APRIL 2019 | ISSUE 217 MIDDLE EAST
PATIENCE AND OPTIMISM: KEY TO UNLOCKING INVESTMENTS IN THE MIDDLE EAST Dhafer Sahmi Al Ahbabi, Chairman of Al Ramz Capital A CPI Financial Publication
Dhafer Sahmi Al Ahbabi, Chairman of Al Ramz Corporation
of play 18 State
operational risk effectively 20 Managing
optimism: riding the investment cycle 54 Opportunistic
innovation in corporate banking 58 Driving
Dubai Technology and Media Free Zone Authority
APRIL 2019 | ISSUE 217
PATIENCE AND OPTIMISM: KEY TO UNLOCKING INVESTMENTS IN THE MIDDLE EAST
AT YOUR SERVICE ACROSS AT YOUR SERVICE ACROSS THE REGION AT YOUR SERVICE ACROSS THE REGION AT SERVICE ACROSS EnjoyYOUR ABK’s simpler banking services in THE REGION Kuwait, Egypt, and the UAE. services in Enjoy ABK’s simpler banking THE REGION Kuwait, Egypt, and the UAE. services in Enjoy ABK’s simpler banking Enjoy ABK’s simpler banking Kuwait, Egypt, and the UAE. services in Kuwait, Egypt, and the UAE. Simpler Banking Simpler Banking Simpler Banking Simpler Banking
losing the first quarter of the year, financial institutions that have announced their Q1 results have thus far boasted profits. Although some have achieved nominal single-digit growth rates, these figures demonstrate the continuous challenging operating conditions across the region. The deceleration in global growth, shifting geopolitical dynamics and trade tension pressures continue to weigh on market sentiment. One thing that investors seem to forget, is that there is always a cycle; and unfortunately, where we are right now (since the last couple of years) is in the lower part of the wheel. In its recent outlook, the IMF projected a slight dip in growth for oil exporters in 2019, from 0.6 per cent last year to 0.4 per cent due to subdued prospects domestically. Volatile oil prices continue to pose economic challenges for some countries, while others grapple with rising public debt. Growth across GCC countries is expected to stay largely unchanged at about two per cent. Oil production cuts and ongoing fiscal consolidation in countries such as Bahrain, Oman, and the UAE are contributing factors to this outlook. Nevertheless, although slightly inconsistent, on the back of structural economic reforms rolled out by governments in the region, investor sentiment is generally on an upward trend. This is particularly evident in the debt capital market space, where sovereign-backed bonds and Sukuk transactions receive overwhelming response when they are auctioned.
As Bahrain is our country focus for this issue, within these pages you will find how the Government is forging ahead, leveraging on its strengths in cementing its position as a technology hub for the region. Entering the second part of the year, our features this month also present you with insights and projections on various facets of the banking and finance industry, from a macro perspective to the unique intricacies that continue to make the Middle East an interesting market. As your information partner for the industry in this region, we hope you enjoy flipping through these pages and wish you a fruitful read.
Nabilah Annuar EDITOR, BANKER MIDDLE EAST
APRIL 2019 | ISSUE 217
NEWS 8 Capital markets: slowly but surely? 12 News highlights
THE MARKETS 16 A pricing marvel 18 State of play
LEGAL PERSPECTIVE 20 Managing operational risk effectively
COVER INTERVIEW 24 Patience and optimism: key to unlocking investments in the Middle East
COUNTRY FOCUS: BAHRAIN 28 Good neighbours 36 Cryptokingdom: how Bahrain is building a leadership role in digital finance
PRIVATE BANKING 42 Calm seas: a modest growth for the wealthy
ASSET MANAGEMENT 46 An outlook on 2019
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APRIL 2019 | ISSUE 217
HUMAN CAPITAL 50 Developing the talent pool
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54 Opportunistic optimism: riding the
62 Banking as a platform: Middle East banks need technology partners in the
CHIEF EXECUTIVE OFFICER STEVE LEE email@example.com Tel: +971 4 391 4681
PATIENCE AND OPTIMISM: KEY TO UNLOCKING INVESTMENTS IN THE MIDDLE EAST Dhafer Sahmi Al Ahbabi, Chairman of Al Ramz Capital
58 Driving innovation in corporate banking
APRIL 2019 | ISSUE 217
CHAIRMAN Saleh Al Akrabi
APRIL 2019 | ISSUE 217
PATIENCE AND OPTIMISM: KEY TO UNLOCKING INVESTMENTS IN THE MIDDLE EAST
race to digitise A CPI Financial Publication
64 Robo-advisors set to shake up region’s
Dhafer Sahmi Al Ahbabi, Chairman of Al Ramz Corporation
of play 18 State
Managing operational effectively 20 risk
Opportunistic optimism: the investment cycle 54 riding
Driving innovation in banking 58 corporate
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US Federal Reserve: biggest risk factor for 2019 58 the
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CAPITAL MARKETS: SLOWLY BUT SURELY? Although a slow start to the year for equity markets, positive sentiments in the debt market indicate a potentially healthy trajectory for the rest of 2019
018 closed encouragingly for the GCC as it witnessed five IPO listings raising over $1 billion in the last quarter of the year. However, positivity dipped a little at the start of 2019 with only one IPO floated for the first quarter, compared to four IPOs worth $430 million, in the first quarter of 2018. SENTIMENT The excitement stemming from the economic reform agendas over the last 18 months may have calmed down
GCC IPO ACTIVITY SINCE 2013
Source: Eikon (Thomson Reuter), PwC analysis
on the back of continued geopolitical and macroeconomic pressures. Nevertheless, raising $58 million, the Saudi Arabian IPO by Al Moammar Information Systems Company, remains a historic feat as it is the first ever IT company in the kingdom to list on Tadawul. A recent report from PwC pointed out that the oil price increase in the first quarter of the year was cautiously received by investors, as it was mainly driven by OPEC agreements to reduce
production. Expansionary policies, government incentives and continuing privatisation efforts in the region continue to assist in improving market sentiment. â€œIn the GCC, efforts to attract investments continue, with the UAE Government set to confirm the sectors eligible for 100 per cent onshore foreign ownership. Continued privatisation efforts across Saudi Arabia, Oman and Kuwait will also drive activity,â€? said Steve Drake, Capital Markets Leader at PwC Middle East.
GCC QUARTERLY IPO ACTIVITY SINCE 2013
Source: Eikon (Thomson Reuter), PwC analysis
GCC EQUITY MARKETS PERFORMANCE BY CUMULATIVE TOTAL RETURN SINCE 1 JANUARY 2018
Source: Eikon (Thomson Reuter), PwC analysis
WE EXPECT SOME REBOUND IN THE LEVEL OF GCC IPO ACTIVITY WITH A NUMBER OF COMPANIES IN THE REGION HAVING ANNOUNCED THEIR PLANS TO LIST IN THE NEXT 12 TO 18 MONTHS. â€” Steve Drake, PwC Middle East Capital Markets Leader
SHARE PRICE PERFORMANCE OF 2018 AND 2019 GCC IPOs* BY SECTOR, RELATIVE TO THE RESPECTIVE ALL SHARE INDEX, FROM THE IPO DATE TO 31 MARCH 2019
THE REGION’S DEBT MARKET CONTINUES TO BE ACTIVE, WITH DEBT PRODUCTS PROVING TO BE OF INTEREST TO INVESTORS. — Steve Drake, PwC Middle East Capital Markets Leader inclusion of GCC sovereign bonds to JP Morgan’s Emerging Market Bond Index (EMBI) from January 2019 is expected to further boost the demand for GCC sovereign bonds, as evidenced by the over-subscription of the recent Saudi Arabia and Qatar bond issuances. Corporate debt activity was also very active with a number of issuances in this quarter stemming from banking institutions, including a Tier 1 Sukuk by Dubai Islamic Bank and programme drawdowns by Qatar International Islamic Bank, Mashreqbank and First Abu Dhabi Bank. On the back of these, PwC foresees a significant spike in GCC debt activity with the debut issuance by Saudi Aramco in Q2.
Source: Eikon (Thomson Reuter), PwC analysis
“After a busy end to last year, 2019 started softly with just one IPO in the GCC during the first quarter. Global activity was also muted, with IPO proceeds more than halved compared to the same quarter in 2018. This is perhaps reflective of continuing geopolitical uncertainties including Brexit, the US-China trade war, and the longest ever shutdown of the US government.” HEALTHY APPETITE FOR GCC PAPER The GCC debt market continues to demonstrate growing strength, with sovereign issuances being a dominant factor. This was evident as the first quarter witnessed notable multi-tranche issuances by the State of Qatar ($12 billion) and the Kingdom of Saudi Arabia ($7.5 billion). According to PwC, the
Al Moammar Information Systems Company raised
million in Q1 of 2019
EXPECTATIONS “Looking ahead, we expect some rebound in the level of GCC IPO activity with a number of companies in the region having announced their plans to list in the next 12 to 18 months. On 10 April 2019, Network International, the largest payment services provider in the region, priced its London Main Market premium IPO, raising proceeds of over $1 billion—becoming the largest IPO on the London Stock Exchange so far in 2019,” highlighted Drake. He affirms that the region’s debt market continues to be active, with debt products proving to be of interest to investors. “In addition to the seasoned bond issuers, the quarter also witnessed a debut debt offering—Almarai’s $500 million Sukuk. With the significant oversubscription of Saudi Aramco’s first ever bond offering on 9 April, we move into the second quarter of the year on an optimistic note.”
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Turkey gives banks $3.7 billion lending boost to spur growth Turkey’s sovereign wealth fund has bolstered the capital ratios of five state-owned banks by TRL 3.3 billion ($3.7 billion) in a bid to keep credit flowing in the recession-hit economy. A market stability fund within the government-controlled investor bought debt issued by the lenders under a recapitalisation programme announced last week, which will see a further EUR 400 million flow to Islamic banks. President Recep Tayyip Erdogan’s administration is seeking to rekindle growth with cheap loans, while tasking the firms with salvaging industries and helping consumers in the hopes that private firms will follow. Capital ratios have fallen as the country’s lenders have undertaken nearly $28 billion in debt-restructuring requests. Turkish lenders are also facing a growing pile of bad loans in the wake of the currency’s plunge last year, which has spurred inflation and increased funding costs.
Egypt mulls Panda, Samurai and Sukuk issuances for next fiscal year Egypt’s Finance Minister said that the government is gearing up to issue its first panda, samurai as well as Sukuk and green bonds in the fiscal year starting in July as it attempts to cut borrowing costs by diversifying funding sources. Mohamed Maait, Egypt’s Finance Minister, said that the country raised $6.2 billion from dollar and euro bond markets in early 2019, but postponed plans to issue debt denominated in Japanese yen and Chinese yuan as well as Sukuk and green bonds during the current fiscal year ending 30 June because it needs more time to prepare. Diversification of instruments and a gradual shift from short-term debt toward longer-dated credit are pillars of a four-year debt strategy designed to reduce the burden for one of the Middle East’s most indebted countries.
Egypt plans to sell Banque Du Caire stake this year The Governor of the Central Bank of Egypt said that the government plans to sell a stake in Banque du Caire, one of the country’s biggest state-owned lenders, toward the end of this year. Tarek Amer, the Governor of the Central Bank of Egypt, said, “The size is around 20 per cent; might go up to 30 per cent, and the sale would be through the Egyptian Exchange.” Egypt expects to raise EGP 80 billion ($4.6 billion) by selling stakes in 23 public companies within three years in sectors such as petrochemicals, oil as well as finance and real estate.
Mubadala launches $1 billion Abu Dhabi Catalyst Partners fund Mubadala Investment Company has launched a $1 billion Abu Dhabi Catalyst Partners fund in partnership with top tier and upcoming investment firms, industry-leading businesses and professionals who will benefit from building a meaningful and sustainable presence in ADGM. The new enterprise will pursue opportunities that satisfy a mandate of creating a hub for pioneering companies to locate at Abu Dhabi Global Market (ADGM), to generate attractive returns while having a positive impact on the ADGM ecosystem. The fund will be backed by Mubadala Investment Company with the endeavour to leverage Mubadala’s networks locally and around the world to originate attractive investment opportunities in the region. The new fund will target opportunities across asset management, specialty finance and financial infrastructure, with investees expected to have a presence in ADGM.
Oman risks descending deeper into junk, says S&P
Saudi Aramco raises $12 billion in debut international bonds sell Saudi Arabia took its first major step onto the global financial stage, issuing $12 billion of bonds for its state-run oil company in one of the most oversubscribed debt offerings in history. The bond sale raises money to finance Saudi Arabia’s economic agenda after an initial public offering (IPO) of Aramco was postponed last year until at least 2021. The demand for Saudi Aramco’s debut offering was so robust it allowed the energy giant to borrow at a lower yield than its sovereign parent. Additionally, the state-owned oil giant’s bond issue, split into maturities ranging from three to 30 years, is seen as a gauge of potential investor interest in Aramco’s eventual IPO.
S&P Global Ratings has started a 12-month countdown for Oman to steady its public finances and stop loading up on external debt or risk an even deeper descent into junk. Oman’s economy has been struggling since the collapse of oil prices in 2014, forcing the government to join other Gulf countries in tapping international debt markets to plug budget shortfalls. The Sultanate has been slow to implement fiscal reforms despite dwindling reserves, raising worry it could follow Bahrain in needing a bailout from wealthier Gulf neighbours. Fitch Ratings and Moody’s have Oman one notch higher than S&P Global. S&P, the first of the major credit assessors to give Oman a non-investment grade, said that its ratings reflect a view that timely support for the Sultanate would be forthcoming if needed. The rating agency said that with large euro bond maturities coming due in 2021 and 2022, the debt structure is vulnerable to a sharp decline in foreign investors’ confidence in Oman and that could even add significant pressure to foreign-exchange reserves.
Dubai Islamic Bank weighs acquisition of Noor Bank Dubai Islamic Bank’s Board of Directors has resolved to allow the bank to explore the possible acquisition of Noor Bank and to revert to the board with findings within three weeks. In a statement, the lender said that the board also allowed the bank to hire financial advisers for due diligence and provide an opinion on the valuation. The acquisition will create a lender with AED 277 billion ($75 billion) in assets.
Saudi Arabia’s Fawaz Alhokair to sell 20 per cent of mall unit in IPO
Emirates NBD to acquire Denizbank in a TRL 15.5 billion deal
Saudi Arabia’s Fawaz Alhokair Group will sell 20 per cent of shares in its malls unit in an initial public offering (IPO) and will use the proceeds to reduce debt. Fawaz Alhokair Group has been planning the Arabian Centres share sale since 2014, when the firm hoped to raise $2 billion from a 30 per cent sale. In a statement, Fawaz Alhkair Group said that Arabian Centres Company will sell 65 million existing shares and 30 million new shares via a book-building process and will list the shares on the Tadawal, without saying what the offer price range will be.
Emirates NBD has agreed to acquire Denizbank from Russia’s Sberbank in a TRL 15.5 billion ($2.75 billion) transaction, saving about $400 million following the lira slump and stalling economic growth since the announcement of the deal 10 months ago. The deal is expected to close in the second quarter of 2019 subject to obtaining the required regulatory approvals. The purchase is both Turkey’s largest merger and acquisition (M&A) deal since 2012 as well as the Dubaibased lender’s biggest acquisition.
Saudi CMA considers relaxing ownership limits for foreign strategic investors The Chairman of Saudi Arabia’s Capital Market Authority (CMA) said that the regulator is considering relaxing a 49 per cent limit for foreign strategic investors in shares of listed companies due to increased demand, according to local newswire. Currently foreigners own five per cent of Saudi equities. The CMA, the Tadawul and the Kingdom’s Debt Management Office (DMO) announced a reduction in fees and commissions to encourage secondary market trading of debt. The three entities said trading commissions for the Tadawul and the CMA was reduced, while fees for new offerings and annual registration charges for issuers were also reduced. Similarly, the DMO also reduced the par value for government-issued Sukuk from SAR 1 million to SAR 1000, signalling further government efforts to facilitate access to the bond market for retail investors.
Saudi Arabia’s PIF on track to manage $400 billion assets in 2020 Public Investment Fund’s (PIF) Head of Corporate Finance and Treasury said that the Kingdom’s sovereign wealth fund is on track to manage $400 billion of assets by the end of next year. Saudi Arabia is seeking to transform the PIF from a domestic holding company into the world’s largest sovereign fund. It’s already made a series of investments in companies such as Tesla and Uber Technologies as well as a $45 billion commitment to SoftBank Group’s Vision Fund.
SRC mulls up to $1.07 billion Sukuk issuance in 2019 The Chief Executive of Saudi Real Estate Refinance Company said that the firm aims to issue up to SAR 4 billion ($1.07 billion) of long-term Sukuk this year. Fabrice Susini, the Chief Executive of SRC, said that the company is also keen to tap foreign institutional investors for its debt sale this year. SRC’s strategy is to tap the market twice this year and the company plans to issue between SAR 2 and 4 billion that will be issued in two tranches, said Susini. SRC issued a SAR 750 million Sukuk with multiple tenors in March, under a programme that allows it to issue up to SAR 11 billion of local currency denominated Islamic bonds. Saudi Arabia wants to increase activity in the real estate market as it moves to diversify the economy and is taking steps to reform the sector as part of its Vision 2030 reform plan.
Saudi Arabia posts $7.4 billion budget surplus in Q1 2019 Saudi Arabia, the biggest Arab economy posted a surplus of SAR 27.8 billion ($7.4 billion) in the first quarter, owing to an increase in non-oil revenue as well as income from crude exports. Higher oil revenue and the introduction of valueadded taxation (VAT) as well as subsidy cuts have helped the Kingdom repair public finances battered by lower crude prices. Saudi Arabia’s budget deficit narrowed to 5.9 per cent of gross domestic product (GDP) last year from 9.3 per cent in 2017. The Kingdom plans to increase state spending by seven per cent this year in an effort to spur economic growth that has been hurt by low oil prices.
Saudi Arabia’s Alinma Bank open to merger opportunities, says CEO The Chief Executive Officer of Alinma Bank said that the lender would be open to a merger if a deal adds value for shareholders. Abdulmohsen Al-Fares, the CEO of Alinma Bank, said, “Mergers and acquisitions are part of a growth wave, so we are working and looking at it closely and I believe in Alinma Bank we will have many opportunities.” Saudi Arabia’s banking landscape is changing with lenders exploring mergers.
Saudi Telecom hires banks for debut dollar Sukuk
Bank Muscat mulls OMR 25 million Meethaq Sukuk issuance Bank Muscat has received approval from the Central Bank of Oman (CBO) and the Central Monetary Authority (CMA) to issue OMR 25 million Sukuk under the Meethaq programme. The Sukuk will have an indicative profit rate of 5.5 per cent per annum and tenor of five years, with a green shoe option to increase it to a maximum of OMR 55 million in case of an oversubscription.
Credit Suisse acquires Saudi banking licence The Governor of Saudi Arabian Monetary Authority (SAMA) said that Credit Suisse has acquired Saudi banking licence as the Kingdom is speeding up the process to allow more global banks to operate in country. The Swiss lender will join competitors such as Citigroup, JPMorgan Chase and HSBC Holdings in expanding into the country, which is saw some of the world’s biggest deals this year.
Saudi Telecom has hired six banks to arrange its first US dollar-denominated Sukuk issuance. The state-owned telecommunications giant has hired HSBC, JPMorgan, StanChart as well as Samba Capital, First Abu Dhabi Bank, and KFH as lead banks for the planned deal. The Sukuk, the size of which will depend on market conditions and demand, is part of the company’s $5 billion Sukuk programme which was established last month to back general corporate purposes.
Saudi CMA approves SABB capital increase request to merge Alawwal Bank Saudi Arabia’s Capital Market Authority (CMA) has approved SABB’s SAR 20.55 billion capital increase request to merge with Alawwal Bank. The CMA stated that SABB will increase its capital from SAR 15 billion to SAR 20,55 billion by issuing around 555 million ordinary shares to merge with Alawwal Bank, then transfer all of Alawwal’s Bank assets as well as liabilities to SABB through a securities exchange offer. The Saudi British Bank (SABB) and Alawwal Bank entered into a binding merger in the second half of 2018 having started discussions on a potential merger in April 2017.
SOVEREIGN RATINGS AS OF 1 APRIL 2019 Issuer
Foreign Currency Rating
Last CreditWatch/Outlook Update
2 Central Bank of Bahrain
11 Saudi Arabia
12 Abu Dhabi
13 Ras Al Khaimah
Copyright © 2019 S&P Global Ratings. All rights reserved.
When Aramco teaches the fixed income world how to make the impossible possible by pricing its bonds inside the sovereign curve, writes Mohammed Khnifer, debt capital markets banker at a supranational banking institution
he $100 billion-plus of orders that Aramco’s generated for its maiden $12 billion bond sale will be also remembered as the issuance that was marketed by Wall Street celebrities and bankers. It is indeed the “one-of-a-kind emerging markets deal”.
and corporates will be much lower than before. Aramco has brought the sovereigns yields down with it. This ripple effect of Aramco bonds has been seen in the repricing of the Saudi yield curve and naturally this will tighten the yield curve of Abu Dhabi and Kuwait as well.
WIDER POSITIVE AFFECT TO GCC DEBT CAPITAL MARKET Almost all the Saudi (sovereign) yields have registered their lowest in more than a year. It means that the cost of borrowing for sovereigns
WHEN INVESTORS ARE TURN APART There was new liquidity that we rarely see coming to Saudi Arabia. These were the investors who focused on investment grade, and those who invest in corporate bonds.
(PHOTO CREDIT: g0d4ather/SHUTTERSTOCK)
THERE WAS NEW LIQUIDITY THAT WE RARELY SEE COMING TO SAUDI ARABIA. THESE WERE THE INVESTORS WHO FOCUSED ON INVESTMENT GRADE, AND THOSE WHO INVEST IN CORPORATE BONDS.
These two types of investors changed the level of pricing they turned the table against the traditional investors—emerging market investors of whom some of them threatened not to subscribe after seeing the initial price thoughts. Emerging market investors had so many reservations on Aramco pricing. This new liquidity changed everything. TRADING THROUGH SOVEREIGN The conventional wisdom in our fixed income industry that it is rare for debut bonds of a state-owned company to yield less than the sovereign debt. It’s unlikely that Aramco’s bonds will trade tighter than Saudi Arabia’s, noted Bloomberg Intelligence in an insight before the issuance was closed.
THIS RIPPLE EFFECT OF ARAMCO BONDS HAS BEEN SEEN IN THE REPRICING OF THE SAUDI YIELD CURVE AND NATURALLY THIS WILL TIGHTEN THE YIELD CURVE OF ABU DHABI AND KUWAIT AS WELL.
However, I have iterated that Aramco will try to price inside the yield curve. In 2015, Aramco (A+ but unrated at that time) managed to obtain two dollar tranches that were priced at 12 basis points (bps) above Libor. That is lower than the 15 bps above Libor that Exxon Mobil (AAA) paid for its $5 billion revolving credit facility signed in 2013. Having priced inside the sovereign curve by 10 to almost 25 bps, we can say now that Aramco made the impossible possible.
Covered 6.0 N/A
ALLOCATION STRATEGY The leads allocation to Europe and US will get you the volume but the cost may increase and you will influence the sovereign’s spreads. Weighing heavily on Asia makes sense for two reasons: 1) Aramco as a brand is well-known— of the oil sold elsewhere, 71 per cent went to customers in Asian markets; 2) Historically, the allocation (for Asia) into previous sovereign issuance was less than 18 per cent compared to 75 per cent to US and Europe.
(MKHNIFER1@GMAIL.COM) and my twitter (@mkhnifer).
STATE OF PLAY Banker Middle East’s Lebanon country expert, Dr. Salim Sfeir, Chairman and General Manager of Bank of Beirut, candidly shares his views on the Lebanese economy
e have reached the moment of truth. Business cannot continue as usual. Decades of fiscal irresponsibility, corruption and nepotism drained the treasury and shook the pillars of the economy. Global economies go through ups and downs, recessions and booms. Sometimes it is because of bad economic policies or unexpected turbulences, but our economy is suffering mainly from mismanagement and short sightedness. It is self-inflicted harm. There is a general consensus among various political factions that the economy should be a priority.
I WARN AGAINST SOME VOICES CALLING TO PUNISH THE BANKING SECTOR, BECAUSE OF ITS SUCCESS. THE PROFITABILITY OF THE BANKING SECTOR IS WHAT HELPED THE LEBANESE ECONOMY OVER THE PAST DECADES.
Dr. Salim Sfeir
This is a good sign, however there are worrying signs that the approach to remedy the situation may exacerbate the situation instead of fixing it. It is common sense not to raise taxes at the time of economic slowdown. What the country needs is to jump start the economy and to return to sustainable economic growth. The world and the Lebanese public expect the government to introduce meaningful reforms and fight corruption, in order to gain the trust of the private sector and the international organisations who expressed willingness to help Lebanon. I warn against some voices calling to punish the banking sector, because of its success. The profitability of the banking sector is what helped the Lebanese economy over the past decades. Bankers are not robbers, go after the bank robbers.
C.R No: 1/22351/8
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MANAGING OPERATIONAL RISK EFFECTIVELY The hazards of various types of operational risk are wide ranging. Steve Punch, Director and Head of Financial Risk Management at KPMG, Lower Gulf, takes a look at how bankers and regulators navigate compliance with a new standard, the identification of control weaknesses that leave institutions susceptible to fraud, and the need for stronger governance frameworks (PHOTO CREDIT:BY ANNA KLEPATCKAYA/SHUTTERSTOCK)
n recent years, banks globally and here in the UAE were occupied by the implementation of IFRS 9. This tended to dwarf all other competing priorities for the risk and finance teams. Regulators, too, appeared to be significantly engaged in the implementation of IFRS 9 and spent considerable time and resources reviewing calculated expected credit loss (ECL) charges under the new rules. Operational risk has now become a heightened area of focus for financial institutions as the industry wrestles with challenges arising from cyberthreats, third-party concerns, trading, conduct a n d c u l tu r e i s s u e s , a n t i - m o n e y laundering fines and sanctions, stresstesting requirements, and technological innovations driving greater opportunities for process automation and digitisation.
DUE TO THE INHERENTLY QUALITATIVE NATURE OF MANAGING OPERATIONAL RISK, ANY BANKS TEND TO BELIEVE THAT THEY ARE ALREADY ‘BEST IN CLASS’ WITH RESPECT TO THEIR OPERATIONAL RISK FRAMEWORK. — Steve Punch
The Basel Committee on Banking Super vision (BCBS) first released Principles for the BCBS 195, Sound Management of Operational Risk in 2011. A review by the committee undertaken in 2014 highlighted that banks globally had not sufficiently implemented these principles which culminated in an additional BCBS paper, Review of the Principles for the Sound Management of Operational Risk, BCBS 292. Taking notice of this, the Central Bank of the UAE (CBUAE) issued draft Operational Risk Standards and Operational Risk Regulations in 2016. Finalised and issued in August 2018 under CBUAE Operational Risk Standards and Regulations 163/2018, we are seeing this is as part of a growing trend across the Gulf Cooperation Council (GCC). Several regulators have recently issued new rules or are refining existing rules relating to operational risk that are in line with international best practice. CAPITAL AND GUIDANCE FROM CENTRAL BANK Operational risk is often regarded as the most challenging risk for both regulators and banks. The rationale for this is that nothing can prevent a bank from experiencing a significant adverse event. Ultimately, allocation of Pillar 1 capital (the regulator’s core measure of a bank’s viability, usually common stock and disclosed reserves) is designed to at least encourage bank boards and senior management to discuss how best to manage operational risk.
In most cases, Pillar 1 capital will likely be lower than the loss history for nearly all banks. The first reason is that ‘boundary events’ tend to get lumped 100 per cent under credit risk losses, with no allowance for apportionment for related operational risk failures involved in credit losses, such as inappropriate models, insufficient monitoring or fraud. Secondly, losses resulting from operational risk generally tend to be under-reported, primarily due to the potential consequences and lack of awareness by bank staff. The August 2018 regulations laid out by the CBUAE are accompanied by a separate ‘standards’ release which provides additional clarity on what banks should be doing to achieve best practice. The key areas for banks’ attention under the Operational Risk Standards are: governance, identification and assessment, control and mitigation, business continuity management, information technology and systems, and reporting. Due to the inherently qualitative nature of managing operational risk (through implementing a robust internal control environment coupled with strong processlevel controls), many banks tend to believe that they are already ‘best in class’ with respect to their operational risk framework. Accordingly, regulators often see the need to spell out principles, standards and rules for banks to follow. The Risk Based Supervisory approach adopted by CBUAE should ensure that a spectrum of results are possible when viewing how banks apply the new standards. KPMG’s recent experience working with several GCC banks on operational risk initiatives implies that there may be room for improvement in enhancing operational risk frameworks and how the seven operational risk event types (as defined by the Basel Committee) are managed. The event types comprise: • Internal fraud • External fraud • Employment practices and workplace safety • Clients, products, and business practice • Damage to physical assets
• Business disruption and systems failures • Execution, delivery, and process management
THE RISK BASED SUPERVISORY APPROACH ADOPTED BY CBUAE SHOULD ENSURE THAT A SPECTRUM OF RESULTS ARE POSSIBLE WHEN VIEWING HOW BANKS APPLY THE NEW STANDARDS. — Steve Punch, Head of Financial Risk Management, KPMG in the Lower Gulf
NEXT STEPS It seems there is much work for banks to do as they strive toward operational risk excellence, including: • Further positioning the operational risk management framework so that it is fully aligned with the banks’ strategy and viewed as an enabler of strategic change, business performance, and customer experience; • Elevating first and second lines of defence (LOD) involvement and results in strengthening risk culture; • Enhancing first LOD communication and escalation of issues outside of established risk appetite; • I m p r ov i n g t h e c o m m u n i c a t i o n between the first and second LODs on emerging risks and changes to the internal and external environment; • Deploying end to end process risk assessments across business lines and divisions to develop a more complete picture of risk, dependencies, hand-offs, and redundant controls; • Expanding convergence efforts beyond risk taxonomies and rating scales to drive increased efficiencies and more effective analysis and management of risk; • Enhancing control testing to create more dynamic and efficient monitoring, escalation and management of exposure; • Establishing robust operational risk dashboards supported by integrated data and tools to deliver consistently meaningful reporting to business lines, risk teams, executive management, and the board. A specific area that is receiving significant focus from regulators and banks recently is mitigating internal and external fraud losses. It is observed that several banks are undertaking fraud risk framework reviews, whilst others are identifying material processes susceptible to fraud and carrying out fraud risk assessments.
Dhafer Sahmi Al Ahbabi
PATIENCE AND OPTIMISM: KEY TO UNLOCKING INVESTMENTS IN THE MIDDLE EAST Dhafer Sahmi Al Ahbabi, Chairman of Al Ramz Corporation, shares his views on economic conditions and capital market projections across the region
hat are your views on the current financial and economic landscape?Â Global economic growth is largely expected to moderate in 2019 to approximately 3.3 per cent from 3.6 per cent in 2018. This will be the third year of growth moderation for the global economy driven mostly by advanced economies as their late cycle corporate earnings growth slows. However, the US Federal Reserve has recognised this, and abandoned interest rate hikes in near term.
With interest rates remaining at current levels, the US Dollar strength we saw in 2018 will abate and corporates around the world will benefit as cost of funding stabilises after rising at the fastest pace last year in over a decade. Emerging market economies will see the most of that benefit with the IMF expecting emerging economies to grow 4.8 per cent in 2020 faster than the anticipated 4.4 per cent in 2019. This will be the first uptick in growth in emerging economies growth since 2017.
How do you see the Middle East fitting into this picture? The Middle East is well-positioned to benefit from the upcoming uptick in emerging economies growth anticipated for 2019. Since the fall in oil prices in 2014 oil producing countries have implemented measures to strengthen their fiscal budgets and stimulate their economies. A sizeable sum of these measures will begin to affect their underlying economies post 2020. Recent rally in oil will also improve overall economic conditions. What sort of challenges do you foresee for the year? In the UAE, real estate remains under pressure in 2019 as peak deliveries are expected this year to increase supply further. This will continue to place pressure on the construction and property sectors in the country that make up over a third of total employment. With such a large percentage of the work force affected this will spillover to most other sectors in the country impacting corporate earnings for the year.
IN THE UAE, REAL ESTATE REMAINS UNDER PRESSURE IN 2019 AS PEAK DELIVERIES ARE EXPECTED THIS YEAR TO INCREASE SUPPLY FURTHER. THIS WILL CONTINUE TO PLACE PRESSURE ON THE CONSTRUCTION AND PROPERTY SECTORS IN THE COUNTRY THAT MAKE UP OVER A THIRD OF TOTAL EMPLOYMENT. â€” Dhafer Sahmi Al Ahbabi, Chairman of Al Ramz Corporation
THE BANKING SECTOR’S GROWTH IN EARNINGS OVER THE PAST TWO YEARS HAS BEEN DRIVEN PRIMARILY BY CONTRACTION OF CREDIT COST AS ASSET QUALITY IMPROVED AND COST OF RISK MOVED TOWARDS NORMALISATION. SUCH CONTRACTION IS NOT PROJECTED TO BE THERE FOR BANKS IN 2019 AS A CATALYST BOTTOM LINE GROWTH. — Dhafer Sahmi Al Ahbabi
How do these pressures impact corporates in this region? And how would you suggest to mitigate this? Patience is key this year for corporates. With peak interest rates likely behind us now and US Dollar strength expected to abate, corporates will be rewarded by delaying accessing credit markets for financing to the latter part of 2019. This will give them the opportunity to raise funds at better cost of funding giving them the ability to participate in the uptick of growth in emerging markets in 2020 on a better footing. What thematic trends do you see developing for the banking and finance sector over the next 18 months? The banking sector’s growth in earnings over the past two years has been driven primarily by contraction of credit cost as asset quality improved and cost of risk moved towards normalisation. Such contraction is not projected to be there for banks in 2019 as a catalyst bottom line growth. Fortunately, banking liquidity has increased over the past year with loan to deposit ratio dropping to the lowest since 2011. In 2019, banks are expected to utilise
this excess capacity and expand their loan books to meet their growth targets for the year. This will help boost the economy as banks expand their loan books. What are your projections on the debt and equity markets in the MENA region? Where are the opportunities? The Saudi market has been the best performing equity market in the MENA region with their inclusion into MSCI and FTSE Emerging Markets indices this year. Foreign flows have lifted the Saudi market to rich valuations.
The UAE equity markets remains one of the most attractive markets for investors. This opportunity will unlikely last for too long as Emerging Markets globally come in favour with global investors. In debt markets, US dollar bonds from GCC states are to be included in JP Morgan’s Emerging Markets Bond Index this year, attracting sizeable inflows and tightening credit spreads. With interest rates expected to be stable to lower going forward those bonds also present a good opportunity for investors to get some good yield. What is your growth strategy for Al Ramz? Where do you see your business going in the next couple of years? Our growth strategy is focused on enhancing our value proposition to our valued customers. We invested over the last two years in the refinement of our offerings as well as the introduction of complementary products and services designed to cater to the needs of our customers. We expect our asset management and brokerage service lines to benefit greatly from flows towards the attractive UAE debt and equity markets.
Dhafer Sahmi Al Ahbabi holds a bachelor’s degree of economics from the United Arab Emirates University. Previous appointments: Treasury Department, Abu Dhabi Investment Authority Board member, First Gulf Bank Board member, Abu Dhabi Islamic Bank Board member, Al Wathba Insurance Board member, Aabar Investments Board member, Invest Bank
GOOD NEIGHBOURS Bahrain was saved from financial ruin by its wealthy neighbours; now it owes them economic reforms
nyone who has ever been to the Middle East’s smallest country has a stamp in their passport cheerfully welcoming them to ‘business friendly Bahrain’. It is easy to justify its tagline. Bahrain has a relatively diversified economy, a beautifully regulated financial sector, a well-educated work force and low-cost environment. It also has some very useful friends. Despite the oil sector contributing less than 20 per cent to GDP, fiscal revenues are heavily dependent on oil, and the fall in prices nearly brought the economy to its knees in 2014. Keen to avoid a financial crisis that could undermine sentiment in the region, in October 2018 Kuwait, Saudi Arabia and the United Arab Emirates stepped in with pledges of $10 billion over the next four years. With the total funds equalling 26 per cent of GDP in 2018, it’s no surprise that Bahrain’s benefactors expect to see something in return for their generosity. Bahrain has responded with an ambitious package of reforms which aim to eliminate the Kingdom budget deficit by 2022. Rating agencies were suitable impressed, with Moody’s upgrading Bahrain’s outlook to stable from negative and S&P affirming its ‘B+/B’ rating. “The key driver of the outlook ch a n g e t o s t a b l e i s M o o d y ’s assessment that Bahrain’s Government and external liquidity risks, while remaining elevated, have materially reduced following the announcement of a $10 billion financial support p a ck a g e f r o m B a h r a i n ’s G u l f Cooperation Council neighbours,” Moody’s said in a statement. “Financial support and the fiscal consolidation measures that are set to accompany it will support investors’ confidence and help to reduce the government’s financing needs.”
WITH THE TOTAL FUNDS EQUALLING 26 PER CENT OF GDP IN 2018, IT’S NO SURPRISE THAT BAHRAIN’S BENEFACTORS EXPECT TO SEE SOMETHING IN RETURN FOR THEIR GENEROSITY. — Bikas Joshi, Mission Chief, Bahrain, IMF
Moody’s anticipates that funds from the financial support package will be disbursed during 2018-22 in the form of long-term concessionary loans, more than covering the scheduled external debt payments of the Government. These concessionary loans will also support Bahrain’s liquidity position and reduce the risk of the Central Bank’s foreign exchange reserves running dry. Importantly, M o o d y ’s b e l i e v e s t h a t B a h r a i n will be able to draw on additional support from its GCC neighbours to maintain the stability of its exchange rate peg during the cour se of the implementation. Moody’s also expects that the presence of the GCC backstop will allow the Government and government-related entities to regain access to international capital markets, which had become compromised during much of 2018. “The fiscal reforms announced by the government as part of the would represent very significant fiscal consolidation,” the rating agency said. “While Moody’s expects some implementation hurdles and, as a result, a more gradual fiscal consolidation, some of the measures outlined becoming effective will slow the weakening of Bahrain’s fiscal metrics.”
Bahrain’s fiscal imbalance is expected to narrow to
of GDP by 2021 from close to
of GDP in 2017 Source: S&P
(PHOTO CREDIT: ANDAMATI/SHUTTERSTOCK)
BALANCING ACT The plan focuses on boosting nonoil revenue, pruning the public sector, slashing expenditures and increasing water and electricity tariffs. The government plans to shrink its public sector workforce by about 15 per cent through a voluntary retirement scheme, offering early access to end-of-service packages and the opportunity to start a new career in the private sector. To ramp up revenues, the Fiscal Balance Programme (FBP) details the introduction of a five per cent value added tax, a review of existing government fees and services and the repricing of tariffs charged to domestic industrial consumers of natural gas. The measures also include setting up new units which will keep an eye on spending, streamline processes and improve transparency across government departments. Internal audit and central government procurement units within the Ministry of Finance, alongside a new debt management office, are also currently in the works. “The authorities’ Fiscal Balance programme, underpinned by the 2019-20 budget, has provided a commendable framework to arrest the decline in fiscal and external buffers since 2014,” said Bikas Joshi, who led an IMF mission to Bahrain in 2018. “The introduction of a value-added tax in January 2019 is a particularly significant step, as are plans for cost recovery in utilities and further meanstested subsidy reforms.” Ta k i n g i n t o a c c o u n t t h e Government’s new plan, S&P now expects Bahrain’s fiscal imbalance to narrow at a faster pace, reaching five per cent of GDP by 2021 from close to 10 per cent of GDP in 2017. Bahrain has kept the conditions of the loan close to its chest, however it is thought to be tied to the planned reforms.
According to Moody’s calculations, the FBP is aiming to shrink government spending to 19.5 per cent of GDP from 26.6 per cent in 2018 over four years, with an increase in revenue to 19.3 per cent from 17.5 per cent, which would restore budget balance by 2022. CRUDE AWAKENING Hydrocarbon production accounted for about 15 per cent of nominal GDP in 2018, implying that Bahrain is less vulnerable to fluctuations in oil prices than the rest of GCC. However, non-oil growth needs a bigger boost before it can protect the economy from the highs and lows of black gold. Moody’s expects that Bahrain’s non-oil growth will be around three per cent in the next few years, with fiscal consolidation weighing on growth momentum somewhat. “Economic activity was subdued in 2018,” said Joshi. “Oil output is expected to have declined by 1.2 per cent, while nonoil output growth decelerated to 2.5 per cent, driven by slowdowns in retail, hospitality, and financial services sectors. Continued implementation of GCCfunded projects has supported growth in the construction sector. “Overall growth in 2018 is estimated at 1.8 per cent, with inflation edging up to 2.1 per cent, mainly driven by higher food and transport prices. With higher oil prices, the reduction in utility subsidies, and the new excise taxes, the overall deficit in 2018 fell to 11.7 per cent of GDP, from 14.2 per cent in 2017. Public debt increased to 93 per cent of GDP. The current account deficit widened to 5.8 per cent, while reserves remained low, covering only about one month of prospective non-oil imports at end 2018.” The Kingdom has highlighted how non-oil revenues have inched upwards. The Bahrain Economic Development Board claims that Bahrain’s annual real GDP growth of 1.6 per cent in the third quarter of 2018 was underpinned by the construction and manufacturing sectors,
THE INTRODUCTION OF A VALUE-ADDED TAX IN JANUARY 2019 IS A PARTICULARLY SIGNIFICANT STEP, AS ARE PLANS FOR COST RECOVERY IN UTILITIES AND FURTHER MEANSTESTED SUBSIDY REFORMS. — Bikas Joshi, Mission Chief, Bahrain, IMF
as well as increased infrastructure spending. Construction has long been a stalwart of Bahrain’s economy, and with a raft of new megaprojects on the horizon it is likely to play an even more prominent role. Overall, construction increased 6.2 per cent in the first three quarters of 2018. Large projects such as the opening of the Alba Line Six, which now makes the aluminium smelter the largest in the world, and the Bahrain Petroleum Company Modernisation Programme, are just two of the many large-scale infrastructure developments underway in the Kingdom.
Bahrain’s financial sector is another dependable performer. “The banking system remains stable,” said Joshi. “Ongoing efforts at supervisory and regulatory vigilance, and to further enhance the AML/CFT framework, are welcome. Bahrain has been a leader in fintech, promoting opportunities while revising regulations and collaborating with other regulators.” S & P e s t i m a t e s t h a t Ba h r a i n’s domestic banks have gross assets at 236 per cent of GDP and, on average, banks display high regulatory capital positions. Domestic liquidity remains healthy with an increase in domestic deposits during 2017, coupled with a stable amount of funds from the Government. Most of the asset price correction has worked its way through the banking system, according to S&P, as shown by the decreasing cost-of-risk of most banks operating in the country. “We do not expect a significant negative impact on the asset quality of the local banking system,” S&P said. “We also note that the exposure to the construction and real estate segment has stabilised at about 19 per cent of gross loans, though it still stands at a high 35 per cent of commercial loans.” However, with a large number of pocket-sized banks to serve the small bankable population, there is no escaping the fact that Bahrain is overbanked, forcing intense competition and squeezing interest margins. “High shares of customer deposits, including from local and foreign owners, and limited reliance on external debt, feature prominently in retail banks’ funding profiles,” S&P said. “Excluding the external assets and liabilities of the wholesale sector, Bahrain’s narrow net external asset position would likely turn to a liability position in the region of 30 per cent of current account receipts rather than the creditor position we currently present.”
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THE BEST LAID PLANS While Bahrain’s promises to better the economy, impartial observers have cast a long shadow of doubt over the country’s ability to fully implement its ambitious reforms in such a short space of time. “Given the challenge of achieving such large and broad fiscal consolidation, and in light of Bahrain’s limited track record of implementing significant fiscal tightening, Moody’s assumes only a partial implementation of the ,” the rating agency said. “While VAT looks likely to be implemented, maintaining some of the planned expenditure cuts over several years will likely be challenging.” Because of this, Bahrain’s new measures are more likely to stem debt rather than obliterate it. S&P estimates that the Government’s gross debt stock will reach 87 per cent of GDP by 2021, down from earlier projections of 100 per cent of GDP by 2021.
Bahrain’s reserves stood at
billion as of September 2018 “In our view, the high level of debt remains a constraint on the government’s fiscal flexibility,” it said. “We do not expect government debt to reach the legislated debt ceiling, currently at 102 per cent of GDP. We estimate debt on a net basis at about 60 per cent of GDP in 2018 and forecast net debt at 69 per cent of GDP by 2021.” This means that ser vicing the Kingdom’s mountainous debts will continue to be a struggle for the cashstrapped countr y. Bahrain’s gross international reserves are low, covering less than one month’s current account payments and about 40 per cent of the monetary base, according to S&P’s estimates.
Bahrain’s external vulnerability is projected to remain very high and its fiscal strength to remain very low.
Bahrain’s reserves stood at $2.6 billion as of September 2018. In the absence of a substantial and sustained net inflow of foreign currency, this level is prone to volatility. Moody’s expects that reserves will remain in a range that covers only about one to two months of imports of goods and services. While Bahrain’s support package will cover its debt payments, they will not stretch to increase its foreign exchange reserves. This leaves Bahrain without much of a cushion against economic shocks, including potential declines in oil prices. Because of this, Moody’s expects Bahrain’s external vulnerability to remain very high and its fiscal strength to remain very low.
WE DO NOT EXPECT A SIGNIFICANT NEGATIVE IMPACT ON THE ASSET QUALITY OF THE LOCAL BANKING SYSTEM. — S&P
WHILE MOODY’S EXPECTS SOME IMPLEMENTATION HURDLES AND, AS A RESULT, A MORE GRADUAL FISCAL CONSOLIDATION, SOME OF THE MEASURES OUTLINED BECOMING EFFECTIVE WILL SLOW THE WEAKENING OF BAHRAIN’S FISCAL METRICS. — Moody's
Nonetheless, a partial implementation of the is better than nothing and will at least make any remaining debt more affordable. Under the assumption of a partial implementation of the , Moody’s expects that debt affordability will remain low, with interest payments to revenue rising slightly, to 21 per cent in 2022 from 19 per cent in 2018. Even if fully implemented, the alone will not be enough to secure Bahrain’s financial future. Upon leaving ‘businessfriendly Bahrain’, Joshi concluded, “Additional reform efforts, anchored in a more transparent medium-term agenda, will be needed to ensure fiscal sustainability and support the currency peg, which continues to provide a clear
Despite the oil sector contributing less than
to GDP, fiscal revenues are heavily dependent on oil
and credible monetary anchor. Further revenue measures, including a direct taxation system such as corporate income tax, could be considered and spending reforms should be designed to protect the most vulnerable. “Sustained structural reforms would help support inclusive growth and further economic diversification. This requires developing a dynamic private sector, while transforming the role of the Government without sacrificing necessary public services. Targeted education and labour market reforms would help promote opportunities and improve productivity. Efforts to place greater emphasis on vocational education and retraining are welcome, particularly as technology is rapidly changing the nature of work. Reforms to streamline regulations should further improve efficiency and catalyse private investment. Improving access to financing for small and medium enterprises would invigorate further the private sector’s contribution to the overall economy.” While Bahrain may be friendly towards business, it perhaps needs to be a little kinder with long-term reforms that will turbocharge the private sector rather short-term measures that will appease the Government’s creditors. When its debts are paid, it will be left with obligations to its citizens and neighbours which the Kingdom’s future prosperity depends upon it fulfilling.
BAHRAIN in numbers POPULATION
31.4 years 1m
Source: Worldometers (2019)
Source: Worldometers (2019)
GDP NOMINAL GDP
$32.2 billion (2016) $35.3 billion (2017) $39.1 billion (2018) $41.3 billion (2019 – projected)
GDP PER CAPITA (000s)
22.6 (2016) 23.5 (2017) 24.9 (2018) 25.4 (2019)
3.5% (2016) 3.8% (2017) 2.3% (2018) 2.7% (2019 – projected) Source: Standard & Poor’s
REAL NONOIL GDP (as percentage of GDP)
4.0% (2016) 4.8% (2017) 3.9% (2018) 3.1% (2019 – projected) Source: IMF
-0.4% (2016) -1.6% (2017) -0.9% (2018) -0.5% (2019 – projected) Source: Standard & Poor’s
REAL GDP GROWTH
GDP PER CAPITA GROWTH
CURRENT ACCOUNT BALANCE
-$1.5 billion (2016) -$1.6 billion (2017) -$0.9 billion (2018) -$0.9 billion (2019 – projected)
OVERALL FISCAL BALANCE (per cent of GDP)
-17.6% (2016) -14.3% (2017) -8.9% (2018) -8.4% (2019)
70.3% (2016) 78.1% (2017) 81.8% (2018) 83.3% (2019 – projected)
15.7% (2016) 16.6% (2017) 18.5% (2018) 17.6% (2019 – projected)
Source: Standard & Poor’s
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CRYPTOKINGDOM: HOW BAHRAIN IS BUILDING A LEADERSHIP ROLE IN DIGITAL FINANCE With established fintech credentials, the Kingdom of Bahrain is taking a comprehensive approach to establish itself as the region’s cryptocurrency leader
The Central Bank of Bahrain’s introduction of the rules relating to cryptoassets is in line with its goal to develop comprehensive rules for the fintech eco-system, supporting Bahrain’s position as a leading financial hub in the MENA region.
(PHOTO CREDIT: DOMINIC DUDLEY/SHUTTERSTOCK)
hen Bahrain becomes the first country in the MENA region to regulate a digital cryptocurrency exchange, the landmark will signal both the region’s digital sophistry as well as the regulator’s readiness to engage with the thorny issues afflicting the $134 billion sector. Only a handful of countries have specified rules for the trading of these digital assets. Regulator attitudes range from outright bans on their trade and holding to recognising them as property. In the UK, for example, cryptocurrencies are not considered legal tender although their exchanges must be registered and any gains and losses are taxed. In this scenario, Bahrain is one of the few nations to emerge as a testing ground for cryptocurrencies and their management. One of the most established financial centres in the Gulf, Bahrain has also reinvented itself as a centre for financial technology and its
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Bahrain FinTech Bay is the largest of its kind hub in the Mena region. Accordingly, its lessons could help other jurisdictions, whether in the UK or elsewhere. ENTREPRENEUR SUPPORT In 2017, the Central Bank of Bahrain (CBB) established a regulatory sandbox to help crypto-linked start-ups trial and refine innovative products, while minimising risks to customers and giving regulators time to enact legislation as required. Cryptocurrency exchange Rain is the first company to exit this sandbox and is now just a short time away from launch, its promoters said recently. The Middle East-focused exchange is currently in the process of applying for the relevant licence to enable sophisticated investors, Islamic institutions and top-tier family offices to trade and store cryptocurrency in a Shari’ah-compliant manner. Rain will open the Islamic markets to cryptocurrency with a Shari’ah-compliant exchange and a suite of cryptocurrency investment opportunities. A major milestone in the cryptocurrency and Islamic markets the company is now very public launch. BUSINESS GUIDELINES Rain’s graduation follows new statutes from the Bahrain Central Bank aimed at bringing cryptoassets within the regulatory perimeter. The guidelines cover areas such as licencing, risk management, governance standards and cybersecurity measures. The CBB’s introduction of the rules relating to cryptoassets is in line with its goal to develop comprehensive rules for the fintech eco-system supporting Bahrain’s position as a leading financial hub in the MENA region. Rain is only one of several firms in the CBB’s programme, according to Dalal Buhejji, the senior manager of business development and financial services at the Bahrain Economic Development Board. Perhaps because of cryptocurrencies’
BAHRAIN IS ONE OF THE FEW NATIONS TO EMERGE AS A TESTING GROUND FOR CRYPTOCURRENCIES AND THEIR MANAGEMENT. ONE OF THE MOST ESTABLISHED FINANCIAL CENTRES IN THE GULF, BAHRAIN HAS ALSO REINVENTED ITSELF AS A CENTRE FOR FINANCIAL TECHNOLOGY AND ITS BAHRAIN FINTECH BAY IS THE LARGEST OF ITS KIND HUB IN THE MENA REGION.
start as a parallel payment system and their use in money laundering, the new regulations have been welcomed by fintech entrepreneurs. Regulated assets raise investor confidence, people who use cryptocurrencies will feel more comfortable knowing there is a regulatory body in place. Last June, the CBB issued its first sandbox licence to the digital asset exchange Palmex, a company that provides multiple trading pairs including DubaiCoin, Bitcoin, Ethereum and XRP. A few months later, the Switzerlandbased financial technology firm X8 AG announced plans for a cryptoexchange with a Shari’ah-compliant component, and said it was in talks with exchanges in Bahrain and other Mena cities. BILATERAL COLLABORATIONS Bahrain has repeatedly stressed the merits of blockchain technology while underscoring the importance of cybersecurity. Its positive environment for blockchain assets is expected to catapult the GCC nation into an elite club of crypto-friendly states that include Gibraltar, Malta and Lichtenstein. The Kingdom’s prominent role in the knowledge economy will also likely attract investors from other markets.
Not only do Bahraini financial services companies having established ties with emerging and developed nations such as India and the UK, but setting up and doing business in the financial services sector here is also 35 per cent cheaper than elsewhere in the Gulf, according to the consultant KPMG. In December, the EDB signed a Memorandum of Understanding (MoU) with the government of India’s Maharashtra state, home to Mumbai, to establish a framework for fintech co-operation between the two countries. A similar agreement is being discussed with Digital Jersey to give the British financial centre access to Bahrain’s Islamic fintech expertise. Final talks are due to be held in April with a possible MoU in May. Bahrain is already a strong market for many British firms and the two nations’ financial sectors could thrive in a post-Brexit partnership. Bahrain has a history of championing new business sectors from the time it was the first place on the Arabian Peninsula where oil was discovered in commercial quantities. In continuing to leverage that tradition of innovation, the island is fast est ablishing a reputation for leadership in the digital finance arena.
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CALM SEAS: A MODEST GROWTH FOR THE WEALTHY Godfrey Sullivan and Harold Haddad, both Partner & Managing Director at Boston Consulting Group Middle East, believe that the performance of MENA economies weighs on the growth of wealth across the region this year
(PHOTO CREDIT: BY EMILIAUNGUR/SHUTTERSTOCK)
ooking back in the last 12 months, what are your views on the private banking and wealth management sector in the Middle East? Personal wealth has experienced a slower than usual growth in the Middle East in 2018, mainly driven by an overall slow-down of the wealthier economies in the region. The GDP per capita variation by country remains unchanged with two extremes from $130,000 to less than $10,000. On a more positive note though, HNWI in MENA have tended to keep their assets closer to home in comparison to previous years, increasing their exposure to home markets. Part of this is due to a continued meek perspective on the overall banking sector in Europe. In line with major trends across the industry, private banks have also begun to offer a more personalised approach to their clients. How do you see this developing over the course of the year, how sustainable is this strategy and would you do things differently? If so, how? Similar to retail banking offerings, private banking players are seeking to implement personalisation to deliver value to clients across many dimensions. This is also beneficial in terms of clients seeing the value and increasing their willingness to invest. Personalisation is not only limited to offeringâ€”it encompasses tailored communication, marketing and event offering.
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Whilst the race to personalisation is on, many banks do not communicate with their clients or assume what the latter wants which can have a detrimental effect on client journeys. Private banks are warming to the idea of hybrid business models, which mix personal advice with digital offerings—and offer investors the best elements of a robo-adviser coupled with a personalised experience only a human can provide. Leveraging digital and analytics, several banks in MENA have introduced new customer journeys, self-service trading platforms and access to a broader set of investment solutions. That being said, digital offerings for HNWI still trail behind mainstream retail, with significant room to introduce further personalisation. Increased focus of many Middle East economies on privatisation will increase the room for angel, VC and private equity investing in MENA which remain significantly behind other developing economies.
WITH A GENERAL SLOW-DOWN IN MENA WEALTH AND IN PARTICULAR, WITH THE FAVOURITE ASSET CLASS OF MANY HNWIS AROUND REAL ESTATE, MENA PRIVATE AND WEALTH MANAGEMENT PLAYERS WILL HAVE TO IDENTIFY ANCILLARY OPPORTUNITIES TO ATTRACT PRIVATE BANKING WEALTH. — Godfrey Sullivan, Partner & Managing Director, Boston Consulting Group Middle East
What challenges do you foresee for the coming year? With a general slow-down in MENA wealth and in particular, with the favourite asset class of many HNWIs around real estate, MENA private and wealth management players will have to identify ancillary opportunities to attract private banking wealth. Differentiation will become increasingly difficult between players as they offer similar products and target the same client and wealth pool—the most effective path to take is to focus on delivering a better, faster and more convenient client experience. Data analytics is believed to be an impetus in investment decisions. How much of this would actually assist wealth managers? What are your recommendations in striking a balance between reliance on predictive technology and human intuition?
Data analytics is naturally an essential component for investment decisions of wealth managers. Data could be leveraged to bridge the existing gap between customer expectations and the business anticipations. Segmenting your audience will allow you to create more personalised offers and attract new clients with razor-targeted propositions. The challenge that continues to be faced in MENA is that banks are sitting on a gold mine of data but they still need to catch on to the idea of mining the data and building on it. M a ny ba n k s h ave t a ke n u p o n themselves to further strengthen their data infrastructure and data quality. That being said, this remains to be done at individual entity levels and tying the knots with broader ecosystems remains nascent. In addition, we have seen a rising trend for banks to start hiring data analysts with the intent to increase personalisation and increase customer share of wallet.
WE EXPECT TO PROGRESSIVELY SEE A SHIFT FROM PREFERRED ASSET CLASSES OF REAL ESTATE INTO PRIVATE INVESTMENTS— THAT BEING SAID, REBALANCING SIGNIFICANTLY THE MIX WILL BE A LONG JOURNEY. — Harold Haddad, Partner & Managing Director, Boston Consulting Group Middle East
What kind of opportunities do you see in Middle East markets at the moment? Further investing in hybrid digital business models and data analytics are certainly key imperatives for the MENA private and wealth markets. However, there is still significant work to be done on the regulatory side, ensuring proper central census entities are established and further transparency is provided. What are your projections on the growth of wealth in the region and on asset classes in 2019? Projections for wealth growth in 2019 will be more modest than previous years as a reflection of the performance of MENA economies. We expect to progressively see a shift from preferred asset classes of real estate into private investments—that being said, rebalancing significantly the mix will be a long journey.
AN OUTLOOK ON 2019 Christian Edelman, Head of Financial Services (EMEA) and Matthieu Vasseux, Head of Financial Services (MEA), both at Oliver Wyman, list out the ten top trends affecting the asset management industry this year (PHOTO CREDIT: ORIONTRAI/SHUTTERSTOCK)
he year 2018 witnessed several industries adjust to the ‘new normal’, where unpredictability was rife, particularly for the asset management industry across the region. The three underlying themes that become predominantly prominent are technology, efficiency and doing the right thing. OUTSOURCING SHIFTS TO THE FRONT OFFICE The outsourcing conversation has tended to focus on cost reduction in the middle and back office processes. No more— it’s coming to the front as well. Open source analytical and code libraries are proliferating, and access to the massive amounts of data created by the online world is increasingly open.
This entails a declining dependence on armies of in-house coders and data scientists, and a greater use of readymade tools and external resources. This will have critical implications for portfolio managers who will have to become fluent in this world. It is early days, but some GCC asset managers are moving to algorithmic trading which requires advanced analytics, and a few pioneers are exploring artificial intelligence o r m a ch i n e l e a r n i n g t o i d e n t i f y investment opportunities. ACTIVE MANAGEMENT BECOMES ACTIVE OWNERSHIP As volatility reasserts itself and the 10 per cent annualised equity returns become a distant memory, managers will define themselves not just by
Some firms have improved the conversion of sales leads by
by applying smart data analytics in distribution
WITH THE RECENT SIGNIFICANT DROP IN MARKET CAPITALISATION FOR STAND-ALONE ASSET MANAGERS, POTENTIAL SELLERS OF IN-HOUSE ASSET MANAGERS MAY BE INCLINED TO REDUCE THEIR PRICE EXPECTATIONS. — Matthieu Vasseux
what they invest in but by how they invest in it. Managers looking to make a compelling case for how they can outperform in difficult markets will begin to shift from an active management to an active ownership mindset, where the typical holding period is more like eightto-ten years rather than the traditional one-to-three. This longer-term, “private equitylike” investing approach will help d i ffe r e n t i a t e t h o s e m a n a g e r s who can credibly frame their v a l u e p r o p o s i t i o n i n t h i s w a y. GCC private asset managers are still focused on shorter time horizon. SWF on the other hand are increasingly being active investors using their scale and clout and taking an ownership mindset.
ASSET MANAGERS LOOK TO 'GREENFIELD' TO TACKLE THE TECHNOLOGY DRAG Outdated core asset management technology architectures make even simple upgrades unnecessarily difficult, costly and unrewarding. Asset managers are reaching a crunch point. Fed up with the traditional incremental approach, some will heed lessons from the banking sector where greenfield tech builds are now wellestablished, not only with newcomers but, increasingly, with incumbent players. At the heart of a greenfield approach is the data integration layer which allows asset managers to plug into a wide range of third-party services and applications, which makes the time and costs of building and operating only a fraction of maintaining the legacy system. We
expect the combination of continued top line and cost pressures to lead to a few initial greenfield asset management builds in 2019. As leading GCC asset managers reach critical scale they indeed look at new greenfield IT solutions to leapfrog, especially for those who have not yet invested in expensive legacy systems. The opportunity is clearest for SWFs who have assets spanning all continents, asset classes and management style. MOVING FORWARD BY MOVING BACK: MONETISING DATA ANALYTICS Hundreds of millions of dollars have been invested in building data science teams and advanced analytical capabilities. There have been successes. For example, some firms have improved the conversion of sales leads by 20-30 per cent by applying smart data analytics in distribution. But that is the exception. For most, the ROI of these investments has been limited. Many firms have yet to figure out how to translate these capabilities into improved decision-making across the organisation. Instead of pushing the boundaries of analytical sophistication, firms will take more of a “back to basics” approach, re-focusing their
mass market and, eventually, to DC plans via customised Target Date Funds, threatening those that are overly reliant on traditional fund structures. Very relevant especially for the lower end of HNW in GCC where margins are still high enough and a lot of untapped client demand for SMA which was not possible before this technology enabled it. ASSET MANAGERS: LATE AGAIN TO REGULATORY REFORM Many asset managers underestimate the impact of the LIBOR transition. They will be affected by changes not only to the instruments in their portfolios, but also to their benchmarks, performance targets and valuation models. The challenge is exacerbated by global divergence in timelines and the type of LIBOR replacements being proposed. Regulatory pressure on banks and insurers is already high, and we expect the asset management industry to come under growing scrutiny. We expect asset managers who have not already done so to scramble to get transition project teams up and running. This is very relevant as many GCC benchmarks are mirrored off LIBOR, like EIBOR and SIBOR. GCC asset managers will need to adapt to this.
efforts on detailing clear uses, getting better business engagement, updating core workflows and data models, and designing solutions for front line users, not for data engineers. For asset managers it is mostly centred around account/client/sales management where leading players are developing real time dashboards and client analytics. For SWF the opportunity is to better steer through advanced analytics what can be very complex portfolios. DEMOCRATISATION OF THE SEPARATE ACCOUNT THREATENS TRADITIONAL MUTUAL FUNDS Advances in technology are making it possible to offer separately managed accounts (SMAs) cost-effectively at much lower AuM levels. The benefits of SMAs include customisation, tax/ESG overlays and minimising the liquidity drag inherent to fund structures. Tech-enabled SMAs will make these benefits increasingly available to the
IN 2019, WE EXPECT CYBERSECURITY AND ENTERPRISE RISK MANAGEMENT WILL BE KEY PRIORITIES FOR ASSET MANAGERS, AS THEY SEEK TO IMPROVE THEIR CAPABILITIES TO IDENTIFY, PROTECT, DETECT AND RESPOND AND RECOVER FROM KEY RISK EVENTS. — Christian Edelman, Head of Financial Services (EMEA), Oliver Wyman
DIVERSITY MOVES UP A GEAR The argument for diversity in asset management is no longer about proving the business case but rather that “it’s the right thing to do”. Asset managers need to lead by example if they want to promote change in their investee companies. There is engagement and energy on the ground and, crucially, support at the top, and that feels like progress. But the numbers do not show much improvement. To turn the dial, leading diversity players are explicitly stepping up their company’s and individuals’ goals. We have seen some holding managers adjust pay, while other firms are setting targets for under-represented groups. We expect more asset managers to do the same,
for doing so. This is a huge theme but especially for SWF and national holding companies where they also have a national agenda and a public image goal. BUILDING BUSINESS RESILIENCY: GROWING IMPORTANCE OF CYBERSECURITY AND NONFINANCIAL RISK MANAGEMENT Cyber, technology and data privacy risks are increasingly important for asset managers by virtue of increasing regulatory pressure and asset owner expectations. Yet, most asset managers struggle to identify and prioritise their most important non-financial risks; erect suitable controls against infrastructure disruptions, compromised systems, and misuse of sensitive client data; and deliver reporting that enables effective business decision-making. In 2019, we expect cybersecurity and enterprise risk management will be key priorities for asset managers, as they seek to improve their capabilities to identify, protect, detect and respond and recover from key risk events. Cyber is key in the GCC where there have been multiple high-profile attacks in recent years and SWFs especially invest to ensure the confidentiality of their most sensitive information and deal making is protected. This is a big focus area.
with the aim of making the industry and the investees more diverse, inclusive and attractive places to work. Increased women participation in workforce is a fundamental trend in GCC, especially in Saudi Arabia, it applies to asset management too where we see women rising to CEO level. STEWARDSHIP—WHOSE RESPONSIBILITY IS IT? ESG awareness is rising. But there are still large unanswered questions for the asset management community. What exactly is stewardship and what form should take? What role should passive capital play in providing stewardship, and who is going to pay for it? And how can stewardship responsibilities be extended to both short-term and long-term providers of capital? We are at an inflexion point where some asset managers are going to step up significantly and show leadership in answering these questions. Society will increasingly recognise and reward them
REGULATORY PRESSURE ON BANKS AND INSURERS IS ALREADY HIGH, AND WE EXPECT THE ASSET MANAGEMENT INDUSTRY TO COME UNDER GROWING SCRUTINY. — Matthieu Vasseux, Head of Financial Services (MEA), Oliver Wyman
BRIDGING THE VALUATION GAP With the recent significant drop in market capitalisation for stand-alone asset managers, potential sellers of in-house asset managers may be inclined to reduce their price expectations. This effect may be greatest for small players without distribution scale or product breadth, making them much cheaper and potentially more relevant targets. Many banks and insurers see their captive asset management unit as a potential token for monetization in case of a crisis. As the value of this token is declining, potential sellers may be more inclined close a deal, leading to increased consolidation.
DEVELOPING THE TALENT POOL Banker Middle East catches up with Jamal Al Jassmi, General Manager at Emirates Institute for Banking and Financial Studies (EIBFS) Jamal Al Jassmi
ow was 2018 for EIBFS? 2018 was a great year that saw EIBFS exceed the targeted number of training programmes. Under our flagship Annual Training Plan (ATP), we offered 616 programmes to a total of 14,990 participants. This represented over six per cent increase from 2017. Together with vocational training and educational programmes, workshops and other activities, our highly qualified trainers delivered 1,043 courses to over 26,000 participants from 1 January to 31 December 2018—our highest number yet. Since the Institute’s inception, its mission has been to provide the best learning experiences in the banking and finance sector. Our training programmes have resonated with the professional community, and we have seen attendance rise steadily. Year after year, we have also expanded our portfolio with subjects and courses in line with the latest industry trends, and in 2018, we have surpassed all expectations. What is the focus for EIBFS is in 2019? We aim to offer a continuous flow of programmes that add value and are in demand by the banking and financial sector throughout the year. The banking and financial services industry is witnessing major disruption. While the traditional business models for banks remain in place, we cannot ignore major technological advancements that have introduced radical changes to the sector. Financial technology or fintech is taking the industry by storm, and digitalisation is changing the face of the domain. At EIBFS, we are aware of the potential effects of this disruption. We have been observing the industry trends over the years and have identified key developments that will affect the sector in due time. This enhances our understanding of the new skills
and abilities employees will require. Because, to keep up with the changes, every professional in the sector needs to master the latest technologies and functional skills. To address this priority, our forward-looking and technologydriven 2019 Annual Training Plan offers a wide spectrum of relevant programmes and courses. At the Institute, we work closely with HR heads of banks and insurance companies. Furthermore, we have a proactive Technical Advisory Committee, comprising HR managers of leading local banks, that conducts training needs analysis and develops tailored programmes based on the results.
WE UNDERSTAND THAT THE KEY TO RETAINING UAE NATIONALS IN THE FINANCIAL SECTOR, ESPECIALLY BANKS, IS TO PROVIDE THEM WITH OPPORTUNITIES FOR GROWTH.
In 2019, we also aim to provide14 professional certificate qualifications in collaboration with specialised international institutions. In addition, we have a target of 14 e-learning programmes as well as 12 national qualifications that align with the UAE government’s Emiratization vision. This year, we seek to conduct our courses across the UAE. In addition to our three main campuses in Dubai, Abu Dhabi and Sharjah, we plan to run programmes in Al Ain and the Northern Emirates. We will also continue to offer our international bachelor’s programme in Accounting and Banking in collaboration with the reputed Bangor University in the UK. The programme allows EIBFS
In line with our commitment to preparing our graduates for the disruptive future of banking, we have introduced the fintech and analytics verticals. Fintech educates the participants about the latest trends in the financial technology space and starts with a programme on the ‘Future of Banking’. In analytics, we teach our students to apply analytical methods to improve performance across diverse domains.
students who have completed their requisite credits here in the UAE to proceed to Bangor for their final year and obtain an internationally accredited bachelor’s degree from the institution. How have digital technologies changed the financial sector, and how does the talent pool cope with it? Digital technologies are transforming the financial landscape in the UAE and globally. It is no surprise that more financial service providers look for employees that are capable of fulfilling the digital demands of the industry. The UAE population is highly tech-savvy, and fintech is instrumental in shaping the future of banking and finance. Blockchain and AI are already playing a pivotal role in various sectors, with blockchain being gradually adopted to power bank transactions. To stay ahead of the curve and strengthen their relationships with their clientele, banks are introducing new applications and technologies to make it easier for customers to manage their finances. Integrated online banking platforms are becoming more popular by the day. At EIBFS, we believe that those who wish to succeed in the field must understand the changes that are occurring and make them an integral part of their academic pursuits. Introducing courses and programmes that explore these subjects is a high priority for us. We aspire to raise the standards of our educational offering and equip our students with the tools they need to excel in their careers. EIBFS has always been at the forefront of pioneering initiatives aimed at building the competencies of the talent pool in the UAE financial industry. Our 2019 Annual Training Plan focuses on qualifying world-class professionals with advanced techno-functional skills, so that they can successfully adapt to the growing technological demands of the financial domain.
OUR FUTURE STRATEGY CALLS FOR FURTHER EVOLUTION IN LINE WITH THE INCREASING SOPHISTICATION OF THE UAE MARKET. THIS ESSENTIALLY MEANS THAT IN THE MEDIUM TERM—AROUND ONE TO THREE YEARS—WE WILL FOCUS ON TRAINING AND CERTIFICATIONS, COMPLEMENTED BY A WELLDEFINED SELECTION OF ACADEMIC PROGRAMMES OFFERED IN COLLABORATION WITH THIRD PARTIES. — Jamal Al Jassmi, General Manager at Emirates Institute for Banking and Financial Studies
What Emiratization initiatives do you have in place for financial institutions in the country? EIBFS has introduced various dedicated programmes for UAE nationals, customised to the needs of banks and insurance companies. As nationalisation initiatives in the banking sector play a significant role in supporting the UAE economy, we routinely review our courses to align with the Emiratization strategies of financial institutions. A prime example of our efforts is the Masrafi National Development Programme that focuses on training UAE nationals who are interested in a longterm career in the banking and financial industry. As part of the initiative, we signed agreements with select banks to encourage their Emirati employees to complete professional certificate courses, such as Certified Banking Operations (CBO) and Certified Credit Management (CCM), as well as specialised training for bank branch managers. Overall, 6,489 Emiratis—25 per cent of the total number of students—participated in our training courses last year. We understand that the key to retaining UAE nationals in the financial sector, especially banks, is to provide them with opportunities for growth. Given the importance of building leadership competencies, and in line with the Federal Government’s strategy to invest in national human capital, EIBFS continues to prepare senior bankers to become the leaders of tomorrow.
training courses and boost quality as well as perception. W ith regards to our academic portfolio that includes bachelor ’s and diploma programmes, BCG has recommended building synergies with other best-in-class educational institutions, preferably within the UAE. It has proposed that we implement a new academic partnership model that will leverage the strengths of our partners to develop high-value
specialised programmes. The partners will handle core course deliver y and add credibility to each degree, especially for advanced courses. In turn, they will benefit from a stronger link with banks. We are keen to pursue this avenue. Finally, as an advocate of Emiratization and a strategic partner of the Ministry of Human Resources and Emiratisation, the Institute will continue to engage in nationalisation strategies.
Digital technologies are transforming the financial landscape globally and in the UAE. It is no surprise that more financial service providers look for employees that are capable of fulfilling the digital demands of the industry.
(PHOTO CREDIT: SUDTAWEE THEPSUPONKUL/SHUTTERSTOCK)
What is EIBFS’ strategy for the medium term? Our future strategy calls for further evolution in line with the increasing sophistication of the UAE market. This essentially means that in the medium term—around one to three years—we will focus on training and certifications, complemented by a well-defined selection of academic programmes offered in collaboration with third parties. We also aim to expand our range of
OPPORTUNISTIC OPTIMISM: RIDING THE INVESTMENT CYCLE Gautam Duggal, Regional Head â€“ Wealth Management EMEA and UAE at Standard Chartered Bank, takes a deep dive into the evolving nature of wealth management in the Middle East, and the investment landscape for the year
ow has the year been thus far? The year so far has been a mix bag. When we published our Outlook for 2019 at the end of last year, we anticipated a shift to less risky investments, given the macroeconomic conditions at the time, however there have been few positive surprises this year with the US Federal Reserve taking a stance to pause the interest rate hikes. What emerging themes do you see developing in the wealth management space? We see an increasing interest in environmental, social and governance (ESG) solutionsâ€”the demand for ESG solutions are being fuelled by increased investor
awareness and interest, government support in many markets as well as wealth changing hands to the next generation of more socially conscious investors. Industry research tells us that the new generation also known as the millennials, are twice as likely to invest in companies or funds with ESG outcomes, and over 80 per cent cite investing with a focus on ESG impact as central to their investment decision making. In line with this, we are seeing a growth in ESG funds in global markets. How have macro developments impacted your business and your clientele?Â Macro developments have positively impacted both, our business and our clientele. As the global macroenvironment
has become extremely dynamic, sentiments have improved and appetite for risk assets have increased, all of which has had a positive impact. When we met last year, you mentioned your biggest concern is the US-China trade dispute. What are your views on that this year? The positive impulse from US-China trade tensions easing initially boosted global markets, however various other forces continue to challenge markets. The negotiators have held several rounds of talks since December last year in a bid to reach an agreement as the dispute has heavily cost the two largest economies in the world and jolted financial markets.
(CREDIT: FLORANTE MAGSAKAY/CPI FINANCIAL)
Nabilah Annuar, Editor, Banker Middle East and Gautam Duggal, Regional Head – Wealth Management EMEA and UAE, Standard Chartered Bank
Our assessment is that a US-China trade deal will be reached in the coming months, but it will remain a risk; US-China trade talks point to de-escalation, albeit not a complete reversal of existing tariffs. What major risks do you see affecting your portfolios? While the macro environment suggests a favourable outlook for some investment strategies, it is important to highlight the key risks: • A stronger-than-expected pick-up in inflation could prompt a change in current dovish stance of the Fed, which may trigger a negative reaction in rate-sensitive income assets;
MILLENNIALS ARE TECHSAVVY, PHILANTHROPIC, FINANCIALLY RISK-AVERSE, AND HAVE A CULTURALLY INCLUSIVE WORLDVIEW—TRANSFORMING PRODUCTS AND ENGAGEMENT MODEL TO A DIGITAL PLATFORM IS VITAL TO SERVE ALL SEGMENTS MORE EFFICIENTLY AND EFFECTIVELY. — Gautam Duggal
• A protracted risk-off environment, prompted by economic and earnings growth concerns, which could lead to significant widening in corporate bond spreads and weakness in equities and non-core assets. Risks to our equity views—US growth and earnings recession, sharp tightening in US monetary policy, weakening Chinese growth; risks to our core holding view—fund outflows, political risks, a global economic slowdown and a China hard landing negatively impacting the commodity markets. Which asset classes are you most optimistic about and why? We favour equities over bonds, alternative strategies and cash.
(CREDIT: FLORANTE MAGSAKAY/CPI FINANCIAL)
Duggal pointed out that wealth management clients are becoming more astute about financial planning and are seeking digital capabilities and better advisory options.
Within equities, we maintain our regional preference for Asia ex-Japan. In our assessment, valuations, earnings and technicals, all suggest that there is room for gains to extend. Within the region, we continue to prefer China (onshore and offshore). While over 30 per cent gains in the onshore Shanghai Composite may seem like a lot, history shows it is not uncommon for the market to deliver significantly more in a given year, especially if inflows to EMs are well-supported. Within bonds, we prefer emerging market (EM), US dollar (USD) government bonds and Asia USD bonds. The absolute level of yields
THE GBP IS VERY UNDERVALUED, AND WE EXPECT THAT BREXIT RESOLUTION AND INTEREST RATE NORMALISATION WILL DRIVE THE GBP STRENGTH IN THE NEAR- AND MEDIUM-TERM. — Gautam Duggal, Regional Head – Wealth Management EMEA and UAE, Standard Chartered Bank
(approximately 6.1 per cent and 4.4 per cent respectively) remains attractive, in our assessment. Meanwhile, further gains in risky assets and a weaker USD also argue the case for rising emerging market bond prices, especially as valuations are not a constraint. In our Global Investment Committee’s assessment, the Fed’s economic and interest rate projections point to capped US bond yields and a weaker USD. In our assessment, our expectations of further gains in equities and EM/Asian USD bonds, and a weaker USD, translate directly to continued support for multiasset income strategies.
What are your views on gold as a commodity? Gold prices have eased as market participants scaled back the probability of a Fed rate cut this year. We expect the Fed to remain on hold this year and we do not expect the economy to tilt into recession. Central bank buying and an improving physical market have slowed the decline. Unless we see a further compression in real rates or a significant decline in the USD, we believe risks are skewed towards the upside given our expectations of gold trading in the $1,250-1,350/oz range over the next 6-12 months. Oil is another inevitable factor when operating in this region. In light of various developments over the last few months, has your outlook changed? While concerns around supply (i.e. renewed conflict in Libya) have risen, the demand for oil has remained resilient despite the recent soft patch in the global economy. The timing of the US decision to end all sanction waivers recently, caught most market participants by surprise, driving prices higher. However, we believe the fundamental set-up is significantly different compared to last year, given the visibility on available OPEC spare capacity, the US has continued to increase its oil output although this had been offset by OPEC production cuts. The de-bottlenecking of the Permian on the back of new pipeline and export capacity should boost US shale production. Investor diversity has also been relatively low. Further price gains will unlikely be sustained in our view. Our expectation for oil to trade in the $65-75/ bbl range remains unchanged. What is your take on currencies this year? We believe the USD uptrend is fading. A rise in volatility and a breakout from recent tight trading ranges could signal the start of a USD decline. We believe
WE BELIEVE THAT AS CHINA AND ASIAN ECONOMIES RECOVER ON THE BACK OF FISCAL AND MONETARY STIMULUS, SENTIMENT TOWARDS THE EUR AREA WILL BECOME LESS PESSIMISTIC AS THE ECONOMY STABILISES. IF THE USD LOSES ITS UPWARD TRACTION, THE EUR/USD, ALMOST BY NECESSITY, WOULD FINALLY TURN HIGHER. — Gautam Duggal China, Japan and EM will deliver fiscal stimulus that could help re-synchronise global growth and allow interest rate differentials to narrow. Capital flows could also shift away from the US. We also await the outcome of bilateral US trade talks with China, Japan and the EU for currency agreements that could limit USD gains. Combined with a gradual diversification in foreign exchange reserves allocation and sharper focus on the US twin deficits, the USD is likely peaking now. The euro (EUR) is likely to strengthen amid USD weakness and a stabilising economy. We are bullish on EUR/USD in the medium term despite current weak European growth and inflation data. Ongoing policy uncertainty resulting from Brexit, US-EU trade issues and forthcoming EU elections continue to weigh on the EUR. However, we believe that as China and Asian economies recover on the back of fiscal and monetary stimulus, sentiment towards the EUR area will become less pessimistic as the economy stabilises. If the USD loses its upward traction, the EUR/USD, almost by necessity, would finally turn higher. The British pound (GBP) is likely to strengthen as a ‘hard Brexit’ is avoided and valuations remain inexpensive. We remain bullish on the GBP as we expect a ‘soft’ or no Brexit, following the recent deadline delay to 31 October. UK political negotiations are likely to centre around a common market or customs union, with a growing chance of a confirmatory referendum. The GBP
is very undervalued, and we expect that Brexit resolution and interest rate normalisation will drive the GBP strength in the near- and medium-term. How do you see the wealth management sector in the region evolving over the next 18 months? The wealth management industry is experiencing an unprecedented level of change. Overall, wealth management clients are becoming more astute about financial planning, and they are seeking digital capabilities and better advisory options. The view of the industry is that the relationship with the banker and reputation remain the key selection criteria for clients. Convenience is becoming increasingly important, further stressing the need for digitalisation. As technology continues to change rapidly, wealth management firms must be agile to enhance the overall experience of clients. Today, the wealth management landscape is influenced by millennials who are the future high net worth individuals. Increased financial awareness is leading to an increased demand for more sophisticated and customised services. M i l l e n n i a l s a r e t e ch - s a v v y, philanthropic, financially risk-averse, and have a culturally inclusive worldview— transforming products and engagement model to a digital platform is vital to serve all segments more efficiently and effectively. This is especially true since all generations are quickly embracing the power of mobility and digitalisation in all life engagements.
DRIVING INNOVATION IN CORPORATE BANKING By Wissam Khoury, Managing Director for Middle East and Africa at Finastra
(PHOTO CREDIT: ANDY SHELL/SHUTTERSTOCK)
he regional banking and financial services industry is experiencing unprecedented levels of change, with an overcrowded sector being roiled by new and disruptive technology trends. On the one hand, digital technologies have transformed customer behaviour and expectations, while on the other, banks here need to continue to drive innovation to stand out from their peers and gain competitive advantage. The need to adapt is now as true for corporate banking as it is for retail: corporates today are looking for more flexibility and personalisation in their banking experiences, and they expect to receive the levels of service they are used
to as retail customers. Corporate needs have evolved from simple payment and cash management services to a stream of new value-added, real-time services such as faster onboarding, improved forecasting, lower connectivity costs, faster data delivery, and integrated bank systems with corporate enterprise resource planning and treasury management systems. To meet these expectations, banks are looking to leverage the power of emerging technologies such as artificial intelligence (AI), machine learning, digital personal assistants and blockchain. Corporates demand seamless user experiences through the transaction journeyâ€”and if their bank cannot provide it, they will look elsewhere.
The challenge for the regional banking sector is that
70 50 12 65
listed banks serve the GCC’s million people compared to about such banks for the UK’s population of
CORPORATES DEMAND SEAMLESS USER EXPERIENCES THROUGH THE TRANSACTION JOURNEY—AND IF THEIR BANK CANNOT PROVIDE IT, THEY WILL LOOK ELSEWHERE. — Wissam Khoury
The challenge for the regional banking sector is that 70 listed banks serve the GCC’s 50 million people—compared with about 12 such banks for the UK’s population of 65 million, according to Bloomberg. Fintech start-ups are also attracting increasing attention in the region, overtaking e-commerce firms as the most actively invested-in sector last year, according to industry watcher MAGNiTT. Governments here are also embracing fintech, with Dubai International Financial Centre (DIFC) and Abu Dhabi Global Markets courting them with accelerator programmes, attractive licencing opportunities and regulatory sandboxes.
The good news is that regional banks do not have to go at it alone—and fintech companies do not have to be the enemy. The shift to digital technologies and emerging trends such as open APIs have made it easier than ever for banks to partner with agile third-party suppliers such as fintechs and other technology companies, and leverage their capacity to delight customers. Banks that want to take advantage of cutting-edge technologies no longer have to develop solutions in-house, a process that is both cost-prohibitive and restrictively slow, but can use other companies’ know-how to benefit more quickly from innovation, while deepening their customer relationships.
Some of the leading banks here in the region are grasping the importance of embracing collaboration and co-creation and how this can drive higher levels of innovation. Instead of fearing fintechs, smart banks are working with them to deliver new and better customer experiences. As a leader in the IDC MarketScape for end-to-end corporate banking solution providers, Finastra is well positioned to support such collaborative initiatives. As the third-largest fintech company in the world, our services are used by banks in over 100 countries, and we continue to work closely with regional banks to help them enhance their services. Over the past decade or so, the UAE has experienced significant digital transformation in the financial-services sector, as banks explore how best to drive innovation, reach new customers and expand their revenue streams. Finastra recently hosted an event with Mashreq Bank, one of the UAE’s leading financial institutions, to drive a deeper
BANKS THAT WANT TO TAKE ADVANTAGE OF CUTTING-EDGE TECHNOLOGIES NO LONGER HAVE TO DEVELOP SOLUTIONS IN-HOUSE, A PROCESS THAT IS BOTH COST-PROHIBITIVE AND RESTRICTIVELY SLOW, BUT CAN USE OTHER COMPANIES’ KNOWHOW TO BENEFIT MORE QUICKLY FROM INNOVATION, WHILE DEEPENING THEIR CUSTOMER RELATIONSHIPS. — Wissam Khoury, Managing Director, Middle East and Africa, Finastra
understanding of the growing impact of technology on the corporate banking sector. Mashreq was a logical choice to partner with on this initiative, as the bank has a long history of embracing t e ch n o l o g y t o d r i v e i n n o v a t i o n and remain ahead of the digit al transformation curve. Mashreq Bank’s vision is to bring those innovations into the corporate world, and the bank is dedicated to delivering next-generation digital banking experiences. The UAE, and other GCC markets, features a predominantly young, techsavvy population, with some of the highest rates of smartphone penetration in the world. Accordingly, many of the technology trends that we are seeing globally are attracting strong attention here, such as banks’ increasing use of cognitive AI solutions to interact with customers. By bringing together senior business and IT leaders from some of Mashreq Bank’s leading customers, including from the telecommunications, utilities and transportation industries, the workshop was designed to examine in-depth some of the key technology trends that are disrupting the market today, including AI, machine learning, digital assistants and blockchain. The adoption of these new technologies is not an option for banks; embracing change is an imperative for survival for financial institutions as they face ever-evolving customer demands and increasing competition. Smarter banks, however, do not just see new technologies as a threat— they see them as opportunities. Those organisations that can leverage technologies such as AI and digital assistants to improve the customer experience will reap the benefits of greater customer trust and loyalty—and increased future revenues. By working more closely with third-party companies, including fintechs, banks can prepare for a better mutual future.
9 - 10 September 2019 Dubai, United Arab Emirates Financial Regulation Technology Summit presents an exclusive opportunity for the Middle East banking industry to bring the focus back to business by creating a more proactive and eﬀective compliance approach. The Summit will host senior leaders from banking and ﬁnancial institutions, regulators, government authorities, solution providers, and experts in risk, compliance and technology from across diﬀerent regions to discuss solutions to major challenges in adapting to the pace and complexities of regulation compliance.
Raja Al Mazrouei
Executive Vice President FinTech Hive at DIFC
Sopnendu Mohanty Chief Fintech Oﬃcer Monetary Authority of Singapore
Dr. Mohamed Damak
Senior Director & Global Head of Islamic Finance, Financial Services Research S&P Global Ratings
Nipun Srivastava Director Deloitte
Call for papers If you have an interesting case study or a technology / solution which can take the industry forward by making the compliance process eﬀective and eﬃcient, please reach out to us.
Topics: � Regulatory Compliance Transformation � Financial Forensics � Cyber Security
� Monitoring / Surveillance � Regulatory Reporting � Risk Management
For speaking and other enquiries, contact us at events@cpiﬁnancial.net or call us on +971 (0)55 5974599 bleed guide.indd 1
BANKING-AS-A-PLATFORM: MIDDLE EAST BANKS NEED TECHNOLOGY PARTNERS IN THE RACE TO DIGITISE Looking East—banks must transform to meet changing customer needs in the age of hyper-personalisation and near-zero marginal costs, says Pieter Zylstra, Regional director of Digital Transformation, Middle East & Africa at Orange Business Services
i d d l e E a s t b a n k s h ave adopted digital strategies as the growing population of younger customers increasingly demand and expect to bank online and on the go, including payments, moving money, managing funds, in addition to managing loans and savings. The strategy is sound and solid but success lies in the execution—and speed of execution. Barriers still remain. The reality of banking today is that it is moving more rapidly into the digital world than traditional banks are able to follow— conser vative regulations, obsolete banking infrastructures, digital savvy populations and aggressive competitors are all challenging the core business model of the traditional banks.
CHASING THE CUSTOMER Can the banking industry overcome the barriers and leverage the opportunities of combining digital technology with financial services? This is a critical question because customers are embracing digital banking solutions way ahead of banking boardrooms and the regulatory roadmaps. We are now seeing a very strong technology push into the banking sector and within banks, as they now increasingly compete with ‘Big Tech’, mobile operators and the new fintech start-ups for younger, tech savvy customers. Already the internet provides digital wallets, cheap transfer of money, crowdfunding and peer-to-peer consumer lending. Social media channels (Whatsapp,
Facebook, WeChat, etc) will soon be facilitating mobile money transfers, following successful pilots. All this is happening because customers and ‘Big Tech’ are finding their own use cases faster and faster, forcing regulators and the banking industry to adapt and play catch-up fast. Interestingly, we now see HNWIs expecting real-time wealth management services and personalised dashboards— all from the mobile phone or the tablet. Expensive wealth relationship managers are being replaced by zero-costs chatbots (algorithms) that offer 24/7 self-service. In digital banking, ‘hyper-personalisation’ i s t h e n ew key wo r d , a n d a g i l e infrastructures are the main challenge.
As all local bankers in the Middle East will know, as their clients become wealthier they start looking for new and added value private wealth management services and this usually leads them to start looking at other alternatives: banks around the region or international banks; local banks are running the risk of losing their clients who will shop around to get a higher return on their investments. LOOKING EAST FOR INSPIRATION Digital banking in Asia-Pac is compelling and provides us a with a glimpse of the future of the banking sector in the Middle East. Banks there have mastered platform-technologies in re-creating ‘banking-as- an-ecosystem’ to the point where they are now in a position to tap into additional revenue streams through adoption of cloud technology and widespread use of APIs. In Asia, we see social media companies and car-sharing players rapidly building financial (banking and insurance) ecosystems - platforms that will facilitate billions of financial transactions - and now applying for a banking licence from the regulator. Their technology stacks are dominated by cloud platforms. More and more digital payment service providers are moving into offering mobile financial services, with companies now applying for banking licences. Again, all using cloud-based platforms. And this is where the regulatory environment comes in; cloud is not yet permitted in most banking sectors across the Middle East region and so the banking sector is constrained in its ability to launch new innovative digital ecosystem banking services and benefit from the attractive economies of scale that can drive down banks’ marginal costs and increase the banks’ profit margins. Here in the Middle East, cloud offers huge potential for the banking sector and the opportunit y to break away from the limit ations of the traditional IT infrastructures and create a new API-economy.
THE REALITY OF BANKING TODAY IS THAT IT IS MOVING MORE RAPIDLY INTO THE DIGITAL WORLD THAN TRADITIONAL BANKS ARE ABLE TO FOLLOW. — Pieter Zylstra
As examples from the Asian banks are showing, customers want to do more with mobile ecosystem banking and we expect over the coming years that this new business model will be replicated and tested within the Middle East banking sector as well. We still have a way to go. Cloud is a great untapped opportunity for the Middle East banking sector. Retail banks themselves are piloting private cloud infrastructures, gaining experiences and putting pressure on the regulators. Major cloud service providers worldwide, including Amazon Web, and Microsoft Azure, are only just arriving now because of the pressures on the regulatory environment.
The future focus for Middle East banks is on ‘banking-as-a-platform’ and ‘channel—as-a-strategy’; banks can no longer monopolise all the digital touch points for customers and so need to work with new ecosystem players; banks also need to learn to partner and collaborate more aggressively, in a similar way to the retail banks in Asia-Pac. This will require new investments, mostly in agile digital banking platforms. ‘Network-as-a-service’ (using new innovative SD-WAN technologies) is already being deployed by large banking companies, freeing up CAPEX to pay for these new investments in digital ecosystem banking platforms. ‘Banking-as-a-platform’—the ecosystem play to manage near-zero marginal costs with hyper-personalisation—enables banks to use data to identify profitable niche markets and segments. If Middle East banks can get this right then there is a strong business case (as well as a growing customer expectation) to accelerate their digital transformation and be ready for the competition with the ‘Big Tech’ challengers.
ROBO-ADVISORS SET TO SHAKE UP REGION’S ASSET MANAGEMENT INDUSTRY As Bahrain publishes new directives enabling AI-capable investment solutions, how long will it take for the industry to respond?
he wealth management market in the Middle East is undergoing a dramatic shift as the region’s regulators embrace digital financial advisories, also called robo-advisors. The Central Bank of Bahrain has issued a set of directives regulating the position of these new fully automated algorithmbased investment platforms, which are fast gaining popularity among digitally native millennials eager for customised, responsive solutions that are available on demand and at a minimal cost. Bahrain has successfully positioned itself as a leading digital financial hub
and authorities are keen to maintain this edge in line with broader policies that foster financial inclusion. The new directives help the Kingdom strengthen that advantage. Robo-advisors are so far active in just a handful of markets, most notably the US, the UK, India and China, although Singapore, Malaysia, Australia, Canada and the UAE are also regulating digital wealth managers. For this emerging class of wealthtech firms, the opportunity lies with an emerging class of younger and ‘mass affluent’ investors with investable income that doesn’t qualify for traditional asset management services from banks.
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Boston Consulting Group estimates t h a t t h e r e g i o n’s H N W I / U H N W I population will grow at 14.1 per cent through to 2022, double the global rate of 7.4 per cent. By then, the Middle East’s wealth per capita is expected to increase to $25,000, from $18,000 in 2017, with total personal wealth forecast to grow eight to 10 per cent annually from $3.8 trillion in 2017. With a regional median age below 30 years, and internet penetration rates of 65 per cent, the investor profile will skew towards a much younger demographic comfortable living their lives online, and who consider instant access to information and innovative smartphone tools to be ever yday standards. Robo-advisors are a natural fit for this population, with their potential to promote sophisticated investment practises to investors with limited access to financial advisors in a fragmented banking market. UNDERSTANDING ROBO-ADVISORS The world’s first robo-advisor to interface with customers launched in 2008, but AI-powered solutions have only recently begun competing with human asset management consultants—a welcome development for regional investors inundated by cold-calling wealth managers. As the industry has expanded, robo-advisors are now more sophisticated, with a wide range of capabilities. From app interfaces to hybrid models, today’s advisories cater to specific investor niches, including women, Islamic finance, emerging markets, and sustainable and socially responsible financing, besides encompassing a variety of asset types. Once an investor’s investment profile and risk tolerance are ascertained, they are assigned a personalised portfolio of exchange-traded funds at management fees of between 0.2 and 0.5 per cent, a quarter of the traditional two per cent charge.
THE RULES WOULD ENABLE SPECIALISED FINTECH FIRMS PLANNING TO OFFER DIGITAL FINANCIAL ADVICE OBTAIN A LICENCE TO OFFER SUCH SERVICES TO INVESTORS. IN ADDITION, BANKS AND INVESTMENT FIRMS WILL NOW BE ABLE TO INTRODUCE SIMILAR SERVICES WITH APPROVALS FROM THE CBB, OFFERING NEW SERVICES TO EXISTING CUSTOMERS IN OTHER SECTORS. — Khalid Hamad, Executive Director of Banking Supervision
Worldwide, Deloitte estimates that the robo-advisory market is expected to reach between $2.2 trillion to $3.7 trillion in assets under management by next year and $16 trillion by 2025. Separately, EY estimates that digital approaches to wealth management, a sector it calls holistic management, will comprise 30 per cent of all worldwide assets under management. READYMADE ENVIRONMENT Bahrain is well placed to leverage that opportunity. As of 2016, the Kingdom Bahrain had $18 billion in assets under management (AUM), a figure expected to increase to $22 billion by 2020. In
comparison, Saudi Arabia had $22 billion AUM, and the UAE $1.6 billion, according to data from the Dubai International Financial Centre. The Central Bank of Bahrain’s (CBB) new regulations will benefit businesses and consumers alike. Bahrain is already the most cost-efficient place in the region for fintech industries, with setup costs for financial services 35 per cent cheaper than in other jurisdictions, KPMG shows. A host of recent new regulations such as those supporting open banking and cryptoasset trade regulation have supported Bahrain’s ecosystem for financial growth and innovation. Encouraged by these developments, 36 new financial services companies from 15 different countries have launched operations at the Bahrain Fintech Bay, a support hub for new businesses. The new directives for robo-advisories could bring new companies to the region. Khalid Hamad, Executive Director of Banking Supervision, said the rules would enable specialised fintech firms planning to offer digital financial advice obtain a licence to offer such services to investors. In addition, banks and investment firms will now be able to introduce similar services with approvals from the CBB, offering new services to existing customers in other sectors. The Kingdom’s robo-advisory directives will also reinforce Bahrain’s appeal for investors. Although the final directives have yet to be published, a consultative draft focused on providing safeguards and controls governing the use of algorithms, in addition to regular independent testing by an external consultant, while educating and informing clients as to the suitability of their products. As forward-thinking regulators such as the CBB take the lead in innovating, the industry must respond with new products and solutions for this fastexpanding business sector—or risk losing out to agile new players.
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