crowdsourced equity and debt finance, and both models will go a long way in helping to fill the estimated US$ 260 billion SME funding gap in the MENA region.

On the equity side, businesses can raise capital from the crowd, which nowadays includes casual retail, business angel, and institutional investors, in exchange for shares in the company. It is the SME private equity investment process digitised, which makes it far more accessible, efficient and transparent.

It is a similar on the debt side: P2P lending has enabled the crowd to issue loans, either to individuals or businesses, which are repaid with interest over a fixed period. Instead of getting their loan application at the bank rejected – the most likely result here in the MENA region, especially with the current economic conditions – businesses can access a pool of individual lenders.

It should be noted that equity crowdfunding and peer-to-peer 78

lending are merely different pieces of the same financing puzzle. The fundamental difference between the two is the type of finance offered: equity or debt, and the “equity versus debt question” is one that should answered individual SMEs. The suitability of each varies according to the type of business, its current development stage, and the planned use of funds.

Equity is better suited for earlier stage businesses because they are unlikely to have the cash flow required to make their regular interest payments. Equity is also more suitable for growth-oriented businesses focused on rapid growth, rather than revenue and profitability, such as many tech companies. These businesses must invest heavily in R&D and/or expand quickly to build up a large enough user base, and often take a while to become revenue generating, making loan repayment an obstacle to growth. For example, 11 of Facebook’s 12 capital injections from 2004 to 2011 were equity investments.

Debt is typically for more mature or organic-growth businesses that require operating capital and have the cash flow necessary to repay the loan. Additionally, more mature businesses could have raised equity capital previously, perhaps a number of times, so founders will look to avoid further diluting their ownership taking out a loan rather than selling more equity.

One of the starkest contrasts between equity and debt financing, and therefore equity crowdfunding and P2P lending, is the alignment of investor interests. Lenders will receive

VS

regular returns so long as the business does not default so their primary concern is that the business remains operational, cash flow positive, and paying. Equity investors, on the other hand, will only receive returns if the business provides an exit opportunity, typically in the form of an acquisition, sometimes an IPO, so their concern is that the business is hugely successful.

This is also what most entrepreneurs hope for as well. Equity investors are more incentivised to enable their investments to flourish.

At the end of the day, a healthy, mature business will have a mix of equity and debt financing. What that mix looks like depends on the nature of an individual business. Fortunately for all businesses, the emergence of alternative finance models such as equity crowdfunding and P2P lending make the capital-raising process more accessible and efficient than ever before.

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The Big Debate

Our new compelling section tackled the long standing financing debate of Equity Crowdfunding vs. P2P lending.

We present two sides of the coin, advocated by the professional entities Eureeca and Beehive.

P2P Lending

Craig Moore, CEO

Beehive

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MEs account for 60 per cent of the GDP in the UAE, yet one of the biggest challenges they face is the ability to get the right type of finance to reach their true potential.

The International Finance Corporation (IFC) estimates that SMEs face a US$260 billion in MENA. There is a critical need for alternative sources of finance to serve this particularly underserved sector of the economy.

Peer-to-peer lending (P2P) is a debt based form of crowdfunding. P2P lending refers to investors lending directly to businesses without the use of a conventional intermediary, such as a bank. P2P lending uses innovative technology and the Internet

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as a platform to connect hundreds of potential investors with businesses seeking finance. As a result, the process of getting funding is streamlined and more efficient. This reduces cost and complexity versus conventional financial routes and means that businesses can get finance considerably faster, in weeks rather than months, at lower rates and on more flexible terms.

P2P lending may be a relatively new concept in the UAE, but it has proved itself an extremely successful and trusted model in the UK and US and has delivered real results to the economic performance of these markets. Estimated to be worth US$30 billion globally in 2015, the global P2P industry is forecast to deliver US$1 trillion by 2025. P2P is increasingly considered a more mainstream option with many large banks, consumer brands (Google and Alibaba) and the UK government agreeing strategic alliances with P2P lenders. The P2P model of collaborative funding has seen the most significant growth, versus equity and other crowdfunding models, and it is challenging the way projects and businesses are funded and providing new sources for business growth.

While both P2P lending and equity crowdfunding operate according to the

principles of crowdfunding, there are significant and important differences between them. The fundamental advantage of peer-to-peer lending is that it offers businesses a way to get finance quickly without giving away any equity. Investors lend money and receive interest rather than own any shares in your company. As a business, you retain full control of your business and only pay interest on the money you borrow. The risk of giving away equity means that you no longer have full ownership of your business and you may need to consult investors before making any major business decisions.

To determine whether peer-topeer lending or equity crowdfunding is the most suitable for a business, it is important to be clear about what stage the business is at, how much funding is needed, what the capital will be used for and how quickly the funding is needed. Peer-to-peer lending is better suited to established businesses, trading for more than two years that require a fast cash injection with flexible terms in order to fund initiatives such as expansion and growth capital, re-financing or working capital. Equity crowdfunding is usually more suitable for start-ups, businesses with high upfront investment costs or those without a creditworthy financial history. Investors will own shares in your company and whilst this means they share the risk; they may also share in the decision making process regarding the future of your business.

P2P lending is a revolutionary source of finance that has already helped thousands of global businesses get fast access to lower cost finance that they otherwise would not have encountered. So if you are an established, creditworthy business looking for faster, lower cost finance, peer to peer lending is the right choice when it comes to alternative finance.

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SME Unplugged

Decoding behavioural finance

Is it possible that psychological factors can influence the decision-making skills of key financial experts within your business? Are emotional factors endangering the work of your certified and qualified management accountants? SME Advisor takes a closer look at the new science of behavioural finance‌ 80

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SME Unplugged

Financial science assumes that typically financial decision-makers will act rationally when undertaking critical finance decisions. However, the reality is that human beings can’t be separated from bias and are often susceptible to emotional and psychological influences, which can impair, twist and confuse effective decision-making at times. This is where behavioural finance comes in. In simple terms, behavioural finance is the study of the influence of psychology on the behaviour of financial practitioners and the subsequent effect on markets.

Behavioural finance is of interest because it helps explain why and how markets might be inefficient.

It is a relatively new field that seeks to combine behavioural and cognitive psychological theory with conventional economics, to provide explanations for why people make financial decisions which incur losses (or even a whole lot of bad press). Top management believes that most finance personnel behave in a rational and predictable manner, under any financial situation. However, this assumption doesn’t reflect how they actually operate in terms of their decisions in the real world.

Influencing financial decision making Behavioural biases fall into two broad categories, cognitive and emotional, though both yield irrational decisions. As cognitive biases stem from faulty reasoning, better information and advice can often correct them. Conversely, emotional biases originate from impulsive feelings or intuition and they are difficult to correct. Pioneers in the field of behavioural finance have identified a few key areas; they are as follows: 1. The concept of anchoring which draws on the tendency to attach our thoughts to a reference point

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- even though it may have no logical relevance to the decision at hand. Anchoring is fairly prevalent in situations where concepts are new. For avoiding anchoring, there’s no substitute other than rigorous critical thinking. Successful investors don’t just base their decisions on one or two benchmarks, they evaluate each company from a variety of perspectives in order to derive the truest picture of the investment landscape.

2. Herd behaviour is the tendency for individuals to mimic the actions of a larger group.

Individually, most people would not necessarily make the same choice. The common rationale is that it’s unlikely that such a large group could be wrong. After all, even if you are convinced that a particular idea or course or action is irrational or incorrect, you might still follow the herd, believing they know something that you don’t. This is especially prevalent in situations in which an individual has very little experience.

3. Overconfident investors/traders tend to believe they are better than others at choosing the best stocks and best times to enter/ exit a position. Unfortunately, traders that conduct the most trades tend, on average, to receive significantly lower yields than the rest of the market.

4. Conditioned thinking is when an individual erroneously believes that the onset of a certain random event is less likely to happen following a decision. This line of thinking is incorrect because past events do not change the probability that certain unpredictable events will occur in the future, under the same set of factors.

5. Often, participants in the stock market predictably overreact 81

SME Unplugged

to new information, creating a larger-than-appropriate effect on a security’s price. Furthermore, it also appears that this price surge is not a permanent trend - although the price change is usually sudden and sizable, the surge erodes over time.

6. In investing, the confirmation bias suggests that an investor would be more likely to look for information that supports his or her original idea about an investment rather than seek out information that contradicts it.

As a result, this bias can often result in faulty decision making because one-sided information tends to skew an investor’s frame of reference, leaving them with an incomplete picture of the situation.

7. Traditional economics believes that the net effect of the gains and losses involved with each choice are combined to present an overall evaluation of whether a choice is desirable. However, according to the prospect theory we don’t actually process information in such a rational way. Losses have a bigger impact on emotions than a similar amount of gains. So people tend to react more to losses.

Apart from these factors, there are also socio-cultural, communal, sectarian and even religious and political elements that influence the decision making process of an economist. Most people are willing to invest in ventures or prospects which they ‘trust’ to be a part of their own identity. The feel good factor of familiarity is a big determinant in their finance judgment.

Overcoming biases Behavioural economics generally begins with assumptions rooted in psychological regularity and 82

Behavioural biases affecting investment decisions Herding - being influenced by peers to follows trends

34%

Confirmation - looking for confirmatory beliefs, overlooking beliefs that disconfirm

20%

Overconfidence - overestimating skill and accuracy

17%

Availability - judging outcomes by past experiences of similar outcomes

15%

Loss aversion - disliking losses more than liking gains Others - not in this list

13% 1%

Source: CFA Institute Financial NewsBrief Survey

questions the outcome of those assumptions. An alternative approach is to work backward, regarding a psychological regularity as a conclusion that must be proved, before we fully understand and accept it.

Critics have pointed out that behavioural economics is not a unified theory, but instead a collection of tools or ideas based on observation of basic human tendencies. Standard economic models do not derive much predictive power from the single tool of utility-maximisation.

Precision comes from breaking down the utility into smaller bits and analysing each and every segment with a clear analytical mind.

Here, we look at some potential solutions to overcoming two of the most prominent biases: Confirmation bias • Turn to fundamental analysis and critical thinking to provide you with proper data which will ultimately help make better decisions • Understand and analyse your

risk taking ability, and have a contingency plan in place • In case of investments, ensure to always have margin of safety and have stop loss in your trades Overconfidence bias • Check whether you have done a proper analysis of the business before making investment decisions • Are you abiding by the necessary risk management rules?

• Are ready to take blame on your part of wrong investing and financial decisions?

In conclusion…

The underlying question here is whether the implicit psychology in economics is ultimately good or bad.

Behavioural economics is not meant to be a separate approach from main stream economics, in the long run. It should be more like a school of thought or a style of modelling, which will gradually replace simplified models based on stricter rationality. Behavioural models will continue to prove to be tractable and useful in explaining anomalies and making surprising predictions.

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