The CFO Middle East | Issue 15 by The CFO Middle East

Vol. 2 ISSUE 15

Webcor group pg 26

CFOs & IPOs

ex factor

pg 30

THE

CFO Pradeep Kumar streamlines UAE Exchange’s budgeting and accounting systems.

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Ms. Represented MANAGEMENT Dominic De Sousa (1959-2015) Founder, CPI Media Group Nadeem Hood Group CEO Rajashree Rammohan Publishing Director EDITORIAL Group Editor Jeevan Thankappan jeevan.thankappan@cpimediagroup.com +971 4 375 5678 Editor James Dartnell james.dartnell@cpimediagroup.com +971 4 375 5684 Contributing Editor Annie Bricker annie.bricker@cpimediagroup.com +971 4 375 1643 Online Editor Adelle Louise Geronimo adelle.geronimo@cpimediagroup.com +971 4 375 5683 ADVERTISING Commercial Director - Business Division Chris Stevenson chris.stevenson@cpimediagroup.com +971 4 375 5674 Group Sales Director Kausar Syed kausar.syed@cpimediagroup.com +971 4 375 1647 DESIGN Neha Kalvani neha.kalvani@cpimediagroup.com Analou Balbero analou.balbero@cpimediagroup.com Photographer Charls Thomas

I’m in no doubt that this month’s editorial – although written entirely in good faith – runs the risk of seeming condescending. However, I do feel the need to once again draw attention to an important issue that this region needs to make a greater priority, in order to satisfy its own conscience, and fortify its long-term interests. It’s been said before, but frankly not often enough. Women need to be given greater representation in senior management roles, and on company boards in the Middle East. Research from the Hay Group division of management consulting firm Korn Ferry shows that women outperform men in 11 of 12 key emotional intelligence competencies. The study examined data from 55,000 professionals across 90 countries and all levels of management. These emotional traits directly impact an individual’s management capabilities – both in terms of effective leadership and talent management. Some will argue that these qualities don’t translate into an ability to generate ROI, or that the evidence itself draws insufficient conclusions. But, in an environment where CFOs are increasingly expected to gauge customer sentiment and successfully navigate and dictate demanding board rooms – as well as traditional number-crunching duties associated with the role – these skills are a matter of necessity. Work is being done locally to raise the profile of women in finance. The Association of Corporate Treasurers in the Middle East recently hosted a training workshop for women in finance, which was headlined by the United Kingdom’s esteemed Lord Mervyn Davies of Abersoch, CBE. Lord Davies released a report in 2015 which concluded that one third of all board positions in the UK should be held by women by 2020. Although this may seem an unrealistic short-term target for GCC countries to achieve, steps need to be taken to set the wheels in motion for this change. Meanwhile, Grant Thornton’s 2014 ‘Women in business: from classroom to boardroom’ report revealed that the UAE has one of the world’s 10 lowest percentages - 14 - of women in senior management positions. I’m sure I speak for most of this region’s finance industry in my hope for a hike in this number, and that the region’s top financial boards and businesses will do all they can to rectify this injustice.

Production Manager James Tharian Data Manager Rajeesh Melath

James Dartnell Editor Printed by Printwell Printing Press © 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.

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tHE CFO MIDDLE EAST

Advisory Panel The CFO Middle East’s Advisory Panel comprises a dynamic group of experts and leaders in various aspects of finance. As industry captains arriving from world-leading organisations and specialising in financial strategies, accounting and management, these key personalities will play a vital role in ensuring the delivery of relevant and accurate analyses of the latest trends and issues in the business community.

Ahmad Darwish Ahmad Darwish is a Board Member and Secretary General of the UAE’s Accountants and Auditors Association (AAA), an organisation tasked with the promotion and development of the accounting profession in the country. He is also the Senior Manager for Financial Accounting at DP World UAE and oversees the management accounting, treasury and asset management divisions of the company. With his extensive financial expertise Darwish is also the first Emirati to chair the UAE Members Advisory Committee of the ACCA. Hanady Khalife Hanady Khalife is the Director of Operations, Middle East and Africa, of the Institute of Management Accountants (IMA). She is responsible for training providers, business partners, universities, governmental entities, amongst others. Khalife is also an expert consultant specialising in assisting clients develop and implement strategic business plans and build partnerships with key industry stakeholders. Michael Armstrong Michael Armstrong, FCA is the Regional Director for the Middle East, Africa and South Asia (MEASA) of ICAEW. He is responsible for the ICAEW’s work across the MEASA region, collaborating with key stakeholders, engaging with businesses across the region, supporting ICAEW members and working with both public and private sectors on raising awareness of the relevance of chartered accountancy catalysing

economic growth. Armstrong has extensive experience advising financial institutions and energy and natural resources companies in addition to having held several leadership and advisory positions in business and government. David Thomasson David Thomasson is the founder and Managing Director of Phoenix Financial Training. David is a fellow of CIMA and worked in the accountancy industry for many years before moving into training in the 1990s. PHOENIX offers courses leading to Professional Finance Qualifications in ACCA, CIMA and ICAEW in Dubai and India. Offering a range of bespoke financial courses in Financial Awareness Building and Corporate Treasury Phoenix’s student body ranges from independent students to practitioners of private companies and sovereign wealth funds. Lindsay Degouve de Nuncques Lindsay Degouve de Nuncques is the UAE Head of the Association of Charted Certified Accountants (ACCA). Her role entails spearheading discussions with regulators, business leaders and important stakeholders to strengthen the ACCA’s network and profile in the region. Degouve de Nuncques has spent more than eight years with ACCA in various senior roles. Geetu Ahuja Geetu Ahuja is the Head of GCC for the Chartered Institute of Management Accountants (CIMA). Responsible for

developing the growth of operations and positioning the global brand of CIMA across the GCC region, Ajuha establishes strategic partnerships with global and regional entities. She is also responsible for overseeing the launch of various region specific CIMA nationalisation programmes in the GCC. Paul Gyles Paul Gyles is the Regional CFO and Board member for all ISG Group companies – an international construction services company delivering fit out, construction, engineering services and a range of specialist solutions. He is responsible for the finance, HR, IT, admin and legal functions for ISG’s Middle Eastern outfit. A key aspect of the role is project funding and raising external financing by working with both Arab and international banks. Gyles is also the Chairman of the Steering Committee of the MECA CFO Alliance, the largest CFO networking group in the Middle East. Amer Khansaheb Amer Khansaheb is the president of the CFA Society Emirates. He is the Managing Director of Khansaheb Investments, an investment company with investments in construction, real estate and infrastructure. His expertise includes real estate management, construction management and financial analysis. Amer graduated from the American university in Beirut with a degree in Civil & Environmental Engineering. In 2009, he received his MSc in Project Management from the British University in Dubai. He has been a CFA charterholder since 2009.

CONTENTS

8 News The latest developments in the local finance indsutry.

10 More power to the CFO An infographic of the CFO Sentiment Study by The CFO Alliance on the shifting expectations placed on the role.

12 Predictive, prescriptive Grant Thornton’s Komil Ahmetov gives his take on why CFOs need to consider the value of the unknown, in the form of predictive analytics.

16 Value-added facts Finbarr Sexton, MENA Indirect Tax Leader, EY, analyses what UAE companies need to do to ensure they are prepared for the expected VAT introduction in 2018.

18 Due service Research from SEI’s Institutional Group sheds light on one of the CFOs’ HRrelated concerns — end of service benefits policies.

26 22 The Ex factor UAE Exchange CFO Pradeep Kumar shares his experience of leading an initiative to enhance the company’s customer experience and backend operations.

26 Food for thought Webcor Group CFO Frederic Marret oversaw the implementation of a treasury management system for better visibility over the firm’s vast international operations.

Up for grabs What lies in store for asset management in the region? The CFO Middle East looks at the potential for mutual funds and private equity growth in the coming months.

Small business, big decisions

KPMG UAE’s Associate Director for Advisory Services, Ben Edwardes, gives insights on the importance of SMEs’ auditor selections in overcoming testing times and planning for the future.

46 Perception is reality

SomersConsult’s Fintan Somers discusses how CFOs can create and enable a topperforming finance team.

News

IMA and SOCPA announce 4th IMA Annual Middle East Conference IMA (Institute of Management Accountants), in collaboration with the Saudi Organisation for Certified Public Accountants (SOCPA), is set to launch its 4th IMA Annual Middle East Techno-Finance Era conference in Riyadh, Saudi Arabia from 13th-14th April. According to Bejamin Mullin, CMA, CPI, CITP, Chair, IMA, in a time when companies struggle to keep pace with the complexities and costs of daily technological changes, choosing the right technology is a formidable challenge. “There are opportunities to learn from and connect with experts on a variety of topics, including leadership, enterprise risk management, corporate governance, cyber security, performance improvement, and more,” he said. Dr. Ahmed bin Abdullah Almeghames, Secretary General of SOCPA, said, “This event aims to highlight the important role played by the accounting and auditing profession in enhancing the fundamental elements of the economy and its institutions, in strengthening the role of the profession in controlling business activities of various kinds, and in providing information that helps managers and clients of those entities to make the right decisions, and consequently ensure the continuation of good performance.” The conference offers a host of solutions as well as an in-depth look at the different technological opportunities available for businesses. Tim Douglas, CMA, past president of the IMA Riyadh Chapter, will lead a session on how to pass the CMA (Certified Management Accountant) exam, including sharing insights about exam preparation and test-taking strategies.

APICORP celebrates listing of $500M Sukuk at Nasdaq Dubai Dr. Aabed Al Saadoun, Chairman of the Arab Petroleum Investments Corporation (APICORP), recently announced the listing of a $500 million Sukuk on Nasdaq Dubai. The total nominal value of Sukuk currently listed in Dubai has now reached $37.81 billion, reinforcing its position as the largest centre in the world for Islamic bond listings. To celebrate the achievement, the announcement was followed by the traditional Nasdaq bell-ringing ceremony, which was attended by His Excellency Essa Kazim, Governor of Dubai International Financial Centre (DIFC), Secretary General of Dubai Islamic Economy Development Centre (DIEDC), and Chairman of Dubai Financial Market (DFM); Dr. Raed Al Rayes, Deputy Chief Executive and General Manager, APICORP, Hesham Farid, Head

During the bell ringing ceremony

of Treasury & Capital Markets, APICORP; and Hamed Ali, Chief Executive of Nasdaq Dubai. Dr. Aabed Al Saadoun, Chairman of APICORP, said, “A listing on one of the Middle East’s premier financial exchanges provides our inaugural Sukuk with global and regional visibility, together with world-class regulation. We look forward to making further use of Islamic financing instruments.” APICORP’s Sukuk is the first to be issued under a $3 billion programme that the bank announced in July 2015, which was aimed at diversifying its funding sources.

UAE among top drivers of MENA M&A activity According to a recent report by Al Masah Capital Limited, mergers and acquisitions (M&A) activity in the MENA region has remained robust during the current decade barring 2015 when both the number and value of deals significantly decline. The report, ‘MENA M&A Industry’, revealed that between 2010-2015, the region witnessed M&A deals worth $105.5 billion, with GCC-based companies leading the way in terms of volume and value year-on-year, peaking at an unprecedented 88.1 percent of the total value of deals in 2015. It also revealed that Qatar, Egypt and the UAE had deals worth $22.37 billion, $21.72 billion and $21.29 billion respectively, accounting for 62 percent of the total deal value during the period. Furthermore, real estate and construction, with 239 deals worth $29.51 billion, financial services and banking, with 346 deals worth $23.04 billion, telecoms with 41 deals worth $15 billion and food and

beverage, with 99 deals worth $5.72 billion were the most attractive sectors collectively accounting for 725 deals worth $73.2 billion. M&A activity in the MENA region has gained traction over the years, primarily due to strong fundamentals and favourable demographics, and driven mainly by GCCbased entities with larger risk appetites and strong liquidity positions attained during periods of high oil prices, according to the report. However, the rapidly changing macroeconomic environment in 2015, due to geopolitical tensions and the anticipated decline in spending by governments on the back of weakened oil prices, have resulted in the total value and volume declining to $7.78 billion and 193 deals respectively, registering the lowest levels in six years. According to the report, all the six GCC countries were among the top nations to lead outbound investments from the MENA region.

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News

KPMG, Dubai Exports put spotlight on taxation

KPMG DED Taxing Times seminar speakers

KPMG, together with Dubai Exports, recently hosted a business seminar focusing on how the developments in the regional tax landscape could impact GCC businesses and investments. A key theme that emerged from the discussion was transfer pricing. Currently, there are no UAE-applicable transfer pricing regulations but the UAE’s evolving tax regime could potentially change this. Nilesh Ashar, Tax Partner, KPMG, said, “Transfer pricing is at the core of

international trade. Any business operating in more than one country must keep up to speed with emerging transfer pricing rules. National tax policy decisions are why a number of high profile companies have restructured themselves – in part to leverage the lower tax rates offered by different jurisdictions.” According to Shabana Begum, Head of Transfer Pricing Function, KPMG’s Lower Gulf, the Organisation for Economic Cooperation and Development (OECD) has agreed an action plan on base erosion and profit shifting (BEPS) that will close many, if not all, international tax loopholes. The OECD’s Action Plan on BEPS is designed to close gaps in existing international rules that allow corporate profits to be significantly reduced or artificially shifted to low tax environments, where companies have little or no economic activity.

Standard Chartered appoints new MENA Head of Economic Research

Dima Jardaneh, Standard Chartered

UBF hosts global risk management seminar The UAE Banks Federation (UBF) recently organised a seminar for its members, which featured presentations and discussions from Professor Edward Altman, the Max L. Heine Professor of Finance at NYU’s Stern School of Business. The seminar, coordinated by the UBF’s Risk Management Committee, was hosted by Commercial Bank of Dubai (CBD) and attracted over 80 senior executives from member banks. Professor Altman discussed ‘Evolution of distress prediction models for assessing the probability of default of firms’, and discussed his development of the ‘Altman Z-score models’ for credit risk management and bankruptcy prediction. He also outlined his current assessment of credit market conditions and the outlook for ‎the credit cycle in the future.

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According to industry reports, Professor Altman’s models have been applied widely in manufacturing and other sectors in the USA, as well as in other developed and emerging markets. The models have led to numerous new techniques being developed by researchers and practitioners in banking and related sectors globally. UBF highlighted that among the coming year’s priorities for its federation’s risk management committee are monitoring of local market conditions, particularly in the SME segment, as well as compliance with UAE Central Bank guidance and regulations on bank operating standards and benchmarks, including IFRS 9, Basel III transition, and risk management frameworks.

Standard Chartered has recently announced the appointment of Dima Jardaneh as its new Head of Economic Research for Middle East and North Africa, Pakistan and Turkey. In her new role, Jardaneh will lead a team of economists covering 10 countries across the Middle East region and will also be responsible for macro research on Turkey and Pakistan. She will be reporting to Marios Maratheftis, Chief Economist, Global research, and will be based in Dubai. Jardaneh has over 12 years of experience as an economist, joining the research team from investment bank EFG Hermes where she was the GCC economist. Prior to that, she was the director of sovereign ratings at Standard & Poor’s from 2011 until 2014, and an economist at the Washington-based International Monetary Fund (IMF) from 2006 until 2011.

MORE POWER TO THE CFO

According to the CFO Sentiment Study by The CFO Alliance, as CFOs embrace a larger role in developing business strategy, driving corporate direction and improving shareholder value, one thing is abundantly clear: departments must work hand-in-hand to ensure that operational improvements and financial objectives are in perfect alignment.

Where is CFO role heading? The numbers tell the story.

72%

56%

See their role changing

18%

Anticipate greater involvement in value creation

expect a bigger role in operations

The CFOâ&#x20AC;&#x2122;s top five operational challenges

driving growth

increasing gross margin

improving responsiveness and meeting customer expectations

improving eBITDA

GENERATING FREE CASH FLOW

Cautious optimism: things are looking up

66% 37% 52% 50% Predict higher revenues

Expect margin improvements

Key Takeaways Why does operational excellence matter?

1. performance The ability to outperform competitors and dramatically grow both top and bottom line performance faster.

2. Agility

The flexibility to handle business complexity and improve responsiveness to meet changing customer needs.

3. Innovation The ability to introduce more differentiated, highmargin products faster. with correspondingly higher revenue.

Source: TBM and The CFO Alliance

Anticipate earnings growth

Expect to increase spending

Insight

Predictive analytics

Predictive, prescriptive

Komil Ahmetov, Associate Director, Business Consulting, Grant Thornton UAE, gives his take on why CFOs need to think outside the box and consider the value of the unknown, in the form of predictive analytics.

he rapid development of new technology, disruptive changes in business models, enhanced competition and volatility in the commodities markets all seem to be impacting the finance function

significantly. The role of the CFO has been transformed from playing a role of financial control and advice, to playing a more strategic role and taking futureoriented decisions and perspectives. Nowadays, CFOs are taking a leading,

rather than an advisory or oversight role within strategic decision-making. More recently, a larger proportion of CFOs have started becoming the key partner for the CEO in strategic decision-making and thus evolving their own role.

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â&#x20AC;&#x153;

CFOs should not simply look ahead, but be predictive, and develop prescriptive solutions.â&#x20AC;?

Senior stakeholders see the main role of the CFO as supporting sustainable business growth. Given the changing external and volatile environment, the finance function should have greater adaptability and agility to ensure the business is braced and safeguarded from risk in the external environment. It must play a much more dynamic and facilitative role, moving from static and rigid processes and controls to adaptive and agile models. The finance function should have greater resilience, with the ability to absorb and bounce back from internal and external shocks along with being able to develop the adaptive capacity of the organisation, provide qualitative planning for unforeseen shocks and use predictive analytics and risk mitigation plans. Developing robust analytics capabilities for the finance function is another important priority and one which the CFOs of the future will become more dependent on as market volatility and competitive pressures call for greater and faster insights from the finance function. Businesses expect that the finance function will provide actionable business insights

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insight

Predictive analytics

“

and this requires (i) turning data into information and insights, (ii) then turning insights into actions. To secure this, CFOs and their finance function must live in the future, change their focus and look more at possibilities, not facts. They should not simply look ahead, but be predictive, and develop prescriptive solutions. Leveraging Big Data can be a good way to provide predictive solutions. It involves examining large amounts of financial data for better decisionmaking and insights. An example being international car rental company AVIS/Budget Group who were facing difficulties during the recession in 2009 and as a result, were cutting back significantly on employee expenses. Reduction in revenues resulted in increased pressure on the management to formulate a plan to identify new opportunities. The company started mining Big Data to derive actionable marketing insights. It used Big Data technology to process significant volumes of transaction and unstructured data to analyse patterns, identify relationships, derive insights and put them into actions. As a result, the Group developed a ‘maximise customer value’ model which led to customer needs that had been previously untapped being identified and addressed. The initiative resulted in enhanced profitability and increased incremental revenues by approximately $200 million. Technology and data are fundamentally impacting the role of the CFO. As a matter of fact, more and more chief information officers are directly reporting to CFOs than ever before. ERP and automation in the future will not be about incremental changes in the existing ERP. They will be about (i) continuous process improvements to increase efficiency and effectiveness; (ii) increasing the degree of functional

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More and more chief information officers are directly reporting to CFOs than ever before.”

process integration; and (iii) taking advantage of emerging technologies (robotics automation, cloud etc.). Such new technologies will enable CFOs to connect: (i) information from financial systems with data from other business functions; (ii) from cloud-based external sources in new ways, and with unprecedented speed. Advanced technologies such as cloud computing, in-memory platforms and predictive analytics amongst others, can help CFOs make better and more sophisticated use of data, influence decisions and take practical, timely action. The following example supports the claim - Verizon, a large communication company in the US were facing challenges since the smartphone market was getting saturated and this impacted negatively on the cash flow. The company looked for opportunities to reduce costs. It introduced robotics process automation to automate corporate bookkeeping and accounting tasks. As a result of this initiative, the company cut a quarter of their manual Excel entry employees from 14,000 to 10,500, closed more than half of its 200 back-office locations, built a new hub for finance operations in Florida and reduced its finance-department costs by 21 percent. Real-time reporting in the future will provide the finance function a tool to communicate insights to businesses, allowing them to act faster in the future, thus promoting efficiency and reducing operating costs. Closing books on an everyday basis will provide the

finance function with more flexible and adaptive processes like near real-time reporting, rapidly produced analytics and dynamic and integrated forecasting. Another big challenge ahead for CFOs is securing an enhanced connectivity within an organisation. It involves integrating finance and operations to provide connectivity between different functional silos, systems and processes. Now, operations and finance are not always well integrated and they act as if they are two different islands. To ensure the integration, the finance function should engage with internal customers to understand their needs and business challenges and obtain necessary insights on how to provide value by supporting them. Real-time reporting, along with strong integration of the finance function with the remaining functions within the organisation, will provide them with a tool to communicate insights to the business, allowing them to act faster in the future, thus promoting efficiency and reducing operating costs. These changes and pressures from the external environment will convert the role of the CFO to become the future innovation leader and profitability officer. We will also see the modern CFO being known as the chief profitability officer, chief strategy officer or chief innovation officer playing a key role in leading innovative initiatives within the organisation and driving forward a pioneering, profitable, efficient and dynamic function in the not so distant future.

opinion

GCC VAT

Valueadded facts There has been a lot written recently about the expected introduction of VAT across the GCC. Finbarr Sexton, MENA Indirect Tax Leader, EY, analyses what UAE companies need to do now to ensure they are prepared for its expected introduction in January 2018.

The introduction of VAT is a major fiscal reform for the GCC. It is expected to be implemented at a low uniform tax rate of five percent across the GCC member states, with the aim of reducing the risk of trading arbitrage and unfair competitiveness. The introduction date for VAT has now been confirmed by Government officials as 1st January 2018, and this confirmation will increase concern in the UAE business community about its impact. Implementation challenges are sure to result from such a fundamental change in tax regimes.

The cold, hard truth is that UAE companies are not currently ready for the introduction of VAT accounting and reporting, and this will be one of the most significant challenges that businesses will face.â&#x20AC;?

Its introduction will diversify Government revenue sources and reduce reliance on oil revenues to finance Government expenditures. The additional revenues collected are likely to fund programmes for the development of job opportunities for nationals and improve education and healthcare in the GCC countries. As with any major fiscal reform, businesses should start planning now to ensure they are able to hit the ground running when the legislation is introduced. The cold, hard truth is that UAE companies are currently not ready for the introduction of VAT accounting and reporting, and this will be one of the most significant challenges that businesses will face. It will cause many challenges for businesses in the UAE and business owners will need to be prepared for the introduction of a tax system that impacts every sector of the economy from importer, manufacturer, wholesaler, retailer and finally to the end-consumer. Common feedback from businesses impacted for the first time by a VAT regime is that they underestimated the financial and operational impact of the change on their companies. Larger businesses in the UAE will be faced with even greater complexity in its VAT compliance processes as it may be faced with different VAT profiles and may have numerous branches and divisions across the GCC that may require consolidation into a single VAT

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grouping. Reliance on an ERP system to meet all compliance requirements is unlikely to be the end solution, as the business will need to build formal compliance processes around the system to manage its risk properly. Staff training and recruitment of staff with VAT accounting and reporting experience will be critical, and engaging with a tax advisory firm for ongoing support during the initial implementation stage is highly recommended. There are plenty of case studies available from across the globe if GCC companies want to compare themselves with their international counterparts. There are over 160 countries worldwide that have implemented VAT or goods and services tax (GST) regimes. Malaysia is one of the countries closest to the Middle East region that has successfully implemented a GST system that is broadly similar to VAT, whilst both China and India have been involved in programmes to unify their existing GST regimes. Key to all of these case studies is the fact that businesses started to prepare early. Business owners should be asking questions at an early date – What is actually going to be the VAT impact on our business? Will it be positive or negative? Small business owners will need to determine whether they need to register for VAT, as in any VAT regime, there will be mandatory and elective revenue thresholds for taxpayer VAT registration. Some small businesses may fall outside the requirement to be registered for VAT, however, in this situation any VAT suffered on their purchases will be non-recoverable and this will result in an immediate additional cost for the business. Given the size of the UAE market, it is likely that most businesses will

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Business owners should be asking questions at an early date – what is actually going to be the VAT impact on our business? Will it be positive or negative?” qualify for VAT registration, and once a business falls within the VAT net it will be critical for that business to implement proper IT systems to calculate VAT on its sales and to capture recoverable VAT on its purchases. VAT impacts almost every part of an organisation, and business leaders will need to take a holistic approach in dealing with the challenges of ensuring that the organisation is ‘VAT-ready’. The transition process needs to be properly structured with a considered business analysis/VAT impact study leading to a formal plan for implementation, testing and post implementation review of business functions and processes. The legal and IT functions need to be closely involved in the transition project that is likely to be led by the finance function. VAT introduction will raise questions from the business related to the day-

to-day impact. In the preliminary stage, a good understanding of the basics will be required. Later, specific training and communications to the various stakeholders - finance function, tax department, legal, sales and purchase departments and customer teams - will be needed. Companies entering into medium to long-term contracts will want to review their commercial terms and conditions to ensure inclusion of provisions for potential VAT. In addition to understanding and planning the likely system changes, businesses will want to strategise on customer communications and consider whether the proposed law creates a competitive advantage or disadvantage for their business or products. There is a lot for businesses to take in – but with enough preparation, companies across the UAE should be able to handle the introduction of VAT with relative ease.

Research

End of service benefits

Due service Research from SEI’s Institutional Group sheds light on the context of the United Arab Emirates’ economy, and how it stands to impact end of service benefits policies – an issue that is creeping up the list of CFOs’ HR-related concerns.

EI’s Institutional Group provides outsourced fiduciary management investment services, and acts as a fiduciary manager to more than 475 retirement, nonprofit and healthcare clients, providing investment processing, investment management, and investment operations solutions. The firm’s 2015 annual SEI report on Employment Trends and Managing End of Service Benefits in the Middle East sheds light on topics such as corporate growth, employment practices and end of service benefits (EoSB) liability management, as well as understanding how companies across the GCC manage EoSBs. From May-June 2015, 110 senior executives, including chief financial and executive officers, as well as human resource and finance directors, participated in the survey.

Of the 110 respondents, 77 percent have employees based in the UAE. This year has witnessed heightened activity regarding the laws and regulations that affect the way business is being conducted in the UAE. Amongst the laws that have seen amendments, or are in advanced stages of discussion at the highest level of government, are the UAE Companies Law, the Bankruptcy Law and the Law of Foreign Direct Investment. Although these laws have been slated for changes for some time, the greater impetus to review them comes in response to the growing challenges of the current global macroeconomic environment, headlined by low oil prices. A recent study by LinkedIn shows that the UAE is the most in-demand destination for highly educated professionals in the world. According to the study, the country saw the biggest entry of

professionals in the world, posting a gain of 1.89 percent of its total workforce and surpassed key job markets like Canada, Australia and Singapore. Despite the dramatic drop in the price of oil, the impact on business has been relatively contained. Sixty-three percent of survey

63%

of survey respondents have indicated that their businesses were not impacted by the decrease in oil prices

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Spend, spend, spend

“It is clear that companies still favour traditional methods such as bonus and incentive schemes and are slow to embrace more differentiated benefit models.” Samer Abdel Kader, Head, SEI Investments Middle East

respondents indicated no impact on their business as a result of the oil price decrease and only five percent experienced significant restructuring.

GCC defiant

According to the results of the survey, the GCC business community appears bullish despite economic and geopolitical fluctuations. Nearly 80 percent of respondents plan to increase their employee headcount over the next three years and 29 percent are planning double-digit

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growth within the same period. This figure is slightly lower than last year, when 85 percent of respondents planned to increase headcount, but is still fairly robust given the greater challenges the region faces today. Similarly, companies are still aggressively increasing salaries, with 65 percent of respondents expecting annual salary increases of five percent or more per year over the coming three-year period. That is lower than last year’s results, where 73 percent expected salaries to rise as much.

A recent study by the National into the saving habits of expatriates found that a quarter of all employed UAE residents do not save any of their monthly wage. It also showed that the cost of living (22 percent), rising rents (19 percent) and inability to save (15 percent), are their top three financial concerns. Annual salary increases are debatably no longer seen as an instrument of retention. Instead, they are considered a necessity for maintaining current standards of living in an environment that has seen the cost of living peak in the last few quarters. July 2015 marked a sixyear high for inflation in the UAE, with a year-on-year inflation level of 4.43 percent. “Given such a scenario, an opportunity exists for employers to generate goodwill by assisting their employees to save for their retirement,” says Samer Abdel Kader, Head, SEI Investments Middle East. “When analysing the retention packages that employers are offering, it is clear that companies still favour traditional methods such as bonus and incentive schemes and are slow to embrace more differentiated benefit models, such as savings plans and End of Service Benefit enhancements.”

CFOs and staff

Of the areas in which finance has become more active, HR ranked second - behind IT - with over 42 percent of respondents indicating that their role has expanded into helping manage the company’s labour force.

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Research

End of service benefits

In order to support recent economic expansion – the UAE experienced a 5.3 percent GDP growth rate in 2013 – companies have increased salaries, made heavy bonus payouts and granted higher allowances for housing and healthcare in order to attract and retain the best talent in a strongly competitive environment, which inflated operational costs. With a slowdown in the region’s economic forecast, highlighted by the downward revision in the IMF’s GDP forecast for 2015 and 2016 to 3.4 percent, 84 percent of CFOs and finance executives felt that managing their operational costs was their biggest challenge today, and 74 percent said cost reduction was one of their top priorities at the moment. “Talent management also featured as a prominent concern, just ahead of risk management and not far behind cost reduction,” Kader says. “This is further evidence of the growing involvement of finance in an area typically seen as an HR responsibility and supports the idea of CFOs seeking improved dollar cost productivity of employees.” An obvious area to be involved in when exercising cost control is that of labour, particularly in a market which has seen the cost of living, and as a result the cost of employment, spiral in recent years. It has become a finance’s concern – almost as much as HR’s – to oversee policies concerning the recruitment and retention of talent. The survey’s results show that companies are being pressured to pay out more to employees, either by way of bonus incentives or salary increases, in a bid to keep engagement, productivity and retention numbers up. “This model for managing human capital may

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Kader sees this is a potential banana skin, however. “Longer employee tenures expose companies to larger EoSB payouts year on year,” he says. UAE labour law stipulates that the EoSB liability owed to employees is 5.75 percent of final salary for every year of employment up to five years of CFOs and finance of employment, increasing to 8.22 executives feel that managing percent of final salary per year after their operational costs is their five years. “As employment tenures, biggest challenge today salaries and benefit payouts grow, this five-year threshold, at which point the EoSB liability immediately increases by 43 percent, represents an ever more important factor that companies should take into consideration.” Another interesting finding is that risk management (58 percent) is one of the top three concerns for CFOs in 2015. “Over 50 percent of the of CFOs believe that risk companies polled leave the funds for management was one of their top three concerns EoSB - one of the three largest payouts for 2015 to employees - sitting on the balance sheet as opposed to being invested,” Kader says. “Twenty-three percent have no idea how the funds for EoSB only prove effective in the immediate are managed. Only 10 percent have set up a trust account to hold and short-term as there is no guarantee ring-fence assets required to pay out of employee loyalty despite these to employees.” costly benefit offerings,” Kader says. The findings suggest that employers “What may be needed is a revaluation are mindful of this legally binding of benefits offered, to ensure that obligation; a finding consistent companies are able to manage the with SEI’s previous two reports. heavy cost of recruitment, training, However, it also exposes significant management, remuneration and shortcomings in the approach retention.” undertaken by many companies to Companies are finding that their managing this obligation. employees are staying with them “The findings suggest that HR heads longer, year-on-year. Nearly half of respondents (45 percent) have annual and CFOs need to work together to attrition rates of 5 percent or less, as strategically map out how they can each meet their top three goals – also compared with 37 percent in 2014. Around 76 percent of the respondents comprising managing operations, market volatility and regulations surveyed have at least 20 percent of - given how closely they are linked their staff employed for five years or to continued corporate growth and longer. This is up from just over 70 success,” Kader says. percent in 2014.

84% 58%

COVER

UAE Exchange

The

ex factor

With 775 branches worldwide, UAE Exchange is a cornerstone in the remittance market. Determined to deliver an enhanced customer experience and improved back-end operations, CFO Pradeep Kumar opted for fresh budgeting and accounting solutions to keep track of the $25 billion in salaries that is transferred annually through its channels.

esidents of the seven emirates have a fond association with UAE Exchange. In a country that is reliant on its 90 percent expatriate population - where citizens migrate for better job and salary opportunities - sending money back home takes on huge importance for people of the United Arab Emirates. For them, and 400,000 others worldwide who use these services monthly, UAE Exchange is a vital channel that helps them feed, house and clothe loved ones around the world. The company was founded in 1980, with just one branch to its name. Joining 25 years later, chief financial officer Pradeep Kumar has seen a great deal of change since his arrival. “Back then, we had 27 branches and no global presence,” he says. “There’s no doubt that the complexity of the operation – and of technology in general – has greatly increased since then.” UAE Exchange now boasts 772 branches worldwide, but 70 percent of its revenue still comes from the Middle East, a region – like the UAE - that is highly

reliant on migrant labour. “This region obviously has huge numbers of workers from South Asia,” Kumar says, “but our expansion strategy involves having a presence in all markets worldwide.” Aside from having a 6.51 percent share in global remittance services, the firm also offers a range of Forex, prepaid and distribution services, among others. These include its pre-paid card scheme in partnership with MasterCard, and GoCash, a multi-currency travel card that can be used in a six countries of the customer’s choosing. Ensuring the $25 billion of customer remittance money transferred annually is delivered in a secure and timely

“

manner, is no easy task. Behind the customer-facing in-store staff and online transfer services, a series of advanced technologies and processes are needed to ensure transactions don’t go awry. “Our greatest ambition is to automate everything,” Kumar says. “This stretches from delivering an error-free experience for the customer, to ensuring there are limited back-end costs for human resources.” Although their services may seem smooth, Kumar knew that UAE Exchange’s budgeting and accounting processes could not be classed as seamless. “A number of department heads in other countries were using Excel to manually input their budgets,” Kumar

This region obviously has huge numbers of workers from South Asia, but our expansion strategy involves having a presence in all markets worldwide.” www.thecfome.com

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COVER

UAE Exchange

“

The in-store model won’t die any time soon. If customers are sending home their hard-earned money, they’ll often want to speak with a human being rather than dealing with a machine.”

says. “This was very time-consuming and compromised the quality of their work. We needed to ensure a smooth flow of information, both internally and in terms of the integration with our 150 correspondent banks.” Keeping track of working capital also takes on huge importance for the firm, both in terms of its internal operations, and in dealings with these external banks. “We always have to ensure that there is enough money available,” Kumar says. Furthermore, the competitive nature of the money transfer business necessitates a complex pricing model for the company. All financial planning is undertaken in Q4, with a timeframe of 60-90 days needed to create a fullyfledged budget for all operations, encompassing all types of KPIs. Additional change to the company had put greater emphasis on the need for change. As of 2016, a new corporate structure has been put in place. This will bring all the Group’s companies under one umbrella, into a single holding company, while UAE Exchange will also maintain dealings with multiple intermediary firms. “This has necessitated further automation,” Kumar says. “There are different levels that need to be considered when consolidating accounts. The more companies that this applies to, the more complex the process.” After a series of meetings with senior stakeholders across UAE Exchange and his finance department, Kumar decided to opt for SAP’s Business Planning and

Consolidation (BPC) software. Kumar opened discussions with UAE Exchange’s CIO, and enlisted the IT department’s expertise for the design phase of the budgeting module, a key component in the new strategy. He also sought assistance with the integration process from MDS ap. Facing “rigid” timeline and budget – some of which were unanticipated – constraints, the process of implementation was not without certain difficulties. “We were certainly concerned that we would not complete the project by the end of 2016,” Kumar says. Adding to these woes were the challenges in deployment and user testing, giving an extra headache to the finance and IT teams. “Seamless” movement of data to the SAP modules was also imperative. Nonetheless, the end-to-end implementation of the project, from design to user access tests, took nine months to complete, with Kumar keen to stress the physical implementation was “much quicker.” The budgeting module of the software has now been successfully deployed, with 2016’s work being carried out on the platform. The accounting module, meanwhile, is due to be completed in two months’ time. Kumar says the completed installations have already proved a fantastic valueadd for the organisation. With the module now available to all appropriate stakeholders, the system is automatically updated to reflect budgeting changes. “It’s been a great help in terms of tracking

and meeting our timelines,” he says. “It’s improved our accuracy, and really enhanced our governance. Beforehand, it wasn’t uncommon to make modifications to our budget via email. Now, any change goes through the system, giving greater transparency to our governance and planning.” Kumar is also confident that once complete, the accountancy aspect will bring similar benefits. The project has added broader operations capabilities to UAE Exchange, releasing bandwidth for the accounts team, which has proved very useful. “The new system will help us have faster time to market,” Kumar says. He speaks highly of the support he received from integration partner MDS ap. “They were supportive in terms of meeting our deadlines, which meant they often had to work overtime,” he says. “They did a great job in supporting our domain team for budgeting and accounting and were highly knowledgeable.” Given the project’s fresh implementation, Kumar says tangible cost savings are yet to be realised, but he is sure they will be evident over time. “By the end of 2016, we will know the full extent of them,” he says. “But I have no doubt it’ll be a substantial amount.” Although Kumar recognises the importance of keeping up with the pace of digitalisation, he is adamant that customers will continue to crave traditional service models. “The in-store model won’t die any time soon,” he says. “If customers are sending home their hard-earned money, they’ll often want to speak with a human being rather than dealing with a machine.” He is bullish about UAE Exchange’s broad service offerings. “We reocgnise that digital will be the order of the day, and we’re prepared to deliver services over any device,” he says. “Our overriding aim is delivering the best possible customer experience.”

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Feature

Webcor Group

Food for thought

Following a period of vast economic transition in its primary market, Angola, Dubai-based food distributor Webcor Group needed better visibility over its cash flow and liquidity. CFO Frederic Marret opted for a fresh treasury management system which is due to bring untold benefits to the firm.

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You’ll be exposed if you don’t do your homework. Banks in Africa have become more cautious of late; investors are there for lowrisk ventures.”

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or Webcor Group, visibility has become its bread and butter. With 3,500 employees in the firm, and with operations stretching across Europe, Africa and Asia – whilst being headquartered centrally in the UAE – keeping track of its finance supply chain and dealings with banks is crucial for the finance team. Founded in 1992 in Congo, the family-owned firm expanded its operations to Angola, Mozambique and various other African locations over the course of a decade, initially focusing on its food business, and the distribution of rice, sugar, flour, vegetable oil and FMCG products. Webcor’s business now focuses on supplying a variety of consumers these FMCG products. “We sell our product to the last procurer in the process before it touches the consumer,” CFO Frederic Marret says. “This includes supermarkets, wholesalers and even local traders for markets.” Their business, however, is being affected by a shift in consumer preference to different products. “Yoghurt, cheese and packed rice and becoming much more popular.” With this in mind, Webcor has introduced four new supermarkets in Angola, as well as opening an industrial flour mill, and is beginning the process of importing vinegar to the country, before diluting it to be sold on. As the company’s operations have grown, Marret and his team have focused more on optimising

their supply chain in order to accommodate international buying processes. “We need to ensure that processes have the best possible transparency, from the unloading of boats to our customers,” he says. The breadth and complexity of Webcor’s operations have put extra strain on its treasury department. After joining the firm in December 2013, Marret appointed a global treasury head to give them an enhanced understanding of cash flow. With finance departments in each operating country needing better visibility over this, Marret sought a new solution that could ensure a swift exchange of information for transparency. “An important part of our strategy is being able to fund our business from trade finance activity to long-term financing,” he says. Against this backdrop, Marret had faced a major challenge, in the form of local, regional and international banks having no clear channels of communication between one another. At the same time, there was an expectation that Webcor could increase its compliance and regulatory processes. “Failure to adhere to these demands can result in blocked transactions or worse,” Marret says. “You’ll be exposed if you don’t do your homework. Banks in Africa have become more cautious of late; investors are there for low risk ventures.”

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Webcor Group

Once we have full visibility over bank charges, that will give us much greater leverage in negotiating them.”

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What’s more, Angola, Webcor’s primary market, is in the midst of economic transition. Although it has been one of the world’s fastest-growing economies in the last 20 years – with capital Luanda having boasted the world’s highest cost of living, its GDP decelerated by 3.8 percent last year. The oil-exporting nation has suffered as a result of the drop in prices, prompting the government to tighten the process of clearing imported goods before their arrival, while its currency, the Angolan Kwanza, has depreciated by 60 percent in the last year. Meanwhile, the country is one of many in Africa to have halted a series of large infrastructure projects, with local demand and housing costs decreasing. “We need to secure our payments abroad so as to avoid the risk of defaulting,” Marret says. “Everything that has happened in Angola necessitates greater visibility and less margin for error.” The series of obstacles faced by Webcor in Angola served as a timely incentive to refresh its relationships with investors. “We needed a stronger grip on our operations, cash and liquidity,” Marret says, “as well as reviewing our trade finance structures.” Together with Webcor’s senior management, Marret decided that a new treasury management system (TMS) was in order. At the start of 2015, Marret and his team began a rigorous POC process, meeting with seven different service providers to determine whose solution could best suit their needs. “We were keen to know exactly how they could help us manage whatever we installed,” Marret says. Eventually opting for a Kyriba solution, Marret highlights the vendor’s “flexibility” as being their USP. “They seemed to understand how we work, and how their system could solve our issues,” he says.

While work on getting the solution completely up-and-running is still ongoing, the team at Webcor has already begun to notice the impact that awaits. Over time, Marret began to realise that the solution could bring more benefits to Webcor than he had initially envisaged. “It’s already evident that the TMS can bring new features to us that can help in a way we hadn’t expected,” he says. “What’s also very important is its user-friendliness; it’s very easy to navigate for non-finance users.” This was even more important, given Marret’s description of Webcor’s IT team as lacking in TMS exposure. “It has certainly been a learning curve for them,” he says. “Detailed RFPs certainly made this process much smoother.” Although Webcor is still in the midst of completing the final phases of the project, Marret is enthused by the progress has been made, and says that being based in the Middle East has brought its unique challenges. “We’re still getting there in terms of our final stages,” he says. “For our previous implementation, there was no local functional consultant, while a lot of TMS forms are not set up for the Middle East. Most service providers want to sell you the whole package, but Kyriba were very understanding in terms of our needs.” Nonetheless, Marret has high expectations for the changes. “I certainly expect it to give us full visibility over our cash flow, which is obviously a huge benefit,” he says. “Once we have full visibility over bank charges, that will give us much greater leverage in negotiating them, will reduce time lag, as well as improving reconciliation with banks.” Marret plans to establish a “two-way” treasury, with in and out flows.

FEATURE

CFOs & IPOs

Public potential

For any fast-growing company, going public signifies a big leap towards further success. For the transition to become fruitful, business leaders must ensure that they make the right judgment on various matters throughout the process.

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FEATURE

CFOs & IPOs

“

Twelve months before an IPO is a good time to start taking stock of your existing staff to determine who is best suited to assist you in this process. This assessment will help you determine where additional resources are needed and identify skills gaps.” Tim Hird, Executive Director, Robert Half Management Resources

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s the finance captain, CFOs are required to lay all the groundwork for the company to achieve a successful initial public offering (IPO), ensuring things go as smoothly as possible. However, while the move presents tremendous benefits, the process is often arduous. According to Chris Power, CFO, LifeLock, an identity theft protection company based in the US, the IPO process is very challenging even for the most seasoned finance chiefs. “It is a very time and energy consuming course,” he says. “The task requires finance chiefs to do more than delivering and reporting on the financials. Since they are central to the preparation process, they are expected to play a more visible role at companies preparing to list on the public markets.” A report consolidated by EY highlighted that as daunting as the exercise of getting an IPO can be, having the right foresight and planning early in the process is key to a successful outcome. Organisations need to carefully plan every step in the transition, from building the right financial infrastructure, to setting the appropriate price and plan for taxes, and other compliance requirements. And, once they are taken care of, ensure that a post-IPO business plan is in place. “Being ready early is vital, so when the timing is right for the IPO, the company can move smoothly,” explains Matt Armanino, Partner, COO of CFO Advisory Services, Armanino. “While CFOs can’t control

financial markets, they can definitely control how their organisations can improve their structure to cope with the market demands, and to move forward when market conditions become ideal.” In this light, finance heads must create a comprehensive plan that balances the company’s short- and long-term goals. “They should, for example, deploy a solution or technology that will enable them to produce financial reports accurately and speedily,” says Jeff Epstein, Operating Partner, Bessemer Venture Partners, and the former CFO of Oracle. “Excel spreadsheets won’t scale properly, and manual accounting, budgeting and general bookkeeping are just too prone to error and time-consuming.” In addition, Epstein also highlights that since private companies might have limited experience in dealing with tax-related issues, therefore, they must address any related procedural concerns this head-on. “They can do this by working with an IPOexperienced tax advisor to reconcile their financial statements with the relevant tax provisions, at the same time, they should also implement systems that will help them automate any processes involving it.” Armanino shares the same notion, explaining that taxes, like everything else, become more complex once a company goes public. “Processes within the organisation receive higher scrutiny during and after the transition to an IPO,” he says. “CFOs can’t just rely on the same old group of linked spreadsheets to calculate the

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FEATURE

CFOs & IPOs

taxes. They should be ready to comply with any local or international tax regulation.” The CFO needs to keep in mind that they don’t need to take on all the work. With the right strategies in place, a risk-based approach and a solid team of skilled accounting and finance professionals and other expert advisors, the journey to the transition can become more manageable. Tim Hird, Executive Director, Robert Half Management Resources, a global financial professional services and consultancy firm, explains, “Twelve months before an IPO is a good time to start taking stock of your existing staff to determine who is best suited to assist you in this process,” he says. “This assessment will help you determine where additional resources are needed and identify skills gaps.” A thorough evaluation of your current team’s capabilities is crucial, according to Hird, as the move to becoming a publicly traded company can result in a big cultural shift. “Also, the change will definitely involve new rules, processes and technologies that your current financial team need to adhere to,” he adds. During the IPO process, along with chief executives, CFOs become the face of their firms. They spend most of their time outside of the office, and investor relations become a top priority. “After the IPO, the finance chief may spend less time managing the company’s day-to-day financial operations,” explains Hird. “Their role will expand even more as they will be responsible for handling a broader range of high-level activities including strategic and operational decision-making, monitoring risk and compliance issues among others.”

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“

Processes within the organisation receive higher scrutiny during and after the transition to an IPO. CFOs can’t just rely on the same old group of linked spreadsheets to calculate the taxes. They should be ready to comply with any local or international tax regulation.” Jeff Epstein, Operating Partner, Bessemer Venture Partners, and the former CFO of Oracle

According to Epstein, one of the most important roles of the financial team that needs to be established once the IPO is fully realised, is the financial controller. “They will the one who needs to take the reins of the operations in the CFO’s absence,” he explains. “If the controller is technically oriented, the company needs to hire an extra person who is adept with financial planning and analysis. Meanwhile, if they have a controller that is more budgetsavvy, they should bring in bring in someone who is proficient in the processes and regulations from entities like the Securities and Exchange Commission” Rarely will a CFO be able to fill in all the roles required to go public, if necessary, CFOs should not hesitate to leverage experienced third-party providers. It may be more costefficient as the team doesn’t needs

to hire a permanent staff member for those functions that are not business-criticial. “A good rule of thumb when considering whether to hire internally or outsource a position is this – utilise internal talent when the team isn’t resource-constrained, and consider outsourcing if the team is burdened or needs a specialised skillset,” opines Armanino. Aside from all these preparations, it is equally important for companies to have an established network of peers and investors. “Many CFOs, especially those going through the IPO process for the first time, should also look to their peers for wisdom and guidance,” says Hird. “This includes gathering tips on how to help the business, and its employees, manage change that will result from one of the most significant business transformations the company will ever experience.”

Feature

Asset Management

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Up for grabs What lies in store for asset management in the region? THE CFO Middle East looks at the potential for mutual funds and private equity growth in the coming months.

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he assets under management (AUM) industry is at an exciting crossroads for the Middle East. The future of the industry in the GCC is in a somewhat precarious state, with a range of outside factors leaving the region’s position uncertain. Declining oil prices of course underpin this concern, while the United States faces pressure to raise its interest rates. With the dollar tied so closely to the dirham, this is key, while the unpredictability of the Chinese market will have a knock on effect in terms of their investors’ interest. The GCC encompasses a range of institutional assets, including central and local banks, international banks, and a range of financial and insurance firms. The combined total of institutional assets in the Middle East tops $200 billion, and of the estimated $2 trillion of assets in the GCC, 88 percent derive from sovereign wealth funds. The region is moving into a transitional phase, with asset management traditionally tied up in the enormous oil reserves, and

this has set it apart in terms of emerging markets. One of the key pillars in the industry, that has served the Middle East – and the world – in asset management since its formation in 2004 is the Dubai International Financial Centre. Providing immunity from federal civil and commercial laws, the free zone is the ideal platform for trading between East and West. It has undoubtedly established the UAE as a unique platform for trading, and a symbol of the bridge between mature and emerging markets. Saudi Arabia’s King Abdullah Financial District is due for completion, and it will be interesting

88% of GCC assets derive from sovereign wealth funds

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FEATURE

Asset Management

4% $1.5 of Saudi Arabia's GDP equivalent to its mutual funds investments

billion invested into MENA private equity in 2014

to see if international sentiment is inclined towards opting for trading assets through the authority. Now that the Tadawul – the Kingdom’s stock market – is open to foreign investment, a degree of change is inevitable in Saudi Arabia. Although investments are limited to 10 percent of the market, this will certainly be a stepping stone to international asset management firms getting a foot in the door of the country.

Mutual funds and private equity The EY GCC wealth and asset management report 2015 suggests that mutual funds are certain to gain momentum in the coming years in the region. Their research reveals just how far behind the region is in this respect. While Saudi Arabia accounts for 80 percent of the region’s mutual fund market, which is equivalent to four percent of its GDP, this figure pales in insignificance compared to South Korea’s 22 percent, for instance. The 10 largest mutual funds from Saudi Arabia and Kuwait account for 42 percent of assets under management, while the 65 funds that are larger than $100 million together hold 78 percent of assets. Nonetheless, Saudi Arabia’s numbers dwarf those of Qatar and the UAE, where the percentage of the nation’s GDP made up by mutual funds is just 0.1 percent and 0.3 percent respectively. The MENA Private Equity Association, meanwhile, estimates that $1.5 billion of private equity was invested in the wider region in 2014, with 55 percent going to the UAE and 21 percent to Saudi Arabia. The door could well be open for more orthodox asset management firms to gain business in the region,

with digital platforms and the interest of international asset management firms stoking competition.

Local leaders? Perhaps underpinning this opportunity for asset managers is the location in which they are based. A look at the history books can serve as a crucial piece of the puzzle when deciding who to entrust asset management with. For many financial decision-makers in the region, the Financial Crisis of 2008 has acted as the acid test for a potential partner. Companies who were willing to remain in the region – and have gone on to thrive – throughout the period have undoubtedly taken huge strides in cementing their reputation as trustworthy partners, and are looked upon favourably by clients. Meanwhile, the issue remains open as to whether external asset managers hold certain advantages over their regional counterparts. Many firms based in Asia, Europe and even those as far away as the US will feel that having a local presence is not entirely necessary, as their international reputation can speak on their behalf. They often believe that being physically present holds no direct advantages over remote operations. On the other – and although businesspeople worldwide will argue the same for their own regions – anyone in the Middle East will tell you that business is conducted largely off the back of one key aspect – relationships. With just over 51 percent of the GCC’s population consisting of nationals – who also comprise their public sector decision-makers and a large number of family businesses – regional expertise is often preferred.

Insight

SME Advisory

Small business,

big decisions KPMG UAE’s associate director for Advisory Services, Ben Edwardes, discusses the importance of SMEs’ auditor selections in overcoming testing times and planning for the future.

lot has been said in the national, regional and international media about how falling oil prices are affecting government spending and larger corporations’ profits across the GCC. However, it is important to remember that companies of all sizes and across all industries are being affected by the current downturn.

The recent news that the Emirates NBD Dubai economy tracker fell below the neutral 50 mark in March underlines how a lower oil price, a stronger US dollar, volatility in financial markets and global economic worries are affecting all types of businesses. In fact, SMEs are often more challenged by low oil prices, as they suffer the same drop in demand while having to

deal with large corporate and government bodies delaying payments to protect themselves in these trying times. Smaller companies don’t have the same margins or resources to see them through a protracted period of smaller cash inflows, forcing them to reduce costs dramatically. Ways of doing this include reductions in staff headcount, delayed

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“SMEs are often more challenged by low oil prices, as they suffer the same drop in demand, while having to deal with large corporate and government bodies delaying payments.” payments to suppliers or – with the threat of imprisonment for bad debts - simply leaving the country, leaving behind debt that is unlikely ever to be repaid. Now more than ever, it is vital that companies of all shapes and sizes go beyond increasing or maintaining revenues. While doing so is always important, companies must ensure that they are spending what time and money they have wisely and that they have the right level of support. Having a good support network is vital – and the options often seem limitless. From advising on process efficiencies or offering day-to-day services like bookkeeping and payroll, the choice – from small SMEs that employ one or two people to large multinational professional services firms with revenues in the tens of billions of dollars and operations in every corner of the globe – may seem overwhelming. But experience shows that – particularly for SMEs - the cheapest provider may not necessarily be the most cost effective option. For example, getting funding from banks is currently particularly difficult and can be expensive. Did you know your likelihood of funding being approved is affected by the company you choose to prepare your books or sign off on your financial statements? Most banks grade accountancy firms, and this grade has a direct impact on your credit application. If nothing else, this at least suggests that choosing the cheapest auditor or bookkeeper may not be in the best interest of your company. If, in this era of lower liquidity, you manage to persuade your bank to fund you, there will be a heavy reliance on

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reported numbers, internal management information and conditions that SMEs need to follow throughout the lifecycle of the loan. These additional information requests can be both time consuming and cumbersome. But non-compliance has implications – such as the loan being cancelled. Again, having the right support options in place – whether that means seconding staff for a limited period to perform a tightly defined task or something more vaguely defined – can make an enormous difference. Not having the right infrastructure – in terms not only of people but also tools and technology - to track and monitor business performance makes informed and timely decisionmaking difficult. SMEs sometimes say they don’t have much of a choice. The perception in the market is that SMEs have to select a local support service firm which seems more affordable. Unfortunately, all too often, these firms do not have the skills or expertise to go beyond the basic requirements they are hired for. At the same time, reputable professional service companies are waking up to the fact that the SME market offers real opportunity. If these companies can offer affordable prices, many SMEs who are seeking to professionalise themselves and grow may be willing to invest in return for working with a top tier firm. These consultancy companies are also investing in teams who specialise in SMEs. To reduce prices, they have invested in new tools and technology, such as cloud-based accounting software or business intelligence systems. This makes them competitive against other top tier firms but also against many of the local

companies based here in the UAE. Key decision-makers in SMEs – the owners and whoever heads the finance function – should consider the advantages – and the disadvantages – of working with a large multinational company. Top tier companies have years of experience across industries, markets and geographies and they bring this experience to bear on all the work that they do. Quality is second nature to these companies - a bad review from a customer, whether big or small, impacts their carefully protected reputation and so must be avoided at all costs. Using a top tier company gives you access to additional areas of support that you may not need now, but which may be critical tomorrow, next month or next year. Working with a large professional services firm gives you access to subject matter experts who can advise on company structures, governance, opportunities for cost reduction, strategic sourcing and mergers and acquisitions, amongst other things. These companies can even also be good sources for referrals, opening new sources of revenue. Using a larger support services firm is not for everyone. Mature SMEs which don’t need bank funding and are happy with their support network may not see much value in using a larger recognisable company. But how can you know whether this is in your best interests? Many SMEs may not know that there are other affordable options. They may be unaware that they can engage with well-known companies who will help them in any number of activities. The important thing to remember is that if you don’t ask, you’ll never know.

feature

Trade finance

The evolving landscape of trade finance

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What are the global drivers of trade finance and what new opportunities that are emerging? Rushika Bhatia presents a compelling survey of market data...

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Trade finance

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 measure 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 bankintermediated trade finance supporting 30 to 40 per cent of global trade flows.

Opportunities in the UAE Let’s take a look closer to home. Postcrisis, UAE has shown strong signs of growth in the last couple of years, and the country is predicted to further expand with a 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:

• 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 crossborder transactions. However, the Wholesale City will play a pivotal role in positioning Dubai as the centre for trade and will further help achieve the UAE’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 $4.3 trillion to $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. • Digitisation of trade finance – This is perhaps one of the 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.

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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 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

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standards – With stricter compliance 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. 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, 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 trade financing that enable the purchase and sale of goods on an international scale. In addition, the global markets experts provide hedging solutions to businesses exposed to different currency transactions. NBAD provides solutions after assessing trade business mechanisms and its key areas of risk as well as liability to the third parties.

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Trade finance

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.

What does this mean for SMEs? A large part of the renewed focus on trade financing has been 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 measures. The same survey by ICC reports that SMEs comprise nearly 53 percent of all rejected trade finance transactions. So make sure you can present audited financial statements (at least from the 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 gives 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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Perception is reality Fintan Somers, SomersConsult

ome readers have asked me: What outcomes can you expect to see from a finance function transformation? What does it look like? My answer is simple: just as ‘beauty is in the eye of the beholder’, a finance function (or any other function for that matter) is effective if the CEO and other colleagues across the organisation judge it to be effective. Perception is reality. And to win the perception battle, it is essential to deliver and over-deliver on the expectations of your customers. Why is this important? Well, I have seen many finance professionals struggle because they do not place sufficient emphasis on the management of perception. Too many finance professionals emphasise the technicalities of the finance job (which is often their comfort zone), while not spending enough time and attention on business leadership (which, often, is not). What many finance people fail to understand is that the CFO role is not about letting your CEO and your colleagues set your objectives, and you then delivering on them. Function leadership is about setting the agenda for your function so that it contributes to the development of strategy and maximises its contribution to the execution of that strategy. This means that you negotiate the objectives and priorities; you do not sit around waiting for orders.

But what expectation should you deliver? In my experience the expectations that many business leaders have of their finance function are often pretty low. And when you ask your colleagues what they want, they can be challenged to describe it, other than to complain about what is wrong with the current set-up. In such a situation, there is a danger that the CFO will develop a tactical programme to fix a random list of complaints, rather than develop a programme that creates a World Class Finance Function. As Steve Jobs said, “A lot of times, people don’t know what they want until you show it to them.” So, I advocate going ahead and doing just that. Most of the finance functions I have transformed had underperformed, not because of poor management, but because of poor leadership. Generally, they have not been deficient in the basic service level of financial and regulatory reporting, but they have underperformed, or not performed at all, on the higher value-added components of function effectiveness. One very important enabling action in my programme, Finance Function LIFT, is the creation of a top team with the competencies to deliver the programme. I look to develop four topteam competencies: • Financial and regulatory reporting: This comprises the basic financial control and reporting service level required of all businesses. The KPI for this competency is timely, accurate

and efficient production of reports. It is the engine room of the function. • Data management and process improvement: This does what it says on the tin: it is the change management competency and supports the development of a rolling programme of constant improvement (Kaizen). Its KPI is measurable process improvement and data management capability. • Business performance improvement: This is the competency that develops effective relationships with the key profit drivers of the business and supports performance improvement including support for development and modelling of strategy and investment and funding programmes. Translation of complexity and communication is also a key role. • Planning and analysis: This competency sits at the centre of the above three ensuring that the view of the future is consistent with the views of the past; that ad hoc analytics required for performance improvement are productionised and controlled; that management information produced is standardised and productionised while ensuring that the overall business focuses on things that matter. Of course, the leadership challenge of the CFO is to mould these competencies into an effective team. This can sometimes be a challenge given the very different personalities and professional priorities of the people who excel in these roles.

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