OCTOBER 2019 | ISSUE 223 MIDDLE EAST
B R AT I
OCTOBER 2019 | ISSUE 223
SERVING THE BANKING INDUSTRY AN INVESTMENT OF THE AGES Sjoerd Leenart, Global Head of Corporate Banking, Regional Head, Central & Eastern Europe, Middle East and Africa at J.P. Morgan Dubai Technology and Media Free Zone Authority
AN INVESTMENT OF THE AGES
Sjoerd Leenart, Global Head of Corporate Banking, Regional Head, Central & Eastern Europe, Middle East and Africa at J.P. Morgan A CPI Financial Publication
18 AANALYSIS drama of supply and geopolitics page 1-6 cover_editors note_contents.indd 1
MARKETS 24 Surviving the trade war
COUNTRY FOCUS TECHNOLOGY 42 Lebanon: 70 2019â€™s at a crossroads transformational technology trends
AN AWARD-WINNING REGIONAL BANK
Nabilah Annuar Editor, Banker Middle East
anker Middle East celebrates a milestone this month. I am proud to say that for over two decades, the publication has successfully served the region's financial community. We are the longest-running GCC-based banking publication, continuously supporting the industry, providing informed commentaries, news, thought leadership articles and analyses. Having been in the market since 1999, the publication has experienced the numerous economic cycles and headlinegripping events the region has seen. From the global financial crisis, to the oil boom and bust, to geopolitical impasses, sanctions and economic milestones, Banker Middle East has been with the industry through it all. The financial services industry in the GCC and wider Middle East has stood the test of time demonstrating resilience and solid capitalisation levels. Despite the persisting cyclical risks faced from time to time, the industry has been able to adjust, and this can be seen with increasing capital market transactions and consolidation activity. In the first few pages of this special anniversary issue, we ask some old-timers of their experiences having operated in this fascinating market over the last 20 years. Our cover story this month also aligns to this theme—we speak to Sjoerd Leenart, Global Head of Corporate Banking, Regional Head, Central & Eastern Europe, Middle East and Africa at J.P. Morgan, an institution that first made its commitment to the region in 1955, on his views of the current financial climate. Within these pages you will also find elaborate features on corporate governance, CSR, SME financing and technology. Our country focus this month is Lebanon— another interesting market we closely watch—a piece that comes with an exclusive commentary from an influential figure in the Lebanese banking sector, Dr. Salim Sfeir, Chief Executive of Bank of Beirut and Chairman of the Association of Banks in Lebanon. It has been a privilege to be the editor of Banker Middle East and I would like to thank my predecessors for making the publication into what it is today. Over the past 20 years, we have been an iconic name in the industry and this does not only take dedication and perseverance, it is also a team effort. I would like to salute the editors that have preceded me in this role, writers, designers and other members of CPI Financial that has contributed to the continued success of the brand. A lot of blood, sweat and tears have gone into making Banker Middle East a staple name in the region’s financial sector. I would like to thank all of them for their efforts and our readers for supporting us. On this momentous occasion, we have redesigned our magazine to reflect our first few issues. I hope you’ll enjoy reading it as much as I have enjoyed producing it for you. And as usual, I wish you a productive read.
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CONTENTS OCTOBER 2019 | ISSUE 223
ANNIVERSARY SPECIAL 8
20 years later: The beginning of a new era
18 A drama of supply and geopolitics
20 News Highlights
24 Surviving the US-China trade war
28 An investment of the ages
COUNTRY FOCUS: LEBANON 34 Turning the tide 42 Lebanon: At a crossroads
RETAIL BANKING 44 Paying it forward
46 A culture of good governance—the first line of defence
52 Asset based financing: A rapidly growing funding option for MENA’s SMEs
CORPORATE SOCIAL RESPONSIBILITY
56 Unlocking opportunities from sustainable
An investment of the ages
Sjoerd Leenart, Global Head of Corporate Banking, Regional Head, Central & Eastern Europe, Middle East and Africa at J.P. Morgan
practises in the banking sector
60 Investor & investing trends in the last 30 years across the region
62 A word of caution
BANKER MIDDLE EAST | OCTOBER 2019 | ISSUE 223
page 1-6 cover_editors note_contents.indd 4
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Over Over 40 years ago, ago, Dubai Islamic BankBank pioneered a way of banking that was truly better: 40 years Dubai Islamic pioneered a way of banking that was truly better: Islamic banking. SinceSince then,then, many generations of customers continue to enjoy world class Islamic banking. many generations of customers continue to enjoy world class products and services backed by the very latest in banking technology. For them as forfor products andago, services backed by the very latest technology. For them as Over Over 40 40 years years ago, Dubai Dubai Islamic Islamic Bank Bank pioneered pioneered ainway a banking way ofof banking banking that that was was truly truly better: better: you,Islamic this isthis still way tomany bank. you, isthe stillbetter the better way togenerations bank. Islamic banking. banking. Since Since then, then, many generations ofof customers customers continue continue toto enjoy enjoy world world class class products products and and services services backed backed byby the the very very latest latest inin banking banking technology. technology. For For them them asas forfor you, you, this this is is still still the the better better way way toto bank. bank.
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CONTENTS OCTOBER 2019 | ISSUE 223
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8/22/19 10:21 AM
th ANNIVERSARY 20th 20 ANNIVERSARY SPECIAL SPECIAL
20 years later: The beginning of a new era As we celebrate two decades in the region's financial services industry, we speak to a few seasoned bankers to look at how things have evolved over the last 20 years
MAKING HISTORY he financial services sector in the Middle East has made great strides over the last two decades demonstrating growth both in size and scale. Over the years, market has moved from being trade-based to one with a diversified focus in areas like manufacturing, real estate, hospitality, education and healthcare. Local commercial banks went through a cycle of change driven by automation and customer focus. Adnan Chilwan, CEO of Dubai Islamic Bank, believes that this region possesses a level of dynamism that is unmatched. “Driven by strong economic growth and sovereign fiscal strength, the last twenty years have seen the wider GCC banking sector reach $2.2 trillion (H1 2019) in total assets supported by increases in capital inflows amongst emerging Arab economies such as Egypt, Saudi Arabia and the UAE.” Providing an indication of scale, Saad Azhari, Chairman and General Manager of Blom Bank, highlighted, “The region’s banks have grown to become universal banks, they managed to largely bypass the financial crisis in 2008, and they have remained well-capitalised and profitable. Out of
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the top 1000 banks in the world in 2019, eight per cent were from the region and their profits constituted 4.7 per cent of the total. These figures are the more notable given that the region’s economy is only two per cent of the world economy; which indicate that the region’s banks are stronger and more visible than the region’s economy.” Adnan Ahmed Yousif, President & Chief Executive of Al Baraka Banking Group reminds us that financial development in the GCC to a large extent relied on banks. “Financial development and inclusion is likely to be associated with stronger economic growth in the GCC countries as we noted over the last years. The development of banks and equity markets has been supported by a combination of buoyant economic activity, a booming Islamic finance sector as well as financial sector reforms.” Financial systems in the GCC have developed significantly over the last couple of decades and there is further room for progress in future, especially with the recent evolution of financial technology in the financial sector. Technological advancements are inevitable and it is changing banking operations. Led by disruption and driven by emerging digital technologies, regional banks are increasingly exploring possibilities of integrating the use of innovation across different set of industries. “Those of us who have closely worked within the financial industry have seen a significant change in shift of consumer habits and demands over the last two decades,” said Ahmed Abdelaal, Head of Corporate and Investment Banking Group at Mashreq Bank. Global financial institutions and multinational corporations found the market increasingly interesting and made significant investments. With the establishment of the DIFC in 2002 and the ADGM in 2013, UAE emerged as the key financial hub in the Middle East.
Commenting on this, Rohit Walia, Executive Chairman of Alpen Capital, said, “The region’s penchant for innovation, the economic boom of the 2000s and the slew of infrastructure projects saw a period of rapid growth in the financial sector with product innovations and cutting-edge technology. The focus on rapid growth also meant there were lessons to be learnt along the way. Since then the financial sector has matured and operates with more prudence and an increasing focus on compliance driven by an evolving regulatory regime.” “Those of us who have worked in the region over the last two decades have witnessed unprecedented changes in consumer behaviour. The pace of change continues to accelerate, and increasingly technology is seen as the key to unlocking success and meeting customer needs. Banks need to be innovative to retain the customers’ loyalty and interest,” added Abdelaal.
HURDLE RACES Having come a long way, the journey has not been without its challenges. One of the biggest, is the global financial crisis and its repercussions—continued market volatility and the ability to navigate through its economic cycles in a prudent and timely manner. Geopolitics has always made the Middle East an interesting market to operate in. “Although it has many pressures on both the funding and financing side of banks, this has resulted in new financial regulations associated with Basel 3, sanctions, anti-money laundering/combating the financing of terrorism and IFRS 9, amongst others. These guidelines have changed the banking landscape in many ways causing de-risking, bank mergers, restrictions on financing, pressures on liquidity, additional compliance cost, risks, and many others,” said Yousif.
“BANKER MIDDLE EAST HAS BEEN A VITAL COMPONENT OF THE REGION’S BANKING AND FINANCE INDUSTRY SINCE ITS INCEPTION IN 1999. THE MAGAZINE’S THOUGHT LEADERSHIP PLATFORMS HAVE BEEN EXTREMELY USEFUL FOR INSTITUTIONS TO ENGAGE WITH EACH OTHER IN NAVIGATING THE MARKET. IT HAS SUPPORTED THE FINANCIAL SERVICES INDUSTRY HIGHLIGHTING KEY ISSUES AND TRENDS THAT SHAPE THE MARKET, AND WILL CONTINUE TO DO SO IN THE YEARS TO COME, ESPECIALLY WITH THEIR NEW THEIR DIGITAL OFFERING.” — Saleh Al Akrabi, CEO, DIFC Investments
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20th ANNIVERSARY SPECIAL
Sitting in Beirut, Azhari highlighted four major challenges: the first, was navigating the political and economic upheavals that the region has witnessed, especially since 2011; the second was complying with new and demanding international rules, regulations, and sanctions in matters relating to capital adequacy, terrorist financing, money laundering, and tax evasion; the third was managing competition successfully both domestically and abroad, in addition to ensuring that expansion into overseas markets in the region and beyond is both rewarding and durable; and the fourth challenge is building the right superstructures and infrastructures to make capital markets more visible and efficient. A great believer in embracing adversity, Chilwan explained that the global financial crisis was a catalyst that delivered necessary corrections to some markets. Banks were forced to navigate the crisis in terms of risk management, corporate governance, revising business models and strategies as declining asset quality in the system impacted medium to long-term profitability. The crisis also constrained capital positions, which led to regulators introducing new policies on managing capital. “In terms of ensuring the regions banking sector was fit for purpose these changes were both necessary and beneficial, increasing as they did, the longer-term stability and security of the sector. A decade on, we still face global volatility and economic and political uncertainties, but I have absolute confidence in the ability of this region to navigate through upcoming challenges,” said Chilwan. Another inevitable factor is technology—the emerging digital economy is introducing opportunities to create and participate in multiple ecosystems that allow for partnerships with companies whether in financial services, technology or other industries. “Numerous technology firms are entering financial services through fintech, and it is up to banks to think more like a technology company rather than a traditional brick and mortar lender. Keeping in mind the shifting consumer demands, banks need to be quick on their feet to reinvent themselves. If our competition is technology then that is where we would like to prepare ourselves. We firmly believe that competition is unlikely to come from banks in the future,” said Abdelaal.
THE NEXT TWO DECADES Looking at the pace of things in the last five years it is difficult to predict how banking will look like in the next 10 years, what more 20. Especially in this part of the world where mobile penetration is one of the highest globally, and how receptive the market is to technology, one cannot imagine the potential milestones Middle East markets can achieve. “The sector is already seeing the much-anticipated consolidation and banks are expected to come out stronger. Regulatory frameworks will continue to evolve, and the industry will enhance its focus on compliance to local as well as international regulations. Digital technologies will drive rapid transformation in the sector. With the development of
fintech initiatives, banks will increasingly see competition from non-banks. Brick and mortar businesses are likely to shrink further. Tech savvy products and online services will push boundaries and will gain dominance over traditional products and services, as well as delivery chains,” projects Walia. Sharing similar sentiments, Azhari said, “It is frankly not easy to envisage how the financial industry will look like in 20 years’ time, especially in our region that is liable to frequent but unpredictable shocks. All I can say in this respect is that we will definitely see more and a significant role for digital banking, perhaps more mergers and acquisitions both among big banks and between big and smaller banks, and perhaps also more and a better role for capital markets.” Chilwan expects an increased level of global connectivity. The emergence of digitisation, and disruptive technologies such as fintech and AI to continue to shape region’s banking landscape. “We need to pounce on the opportunities created by these new technologies. I would expect analytics to play an increasingly critical role in identifying customer pain points and sales opportunities. Successful banks will be those that can most effectively use their digital tools and solutions to address these issues.” Elaborating further on technology, Abdelaal stressed that banks of the future need to complement the lifestyle of customers and must offer an integrated and seamless customer experience across all their channels. “Whether customers visit a branch, transact through a robot or machine, or use online banking or mobile banking apps— the experience must be unified, convenient, and easy to execute. Another trend that will grow and that we have already invested in at Mashreq, is that more banks will use a combination of AI and data analysis to offer sophisticated and value-added advisory services to customers. We also see ATMs as being upgraded to Interactive Teller Machines (ITMs), acting as round-the-clock service centres for customers rather than cash-dispensing machines. Digitalonly banks are expected to play a huge role in the digital banking space and will use AI technology and big data to offer a simpler, more intuitive and more innovative banking experience to customers.” Sharing his two cents, Yousif added, “The scope and speed of evolution in regulation, customer behaviour and technology—coupled with the emergence of new competitors—means that the future of banking will not be a continuation of the past. New technologies will transform the financial and banking industry, providing both opportunities and challenges for financial institutions.” Financial institutions are at an inescapable crossroads— to adapt to change, or perish. This has been the case over the last few years and banks in the region have taken constructive initiatives to digitalize both their operations and services. The global economic climate has also forced a wave of consolidation in the sector that is much needed for scalable growth. These are signs of a maturing market and definitely a positive indication for a sustainable future.
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20th ANNIVERSARY SPECIAL
“OUR ASSOCIATION WITH BANKER MIDDLE EAST DATES BACK TO THE TIME WHEN ALPEN CAPITAL WAS ESTABLISHED IN THE DIFC. OVER THE YEARS BME HAS BEEN A VALUABLE PARTNER THAT HAS SUPPORTED US IN OUR QUEST TO GROW THE BRAND IN THE REGION. BME HAS AN UNPARALLELED REACH IN THE REGION WITH ITS MAGAZINE, ONLINE PLATFORM AND AWARDS. WE HAVE FOUND OUR ASSOCIATION WITH BME TO BE VERY REWARDING.” — Rohit Walia, Executive Chairman, Alpen Capital
“BANKER MIDDLE EAST PLAYS A CONSTRUCTIVE ROLE IN THE REGION’S BANK PERFORMANCE AND IN NAVIGATING THE MARKET LANDSCAPE. THIS IS CAPTURED THROUGH TWO AVENUES. THE FIRST IS THAT WINNING THE BANKER MIDDLE EAST’S PRESTIGIOUS AWARDS IS A STRONG INCENTIVE FOR THE REGION’S BANKS TO PERFORM WELL AND TRY THEIR BEST TO MAINTAIN STEADY PROFITABILITY AND GROWTH; AND THIS COVERS DIFFERENT ASPECTS OF THE BANKS’ OPERATIONS BECAUSE OF THE DIVERSITY OF THE AWARDS. THE SECOND IS THAT YOUR MONTHLY MAGAZINE IS A VERY CREDIBLE AND VALUABLE RESOURCE FOR BANKERS SO AS TO UNDERSTAND BETTER MARKET MOVEMENTS AND DEVELOPMENTS AND TO USE IT FOR BETTER STRATEGIC MARKET PLANNING AND OPERATIONAL SUCCESS.” — Saad Azhari, Chairman and General Manager, Blom Bank
“I SPEAK FOR MYSELF, AND MANY OF MY COLLEAGUES WHEN I SAY THAT BANKER MIDDLE EAST’S PUBLICATIONS, NEWS AND EVENTS HAVE BEEN INVALUABLE IN PROVIDING AN INSIGHT INTO THE MACRO-ECONOMIC AND BUSINESS DEVELOPMENTS OF THE REGION, ENABLING LEADING FINANCIAL INSTITUTIONS SUCH AS DIB, REGULATORS AND THE WIDER BUSINESS COMMUNITY TO GAIN AN IN-DEPTH UNDERSTANDING OF CURRENT ISSUES AND KEY EVENTS. THEIR PERSPECTIVE PROVIDES NOT ONLY RELEVANT INFORMATION BUT CRITICAL THINKING FOR BUSINESS LEADERS AND KEY DECISION MAKERS DRIVING ECONOMIC GROWTH ACROSS THE REGION.” — Adnan Chilwan, Group CEO, Dubai Islamic Bank
BANKER MIDDLE EAST | OCTOBER 2019 | ISSUE 223
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Al Al Baraka Baraka Al Baraka Banking Banking Banking Group Group Group B.S.C. B.S.C. B.S.C. (“ABG”) (“ABG”) (“ABG”) is licensed is licensed is licensed as as anan as an Islamic Islamic Islamic wholesale wholesale wholesale bank bank by bank by thethe byCentral the Central Central Bank Bank of Bank of Bahrain Bahrain of Bahrain and and isand listed is listed is listed onon Bahrain Bahrain on Bahrain Bourse Bourse Bourse and and NasdaqDubai. and NasdaqDubai. NasdaqDubai. It is It aisIta is a leading leading leading international international international Islamic Islamic Islamic banking banking banking group group group providing providing providing itsits its unique unique unique services services services in in countries countries in countries with with awith population a population a population totaling totaling totaling around around around one one billion. one billion. billion. The The Group The Group Group hashas a wide has a wide ageographical wide geographical geographical presence presence presence in in thethe in form the form form of of subsidiary subsidiary of subsidiary banking banking banking units units and units and representative and representative representative offices offices offices in in in 17 17countries, 17 countries, countries, which which which in inturn in turnturn provide provide provide their their their services services services through through through over over 700 over 700 branches. 700 branches. branches. Al Al Baraka Baraka Al Baraka Banking Banking Banking Group Group Group hashas operations has operations operations in in Jordan, Jordan, in Jordan, Egypt, Egypt, Egypt, Tunis, Tunis, Tunis, Bahrain, Bahrain, Bahrain, Sudan, Sudan, Sudan, Turkey, Turkey, Turkey, South South South Africa, Africa, Africa, Algeria, Algeria, Algeria, Pakistan, Pakistan, Pakistan, Lebanon, Lebanon, Lebanon, Saudi Saudi Saudi Arabia, Arabia, Arabia, Syria, Syria, Syria, Morocco Morocco Morocco and and Germany, and Germany, Germany, in in addition addition in addition two twotwo
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20th ANNIVERSARY SPECIAL
“BANKER MIDDLE EAST IS AN IMPORTANT SOURCE OF INFORMATION FOR BANKERS IN THE REGION TO GAIN AN IN-DEPTH UNDERSTANDING OF CURRENT MARKET TRENDS AND LATEST DEVELOPMENTS.” — Ahmed Abdelaal, Head of Corporate and Investment Banking Group, Mashreq Bank
“WITH EXPERIENCE OF MORE THAN TEN YEARS IN THE REGION, BANKER MIDDLE EAST HAS BEEN ABLE TO HIGHLIGHT THE BIGGEST NEWS STORIES AND INDUSTRY DEVELOPMENTS ACROSS MENA, PROVIDING IN-DEPTH ANALYSES ON VARIOUS FACETS OF THE FINANCIAL SERVICES SECTOR, AS WELL AS EXCLUSIVE INTERVIEWS WITH MARKET LEADERS. WE AS BANKERS ALWAYS REQUIRE SUPPORT FROM MAGAZINES SUCH AS YOURS, WITH HIGH STANDARDS OF EDITORIAL CONTENT AND ANALYSIS, TO PROVIDE US WITH UP-TO-DATE INFORMATION ON WHAT IS GOING ON IN THE BANKING, FINANCIAL AND ECONOMIC SECTORS SURROUNDING US, WHICH WOULD ENABLE US TO TAKE THE RIGHT DIRECTION.” — Adnan Ahmed Yousif, President & Chief Executive of Al Baraka Banking Group
“I’VE ALWAYS SEEN BANKER MIDDLE EAST AS THE ‘AUTHORITATIVE VOICE’ FOR BANKING AND FINANCE IN THE REGION AND I AM PROUD THAT WE PLAY AN INTEGRAL PART AS BOTH A CONDUIT AND PLATFORM FOR INSTITUTIONS TO DISCUSS ISSUES AND DEVELOPING TRENDS IN THE FINANCIAL MARKET. WE WILL CONTINUE TO DEBATE THE CRITICAL ISSUES FACING OUR INDUSTRY IN THE HOPE THAT THEY WILL INSPIRE FURTHER DEBATE AND WILL RESULT IN POSITIVE CHANGES. I HAVE NO DOUBT IN MY MIND THAT WE WILL BE AROUND IN ANOTHER 20 YEARS AS, LONG AS WE KEEP LISTENING AND ADAPTING.” — Nigel Rodrigues, Founder and CEO, CPI Financial
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THANK YOU! Celebrating 20 years in the industry, we would like to thank you for your continued support and trust in Banker Middle East. You have been integral to our longevity and success over the last two decades, and we look forward to working with you for the next two, providing you exclusive intelligence to navigate the Middle East market
B R AT I
in the years to come.
SERVING THE BANKING INDUSTRY
Chief Executive Officer & Founder
Editor, Banker Middle East
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A drama of supply and geopolitics The 14 September drone attack on Saudi Aramco’s oil processing facilities at Abqaiq and Khurais in eastern Saudi Arabia has left oil prices in dismay. What does this mean for the stability of Saudi economy and its credit profile?
he attack on the world’s largest oil facility, processing up to seven million barrels per day of Saudi crude production, is said to be the biggest disruption to the oil market ever. According to industry estimates, damage to the to sites reduced Saudi Arabia’s oil production from about 9.8 million to 5.7 million barrels a day. The 25-drone and missile attack wiped out approximately five per cent of the world’s oil supply and forced the kingdom to shut down half of its oil production. This recorded the steepest price surge in 30 year, the biggest jump in oil prices since 1988. The attack caused spot Brent crude to spike 19 per cent to $71.95 per barrel at market open the next week before the oil benchmark slipped back to around $66 per barrel. With fingers pointed at Iran for the attack, the Iranian government has categorically denied the accusations. Nevertheless, S&P suggests that the question
that really concerns the market is what the response will be from Saudi Arabia, the US, and many Western nations if it’s believed that Iran supported or was behind the attacks. The threat of an extended supply outage from Saudi Arabia, the world’s top crude exporter, highlights the lack of spare production capacity in the market, with the impact of this being felt across upstream and downstream markets. However, in a recent press conference, Saudi Energy Minister Prince Abdulaziz bin Salman affirmed that production will be back to normal by the end of September, with another official indicating that the Saudi Aramco initial public offering (IPO) will continue as is. Although this has brought a bit of calm to the oil markets, analysts are sceptical and say the numbers do not assure the oil markets about current production levels and that the outage will leave the Kingdom with little spare capacity, keeping markets on edge. Analysts at S&P have questioned
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the level of stocks still available to meet supply to Aramco’s customers as neither Prince Abdulaziz nor Aramco CEO, Amin Nasser shed light on the level of oil stocks still available.
ECONOMIC IMPACT According to Indosuez Wealth Management, a subsidiary of Crédit Agricole Corporate and Investment Bank, Saudi Arabia’s nominal GDP was SAR 718,543 million in Q1 2019. Crude petroleum and natural gas extraction represented approximately SAR 188,759 million and petroleum refinery was SAR 27,251 million, together representing around 30 per cent of nominal GDP. Assuming that half of its daily capacity is lost, this would translate into a yearly GDP loss of 15 per cent, or 0.3 per cent per week. Paul Wetterwald, Chief Economist, Investment Intelligence at Indosuez Wealth Management explained, “The length of the loss of capacity is of the utmost importance here. The current oil price is now 10 per cent higher than its 2019 average. Therefore, the loss in revenue for the Saudi government due to the decrease of production will be mitigated by the higher price.” Prior to the attack, the current oil price would not have been high enough to balance the Saudi budget. According to the IMF’s fiscal monitor report in April 2019, the general government deficit could have been as high as 7.9 per cent of GDP in 2019, which translates into a deteriorating net debtto-GDP ratio. The IMF forecasted that the general government revenue would be 31.3 per cent of GDP in 2019. “If we apply this rate of government revenue loss to this latter figure and taking into account the decrease in nominal GDP, this would push the debt to GDP ratio up to 50 per cent. This would make the Aramco IPO all the more necessary, at a time when it seems much less attractive. To conclude on a positive note, the rough figures that we have computed rely on an assumption that the disruption lasts for one whole year, which is a worst-case scenario,” said Wetterwald.
CREDIT PROFILE The drone attacks are undoubtedly a credit negative for the Kingdom’s credit ratings. However, Moody’s in a commentary does not expect it to leave a long-lasting impact on Saudi Aramco’s financial profile on the back of its robust balance sheet and strong liquidity buffers. “This event however highlights the credit linkages the company has to Saudi Arabia both in terms of geographic concentration and more importantly exposure to geopolitical risk,” said Rehan Akbar, a Moody’s vice president. Highlighting the geopolitical risks that entail, Steve Wood, Managing Director at Moody’s explained, “The attack on Saudi Arabian’s oil facilities highlights the role of geopolitical risk on oil prices, which will likely reflect a risk premium even after Saudi production resumes. Higher oil prices will help producers and hurt refiners in the very near term, but the longer-term effect on energy companies will depend on the timing and magnitude of Saudi Aramco’s lower production” The International Energy Agency does not feel the need to immediately release emergency stocks, but according to reports, it has indicated the need to be prepared for an escalation of military conflicts between Saudi Arabia and Iran. “The attack underscores Saudi Arabia’s exposure to geopolitical risk and a widening of the channels through which a crystallisation of such risks can impact its sovereign credit metrics by highlighting that oil production and vital oil infrastructure could itself be targeted and disrupted in a significant way. Nevertheless, the ability to quickly restore production to normal, if confirmed later this month, would demonstrate an important degree of resilience to potentially very damaging shocks, and likely reflect a combination of strategic redundancies in Saudi Aramco’s processing facilities as well as very well managed operations and disaster recovery processes,” added Alex Perjessy, a Moody’s vice president.
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Saudi Arabia’s SRC mulls SAR 1 billion Sukuk issuance by year-end Saudi Real Estate Refinance Company (SRC), the Kingdom’s first mortgagerefinancing firm, plans to issue SAR 1 billion ($267 million) by the end of the year, reported Bloomberg. Fabrice Susini, the CEO of Saudi Real Estate Refinance Company, said that the issuance by the state-run SRC would be its second this year and the company has not decided whether it will be a local or international offering. The company said that the Kingdom’s finance ministry will guarantee future Sukuk issuance, helping to lower funding costs and attract local as well as international investors. Saudi Arabia is making moves to increase home construction and lending as it seeks to overcome one of the world’s lowest mortgage penetration rates. For years, the absence of financing firms like SRC limited the ability of banks to expand their mortgage books amid central-bank limits on loans to any one sector.
Saudi Aramco adds Barclays, BNP, Deutsche, UBS as bookrunners Saudi Arabia joins IMF’s SDDS standard for official statistics Saudi Arabia joined the International Monetary Fund’s (IMF) Special Data Dissemination Standard (SDDS) for publishing government financial and economic data, according to local newswire, the Saudi Press Agency. Mohammed Al-Jadaan, Saudi Arabia’s Minister of Finance, said that the subscription of the Kingdom to SDDS is an important step in the path taken by the Kingdom to enhance financial disclosure and transparency in accordance with international standards. The move is expected to contribute to the availability of real-time and comprehensive statistics leading to an increased level of data access to financial markets to help make investment decisions in the Kingdom. The subscription to SDDS will enhance investors’ confidence as the Kingdom is diversifying its economy away from reliance on oil as part of Crown Prince Mohammed bin Salman’s Vision 2030 reform plan.
Saudi Aramco added banks including Barclays, BNP Paribas as well as Deutsche Bank and UBS Group as bookrunners on its planned initial public offering as it pushes ahead with plans for the blockbuster deal, reported Bloomberg. The energy giant also picked Credit Agricole, Gulf International Bank and Societe Generale. The state-owned energy giant plans to select around 15 bookrunners in total, including two Chinese firms. Saudi Aramco is moving fast to add banks in junior roles on the deal after choosing the top underwriters last week. Bankers from the newly appointed underwriters are flying to the Middle East for meetings with the company this week. The oil producer is still planning to add more local firms in junior roles on the offering. Aramco held kick-off meetings with the top banks in Dubai last week. Bank of America Corporation, Citigroup together with Credit Suisse Group, Goldman Sachs Group as well as JPMorgan Chase & Co. and Morgan Stanley were chosen earlier for senior roles on the deal.
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Turkish banks hire Morgan Stanley to sell Turk Telekom stake
Lebanon’s Jammal Trust Bank liquidates following US-blacklisting
A group of Turkish banks hired Morgan Stanley as financial adviser to sell their 55 per cent stake in the country’s largest phone company, Turk Telekomunikasyon, reported Bloomberg. The three banks—Turkiye Is Bankasi, Akbank and Turkiye Garanti Bankasi— took control of Turk Telekom in December 2018, setting it up for a likely sale after previous owner Otas defaulted on a multibillion-dollar loan. In bourse statements, the lenders said that the plan is to sell special purpose vehicle Levent Yapilandirma Yonetimi— which holds the 55 per cent stake in Turk Telekom—or the stake that it holds.
Banque du Liban (BdL) approved a request for self-liquidation by Jammal Trust Bank (JTB), the bank which was recently blacklisted by the US Treasury for allegedly facilitating banking for the Iranbacked Hezbollah movement. In a statement, Jammal Trust said, “In light of the US Treasury’s decision to list Jammal Trust Bank on the SDGT on 29 August 2019, despite its sound financial position confirmed in the reports of oversight commissioners and its full compliance with local and foreign banking rules and regulations, the Board of Directors had to take the decision of selfliquidation, under full coordination with the Central Bank of Lebanon.” The Lebanese central bank said that Jammal Trust’s fixed assets and belongings are sufficient to cover its deposits and liabilities. US Treasury described Jammal Trust as posing a direct threat to the integrity of the Lebanese financial system.
Turkish regulator told banks to reclassify $8.1 billion debt as bad loans Turkey’ Banking Regulation and Supervision Agency (BDDK) said that lenders should reclassify TRL 46 billion ($8.1 billion) of loans as non-performing (NPLs) by the end of the year and set aside enough provisions to cover them. The reclassification of the loans, mostly to construction and energy firms, will bring the industry’s non-performing loan ratio to 6.3 per cent this year, slightly higher than the regulator’s December 2018 prediction of six per cent. BDDK stated that the reclassification also reduces banks’ capital adequacy ratio to 17.7 per cent from 18.2 per cent, adding that the banking sector maintains its health and strong structure. Banks’ capital levels and asset quality have been under scrutiny as lenders have been struggling with the fallout of a currency crash in 2018, a wave of debt-restructuring demands from companies as well as a slowing economy, and they are reluctant to lend more before they clear their balance sheets of existing problem loans. Turkish lenders are currently trading at slightly over half of their book value as concerns on asset quality scare off investors.
Oman’s OSC secures $110 million financing facility from Standard Chartered Oman Shipping Company (OSC) secured a $110 million financing facility from Standard Chartered to acquire three tanker vessels and two very large crude carriers. The new financing facility will enable the shipping company to optimise its debt position by reducing overall borrowing costs and eliminate refinancing risk while diversifying the company’s pool of financial partners. Michael Jorgensen, acting CEO of Oman Shipping Company, said, “We are delighted to have agreed this substantial finance facility for five of our vessels with Standard Chartered.” In a joint statement, the duo said that the facility will help OSC explore opportunities to expand its offering yet further supporting the company growing customer base and connecting them to global markets through its full-service fleet of over 50 world-class vessels. OSC is a full-scale shipping company handling ship owning, technical management and chartering.
UAE, Saudi Arabia cut interest rates following Fed’s decision The Central Bank of the UAE (CBUAE) and the Saudi Arabia Monetary Authority (SAMA), the central banks of the two biggest Gulf Arab economies, reduced interest rates by a quarter percentage point after the Federal Reserve policymakers lowered their main interest rate for a second time this year saying the move should be sufficient to sustain the US expansion. The Saudi riyal and the UAE’s dirham are pegged to the US dollar and the central banks in the respective countries follow the US Federal Reserve on interest rate moves. CBUAE stated that it will lower interest rates applied to the issuance of its certificates of deposits in line with the decrease in interest rates on US Dollar, following the Fed’s decision to decrease the Federal Funds Rate by 25 basis points. Additionally, the central bank also said that the repo rate applicable to borrowing short-term liquidity from CBUAE against certificates of deposits has also been lowered by 25 basis points. Similarly, SAMA said that it has reduced the repo rate from 2.75 to 2.50 per cent as well as the reserve repo rate from 2.25 to two per cent in line with the regulator’s objective of preserving monetary stability amid evolving developments in global financial markets.
CBK amends corporate governance guidelines for Kuwaiti banks The Central Bank of Kuwait (CBK) has amended governance regulations for Kuwaiti banks, allowing them to add independent members to their boards of directors and subcommittees. The new regulations define independent board members and the conditions of such independence in order to enable them to make impartial and objective decisions for the bank’s best interest, enhance trust in the bank and strengthen its financial stability. Dr Mohammed Yousef Al-Hashel, the Governor of CBK, said that independent members to banks’ board of directors will enhance board members’ independence as a basic principle of sound governance practises. The amendments also allow a minimum of two independent members from 30 June 2020, then four from 30 June 2022 to avoid unexpected demand for independent members and allow gradual implementation of the decision, says Al-Hashel.
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Former Drake & Scull CEO says he’s a scapegoat for rising losses
SoftBank backers rethink role in Vision Fund 2 The biggest backers of SoftBank Group’s Vision Fund are reconsidering how much to commit to its next investment vehicle, Vision Fund 2 as an oversized bet on flexible workspace provider WeWork sours, reported Bloomberg. Saudi Arabia’s Public Investment Fund (PIF), which contributed $45 billion to the $100 billion Vision Fund, is now only planning to reinvest profits from that vehicle into its successor, Vision Fund 2. Abu Dhabi’s Mubadala Investment Company, which also made an investment of $15 billion, is considering paring its future commitment to below $10 billion. A partial retreat of the Saudi sovereign wealth fund and Mubadala would complicate fundraising for SoftBank’s Chief Executive Officer Masayoshi Son, who upended venture capital by making huge bets on promising yet unproven companies and spurring others to follow suit. The Wall Street Journal previously reported that Saudi Arabia’s sovereign wealth fund wasn’t planning to be a significant investor in the new fund but may still make a more modest commitment. A decision to only reinvest proceeds from the first fund would mark a significant shift. Saudi Arabia’s Crown Prince Mohammed bin Salman said last October that he planned to invest another $45 billion into any new fund.
Turkey set to launch its own national rating company Turkey plans to start its own national rating company after years of lashing out at foreign credit assessors, reported Bloomberg. Turkish politicians have long complained about what they perceive as unfair treatment at the hands of Moody’s, Fitch and S&P, all of which rank the country below investment grade. A group comprised of Turkish banks, the nation’s stock exchange and financial industry associations will jointly establish a firm by acquiring a majority stake in the local unit of Japan Credit Rating Agency (JCR). The group is in talks to buy more than 80 per cent of JCR Eurasia Rating from shareholders including Orhan Okmen and Rafi Karagol for about $13 million, JCR is expected to retain a stake. President Recep Tayyip Erdogan has accused foreign credit rating firms of political bias and likened them to circus jugglers. In April, Treasury & Finance Minister Berat Albayrak said a national credit rating firm would be established this year. In June, the banking regulator’s chief, Mehmet Ali Akben, said the necessary regulatory work was already completed.
The former Chief Executive Officer of Drake & Scull International said that the company’s accusations of financial violations against him are an attempt to find a scapegoat for rising losses, reported Bloomberg. Drake & Scull International began reporting losses in 2015 after the decline in oil prices forced developers and clients to defer payments and delay projects. Khaldoun Tabari, the former CEO of Drake & Scull, said that the Dubai-based contractor filed 15 complaints against him to the public prosecutor last year, adding that the allegations prompted authorities in the UAE to order banks to freeze his bank accounts in June 2018. Following Tabari’s departure as CEO in 2016, the contractor has replaced five Chief Executives and four Chief Financial Officers, and its shares were suspended November. In April, the construction company blamed its AED 4.5 billion ($1.2 billion) loss in 2018 on ‘a deliberate and conscious decision by the previous management and board to defer announcement of losses for the years 2009-2016’, without identifying members of the management by name.
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Bahrain issues dual-tranche bond first time since $10 billion bailout package
Egypt mulls around $7 billion international bond issuance An Egyptian finance ministry official said that the government will approach investment banks soon to advise on a planned international bond issuance to raise between $3 billion and $7 billion by June 2020, reported Bloomberg. The new offering could include Egypt’s first Panda, Samurai, Sukuk and green bonds as well as euro- and dollardenominated bonds. Khaled Abd Elrahman, the Egyptian Deputy Minister of Finance, said that the so-called request for proposal is being prepared and will be sent to banks imminently, without giving a timeline. The government is taking advantage of lower borrowing costs amid signs the world’s major central banks may cut interest rates or deliver a fresh salvo of monetary stimulus to shore up economic growth. Egypt was able to return to global bond markets in 2017, lowering its borrowing costs overseas as domestic rates soared amid a far-reaching economic reform programme. The government is now seeking to vary its instruments and gradually move toward longer-term credit to reduce the burden for one of the Middle East’s most indebted countries.
Bahrain has issued $2 billion dual-tranche dollar-denominated bond, the first since the Kingdom obtained a $10 billion bailout from its wealthier Gulf allies last year to avert a credit crunch, reported Bloomberg. The issuance comes amid a sudden surge in debt sales by frontier and emerging sovereigns after the cost of borrowing declined. The government last year received $10 billion in pledges from Saudi Arabia, Kuwait and the UAE after low oil prices pushed its public debt to almost 93 per cent of GDP. Bahrain is aiming to balance its budget by 2023, a target it set for itself as part of last year’s bailout when it embarked on a series of reforms including further subsidy cuts and the introduction of a five per cent value-added tax. In May 2019, the Kingdom said that out of the $10 billion Gulf aid, the government received $2.3 billion last year and is expecting another $2.28 billion in 2019.
KFH’s board offers to acquire Ahli United Bank in a $8.8 billion deal Kuwait Finance House’s (KFH) Board of Directors offered to acquire Bahrain’s Ahli United Bank (AUB) in an all-share deal that is valued at about $8.8 billion. The merger will create the largest banking entity in Kuwait with assets of about $94 billion and the sixth-largest bank in the Gulf region. KFH plans to issue one share for every 2.326 shares of AUB, the banks’ advisers had recommended the same swap ratio. The KFH-AUB merger deal was formalised in January and it is going to be the first major cross-border tie-up in the Gulf region in recent years. Lower oil prices over the past five years are forcing Gulf lenders to consolidate for scale and to better compete in a crowded market. Subdued credit growth, competition for deposits, higher cost of funds and deteriorating asset quality are driving consolidation in the regional banking sector. S&P Global Ratings said that given the overbanked nature of some GCC banking systems, further consolidation could help improve banks’ performance and financial stability hence a new wave of M&A motivated by purely economic reasons could follow, but it may take longer to be realised.
Sovereign Ratings as of 1 October 2019 Issuer
Foreign Currency Rating
Last CreditWatch/Outlook Update
2 Central Bank of Bahrain
3 Egypt 4 Iraq 5 Jordan 6 Kuwait 7 Lebanon 8 Morocco 9 Oman 10 Qatar 11 Saudi Arabia 12 Abu Dhabi 13 Ras Al Khaimah 14 Sharjah
B/Stable/B B-/Stable/B B+/Stable/B AA/Stable/A-1+ B-/Negative/B BBB-/Negative/A-3 (BB/Negative/B) AA-/Stable/A-1+ A-/Stable/A-2 AA/Stable/A-1+ A/Stable/A-1 BBB+/Stable/A-2
12-May-2018 03-Sep-2015 20-Oct-2017 20-Jul-2011 04-Mar-2019 06-Oct-2018 11-Oct-2017 08-Dec-2018 17-Feb-2016 02-Jul-2007 05-Dec-2018 27-Jan-2017
Copyright © 2019 S&P Global Ratings. All rights reserved.
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PHOTO CREDIT: rawf8/Shutterstock
THE MARKETS MARKETS
Surviving the trade war Analysts are saying that there are no winners in the US-China trade war, only losers—although one side may lose more than the other
he prospects of other countries being pushed to take sides between the US and China could broaden the scale of the trade war, and the resultant spill-over eﬀects are unlikely to spare the Middle East region. According to Moody’s, the US and China are the world’s two largest economies as well as major trading partners, a decline in their trade will hurt not only their own economies but also the global economy. While the Gulf countries have been steadily diversifying their economies, the primary income is still generated from oil revenues, therefore any volatility in oil could dampen conﬁdence among investors and aﬀect the regional markets. Forbes in a recent report indicated that the Middle East could be aﬀected indirectly if the trade war escalates, the region accounts for 40 per cent of China’s oil imports and if industrial activity falls as a result of slow growth, demand for oil exports from the MENA could fall.
There are a few critical areas where the Middle East might have to choose between the US and China, especially if their bilateral economic relations continue to deteriorate. One such area is the broad domain of security-related trade and investment—whether in cybertechnology or sensitive raw materials. The new tariffs are making imports more expensive, so consumers pay higher prices and buy less, and as a result, overall trade declines, and with-it economic growth in both countries. “Recent trade policy actions are weighing on global trade flows, investment and growth, they have had no discernible impact on external imbalances thus far,” said the IMF.
COLLATERAL DAMAGE The inclusion in the MSCI EM and FTSE frontier markets indexes of the GCC have brought the regional markets closer to the global counterparts. Therefore, regional markets are now more responsive to global market movements.
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the East and Frankfurt as well as Charles de Gaulle in Europe. According to International Air Transport report, the annual growth in air freight tonne-km remained in negative territory in July, down by 3.2 per cent compared to 2018, a ninth consecutive month of year-on-year decline in air freight volumes. The weakness in air freight volumes remain broad-based across regions, however, the largest falls are currently being recorded in the Asia Pacific and the Middle East. Indeed, the escalation of the ongoing US-China trade dispute resulted in a weaker data in August and further tariff increases scheduled in October and December can lead to a more pronounced impact of the US-China trade war in the remainder of the year.
REAPING THE BENEFITS Both the US and China have started to look elsewhere than towards each other for markets, economic inputs, and investment opportunities. The quest for trading partners to a certain extent has redirected some of the US and China’s foreign economic activity towards selected Gulf region destinations. The UAE’s federal credit insurance company signed partnership agreements with three Chinese financial institutions to boost trade, investments and bilateral exports between the UAE and China. In addition, The Shanghai-based manufacturing giant East Hope Group is considering investing $10 billion in the Khalifa Industrial Zone Abu Dhabi (KIZAD), joining several Chinese firms seeking a slice of China’s Belt and Road Initiative in the region. In partnership with KIZAD, East Hope Group will develop industries over the next 15 years in a three-phase plan. China’s threats to retaliate by imposing additional tariffs on $75 billion of US goods in August 2019, sent stocks across the Middle East’s most liquid markets tumbling signalling the effects of the latest escalation in the US-China trade war and the deepening concerns about a possible global recession. China is the biggest trading partner to the six-member GCC bloc, all of which rely on income from oil exports to fund government spending, hence any negative impact on the country’s economy is likely to affect its trading partners across the region. In a report, Markaz stated that GCC markets ended the month of August in negative territory, affected by the weakening of oil prices amidst growing concerns surrounding the US-China trade war. Similarly, oil prices are witnessing a downward pressure even after the Organisation of Petroleum Exporting Countries decided to extend production cuts into 2020 and the uncertainty stemming from a trade war as well as growing concerns of global economic slowdown. In Kuwait, the fall in the number of projects awarded by government as a consequence of the decline in oil prices since 2014 and subsequent fiscal pressure has reduced the loans and advances towards real estate and construction activity as lenders are working on reducing their exposure to the real estate sector. The total claim of local banks in Kuwait on the private sector stood at KWD 37.9 billion ($125.7 billion) and going forward, the credit growth is likely to remain modest when compared with the pre-oil slump years, says Markaz. Additionally, the UAE’s Emirates Steel’s exports to the US were also affected after the Trump administration imposed a 25 per cent tariff on steel. The UAE is the third-largest exporter of aluminium to the United States, after China and Russia. The Gulf region is home to some of the world’s top air cargo hubs owing to its strategic location between Hong Kong in
“THE US AND CHINA ARE THE WORLD’S TWO LARGEST ECONOMIES AS WELL AS MAJOR TRADING PARTNERS, A DECLINE IN THEIR TRADE WILL HURT NOT ONLY THEIR OWN ECONOMIES BUT ALSO THE GLOBAL ECONOMY.” — IMF
The Kuwaiti government is also in talks with China to create a $10 billion Kuwait-China Silk Road Fund that would invest in Kuwaiti projects related to the Silk City and islands development. The investment fund will also be used for strategic investments in China under the Asian country’s ‘One Belt, One Road’ initiative. Similarly, Saudi Arabia’s National Housing Company and China’s State Construction Engineering Company signed a SAR 2.5 billion Riyadh housing deal to build more than 5000 housing units. Also, the Kingdom’s state-owned energy giant, Saudi Aramco, partnered with Norinco and Panjin Sincen— to form a company called Huajin Aramco Petrochemical Company—among other Chinese firms to construct refining and petrochemical centres as well as to establish fuels retail business across China. China’s Belt and Road Initiative has increased its substantial construction, financial as well as manufacturing and other economic exposure in the UAE, Saudi Arabia as well as Oman and Kuwait. The US’ policies of protectionism are hurting foreign direct investment in the region; however, the UAE is coming up with a number of open market policies which are meant to invite investors to compete locally.
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An investment of the ages Sjoerd Leenart, Global Head of Corporate Banking, Regional Head, Central & Eastern Europe, Middle East and Africa at J.P. Morgan, sits down with Banker Middle East to share his thoughts on opportunities in the region and factors that continue to shape the market landscape
ooking back at the last 18 months, how has your sentiment for the region changed?
If anything, while growth has been somewhat tepid, our long-term outlook has improved. The reduction in oil prices since late 2014 and a change in leadership in various countries has started an economic and social reform plan in the region that will be very important for the long-term prospects of this region. We are excited about that and think as a bank, we can be very helpful in that transformation process, whether it is by providing advice, facilitate access to the debt and equity markets or help companies and countries optimise their asset and liability profiles.
What are your main concerns this year?
They are largely geopolitical. The world is not as coordinated as it was before on very important subjects such as global trade or regional conflicts. Time will have to show whether the ‘global community’ is set up to deal effectively with difficult economic or political situations we may encounter going forward.
How would you describe the global appetite for GCC and wider Middle East investments? A material portion of the high-grade bond market is trading at negative yields. The GCC region offers high quality credits at attractive rates which should support the growth of the capital pools earmarked for the region. We are also working with our clients on expanding their reach by connecting with investors across the globe to further grow and diversify the investor base.
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“THE MIDDLE EAST HAS A STRONG, PROFITABLE BANKING SECTOR. THE IMPEDIMENT TO MORE GROWTH IS NOT THE SUPPLY SIDE OF BANK LENDING, BUT RATHER THE LACK OF INVESTMENTS AND ASSOCIATED NEED FOR BORROWING." — Sjoerd Leenart, Global Head of Corporate Banking, Regional Head, Central & Eastern Europe, Middle East and Africa, J.P. Morgan
J.P Morgan’s top line for the region has grown
25% 13 %
over the last 4 years; the firm has a
market share in investment banking
With respect to FDI, we see upside, admittedly from a relatively low base, in places like Saudi Arabia, UAE and Egypt, as valuations are relatively attractive and economic reforms start to have an impact on the overall business climate and the ease of doing business.
What are your projections on the bond market in this region for the next 12 months? So far this year, market conditions have been very favourable for high grade and emerging market issuers. In the Middle East, we have seen $68 billion of supply this year across all sectors, with sovereigns claiming a 50 per cent market share, and we would not be surprised if 2019 ends up being a record year in terms of volumes. Our near-term view is that current market conditions will persist with low interest rates encouraging clients to refinance and optimise their capital structure.
What are your views on liquidity in the Middle East’s banking sector? How do you see this changing? Amongst the oil exporters, liquidity has definitely been impacted negatively by the drop in oil prices after 2014. While we have witnessed some modest improvement since 2018, most countries continue to grapple with weak growth amidst regional conflict, which in turn has impacted trade, travel, and investment activity, and thus growth and liquidity conditions remain sub-optimal. We do not expect a significant change either way. While the reversal of monetary headwinds will provide some impetus to liquidity growth this year, this will be tempered by the downward pressures on commodity prices due to the weaker global growth outlook and surging US supplies.
The Middle East has a strong, profitable banking sector. The impediment to more growth is not the supply side of bank lending, but rather the lack of investments and associated need for borrowing.
Having a broader view of things, how do you see the GCC/Middle East fare amongst its emerging market peers?
It’s hard to generalise as each country has its own dynamics. The Middle East has a number of very appealing stories, for example the reforms and MSCI inclusion in Saudi Arabia or the improved economic picture in Egypt. For the broader region, low oil prices, geopolitical complications and an overall slowdown in global growth are worries for investors. On the positive side, the widely anticipated decline in US rates will have a similar impact on rates in the GCC and is likely to lend support to economic activity.
What is J.P. Morgan’s current position in this market? And what are your plans for your operations in this region? Whether it is governments, corporates or financial institutions, clients seem to very much value our commitment to the region and the quality of our people and services. As a result, our top line has grown 25 per cent over the last four years, we have a 13 per cent market share in investment banking, almost four per cent ahead of the number two, are equally dominant in the markets business, and have leading positions in other businesses such as corporate banking, global and local custody as well as asset and wealth management.
J.P. Morgan’s presence in the Middle East
J.P. Morgan has a history of serving clients in the Middle East dating back to the 1930s when a predecessor firm helped US-based oil companies strengthen their operations in Saudi Arabia. The firm opened its first branch in Beirut, Lebanon in 1955 and now operate across offices in Abu Dhabi, Beirut, Cairo, Doha, Dubai, Manama and Riyadh. The lines of business operating in the region include the Corporate and Investment Bank and Private Banking relationship management, which facilitates access to a global team of dedicated specialists. Globally, through the JPMorgan Chase Foundation, the firm makes philanthropic investments in cities where it has major operations, assisting those at a disadvantage by helping them build better lives for themselves, their families and their communities. Across EMEA, J.P. Morgan focuses its investment and attention on three pillars: economic development, financial empowerment and workforce readiness. As announced in early 2018, JPMorgan Chase will deploy $1.75 billion in philanthropic capital around the world by 2023. It will also lead volunteer service activities for employees in local communities by utilising our many resources, including those that stem from access to capital, economies of scale, global reach and expertise.
BANKER MIDDLE EAST | OCTOBER 2019 | ISSUE 223
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For more information, please contact TIM HAYWOOD at
Timothy.Haywood@walton.com For more information, please contact TIM HAYWOOD at Timothy.Haywood@walton.com Note: 1. Information as of December 31, 2018; Note:disclosures: Investing in land has risk. Land investment is illiquid and it may be impossible for you to sell your land within a short period, or at any time at all. Land could potentially lose value over Risk time. Past performance is not necessarily 1. Information as of December 31, 2018; indicative of future results. No representation is made that profits, income or other returns will arise, or will likely arise, from the acquisition, holding, disposal or any other dealing with the land, or that any profits, income or other returns will arise or will likely arise within any specific time. These risk disclosures do not purport to disclose all risks associated with Risk disclosures: Investing in land has risk. any Land investmentfinancial, is illiquidaccounting, and it may legal be impossible for youYou to sell yourcarefully land within a shortwhether period, land or atinvestment any time atisall. Land could potentially value over land purchases. Walton does not provide investment, and tax advice. should consider suitable for you in light oflose your financial time. Past performance is not necessarilyinvestment indicative and of future results. No representation is made thatare profits, income or returns or will likely arise, from the acquisition, disposal or circumstances, and consult professional tax advisers. Walton and its representatives not licensed to other transact in or will witharise, any real property located in Mainland China, holding, Hong Kong, Macau, any other dealing withUAE, the land, or thatMalaysia, any profits, incomeVietnam, or other India returns will arise or will likelyWalton arise within any specific time. These risk disclosures do not purport to disclose all risks associated with Taiwan, Japan, Korea, Singapore, Thailand, and Indonesia. © 2019 International Group Limited land purchases. Walton does not provide any investment, financial, accounting, legal and tax advice. You should carefully consider whether land investment is suitable for you in light of your financial circumstances, and consult professional investment and tax advisers. Walton and its representatives are not licensed to transact in or with any real property located in Mainland China, Hong Kong, Macau, Taiwan, Japan, Korea, UAE, Singapore, Malaysia, Thailand, Vietnam, India and Indonesia. © 2019 Walton International Group Limited
J.P. Morgan's plans involve no radical changes, but rather, to stay the course and keep investing in people and capabilities, particularly in Saudi Arabia, said Leenart.
Our plans involve no radical changes, but rather, to stay the course and keep investing in people and capabilities, particularly in Saudi Arabia. For example, over the last few years, we built a Saudi equity brokerage platform that ranked number two in volumes last month and we have also built a local Saudi custody platform for debt and equity, which has seen tremendous inflows. In the UAE, we also intend to keep investing in local capabilities as we expect it to continue to be a key regional hub for our global clients.
“THE WORLD IS NOT AS COORDINATED AS IT WAS BEFORE ON VERY IMPORTANT SUBJECTS SUCH AS GLOBAL TRADE OR REGIONAL CONFLICTS. TIME WILL HAVE TO SHOW WHETHER THE ‘GLOBAL COMMUNITY’ IS SET UP TO DEAL EFFECTIVELY WITH DIFFICULT ECONOMIC OR POLITICAL SITUATIONS WE MAY ENCOUNTER GOING FORWARD." — Sjoerd Leenart, Global Head of Corporate Banking, Regional Head, Central & Eastern Europe, Middle East and Africa, J.P. Morgan
Sjoerd Leenart is the Global Head of Corporate Banking, responsible for Corporate and Financial Institution clients across North America, Latin America, Asia-Pacific, Europe, the Middle East and Africa. He is also the Regional Head for Central & Eastern Europe, Middle East and Africa (CEEMEA). In this capacity, he represents J.P. Morgan’s global platform across all business lines and works with coverage teams and clients across the corporate and investment bank and asset management. He is also responsible for the firm’s governance and the relationships with local regulators in these markets. Leenart has been at J.P. Morgan for over two decades and gained experience in a variety of roles across the firm. He led the European high-grade bond syndicate desk until 2002 and then became co-head of western European debt capital markets. In 2006 he was named co-head of CEEMEA Debt Capital Markets, Sales and Derivatives Marketing and added Latin America to his responsibilities in 2009. He was appointed Senior Country Officer for the Middle East and North Africa region in 2011 and expanded his responsibilities to Turkey and Africa in early 2014. He was named Regional Head for CEEMEA in 2017. Leenart holds a doctorate degree in Economics from Erasmus University of Rotterdam.
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PHOTO CREDIT: Patrick Mouzawak/Bloomberg
Turning the tide Investors are confident that Lebanon’s fragile government can make the necessary reforms that will unlock vital funding to rebuild the country’s infrastructure and ease its swelling debt burden
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Lebanon has always known how to make a comeback. In April 2018, at the CEDRE Conference in Paris, international donors pledged more than $11 billion in loans and grants to help improve Lebanon’s ailing infrastructure. However, in the absence of a functional government, authorities have been unable to launch reforms and sign off on the package. The aid was an extraordinary vote of confidence in a country that has made little progress on promised fiscal reforms due to political wrangling but the formation of a cabinet in January 2019, almost a year after the elections, revived the hope of growth. However, the current situation is offsetting the hopes of a comeback anytime soon.
CAUGHT BETWEEN A ROCK AND A HARD PLACE Not only are there political issues beyond the country’s control, there are struggles for power that are not only driven by internal political ambitions, but also a political unrest in the region that impact Lebanon. Lebanon’s unique consensus government—tailored to deal with a diverse population—rests on a power-sharing structure whereby the Prime Minister, President and Speaker of the house must come from the country’s three largest religious groups. However regional powers tend to exert influence in the country through these various groups.
“LEBANESE BANKS’ LARGE SOVEREIGN EXPOSURE REMAINS THEIR MAIN SOURCE OF FINANCIAL RISK.” — Moody's
he political turmoil in Lebanon coupled with the influx of Syrian refugees fleeing the conflict back home have combined to dry up inflows and aid from the country’s wealthier Gulf Arab allies. Moody’s said that renewed political unrest is derailing the reform agenda which is urgently required to resuscitate the ailing economy. According to the International Monetary Fund (IMF), Lebanon’s public debt burden will rise further to 180 per cent of economic output by 2023. However, the country has never defaulted on its obligations and officials have repeatedly ruled out any restructuring since the finance minister floated the idea earlier in 2019. Recently, the Lebanese authorities moved in to implement the much-needed reforms to control the deteriorating economic conditions. The parliament approved a new plan to reform the electricity sector and reduce its fiscal cost, as well as a budget, in a bid to reduce the overall fiscal deficit in 2019. The electricity reform and budget are the first steps on a long path to re-equilibrate the economy that will need to involve further fiscal adjustment and radical structural reforms, said the IMF.
According to COFACE, in addition to reinforcing sectarian and political divisions at home, the growing influence of Hezbollah, an Iranian-backed party that provides military assistance to the Syrian regime, is straining Lebanon’s relations with its traditional allies. The group holds three seats in the Lebanese cabinet and when regional powers are at odds, Lebanon usually gets caught in between, a situation that has stalled progress when it comes to ratifying policies that are crucial to resuscitating the country’s ailing economy. During his recent trip to Beirut in April 2019, the US Secretary of State Mike Pompeo pledged to choke off the financing, the smuggling and the misuse of government positions and influence that feeds Iran and Hezbollah. Pompeo’s words were followed by the blacklisting of Jammal Trust Bank by the US for allegedly facilitating banking for Hezbollah, an allegation which led Banque du Liban (BdL) to approved a request for self-liquidation by Jammal Trust. The World Bank said that up to 1.5 million Syrians, about a quarter of the Lebanese population, have taken refuge in Lebanon since March 2011 and the situation has strained the country’s public finances, service delivery and the environment. The Syrian crisis also resulted in fragile state of security in the region, leading countries vital for Lebanon’s tourism industry (including some key Gulf states) to issue travel advisories. However, the UAE and Saudi Arabia lifted a yearlong travel ban on Lebanon earlier this year, a move that could revive the embattled country’s tourism sector.
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THE HEALTH OF THE BANKING SYSTEM Lebanon’s banking system relies on bank deposits—mainly from remittances from millions of Lebanese living abroad—to keep its lenders stable with the BdL using what it describes as financial engineering to keep up an inflow of hard currency. According to S&P, Lebanese banks fund their debt purchases through deposits, so they must expand their deposits to continue buying. To attract investors, the central bank hiked interest rates, with the reference rate reaching 12.39 per cent in March 2019, its highest since inception in 2011. Investors seem more confident that Lebanon’s fragile government can make the necessary reforms to unlock vital funding to rebuild the country’s infrastructure and ease its swelling debt burden. A concern that has heightened fears of a state default and a run on its banks. Saad Azhari, the Chairman & General manager of BLOM Bank, said, “The banking sector’s combined profits from their Lebanon operations fell 16 per cent in 2018.” The performance of the big four banks in the country was mixed in 2018. BLOM Bank and Bank of Beirut both saw net income increase year over year, while Bank Audi and Byblos Bank posted a decrease in income. S&P said that BLOM and Audi have expanded to other Middle East markets to try to offset domestic difficulties. However, Moody’s stated that the next 12-18 months remain challenging for Lebanese lenders and banks dependent on the new government’s ability to fully implement highly anticipated fiscal and economic reforms.
WHEN THE MUSIC STOPS In its 2019 draft budget, the Lebanese government set a deficit target of 7.6 per cent of GDP, but the IMF expects this to reach 9.8 per cent. The Lebanese authorities plan to pare the deficit primarily by reforming its ailing electricity sector and cutting public sector benefits. Although the IMF said that the measures proposed in the 2019 budget, together with savings from electricity sector reforms, are projected to reduce the primary deficit for 2020-22, it will still leave debt on a rising path. Lebanon’s central bank recently said that it secured up to $1.4 billion in five-year deposits from private investors overseas, boosting dollar reserves and easing concerns that it could struggle to repay its debts and defend its currency. However, S&P Global Ratings poured cold water on the excitement, saying that while Lebanon’s foreign currency reserves remain sufficient for immediate financing obligations, there is a risk that customer deposit flows, particularly by non-
“THE NEW GOVERNMENT FORMED IN JANUARY 2019 PROVIDED SOME RESPITE FROM MONTHS OF INVESTOR AND DEPOSITOR UNCERTAINTY.” — Moody's
residents, could continue to decline. And this could result in an accelerated drawdown of foreign currency reserves that would test the country’s ability to maintain the currency peg to the US dollar. Moody’s said that the stable outlook for Lebanese banks assumes slightly higher economic growth and deposit inflows, and any negative political developments are a key risk for banks. Lebanese banks’ large sovereign exposure remains their main source of financial risk. The political developments affecting the pace of economic reform and depositor confidence are also a key risk for lenders. Similarly, Fitch Ratings also downgraded Lebanon’s sovereign credit ranking into junk territory, as one of the world’s most indebted nations finds its finances stretched with a dwindling flow of cash from abroad. The downward pressure on banking sector deposits and central bank foreign reserves as well as increasing dependence on unconventional measures by the BdL to attract inflows, illustrate increased stress on financing. The downgrading of Lebanon’s credit rating reflects intensifying pressure on the country’s financing model, increasing risks to the government’s debt-servicing capacity. While recent policy steps point to promising fiscal adjustment, a credible medium-term plan to stabilise the government’s debt to gross domestic product ratio lacks firmness, said Fitch. In March 2019, the IMF cautioned the BdL saying that the regulator risks undermining its credibility if it agrees to a government proposal to buy treasury bills at below-market rates. The warning by the IMF followed the finance minister's proposal to issue LBP 11 trillion ($7.3 billion) of treasury bonds to commercial banks at a rate of one per cent (about a tenth of the market rate) in order to cut LBP 1 trillion from debt-servicing costs, a proposal that was also turned down by Lebanese lenders.
BONE OF CONTENTION Lebanon’s Prime Minister Saad Hariri finally announced his new cabinet line-up in January 2019 after nine months of political bickering and mounting economic challenges, a period long enough to create a mammoth task for authorities to manage the country’s faltering public finances. Political disputes between Prime Minister Hariri, President Michel Aoun and Hezbollah had stalled the formation of a government since an election in May 2018, undermining plans for much needed fiscal and structural reforms that would unlock $11 billion in grants and loans. Alexios Philippides, AVP-Analyst at Moody’s, said that the new government formed in January provided some respite from months of investor and depositor uncertainty. Moreover, the newly formed Lebanese government approved its 2019 draft budget in March 2019 after months of delays. Subsequently, the hotly contested budget was passed almost two months after it was first endorsed by the Cabinet, with 83 MPs voting in favour, 18 against and one abstaining. The World Bank praised the government for pulling out all the stops to push through a budget touted as the most austere in the country’s history, in hope of appeasing investors, donors and rating companies. The build-up of arrears that lies behind the turnaround is masking fiscal risks that could snowball later. Under the budget recently ratified by parliament, deferral of payments and postponement of ministerial projects make up almost half of the total reduction in spending, said the Lebanese Centre for Policy Studies (LCSC).
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PHOTO CREDIT: Sima Diab/Bloomberg
“LEBANON’S PUBLIC DEBT BURDEN WILL RISE FURTHER TO 180 PER CENT OF ECONOMIC OUTPUT BY 2023. HOWEVER, THE COUNTRY HAS NEVER DEFAULTED ON ITS OBLIGATIONS AND OFFICIALS HAVE REPEATEDLY RULED OUT ANY RESTRUCTURING SINCE THE FINANCE MINISTER FLOATED THE IDEA EARLIER IN 2019." — The IMF
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“A STABLE OUTLOOK FOR LEBANESE BANKS ASSUMES SLIGHTLY HIGHER ECONOMIC GROWTH AND DEPOSIT INFLOWS, ANY NEGATIVE POLITICAL DEVELOPMENTS ARE A KEY RISK FOR BANKS.” — S&P
Lebanon seeks to reduce deficit by an estimated LBP 1,740 billion ($1.16 billion) this year. Forty six per cent of this decrease is due to a deferral of dues for ongoing ministerial projects and these postponed payments are distributed across the years 2020-2023, with five per cent of them being due in 2020, 65 per cent in 2021, 17 per cent in 2022 and 13 per cent in 2023. The remainder of the projected reduction will be the result of cuts made to consumption expenditure, a threeyear employment freeze, reduction in personnel costs and reduction in the contributions to non-profit entities, among others, added LCSC.
ALL-WEATHER FRIENDS In February 2019, Lebanon said that it is in talks with allies to secure financial backing that would help it manage one of the world’s biggest debt burdens, following the Qatari authorities’ pledge to buy Lebanese government bonds worth $500 million. In addition to the Qatari pledge, the Saudi’s Finance Minister Mohammed Al Jadaan also said that the Kingdom would support the Lebanese economy “all the way”, without giving much details. Saudi Arabia has traditionally been an economic patron of Beirut and one of its top investors, however, the Kingdom withheld a $3 billion aid package to Lebanon in 2016 in response to the rising power of Hezbollah. Lebanon also secured $11 billion in aid at the Paris CEDRE Conference in 2018 and the pledges include $10.2 billion in loans and $860 million in grants. However, donors want to see Lebanon commit to their long-stalled reforms. In a nod to those demands, Prime Minister Hariri pledged to reduce their five per cent of their budget deficit in the coming five years. Bloomberg reported that the aid included $4 billion in World Bank loans, EUR 1.1 billion ($1.35 billion) in loans from the European Bank for Reconstruction and Development, and the renewal of a previously pledged $1 billion credit line from Saudi Arabia. The country has long suffered from large fiscal deficits which have left public debt at over 150 per cent of GDP, the current account deficit is over 25 per cent of GDP, and growth has been low since the start of the Syrian crisis. The Lebanese central bank has successfully maintained financial stability in difficult circumstances for some years, but the challenges it faces in doing so have grown. This cast a grey cloud on the growth of the country. The IMF said that it is of paramount importance that Lebanon begins a process of significant fiscal adjustment and structural reforms to contain public debt and raise growth, adding that adjustment and reforms are the only path out of Lebanon’s conundrum.
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LEBANON in numbers POPULATION
28 years Source: Worldometers
GDP NOMINAL GDP
$59 billion (2019 est.) $56 billion (2018 est.) $53 billion (2017 est.) $50 billion (2016 est.) $49 billion (2015 est.) Source: BLOMINVEST
(2018 est.) Source: The World Bank
ANNUAL GDP GROWTH
1.3% in 2020 (est.) 0.9% in 2019 (est.) 0.2% in 2018 0.6% in 2017 1.6% in 2016
Source: The World Bank
GDP PER CAPITA
$23,000 (2018 est) $19,500 (2017 est.) $19,400 (2016 est.) Source: CIA World Factbook
73.3% (2017 est.) Source: CIA World Factbook
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Dr Salim Sfeir
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Lebanon: At a crossroads Dr Salim Sfeir, Chairman and CEO of Bank of Beirut, says that the country needs to transition into a modern economy through empowering oversight institutions and eradicating old practises of cronyism
e have reached the moment of truth: our economy is sputtering, but there is a glimpse of hope if we act responsibly and act now. And yes, our economy can rebound if we change our approach and reverse years of mismanagement and government incompetence. To stop the bleeding, privatisation is the only remedy. The government owns and runs several sectors that can be profitable and could generate the needed funds. Only the private sector can turn these sectors into an efficient operation, away from cronyism and corruption. With the private sector running these areas and institutions, political leaders can be relieved from the pressure of securing jobs for their supporters and draining the budget. We have recently witnessed a positive change in our politicians’ attitude toward the economy. They now understand that they cannot continue to do business as usual, and the blaming game has to come to an end. The economic situation has become a priority, and populism is costly and will hunt back the populists. Political bickering and sectarian populism are luxuries we cannot afford anymore. Our gross domestic product represents 25 per cent of our banking sector for a population of six million people. The main challenge is to secure needed capital and investment. This is where close coordination with the government is required. Adding more taxes should not be the only way to increase revenues. There are other revenues such as giving incentives to settle maritime properties that can help ease the fiscal challenges and generate much-needed revenues. There is no room for a futile debate. Lebanon is not the only country which went through creditor and large national debt problems. There is a proven remedy which requires national consensus and decisive leadership. Securing local and foreign investments requires readiness to implement serious and credible privatisation efforts, mainly for the sectors causing the budget deficit, particularly, utility services. The banking sector is capable and ready to play its traditional role in jumpstarting the economy, but the government needs to do its part. We need to restore the international credibility in our institutions and governance. Oversight institutions should be empowered, and old practises of cronyism should end.
The national debt and its servicing remain the elephant in the room. There is only one way to tackle it: economic growth and a balanced budget. The 2019 budget was a step in the right direction, but the jury is still out on the 2020 budget. Reasonable and balanced budgets can help improve our rating and lower the interest rates that are hindering the investment climate in the country. The upcoming budget should not even be a book entry exercise but must include an economic strategy to lead the country toward economic recovery. High interest rates are the result of uncertainty and this is considered a “fear tax” that we pay to offset political instability. Regaining the confidence of donor countries and international institutions is key to the success of CEDRE conference. The recent credit rating given by the agencies
“TO STOP THE BLEEDING, PRIVATISATION IS THE ONLY REMEDY.” — Dr Salim Sfeir
should serve as an incentive for us to work harder in order to regain the trust of the international community. The latter should be done by updating our institutions and having better auditing procedures. The current challenges can present an opportunity to modernise the economy and the public institutions. We are part of an international market. We have to be compatible with the world and credible to the international banking sector, its regulators and the rating agencies. Lebanon is at a crossroads. To secure a successful transition into a modern economy, we need a national hero who people trust and would be willing to temporarily sacrifice certain privileges toward prosperity. Our main assets have always been our human resources, and we can now add the awaited promised natural resources. Our outlook is positive, and our destiny is in our hands. It is not too late, but we have to choose between credible, modern institutions or the current archaic system.
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PHOTO CREDIT: Akarat Phasura/Shutterstock
Paying it forward Ramana Kumar, SVP & Head of Payments, Personal Banking Group at First Abu Dhabi Bank, sheds light on the bankâ€™s approach to payments and how this could evolve in the next three to five years
ased on your experience, how would you describe the evolution of the payments landscape in the UAE? How has it changed to reflect market demands?
The payments market in the UAE is undergoing a massive transformation. The biggest contributor to this is the cashless vision of the UAE as well as the initiatives of the government and the central bank. The UAE has been at the forefront of adopting new forms of payment, and the usage of digital wallets. Card payments have grown considerably over the last few years. There have been many initiatives around cash conversion and cheque conversion. Financial inclusion has also contributed to reshaping the payments industry.
What was the latest payment capability you implemented for the bank? Payments has been one area where we have invested in services that differentiate us from our competition. FAB has implemented many new features, such as the launch of sound-based payments on Payit, the UAEâ€™s first fully featured digital wallet. We have also invested in artificial intelligence (AI)-driven payment analytics. This helped us to move away from pricing-driven conversations to valuedriven conversations. We have also rolled out application programme interface (API)-driven payment capabilities around remittances on Payit. All of these capabilities are driven by our vision to help our clients grow stronger. We work with our clients to not only
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“PAYMENTS ARE GOING TO BE REAL TIME, SEAMLESS, AND INVISIBLE.” — Ramana Kumar
bring them new technical features on the payment channels, but to also help them achieve new growth opportunities through AI and focused campaigns by providing them with invaluable data.
As one of the largest financial institutions in the region, how is FAB promoting financial inclusion? FAB’s Ratibi Prepaid Card is a market leading wages protection system (WPS) solution for corporates. We have more than 1.7 million WPS cards. The reason corporates work with us for these types of solutions is because we offer end-to-end integrated systems, coupled with cash management systems.
We have also seamlessly integrated the Ratibi cards into the Payit wallet. All WPS customers can now use Payit and can conduct P2P, merchant payments, bill payments, and top up features for mobile phones. Customers can use Payit anytime, anywhere, to send money to a bank account or for cash pick up with a click of a button.
Tell us more about your wallet, Payit, and why it is different to other products? Payit is the UAE’s first fully featured digital wallet for customers and partners. Any UAE resident with a valid Emirates ID can download and register for free. Customers can load money using a debit card, cash deposit, and request a friend for wallet to wallet transfers or local bank transfers. The money can be used for person-toperson payments, merchant payments, bill payments, top-up for mobiles and it can be used to transfer money internationally to accounts or cash pick up using MoneyGram. For partners and merchants, Payit offers easy payments solutions through the use of a QR code and sound-based technology which is seamlessly integrated into POS machines. Payit incorporates AI and machine learning tools to drive customer buying behaviours, spend campaigns, offers and new customer acquisitions.
What are your views on new technologies like artificial intelligence and machine learning? Where do you see the relevance in the payments space? AI and machine learning (ML) are going to disrupt the market at such a level that the results would be astonishing. In the payments space today, we are already using AI and ML tools to help our clients analyse data, forecast spends and drive new revenues and market share by channelling marketing campaigns to targeted segments. AI and ML, coupled with mobile technology, will drive the vision for invisible payments. Solutions around “queue-busting” and invisible checkouts are expected to make payment experiences exciting and even more efficient in the future.
What do you expect will be the most prominent payments industry trends in the next three to five years?
Ramana Kumar, SVP & Head of Payments, Personal Banking Group, First Abu Dhabi Bank
Payments are going to be real time, seamless, and invisible. New features will help in evolving the world of payments including facial recognition, voice recognition, etc. The back-end processing will be driven with tools like blockchain and real time processing.
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PHOTO CREDIT: Sophie James/Shutterstock
A culture of good governanceâ€” the first line of defence Speaking to Banker Middle East, Dr Ashraf Gamal El Din, CEO of Hawkamah, says that banks need to pay more attention to good governance, risk management, audit, and control functions 46
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aving been at the helm since 2014, can you tell us how corporate governance practises in the MENA region have evolved? When the Dubai International Financial Centre Authority, DIFC, established Hawkamah back in 2006, governance was relatively new in the region. Much of our work were focused on the basics—What is the meaning of corporate governance? Why is good governance important? Is governance just another layer of regulation? Why does the MENA region have to copy concepts coming from other regions? And many more questions of this basic nature. Some of our initial surveys highlighted the mismatch between the acknowledgement of the importance of good corporate governance and the understanding of what constitutes good corporate governance. The region’s corporate governance landscape has changed and there have been several key milestones in the region’s governance developments. One of the first milestones for the regional banks’ corporate governance journey was when Hawkamah issued, with Union of Arab Banks (UAB) and the organisation for Economic Co-operation and Development (OECD), the main drivers of global and regional corporate governance, a Policy Brief on Corporate Governance of Banks.
The Policy Brief was converted to a number of initiatives by Hawkamah, UAB, and OECD to push for better corporate governance practises. Hawkamah produced policy briefs for Islamic financial institutions, private equity firms, state-owned enterprises, as well as on insolvency and creditor rights. On the back of our engagement with regulators and market players for each of these policy briefs, we hoped to frame and evolve regional corporate governance discussions away from the basics to how corporate governance can actually add value to the region’s corporates. Since these initial steps, we have witnessed countries in the region develop their own codes of corporate governance. Many of them have also established institutes that focus on governance creating awareness and improvement in their respective countries. Listing rules have changed massively to reflect almost all of the well-established best practices including defining independent and non-executive directors, related parties, conflict of interest, and the like; mandating audit committees and pushing for the development of risk committees; introducing minority shareholder rights protection such as cumulative voting; mandating minimum disclosure requirements (some of which mandate disclosures in multiple languages to account for the needs of potential international investors) and the appointment of investor relations officers. A good number of these codes, introduced in the early 2000’s, have gone through several updates and iterations reflecting some of the lessons learned from the financial crisis and the regulators’ desire to stay on top of global corporate governance developments.
“THIS IS NOT ABOUT REGULATION; IT IS ABOUT HOW YOU MAKE DECISIONS ON A DAILY BASIS.” — Dr Ashraf Gamal El Din
Dr Ashraf Gamal El Din, CEO, Hawkamah
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One of the key milestones that we are proud of at Hawkamah is the launch of the first, and only, MENA region Environment, Social and Governance (ESG) Index in 2011. The index was a result of our work with Standard & Poor’s with the support of the International Finance Corporation, IFC, of the World Bank. The HawkamahS&P Pan Arab index tracks the status and disclosures of the region’s top and most active companies in the areas of governance, environment and social practises. Our work on the index have shown that the issuance of national codes of corporate governance helped regional companies in increasing their governance disclosures. Over a decade of tracking the ESG Index, we have noticed considerable improvements on the region’s governance disclosures. There is, however, far less improvements in the social and environmental practises and disclosures.
“THE ISSUE IS BEHAVIOUR. A BANK MIGHT BE AT HIGH RISK, EVEN WHEN IT COMPLIES WITH REGULATORY FRAMEWORKS, IF IT HAS INTERNAL VULNERABILITIES. IF THE AUDIT COMMITTEE IS NOT DOING ITS JOB OR IF INTERNAL AUDIT IS NOT TRULY INDEPENDENT OR IF NOT EVERYONE IN THE BANK UNDERSTANDS RISKS AND HOW TO MITIGATE THEM OR IF THE BANK HAS A POOR CORPORATE CULTURE, THEN THE BANK POTENTIALLY LEAVES ITSELF EXPOSED TO AN EXISTENTIAL CRISIS.” — Dr Ashraf Gamal El Din, CEO, Hawkamah
In parallel, we have also witnessed increasing interest from existing and aspiring board members to go through a structured capacity building programme to enable them to become stronger corporate governance advocates in the boardroom. Since Hawkamah started its director development programme in 2009, over 2000 directors have gone through our programme. This year, we accredited our 100th director which is a milestone in itself given that director accreditation is not mandated by regulators. The accreditation programme includes a rigorous exam and requires all accredited directors to maintain their corporate governance knowledge by participating in programmes for continuing professional development (CPD) credits. We have also seen a considerable increase in the number of corporate governance professionals and the introduction of certain governance related functions in companies. This includes professional company secretaries, investor relations officers, compliance officers, and corporate governance managers. These changes were quite important as previously most of the governance work was non-one’s job. Now responsibilities are assigned, accountability is established, and professionalism is on the rise. More than a decade since Hawkamah started, we have seen a confluence of regulators articulating a framework for good corporate governance practices through the corporate
governance codes and regulations, boards slowly starting to be aware of the need to implement these frameworks, directors and corporate secretaries that realise that corporate governance goes beyond mere implementation of these codes and regulations, and an evolving (although admittedly still nascent) interest on ESG practises and disclosure. The region has come a long way, but more work still has to be done.
Particularly for the banking sector, what were the major issues faced then? How were they resolved and what are the challenges ahead? The banking sector is the most important one in any economy. It is the sector that leads development and affects every other sector and every single organisation in the economy. One of the main issues then was the localization of a naturally global industry. Banks can be abused and money can be channelled into illegal activities. Regulators were concerned with maintaining strong banking sectors while making sure that they are not used to finance terrorism, finance illegal business or evade taxes. While developments led by the Bank for Information Settlements in Basel, Switzerland handled many of the risk and governance challenges, other regulations such as Anti-Money Laundering (AML) and Countering Terrorist Financing (CTF), were also developed. Central banks had to include international regulatory developments into their own governance rules and had to supervise the implementation and adherence to those regulations. The role of the banking sector in protecting the environment and the social fabric of societies have also been high on the agenda of banks and various interest groups in the region. Globally, we have general business initiatives such as the Global Compact that call for businesses to act responsibly. For the financial sector there are many other initiatives such as the Equator Principles and Principles for Responsible Investment and Sustainable Finance. They all call for banks to consider the non-financial impacts of their funding and investment practises. This includes environmental impact assessment as well as social implications of projects and investments. In these areas, the MENA region is still lagging behind international best practises. Some banks have officially adopted these initiatives and are adhering to them while the majority are still in the “thinking” phase. Moving forward, the coming years look challenging for the banking sector. On the one hand, we are witnessing a trend towards mergers of banking institutions. On the other, how to stay profitable in times of uncertainty is a major issue. While many banks in the region have liquidity, it is getting more difficult to find the right investments and to balance credit levels with the desired profitability and risk levels. Fintech also seems to be on the rise in the region. This is a great disruptor for the sector in the MENA region. Fintech companies operate at a far lower cost structures, have more relaxed regulatory pressures, and are more flexible. How banks compete against them within their current governance and regulatory frameworks is a serious challenge. This will sure have implications not only on the business model of the banking sector but also on the board structure and organisational structure of the sector.
How detrimental is poor corporate governance for financial institutions in the region? Financial institutions cannot afford to have poor governance structures. Regulatory pressures make it impossible for a MENA bank not to have a good governance structure. The risk is not in the lack of structure but in how agile the governance structure is.
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There are two main risks associated with governance structures: focusing on the form, (i.e. not the substance of governance) and having too rigid a structure. In other words, the issue is behaviour. A bank might be at high risk, even when it complies with regulatory frameworks, if it has internal vulnerabilities. If the audit committee is not doing its job, or if internal audit is not truly independent, or if not everyone in the bank understands risks and how to mitigate them, or if the bank has a poor corporate culture, then the bank potentially leaves itself exposed to an existential crisis. We have seen this in banks across the world and it can happen in the region if we do not learn the lessons. The advice for banks is therefore to adhere to the core and essence of good governance. This is not about regulation; it is about how you make decisions on a daily basis. Therefore, in the coming years, corporate culture remains to be the key area that banks have to work on. Experience shows us that the first line of defence for the organisation is its strong corporate culture. Bank boards, management, and employees must understand and respect ethics and the values of integrity, transparency, and long-term value maximisation. Unfortunately, bank management is assessed using mere financial indicators. If financial indicators continue to dominate KPIs, then it is a matter of time until we see major scandals. Boards set the tone at the top; they need to cherish adherence to good governance, ethical practises, stakeholder value maximisation and sustainability.
“THE RISK IS NOT IN THE LACK OF STRUCTURE BUT IN HOW AGILE THE GOVERNANCE STRUCTURE IS. THERE ARE TWO MAIN RISKS ASSOCIATED WITH GOVERNANCE STRUCTURES: FOCUSING ON THE FORM, (I.E. NOT THE SUBSTANCE OF GOVERNANCE) AND HAVING TOO RIGID A STRUCTURE.” — Dr Ashraf Gamal El Din, CEO, Hawkamah
The use of technology in advancing banking services and how banks respond to the rise of fintech will either make or break banks. Banks have to choose whether they want to be disruptors or will rather wait to be even more disrupted.
What are Hawkamah’s plans for moving forward? In the coming year, Hawkamah will work more with banks and other institutions to enhance board effectiveness through board evaluations, private board sessions and specialised board committee briefings. Hawkamah’s work in ensuring that the board is composed of professional directors, enabled by an active chairman, and supported by an able and professional company secretary, will continue. As a matter of fact, we had a breakthrough engagement two years ago with the Dubai Financial Market mandating DFM-listed companies to have their company secretaries go through the Hawkamah certified company secretary programme. Over the course of the past two years, we’ve certified close to 200 company secretaries. We urge other markets to create a mechanism to ensure that company
“EXPERIENCE SHOWS US THAT THE FIRST LINE OF DEFENCE FOR THE ORGANISATION IS ITS STRONG CORPORATE CULTURE. BANK BOARDS, MANAGEMENT, AND EMPLOYEES MUST UNDERSTAND AND RESPECT ETHICS AND THE VALUES OF INTEGRITY, TRANSPARENCY, AND LONG-TERM VALUE MAXIMISATION.” — Dr Ashraf Gamal El Din, CEO, Hawkamah
secretaries are aware of their duties and responsibilities, (and liabilities) so that they are able to better advise the boards on good corporate governance practises. Hawkamah is also working with a couple of regulators in the region to update listing rules to make sure they take into account latest governance developments and also include sustainability and integrated reporting as key competitive elements, not just regulatory requirements. Another important project that we are currently working on is launching a new ESG index with S&P covering all UAE markets. The project was initiated by the Dubai Financial Market, DFM, with the support of the Securities and Commodities Authority, SCA and the Abu Dhabi Stock Exchange, ADX. The idea of the index is to create healthy competition among listed companies through which they pay more attention to good governance, corporate citizenship, and environmental policies. To score high on the index, companies must have the right policies and frameworks in place and must have good disclosure practises as well. One of the pioneering developments on the governance landscape in the MENA region is the keen interest of the UAE government to introduce the highest standards of governance to government institutions. At times when regulators are focusing on how to improve governance mainly for listed companies and financial institutions, the UAE government turned its attention to itself as well. This interest covers federal as well as local level government entities. We have supported many such institutions to enhance their governance structure and practises through working directly with them on long-term partnership basis. On the national level, Hawkamah is working on major assignments to improve governance practises in government institutions through revised regulations, awareness sessions and training courses for senior government officials. Furthermore, a tailored study tour for senior government and market regulators from the MENA region to Singapore will be held in December 2019 to exchange experience and gain knowledge of latest developments and to establish strategic relationships between governments and regulators of the region with their counterparts in Singapore. To conclude, the MENA region has gone through an impressive journey towards achieving good governance in the last two decades. The journey is far from being completed, there is a lot more to be done. This, combined with the looming global economic crisis, trade wars, and general instability, means that financial institutions and large corporations need to pay more attention to good governance, risk management, audit, and control functions.
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Asset based financing: A rapidly growing funding option for MENA’s SMEs Claudia Perri, Regional Commercial Director for Southern EMEA at HPD LendScape, explains the importance of supporting SMEs as they are the cornerstones of Middle East economies
“T Claudia Perri, Regional Commercial Director for Southern EMEA, HPD LendScape
he future of Middle East economies hinges on SMEs and entrepreneurs.” It is a statement that is heard at nearly every budget announcement, at every regional conference and is a key aspect of the economic vision for ambitious markets across the Middle East. Yet, limited access to funding has been and remains a significant barrier to SME growth in the region, as it is across the rest of the globe, despite major initiatives at government and private sector level to address the issue. Given this backdrop, it is perhaps no surprise that assetbased financing (ABF) is now emerging as an increasingly popular alternative financing technique for SMEs and the banks that support them. Encompassing factoring, discounting, supplier finance, PO finance and other receivable and payable finance products, demand for the flexibility and low risk form of financing offered by ABF is now growing in the MENA region. For example, there was a seven per cent increase in factoring in 2018 to $9.8 billion, which was only marginally behind the 10 per cent growth of factoring in Europe.
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SMES: THE LIFEBLOOD OF MIDDLE EAST ECONOMIES SMEs invariably sit at the heart of Middle Eastern economies, accounting for a reported 90 per cent of businesses across the region. That is just as well when we consider the task ahead of them: as many MENA countries pivot away from economic models centred on hydrocarbons, the private sector, and SMEs in particular, are being encouraged to take centre stage. In the UAE, the Government is targeting an increase to 60 per cent in SME contribution to GDP; in Saudi Arabia, SMEs are tasked with increasing their contribution to GDP by 15 per cent ahead of 2030; in Lebanon, Egypt and Jordan, dedicated strategies have also been formulated to drive SME growth. Supporting SMEs is a natural priority for economies focused on sustainable growth, particularly when we consider the important economic role SMEs play in the region, currently contributing 22 per cent to the region’s GDP. Also, the potential for SMEs in the region is significant: the SME market in the Gulf is forecast to be worth as much as $920 billion in 2023. It is unsurprising then, that creating an environment that nurtures growth for businesses and helping them to develop, thereby increasing their economic contribution, should be top of the agenda for MENA governments.
FINANCING CONSTRAINTS LIMITING GROWTH
Easy access to finance is an obvious pillar of this supportive environment for growth companies that MENA governments are trying to foster. Yet, access to funding remains relatively constrained globally and SMEs in the MENA region face the largest credit gap in the world. While banks in the region are beginning to recognise the importance of plugging this gap, SMEs only account for eight per cent of total bank lending. Many banks remain reticent to lend to young businesses without a track record and assets, while others claim to be restrained by regulatory restrictions. Where “challenger banks” have stepped up in Western markets to tap into a rich pool of SME borrowers, MENA’s SMEs are still left wanting.
“SUPPORTING SMES IS A NATURAL PRIORITY FOR ECONOMIES FOCUSED ON SUSTAINABLE GROWTH, PARTICULARLY WHEN WE CONSIDER THE IMPORTANT ECONOMIC ROLE SMES PLAY IN THE REGION, CURRENTLY CONTRIBUTING 22 PER CENT TO THE REGION’S GDP.” — Claudia Perri, Regional Commercial Director for Southern EMEA, HPD LendScape
The SME market in the Gulf is forecast to be worth
Source: HPD Lendscape
As an added difficulty, traditional sources of finance also pose timeframe challenges for SMEs, which often need quick injections of cash. Alternative finance models such as crowdfunding and peer-2-peer (P2P) lending have quickly and effectively started to address this, bridging the gap left by traditional bank loans. However, these forms of alternative finance are relatively new entrants to the world of SME financing and are still in their infancy in the Middle East.
ASSET-BASED FINANCING GROWING AS A FUNDING OPTION
As new participants grapple with regulations across different markets in the region, asset-based financing, which provides a loan to a company secured by one of its assets, ranging from equipment to accounts receivable, is gaining ground. ABF has a long history and in its many forms has expanded worldwide, with 2018 seeing global ABF volumes of lending against assets and invoices at approximately $3 trillion. Now, the model is gaining traction in the Middle East, with countries such as Egypt seeing 19 per cent growth in 2018 to $573 million. Fueled by growing demand for low risk and easily accessible working capital from the region’s many SMEs, there is a growing appetite for services such as ABF and invoice factoring. Increased digitisation is a major driver of the growing appetite for ABF services in the region, making it increasingly accessible to MENA’s banks and businesses alike. On the one side, technology means that businesses’ accounting systems can become more and more sophisticated enabling more transparency. Businesses are thereby more easily funded by ABF. On the other side, banks and other lenders are now able to tap into technology solutions that help them provide more cost-effective, diversified and sophisticated ABF services, increasing their access to ABF for clients. In digitally-advanced economies across the Middle East, this momentum picking up around ABF in all its forms looks set to increase. As SMEs take an even larger role in Middle Eastern economies, the entities that finance them are having to step up. With access to traditional lenders constrained, alternative finance is emerging as a critical lifeline for the region’s SMEs and ABF is beginning to establish itself as a major avenue of support. Technology is paving the way for the increased supply of such services by lenders and, as the demand escalates for quick and flexible finance from the ever-growing MENA SME sector, ABF is poised to help more and more growing businesses unlock their potential.
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CORPORATE SOCIAL RESPONSIBILITY
Unlocking opportunities from sustainable practises in the banking sector How the rising trend of sustainability is feeding consumer demand across the UAE
cknowledging that environmental and societal issues are of increasing importance to customers and clients alike, many of the UAE’s leading banking and finance businesses have been developing sustainability partnerships to explore innovative ways of addressing this demand. Case studies demonstrate that environmental sustainability does benefit business operations, and research such as the Edelman 2018 Earned Brand Report shows one in two people are now belief driven buyers (meaning they choose, switch, avoid or boycott a brand based on its stand on such issues). However, the complexity of some environmental issues and the challenge of demonstrating a return on investment in the short-term can create barriers to further progress. Navigating these issues is critical to meet future consumer demand, in addition to satisfying pressure from investors and the sustainability ambitions of the UAE leadership.
THE SUSTAINABILITY AGENDA
Abdulla Al Nuaimi, Director of Business Development, Emirates Nature-WWF
Sustainable development remains high on the UAE government agenda—aiming to preserve the environment, and to achieve a balance between economic and social development. However, accomplishing the UAE’s national sustainability goals requires wholehearted participation from the private sector—a call to action currently being pioneered by leaders across the banking sector.
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The annual Emirates NBD Desert Walk Challenge held within the boundaries of the Dubai Desert Conservation Reserve, makes financial contribution to Emirates Nature-WWF for every person that finished the walk, to support conservation and sustainability initiatives.
“THE PRIVATE SECTOR CAN ACCOMPLISH SUSTAINABILITY GOALS THROUGH MANY AREAS OF COLLABORATION, INCLUDING PUBLIC-FACING INITIATIVES, FINANCIAL DEVELOPMENT MECHANISMS, AWARENESS CAMPAIGNS, AND OPPORTUNITIES TO SUPPORT RESEARCH PROJECTS THAT CONTRIBUTE TO THE PROTECTION OF THIS COUNTRY’S MOST ECOLOGICALLY IMPORTANT PLACES.” — Abdulla Al Nuaimi, Director of Business Development, Emirates Nature-WWF
The alignment of business strategy with that of the government’s objectives is the only way to successfully transition to a sustainable economy, that is capable of meeting the society’s needs now and in the future. Emirates NatureWWF has welcomed many of the UAE’s biggest names in banking and finance as partners, offering support, expertise and co-creating solutions to support this transition. Society, Economy and Environment can thrive side by side One such example of a successful collaboration with the banking sector is the long-standing partnership between Emirates Nature-WWF and HSBC Bank Middle East which dates back to 2006. Funding from HSBC supported vital research undertaken by Emirates Nature-WWF, in collaboration with Fujairah Municipality, to support the declaration of Wadi Wurayah as a Protected Area in 2009. In 2013, the three entities and Earth Watch Institute, established The Water Research and Learning Programme (WRLP) in Wadi Wurayah National Park. Aligned with the HSBC Global Water Programme and Regional HSBC sustainability agenda, WRLP researched and highlighted the importance of freshwater resources, the unique water challenges our region faces, and the implications for society and businesses. Over the course of the four-year programme, nearly 1,000 citizen science leaders from HSBC spanning 12 countries in the MENA region, significantly contributed to the research and became ambassadors for water awareness in the society.
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CORPORATE SOCIAL RESPONSIBILITY
Furthermore, in addition to the UAE National Agenda, by supporting HSBC’s local sustainability and global water strategy, this collaboration led to significant employee engagement opportunities and contributed to substantially raising awareness within the company and its people.
ADDING CUSTOMER VALUE Since joining the Sustainability Partnership Programme at Emirates Nature-WWF in 2012, Abu Dhabi Commercial Bank (ADCB) has been contributing towards vital conservation programmes throughout the country by enabling customers to make seamless donations through its ATM network and online banking platform. Such e-platform initiatives have generated vital financial support for vital conservation projects in the UAE and continues to be applauded by customers of the bank who consistently opt in to make contributions. The outcome of such initiatives result in support for vital conservation work while simultaneously raising awareness amongst customers and giving them an opportunity to make a positive impact in the UAE, as well as enhancing the brand’s reputation as an industry leader in this market.
WALKING THE TALK Emirates Nature-WWF also collaborates with Emirates NBD, a partnership which includes the annual Desert Walk Challenge held within the boundaries of the Dubai Desert Conservation Reserve. The Desert Walk Challenge welcomed over 800 participants in 2018, and for every person that finished the walk, Emirates NBD made a financial contribution to Emirates Nature-WWF to support conservation and sustainability initiatives.
"IN THE NEW GLOBAL ECONOMY, BUSINESSES OF ALL SIZES ARE FACING INCREASING ENVIRONMENTAL AND SOCIAL CHALLENGES. THESE CHALLENGES COUPLED WITH GROWING PUBLIC AND INVESTOR EXPECTATIONS FOR ACTION ON CRUCIAL ISSUES, SUCH AS CLIMATE CHANGE, MEANS WE ALL NEED TO ADAPT AND DO MORE TO HELP SHAPE A TRULY SUSTAINABLE WORLD." — Belinda Scott, VP & Head of Corporate Sustainability, First Abu Dhabi Bank
This event demonstrates the level of staff engagement and brand awareness that such projects offer companies in the UAE, while highlighting to others the opportunities associated with such mutually beneficial partnerships. Desert Walk Challenge also generates significant financial contributions towards the environmental protection work in the UAE while being aligned to the banks long-term strategy.
GROWING STRONGER TOGETHER Also celebrating a long-term partnership with Emirates Nature-WWF is First Abu Dhabi Bank (FAB). FAB made a commitment to work with the communities it serves so that they can grow stronger together. Through this partnership, Emirates Nature-WWF has helped support FAB’s BE THE CHANGE #RethinkPlastic campaign, with the objective of building greater understanding and raising awareness among employees of the impact of single-use plastics on our environment and encouraging positive behaviour change. This campaign achieved high levels of staff engagement and brand awareness through the elimination of single-use plastic bottles in the company’s head office, along with a reduction in the use of single-use cutlery and straws in the cafes in its office premises in Abu Dhabi and Dubai, and the introduction of awareness activities for employees and their families. As a part of this campaign, employees swap out items of single-use plastic for an eco-friendly alternative. The single-use plastic items collected are repurposed into eco-friendly giveaways. Shedding light on this initiative, Belinda Scott, VP & Head of Corporate Sustainability, First Abu Dhabi Bank, said, “We chose to partner with Emirates Nature-WWF, an organisation that understands the complexity of the issues we care about, as we believe that together we can work towards being a part of the solution to ensure a sustainable future in the UAE. In the new global economy, businesses of all sizes are facing increasing environmental and social challenges. These challenges coupled with growing public and investor expectations for action on crucial issues, such as climate change, means we all need to adapt and do more to help shape a truly sustainable world.” Sharing his thoughts, Abdulla Al Nuaimi, Director of Business Development, Emirates Nature-WWF, added, “The private sector can accomplish sustainability goals through many areas of collaboration, including public-facing initiatives, financial development mechanisms, awareness campaigns, and opportunities to support research projects that contribute to the protection of this country’s most ecologically important places. While sustainability is a notoriously challenging subject to address, our team is supporting our partners in the delivery of projects and initiatives across a variety of key areas—resulting in business and conservation results that would not otherwise be possible.”
THE FUTURE OF SUSTAINABILITY IN BANKING There is no doubt that a sustainability transformation is already underway in the UAE’s banking sector. As we can see, many leading banks have demonstrated their commitment to the cause and are realising the positive benefits in doing so. Looking to the near future we are certainly going to experience more collaborations and partnerships with organisations like Emirates Nature—WWF, delivering mutually beneficial outcomes around a shared vision of prosperity and sustainable development.
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Investor & investing trends in the last 30 years across the region The role of Century Financial in the UAE financial landscape
Bal Krishen, Chairman, Century Financial
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he UAE economy has grown in leaps and bounds from the early 90’s GDP numbers of $40 billion to latest estimates of $425 billion in 2019. Time and time again the contribution of every sector to the economy’s growth has been critical from real estate, to tourism, to the banking and financial services sector that acts as a bellwether of sorts to assess the nation’s economic growth. Perhaps the sector that best describes the overall growth and rising aspirations of the UAE's economy is the financial sector. The sector, which also has one of the highest weights in the final GDP index calculation at around 13 per cent, has far reaching repercussions on other sectors’ growth too. Starting with mobilising investments for the common public to providing them a platform to explore new avenues for earning returns, the end objectives of the financial sector are many. The last 30 years have witnessed significant changes in the investment as well as financial markets across the world. The fall of the Berlin Wall and Soviet Union in the early 90’s, led to the spread of capitalism and growth of financial markets across the world and the UAE was no exception to this trend. Attractive business and trading provisions together with hospitable conditions provided by the leadership of the Emirate, proved highly effective throughout the last two decades which resulted in bringing Dubai to the world and the world to Dubai. The banking and financial sectors also benefitted immensely as the inflow of foreign investments drove the city and its economy forward at alarming speed and fueled its passion for growth without over dependence on oil. Investment in global markets, particularly those of the US, has long been of great interest to local and expat populous. From the late 80’s to mid-90’s however, only international banks with offices in Dubai, could facilitate such investments albeit at exorbitantly high costs and limited products. Trading was done through phone and telex operators across order desks in New York, Chicago and London. This all changed rapidly with the introduction of internet-based software, popularly called online trading platforms by the end of millennia, which transformed the industry on a global scale and shifted the balance in favour of private investors. As the industry grew, so did the demand for new products, which is when CFDs (contracts for difference) made headway throughout the 2000’s. Today we are witnessing another revolution in the financial world through the launch of cryptocurrencies, AI-backed trading systems, algorithms and expert advisors that use automated pre-programmed trading instructions to trade markets and track price movements without human intervention. Over the years, new products in commodities, indices, bonds and stocks have also been added to the product portfolio which offers diverse markets for traders. This has been very much necessary as markets are now not only about ‘buy and hold’ style of investing. The rise of index funds has meant that anything and everything can be accessed through the markets. More recently, exotic financial instruments like structured products have become more common among the high net worth (HNW) clients as they give the investor tailor-made solutions. A structured product can be made on a single security, a basket of securities, options, indices, commodities, debt issuance or foreign currency. All of these new products have certainly helped investors diversify their portfolio from an asset as well as geographical perspective, enabling them to generate stable returns.
“OUR GOAL IS TO PROVIDE THE MOST SUPERIOR AND UNRIVALLED TRADING EXPERIENCE FOR OUR CLIENTS”. — Bal Krishen
Century Financial, a SCA licenced firm, has been present through all the various stages of the UAE’s economic growth. The history and origins of the firm traces back to a period even before Dubai Financial Markets & Abu Dhabi Securities Exchange were launched. With three decades of experience in global financial markets, the firm has remained UAE’s oldest and trusted investment solution provider serving both local and expatriate population alike by not only being the first choice for investment but also to simplify the investmentmaking choices through highly customer centric approach with emphasis on cutting edge technologies. Century Financial has helped investors across the UAE, navigate through the various trends in the market by being their guide and mentor, and empowered them to become better traders through its training and education programmes. Investors have been able to access some of the best bluechip companies in the world, trade live exchange rates of major foreign currencies and multi-commodities through the platform offered by Century Financial. For a country like the UAE where banks have predominantly dominated the financial broking and investment space, firms like Century have ensured that investors get more avenues to deploy their funds and get access to other global products like niche sector ETFs that have traditionally not been available even through major local banks. The firm today operates across 100 global markets with more than 10,000 individual product listings giving customers access to multiple asset classes including stocks, commodities, indices, metals, energies and ETFs. Century’s platform has facilitated client’s requirement on accessing specific set of products that suits their needs. As rightly summarised by Century’s Chairman, Bal Krishen, “Our goal is to provide the most superior and unrivalled trading experience for our clients”. For Century, the journey is set to continue as global markets become more complex and dynamic by the day, presenting new challenges and opportunities for the company and investors alike.
Century Financial Consultancy is a privately-owned financial services provider, with a three-decade presence in the UAE that specialises in investments and trading in CFDs (Contracts for Difference), forex, indices, shares, commodities, treasuries and ETFs as well as exchange-traded derivatives.
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A word of caution Alex Gemici, Chairman, CEO and Founder of Greenstone Equity Partners, tells Banker Middle East that the global political environment and the precarious position of the markets make existing geopolitical tensions more of a risk now than before
Looking at the rest of the year and into 2020? What are your projections and what worries you most?
n the back of challenging geopolitical operating conditions, what are your views on the investment appetite in the region?
Traditionally, investors of all types, from High Net Worth Individuals to Sovereign Wealth Funds, have invested outside the region into both traditional and alternative investment classes. This strategy has enabled them to ensure diversification from the local economies in which they have principal exposure. This thesis has not changed with the economic and geopolitical risks which have grown over the last year. Instead of reducing the flow of commitments, investors are now looking for the right strategies to shield against a possible widespread recession.
In which sectors/investment products do you see opportunities? Recently, we have seen GCC investors assigning more weight to alternative products, such as private debt, which offer shorter lockups as well as to funds which pay a current yield. In order to hedge against inflationâ€”and recession to a certain extentâ€” income producing real estate funds are of interest to investors, especially those with underlying assets in multi-family real estate. We have not yet seen a risk-off sentiment (a rush to quality). Investors continue to look for double digit net IRR returns from alternative investments. Buy-out private equity with brand name and/or top-rated managers continue to draw commitments from investors allocating to long-term locked up investments.
The next two to three quarters leading into the 2020 US presidential election have the potential to be tumultuous, similar to the last 12-24 months. I am not one to make predictions, but I look to identify potential near-term risks and minimise their potential effect on our business. For the near term, other than the secular economic recession, which is several years overdue, most leading economic risks are politically driven, like a hard Brexit and a further deterioration of the trade tensions between the US and its economic partners. I believe that geopolitical risks affecting financial markets are now at their highest since the end of the cold war nearly 30 years ago, primarily due to the spike in nationalism at the leadership level of the largest economies. This worldview minimises diplomacy and results in increased and unsustainable isolation of rouge countries, increasing the chances of conflict driven by economic or political desperation of the targeted countries. Consequently, potential flashpoints in the near term which could cause stress to markets and have a chance to spiral to a much larger global disruption, continue to be North Korea, Iran, Yemen and the Palestinian/Israeli conflict. While none of these are new geopolitical risks, the global political environment and the precarious position of the markets make them more of a risk now than before.
Tell us more about your plans for Greenstone moving forward? What are your main areas of focus? Greenstone Equity Partners performs the function of identifying top-tier traditional and alternative investment opportunities for the entire spectrum of GCC investors, from the smallest to the largest. Historically, other than the twodozen top institutional investors, GCC investors of every size have not been directly exposed to select fund opportunities in an institutionally curated and vetted manner by a firm which is culturally and geographically close to them. As opposed to being the local branch of a global investment bank, Greenstone is headquartered in the GCC, and fills this void using its outreach and global relationships to identify, select and vet top tier funds and make them available to its investors throughout the GCC. Over the last eight years, Greenstone has obtained local on-shore licencing in all five main GCC countries and opened investor-facing offices in every major city in the region. As we grow our presence in the local markets and strengthen our investor relationships, we continue to increase the size of our team by engaging the best and the brightest investment professionals in the GCC.
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BANKSâ€”A LIFESTYLE AGGREGATOR Binay Shetty, Executive Director, Finablr
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For more information difc.ae @difc
BANKS—A LIFESTYLE AGGREGATOR Speaking to Banker Middle East, Binay Shetty, Executive Director at Finablr, explains why there is a real shift in banking services, from demographic targeting to a more lifestyle one, particularly in the MENA region
hat are your views on digital transformation trends amongst financial institutions in this region?
The MENA region is experiencing a real technology revolution. Fifty per cent of the population is under 20 years of age. Internet and smartphone penetration are high in the region. We are currently seeing faster fintech adoption in the region primarily driven by customer preference for digital services, access to capital, and public policy reforms. The UAE, Saudi Arabia, Bahrain and Egypt have already established government-backed regulatory sandbox programmes, to attract some of the best global start-ups. These programmes allow fintech companies to gain easier market entry to the region, expand and operate in a cost-effective manner. Success stories of the model include the Dubai International Financial Centre’s FinTech Hive, ADGM’s Plug and Play Accelerator and the Saudi Arabian Monetary Authority (SAMA).
What do you see as the greatest challenges for banks in the payments space?
Blurring industry boundaries—the entrance of the Big Tech and telecommunication companies, although at a relatively slow pace, have begun to redefine and reshape the banking sector. Companies like Google or Facebook do not plan on launching their own banks but are starting to position themselves as players in the traditional banking industry. Similarly, PayPal promotes the concept of how a user’s line
of credit has ‘attractive’ incentives—eliminating the need for customers to approach commercial banks for loans. Business model innovation—the emergence of new operating and business models is one of the challenges facing retail banking. The dynamic nature of the sector means that the revenues or margins of organisations can decrease if they do not drive a transformation of processes and business functions. Among the main challenges related to the new formulas, banks must boost revenues from non-banking services, monetise the use of APIs and automate systems to save costs. With innovation being a real disruptor in how the banking industry visualises the landscape, the consolidation of new banks, the state of the economy and geopolitics are all main factors that create both opportunities and obstacles to how banks address consumers and key players in the market. In parallel, the MENA’s banking industry is much stronger and profitable than it has ever been, thriving again after the crisis of 2008.
“AS HISTORY TELLS US, CHALLENGES HAVE OFTEN LED TO NEW INVENTIONS, NEW POSSIBILITIES AND IMPROVED EXPERIENCES.” — Binay Shetty
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The regulatory framework established in the UAE for both banks and financial institutions keeps us optimistic. As history tells us, challenges have often led to new inventions, new possibilities and improved experiences.
Framing these challenges, things differently?
We have been a disruptor in the space for close to four decades now. Our business has been constantly evolving to cater to the continuously growing needs of the customers. In the context of the trends and challenges facing our industry, we have taken measures to future-proof our business. We can contribute to the existing government initiatives focused on enabling a fintech start-up environment through our programmes. In parallel, we would also establish closer collaboration with key entrepreneurs and start-ups whose work will add-value to our business operations. From our perspective, we would support start-ups with mentorship and training. Collaboration is integral and we have capitalised on it to unlock significant potential by delivering seamless solutions for customers.
“USERS AND CUSTOMERS ARE DEMANDING MORE FROM THEIR BANKS TO HELP MANAGE THEIR LIVES AND NOT JUST THEIR FINANCES— IT IS A DIFFERENT CLIMATE.” — Binay Shetty
Binay Shetty, Executive Director, Finablr
From a systems and structure standpoint, we are exploring ways of fostering and attracting exceptional talent that will be important to our business growth. Our strategy involves end-to-end ownership of the payments value chain across origination, processing and the last-mile distribution network. This approach promotes operating efficiencies which have a direct impact on customer and stakeholder experiences.
What kind of opportunities do you see in this market?
There are multiple opportunities within the fintech space. UAE tops the global smartphone penetration with over 73 per cent of phone users owning smartphones. Similarly, 77 per cent of the Saudi Arabian population own a smartphone. This presents a huge insight into the future of digital payments. Based on what we are already seeing in trends, we expect payments to seize to become standalone activities, and instead become embedded into the overall customer-journey or lifestyle experiences. This can already be seen at companies such as Uber. We also see the MENA region moving beyond just digitisation to embrace progressive regulations around electronic payments, open banking, and artificial intelligence. The UAE for example created a Ministry of AI as a result. The tech savvy central bank-led initiatives across the GCC have also been created to build a start-up ecosystem for the purpose of developing payments facilities in the region. Policies are in place to focus on creating innovations. Finally, there is a demand from consumers for personal finance management and wealth management from financial institutions.
How do you envision banking to be in the next 10 years? There is a real shift being seen globally, especially in the MENA region, from demographic targeting to a more lifestyle one, hence reinforcing the old saying, “The Customer is King”. The banking industry’s staying power will lie in its ability to analyse their customer’s traits, lifestyle choices, in addition to individual experiences, and ultimately re-think their business models accordingly. Moreover, banks will need to delve deeper into advanced analytics and digital technologies to be able to anticipate customers’ needs ahead of time. We are talking about studying vast amounts of large internal financial behavioural data sets, customer data, transactional data, and even social media data. Customer-centric relationships will be the norm, and that will need to be deeper, rather than transactional. Users and customers are demanding more from their banks to help manage their lives and not just their finances—it is a different climate. When it comes to customer service and loyalty programmes, banks are predicted to be exploring ways of delivering value-added services through engagement to ensure customers continue doing business with them. To deliver this, banks would most-likely overhaul traditional merchant relationships, and focus more on collaborations with the new tech players and start-ups. The transformations would impact the talent pool in the industry. Recruiting new capabilities and ways of attracting the new era of professionals would be established. With a different world of banking, it’s anticipated that we would have jobs that do not exist today but will be the norm tomorrow. From my perspective, this is one of the most exciting times as we are at the centre of a huge movement and strategy shift in traditional services.
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S U P P O R T E D BY
O R G A N I S E D BY
26 NOVEMBER 2019
The Ritz-Carlton, DIFC, Dubai, United Arab Emirates
SUBMIT YOUR ENTRIES BY 3rd OCTOBER 2019 Award Categories • Best Bank in the Middle East • Banker of the Year • Lifetime Achievement Award • Fastest Growing Bank • Best Retail Bank • Best Islamic Bank • Best Corporate Bank • Best Commercial Bank • Best SME Bank • Capital Market Transaction of the Year • Most Innovative Digital Banking Proposition • Best Insurance Provider • Best Takaful Provider • Best Investment Bank – Conventional • Best Investment Bank – Islamic • Best Private Bank
Join over 400 senior banking and ﬁnance ofﬁcials from across the Middle East as we honor the outstanding institutions that shape the region’s ﬁnancial landscape.
• Best Wealth Management Firm • Best Investment Management Firm • Best Private Equity Firm • Best Trade Finance Institution
Now in its 20 year, the Banker Middle East Industry Awards programme is recognised as the most prestigious banking accolade celebrating ﬁnancial excellence across the MENA region. It acknowledges pioneering developments, innovative banking solutions, and achievements in the ﬁnancial services industry. th
We encourage you to select your categories and submit your entries online by 3rd October 2019. You are welcome to submit multiple entries.
• Best Brokerage Solutions Provider • Best Law Firm – Banking & Finance • Best Law Firm – Private Equity • Best Research & Consultancy Firm • Best Ratings Agency • Best Islamic Ratings Agency • Best CSR Programme • Best Core Banking Service Provider • Best User-Experience Innovator • Best Cybersecurity Provider
To learn more about the Awards process, please email: email@example.com
• Best Payment Solutions Provider • Best Communications Infrastructure Provider
FANTASTIC INSIGHTS AND WHERE TO FIND THEM Data might be the new oil, but actionable insight is the vehicle that actually gets your business places, writes Ahmed Helmy, Vice President – CTO at Avaya International
he amount of data generated in the modern contact centre is truly staggering. With scores of interactions taking place every minute—each with the potential to impact the customer’s perception of your brand—it’s easy to find yourself drowning in the data deluge. But what if there was a way to turn all this information into actionable insight? That is where real-time analytics steps in, which is why it should come as no surprise that 85 per cent of organisations believe it will help them deliver better customer experiences. But there is a catch—to be of real value, the analytics need to be delivered in a clear, comprehensive, concise and convenient manner. This challenge is perhaps most pronounced for C-level executives, whose precious little time doesn’t afford them the ability to pour over cumbersome reports.
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As a 17-time Leader in the Gartner Magic Quadrant for Contact Centre Infrastructure Worldwide, we took it upon ourselves to address this. That is why we’ve created our IX Dashboard—an open, modular, extensible dashboard that delivers rich, real-time, and easily accessible business insights. So, let’s look at three reasons why you’re sure to get excited about our latest offering.
REAL-TIME, ALL THE TIME
PHOTO CREDIT: Gorondenkoff/Shutterstock
In an era when 79 per cent of customers expect an immediate response when dealing with organisations, you need to stay on top of everything that is going on in your contact centre, as it happens! With our IX Dashboard, that is what you ge—an up-to-the-second snapshot of the performance of your entire contact centre. It’s fully customisable too, so you get the power to pick the KPIs and metrics that are most important to you. Of course, we would not call this real-time if it is wasn’t always there exactly when you need it. that is why we’ve ensured you can access your IX Dashboard from anywhere, via any device. This means that if you want to find out how many of your agents are currently logged in, what customers are saying about the service they received, or your current CSAT or NPS scores—while you are sitting at an airport for example—you can literally have it all available at your fingertips!
ENCAPSULATING THE ENTIRE CUSTOMER JOURNEY Today, a typical customer enquiry might originate on your website, move to a web chat and find final resolution via a voice call. that is why you need a comprehensive view of the entire customer journey, encapsulating all touch points, processes and procedures. Because we’ve designed our IX Dashboard on an open framework, it can easily collect and aggregate data from multiple channels and data sources—whether these are your latest investments or legacy systems. Another benefit of this approach is that it gives you the freedom to develop and customise new or existing views, measures, tabs, and reports. While the obvious benefit of this is the ability to view what’s most important to you, at a glance, if you’ve got a bit more time, you can certainly dig deeper. With just a few clicks (or taps), you can drill down into each customer’s journey to see how it played out. Similarly, you can look at key metrics for individual agents, or channels. It is after all the real-time analytics that are most important to you that we’ve aimed to deliver.
“IN AN ERA WHEN 79 PER CENT OF CUSTOMERS EXPECT AN IMMEDIATE RESPONSE WHEN DEALING WITH ORGANISATIONS, YOU NEED TO STAY ON TOP OF EVERYTHING THAT IS GOING ON IN YOUR CONTACT CENTRE, AS IT HAPPENS!” — Ahmed Helmy
Data might be the new oil, but actionable insight is the vehicle that actually gets your business places. To understand the capabilities of the IX Dashboard in this regard, consider what it can do for your outbound campaigns. Via a single screen, you can instantly find out how close your campaign is to its target, the number of customer interactions, the conversation rate on engagements, and even who your highest performing agent is. Or if you’re tracking the sales of your products and services, we’ve made sure you can just as easily cheque how well your agents are upselling, and cross-selling. All this being instantly available in real-time, lets you take the right action, at right time, with right resources—every time! The solution is just one of many innovations that Avaya is demonstrating at GITEX Technology Week 2019 under the theme, ‘The Art of Experience’. Pay us a visit and discover how you can deliver Experiences That Matter.
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2019’s TRANSFORMATIONAL TECHNOLOGY TRENDS Sensing and motion, augmented human, postclassical compute and comms, digital ecosystems, as well as advanced AI and analytics, are five key trends in the emerging technologies hype cycle this year FIVE EMERGING TECHNOLOGY TRENDS
he Gartner Inc. Hype Cycle for Emerging Technologies, 2019 report has revealed five distinct emerging technology trends that create and enable new experiences, leveraging artificial intelligence (AI) and other constructs to enable organisations to take advantage ofemerging digital ecosystems. “Technology innovation has become the key to competitive differentiation. The pace of change in technology continues to accelerate as breakthrough technologies are continually challenging even the most innovative business and technology decision makers to keep up,” said Brian Burke, Research Vice President at Gartner. The Hype Cycle for Emerging Technologies garners insights from more than 2,000 technologies into a succinct set of 29 emerging technologies and trends. The Hype Cycle specifically focuses on the set of technologies that show promise in delivering a high degree of competitive advantage over the next five to 10 years.
Sensing and Mobility: By combining sensor technologies with AI, machines are gaining a better understanding of the world around them, enabling mobility and manipulation of objects. Sensing technologies are a core component of the internet of Things (IoT) and the vast amounts of data collected. utilising intelligence enables the ability to gain many types of insights that can be applied to many scenarios. For example, over the next decade augmented reality (AR) cloud will create a 3D map of the world, enabling new interaction models and in turn new business models that will monetise physical space. Enterprises that are seeking leverage sensing and mobility capabilities should consider the following technologies: 3D-sensing cameras, AR cloud, light-cargo delivery drones, flying autonomous vehicles and autonomous driving Levels 4 and 5. Augmented Human: Augmented human advances enable creation of cognitive and physical improvements as an integral part of the human body. An example of this is the ability to provide superhuman capabilities such as the creation of limb prosthetics with characteristics that can exceed the highest natural human performance. Emerging technologies focused on extending humans includes biochips, personification, augmented intelligence, emotion AI, immersive workspaces and biotech (cultured or artificial tissue).
“THE ADOPTION OF EDGE AI IS INCREASING FOR APPLICATIONS THAT ARE LATENCYSENSITIVE (E.G., AUTONOMOUS NAVIGATION), SUBJECT TO NETWORK INTERRUPTIONS (E.G., REMOTE MONITORING, NATURAL LANGUAGE PROCESSING [NLP], FACIAL RECOGNITION) AND/OR ARE DATA-INTENSIVE (E.G., VIDEO ANALYTICS).” — Brian Burke
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HYPE CYCLE FOR EMERGING TECHNOLOGIES, 2019
Biochips Al PaaS 5G Edge Analytics Autonomous Driving Level 5 Low Earth Orbit Satellite Systems Edge AI Graph Analytics Explainable AI Personification Knowledge Graphs Next-Generation Memory Synthetic Data 3D Sensing Cameras Light Cargo Delivery Drones Emotion AI Transfer Learning Flying Autonomous Vehicles Autonomous Driving Level 4 Augmented Intelligence Nanoscale 3D Printing Decentralised Autonomous Organisation DigitalOps Generative Adversarial Adaptive ML Networks Decentralised Web AR Cloud
Biotech — Cultured or Artificial Tissue As of August 2019
Peak of Trough of Inflated Disillustionment Expectations
Plateau of Productivity
Plateau will be reached: Less than 2 years
Slope of Enlightenment
2 to 5 years
5 to 10 years
More than 10 years
Obsolete before plateau
Postclassical Compute and Comms: For decades, classical core computing, communication and integration technologies have made significant advances largely through improvements in traditional architectures—faster CPUs, denser memory and increasing throughput as predicted by Moore’s Law. The next generations of these technologies adopt entirely new architectures. This category includes not only entirely new approaches, but also incremental improvements that have potentially dramatic impacts. For example, low earth orbit (LEO) satellites can provide low latency internet connectivity globally. These constellations of small satellites will enable connectivity for the 48 per cent of homes that are currently not connected, providing new opportunities for economic growth for unserved countries and regions. “With only a few satellites launched, the technology is still in its infancy, but over the next few years it has the potential for a dramatic social and commercial impact” said Burke. Enterprises should evaluate technologies such as 5G, nextgeneration memory, LEO systems and nanoscale 3D printing. Digital Ecosystems: Digital ecosystems leverage an interdependent group of actors (enterprises, people and things)
sharing digital platforms to achieve a mutually beneficial purpose. digitalisation has facilitated the deconstruction of classical value chains, leading to stronger, more flexible and resilient webs of value delivery that are constantly morphing to create new improved products and services. Critical technologies to be considered include: DigitalOps, knowledge graphs, synthetic data, decentralised web and decentralised autonomous organisations. Advanced AI and Analytics: Advanced analytics comprises the autonomous or semiautonomous examination of data or content using sophisticated techniques and tools, typically beyond those of traditional business intelligence (BI). “The adoption of edge AI is increasing for applications that are latency-sensitive (e.g., autonomous navigation), subject to network interruptions (e.g., remote monitoring, natural language processing [NLP], facial recognition) and/or are dataintensive (e.g., video analytics),” said Burke. The technologies to track include adaptive machine learning (ML), edge AI, edge analytics, explainable AI, AI platform as a service (PaaS), transfer learning, generative adversarial networks and graph analytics.
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Wissam Khoury, Senior Vice President and General Manager for MEA and APAC, Finastra
RIDING THE SHARED PLATFORM WAVE Wissam Khoury, Senior Vice President and General Manager for MEA and APAC at Finastra, discusses the power of open platforms in driving the next era of growth in the region
he unprecedented shift in the way financial services worldwide collaborate, innovate and compete can propel waves of high productivty and exceptional customer experiences in the near future. Innovation in technology is changing the way modern banking software is developed and distributed. The opportunity to utilise shared knowledge is exciting in the way it can transform Middle Eastern and African economies and help to bring millions of people into the financial system, which is the need of the hour. The latest financial inclusion index from the World Bank stated that in the Arab world stretching from Muscat to Casablanca, only eight per cent of adults are banked, while 23 per cent are underbanked. The financial inclusion opportunity in the Arab world is 92 per cent. Open platforms are enabling the industry to truly expand on the rich data they hold to capitalise on its potential and witness first-hand how innovation can radically accelerate the adoption of financial tools and products. Open platforms have the power to drive the next era of growth and adoption, by addressing common challenges faced by fintech and traditional banking players in the industry.
The financial inclusion opportunity in the Arab world is
92% Source: World Bank
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CASHLESS SOCIETY The transformative impact of technology in the finance sector can be best illustrated through a country’s digital payments ecosystem. Whilst a large chunk of the population in the region is unbanked, they all have the most powerful tool—a smartphone. As per the McKinsey Middle East Digitisation Index, Bahrain and the UAE are among the top countries in the world with 100 per cent smartphone penetration and it is estimated that there will be 160 million digital users by 2025. The GCC block’s readiness to pave the way for emerging financial services is better demonstrated by its successful efforts to establish fintech incubation programmes such as Dubai International Financial Centre’s FinTech Hive and the Saudi Arabian Monetary Authority’s Fintech Saudi. Mastercard’s recent study shows that the UAE and KSA are steadily moving beyond cash, which is the result of the respective governments’ commitment towards promoting electronic payments to support their social and economic goals. As an example, earlier this year the UAE government announced that residents who opt to pay for their vehicle and driving fines by visiting the Road and Transport Authority service centre instead of paying online, will have to pay AED 100 more. According to the recent report ‘Middle East and Africa Online Payment Methods 2019’, the foundation is laid for mobile growth in the region. The adoption rates for mobile payments are increasing in the region, compelled by MENA’s mobile wallet usage and Sub-Saharan Africa’s mobile money popularity. In the UAE, more than two-thirds of shoppers who paid online at least once by a card or a digital wallet will consistently choose this method in the future. Recently, a number of mobile wallet solutions were deployed, including Google Pay in the UAE and Apple Pay in Saudi Arabia. Simultaneously, mobile money services such as M-Pesa are driving financil inclusion in African countries, where card and bank account penetration rates are significantly low.
TECHNOLOGY AND FINANCIAL INCLUSION Whilst there has been a significant push for the advancement of financial inclusion in the region, significant challenges remain. A report published by Oliver Wyman in collaboration with Dubai International Financial Centre (DIFC) cites that almost half of the world’s 1.7 billion financially excluded and underserved adults are currently concentrated in the Middle East, Africa and South Asia (MEASA). Across much of the region, microfinance lending officers physically visit homes and businesses to assess the value of collaterals. Today, technology such as artificial intelligence is being used in some locations to improve data collection and streamline credit decisions. However, the cost of acquiring technology is a major hurdle, coupled with having the skills and experience internally to run large scale projects and applications. The challenge is to bridge these gaps to create sophisticated solutions like core banking systems, e-wallets, treasury management and trade finance applications more accessible. With this in mind, the heavily fragmented region calls for the establishment of a shared platform dedicted to the development and distribution of scalable digital financial solutions. This concept is built on leveraging investments in technology to groups of financial instituions in order to reduce adoption costs and centralise experience and expertise.
“IF FINANCIAL INSTITUTIONS ACROSS THE REGION INVEST IN TECHNOLOGY THAT ENABLES OPEN COLLABORATION, THEN THIS TRANSITION CAN BE NOT ONLY SEAMLESS BUT FURTHER ACCELERATED AS WELL.” — Wissam Khoury
To this end, rapid development of cloud infrastructure will also enable advanced applications to be hosted in country and provided as a turn-key solution. The market can then shift their focus from delivery channels to digitising and automating other key business areas such as payments, treasury and capital markets, SME banking as well as trade finance. Technology has the potential to disrupt these commercial banking verticals in the same way that has led to the emergence of mobile wallets.
COLLABORATE TO INNOVATE To remain relevant and keep abreast with the continously evolving fintech landscape, it is simply not enough to invest and host the technology. Capgemini & Efma reported that 91.3 per cent of banks expect to partner with fintechs in the future, which reaffirms our belief that the future of banking innovation is collaboration. The app economy has revolutionised consumer industries, and we see the same happening in the banking and financial industry. Fast-evolving innovations such as banking microservices, AI technology and real-time capabilities are fueling open APIs that are cloud-delivered into the app economy. It’s driving innovation, co-creation and new business models—thus, transforming banking services. If financial institutions across the region invest in technology that enables open collaboration, then this transition can be not only seamless but further accelerated as well. Mission critical applications need to be developed around open APIs and micro-services to be easily consumed by fintechs and partner organisations. Open collaboration plus a cloud-first deployment approach using shared platforms offers a formula for innovation and growth. While great progress has been made in this industry pertaining to investments in technology for inclusion and diversification, there is even greater excitement about what this innovative and vibrant continent can do next.
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Nabilah Annuar, Editor of Banker Middle East, in a fireside chat with Stephane Malrait, Global Head of Market Structure and Innovation for Financial Markets at ING Bank â€“ London, at the Middle East Banking Innovation Summit 2019.
DISRUPTION RISKS ARE LOW, BUT COLLABORATION IS KEY With new disruptive models and technologies introduced, banks are evolving and introducing new methods of banking for their customers, while pursuing new strategies for sustainable growth. Amongst others, the Middle East Banking Innovation Summit 2019 discussed various disruptive technologies, new banking regulations and emerging key trends impacting the regionâ€™s financial sector
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n an era of disruption, the only way to survive is through collaboration; and this is something that is required across the board between banks, fintechs and regulators. Technology is the enabler of transformation. With the permeation of technologies such as artificial intelligence, IoT and blockchain in the banking and financial services industry, the future of banking has transformed significantly. Banking and financial services are redefining their services in line with the changing times and growing consumer needs. In a recent report by S&P, the main risk of technological disruption for retail banks in the GCC is changes in customer preference. The digitalisation of GCC economies is still a work in progress. Retail banking in the GCC faces disruption in money transfer, foreign currency exchange, and payment services. The adoption of big data, artificial intelligence (AI) analytics, as well as voice and facial recognitions tools, could enable a more effective and cost-efficient provision of customer services. New technologies are changing and shaping the banking industry and the future of banking. Additionally, large expatriate and youth populations will continue to drive demand. Ushering in the era of digital opportunity, the summit also discussed the technologies banks should be investing in to remain competitive in customer experience and how the banking regulations and legacy systems are affecting business. It is highly important for banks to keep up with the ever-increasing rate of digital transformation to appropriately address emerging customer trends and prepare for the future of banking. In a fireside chat with Banker Middle East at the event, Stephane Malrait, Global Head of Market Structure and Innovation for Financial Markets at ING Bank â€“ London,
TECH DISRUPTION RISKS: GCC BANK Regulations will continue to protect GCC Banking Systems Regulation
High Intermediate Low
Risk factor banks
Source: S&P Global Ratings Copyright ÂŠ 2019 by Standard & Poor's Financial Services LLC. All rights reserved.
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DELOITTE NATIONAL ICT INDEX SCORES 90 80 70 60
50 40 30 20 10
an d nl Fi
s at e St
re U ni
ng ap o
an ce Fr
Q at ar Sa ud iA ra bi a
s ira te
Source: Deloitte Copyright © 2019 by Standard & Poor's Financial Services LLC. All rights reserved.
talked about the opportunities and challenges in adopting a collaborative approach with fintechs. Malrait suggested that when working with fintechs, the best practise is to first work closely with them with a proof of concept and experimenting when adopting it in an innovation lab. The collaboration must not only be with fintechs but also with other banks. Financial institutions must work as an industry in managing the onboarding of fintechs with banks and employ different types of partnership structures. Malrait called on banks to meet with a few fintech companies a week, to assess them and their business model, following which explore the potential and eventually, if suitable, on board them on a large scale. Based on the discussions throughout the event, collaboration seem to become increasingly important, not only between banks, but within the market itself as well. Malrait warned banks not to spend too much time on improving legacy infrastructure and technology but more on looking at the future, the intended business model and direction the institution is going in the future in order to properly cut cists and have a steady growth of revenues. “Changing existing technology will give you a gain of 5-10 per cent, but with fintech companies you may be looking at an exponential growth in revenue or in reducing your cost of transaction,” said Malrait. In terms of risks, S&P suggests that regulatory risk is low as policymakers are conscious of the extreme importance of local banking systems in the region, and the need to keep them safe from potentially disruptive unregulated competition. Technology and industry structure present a moderate risk of disruption. The ratings agency expects some GCC bank business lines to remain protected from fintech in the medium term—these includes, corporate lending,
where human added-value remains significant in the region. Therefore, even if customers’ preferences continue to evolve, risks to these banking systems remain contained, at least in the next two years. This is because regulators continue to protect them and the share of current activity at risk is small. Compared with other emerging markets and particularly the Middle East and Africa, the GCC countries enjoy a more favourable environment for fintech adoption, said S&P. According to Deloitte’s National ICT Index, which measures a variety of information and communication technology (ICT) readiness factors, GCC countries have made significant progress but lag behind some developed economies. The average National ICT Index for GCC countries stood at 62 per cent, compared with 84 per cent for Singapore and Finland, and 78 per cent for South Korea, for example. At the same time, some GCC countries appear at least as ready as some major European countries. For example, Qatar is level with Germany, and the UAE is even more advanced. However, although these prerequisites are necessary, they are far from sufficient to drive the digital transformation of the economy as a whole. In the GCC, for example, broader adoption of big data, AI analytics, and cloud computing is still a work in progress. Nevetheless, as these technologies come under the main objectives of some GCC governments’ national transformation plans which aim to diversify their economies by moving progressively away from hydrocarbons, the incentives are encouraging. Big data, AI analytics, and voice and facial recognition tools could enable more effective and cost-efficient customer profiling, enhance marketing to new customers, and improve risk management and fraud detection at GCC banks.
BANKER MIDDLE EAST | OCTOBER 2019 | ISSUE 223
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