Vol. VII. No. 50 January 2011
Publisher & Managing Director Sankaranarayanan
MANAGING Editor K Raveendran
Editor C L Jose
consulting Editor Matein Khalid
Director Finance Anandi Ramachandran
GENERAL MANAGER Radhika Natu
Editorial Contributing Editors Anand Vardhan Vanit Sethi Manju Ramanan
DESIGN DIRECTOR Ujwala Ranade
ACCOUNTS Sujay Raj Circulation Supervisor Printing
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Share buyback rules need clarity Economies are still struggling, the world over. It’s true we get to hear inconsistent statements, at times about the green shoots as well as the grim statistics of growth from different parts. No one is a reliable forecaster on the economy’s future; such is the complexity involved in taking a view on the future at this point in time. But what the authorities can do at this juncture is to start cleaning up the system and establish proper guidelines and directions for the participants in the economy to follow. The Central Bank has last month come out with its new set of loan classification and provisioning norms for banks. Though the new rules look a bit tough on banks, the banking community at large welcomes the initiative. More than introducing new regulations and rules, we need to bring in clarity to the existing regulations also – and one in focus is that on the share buyback. Many companies listed on DFM as well as ADX have gone in for share buyback, and the exercise has been on for some time now. A big debate was triggered by the decision of First Gulf Bank (FGB) to distribute the shares bought back under the scheme, to its own shareholders. The question being hotly discussed is whether the companies can issue these shares as bonus shares. This is a practice that is unheard of. It is the regulator who needs to clear the confusion on this – the options available for companies on the shares bought under share buyback.
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Bonus is Issue
FGB’s recent bonus issue announcement raises eyebrows
NEW TRENDS IN LENDING 20 Banking on diverse strategies
FUTURES 24 Rupee ‘future’ hinges on India’s tax 28 Indian rupee is DGCX superstar
BANKING 32 Time deposits going longer term
New accounting standards boon to SMEs T he new dedicated accounting standards (IFRS) released for small and medium Enterprises (SMEs) will go a long way in addressing many of the key issues facing SMEs, especially the preparation of their annual financials. With the liquidity drying up and the banks tightening their purse strings, getting finance for SMEs has become a tough thing. Banks are very particular that the companies seeking funding should present their financials, which used to be impractical for SMEs as it had involved spending a lot in paying big amounts to the audit firms. “But with the new set of accounting standards, which are far smaller than the full set of IFRS, having been released, SMEs find it easier to meet the demand from the banks,” said sources in the sector. Banks in the country are expected to ease their lending criteria to small & medium enterprises (SMEs) in 2011, according to a study by Jitendra Chartered Accountants.
The findings are based on a study that evaluated 1,000 companies across key sectors – industry & manufacturing, garments, IT, consumer products, chemicals, food & dairy, retail, hotels – and studied the impact of new accounting standard ‘IFRS for SMEs’. The lending of capital by banks will come as a major boost to SMEs who form the backbone of UAE economy. It is estimated that 98.5 per cent of the companies in the UAE are defined as SME using the Dubai SME definition. “Banks in the UAE will be at ease to lend to SMEs in 2011 and going forward considering that these companies will have to shift to the latest ‘IFRS for SMEs’ accounting principles. Banks are comfortable to lend to private companies that present their financial numbers in IFRS for SME format as against Full IFRS, which is mainly for public listed companies.,” said Jitendra Gianchandani, Chairman, Jitendra Chartered Accountants.
Apicorp sells ACBC stake to Aditya Birla T he Arab Petroleum Investments Corporation (Apicorp), the multilateral development bank of the Organisation of Arab Petroleum Exporting Countries (OAPEC), has signed an agreement to sell its 12 per cent stake in the Egyptbased Alexandria Carbon Black Company (ACBC) to India’s Aditya Birla Group, the majority shareholder of the company. The move is said to be part of a divestment plan aimed at mobilising funds for a new phase of investments. The divestment, Apicorp’s first ever, was approved by Apicorp’s board of directors at its fourth and final board of directors meeting for 2010 held in Cairo on December 26. The Government of UAE owns a 17 per cent stake in Apicorp. Ahmad bin Hamad Al-Nuaimi, Chief Executive and General Manager of Apicorp said, “The agreement is further evidence of the rapid divestment potential of our investments. Hence, this sale is part of an investment strategy to re-deploy funds for diversification into new midstream sectors, particularly oil
refining, storage, transport and shipping.” Al-Nuaimi also said the goal of each of Apicorp investments is to support the investee company in reaching a level of business stability and operational maturity from which it can sustainably accelerate its development. “Since we invested in ACBC 17 years ago, we have seen the company evolve into the world’s largest production line in the carbon black industry and we now feel it is the right time to monetise the investment. We wish ACBC every success in continuing its exceptional growth story,” he added. Alexandria Carbon Black Company (ACBC) was established in January 1993 in Egypt with a paid-up capital of LE 99.5 million. Apicorp has been a 12 per cent equity stakeholder with a board representation in ACBC since its establishment. The company produces various grades of carbon black (CB); the basic material used in the manufacture of tyres and other rubber-based products like hoses and inks.
The sale is part of an investment strategy to re-deploy funds for diversification into new midstream sectors, particularly oil refining, storage, transport and shipping
4 BANKING & BUSINESS REVIEW
Dana Gas achieves 20 pc growth in Nile Delta D
ana Gas, the Middle East’s first and the largest regional private sector natural gas company, has achieved an estimated 42,000 barrels of oil equivalent per day (boepd), from its Nile Delta Concessions in Egypt. According to a company statement, this represents an increase of 20 per cent over that of 2009. The company has commenced production from seven new fields in order to achieve this target. In addition, the company has continued its exploration success during 2010, with seven new field discoveries in the Nile Delta from eleven exploration wells drilled and this has led to a 20 per cent increase in reserves, after allowing for 2010 production. Considering these continued operational successes, particularly the discovery of the South Abu El Naga and Salma Delta North fields in September, the board of Dana Gas has decided to retain its 100 per cent interest in its Nile Delta Concessions and continue operating them to maximise benefit for its shareholders rather than proceeding with the proposed farm-out. Dana Gas has now embarked on a new phase of production growth, upgrading its existing plants and building new capacity to bring these new fields online as quickly as possible. The planned new gas processing plant to the East of the Nile River will be designed to process 120 million standard cubic feet per day (mmscfpd), a considerable increase compared with the original planned design of 50 mmscfpd, which will contribute significant value to the current output as the South Abu El Naga and Salma North discoveries have high liquid content. This, along with an ongoing increase in capacity at its El Wastani Plant, will bring Dana Gas’ total production to some 400 mmscfpd (67,000 boepd excluding liquids) by mid-2012. The company is also continuing its aggressive exploration campaign with a 14-well programme for 2011; the drilling of the first well, Sanabel-1, having com-
6 BANKING & BUSINESS REVIEW
menced targeting the deeper high potential Sidi Salim formation. On the Komombo Concession in Upper Egypt, Dana Gas along with 50 per cent joint operator Sea Dragon Energy Inc, has produced oil at an average gross production rate of 620 barrels of oil per day (bopd) and is currently producing at approximately 800 bopd. Work is on to increase productivity of the Abu Ballas formation by fracturing, with two fractured wells due to be placed on production from January 2011 onwards. During 2010, 480 kilometres of 2D seismic was acquired and processed, and the first exploration well, Memphis-1, commenced drilling in December. Ahmed Al Arbeed, Dana Gas CEO, said, “Our ongoing excellent exploration performance, with 16 discoveries in the Nile Delta over the past three years, combined with our year-on-year production increase of 20 per cent, reinforces our view of the remaining potential of this first-class acreage and thus confirms to us that retention of our 100 per cent interest will deliver the maximum value to our shareholders. He said the company’s team in Upper Egypt continues to work hard to enhance production from the Al Baraka Field with further development drilling planned in 2011, alongside the exploration programme to test the vast potential of the Komombo Concession.
Islamic banks’ focus limited to very few asset classes: E&Y S
carcity of data and under-investment in analytical tools have rendered Islamic banks’ focus limited to a handful of asset classes while their operating costs are, in many cases, higher than their conventional peers, according to an Islamic finance expert with Ernst & Young. Ashar Nazim, Executive Director and MENA Head of Islamic Financial Services Group at E&Y, noted in a statement that future opportunities in Islamic finance might no longer come from traditional captive clientele. “Instead, Islamic financial institutions urgently need to upgrade their business models to tap mainstream segments,” he added. According to Asher, decision makers at Islamic financial institutions need research and tools to assist in making informed decisions on the future growth trajectory of their businesses. He also said implications of Shariah rulings on governance, product structures and markets need to be appropriately incorporated at the planning phase itself. Ernst & Young joined hands with AAOIFI, the standard-setting body for Islamic finance industry, to provide product and contract certification that would strengthen universal acceptability of Shariah-compliant products offered by Islamic financial institutions. Ernst & Young’s World Takaful Report highlighted the fluid nature of the Takaful industry, as well as its tremendous growth potential. The industry is expected to grow three-fold from an estimated $9 billion in 2009 to $25 billion by 2015. “The biggest challenge for the Takaful
operators is to bring out the differentiation, its unique Islamic proposition, for its stakeholders. This was the key message for the industry during 2010,” said Ashar. Ernst & Young’s Islamic Funds and Investment Report 2010 confirmed that more than half the Islamic fund managers may be operating with less than the minimum assets under management needed to remain viable. The opportunity is for global fund managers as well as for consolidation within the industry. Islamic endowment, or Waqf, with an estimated $105 billion wealth pool, was highlighted as a key emerging sector that could potentially stimulate strong liability generation for Islamic banks, as well as help revive the Islamic fund management industry. Stating that the Islamic financial institutions are at crossroads entering 2011, Ashar said the industry is expected to continue to show resilience in the face of a challenging economic scenario. “This is despite the fact that growth levels of the Islamic finance industry, at more than 20 per cent per annum for the past several years, came under tremendous pressure in 2010,” he added. Having achieved the critical volume estimated at $1 trillion in Islamic assets, the question reverberating across boardrooms and among users of Islamic financial services, is about differentiation, or the lack thereof, that Islamic financial institutions have on offer. “Effectiveness of the existing Shariah governance framework as well as synthetic product structures commonly in use are especially under discussion,” Ashar noted.
“More than half the Islamic fund managers may be operating with less than the minimum assets under management needed to remain viable”
8 BANKING & BUSINESS REVIEW
SMEs employ more than 50 pc workforce in UAE, but lack business clout in the market T he small and medium enterprises (SME) sector employs more than 50 per cent of the UAE workforce, according to an international management and marketing expert, who added that SMEs are important in creating new jobs and enhancing growth of any economy. SMEs, which fall in the category of companies employing less than 250 employees, however, lack proper marketing and business clout to make their presence felt. Zed Ayesh, Managing Director of Flagship Consultancy, said marketing has not been exploited well by SMEs because most of them believe marketing is only important to large enterprises. “This is not true, all businesses needs marketing, regardless of its size or age”, Ayesh added. Flagship is a leading management and marketing consultancy based in Dubai and has supported the Tecom SME Builder initiative as its marketing expert since its early editions. . Ayesh said Flagship has been able to guide owners of small and medium enterprises to enhance their marketing skills by highlighting latest international techniques as well as tailoring global practices for the local market that
is becoming very competitive and results-driven. “There is no room for trial and error anymore. SMEs should start thinking outside the box for solutions and techniques that would enable them to grab a larger market share and develop intimate relationship with their clients through efficient marketing techniques,” he added. Engaging with representatives from small and medium enterprises, Ayesh explained how marketing is related to all business activities and how such activities should support sales and maximise performance.
Doha Bank plans $500m senior debt issue D
oha Bank, Qatar’s third largest bank, is set to become the next candidate to tap the international market to raise $500 million through senior debt bonds during the first quarter of 2011. The bank intends to do this through its fully-owned Bermuda-based subsidiary. In a statement, following an ordinary general meeting (OGM) held recently, the bank said despite the uncertain economic climate following the global financial crisis, it has made headway in profits and increased returns on assets and equity in the first nine months of 2010. The OGM was held to discuss the issue of the senior debt bonds, among others. The Bermuda-based Special Purpose Vehicle (SPV), which will issue the senior debt bonds, has been incorporated to support the bank’s market interventions to raise capital. The bonds and
other market instruments will be guaranteed by Doha Bank. The bank’s chairman, Fahad bin Mohammed bin Jaber Al Thani, said Doha Bank has endured and achieved high growth rates in most of the financial indicators. The net profit during the period ending November 30, 2010, grew by 5.4 per cent. Return on average assets (RoA) grew by 2.6 per cent, while return on average equity (RoE) was up by 22.4 per cent during the period. “As you are all well aware, the implications of the global financial crisis was considerable and have affected various economies of the world, including the developed economies such as Britain, France, Spain and other economic giants who are spearheading reforms to get out from this crisis and restore the situation to normality,” he added.
BANKING & BUSINESS REVIEW
Emirates NBD establishes Singapore branch
mirates NBD, the leading banking group in the region, launched its Singapore branch last month. The group international operations now include branches in Singapore, the Kingdom of Saudi Arabia, Qatar, the United Kingdom and Jersey (Channel Islands), and representative offices in India and Iran. Ahmed Humaid Al Tayer, chairman of Emirates NBD, said the bank’s objective in opening a branch in the Asia-Pacific area is to position itself in a convenient hub to cover the world’s most dynamic economic region that includes the strong emerging markets of China, India, South East Asia and other East Asian countries. “Singapore’s established reputation as one of the world’s leading financial centres and its strategic location within the Asian region makes it a logical choice for Emirates NBD to establish its first Asia Pacific branch in the country,” Al Tayer said. Abdul Wahed Al Fahim, the Deputy CEO of the bank said the Singapore Branch will seek to leverage the extensive infrastructure the bank has in UAE, and to exploit the overseas offices of Emirates NBD to maximise the business opportunities available to the branch. The UAE is Singapore’s second largest trading partner in the Gulf with total bilateral trade of 11.6 billion Singapore dollars. “Emirates NBD will seek to facilitate trade and investment flows between the Gulf and the Asia-Pacific region,” Al Fahim added.
10 BANKING & BUSINESS REVIEW
‘Green’ ideas for building construction H
awk Freight Services, part of the UK-based Hawk Group, has pioneered a new concept by opening an environment-friendly state-of-the-art Logistics Centre at Dubai Airport Free Zone. Talking on the new venture, Bob Puri, founder and Managing Director of Hawk Group said the new centre would set a trend in building construction using energy-efficient technologies. “The corporate sector is moving towards greener building practices worldwide, and the new Hawk Freight Services building is the first of its kind in the UAE as it is built on Eco-block, a concept that uses recycled materials whenever possible,” Puri said. Eco-block reduces the pressure on precious natural resources by replacing lumber used in frame construction with an environmentally friendly clean product. The Hawk Freight Services Logistics Centre is designed to save energy, improve indoor air quality and support the use of energy-efficient appliances. Eco-block also does not use or emit harmful fumes or gases. The eco-friendly Logistics Centre is equipped with 2,500 air conditioned pallet positions, Customised Supply Chain Solutions, security system including access control, CCTY coverage and motion detectors, web-based inventory management system which can be accessed by clients for real time information on their stocks and a high rise racking system. The special equipment and features are aimed at providing Hawk’s customers high levels of service and complete solutions. “Our aim is not only to set standards in operational excellence but also effectively address sustainability and adhere to best practices that contribute to a safer and healthier environment in line with our CSR programme, Puri added.
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Traded value on DFM drops 60 pc in 2010 Real estate accounted for more than two-thirds transactions By BBR Staff
he total value of trading on Dubai Financial Market (DFM) witnessed a sharp drop of about 60 per cent in 2010 as the value plummeted from Dh173.5 billion in 2009 to Dh69.7 billion, statistics released by the market revealed. Real estate and construction sector accounted for more than two-thirds of the trading on DFM last year. The number of shares traded was down by a whopping 65.3 per cent to 38.4 billion shares during 2010, compared with 110.7 billion shares in the previous year. Likewise, the number of transac-
tions executed during 2010 decreased by 60 per cent to 794,700 compared with 1.984 million deals carried out during the previous year The market index also fell by 9.6 per cent from 1,803.6 points to 1,630.5 points in 2010, a year which saw several rock bottoms. The market capitalisation, as of 2010-end, was down by 6.6 per cent to Dh199.1 billion, compared with that at the end of the previous year. In terms of the sectoral contribution to trading volumes, the real estate and construction sector ranked first in terms of the value of traded shares, to reach Dh46.9 billion, or
Shares UAE Nationals & Foreigners Trade Summary For The Period From 01/01/2010-31/12/2010 ARAB GCC OTHERS Total Foreign Trading UAE Nationals Total
Value of Stocks Bought AED 15,926,716,391 4,352,410,733 10,538,605,159 30,817,732,282 38,847,036,104 69,664,768,386
Value of Stocks Sold AED 16,111,367,189 4,307,288,426 10,218,763,059
Net Investmen AED (184,650,798) 45,122,307 319,842,100
30,637,418,673 39,027,349,713 69,664,768,386
180,313,609 (180,313,609) 0
Shares Institutional & Retail Investment For The Period From 01/01/2010-31/12/2010 Value of Stocks Bought AED Banks 2,118,766,154 Companies 13,714,555,978 Institutions 201,696,184 Total institutional investment 16,035,018,315 Individuals 53,629,750,071 Total 69,664,768,386
12 BANKING & BUSINESS REVIEW
Value of Stocks Sold AED 1,822,725,793 13,232,221,934 115,395,237
Net Investment AED 296,040,361 482,334,044 86,300,947
15,170,342,964 54,494,425,422 69,664,768,386
864,675,351 (864,675,351) 0
67.3 per cent of the total value of shares traded in the market. Investment and financial services ranked second at Dh10.5 billion, or 15.1 per cent, followed by the transportation sector to Dh4.19 billion, or six per cent, and the banking sector amounted to Dh4.17 billion, or 5.99 per cent of the total traded value on DFM. The communications sector accounted for Dh2.5 billion, or 3.6 per cent of the value, and insurance sector amounted Dh55.9 million. Utilities sector trade was to the tune of Dh665.5 million, or one per cent, and the consumer staples and material sectors ranked last posting Dh5.2 million and Dh3.1 million respectively. The value of shares bought by foreign investors during this year touched Dh30.8 billion, comprising 44.2 per cent of the total value of stocks traded during the period. The value of stocks sold by foreign investors during the same period was Dh30.6 billion, accounting for 44 per cent of the total value of stocks traded during the period. Net foreign investment on the market reached Dh180.3 million during the same period, as aggregate buy. The value of stocks bought by institutional investors during the year under discussion reached Dh16 billion, which works out to about 23 per cent of the total value of stocks traded during the period. The value of stocks sold by institutional investors during the same period was Dh15.2 billion, which is 21.8 per cent of the total value of stocks traded during the period. Net institutional investment on the market reached Dh864.7 million during the period, as aggregate buy.
BBR Mag FP.ai
14 BANKING & BUSINESS REVIEW
Issue By CL Jose
It is not proper on the side of the companies to redistribute the shares it bought back under share buyback scheme to the shareholders as bonus shares
BANKING & BUSINESS REVIEW
he First Gulf Bank (FGB) decision on January 6  to distribute 75 million shares it bought back over the past one year under the share buyback scheme has not only raised eyebrows in the UAEâ€™s capital market and among analysts, but has surprised many from outside as well. Most analysts and stock market experts Banking & Business Review (BBR) talked to on the recent bonus issue pointed out that it is not proper on the part of the companies to redistribute the shares it bought back to the shareholders as bonus shares. They said many other key issues are also awaiting regulatory intervention. It may not be the first time that key decisions have created confusion in market circles. Brokers and analysts strongly believe that the Securities and Commodities Authority (SCA) should have acted on the suspension of trad-
FGB has reduced the cash from current assets, and so it needs to reduce the share also from the equity side in order for them to balance out
16 BANKING & BUSINESS REVIEW
Andre Sayegh, CEO, First Gulf Bank
ing in Amlak and Tamweel shares for the past more than two years. “How come the shareholders of Amlak and Tamweel, the two companies listed on the Dubai Financial Market (DFM), are still denied trading opportunity or more precisely, an exit route for this long?” was the response from a share broker who was contacted for a view on the FGB bonus issue. It’s a fact that trading in the shares of Amlak and Tamweel remains suspended on DFM for more than 28 months now. The hapless shareholders, who keep calling media offices, including BBR, are keeping their fingers crossed blandly on this question.
FGB buyback and bonus
On the recent bonus issue, First Gulf Bank said in a statement issued to the media that the move to distribute bonus shares, which is subject to approval by the competent authorities and the annual general meeting, was to benefit its shareholders. FGB initiated the share buyback programme in early 2009 to support the weak share price due to the depressed market sentiment, and thus to improve liquidity. FGB bought 75 million shares or about five per cent of the issued capital for Dh1.056 billion, with the average share price working out to Dh14.08.
cerning Commercial Companies, a company may purchase a percentage not exceeding 10 per cent of its own shares for the purpose of the sale thereof in accordance with the controls stated below……………….; such company shall be responsible for preventing any adverse effect on the company’s financial position resulting from the purchase. Talking to BBR, Haissam Arabi, chief executive officer, Gulfmena Alternative Investments, said the FGB move is not only rare or even unique in the UAE’s capital market history, Haissam Arabi it could create accountily come from the recapitalisation of ing distortions in the books. FGB has retained earnings and not by paying used the cash from the current asthe company’s cash surplus and SCA sets to buy back treasury shares and should come out with a clear-cut view on the issue. It is true that the market being subdued, no company can expect to sell shares in the current market to fetch a decent value. Moreover, an offloading of shares at this juncture will further depress the share price, thus defeating the very purpose of the share buyback launched this has moved the cash away from the current assets as this has not by the companies. been bought using retained earn“But this shouldn’t mean that ings. Either the company should sell companies can go out of the way and this back into the market or privatetake the totally unheard-of routes to place with strategic investors. “You address the issue.” have reduced the cash from current There are several companies, assets, and so you need to reduce which have been going through the the share also from the equity side exercise of share buyback and this is in order for them to balance out,” the right time SCA came out with its Arabi noted. clear stance on the same. And if the Analysts were of the view that recent move is in violation of SCA the bonus shares have to necessarregulation on Share Buyback, the
Shareholders of Amlak and Tamweel are still denied trading opportunity or more precisely, an exit route for the last 28 months for no fault of theirs
Though many market experts chose to argue that SCA has not said anything concretely on what can be done with the shares bought back under the buyback scheme, BBR found that is not absolutely true. SCA has stated in its website that - Subject to Federal Law No.18 of 2006 amending certain provisions of Federal Law No. 8 of 1984 con-
BANKING & BUSINESS REVIEW
Prabhakar Kamath message needs to go to the market without delay.
Statement from bank
FGB, through an email to BBR confirmed the media report by stating, “Concerning the shares bought by FGB under the buy-back programme, the board of directors is recommending to distribute those shares as ‘free’ bonus shares back to the shareholders.” It added that the primary objective is to protect the shareholders’ interests and give them an added value. “The board has thoroughly analysed various options and decided to recommend the option of distributing those shares back to the shareholders in the form of bonus shares, which was considered to be a logical and beneficial option to all parties. Other alternatives, such as selling the shares back in the market or cancelling the shares by reduc-
18 BANKING & BUSINESS REVIEW
ing the capital of the bank may not be the ideal options to serve the shareholders interest; neither will it be in the interest of the market in general,” the statement further clarified the bank’s stance on the issue. Prabhakar Kamath, Partner & CEO, Morison Menon Ltd – an expert on capital markets, based in Dubai, echoed Haissam’s view on the issue. He clarifies that the buyback of the share and issue of the
same back as bonus shares need to be viewed as two different issues. “It is very clear: the shares bought back can be cancelled or sold and the bonus shares can be issued by capitalising the reserve.” He added that if the bought-back shares would have been cancelled, and bonus shares are issued in a separate process (by capitalising the reserve) the position would have been the same as giving the bought-back shares free to shareholders. The result is same in terms of EPS earned by the bank, a very important measure of earnings efficiency, post bonus issue. “I am not sure why FGB says that the bonus shares are issued out of the bought-back shares. Shareholders should not assume or get an impression that they have got something for free because in net effect, they stand to gain nothing through this,” he noted.
UAE business upbeat on growth BBR Staff
bout 78 per cent of the UAE businesses are optimistic about the UAE economy in 2011, as opposed to a global average of 23 per cent, according to a survey conducted by Grant Thornton UAE, a leading financial and business advisory firm. Grant Thornton UAE announced its findings from its International Business Report, an annual survey of over 11,000 businesses in 39 countries This figure places the UAE as the joint fourth most optimistic country among the 39 countries surveyed. Chile and India led the optimism scale with 95 and 93 per cent each. The survey also reveals that 74 per cent of companies in the UAE expect revenue to increase in the next 12 months, while 56 per cent expect to see an increase in profitability and 55 per cent companies expect to see an increase in employment. “The UAE has well established itself as a business hub of choice for companies aiming to capitalise upon the opportunities presented in the region,” said Hisham Farouk, International Practice Partner, Grant Thornton UAE. “A pioneer in infrastructure development in the region, the world-class facilities offered by the UAE continue to encourage businesses to set up regional base here. “Compared with Western economies, the Middle East-based businesses remain more optimistic due
to stable income from oil reserves, greater disposable income, growing youth population and increased investment opportunities.” The Grant Thornton International Business Report (IBR) is an annual survey of the views of senior executives in privately held businesses and listed entities in 39 economies across the world, providing insights on economic and commercial issues. The Grant Thornton International Business Report (IBR) provides insight into the views and expectations of over 11,000 businesses per year across 39 economies. This unique survey draws upon 19 years of trend data for most European participants and nine years for many non-European economies.
Optimism % balance ranking Chile India Philippines Brazil Switzerland UAE Germany Sweden Georgia Argentina Canada Botswana South Africa Mexico Singapore Vietnam Hong Kong Finland Malaysia Armenia Turkey Taiwan Belgium Mainland China Denmark Thailand Australia Poland Russia New Zealand United States Netherlands Italy United Kingdom France Greece Ireland Spain Japan
BANKING & BUSINESS REVIEW
95 93 87 78 78 78 76 76 72 70 67 66 65 64 63 61 61 60 52 50 50 45 44 41 40 40 38 36 35 33 21 21 17 10 9 -44 -45 -47 -72
January 2011 19
NEW TRENDS IN LENDINGS
Banking on diverse strategies Security first, business next By CL Jose
20 BANKING & BUSINESS REVIEW
n interesting trend has emerged among UAE banks, especially in Dubai, in the wake of the economic slowdown and the tight liquidity conditions most banks are facing currently. Most banks have slowed down on corporate lending and are focusing more on small businesses and retail segments. And here as well, different banks are taking diverse views – while some banks are keen to do non-salarytransfer personal loans and small business loans at rates as high as 25 per cent and upwards and thus taking huge risks, banks like Emirates NBD seem to have taken a cautious stance with most of its activities being confined to secured retail space. Abu Dhabi Islamic Bank (ADIB) may have been the most active local bank in corporate financing, at least among the Islamic banks, as it has entered into several large financing deals during the last few months. During December, ADIB acted as mandated lead arranger for $32 million structured Ijara facility to fund the acquisition of up to six offshore vessels (OSVs) for Waha Offshore Marine Services, the marine chartering and operations arm of Waha Maritime. Again, during the same month, ADIB arranged a syndicated Dh1.14 billion Islamic financing deal for Dubai-based Majid Al Futtaim (MAF) Group. ADIB acted as the initial mandated lead arranger, sole book-
runner, investment bank and the security agent for the deal. In October, the bank had provided the financing facilities to Hyundai Engineering & Construction Company Ltd for the newly awarded project Borouge 3 expansion project with a project value of Dh3.41 billion. However, the leading Dubai-
period. “The trend is clear from the ninemonth financials released by the bank recently,” a bank analyst said. Though the total assets of Emirates NBD posted a marginal increase from Dh281.576 billion to Dh284.222 billion during the nine-month period ended September 30, 2010, the ‘loans and receivables’ shrank by more than Dh12 billion during the period. At the same time, a substantial amount has been moved to the Central Bank. The cash and deposits with Central Bank during the nine months swelled from Dh19.670 billion as of 2009 end to Dh32.600 billion as of September 30, 2010 – an increase of more than 65 per cent. Among the major segments of lending for Emirates NBD, only sovereign has witnessed a noticeable increase, by about Dh2.8 billion to Dh51.864 billion as of September end, 2010. The impairment losses were to the tune of close to Dh3 billion for the 9-month period ending September 30, 2010. Interestingly, Emirates NBD was one of the biggest players in the wholesale banking during 2008. A report appeared in August 2008 stated Emirates NBD had been ranked the number one mandated arranger for corporate deals in the UAE with 10.58 per cent share of the UAE market. Emirates NBD had arranged deals valued at more than $23 billion during the
Emirates NBD looks like moving towards safer businesses, especially that capture the safety and strength of gold based banks such as Emirates NBD and Mashreqbank saw their lending fall during the first nine months of the year as against that of most Abu Dhabi banks. While Emirates NBD’s loans and advances fell from Dh194.7 billion to Dh182 billion during the nine-month ending September 30, 2010 end, that of Mashreqbank dropped marginally from Dh42 billion to about Dh37 billion during this
BANKING & BUSINESS REVIEW
eight months since the beginning of 2008. It had also topped the bookrunner, manager and lead underwriter charts during that period.
Focus on retail space
Come 2010, most of the actions the bank launched are in the retail space. A close look at the announcements the bank made in the last few months would amply prove this. They include loan against gold, loan against end-of-service benefits (EOSB), gold sales, etc. There were very few deals in the wholesale banking announced by Emirates NBD during this period. According to banking sources, syndicated deals have almost dried up and most of the bilateral and club deals that took place in the market made little noise during the last year.
Playing safe with gold
Emirates NBD looks like moving towards safer businesses, especially that capture the safety and strength of gold. Though the bank’s top officials such as Asif Lakhany, vouch that there is nothing new in the bank’s business model, the recent new announcements by the bank make one believe that Emirates NBD seeks to move away from the conventional risky lending to safer areas of business. On the occasion of the launch of the ‘Gold Business’ an innovative venture by the bank, Asif Lakhany, Head of International Retail Business & Strategic Projects Consumer Banking & Wealth Project, told the Banking& Business Review (BBR), “We are not moving away from lending. Banks go through different cycles and it is quite natural that the banks will have different
business strategies for each time.” But one thing is for sure. The two announcements by the bank in the recent past had something to do with gold. The gold having registered a steady growth in price during the whole of 2010 – and set to continue the surge during 2011 also, Emirates NBD seems to have determined to capture all the available avenues the yellow metal could throw up in the future. In November, Emirates Money, a wholly owned subsidiary of Emir-
Abu Dhabi Islamic Bank may have been the most active local bank in corporate financing in 2010
22 BANKING & BUSINESS REVIEW
ates NBD, launched an innovative loan initiative that enables customers to borrow up to 80 per cent of the value of the gold they deposit. The product, which is named LoanAgainst-Gold is considered to be the first product of its kind in the GCC.
Emirates Money claims that this product offers competitive interest rates that are among the lowest in the market for retail loans, while at the same time ensuring the safe and secure storage of the gold. According to a source, the interest charged on this loan is about nine per cent, which is much lower than the rate charged on personal loans by UAE banks.
Setting new trend in fund raising In the meantime, Emirates NBD set a new trend on the liability side last year by raising a $410 million-equivalent 5-year multi currency loan structured around its portfolio of diverse syndicated loans to regional corporates, at an extremely competitive margin of 1.75 per cent per annum over applicable reference rates plus structuring fee. “This has indeed set a new pricing benchmark for UAE-based borrowers,” analysts pointed out. The loan, which is the first of its kind in the region in terms of its unique structuring was fully subscribed by JP Morgan.
Rupee ‘future’ hinges on India’s tax Indian traders from the subcontinent set up UAE offices to trade on DGCX By CL Jose
24 BANKING & BUSINESS REVIEW
he short-term capital gains tax and other tax bindings in India have prompted Indian traders from the subcontinent to set up offices in the UAE to carry out rupee futures trading on Dubai Gold & Commodities Exchange (DGCX), which is the only regulated exchange outside India for Indian currency futures. Indian rupee (INR) currency futures are traded domestically in India on the National Stock Exchange, United Stock Exchange (BSE-CDX) and MCX Stock and Exchange (MCX-SX). At the same time, rupee futures are also traded in Singapore on a non-deliverable forwards (NDF) basis. Explaining the impact of capital gains tax, Sajith Kumar, chief executive and director of the Dubai-based JRG International, said the futures trading in rupee could attract a maximum capital gains tax charge of up to 30 per cent in the case of individuals as well as corporates. India does not allow residents or resident companies to trade in rupee futures outside the country. Moreover, non-Indians other than foreign institutional investors (FIIs) are not allowed to trade rupee futures on Indian exchanges. What makes DGCX attractive is the fact that there is no
restriction on this front on DGCX, and thus the Dubai exchange offers a platform to all for trading in Indian rupee futures on a cash settled basis, and without requiring to pay any tax. According to sources close to DGCX brokers, there are several Indian companies established in the UAE’s free zones with the sole purpose of trading in rupee futures. “It is true that we get enquiries on rupee futures trading from free-zone based companies. However, we don’t ascertain Sajith Kumar why these companies are operating from free zones, as it is not up to us to go into such details,” said Pradeep Unni, Senior Analyst Research and Trading at Richcomm Global Services, DMCC. Kumar of JRG told Banking & Business Review (BBR) that many exporters and importers from India prefer to do their hedging from DGCX
through their UAE offices. “Since the free zones offer 100 per cent ownership and a tax-free regime, it works out better than risking the payment of capital gains tax and other transaction related tax in India,” Kumar pointed out. Another key reason behind the rapid rise in volumes of Indian rupee
In India, futures trading in rupee would attract a capital gains tax charge of up to 30 per cent for individuals and companies BANKING & BUSINESS REVIEW
Cash-settled contract provides the opportunity to trade it till the last day of futures contract without getting into the tangles of delivery
futures on DGCX is the huge arbitrage opportunities between different INR currency futures traded on different exchanges. Before these exchanges were established, over-the-counter (OTC) currency derivatives contracts were the only option available to hedge the currency, though it had its own inherent limitations. Pradeep Unni explained that seldom were these OTC markets able to address the need of micro, small and medium-scale enterprises (MSME) for mitigating their currency risk. “There wasn’t enough price transparency and the lot size was quite big, especially for retail investors. DGCX contracts are the sole comfort for traders across the world, especially those based in UAE to hedge their currency transactions through India, which is a large trade partner with UAE and other Gulf nations,” Unni added. The increasing volatility of Indian
rupee of late has also been a key reason for the high volumes in rupee future. “Earlier, rupee used to fluctuate in a 5-10 paise range (of course with few exceptions), but currently, 15-20 paise seems to be the order. This volatility has forced many investors and traders to hedge their currency risk on DGCX. According to Sajith Kumar, India’s rapidly growing trade flows, increased cross-border investments and the brisk fluctuations in exchange rates have prompted the
that support rupee trading and the enhanced participation of exporters and importers play a big role in the fast growth of rupee futures trading volume on DGCX. Kumar said DGCX has provided higher liquidity support in 2010 than in the past. “DGCX is the only exchange that provides Client Segregated Bank Account facilities to their clients, through JRG and Emirates NBD,” Kumar pointed out. DGCX has scored over the NDF exchange in Singapore as cashsettled contract addresses a key issue in futures trading. Cash-settled contract provides the opportunity to trade the contract till the last day of futures contract without getting into the tangles of delivery. “Both the broker and the investor/trader are relieved as the contract settles automatically at the last trade price on the final day. The normal procedures of rollover to the next calendar month or adding additional funds to meet the delivery period margin do not arise in this case. There is a strict penalty if investor defaults a delivery and this is completely avoided by cash-settled contracts. Futures markets are not the ideal platform for delivery, and globally less than one per cent of the final open interest results in delivery,” Unni asserted.
Since the UAE free zones offer 100 per cent ownership and a tax-free regime, it works out better than risking payment of capital gains tax and other transaction related tax in India
26 BANKING & BUSINESS REVIEW
traders to go for strict hedging of their positions. Apart from this, the growing awareness about futures trading, availability of ideal trading platforms
Continually Evolving Risks By V A Tommy
ll of us are involved in managing risk one way or other without actually realising that we are doing so, be it personal or in our professional life. This is because we operate in a continually changing environment where new risks emerge by the day if not by the minute. Even the most powerful country in the world could not have over emphasized the significance of managing online data and information security until recently when Julian Assange exposed ‘chinks’ in the otherwise unbreakable US Military Armour.
Except when you want to protect the life of your person (or that of your loved ones) against the risk of untimely death due to illness or accident, most of the time you are concerned about protecting your wealth which is manifested in terms of assets that you own or in which you have substantial stake. You are also concerned about minimising your potential or actual liabilities. When you set up a business, you will, in all probability be encountering two kinds of risks – Business Risks and Pure Risks. Business Risk is the uncertainty arising from possible failures to take-off or break-even. Business risks could be controlled by adequate project planning and forecasting. There are, however, external forces beyond the control of the businessmen or entrepreneurs. Risk can be broken down into key areas, which will need analysis prior to the eventual strategising on risk mitigation, allocation and avoidance.
Broad Risk Categories
All operations face risks across the whole business spectrum and any successful development process, including
tify – in monetary terms – the impact of such exposures on their balance sheet, then the management of the businesses can take an informed decision as to how to mitigate the financial impact arising from such exposures. The management will be better equipped to take such informed decisions if they have a Risk Management Philosophy within the organisation.
World Economic Forum Initiative the structuring of an optimal insurance and risk management programme, involve looking at these risks in terms of five broad categories – Economic Risks, Environmental Risks, Geopolitical Risks, Societal Risks and Technological Risks.
Shifting Global Spectrum
Gone are the days when it was Multinational Corporations (MNCs) based in the United States and continental Europe only were investing in businesses outside their home countries. Today, we have enterprising businessmen operating from the Middle East, Indian Subcontinent and China who increasingly look for setting up factories and production houses away from their homelands and far away in Arab and African countries. Any pure risks faced by the businesses – which are fortuitous in nature, i.e., when there is an element of uncertainty as to its occurrence, and the business stands to lose financially if it occurs, can be transferred to professionals who are in the business of managing risks – they include insurance and reinsurance companies. Once the business is clear as to its exposures and if they are able to quan-
It is however satisfying to note that the continually evolving risks have been duly recognised by business and government leaders at the highest level and has become a regular feature in the World Economic Forum’s annual meetings. Global Risks 2011, the Sixth Edition provides a high level overview of 37 selected global risks as seen by members of the World Economic Forum, supported by a survey of 580 leaders and decision-makers around the world. It is also heartening to note that the leaders in the insurance fraternity - Marsh & McLennan Companies, Swiss Reinsurance Company and Zurich Financial Services, have partnered in this global initiative. In the future editions to come, we shall jointly analyse the possible risks in business at various stages and discuss ways and means to mitigate the same if not elimate them altogether. I would be keen to hear from the readers in case they have specific queries or thoughts on Managing Risks in general or in particular to their specific business or interests. The views expressed by the Author, a Director for Sun Reinsurance Brokers LLC Dubai, are his own and not necessarily contributed to/by his employers. You may contact him via email: firstname.lastname@example.org
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January 2011 27
Indian rupee is DGCX superstar More products are in the offing By BBR Staff
28 BANKING & BUSINESS REVIEW
Eric Hasham, CEO of DGCX
ndian rupee futures staged a smart show in 2010 on DGCX, the only exchange outside India to trade deliverable contracts in the Indian currency, by clocking in 480,725 contracts - an unprecedented growth of 625 per cent in the contracts volume compared with the previous year. The Indian rupee enjoyed an outstanding run in 2010, setting five consecutive monthly records between June and October. In December, it recorded its highest monthly volumes of 98,105 contracts. It also set its highestever daily volume of 8,275 contracts on November 12. Annual volumes for 2010 on DGCX
registered a 28 per cent growth on 2009. The exchange ended 2010, its best year so far, with a total annual volume of 1.925 million contracts. The value of the annual volume was $104.18 billion (Dh382,34 billion), a 32 per cent increase on the previous year.
Total currency volumes recorded 1,287,409 contracts, a 109 per cent increase from last year. Annual volumes of euro, pound and yen futures rose 54 per cent, 12 per cent and 43 per cent respectively from 2009 to reach 473,771 for euro, 205,548
The year 2010 is the exchangeâ€™s best year in terms of annual volumes and value, with volumes increasing 28 per cent to record 1.925 million contracts BANKING & BUSINESS REVIEW
Eric Hasham, CEO of DGCX said, “Over 2010, DGCX offered investors some of the best tools available in the region to manage risk effectively in an uncertain market. Our growth in 2010 was also driven by our ability to offer an expanded range of liquid, competitively priced and easily accessible products within a safe and secure trading environment. The success of 2010 sets the stage for greater progress in 2011.” On the 2011 plans, Eric Hasham stated, “We are developing new innovative products and services to ca-
for pound and 82,922 contracts for yen. The 2010 volumes for gold and WTI reached 490,175 and 115,777 contracts respectively. Australian dollar, Canadian dollar and Swiss franc, currency pairs launched by DGCX in 2010, achieved annual volumes of 14,064 for the Australian currency, 15,735 for Canadian dollar and 14,644 contracts for the franc during 2010. For December 2010, volumes on DGCX reached 164,893 contracts.
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Currencies recorded 119,566 contracts, while gold registered 36,701, silver 3,598 and WTI futures 5,028 contracts. Currency volumes in December grew by 34 per cent year-on-year. Last year saw DGCX hitting a number of all-time highs. On July 13, DGCX crossed one million contracts. In October, the exchange recorded its highest-ever monthly volumes of 209,994 contracts. DGCX also recorded its highest-ever daily volume of 19,255 contracts on March 1.
ter to the requirements of our members and market participants.” In October 2010, DGCX entered into a licence agreement with Dow Jones Indices, one of the world’s leading index providers, as part of its plans to list futures contracts on Dow Jones-branded indices. Among the first product of these indices planned for DGCX is the Dow Jones Islamic Market Titans 100 Index Future, which represents the top 100 blue-chip Shariah-compliant stocks globally”.
0683-00004\SME Business Account Ad_27.5x20.5.ai
Time deposits going longer term Lending-deposits ratio improves considerably By CL Jose
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ecession has not only encouraged depositors to park their funds increasingly with banks than to make any risky investments, but has also prevailed on them to increase the tenure of their deposits. The new trend certainly helps the banks in a country like UAE, where the banking system has historically been struggling to match the assetliability profile. The banks based in the GCC, especially the UAE, are typically forced to play the game of living on short-term deposits and lending long term, and this has landed many banks in the ‘asset-liability mismatch’ trouble. But is the trend changing? While more than half of the ‘time deposits’ with UAE banks - 52.37 per cent - used to be parked for less than three months during the year ending December 31, 2008, the share of this type of deposits has gradually been falling since then as these deposits are apparently going for longer term. The share of less-than-threemonth deposits has dropped to 43.63 per cent as of October-end, 2010, according to the latest Central Bank data. During 2009, the share of deposits with maturity less than three months was just a little over 44 per cent. At the same time, the share of time deposits with maturity of more than six months has considerably increased since 2008-end. While this type of deposits was only 31.15 per cent of the total time deposits as of 2008-end, it has increased to 38.41 per cent as of 2009-end and thereafter to 39.23 per cent towards October end, 2010. “Surely, there has been a noticeable shift from deposits with very short maturity to tenures above six months and one year,” said a top official of a local bank based in Dubai.
One main reason for this, according to him, could be the attractive interest rate in the market. “There are banks that pay interest as high as four per
that never faced serious liquidity issues are stuck with assets that have witnessed severe drain on their valuations. The month of October 2010 saw the deposits exceeding lending, maybe a phenomenon taking place after more than two years, by about Dh16 billion. But within one month, as of November-end, the gap narrowed by about Dh7 billion to Dh9 billion. “Many banks, including Mashreqbank, the largest private sector bank, have been pruning their lending portfolio to improve their lending-deposits ratio that has been lying above 100 per cent for long. “While most major Dubai-based banks are focused on cleaning up their books, Abu Dhabi-based banks are still growing their balance sheets. One main reason for this is that most large projects are taking place in the capital currently,” a banking analyst told Banking & Business Review (BBR).
GCC banks are typically forced to play the game of living on short-term deposits and lending long term, which has landed many banks in the ‘asset-liability mismatch’ trouble cent as many banks are still struggling for liquidity,” he said. It is a fact that not only the government and government related companies are going for refinancing or restructuring of their loans, but of late, the market has started seeing companies with high reputation also approaching banks for loan restructuring and refinancing. According to the chief executive of a foreign bank, even family businesses
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January 2011 33
BoB eyes â€˜goldenâ€™ opportunities May launch loan against yellow metal BBR Staff
ank of Baroda (BoB), which has a strong presence in retail operations in the UAE, is exploring possibilities of launching a comprehensive range of gold products, including loan against gold. Talking to Banking & Business Review (BBR) recently, Ashok Gupta, the chief executive of Bank of Baroda, GCC operations, said gold is an area the bank is currently exploring.
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“The demand for gold has increased enormously, both at the regional and global level as a result of the economic instability. Despite dramatic price increases, investor appetite continues to remain high. We are planning a comprehensive range of gold products and services to individuals and also to business enterprises,” Gupta added. The UAE has seen corporate lending slowing down and this has encouraged banks to focus more on retail products. Gupta acknowledges that there are signs of banks getting stronger in retail space, which may be attributed to the fact that the economy is picking up post recession. “Although there is an element of caution in lending, retail products are being focused on,” he added. BoB is keen on strengthening its distribution channels. The bank, which has already introduced Internet banking, has established a number of Customer Service Centres (CSCs) and ATMs, thereby taking the banking services closer to its customers. The bank has also introduced easy pickup facilities for bulk cash in the past few months. The services the bank plans to introduce in the near future include insurance and investment products and services, credit and debit cards, bill-payment services and easy access to financial information at customer’s convenience. Mobile banking is another product that is high on the bank’s priority list. “Our strategy is to develop alternative distribution channels and to provide clients with innovative solutions that make banking easy. Simultaneously, we are strengthening our marketing team for optimum distribution of products and services,” Gupta added. BoB has big plans for non-resident
Indians (NRIs) who form a vital part of the bank’s ambitions, right from its establishment in the emirates. “NRIs are our very privileged customers and we are continuously introducing new products and services keeping in view the requirements of NRIs. We have dedicated NRI desks at all our branches/customer service centres to cater to the requirements of NRIs. We take care of most of their Indian banking needs in UAE itself,” the bank chief executive said. The bank is providing one-stop services for the NRIs’ local and Indian banking requirements and work with the philosophy that ‘NRIs need not go to India, as we bring India to them’. The bank is providing some unique services like opening non-resident ex-
have significantly come down and a further downturn may be limited. Therefore, it may be a good time to buy completed property particularly in prime locations where further reduction may not be there. However, Gupta said his bank would keep the loan-to-value at a conservative level – anywhere between 50 and 60 per cent. “But in really deserving and exceptional cases, we may go up to 70 or 80 per cent,” Gupta said. Welcoming the Government move to create a credit bureau in the country, the BoB chief said the move would provide complete transparency on the status of clients and will help banks to have a clear vision. By providing a data backbone to financial transactions, uncertainty at both bank and client level would be reduced to a great extent. He pointed out that the credit rating would provide a platform for pricing products rationally, depending on the credit worthiness of the borrower, and hence this would function as an effective tool to check multiple financing. Bank of Baroda, which has been operating in the UAE for the last 36 years through six branches, says it has chalked out plans to further expand in the UAE by setting up two more CSCs – one in Sharjah and another in Karama. Two more are also planned for the near future itself. “Our motto is to reach the doorstep of the customer instead of the customer coming to the bank,” Gupta noted. BoB is also present in Oman through its branches in Muscat (two) and Salalah, and another branch will be operational in Sohar soon. BoB has plans to start operations in Kuwait, Qatar and Saudi Arabia, thereby making it the only Indian bank offering services in all the GCC countries.
The credit bureau will provide complete transparency on the status of clients and will help banks to have a clear vision: Ashok Gupta ternal (NRE) accounts in the UAE itself, the spot renewal of rupee fixed deposit receipts (FDRs), instant loans in UAE against NRE or FCNR (foreign currency non-resident) deposits in India, cheque-books for selected Indian branches, facilitating housing loans in India, wealth management services, wherein the bank provides services for investment in mutual funds, providing services under the portfolio investment scheme, assistance in opening Dmat accounts, etc. BoB will shortly be providing online trading services and remittance through Internet banking. With the valuations of real estate and property dropping to attractive levels, BoB is keen to expand mortgage loans in the UAE. Gupta points out that the market dynamics have changed during the past year. Prices
BANKING & BUSINESS REVIEW
Asset class: SBI eyeing a qualitative shift By Amit Chettupuzha
Debajyoti Ray Chaudhuri
he State Bank of India (SBI) Dubai (DIFC) branch is seeking a qualitative shift for its portfolio by focusing more on long-term assets and bringing down the proportion of short-term trade finance exposure in the books. Talking to Banking & Business Review (BBR), Debajyoti Ray Chaudhuri, who took over as the new CEO of the SBI DIFC branch recently, said SBI doesnâ€™t face any problem on the liquidity front, and hence it prefers to go for
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Dubai is today one of the four global hubs for SBIâ€™s syndication road shows along with London, New York and Singapore
long-term assets, which offer better pricing. “Moreover, the issue with the short-term assets is they create volatility in balance sheet giving head aches to treasury. More than that, it is not always easy to get a quality asset to replace the maturing short-term assets at a time when identifying good assets has become a bigger challenge,” added Ray Chaudhuri. The SBI move may sound a bit strange in the context of the fact that almost all Dubai banks have slowed down on their lending and the syndicated loan market has virtually dried down. Importantly, currently, GCC banks are struggling to get longterm liabilities in order to avoid the mismatch in the management of assets and liabilities. “I would prefer to have longterm assets with maturities in the range of three to five years in place of short-term trade finance assets. This doesn’t mean that SBI will not do trade finance business, but will try to build up more of long-term assets including long-term trade finance assets that have maturities of at least one year,” Ray Chaudhuri explained. “For SBI, long-term liability is not a challenge,” said Debajyoti Ray. In the UAE, banks have become importantly hesitant about booking long-term assets in the wake of the recession and also the current developments in the region’s corporate world. He said SBI’s DIFC branch is extending loans to India-based companies also, primarily dollar lending, as Indian branches of SBI cannot meet the requirement of dollar borrowings of Indian corporates especially at a time when Indian corporates are eyeing overseas acquisitions where dollar funding is key. SBI is the number one mandated lead arranger (MLA) in the Asia Pacific region excluding Japan and including Australia.
Dubai has gained greater significance on SBI’s global map and the emirate has become one of the four international hubs for SBI road shows held for syndication along with Lon-
property. However, the banks are currently working with DIFC to get the help of local banks in taking charge of collaterals as security against lending. “We have convinced the authorities concerned that we will be able to play much more meaningful role in lending here if the collateral issue is resolved,” he added. However, he acknowledged that being in DIFC helps the banks deal with other international banks better due to the high compliance standards followed by the Centre. Though the high charges levied by DIFC had earlier invited criticism from some quarters, the Centre has recently slashed rates to reasonable levels across the board. The move has also been welcomed by the DIFC-based companies. Ray Chaudhuri said SBI is chalking out plans to strengthen the NRI business through its DIFC branch. The bank believes that it would be in a position to market a basket of products to the wider NRI community within one or two months.
India’s largest bank, State Bank, is the number one mandated lead arranger (MLA) in the Asia-Pacific region excluding Japan and including Australia don, New York and Singapore. Ray Chaudhuri told BBR that two roadshows have already been held in Dubai. Stating that SBI is keen to grow its lending portfolio in the GCC, including UAE, he said this doesn’t mean that the bank will dilute its due diligence and scrutiny standards on lending. “We will continue to see the external ratings, our own internal ratings after seeing through the clients’ financials to get to know the past track record, etc, before we draw a conclusion on the client,” SBI CEO noted. He said the market is good and there is huge potential for lending. There is a situation where we have the resources and the willingness to
DIFC banks’ lending activities are constrained, as they cannot create security on immoveable property lend, but our lending activities are constrained by the fact that we cannot create security on immovable
In the GCC, SBI has an old set-up in Bahrain where the bank has a wholesale banking operation (offshore) and a full commercial operation. In Oman, SBI runs a full-fledged branch licensed by the Central Bank of Oman (CBO). SBI has ambitious plans to further increase the retail footprint in Bahrain and Oman. In Saudi, the bank has got a licence and plans are afoot to launch operations soon. In Qatar, SBI’s branch will be operational soon from the Qatar Financial Centre (QFC). SBI, which is present in 32 countries, started its DIFC operations in 2006 with a Category IV licence from the DFSA. However, the bank was able to get the Category I licence within three year from then, in 2009.
BANKING & BUSINESS REVIEW
New measures to weigh on banks By CL Jose
he recent steps announced by the Central Bank of the UAE to tighten the provisioning regime for banks with respect to their classified loans may be dubbed as a too-hurriedly initiated move, at least, by some in the countryâ€™s banking sector. Already, the banks are burdened with the need to provision against loan losses coming from different sectors and different markets â€“ either large private sector or government and government-related firms. To take on all these in one go at a time when the economy itself is passing through its worst phase in recent times, will see many banks ending up with a bad year. Central Bank has also said the banks and finance companies are required to increase their specific provisions made against the exposures to the Saudi-based Algosaibi
38 BANKING & BUSINESS REVIEW
Until last year, UAE had been one of the few markets that had the luxury to delay provisioning until the loan payments are in arrears for more than 180 days
and Saad Groups to 80 per cent of their exposures during 2010 instead of the earlier 50 per cent. “I still remember those years that stretched through 20032004 until 2006-2007 or even 2008, when the banks were improving their net profits year after year and growing their asset base by 20 and above percentage points every year. No one bothered to talk about introducing general provisions or tightening the provisioning norms further,” notes the chief executive of a foreign bank The new norms have the stipulation of 25 per cent provisioning against substandard Sanjay Uppal loans and a 1.5 per cent general provisioning against unclassified loans. Ironically, until last year, UAE had been one of the few markets that had the luxury to delay provisioning until the loan payments are in arrears for more than 180 days. Now with the new set of rules being established, not only that the provisioning has to commence for a loan which is in arrears for more than 90 days, but more importantly, a steep 25 per cent provisioning has been stipulated straight away for this class which is called the substandard loans. “Even in India, which is considered to be much more conservative than most major markets, Reserve Bank stipulates only 10 per cent provisioning for secured and 20 per cent for unsecured loans in the Substandard class. Moreover, the general provisions are required at about 0.4 per cent except for real estate exposures, which attract one per cent,” a top Indian bank official told Banking & Business Review (BBR). Talking from Singapore, Sanjay Uppal, banking expert & former Group CFO of Emirates NBD, said the requirement for UAE banks to achieve General Provisions of 1.50 per cent of the risk weighted assets on unclassified loans and advances is on the conservative end of the range when compared with other emerging markets. “But, he added, this would greatly strengthen the
UAE banking sector in coming years.” According to most banking experts in the UAE, the new regulation offers structuring of the capital within banks in line with the results of the portfolio risk assessment, thus enhancing and unifying the role of risk management with that of banks lending. The new regulation emphasises the need for more active and more responsible attitude towards risk assessment and risk management within the banking institutions. Banks will now also be required to disclose the classification of all its loans and advances to the Central bank upon its request and in addition, will be required to display the reasons and logic behind its loan classification and provisioning decisions,” said Saad Maniar, Managing Partner, Horwath Mak, Dubai. However, many bankers, who would not want to be named, believe that these rules could have been implemented in phases over a period of time. It is true that the Central Bank has given four years’ time for achieving the 1.5 per cent general provisioning.
The requirement for UAE banks to achieve General Provisions of 1.50 per cent is on the conservative end of the range when compared with other emerging markets
BANKING & BUSINESS REVIEW
Areas that need tightening
which could prove to be equally dangerous,” said the financial controller of a bank.
Though there have been some very forward-looking moves like the introduction of Islamic certificates of deposits (CDs) and additional liquidity windows that helped the banking system during the past more than a year, experts argue that some areas still need special attention. Though it remains a fact that the minimum capital [share] requirement at Dh40 million doesn’t pose any danger to the banking system as all the banks are capitalised well above this benchmark, they pointed out that banks should be made to strictly follow the seven per cent [of bank’s networth] single-party exposure limit without fail as many banks now manage to get waiver on this. More importantly, this limit does not include off-balance sheet exposure
Role of Boards & Management While the regulations on provisioning are quite specific in guidance, UAE Central Bank acknowledges
Central Bank on any deviation from the stated guidelines. However, Uppal added, the implementation of these new regulations would be deficient without commensurate disclosures relating to loans and provisions in a bank’s financial statements. “Disclosures (largely reflected in IFRS 7 & Pillar 3 of the Basel II capital framework) provide readers of financial statements with information about an entity’s risk profile and risk management process. In the context of loan provisioning, disclosures necessitate banks to adopt and implement policies that result in reserves being maintained at adequate levels and timely recognition of losses. The boards and management of banks should view this aspect as critical to the overall provisioning framework and a key element in achieving Central Bank’s objective and meeting stakeholder expectations,” he added.
Banks should be made to strictly follow the seven per cent single-party exposure limit without fail the role of boards & management of the banks when it states “there is no substitute for mature judgement, based on the experience and knowledge”. Uppal said he hopes there will be enhanced oversight from UAE
Classification of loans Classification of loans Details Normal loans Watch-list loans Sub-standard loans Doubtful loans Loss loans
Loans which bear the normal banking risk, where the information available assures repayment as agreed Loans which show some weakness in borrower’s financial condition and credit-worthiness Loans which may lead to incurring of loss due to adverse factors. 25% of total loan balance Normally, this category includes loans. Payment of principal is in arrears beyond 90 days Loans whose full recovery seems doubtful on the basis of 50% of total loan balance information available. Loans where all courses of action are taken, but failed to recover anything, or where there is a possibility that nothing shall be recovered
Provisions for consumer loans, car loans and credit cards Instalment in arrears
90 days 120 days 180 days
25% of loan balance 50% of loan balance 100% of loan balance
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Source: Central bank data
Business Process Management: Banking on success By Siddhartha Khare
uccess in the banking industry can be tough without a Business Process Management (BPM) strategy which effectively aligns systems and processes with business objectives. BPM offers a bird’s eyeview of the organisation, bringing together business activities or processes, with people and information. This is not only limited to the organisation’s internal mechanics but also includes customers, suppliers, partners and other stakeholders in the banking ecosystem. The past few years have seen a significant rise in the number of banks that have realised the value in investing in BPM solutions to execute and monitor their business processes. It’s never too late for banks to adopt BPM, but the decision to do so can sometimes be met with hesitation stemming from a lack of clarity in its uses and benefits. Essentially, BPM solutions help provide a holistic view of a bank’s operations and help to cut cost in the long run by boosting efficiency and enhancing customer service. And how does it do this? By recognising areas that can be automated and reducing the time needed to complete a business process, as well as bringing down the number of errors involved in completing an activity. Perhaps the most important benefit BPM is seen to offer, given the nature of today’s economy and increas-
ing regulations, is that it provides a stable flexibility to adapt to change. How does a bank go about implementing a BPM strategy? Initially, it starts with identifying its needs. This might seem easy enough but in reality involves in-depth research on specific processes that currently exist and the related owners of those processes. A process includes both system and human interactions - any activity taken in order to realise a business function, such as credit card
IBM’s BPM Suite, and successful automation can be seen in banks that choose either a ‘packaged’ or a customised solution. The key is finding a solution that is the best fit. Business Process Management can get fairly complex depending on the banking institution, and a good solution is often the difference between greater effectiveness and chaos while deciding what to automate. Through it all, there needs to be a focus on return on investment because, while BPM is a necessary investment considering today’s economy, cost, time and effort are key factors that influence the ever-important bottom line. Often, there is a fear that using BPM will result in employees being made redundant but it’s rather a case of finding out where there is an abundance of skills and then streamlining process orchestration. For example, there might be other departments that need more attention and support, like call centres. Significantly, BPM often helps expose the need for further training in order to make best use of human resources. At Gulf Business Machines, we have already helped a number of the region’s leading banks and financial institutions turn to BPM solutions. This has allowed them to make the most of their resources in order to increase efficiency and gain a competitive edge. BPM is truly enabling their success. The writer is WebSphere Sales Manager – Gulf Region, Gulf Business Machines
BPM solutions help provide a holistic view of a bank’s operations and help to cut cost in the long run by boosting efficiency and enhancing customer service issuance, payroll, loans, online banking, sales and marketing, etc. Next, a bank will decide on application requirements, which simultaneously help in realising business priorities of the organisation. By doing this, banks understand the core demands a BPM system should deliver on and decide whether to choose a ready-to-deploy BPM solution that best fits their needs or opt for a custom solution, tailored exactly to specification. There’s no shortage of solutions available through the best players in the BPM field, such as
BANKING & BUSINESS REVIEW
NEW POWER CENTRES
We are in an economic Super Cycle By Gerard Lyons
he world economy is in a super-cycle. This is a period of historically high global growth, lasting a generation or more. There are many factors driving this, including rising trade, high rates of investment, rapid urbanisation and technological innovation. Super cycles are also characterised by the emergence of economies enjoying rapid growth, such as China, India and Indonesia now. The world economy has twice enjoyed super-cycles before. The first, from 1870 to 1913, saw a significant pick-up in global growth, with the world growing on average each year by 2.7 per cent, a full one percentage higher than previously seen. That cycle was led by the emergence of the United States and saw increased trade and greater use of technologies from the Industrial Revolution. The second super-cycle, from 1945 to the early 1970s, saw growth averaging 5 per cent and was characterised by the post-War reconstruction and catchup across large parts of the globe. It saw the emergence, both of a large middle-class in the West and of exporting nations across Asia, led by Japan. We may now be in another supercycle, with aspects similar to those seen in the first two super-cycles. For people in Asia and across the
emerging world, the idea of strong growth may not sound unusual. But for many in the West, the thought of a super-cycle may sound strange, given the present problems confronting the world economy.
and it has already exceeded its pre-recession peak. Over the last two years, its rebound has been driven by policy stimulus in the West and by stronger growth in the East. Indeed, emerging economies, which are one-third of the world economy, currently account for two-thirds of its growth. This trend looks set to continue. By 2030, the world economy could grow to $308 trillion. Excluding inflation that would equate to $129 trillion in real terms, or in todayâ€™s prices, and to $143trn, keeping prices constant but allowing for some emerging-market currency appreciation. The projections would imply a real growth rate of 3.5 per cent for the period between 2000, when the super-cycle started, and 2030, or 3.9 per cent from now to 2030. That would be a significant step-up compared with 2.8 per cent between 1973 and 2000. What is remarkable is not only the likely scale of this expansion, but the fact that these forecasts are based on projections for growth that some might even think are too cautious! For instance, China is expected to
During the super-cycle, China can displace the US as the worldâ€™s largest economy by 2020
42 BANKING & BUSINESS REVIEW
Yet the reality is the world economy now is over $62 trillion, about twice the size it was a decade ago,
grow on an average of 6.9 per cent per annum over the period to 2030, and India by 9.3 per cent. By 2030, India may have become the world’s third largest economy. Moreover, Indonesia, currently the 28th largest economy may have moved to fifthth largest in 20 years, having enjoyed nearly seven per cent average growth over that period. There are always risks that could impact global growth. The first supercycle ended with the outbreak of the First World War, the second with the oil shocks of the early seventies. Hopefully, the world today is better placed to address such risks, thanks to the emergence of international decision making bodies and policy fora such as the G20. It is important to stress that a supercycle does not mean that growth will be continuously strong over the whole period. For the last three or four years, we have been amongst the most pessimistic about US growth. I am still cautious. Despite the benefits of quantitative easing, the US economy will still struggle in the year-ahead, growing below trend. Likewise, Europe and Japan face a sluggish near-term outlook where growth will be modest. All this makes it even more remarkable if Asia can drive more of its own growth. That is, after all, what the world needs. Next year, China sees the first year of its twelfth five-year plan. That should help growth. But, even allowing for this, the Chinese and other central banks across Asia will be tightening policy to cap inflation. In turn, this should allow growth to be more sustainable, but at rates either close to, or even below, those seen this year. So, even in a super-cycle, there can be challenges for policy-makers. Just as it is important to focus on
near-term challenges, it is also vital to keep sight of longerterm opportunities. During the super-cycle, we believe that China can displace the United States as the world’s largest economy by 2020, far sooner than many expect. While such forecasts give a scale of the outlook, it is the story behind what is happening that is as important. There is the scale of the economies that are growing. As emerging economies grow, they will exert greater influence on the world econ-
By 2030, the world economy could grow to $308 trillion
population is becoming increasingly inter-connected through trade, allowing an unprecedented number of people to contribute to the global economy. Cash and financial resources will be critical drivers of growth, given the need for investment, particularly in infrastructure. Then there is what I call perspiration, with more people working and spending, and inspiration, with greater use of innovation and technology. The countries that will succeed will be those with the cash, the commodities and the creativity. In recent years, I have described what was happening as the New World Order, reflected a shift in the balance of economic and financial power from the West to the East. While still valid, a super-cycle better reflects what is happening. It is still possible for the West to do well in this environment, particularly if economies there are creative. Yet it is Asia that appears to be the clear winner. (Dr Gerard Lyons is Group Head of Global Research and Chief Economist at Standard Chartered Bank)
The first super-cycle ended with the outbreak of the 1st World War, the second with the oil shocks of the early 70s omy. Then there is the impact from the growth of new trade corridors. Close to 85 per cent of the world’s
BANKING & BUSINESS REVIEW
Louis Fourteen to launch
“Louis Fourteen for Mojeh” By BBR Staff
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ouis Fourteen, the providers of lifestyle management & luxury services and part of the Al Khaleej Continental Group, is embarking on an innovative partnership with HS Media Group. The new initiative will ensure that the readers of the high-end woman fashion magazine from the HS Media Group – Mojeh get tailor-made exclusive services from Louis Fourteen. Talking to Banking & Business Review (BBR), Shahab Izadpanah, the Group CEO, Al Khaleej Continental Group, said the details of the new partnership and the exact services to be offered to the Mojeh readers will be announced in March. “Mojeh, meaning eyelash, is more than a magazine, It is sophisticated, self-indulgent and loves shopping and embraces fashion, beauty and lifestyle,” Izadpanah explained further. ‘She’ is friend and a confidant. She stays honest, consistent and is a fundamental voice for her readers. She will quickly play an important role in her readers’ lives – where Mojeh goes, they all will follow. Mojeh sets itself apart from the rest of the fashion magazines in the Middle East, challenging the trend to make the difference in the life of a woman. Created as an elite and glossy coffee table magazine and published every two months, Mojeh will be enjoyed, discussed by the topnotch people in the city’s fashion circuits. Launched only in 2010, Louis
Fourteen already has an impressive number of VIP members registered with it, Izadpanah said, and the company is opening its Geneva and Beirut offices in February 2011. It targets to set up new offices in all the big metros across the globe, and to enrol 1,000 prestigious clients - both Privy and corporate, within two years from now. ‘As providers of lifestyle management and luxury services, we take pride in offering our members superior personal and business services, so
that they can enjoy what matters and simplify their lives,’ Izadpanah said. He adds, “It is my wish that my clients should live like a king when we are at their service – he/she will have all the luxury that King Louis Fourteen enjoyed.” Elaborating on the concept of Louis Fourteen, Izadpanah said the services are offered to chief executives or top officials of SME companies to multinational companies. What is lifestyle management? We offer services to celebrities, pro-
fessional sportsmen, busy executives or CEOs of corporates who find it difficult to manage their day-to-day and corporate needs effectively and meaningfully. And the list of services includes right from booking flights, hotel stays or even making purchases from their favourite malls and shopping centres within the country and overseas. Izadpanah said once registered for corporate service, the CEO or the company’s top officials will have dedicated personal assistants to take care of their corporate and official needs. The company has ambitious expansion plans that include new offices in various cities the world over. Being part of Al Khaleej Continental Group, Louis Fourteen has access to different business segments, including financial services, property management, corporate affairs, etc. Izadpanah argues that the membership fee is easily compensated through the bargains the clients get entitled on tickets, hotel stay, purchases, etc. Louis Fourteen provides a world-class service not only locally but also globally. It helps busy individuals to not just schedule ‘important’ tasks, but to get them completed as well. Different from concierge firms that focus on many tactical items, Louis Fourteen goes further by offering a variety of assessment and planning services to help members prioritise and focus on attaining their goals.
BANKING & BUSINESS REVIEW
Aiming big in B2B space Joyalukkas offers unique B2B solutions to corporates
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oyalukkas, the renowned jewellery retail chain has strongly established its presence within the business-t-business (B2B) segment, providing unique solutions to the corporate segment. The B2B division of Joyalukkas currently operates across the GCC and its clientele includes the who’s who of corporates, as well as various government departments and institutions in the region. Banking & Business Review (BBR) discussed with Joy Alukkas, Chairman of the Joyalukkas Group about the group, the B2B division’s successful initiatives in the recent past, as well as its plans for the future.
growth in its branded segment over the years. What are the group’s plans for the future? Having established a strong presence in seven countries i.e. in India, UK and most GCC countries, Joyalukkas today is one of the most renowned and respected jewellery retailers in the region, and we are all set to spread our wings into new markets. At present,
able and we have noticed a marked shift of customers from the yellow metal to diamonds. Many businesses have been affected by the slowdown in lending. What about the gold jewellery business? Though it is widely said that slowdown in bank lending has affected gold jewellery like any other businesses, I would like to say, “this is not true!” During the initial stages of the slowdown, the banks were a bit hesitant about lending, and this had affected the jewellery trade in the UAE to a large extent. However, the banks are more proactive today, and are not shy to offer facilities, provided you have a concrete business model, strong financials, and a growth proposal.
Corporatisation of the jewellery business has given birth to another business trend – branded jewellery
How big is the Joyalukkas Group today? Since its inception 24 years ago, the Joyalukkas Group has rapidly expanded its power zone across the globe. In addition to being recognised as the world’s favourite jeweller, the group has also diversified into other profitable businesses. Today, we have grown to have 10 million customers and employ a team of over 3,000 people in seven countries, namely India, UK, UAE, Kuwait, Oman, Bahrain and Qatar. The success of the group has been driven by our unstinting commitment to quality. Joyalukkas jewellery was the first jewellery retailer to be awarded the prestigious ISO 9001:2008 and 14001:2004 certification, and a series of achievements still add on to the list. Other than this, Joyalukkas has also received recognition from the Dubai Quality Appreciations programme.
we are on a consolidation mode in the GCC, and although expansion in the Gulf is not a high priority at this point in time, we have recently finalised plans to enter Saudi Arabia, the largest market in the region. Towards this end, we have already identified three locations in the kingdom - Al Khobar, Jeddah and Riyadh - where our outlets will soon be established Has the high price of gold helped boost the diamond business? Though diamond jewellery has made
How have the customer preferences been evolving during the recession? The high prices prevailing in the market have given rise to a change in customer preferences. Today, the customers prefer lightweight jewellery as opposed to conventional heavy jewellery. They have also become more focused on designs and variety and are willing to purchase exotic and good designs at a premium. How does the rising gold price affect the business? The yellow metal has been witnessing a rally during the last few years. The high bullion prices along with the general slowdown in the economic activity had indeed impacted the business during the first half of the current financial year (April to September 2011). However, economic recovery is round the corner, and gold will once again become the people’s favoured choice of investment. In fact, the customers have already reconciled with the current high price levels and we anticipate this year a growth of
Though the rising price has been a deterrent to the gifting trend, the corporates still prefer gold for gifting
How big is the branded jewellery market in the UAE? Corporatisation of the jewellery business has given birth to another business trend – branded jewellery. The market for branded jewellery is surprisingly fast and the Joyalukkas Group itself has witnessed good
its entry into the market in the midnineties, the economic slowdown and the recent rally in gold prices have forced many new customers to look closely at diamond jewellery. A significant segment of the customers find diamond jewellery more afford-
BANKING & BUSINESS REVIEW
January 2011 47
5 to 10 per cent in terms of volume business in gold jewellery. How do you view gold in corporate gifting? This is a relatively new trend, namely the concept of gold as a corporate/ social gift that has emerged in the past decade. We as jewellers have a very important role to play in the gifting industry by introducing innovative concepts and ideas into the gifting arena. Though the rising price has been a deterrent to the gifting trend, the corporates still prefer gold for gifting, because gold is viewed as a solid investment that keeps appreciating by the day, and also has ornamental value. At Joyalukkas, we have a dedicated team that manages the unique requirements of the corporate segment and ensure they come up with innovative and customised solutions to every corporateâ€™s needs.
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Joyalukkas expects this year a growth of 5 to 10 per cent in terms of volume business in gold jewellery Which are the corporates that Joyalukkas caters to currently? Over the years, we have provided a number of corporates gifting solutions that help them stand apart. Our wide and varied client list encompasses a number of sectors, ranging from banking to retail to hospitality. Which are some of the innovative solutions you have created for the B2B segment? Over the years, we have created unique mementoes and gifts for various clients, and this has made an impression in the minds of the
people. For instance, as part of the FIFA 2006 promotion, we were commissioned to create a 750gm golden football in 24 karat gold. We followed up our success during the 2010 FIFA World Cup, when we created a 450gm golden boot. In addition, we have also immortalised the tallest building in the world, the Burj Khalifa in 18 karat gold, as a unique memento. We also specialise in creating smaller items for the corporates, like customised jacket pins, tie-pins, gold USBs, cufflinks, corporate accessories, and many more.