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JANUARY 2018 | ISSUE 202


JANAURY 2018 | ISSUE 202

Looking to the future Steve Bertamini, CEO of Al Rajhi Bank

Looking to the future

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A CPI Financial Publication

Steve Bertamini, CEO of Al Rajhi Bank

Dubai Technology and Media Free Zone Authority

“It’s about quality of customer service and the experience around everything you try to do.”




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JANUARY 2018 | ISSUE 202




s the cycle begins again, we can expect better circumstances in 2018. The past two years have been tough on global markets, especially economies in the region. However, this period has resulted in encouraging developments as sovereigns slowly move farther away from oil, aggressively diversifying their sources of income. With the improving economic conditions and the gradual increase in oil prices, market players can expect smoother terrain this year. Fiscal consolidations and reforms rolled out by governments will begin to see its effect materialise. In addition, an increase in debt capital market transactions are also


In this issue, speaking to various industry leaders we explore a deeper meaning of customer experience, digital banking, cybersecurity, as well as the parameters of its application and feasibility. Here’s to renewed hopes, new beginnings and a profitable year.

expected to take place this year on the back of a sustained healthy appetite for GCC securities. The industry will be seen moving away from rectification mode and towards plugging the gaps, addressing the inadequacies that still exist in their respective banking systems. On the operational front, 2017 witnessed numerous technological advancements amongst fellow banks, either enhancing their core banking system or their customer experience competencies. This year we will see this segment develop further with a more dynamic implementation of technologies such as AI and biometrics as banks aim to act as enablers bridging the gap between the financial and the retail sector.


6 8

Nabilah Annuar Nabilah Annuar Editor

BankerMENA CPI Financial

2018: a better year for GCC banks News highlights

THE LONG VIEW 10 A new horizon


12 Deepening GCC-Asia petrochemical ties 16 Preparing ahead


COVER INTERVIEW 20 Looking to the future

COUNTRY FOCUS — UAE 24 The new black


28 Challenges on the path to achieving impact JANUARY 2018


| ISSUE 202


| ISSUE 200




“Natixis has just announced its next strategic plan, New Dimension, which will run from 2018 to 2020, with the expansion of our Middle East platform specifically identified as a target.”

Executive Chairman,











“It’s about quality customer service of the experience and everything you around try to do.”

Prioritising future solutions

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Simon Eedle, Regional Head, Middle East, Natixis INSIDE:

12 2018 AND BEYOND

Dubai Technology and Media Free Zone Authority

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and Media Free

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that we are doing "Everything our investors’ is driven by is large, and needs. Our ambition the right team and we havemake it happen." resources to

Looking to the future

Steve Bertamini,

CEO of Al Rajhi








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JANUARY 2018 | ISSUE 202



32 Revealed: how Middle Eastern consumers are really spending their money


34 Securing the future of banking


36 Serving the underserved



40 Minding the important things


42 Leading technological transformation in the region 44 Banking on blockchain 48 Fintech in the UAE



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Administration & Subscriptions Tel: +971 4 391 4682 Tel: +971 4 391 3709 ©2018 CPI Financial. All rights reserved. No part of this publication may be reproduced or used in any form of advertising without prior permission in writing from the editor. Registered at the Dubai Media City. Printed by United Printing & Publishing - Abu Dhabi, UAE

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2018: a better year for GCC banks

Improving economic conditions and strong capitalisation underpin the resilience and stability of financial institutions


ndustry players can relish in the fact that 2018 will potentially be better than the past couple of years. Market reports and analyses have shown that the GCC banking system will benefit from improving economic conditions. Rating agencies such as S&P and Moody’s have projected a stable outlook on the banks that it rates in UAE, Saudi Arabia and Kuwait (which account for 75 per

cent of GCC banking assets); except for those in Bahrain and Oman— due to their weaker fiscal position, and Qatar—due to the geopolitical risk from the diplomatic row with fellow GCC states. GDP GROWTH Moody’s has forecasted that real GDP growth in the region will rise to approximately two per cent in 2018, up from almost zero per cent in 2017.

Oil prices are projected to stabilise at between $50 and $60 a barrel this year and through to 2019. Additionally, strategic government initiatives and large-scale projects such as the Saudi Arabia’s National Transformation Plan, Dubai’s Expo 2020, Qatar’s 2022 World Cup and the Kuwait 2035 vision is expected to drive capital expenditure and private sector lending growth, which has been projected at between four to five per cent. By the middle of this year, banks should have recognised most of the impact of the softer economic cycle on their asset quality. Barring any geopolitical predicaments, financial profiles of GCC banks will start to stabilise from the second half of 2018. S&P points out that this projection does not apply to Qatar whose trends in asset quality will depend on how the boycott of the country evolves. ASSETS AND LOANS As economic growth improves and the effects of the adjustment wear off, BMI Research projects assets and loans in the UAE to expand to 5.6 per cent and 5.9 per cent respectively over the course of 2018, significantly more from the four per cent and two per cent forecasted in 2017. This estimate is based on improved business and consumer confidence, coupled with an easing of oil production cuts and an expectation that the construction sector will be a key driver growth of underpinned by a strong investment pipeline. BMI notes that UAE banks will also benefit from monetary tightening over the coming years, with the UAE Central Bank to continue following the US Federal Reserve’s hiking cycle, especially as the country’s economy appears to withstand higher rates, which will benefit UAE banks as lending rates are indexed on the central bank’s policy rate.

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RISKS In addition to muted loan growth, key risks for the GCC banks also include a higher cost of risk, geopolitical risks and lower profitability. According to S&P cost of risk for GCC banks will increase in 2018 because of the adoption of IFRS 9 and the higher amount of restructured and past due

Not all is positive. Moody’s has pointed out that problem loans for the region’s banks may edge higher in 2018, due to the sluggish economic activity last year. Banks remain vulnerable to high borrower and sector loan concentrations, in addition to uneven disclosure in the corporate sector.

Asset Quality Indicators Nonperforming loans / total loans

10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2011


Cost of risk



Loan loss reserves / total loans (right scale)


160% 140% 120% 100% 80% 60% 40% 20% 0% 2017*


*As of September. Source: S&P Global Ratings Copyright © 2018 by Standard & Poor’s Financial Services LLC. All rights reserved.

GCC Banks - Funding Profile Loan / deposits

Government deposits / total deposits (right scale)

Deposits’ growth rate (right scale)

Government deposits’ growth rate (right scale)

90% 89% 88% 87% 86% 85% 84% 83% 82% 81%

30% 25% 20% 15% 10% 5% 2011








*As of September. Source: S&P Global Ratings Copyright © 2018 by Standard & Poor’s Financial Services LLC. All rights reserved.

GCC Banks - Profitability Return on assets

4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2011

Net interest margin




Cost / income (right scale)



*As of September. Source: S&P Global Ratings Copyright © 2018 by Standard & Poor’s Financial Services LLC. All rights reserved.

39.0% 38.5% 38.0% 37.5% 37.0% 36.5% 36.0% 35.5% 35.0% 34.5% 34.0% 2017*


but not impaired loans sitting on their balance sheets. However, the general provisions that banks have accumulated over the years will assist in a smooth transition to the new accounting standard. As low credit growth weighs on interest income, fees and commissions, profitability will decline. It is however, expected to stabilise at a lower level than historically, underpinned by an increased cost of risk and the introduction of value added tax, some of which banks will pass on to clients. STRENGTHS Despite these projections, the outlook on banks in the GCC remain stable on the back of strong financial fundamentals that provide resilience to lower profitability and weaker loan quality issues. Albeit some signs of quantitative and qualitative deterioration, GCC banks remain well-capitalised by global standards, with levels well above Basel III requirements. Coupled with high loan-loss reserves, this provides banks with the capacity to absorb losses, noted Moody’s. Tangible common equity ratios are expected to remain in the 11 to 16 per cent range, while problem loan coverage across the region remains high at 95 per cent. The strength of GCC banks is the low cost and stable depositbased funding, combined with elevated liquidity buffers. In 2017, government’s injected liquidity from international debt issuances, easing a long funding squeeze stemmed from low oil prices. Liquidity amongst GCC banks improved in last year and this will continue into 2018 as continued debt or Sukuk issuance by governments this year will absorb some of the liquidity without a major change in risk appetite.

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ADX and SWIFT sign MoU to explore distributed ledger technology Seven central securities depositories including the Abu Dhabi Securities Exchange (ADX) have signed a Memorandum of Understanding (MOU) to work together to demonstrate how distributed ledger technology could be implemented in post-trade scenarios, such as corporate actions processing, including voting and proxy-voting. The group will investigate the types of new products that can be built using it, and how existing standards such as ISO 20022 can support it. ADX is the first market in the MENA region to enter into an agreement of this kind. Other aspects of the MOU include fostering collaboration amongst the CSD community in DLT research and development, helping define the role of financial market infrastructure providers in markets based on distributed ledgers as well as identifying, defining and developing additional use cases for DLT in a CSD environment and the post-trade landscape, such as services for different kinds of DLTbased digital assets. In addition, the group will focus on creating and adapting common standards and principles for the use of DLT amongst CSDs and the financial industry and promoting the adoption of those standards and principles to other parties, including regulators. Confirming the importance of the CSD Working Group on DLT, the International Securities Services Association (ISSA) recently endorsed the group and included it as part of a new work stream within the Association’s existing Working Group on DLT, giving this initiative greater industry visibility. As a part of ISSA, the CSD Working Group on DLT will initially focus on digital assets with a goal to establish a business framework for how these assets could be used in the post-trade space. The framework will identify key definitions, classifications, services and post trade service provider roles. Findings from the use case on digital assets are expected to be published in Q2.

Middle East deal market experiences a general decline in 2017 Although debt capital markets underwriting fees were up 102 per cent year-on-year, the equity and M&A market witnessed a decline last year. Recording the highest full year total in the region since 2000, debt capital markets fees accounted for 28 per cent of the overall Middle Eastern investment banking fee pool, the highest full year share since 2001, according to an investment banking analysis by Thomson Reuters. Syndicated lending fees accounted for 42 per cent, while completed M&A advisory fees and equity capital markets underwriting fees accounted for 20 per cent and 10 per cent, respectively. Bolstered by Saudi Arabia’s $12.4 billion international Islamic bond in September, Middle Eastern debt issuance reached $103.7 billion during 2017, 33 per cent more than the proceeds raised during last year and by far the best year in the region since 1980. Saudi Arabia was the most active nation in the Middle East accounting for 30 per cent of activity by value, followed by the UAE with 27.8 per cent. International Islamic debt issuance increased 36 per cent year-on-year to reach $51.5 billion so far during 2017. Equity capital markets fees increased 118 per cent to $91.3 million, while fees generated from completed M&A transactions totalled at $181.9 million, a 21 per cent decrease from last year and the lowest full year total since 2012. Syndicated lending fees declined 25 per cent year-on-year to $389.9 million. Middle Eastern equity and equity-related issuance totalled at $3.5 billion during 2017, a 36 per cent decline year-on-year and the second lowest year since 2009 for issuance in the region. Twelve initial public offerings raised $2.8 billion and accounted for 80 per cent of the year’s ECM activity in the region. Emaar Development’s IPO raised $1.3 billion and stands out as the biggest deal for 2017. According to Thomson Reuters, the value of announced M&A transactions with any Middle Eastern involvement reached $43.8 billion during 2017, 14 per cent less than the value recorded during 2016. Domestic and inter-Middle Eastern M&A declined 63 per cent year-on-year to $8.7 billion, while outbound M&A activity dropped 35 per cent to $10.8 billion.  Energy and power deals accounted for 41.9 per cent of Middle Eastern involvement M&A by value.


Abu Dhabi


Bahrain Egypt Iraq


Kuwait Ras Al Khaimah Turkey






BB+ B- 

















Bahrain Egypt

















Turkey Saudi Arabia Qatar












Under Review





Saudi Arabia


Country Ceiling

KEY Positive Negative Evolving Stable




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Ministries of Finance discuss economic reforms in Arab countries Organised by the Arab Monetary Fund (AMF), the undersecretaries of the various ministries of finance, together with the International Monetary Fund (IMF), World Bank Group (WBG) and the Organisation for Economic Cooperation and Development (OECD) have gathered to discuss financial and economic developments and reforms in Arab countries. The meeting aimed to address several papers on public financial reforms framework, including one provided by the IMF on reforming rent bills in Arab countries, a paper provided by the World Bank on enhancing initiatives to develop public and private sector partnerships in Arab countries, particularly with regards to financing public investments and discussing a study on subsidy policies. Their Excellencies the Undersecretaries of Arab Ministries of Finance deliberated on reforms and policy frameworks on managing public finances in Arab countries. The meeting also highlighted the need to develop sound financial and economic policies based on the diversification of income sources, managing public finances, and finding additional income sources. These measures will help in strengthening the national economy, maintaining financial stability, and driving sustainable growth, all of which points to a better economic performance in 2018; with expectations of foreign investment flow to achieve high growth rates in the upcoming years. The paper on the international standards of exchange of financial information issued by OECD, highlighting the UAE Ministry of Finance’s commitment to implement the joint disclosure system and the effective and automatic exchange of information for tax purposes, following G20 and OECD directives, and in accordance with the Foreign Account Tax Compliance Act (FATCA), was also discussed. The UAE was the first Arab country to have obtained a seat on the International Steering Committee (ISC) for the exchange of information.

Security risk evaluates threats to the nancial, physical and human assets of a company, as well as the willingness and capability of public security forces to protect corporate assets and personnel. Factors assessed include military conict, insurgency, terrorist attacks, strikes and riots, vandalism, kidnapping, and violent and acquisitive crime. Security risk may vary for companies and investment projects because of factors such as industry sector, investor nationality and geographic location.

Areas of heightened piracy risk

Political risk evaluates the likelihood of government interference and political instability, and their impact on the business environment. Political risk assesses general political stability and policy issues such as regulatory change, high-level corruption, reputational risk, expropriation and nationalisation, contractual interference, sovereign default and non-payment, and international sanctions. While the rating applies generally to the designated jurisdiction, political risk may vary considerably between industry sectors and investor nationalities.

Copyright © Control Risks 2017. All rights reserved. Reproduction in whole or in part prohibited without the prior consent of the Company. The Risk Ratings are compiled from sources that Control Risks considers to be reliable or are expressions of opinion. Control Risks has made reasonable commercial efforts to ensure the accuracy of the information on which the Risk Ratings are based, however, the Risks Ratings are provided ‘as is’ and include reasonable judgments in the circumstances prevailing at the time. The Risk Ratings provided should not be construed as definitive or binding advice. Boundaries and names shown on this map do not imply endorsement or acceptance by Control Risks.

Source: Control Risks

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long view

A new horizon Tony Long, CPI Financial’s new CEO, shares his thoughts on the future of banking


he future. It’s always interesting to imagine new possibilities and how things might change tomorrow, or many years ahead. My first and only time in Dubai before joining CPI Financial a few months ago was back in 2005. The Burj Khalifa was still not above the foundations and construction of the Dubai Metro had not yet begun, but the vision for Dubai was already well under way. Arriving here a few months ago from London, it seemed impossible to imagine just how much of a transformation had taken place so quickly, and the plans for the future here and throughout the region are every bit as ambitious and exciting. Banker Middle East recently celebrated its 200th edition, recalling the events and progress that has been made over the last 18 years, and beyond the challenges of what life was like post the 2008 crash and the more recent collapse in oil prices, it is incredible to think what the economies and the banking sectors of the Middle East have been through and achieved in such a relatively short period of time.

Tony Long

As we look towards the next 200 issues, it seems equally impossible to predict quite how much life will change again, other than to say that the pace of change will inevitably continue to accelerate as we speed towards new horizons. The challenges facing the banking industry globally, and particularly in

the GCC region, where some of the youngest populations in the world are shaping the digital economy are hugely exciting, if not a little daunting for some. As the disruption of technology continues to disintermediate traditional banking services across the world, the evolution of new

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long view

products and services will depend as much on the visionary leadership of our most progressive banks, as the demands of clients and consumers. Innovation is completely our responsibility and our sole means of survival. There are two people in particular who have done more to drive true innovation than almost any others in the post-industrial age. As Henry Ford allegedly said, “If I had asked my customers what they wanted they would have said a faster horse”, and Steve Jobs went further in his belief that “It’s not the consumers job to know what they want”, when asked, “How much market research went into the iPad?” So, as we enter the fourth industrial revolution, it is encouraging that as banking systems across emerging and developing markets leapfrog the legacy infrastructures of established economies, new products, services and routes to market are continually being created as vast swathes of unbanked populations move into the new digital economy. Yet within all this frenetic development and disruption there is an even greater need to regulate a technology driven industry faced with all the challenges that rapidly advancing digital economies present. FinTech meet RegTech. Artificial Intelligence (AI), robotics, blockchain, cryptocurrencies and cashless societies are simply the beginning of what will be an unrecognisable future much sooner than we think. These are the biggest challenges in the history, and to the future, of banking. Traditional banks are being threatened from all quarters in ways that have not been possible for the last 500 years and the agility with which the industry is able to develop and respond to these opportunities

and challenges will have a profound and lasting impact of the future of banking as we know it today. The media industry was one of the first to feel the full impact of the democratisation that the internet and digital technology has brought to people on a global scale, and publishers faced similar challenges to those which banks are facing today; how to stay relevant and add value in a market where barriers to access have got so low that everyone believes they can compete and new entrants are appearing from every direction.

Traditional banks are being threatened from all quarters in ways that have not been possible for the last 500 years. – Tony Long – Needless to say, we’ve seen a lot of these businesses find out just how challenging it is to build new brands and establish trust with new customers and many have disappeared as quickly as they arrived. But some will survive and flourish as they find the right products and approach to consumers who are looking for a new relationship with their bank, and the future most certainly belongs to those who are able to adapt best (not necessarily fastest) to the changing dynamics of the global economy and the local markets they serve. Our vision for CPI Financial is very straight forward. We have a


single-minded approach to be the most respected financial media company in the region by adding tangible, unique value to the relationships we have with our clients and customers. We will develop our media brands in whichever way best serves our customers’ needs to become a more valued strategic partner and we are proud to be headquartered in Dubai and share in its vision as we seek to expand our reach and influence into new markets throughout the Middle East. There’s no doubt that we are all living truly digital lives these days and whilst we will continue to invest in developing the platforms and channels that our readers are using and moving towards, we also believe that print is far from dead. The question is, ‘what is the role for paper?’ There is certainly a new-found interest in print media, as witnessed by the recent resurgence in book publishing and the number of new authors that continue to launch their work in print as the lead medium, albeit often purchased online. For magazines, quality journalism, authority and integrity (along with the simple tactile pleasure of reading a magazine) will always attract readers who wish to reflect on what they are reading in a way in which the consumption of digital media is not always best suited. There is much to be excited about in the future for banking in the GCC and the opportunities are there for all. As media-owners we have learned one simple truth; that we have to develop products that serve our customers in the way in which they want to be served, when they want to be served, and where they want to be served. It’s not exactly rocket science, but then once upon a time, neither was banking.

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Deepening GCC-Asia petrochemical ties Hetain Mistry, Managing Analyst— Petrochemicals at S&P Global Platts, suggests a rapid re-think of the playbook for Gulf exporters to sustain a competitive edge


ing-fencing coveted business in Asia’s petrochemical order book is keeping Gulf producers on their toes as competition in the $3 trillion-plus global industry intensifies. US and Iran are equally keen on building eastern alliances— unsurprising considering the demand growth forecasts. Petrochemicals are used to make plastic, nylon and other materials for consumer products, manufacturing, aviation and nearly every commercial industry—each crucial to facilitating

Asia’s rapid population growth. China and India’s population will each reach 1.4 billion by 2024, with China’s population then stabilising while India’s grows to account for 17 per cent of the global population at 1.6 billion by 2050, according to the UN. Overall, Asia Pacific is home to a staggering 60 per cent of the world’s population. China and India led the economic growth profile. In India, growth of polyethylene and polypropylene demand could be 1.3 times GDP, while for China, future growth should certainly be in step with GDP

over the next decade, according to Platts Analytics. Looking at demand growth solely for polyethylene, the world’s most common plastic, China’s CAGR demand growth rate over the next ten years is projected to be 5.7 per cent and India’s is around eight per cent, our data shows. This supports our belief that India’s demand for plastics has a lot more potential, in line with its continually rising population up to 2050. But remember that India’s growth is from a considerably smaller base than China. According to our data, China’s current consumption of 27 million metric tonnes (mt) of polyethylene a year, versus India’s 4.7 million mt a year, is expected to increase to 47 million mt by 2027. Beijing is ramping up local feedstock and manufacturing capacity to boost self-sufficiency, cont. on page 14

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cont. from page 12

but demand will almost certainly outpace the behemoth’s rate of local production—good news for those who have strong export ties with China. More than 80 per cent of volume from Saudi Arabia, the Middle East’s biggest petrochemicals exporter, is shipped to China, for example. But China’s capacity expansion highlights Gulf producers’ need to spread their petrochemical wings to encompass both established and budding export markets. While a slow burn compared to China and India, Africa’s potential is also highly valuable. Efforts to improve elementary or non-existent infrastructure are helping accelerate the evolution of middle class economies on the continent, with its population of 1.25 billion today expected to reach 2.56 billion by 2050. Can the Gulf expand its advisory role to help craft strategies and policies that the UN Economic Commission for Africa Regional Integration and Trade Division (RITD) said are key to achieving the continent’s industrialisation ambitions? The Gulf would benefit from an early mover advantage in a promising market and ‘exporting’ know-how reaffirms Gulf countries’ bid to transform themselves into knowledge-based economies. Gulf producers’ market acumen so far has been lauded. The Arabian Gulf’s petrochemical industry grew by 3.7 per cent to 150 million mt of capacity last year, which outpaced the global average growth of 2.2 per cent, according to the Gulf Petrochemicals and Chemicals Association (GPCA). The second largest manufacturing sector in the GCC, the chemicals industry represents 2.9 per cent of the region’s GDP with a value of $97.3 billion. But the US threatens the

region’s role as the world’s cheapest petrochemical-producing region with the lowest feedstock costs in the world. A rapid re-think of the playbook is required—business as usual will no longer sustain the Gulf’s competitive edge. The US’ shale boom and subsequent cheap access to ethane feedstock means it is enjoying a position that the Middle East, especially Saudi Arabia, have long benefitted from. The US currently accounts for 18 per cent of global ethylene capacity according to our data.

The Arabian Gulf’s petrochemical industry grew by

% 3.7 to 150 million mt of capacity last year, which outpaced the global average growth of


This will rise to 21 per cent by 2025 if projects come online as planned. The US’ polyethylene surplus of about 4.4 million mt during 2017 will reach 7.54 million mt in 2020—a 70 per cent increase in just three years, our analysis shows. Closer to home, Tehran’s calls to global investors to help leverage feedstock from its giant South Pars field and expand its petrochemicals industry are being answered.

Total may invest up to $2 billion, for example. This would mark a relatively small but significant step forward in Tehran’s bid to attract the $85 billion that its industry is expected to require over the coming decade. As competition ramps up, savvy Gulf producers are investing in innovation and collaboration. Petrochemical companies in the GCC spent $700 million on research and development in 2016, which was 40 per cent higher than in 2015 and more than double the $300 million in 2010, GPCA data showed. Proactively diversifying the product offering is essential. Sadara, the $20 billion joint venture of Saudi Aramco and US’ Dow Chemical at Jubail on the Arabian Gulf, is creating chemicals new to the region using heavier feedstock, for example. Cross-border alliances are also paying off. One of the world’s largest petrochemical companies, Riyadh-based Sabic, signed a strategic cooperation agreement with China’s state-owned Sinopec Group in March to explore joint venture petrochemical projects in both countries. Gulf producers must also leverage the UAE’s Port of Fujairah, a ‘maritime doorstep’ of the New Silk Road, which stretches from Beijing to East Africa. The Port, the world’s second largest bunkering hub, can enhance its offering with specialised chemicals, including high-end plastics. And Gulf countries can make it as easy as possible for Beijing to base on Arab soil the manufacturing units required to send petrochemicals directly back to China. Gulf producers’ new reality of having to fight harder to retain precious market share is a permanent one—the sooner producers master the new game plan, the better.

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P in L

Profiles in Leadership An important new series from CPI Financial, the Middle East’s leading financial and business publishing house. In challenging times, clear and dynamic leadership is the key to business success. CPI Financial’s new series Profiles in Leadership will identify and define those qualities necessary to succeed, profiling successful individuals and their businesses.

CPI Financial TV CPI Financial TV is proud to launch a new online Leadership series. We are conducting a series of in-depth, on-camera, face-to-face interviews with the key players in the Middle East banking and financial services sector. Dubai Islamic Bank The longest-established modern Islamic bank is one of the leading financial institutions and our interview with its Group CEO launched our Leadership series on 10 September 2017. You may watch the full interview online or alternatively view key segments of the interview individually. Who’s next? Our Leadership series launched with Dr. Adnan Chilwan, GCEO of Dubai Islamic Bank, followed by HE Abdul Aziz Al Ghurair, CEO of Mashreq. Look out for more great interviews in the coming weeks. Unparalleled insight Understand how the region’s top bankers view the challenges and opportunities their institutions face… and the plans they intend to implement. Identify ambition Whether in the domestic, regional or international arena you will be able to see for yourself just what is in store in the evolution of one of the world’s most dynamic economic arenas and for the institutions helping to bring economic dreams into successful reality. Bookmark CPI Financial TV Bookmark CPI Financial TV now to make sure you stay in touch and on top of these unique insights into the region’s banking and financial services industry.


Steve Bertamini CEO Al Rajhi Bank

Dr. Bernd van Linder CEO Commercial Bank of Dubai

Michel Accad Group CEO Al Ahli Bank of Kuwait To learn more, contact: OMER HUSSAIN

CPI Financial FZ LLC • PO Box 502491 Al Shatha Tower, Office 1209 Dubai Media City, Dubai, U.A.E.

+971 4 391 5419

Tel: +971 (0) 4 391 4681 • Fax: +971 (0) 4 390 9576 •

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hat are your views on the regulatory landscape banks in the region currently operate in?Â

Gearon says that one of the regulatory changes that UAE financial institutions should anticipate is an increase in insurance regulation. (PHOTO CREDIT: GARAGESTOCK/SHUTTERSTOCK)

Preparing ahead In an exclusive interview, Banker Middle East sits down with Patrick Gearon, Partner at Charles Russel Speechlys, to discuss the regulatory environment surrounding financial institutions in the UAE and wider GCC

Financial institutions in the GCC are continuing to face a number of challenges with respect to regulation. Since the financial crisis, regulations have reflected a higher degree of stringency and compliance to address capital and liquidity requirements, counter the serious threats posed by cybercrime and to manage the risks of lending. One direct example is the growing scrutiny that central banks in the region are taking with respect to anti-money laundering and anticorruption policies to develop and issue new regulations for better security, regulation and protection to provide stability to the financial system and instil greater confidence.  A further example is the establishment and introduction of new compliance and regulatory departments within the financial institutions themselves. The costs of regulatory compliance are also increasing for financial institutions. For example, the Central Bank of Bahrain recently introduced a requirement that all Islamic financial institutions must be externally audited.  

From a legal point of view, what challenges do banks face in adapting to international standards?

The role that financial institutions and banks in the region play is growing and thus there are more and greater challenges. One of these challenges is related to background cheques, Know Your Client (KYC) documents, Source of Funds and general enhanced compliance requirements. A further challenge is the difficulty in recovering debts and defaulted loans. cont. on page 18

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cont. from page 16

As a result, regional financial frameworks in the region have been developed and adapted to meet international standards. The UAE and Bahrain have been regional leaders in adapting new financial frameworks such as establishing the Al Etihad Credit Bureau (2010) under the UAE Central Bank’s supervision to collect credit information from financial and non-financial institutions in the UAE.

What major regulatory changes should financial institutions in UAE anticipate going into 2018? One of the regulatory changes that UAE financial institutions should anticipate is an increase in insurance regulation. In addition, they will be required to close the gap between their assets and liabilities which will require more mature lending frameworks. Greater cybersecurity and online transactions regulations must also be adapted and the creation of more digital technologies for use by financial institutions, will also require close regulatory supervision and oversight.

In your opinion, what legislative measures should authorities take in raising the profiles of their respective financial jurisdictions? The two great drivers in the financial sector at present are: the development and adoption of fintech and the growth of Islamic finance. Both Bahrain and the UAE have credible claims to be market leaders with these two drivers. The key in the context of fintech will be for legislation and regulation to be flexible and nimble enough to cater for the extremely fast pace of

Patrick Gearon, Partner, Charles Russel Speechlys

The two great drivers in the financial sector at present are: the development and adoption of fintech and the growth of Islamic finance. – Patrick Gearon –

development of fintech products. In relation to Islamic finance the key is ensuring that regulation keeps pace with the ever developing products which Islamic financial institutions are creating for their customers.

What is your outlook on the industry moving forward? The outlook for the financial sector in UAE is a promising and stable one owing to the stability of the economy and its continued growth

which will be boosted by large-scale projects, including Expo 2020, the new airport and expansion of the metro infrastructure. New construction projects in Abu Dhabi, Dubai and Ras Al Khaimah are increasing the flow of money and financial transactions. In addition, a continuing investment focus on tourism, services and the hospitality sectors in UAE will further aid the growth of the financial sector.

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04.01.18 13:47 28/01/2018 09:39



Robin Amlôt (left) and Steve Bertamini (right)

Looking to the future In a conversation with Robin Amlôt, Consultant at CPI Financial, Steve Bertamini, CEO of Al Rajhi Bank, talks about the bank’s performance in 2017 and its plans in the economic development of the Kingdom of Saudi Arabia

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hat are your views on the Al Rajhi Bank’s performance in the last 12 months?

Well I think the last 12 months have been very good for Al Rajhi Bank. We’ve seen double digit net income growth for the first nine months of the year. Our asset growth has been in excess of three per cent, which compared to the market which is actually down 1.8 per cent. We’ve also been able to achieve quite a few critical initiatives which I’m happy to talk about a bit later in the interview.

Al Rajhi has had nine quarters of growth now; Islamic banks in the GCC have in general been more profitable than their conventional peers over the last couple of years. Is this a trend that is going to sustain? Yes, I think we’ve seen Islamic banks now outperform conventional banks globally for the better part of the last 10 years, and every indication seems to appear to be that will continue. One of the big advantages Islamic banks have is a much slower cost of funds and by definition they take a lower risk profile which obviously worked quite well particularly during the turbulent period many of us had to face a few years ago.

So how is Al Rajhi shaping the Kingdom’s financial landscape, what’s your focus for 2018, and how does that fit in with the general economic thrust of the Kingdom’s agenda? We’re very aligned with the national transformation programme and the 2030 vision. When that first came out we spent quite a bit of time as a team analysing that and finding areas that we thought made the most sense to us. For example, housing plays very

well for our focus as a retail bank, we thought SME financing would be a great opportunity for us to also participate. Of course, with the increase of females in the workforce, we thought that was also a great opportunity for our bank.

Moody’s says that Al Rajhi is ‘best positioned in the Kingdom’ thanks to the Islamic franchise and the lowcost deposit base. Having said that, do you have any concerns about the corporate sector? Well actually we’ve done quite well in the corporate sector, as you might be aware we’ve been underrepresented for many years. We grew our share from 2015 we were 6.1 per cent share, as of the third quarter of 2017 we are at 7.6 per cent, which is quite a significant increase over a relatively short period of time. We’ve also seen the quality of our book improve, so we now have market leading indicators in terms of non-performing loans and our level of reserves is substantially higher than the market. I think we built the book well.

Is this going to continue to the future? Where’s the competitive position for the bank? For us, obviously retail is the area that we excel in. As you know, we’ve got basically a fourth of everything: a fourth of the branches, a fourth of the ATMs, a fourth of the point of sales, and we are very much focused on automation. Having said that, as I mentioned, in SME, corporate and treasury, we believe we have been underperforming for some time. So we’ve been putting more focus on those businesses and we’ve seen good gains over the last 18 months and we expect that to continue.


Are those the key areas for growth potential or are there other areas as well? The number one growth potential for us is mortgage, if you think about the country wanting to increase the percentage of home ownership, we’re in the prime position to take advantage of that. Our share of mortgages has also grown quite substantially—we’re at 20.4 per cent I believe, at the end of 2015, and we’re now at 24 per cent. Roughly 42 to 45 per cent of every mortgage written in the last 18 months we’ve been able to have occur at Al Rajhi bank. Strategically, growing this part of the business will position the bank for long-term success.

The IMF projected GDP growth in Saudi Arabia to be close to zero for 2017, and looking to the whole of 2018 they’re talking about a softening of credit demand, which is partly on the back of reduced Government spending. Is that going to impact your prospects for the year? You must look at what’s occurring in the economy, but we are really focused on continuing to grow our position and proving our products. For example, in 2017 we launched 10 new products. We’re heavily investing in our digital agenda, so we still think there are a lot of opportunities. Everyone expects the new expansionary budget announced last year to have a positive impact on the economy, so we remain relatively optimistic about 2018.

There is a framework being put together to allow more foreign investment in the Saudi market. How important is that? I think it is critical—if you think about the country’s ambitions to transform cont. overleaf

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cont. from page 21

the economy, it needs both foreign technology as well as investment. I think you will see the Kingdom increasingly leverage that, and this is partly why there has been so much focus in making changes to foreign investment rules, to how quickly trades get done—the T+2-1 etc.

party—go from number seven in the Kingdom to number two. We’ve therefore seen a huge improvement over the last 18 months. The second area is market share. We monitor market share across a broad range of areas and we’ve seen our market share increase

I think there are a lot of new exciting formats, products and experiences that we can create for customers, not only in the next 12 months but quite frankly for the next three to five years. – Steve Bertamini, CEO of Al Rajhi Bank

All the changes that are taking place to enable and to increase confidence for foreign investors to come into the market, and of course Aramco is expected to be a game changer, not only for Saudi Arabia, but for the Middle East.

The bank has deployed several new products and implemented new technology in the last 12 months. How are customers reacting to that? Has it helped in customer acquisition? Look there are two broad measures that we look at to really see and understand how our customers view us in the marketplace, the first one we use is something called Net Promoter Score which really is a measure of customer advocacy. And effectively we’ve seen our Net Promoter Scores—and this is externally benchmarked by a third

in virtually every category over the last 18 months as well.

There have been changes within the bank that the customer themselves will not necessarily see, such as the payment service hub in collaboration with Accenture. What does that mean for the bank and for the services that you can offer? Well, ultimately the more you can automate and modernise your infrastructure, the better your cost, the simpler your procedures, the lower a chance of anything going wrong and therefore service levels tend to go up, so we’ve been investing heavily in that area. Another area for example, has been robotics. We believe we are one of the leaders in implementing robotics across the Middle East.

We’ve got over 200 bots in the bank dealing with, I believe, something like 15,000 transactions per day, so we think this is another area that will allow us to not only automate but also improve service at the same time, and lower our cost.

Some of the changes that banks make are things that customers do not see but should make their journey easier, more efficient and quicker. What are the key challenges for the bank now and in the future, are they all going to be focused on delivering that service as seamlessly as possible, and if you are going to do that kind of automation what does that mean for levels of employment in the bank? Banks are increasingly not dissimilar to many other industries. I think as automation and technology becomes a bigger and bigger part of your business, that requires different skills and different mixes. For example, this year, despite our growth, our employment has remained relatively flat. So, I think we will end up with the same or fewer jobs but with better paid people, and increasing automation and digital technology will make it much easier for customers to self-serve and get better levels of service.

The competition is not other banks, the competition is going to be the likes of Amazon and Apple, because companies like them are leading the digital charge as this comes down to what the future of banking is? What’s driving the operational change? And how are you as Al

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Rajhi Bank going to be able to keep ahead of that or keep on top of it? I think the companies that you mentioned as examples are exactly the right ones to look at because they are changing the customer experience. They do not have any legacy and they are able to redesign processes, so in many ways we must do that to ourselves and this is an area we’ve been spending quite a bit of time. For example, we now have an Innovation Centre—so we can see how customers interact with technology, what they like and what frustrations they have, because increasingly it’s the experience that really makes a difference. People expect a bank to work like Amazon so therefore when that experience isn’t the same they find it very frustrating and I think in many ways it felt like the industry recognises that they need to move faster otherwise they’re going to be at a competitive disadvantage. It’s about quality of customer service and the experience around everything you try to do.

What excites you about the coming 12 months? What are you looking forward to most? I think as we digitise our bank faster, it actually opens up resources and capacity to invest in the business, so we are constantly changing our business model. For example, the way that we used to have a branch and open a new branch two years ago is materially different to the way that we are opening branches today. You still need some type of physical environment and many times simply because of regulatory preference restrictions that require an employer to physically sign a document or have a wet signature take place—even that will change

over time. But you still need to have an environment that is technology friendly and this is where we are evolving and trying different models, so I think there are a lot of new exciting formats, products and experiences that we can create for customers, not only in the next 12 months but, quite frankly, for the next three to five years.

If we can look specifically the faith-based side of things, you are certainly one of, if not the largest Shari’ah-compliant bank in the world. In that lens, what are the bank’s top priorities going forward? For us we always want to make sure that we are constructing products in a compliant manner, and this is where we are very fortunate to have in many ways quite a conservative Shari’ah board. This is one of the differentiators that I think has really helped to inspire confidence in our customers and one of the reasons that we continue to do well. For example, you might be surprised to learn that our share of current accounts today is the highest that it’s ever been in the bank. And as you know having a very strong current account deposit base, particularly when you are a Shari’ah-compliant bank, is a huge competitive advantage. So we always make sure we stay focused on that and we’ve been able to see that happen over the last extended period, but in particularly the past 18 months as well.

Talking about the growth in your corporate banking business, this is one of the major challenges facing Islamic banking and the Islamic finance sector in terms of developing that market segment and


its products for the future. Obviously, you have the retail deposit base to be able to leverage, but what is the best way forward for the industry in terms of creating a vibrant corporate finance sector? Well, it comes back to product development. For example, about three months ago, we had a FX forwards for the first time—which may not sound like a big deal—but for us as a bank and for the industry, it was quite helpful. You have many conventional banks that will create an Islamic product but many times that doesn’t quite appeal to everyone. So we work very hard to innovate at a faster pace than we have, and we think that over time, the gap between conventional and Islamic banking will continue to narrow, which is, I think one of the reasons why you continue to see Islamic banking continue to outperform conventional banking.

You’re a big bank in the biggest market in the GCC. Stepping back and looking at the region as a whole, what is your outlook for the finance markets and the GCC economy overall for the next year? We believe the GCC economy will do better this than it did in 2017, obviously given all the difficulties and the fact that even places like KSA were basically zero growth or even 0.1, we believe next year should be better than that. I think the IMF is forecasting 1.1 per cent, and this is before the announcement of the expansionary budget. I think UAE will do better, Kuwait will do better, so you think about some of the biggest markets in the region the future seems to be a bit brighter than it was in 2017.

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The new black Oil may finally stop dominating the conversation in 2018, thanks to the UAE’s safe-haven status, sound banks and diversified economy


he UAE has faced facts: lower oil prices are the new normal. The good news is that no other Gulf country has moved so far from its petrochemical roots. The UAE has travelled a hard road since 2014, when falling oil prices blackened the country’s outlook. With less fuel for the economy, the country’s fiscal and external positions were weakened, financial conditions were tightened, and growth slowed. However, the UAE’s governments have been far from idle. There have been ongoing initiatives to upgrade the supervisory and regulatory framework for the financial sector, significant subsidy reforms and the timely introduction of VAT.

OIL’S WELL THAT ENDS WELL For these reasons, oil is unlikely to darken the headlines in 2018. Although the IMF predicts the UAE’s GDP growth will drop to 1.3 per cent in 2017, non-oil growth is expected to pick up, suggesting that the country’s diversification strategy is bearing fruit. Moody’s predicts that non-oil economic activity will increase real GDP growth to 3.2 per cent in 2018, following a forecast slowdown to 1.1 per cent in 2017 from three per cent in 2016. Abu Dhabi currently derives 50 per cent of its real GDP and 60 per cent of government revenues from the hydrocarbon sector, according to S&P’s 2017 estimates, including oil taxes and royalties, plus dividends

from the state-owned giant Abu Dhabi National Oil Co. (ADNOC). Despite the current low oil prices, Abu Dhabi maintains one of the highest GDP per-capita levels in the world, and the emirate’s very strong net government asset position, mostly in foreign currency, makes its economy resilient to shocks in the commodity market. The latest Emirates NBD UAE PMI paints a very positive picture. New order growth among non-oil private sector firms accelerated to a 35-month high December 2017, with survey respondents commenting on a strong level of underlying demand; others reported an increasing inflow of new business from government sources.

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Non-oil economic activity will increase real GDP growth to



in 2018 Total trade in the UAE reached

268 billion


during the first 9 months of 2017 a


Despite low oil prices, Abu Dhabi maintains one of the highest GDP per-capita levels in the world. (PHOTO CREDIT: ZHUKOV OLEG/SHUTTERSTOCK).

The rate of growth was solid overall and the strongest recorded in nine months. According to anecdotal evidence, demand from neighbouring GCC countries also picked up in December. Khatija Haque, Head of MENA Research at Emirates NBD, said, “The UAE’s non-oil sector expanded sharply in the last two months of the year, largely due to a strong rise in output and new orders. It is likely that the introduction of VAT in January has spurred activity and purchasing in Q4 2017, which is in line with our expectations. Nevertheless, employment and wage growth has been relatively muted, not just in December but for 2017 as a whole.”

growth over the same period of 2016 Credit growth in the UAE is forecasted at approximately


in 2018 According to the survey, buying activity growth also remained sharp throughout December. Companies operating in the UAE’s non-oil private sector increased their purchasing volumes in anticipation of an upturn in output requirements. “The diversified structure of the UAE’s economy has meant that domestic suppliers have been less impacted by the economic slowdown


and tight liquidity conditions than exporters, which have been affected by the weak recovery in world trade,” said Seltem Iyigun, Economist for the Middle East at Coface. THE FUTURE IS NO OIL PAINTING HE Hamad Buamim, President and CEO of Dubai Chamber of Commerce and Industry said at a recent ‘Meet the CEO’ event that Dubai Chamber has projected steady growth in Dubai’s markets in 2018, with the emirate’s economy expanding by three to four per cent. He was quick to point out that 98 per cent of Dubai’s GDP comes from non-oil sectors, including tourism, aviation, hospitality, retail, logistics, and financial services. The trade sector is expected to account for around 28 per cent of Dubai’s GDP in 2017, with the logistics sector contributing 16 per cent and the financial services sector 11 per cent. Tourism is expected to see a growth of 5.1 per cent, and retain a five per cent growth rate over the next two years.   Buamim also took the opportunity to highlight Dubai’s volume of foreign direct investment, which exceeded $3 billion in the first half of 2017. Total trade—direct and free zones—reached $268 billion during the first nine months, a 3.5 per cent growth over the same period of 2016. The Dubai government is working to eliminate some of the perceived barriers to entry for foreign companies. Most recently, it announced plans to reform the UAE Commercial Companies Law to ease the foreign investment regulations. This will see certain sectors liberalised from the 51:49 per cent shareholder split currently in place. Should this long-awaited change to the Companies Law take place, there is likely to be a further boom in foreign direct investment. cont. on page 27

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in numbers POPULATION


9.9 million



Source: International Monetary Fund; World Economic Outlook Database (April 2017)


3.4% UAE’s GDP growth is expected to reach 3.4% in 2018 Source: IMF Staff Calculations, 2017 Article IV Consultation

Sources: Country authorities; Haver; Market; Bloomberg; Dealogic; and IMF staff calculations.

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cont. from page 25

THE IT CROWD According to the Global Competitiveness Report for 2017 issued by the World Economic Forum (WEF), the UAE continued to lead the Arab world in terms of competitiveness, coming in as the 17th most competitive economy among 137 countries. To further increase its competitiveness, the report said that the UAE will have to speed up progress in terms of spreading the latest digital technologies. With Dubai vying to become the Middle East’s smartest city by 2021, a growing number of local and international fintech companies are already eyeing the emirate as their future regional base. The rate of fintech growth in Dubai continues to garner worldwide attention, largely due to the Dubai Blockchain Strategy launched by the Smart Dubai office and the Dubai Future Foundation in 2016. With Dubai moving to become the first blockchain-powered government by 2020, both local and international fintech companies are increasingly viewing the emirate as the testbed for their latest solutions. While the Dubai government’s digital strategy is an important growth driver of both the fintech and broader technology sectors, the UAE’s young and digitally-enabled demographic is also a drawcard for investors. In a region where more than half of the population is under the age of 25 and where smartphone penetration is among the highest in the world, tech firms see the potential for rapid user adoption rates. “Our recent efforts within the fintech start-up community have highlighted the need for an even more robust ecosystem and specific infrastructure to be put in place to ease the incorporation process for these new businesses,” said John

Although the IMF predicts the UAE’s GDP growth will drop to 1.3 per cent in 2017, non-oil growth is expected to pick up, suggesting that the country’s diversification strategy is bearing fruit. Martin St.Valery, Founder and CEO, of Links Group. “Promisingly, the Dubai Government recognises this and is eager to collaborate with emerging sectors, such as fintech, to put in place the necessary frameworks that will help cement the emirate’s position as an epicentre for future industries and the Fourth Industrial Revolution.” BOLSTERING BANKING Improving economic conditions bode well for the UAE’s banking sector. “Faster economic growth in 2018 will support the banking system’s credit growth, and we forecast credit growth of around five per cent in 2018, after a forecast lower growth of around two per cent in 2017, from 5.8 per cent in 2016 and eight per cent in 2015,” said Mik Kabeya, analyst at Moody’s. Moody’s predicts that credit growth will increase to around five per cent in 2018, after a forecast decline to two per cent in 2017, from 5.8 per cent in 2016. The credit ratings agency predicts that loan performance will soften, but only modestly. Following sluggish economic growth in 2017, Moody’s predicts that problem loans will edge higher, reaching 5.5 to six per cent of gross loans by 2018, from 5.3 per cent in June 2017. This is largely because banks’ loan books are dominated by real estate and government institutions. Nonetheless, Moody’s expects that funding and liquidity conditions will remain stable. “Stabilising oil prices and international bond issuances

will continue to support funding and liquidity, following a tightening during 2016 amid oil price weakness. UAE banks will remain primarily depositfunded, with some recourse to more volatile market funding,” the credit rating agency said. Profitability will remain strong. Moody’s said that thinner margins will be balanced by lower operating expenses and stabilising provisioning charges. Pressure on interest margins will reflect higher funding costs, as rising US interest rates translate into higher local currency rates through the currency peg of the UAE dirham with the US dollar. However, the UAE’s banks can count on government support. “The UAE Government’s willingness and capacity to support local banks if needed will remain very high over the next 12 to 18 months, as reflected by our affirmation and outlook change to stable on the government credit rating in May 2017,” Moody’s said. According to the UAE Central Bank’s September 2017 Monthly Statistical Bulletin, the banking system’s net loan/deposit ratio had improved to 91 per cent as of 30 September 2017, from 96 per cent as of 30 September 2016. The UAE may have paused for breath when lower oil prices became an ongoing theme; now they have been accepted as the new normal, economic activity is expected to strengthen as global trade regains momentum and the countdown to Expo 2020 begins.

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Challenges on the path to achieving impact Management need to be clear on the objectives and to be fully committed, says Tariq Hameed, Senior Director at Alvarez & Marsal’s Financial Institutions Advisory Services in Dubai

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ith consumers finding technology increasingly easy to access and deploy, businesses in all industries are using innovative thinking to redefine their models to address consumer expectations in terms of experience and fulfilment. In particular, more and more banks across the globe are adopting digital strategies to transform channels, products, processes and back-end systems. All are aimed at delivering a higher level of customer experience, remaining relevant in the market, appealing to new and emerging customer segments and lowering costs. The race for digital banking is on and the region has seen a number of initiatives, with more to come in the very near future. They are primarily customer-centric and aim to address customer needs for a better experience. They also seek to improve financial performance by reducing operating costs, as well as acquiring customers from new segments—particularly the fastgrowing millennial segment. With all the new digital strategies being rolled out, stakeholders across the value chain—whether they are customers, target segments, bank management or shareholders—are debating the relevance and impact of digitalisation. Is it necessary, and fully understood in the context of banking? Is the adopted approach towards it the right one? Will it achieve the desired objectives? While digitalisation has already impacted several other industries and drastically changed their business models, the banking sector is yet to experience substantial impact globally. This is particularly true of the Middle East. The sector has been amongst the slowest to react to digitalisation, largely due to regulatory ‘protection’ against disruptors.


This is somewhat perverse, given that technological disruption is actively encouraged by governments who place innovation at the heart of their growth and diversification strategies. However, with the extent of investment in new technologies, as well as the effort and focus of bank resources, there is a need to understand how and when the banking sector will realise the impact and potential of digitalisation.

For a truly sustainable digital proposition, customer fulfilment must be addressed, which is best done through investment in the back-end IT infrastructure. – Tariq Hameed, Senior Director, Alvarez & Marsal, Dubai –

In the context of the Middle East region, which has its own economic and demographic considerations, the impact and success of digitalisation can be measured from a few different perspectives. However, the approach taken towards digitalisation is important to determine its success. First and foremost, we must understand that digitalisation is neither a temporary fad nor a gimmick, nor is it a separate business line or just about front-end channels; cont. overleaf

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cont. from page 29

Tariq Hameed

it is the way to do business—a new model that is necessary for survival. Once this fundamental concept is understood, it will become clear to banks that they must adopt digital transformation journeys for their entire and existing business, rather than establish a new and separate stream. Transforming to a digital business model is a challenging exercise that requires a long-term commitment to investing time and finances, as well as to changing the mind-set and

culture. Consequently, while initial successes can likely be realised through a prioritisation process, our experience has shown that the full and true impact will take a minimum of three to five years on average. Any digital transformation has to go hand-in-hand with that of IT, which means channels, middleoffice and back-end infrastructure, as well as data analytics capabilities. For the transformation to be successful, front-end digital

channels must offer the same experience as other channels; robust and extensive data analytics capabilities must be in place to determine which segments to target and with what products and services (whether from the existing suite or to be developed); and the capacity and capability of the bank’s IT infrastructure has to be enhanced in order to fulfil customer expectations in the speed and accuracy similar to that of requests initiated by customers. As crucial as these elements are, many banks debate whether they should incur high capital expenditure on technology to lower operating costs. This is particularly disconcerting when considering legacy issues of IT infrastructure, for which the capital expenditure to transform technology can be prohibitive. In this regard, we have actually found that digitalisation can help achieve an improvement of around 40 per cent in EBITDA (earnings before interest, tax, depreciation and amortisation), and that this is largely driven by cost reduction rather than revenue increase, despite capital expenditure incurred on IT. Interestingly, when pertransaction costs are broken down by front-office, middle-office and back-office, some cost efficiencies can be achieved by just digitalising the front-end, so many initiatives focus on this. Whilst this is the easiest and quickest way to address market perception on digitalisation as well as cost reduction, it is neither sustainable nor does it improve the level of customer experience. For a truly sustainable digital proposition, customer fulfilment must be addressed, which is best done through investment in the back-end IT infrastructure.

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Depending on the size and business model complexity of the bank and the vintage of the IT infrastructure, the investment required to achieve foundational digital capability will vary; for midsized and developing markets’ banks, it is in the range of around $30-50 million over an average five-year period, while it is between $100-500 million for larger universal banks and those in developed markets. Some benefits begin to materialise in the first 12-18 months, but this has to be viewed as a medium-to-long term investment. While the age and complexity of legacy IT infrastructures and architectures predominantly drive the investment value and complexity of digital transformations, we have found that these are just the obvious obstacles. A number of hidden issues create larger challenges and need to be addressed at the outset when setting a timeline and investment plan for the transformation roadmap. From our experience in developing and implementing digital and IT transformation strategies, these typically include: a non-digital organisation structure that needs to be realigned for the digital business model; limited understanding of technology by business heads and other senior management including, in most cases, at board level; limited commitment from management and the board beyond the initial steps of such a programme; resistance to changing the culture of the bank, particularly in the decisionmaking process, to adopt any new business model created through digitalisation; and probably the most underestimated, capacity constraints created through quality and quantity limitations in human capital.

It is never easy to implement transformation of any kind, considering the general resistance to change found in many organisations. Successful implementation of digital transformation requires banks to ensure a few key measures and disciplines are addressed as part of

The investment required to achieve foundational digital capability will vary; for mid-sized and developing markets’ banks, it is in the range of around

million 30-50 over an average -year period, 5 while it is between $100-500 million


for larger universal banks and those in developed markets the digital transformation journey. Firstly, they must set clear goals for digitalisation and understand why the bank needs to digitalise; a fundamental objective should be the need to remain relevant in response to fast-changing consumer demand. Additionally, banks should appoint a dedicated and specialist to lead the digital transformation, who must


also be a member of the Executive Management, report directly to the CEO and be sufficiently empowered. Third, a joint decision-making body with senior cross-functional representation should also be formed and tasked with reviewing and approving initiatives necessary for digitalisation, and prioritising them to align with the digitalisation goals set by the bank. A Project Management Office (PMO) function for digitalisation is essential, and will ensure a PMO discipline is followed for onboarding new projects and monitoring progress and performance. Moreover, cross-functional teams comprising experienced competent resources from strategic business units should work on the various initiatives identified for digitalisation, with someone appointed to lead each one. Simple and practical approaches are important for prioritised and phased selection and implementation, as is an IT roadmap that is aligned with the digital transformation roadmap (after gaps for the target operating model have been determined), with an investment plan and approved budget. Finally, the acquisition of new talent—while potentially challenging—is critically important; banks should re-evaluate how they are perceived by the millennial workforce to refresh their position as an employer-of-choice for this segment and to make the sector exciting and motivating enough for retention. These are just some of the key elements to bear in mind for successful digital transformation. Ultimately, banks can be certain that they will realise the benefits that digital transformation can bring, so long as the objectives for digitalisation are clear and the unwavering management commitment is in place.

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Revealed: how Middle Eastern consumers spend their money American Express Middle East shares some insightful findings from a recent study conducted on the market


hen looking at the spending habits of affluent consumers around the Middle East, American Express has become the ultimate authority. Due to its unique ‘closed loop network’ business model and therefore a close relationship with both cardmembers and merchants, the company places a major emphasis on consumer insights, and understanding exactly how and why people spend their money. As a result, its annual Spending Habits study has become a must read for those follow such matters. Conducted by world renowned data and research company GfK throughout January and February 2017, the survey looked at six countries—UAE, Oman, Qatar,

Bahrain, Kuwait, and Lebanon—and focused on the principal financial decision makers in the household and have annual household incomes of at least $75,000. The survey asked a range of questions looking at areas such as main household expenditure, essential purchases in relation to perceived luxury purchases, as well as items like holiday, leisure and lifestyle priorities. All respondents have been living in their respective countries for a period of six months or more, with age profiles ranging from 24 to 55 years of age. It was clear that for 2017 there were a number of key trends ranging from the levels of money consumers were willing to save compared to what they will spend on necessities and luxuries, through

to the preferred travel destinations, the relationship between online and instore shopping, as well as a continued appetite for travel. Seventy one per cent of those asked are planning to spend at least the same amount of money, if not more, than they did in the previous year. The principal reasons for this was that respondents had a greater sense of optimism in their general perspective on life with 40 per cent feeling more secure in their jobs and 35 per cent saying they had greater confidence in the overall economic outlook than they the previous year. And whilst the general trend was to focus on the necessities of life such as grocery shopping, transport and general household costs, there is a healthy appetite for spending on

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Source: American Express Middle East


luxury items, with travel, fashion and home furnishing being the three principal categories. In fact, across the Middle East, 54 per cent of luxury spend was focused on acquisitions including new cars, jewellery and electronics, whilst 46 per cent was focused on lifestyle experiences such as travel, holidays and leisure pursuits. Of the necessities in life, the top three categories with increased spending were transport and car usage, 42 per cent, expenditure on living and household costs, also 42 per cent, and health and wellbeing at 39 per cent. Geographically, Dubai still maintains centre stage and is the Middle East’s capital when it comes to luxury spending, and continues to lead the way of global cities such as Paris, Milan, London and New York. Although there has been a general shift towards shopping online, when it comes to luxury spend, consumers still very much prefer the in-store experience, with an average of 77 per cent of respondents across the region stating they still prefer visiting the major shopping malls and departments stores. In conclusion, as the American Express Spending Habits survey has highlighted a number of interesting and diverse themes in spending patterns across the Middle East, it also demonstrates an underlying growth of maturity in the way consumers are spending across the region, as well as a broader sense of optimism. May this continue into 2018.

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Securing the future of banking Srinivasan C.R.–Senior Vice President, Global Product Management & Data Centre Services at Tata Communications sheds light on new cyberthreats in banking and the best way to address them


he financial crash in 2008 plunged the world into a prolonged period of financial instability, leading to unemployment and a global decline in business profits due to a fall in demand for goods and services. Ten years on from the crash and we are experiencing an entirely new digital financial landscape, and facing a brand new set of opportunities and challenges. Although the crash resulted in a number of regulatory and legislative measures to prevent a similar event from happening again, the changes in our banking habits are already attracting a new breed of threat: cybercriminals. Incumbent banks and insurers have been under growing pressure to evolve the way they operate over the last decade in order to compete with a host

of innovative new, data-driven, digitalsavvy competitors who have grown out of a consumer demand for more convenient, personalised services. In order to compete and offer an increasingly personalised experience for their customers, banks need to collect and maintain a wealth of data on their customers. The return for the financial industry, from banks to insurers, is clear as experts estimate that organisations that invest in big data are anticipated to increase their operating margins by 60 per cent. The value of data has increased exponentially in the last decade and the next financial crisis could be caused by security attacks. We’re already seeing ripples in the financial industry in this space—the most recent example being the huge data breach at US credit reporting bureau Equifax. The breach resulted

in a significant loss of data in which the personal details of over 145 million people across the US, UK and Canada were leaked. The event has already started to affect a change in the US, spurring a rethink of data protection laws and has financial services industry commentators considering the role of cybersecurity in banking. In Europe there will soon be an eye-watering financial tag associated with data loss of up to 20 million Euros or four per cent of group worldwide turnover. Elsewhere in the world bodies like the new Computer Emergency Response Team in Financial Sector (Cert-Fin) in India show that institutions around the world are taking steps to mitigate the threat that cybercriminals pose. This demonstrates the hugely damaging effect that a breach can have on revenue but the industry must also consider the reputational fallout. According to a recent study 50 per cent of consumers would consider switching banks if theirs suffered a cyberattack, with 47 per cent admitting they would ‘lose complete trust’ in their bank, should the worst happen. Trust is paramount in the financial services sector, and the

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as PSD2 is being introduced to increase competition in the industry by introducing an open API standard for banking in the UK, for example. Securing all the various channels will only get more difficult for the industry as the way we bank continues to evolve and leaders must be armed with an agile cybersecurity plan to move into the next generation of finance with the confidence of their customers behind them.

industry is acutely aware of the criticality of the information they’re handling, but as the industry evolves, so too does the threat. COMBATING NEW CYBERTHREATS In early 2017, UK-based banks operating under Lloyd’s, Halifax and Bank of Scotland were hit by a significant DDoS (Distributed Denial of Service) attack over the course of 48 hours. More recently, a host of South Korean banks were threatened by a damaging DDoS attack if they did not pay the $315,000 bitcoin ransom demand. Thankfully, banks are acutely aware of the criticality of the data they handle, and in both cases the attacks were successfully defended against. Although DDoS attacks remain prevalent across a number of industries, the effectiveness of the method relies on the organisation paying up the ransom, which many organisations are refusing. Another more worrying form of attack for banks is one that quietly syphons off data across a period of time. These are often introduced in the form of malware driven attacks, such as banking Trojans. An example of these kinds of threats is an evolving malware project called TrickBot which, while currently plaguing Latin America, has targeted banks in over 40 countries across the globe. Attacks that lead to a systematic leakage of data over time do not have the immediate shock effect of a swift attack, but they can be just as damaging, and serve to weaken the banks’ defences over time. An additional layer of complexity to this issue is that there will soon be more and more channels in which hackers can access the systems. P2P services are on the rise, and regulation such


Srinivasan C.R.

Attacks that lead to a systematic leakage of data over time do not have the immediate shock effect of a swift attack, but they can be just as damaging, and serve to weaken the banks’ defences over time. – Srinivasan C.R. – Senior Vice President, Global Product Management & Data Centre Services, Tata Communications –

SECURING THE FUTURE OF BANKING FROM THREATS Traditionally, the banking industry has been one of the main investors in security, and it’s likely this will continue to be the case as we navigate the new threats landscape that the future of banking presents. As open banking accelerates and the industry’s data becomes more and more interconnected, the industry cannot afford to take risks with the data they hold on their customers. One leak could be the first symptom that infects the whole industry with a sickness that could have widerreaching effects. In order to combat this evolving threat, the industry needs an adaptive, 24/7 method of detection, defence and counter-attack. Many organisations are looking to outsource their security services in order to ensure they have comprehensive, around the clock coverage. Investment in security operation centres for example is on the rise. One of the main learnings of the 2008 crisis was that the industry needed to be more responsible in its approach to risk. By keeping abreast of the latest security threats, and investing in security applications that are able to adapt to the future of banking, the industry will be able to avoid a similar crippling financial event.

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Serving the underserved Vipul Sardana, Head of Trade Finance at Maersk, speaks to Banker Middle East about its expansion into the UAE



hat is your opinion of the trade finance landscape in the UAE and the wider Middle East?

UAE is the third-largest trade hub after Hong Kong and Singapore. It is, and has historically been, the key trade hub for the Middle East, Africa and South Asia, both due to its strategic geographical position—with more than 150 shipping lanes passing through—and its leading multi-modal logistics capabilities. Access to trade finance is one of the biggest obstacles in global trade and we have noticed this gap in the market and created a product that can meet our clients’ needs—Maersk Trade Finance. According to the UAE customs data, in 2016 trade contributed AED1,270 billion to the country’s economy. Additionally, the UAE government’s diversification agenda away from oil will further increase trade volumes. With this ambitious potential in business, I see great opportunities for the trade finance to blossom in the UAE as well as in the GCC region. cont. overleaf

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cont. from page 37

Vipul Sardana, Head of Trade Finance at Maersk

Having launched Maersk Trade Finance in July, what are your goals for the company’s operations in the Middle East? We are the largest shipping line in the world, shipping over 10 million forty-foot equivalent units (FFEs) every year with a legacy of 100 years in carrying the trade globally. We understand the needs of our customers well as they have been working with Maersk Liner businesses for many years (Maersk Line, Safmarine, etc.). We offer import and export financing solutions to bridge gaps related to capital access among our customers who want to take their products to global markets. I do not look at it as how much more

we can do, but would rather focus on how much more we can simplify our offerings to our customers. Our current focus is to scale up in the UAE in 2018, but at the same time we will be looking out for opportunities and evaluate what should our next steps be. Although we are still at the beginning of our journey in UAE, we have already introduced Maersk Trade Finance in other countries such as India, Singapore, Spain as well as the Netherlands, and have established best practices.

It is a known fact that banks have reigned in their loan disbursements for SMEs and businesses. How does Maersk

Finance fill in this gap? Would it only be for transactions involving the use of Maersk’s shipping logistics? The scale and complexity of the current global trade system is unparalleled. Global trade involving the flow of goods and money is still very complex with multiple intermediaries, information asymmetry, limited or no transparency, high risk and paper intensive processes, all woven in a complex web of regulations, customs, currencies, etc. across geographies. We are venturing into trade finance to simplify the process for our customers and to be present across the value chain and serve

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them. Our customers expect more from us and delivering a trade finance experience digitally is one area where we can create significant value for their business. We have created a simple, end-to-end digital solution, removing the paper trail from traditional financing options, providing digital easy access to capital to customers when they most need it. The banking industry itself is seeking to simplify trade finance processes by leveraging blockchain technology which has the potential to save billions of dollars in costs and speed up transaction times. Access to financing has been limited and expensive. Basically, the credit environment is constrained for everyone that is not a giant.

flowing through in the real sense, thereby addressing many of the risks which banks are unable to—we control the goods and we know the buyers and sellers at both ends.

Apart from the lack of funding, what are the other major challenges you see impeding trade volumes in the UAE? Dubai is shifting its core economic focus from oil to tourism, real estate and financial services but more significantly towards pharmaceuticals, logistics and manufacturing. The UAE is aiming to increase the contribution of the manufacturing sector to overall GDP from the current 15 per cent to 25 per cent by 2025. UAE must be willing to invest in new machinery,

We look at risk differently as we are not just funding paper, we are aware of the transaction and see the goods flowing through in the real sense, thereby addressing many of the risks which banks are unable to – Vipul Sardana, Head of Trade Finance at Maersk – SME requests for trade financing have a 57 per cent rejection rate on compared to a 10 per cent rejection rate for large companies. Maersk Trade Finance is our attempt to bring together the flow of goods and the flow of money. Our trade finance offering is bundled with our shipping offering. Banks have reigned their loan portfolio for SMEs and businesses on accounts of managing and mitigating financial risks. Maersk Trade Finance looks at risk differently as we are not just funding paper, we are aware of the transaction and see the goods

software and talent, how to manage the abundance of data so that it becomes useful and not overwhelming. The country would also build strategic partnerships, monetise digitalisation and adapt technology to run its own supply chain and operations more seamlessly. All of this has the highest focus of the government and this should accelerate trade growth. Nevertheless, this is also something that needs to come from corporates to support this growth. In this context, we believe that our bundled shipping and trade finance offering comes to UAE exactly at the


right time, giving companies a single window to manage both their supply chain and financing in an efficient way.

How do you view the competition with other nonbank lenders in the UAE? We are still very small, learning the ropes and co-creating solutions with our customers. With such potential in business, there is an opportunity for multiple players to be present in the market, to participate and simplify as well as enable customer growth in the UAE. We aim to reach $200 million in loans disbursed globally by the year end. Our current focus is to scale up in the UAE in 2018.

Penetrating the market Part of Transport & Logistics Division of A.P. Moller—Maersk Trade Finance, has introduced a new digital service in the UAE to finance containerized shipments for companies who are looking to finance their global shipments to international markets. Available in Singapore, India, Spain, the Netherlands, the USA and now in the UAE, Maersk Line is offering local customers an easy access to capital at a lower cost for their global shipments. With its strategic geographical location Maersk sees UAE as a key trade hub for companies that aim at trading in the Middle East, Africa and South Asia. Maersk Trade Finance has on boarded approximately 150 customers and has disbursed loans over $160 million. Since the launch in July 2017 a range of customers from diverse sectors have acquired the company’s resulting in more than $30 million in business contracts. Source: Maersk

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Minding the important things The ability to make customers’ life easier is an important factor in attracting and retaining customers.


hat are your views on the development of the insurance industry?

The insurance sector is one of the most attractive industries in the UAE. The UAE Insurance Authority issues reports about the performance of the sector on an annual basis, and these reports have shown constant growth over the last five years. Enhanced legislations were also introduced in the country with an aim to ensure stability and sustainability of the insurance industry. Early 2015, the UAE Insurance Authority introduced numerous measures and controls, including enhanced financial reporting standards for better governance. As the country focuses its efforts on diversifying its economy away from oil; and with the great progress seen in this area, we believe the insurance sector will continue to see growth.

Can you enlighten us on the latest technological advancements and innovation in this space? Adoption of new technology and product innovation has become

Abdulla Al Nuaimi, EVP, Shared Services, ADNIC

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a priority for the insurance sector as part of establishing their competitive edge. The UAE Insurance Authority encourages the insurance sector to embrace innovation through initiatives like the Innovative Insurance Product Award. ADNIC has been at the forefront with its innovative product. We were the first UAE insurer to launch a medical mobile app in 2014. It is a menu driven and user-friendly solution which not only allows ADNIC’s members easy access to their medical insurance offerings but also to locate the insurer’s branches, tap in for emergency services like ambulance, police, SAAED and its network of medical service suppliers. Moreover, it also allows members to upload documents and claims up to AED 2,500 with three working days as processing time, including payment disbursal in member’s account which is faster than the industry standards. To keep up with ongoing digital advancements ADNIC is continuously fine-tuning the mobile platform to always offer the most ergonomic and best-in-class service to its members. In August 2017, ADNIC has revamped the ADNIC Plus mobile app and enhanced certain functionalities.

In terms of creating traction and gaining a larger market share, what do you think are the best practices in engaging customers? Innovation is key. It allows businesses to provide new solutions and methods to engage with customers, and increases the competitiveness of businesses. The ability to make customers’ lives easier is an important factor in attracting and retaining customers.

Through our app for example, we have seen a 21.83 per cent increase in claims for the past three years. The application has increased our efficiency in claim execution, and have also saved our customers’ time. Moreover, this process saves paper. The same service was rolled out on our website, and the results were very good as well. ADNIC is constantly looking for ways to improve customer engagement. In addition, earlier this year, ADNIC held a Service Leadership Workshop with world-renowned author and consultant Ron Kaufman to enhance customer service productivity at the firm and further strengthen our customer service procedures in our aim to boost customer satisfaction across business lines.

Do you see a dearth in talent in the market? The insurance landscape, like other industries, is constantly changing. With that, customer needs are also changing and becoming more complex. All this requires a new skillset and talents that not only understand the new processes but are also capable of dealing with evolving customer needs. To address this, ADNIC is constantly designing training programmes to improve the different skills of its working force. We also were the first insurance company to achieve its target for the UAE Government Accelerators programme, and employed 10 Emirati talents during the first 100 days of the programme. We are always looking for ways to bridge the gap and attract talent, while we continue to improve the skillset of our people.


How important is CSR for ADNIC? Corporate social responsibility (CSR) demonstrates an organisation’s commitment to its community and people. We at ADNIC strive to show the added value to both our shareholders as well as our customers through CSR initiatives with the right partners. We are committed to giving to our community back through several initiatives, which are aligned with the Year of Giving and the Government agenda. We have recently partnered with the UAE Genetic Diseases Association Research Centre (UAEGDA), a non-profit organisation that aims to create awareness about the impact of genetic disorders in the UAE, to support the centre’s mission in performing diagnosis and exploring options for treatment. In June this year, we renewed our partnership with Al Bayt Mitwahid Association for the fourth consecutive year. Al Bayt Mitwahid was launched by the employees of the Abu Dhabi Crown Prince Court in 2012 and has since become the foremost association of its kind dedicated to community welfare initiatives within the UAE. In addition, ADNIC is also a participant in ABSHER, an initiative designed to enhance Emirati participation in the private sector workforce. We have also launched a motor safety awareness campaign to promote safer driving practices in the UAE. Last year, and to mark the Year of Giving, ADNIC donated AED 4 million to Sandooq Al Watan. In addition, we have also the fund with free insurance coverage to support its strategic objective. These initiatives demonstrate our commitment to our society and our efforts in creating an impact as a responsible company.

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Leading technological transformation in the region Raja Al Mazrouei, Acting Executive Vice President of FinTech Hive at DIFC

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Banker Middle East speaks to Raja Al Mazrouei, Acting Executive Vice President of FinTech Hive at DIFC, about the accelerator’s successful first year and its future commitments


aunched in January 2017 in partnership with Accenture, FinTech Hive at DIFC, the region’s first fintech accelerator, has managed to achieve several milestones since its inception. Providing a platform that brings financial and technology firms together, the initiative caters to the MEASA markets, increasing access to, improving customer experience and driving operational efficiencies in the financial services sector. Participating companies benefit from the recently introduced Innovation Testing Licence (ITL), which allows qualifying fintech firms to develop and test their concepts from within the DIFC, without being subject to the regulatory requirements that normally apply to regulated firms. Following its launch, FinTech Hive at DIFC commenced the first cycle of the accelerator programme in August. It received over 100 applications from more than 32 countries for its inaugural programme. Majority applications came from the UAE, UK, US, India, Nigeria and Singapore, and cover a range of concepts including big

data and analytics, the blockchain, payments, P2P and crowdfunding, robo-advisors, and mobility. Having undergone an intensive evaluation and shortlisting process, 11 finalists were selected to join the programme. DIFC, Accenture, and partnering financial institutions assessed the applications based on the uniqueness of the proposed innovation, whether it fills a gap in the market, and meeting industry needs. The programme ran for 12 weeks. In the first phase, each finalist met with executives from the accelerator’s financial institution partners to discuss industry challenges and possible solutions to address them. The second phase revolved around engagement with partners and mentorship by the financial institutions, as well as other select partners covering technology, legal, Islamic finance and regulatory themes. The third and final phase was the pitch preparation for the Investor Day in November where each start-up promotes its product to a host of investors, bankers and government officials. Commenting on the success of the inaugural cycle of FinTech Hive,

In 2018, we will be tripling our commitment to FinTech and run two new programmes with a focus on RegTech and InsureTech. – Raja Al Mazrouei –

Raja Al Mazrouei, Acting Executive Vice President of FinTech Hive at DIFC, said, “Throughout the 12-week programme, FinTech Hive provided the 11 finalists with a collaborative platform to work side-by-side with leading financial institutions and wellestablished FinTech firms, as well as our regulator, the Dubai Financial Services Authority to develop new products and technologies. Their outstanding fresh, creative solutions presented at DIFC’s recent Investor Day to an audience of 300 investors and stakeholders demonstrated the real benefits that technology and innovation can bring to business and society.” FinTech Hive at DIFC also managed to acquire several strategic partners, amongst others they include: Dubai Islamic Economy Development Centre, UAE Exchange, Australian Securities and Investments Commission, as well as Envestnet | Yodlee, Facebook and IBM as technology partners. Looking to 2018, Raja added, “We believe in building a comprehensive fintech ecosystem and continue to bridge the SME funding gap. HE Essa Kazim recently announced at DIFC’s Global Financial Forum, the launch of a $100 million fintech fund to help fintech firms grow and thrive in the Middle East, Africa and South Asia markets (MEASA). In 2018, we will be tripling our commitment to fintech and run two new programmes with a focus on regtech and insuretech reinforcing our role in shaping the future of the financial services for the MEASA region.”

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Banking on blockchain Erica Crosland, Associate at Eversheds Sutherland, points out the impacts of blockchain technology on the financial services industry

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ast month’s issue (Banker Middle East Issue 201) considered the rise of bitcoin and how the infamous cryptocurrency had revolutionised thinking in financial, economic and legal circles by providing a digital and transnational alternative to traditional fiat currency. An alternative that is not centrally owned nor controlled, and requires no intermediaries—in other words, currency as an open network. At present, that revolution may be more theoretical than practical and the predominant engagement


blockchain technology actually works. The technology itself is complex at a granular level but, for the purpose of most commercial discussions, it can be summarised as a decentralised ledger that keeps track of transactions by grouping them together in data structures called blocks. Each new block contains a reference to the previous block that is produced by running the block (and all the transactions in the block) through a mathematical algorithm and producing a unique reference—a ‘hash’. This concept is

Blockchain has the potential to help financial institutions coordinate AML efforts and change the way transactions are viewed by transforming them from isolated events to functions of a much bigger picture. – Erica Crosland


with bitcoin so far has been of a more speculative rather than utilitarian nature. While the jury may be out on the practical uses of the cryptocurrency, there is no doubt that blockchain, the underlying technology that powers bitcoin, has won the day and companies across the world are exploring how to benefit by implementing systems based on blockchain. WHAT IS A BLOCKCHAIN? Before proceeding further, it is useful to first consider how

what prompted the name blockchain (i.e. a chain of blocks) and it also accounts for one of the key security benefits. Any attempt to alter a previous block, or transaction in a block, would have a cascading effect on all later blocks as the hash references would no longer match. The computing power necessary to override the established consensus on a mature network (for example bitcoin) is widely considered mathematically impossible after just a few blocks. This process of consolidating the transactions and cont. overleaf

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cont. from page 45

adding a new block to the blockchain is known as ‘mining’ in bitcoin parlance but the application is not limited to keeping track of the bitcoin ledgers and it can be used to track and monitor the exchange of information more broadly. Every user on the blockchain has access, and maintains, the same copy of the distributed ledger through a process known as ‘reaching consensus’. There are different ways of reaching consensus but a reliable method is central to maintaining the blockchain ledger and the system as a whole. Blockchain can be public or permissioned with the permissioned model being adopted in most commercial projects as it allows the organisation to restrict who uses the system. BLOCKCHAIN APPLICATION IN FINANCE The potential applications for the decentralised and secure blockchain system are numerous and established IT companies as well as fintech start-ups around the world are already experimenting with wider applications. Some of the most promising applications for the finance industry relate to: • Enhanced security and fraud reduction—the distributed and decentralised nature of the network makes data manipulation extremely difficult as there is no central point to attack. • Eliminating intermediaries— payment transactions can traditionally involve a number of intermediaries. Blockchain technology could eliminate the need for these if both transacting parties can verify the transaction without the need to refer to a third party. As a result, the speed Erica Crosland, Associate, Eversheds Sutherland

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of transacting can be greatly increased and costs lowered or eliminated. • Eliminating operational errors— by limiting the need for human interference and data entry points, the security of banking operations and transactions driven by blockchain technology can be more secure and free of operational errors. • Anti-money laundering (AML)—in a somewhat ironic turn of events given the money laundering concerns surrounding bitcoin, blockchain technology has the potential to become one of the most effective tools in the fight against money laundering and terrorism financing. In addition, it has the potential to significantly reduce the financial burden and efficiency of mandatory Know-Your-Customer (KYC) requirements. Given the relevance to the region, this advantage is explored further below. BLOCKCHAIN IN THE FIGHT AGAINST MONEY LAUNDERING Blockchain has the potential to help financial institutions coordinate AML efforts and change the way transactions are viewed by transforming them from isolated events to functions of a much bigger picture. By reporting transactions to a common ledger accessible to all participating financial institutions, a blockchain based triple accounting system could be developed, similar to that proposed by accountancy firms. Such a protocol could provide a complete picture of the source and destination of funds even in the context of multiple transfers across different banks. Taking the proposition even further, it could be combined with the work being

done on blockchain based identity verification and the emergence of artificial intelligence (AI) and machine learning software to present a formidable obstacle against money laundering. With multiple such projects underway in different jurisdictions and a significant increase in fintech investment it is important to look ahead. This diversity of interest and investment bodes well for the development of blockchain technology generally but it also runs the risk of replicating one of the financial industry’s greatest challenges—standardisation. If the patchwork of systems that exists today is simply replaced with a patchwork of blockchain enabled systems then the industry will fall short of achieving the full potential that blockchain offers. That is why collaborations will be paramount in order to achieve a level of interoperability that could truly revolutionise the industry. LOOKING AHEAD While blockchain technology offers many advantages and the potential applications are easy to see, they remain difficult to implement in the face of the regulatory, compliance and other legal requirements imposed on financial institutions. Around the world, regulators and industry experts are concerned that new technology is growing at a rate that far exceeds the risk testing and development of cybersecurity infrastructures required to support it. In light of the significant cybersecurity breaches that have been reported by large companies in the past year, this is a real concern. At the Middle East Banking Forum on 22 November 2017, the HE Mubarak Rashed Al Mansoori, Governor of the Central Bank of


the UAE expressed his support for fintech developments in the region but cautioned that the increasing rate of digitalisation also brings an inherent increase in cybersecurity risk. Al Mansoori announced that, to combat this risk, the Central Bank is in the process of preparing new regulations that will mandate a minimum set of standards for the systems and controls of licenced entities. We expect that introducing mandatory standards is likely to have a positive effect on technological development overall as it will create some regulatory certainty around the legal requirements, as we have seen in other countries. Whilst the legal implications are significant, the advantage will be on the side of nimble execution and financial institutions within the Middle East are well placed to develop and test new technologies within the emerging technological ecosystem. Initiatives such as the Dubai Blockchain Strategy offers government institutions and companies from a diverse range of industries an opportunity to participate in the evolving Smart Dubai initiatives. Participation by such a variety of companies will not only complement each other but it is also likely to create an ecosystem of blockchain functionality to truly test its capabilities. Looking ahead, financial institutions will have to determine how to comply with existing laws and regulations in a way that accommodates both domestic requirements and technological ambitions in a changing and novel legal landscape involving not only blockchain but also AI, cloud computing and cryptocurrencies. It is a brave new world for banking.

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Fintech in the UAE Matthew Shanahan, Partner at Baker McKenzie Habib Al Mulla’s banking and finance practise in the UAE, discusses future developments in technology for financial institutions and regulators


he expression ‘may you live in interesting times’ is supposedly an old Chinese curse. Whether or not there is any truth to the origin of the curse, the financial services sector is certainly living in interesting times. None more so than the traditional consumer and commercial banking sectors, which typically evolve at a snail’s pace.

Traditional banking is facing the most disruptive change in decades. Not since the arrival of the ATM or internet banking has the banking industry been at such an inflexion point. Change can be seen as a threat or an opportunity, not just for the banks, but for consumers and, importantly, the financial services regulators who must learn how to supervise an industry that is digitising rapidly.

This year has seen the banks begin in earnest to embrace fintech. Fintech is becoming mainstream as banks accept that digital payment systems will prevail and as regtech (regulation technology—leveraging technology to manage regulatory risks) helps reduce compliance costs, which have grown exponentially since the global financial crisis. Even the regulators are getting on board, exploring ways to use suptech (supervision technology—leveraging technology to help them supervise and monitor financial institutions and markets) to regulate more effectively and efficiently. So what is in store for the financial services sector in the UAE in what is bound to be an interesting 2018? Fintech, challenger banks, artificial intelligence, robo-advice, regtech and suptech are just some of the changes heading our way. Fintech is currently dominating the headlines in the financial services sector. The UAE is without doubt the leading regional centre for fintech. Is it all hype or will fintech really be a game-changer? Two things to note: • First, there is always a time lag between technological innovation and the actual technical change that the innovation is supposed to bring. Smartphones were first imagined years before the arrival of the iPhone in January 2007. Therefore, the true day to day impact of fintech is still years from being felt by consumers. • Second, the dotcom bubble of the early 2000s taught us that far more start-ups fail than actually succeed in the technology space. Think AOL,, Beenz (a virtual currency—sound familiar?), and Global Crossing, to name a few. These companies all filed for bankruptcy or were sold at cont. on page 50

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valuations well below their dotcom peaks. The Nasdaq Index lost 78 per cent of its value in the dotcom crash. Many companies recovered and are now amongst the biggest in the world, such as Amazon, Google and Apple. Bubbles grow quickly, but when they burst, only a few survive. So before fintech brings about meaningful changes for the financial services sector, we are bound to see a lot of hype and speculation. More fintech start-ups will fail than succeed and a great deal of value loss will occur. This is all part of the process of disruptive change. The arrival of ATMs and internet banking were in both cases heralded by claims of the end of bank tellers and branches respectively. Likewise, the arrival of fintech has generated endless stories in the Middle East media about massive job losses in banking and in the case of cryptocurrencies, the end of banks as financial intermediaries. It is unlikely that either scenario will transpire. Any changes will take years, not months. In the meantime, Middle East entrepreneurs will be looking to bring their fintech ideas to the market. What many do not realise is that a lot of fintech activities fall into the regulated space. Being regulated can turn a great idea on paper into an expensive bureaucratic nightmare. Fortunately for entrepreneurs, the UAE financial free zone regulators in the Dubai International Financial Centre (DIFC), the Dubai Financial Services Authority (DFSA), and in the Abu Dhabi Global Market (ADGM), the Financial Services Regulatory Authority (FSRA) have both developed regulatory regimes for their free zones’ fintech accelerator programmes. The FinTech Hive at the DIFC and the

Matthew Shanahan, Partner, Baker McKenzie Habib Al Mulla

RegLab at the ADGM, both offer a light touch regulatory regime for fintech start-ups to test their technology without the significant financial cost of obtaining a full financial services licence. The fintech ideas that survive will bring benefits to consumers through reduced transactional costs in areas such as foreign exchange and online trading. For the banks, fintech and regtech innovation has a huge potential to cut costs. Distributed ledgers, robo-advice, digital payments and artificial intelligence offer opportunities for a wide variety of applications. In the anti-money laundering space, customer identity authentication and verification though biometrics and public/private keys could make a huge difference. Expect the number of potential applications to grow. Although most of the big innovations will be industry-led, for the regulators, suptech may bring important enhancements to the way in which they supervise financial institutions and monitor the financial markets. The same technologies

which are helping to change the financial services industry can help make for more effective and efficient supervision of the industry. Regulators are typically funded by a mix of government funds and industry fees. The pressure to regulate within budget and keep up to date with a rapidly-changing industry should not be understated. Suptech can leverage technologies such as data analytics and artificial intelligence to better understand the industries that regulators supervise and to reduce the need for on-site visits and, ultimately, save costs for regulators. Suptech is still in its infancy but it is not unrealistic to speculate that it may, in the not too distant future, bring a degree of real-time supervision of the markets and financial institutions, and may make risk management, intervention, and enforcement much more proactive than reactive. This could be quite an intimidating prospect for financial institutions. However, suptech will require a significant amount of investment and testing before it is ready to be deployed by regulators. The DFSA and the FSRA are both doing a very good job of helping to create a regulatory environment that should encourage fintech in the UAE. Both regulators have produced proportionate rules and are generally going with the grain of technological change, while remaining open to the risks that the technology poses to consumers and the industry. However, the DFSA and FSRA (and the other UAE regulators) will need to leverage fintech themselves or they risk falling behind the curve. The regulators must evolve in order to maintain the right regulatory toolkit to address the changes to the financial services industry that fintech will invariably bring.

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THE JOURNEY TO SIMPLICITY 50 years ago, we started with a single thread of hope. Even though there were knots and tangles along the way, we persisted until we overcame the complexities to offer simpler banking solutions today. ABK... moving forward over 50 years.

Simpler Banking

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#202 - January 2018