#188 - October 2016

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OCTOBER 2016 | ISSUE 188

In spite of macro-economic challenges, the Kingdom strives to maintain an upward trajectory

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12 An outlook on the Saudi debt market page 3-4 contents.indd 1

38 The unsettling lack of ďŹ nancial aid for SMEs

42 Creativity in ďŹ nancial engineering

Dubai Technology and Media Free Zone Authority

Jordan in transition In spite of macro-economic challenges, the Kingdom strives to maintain an upward trajectory

Jordan in transition

58 IFRS 9: where are banks right now?

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CONTENTS

OCTOBER 2016 | ISSUE 188

Editor’s Letter

P

12

24 6

30

News Analysis Oil and wars continue to be the bane of the Middle East

8

News bites

THE MARKETS 12 An outlook on the Saudi debt market LEGAL FOCUS 16 Iran—nine months on 20 Managing bribery and corruption in the UAE COVER STORY 24 Jordan in transition SPECIAL REPORT 30 Falcon Private Bank confident despite FINMA and MAS rulings

PRIVATE EQUITY 34 Survival of the fittest

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Challenging times ahead for Turkey

Creating opportunity in adversity

52

Servicing a massive labour market

Hisham AlRayes, CEO, GFH Financial Group

10 Keeping up with constant change

38 Sophistication in investments

42 Reaching the masses

Jordan in trans ition In of macro-econo the Kingdspite mic challenges, om strives to maint ain an upwar d trajectory

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50 Staying relevant

12 An outlook on the Saudi debt market

38 The unsettling of financial aid lack for SMEs

42 Creativity in financial engineerin g

58 IFRS 9: where are banks right now?

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CPI Financial

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page 3-4 contents.indd 3

Zone Authority

Dubai Technology

and Media Free

Zone Authority

46

Get the next issue of Banker Middle East before it is published.

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Dubai Technology

28

Onwards and upwards

trajectory

Expected headwinds for GCC banks

“The MENA region reflects a lot of challenges, yet at the same time, I like to see them as opportunities.”

to maintain an upward

K CEO of RAKBAN

Peter England, CEO

10

Kingdom strives

BankerMENA

Get the next issue ofEast Banker Middle before it is published.

Full details at: m www.bankerme.co

c challenges, the

of RAKBANK

Editor

Balancing the scales

In spite of macro-economi

over the “From my experience service right, years, if you get the the sales will come.”

Jordan in transition

Peter England, CEO

Onwards and upwards Hisham AlRayes, CEO, GFH Financial Group

Balancing the scales

Nabilah Annuar

| ISSUE 188

186 2016 | ISSUE

Dubai Technology and Media Free Zone Authority

JULY-AUGUST

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OCTOBER 2016

SEPTEMBER 2016 | ISSUE 187

and Media Free

icking up pace after the summer lull, October was jam-packed with various forums, publications and discussions on the progress of the industry. From the Global Islamic Economy Summit to the Global Digital Banking Conference, and the launch of IMF’s Regional Economic Outlook on MENA—October was a month of enlightenment and reinforcement as market players unite in enduring challenging times.

Like it or not, GCC and the larger MENA region has and will always be affected by fluctuations in oil prices as well as geopolitical tensions. These macroglobal economic factors reverberate through all layers of a country’s economy, particularly affecting the financial sector. It is therefore pertinent for governments and regulators to ensure the strength of the country’s banking and finance system for a sustained growth.

The magazine this month covers an array of issues—Saudi Arabia, Iran, Jordan, private equity, SMEs, digital banking, etc. The MENA region (and the rest of the world) are currently adjusting to lower oil and commodity prices, as well as a sluggish global growth. And this will not be the only issue we will be facing going forward. Global markets can also expect minor shocks from the results of the US elections next month (especially if Donald Trump wins) and in Europe, the realisation of Brexit.

We are definitely living in uncertain times. But in spite of all this, there is still hope as governments roll out policy and fiscal reforms to ensure their ability to absorb possible systemic shocks to their respective economies. The IMF expects decreased momentum to continue into 2017, with little improvement.

We definitely have challenging times ahead.

Till next month, have a productive read.

3 23/10/2016 15:15

CONTENTS

OCTOBER 2016 | ISSUE 188

SME 38 The unsettling lack of financial aid for SMEs IN DEPTH 42 Creativity in financial engineering 44 The value of healthcare investments

38

PAYMENTS 46 Staying ahead of the curve TECH FOCUS 54 Saudi Vision 2030: roadmap to financial services innovation

44

PERSONALITY 60 Shailesh Dash, Founder and CEO of Al Masah Capital

60

46 Log on to www.cpifinancial.net for news, polls, events, analysis, blogs, features, commentary and more.

Caring for your career

Looking for a new position in financial services in the Middle East?

Checkt CPI Financial’s Jobs page

ou

4 page 3-4 contents.indd 4

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EVENT 58 IFRS 9: where are banks right now?

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Oil and wars continue to be the bane of the Middle East The IMF expects a 3.5 per cent regional growth this year in the Middle East, North Africa and Pakistan region, but governments still need to implement long-term sustainability reforms to ride out tougher conditions

I

n the most recent regional economic outlook published by the IMF, two main factors—low oil prices and ongoing geopolitical conflicts in the region—continue to weigh on Middle East, North Africa, Afghanistan and Pakistan (MENAP).

As a result, (with much uncertainty due to these factors) MENAP’s growth will be modest at 3.5 per cent this year, with little improvement (slower than last year) expected in 2017.

Uncertainties arising from conflicts in Iraq, Libya, Syria, and Yemen continue to weaken confidence, while lower oil prices take a toll on exports and economic activity in oil exporting countries. On the other side of the spectrum, oil importing countries benefit from lower oil prices although declining remittances from oil exporters are partly offsetting these benefits.

Therefore, it has been suggested that structural transformations are needed across the region to raise medium-term prospects and create jobs.

Dr. Masood Ahmed, Director, Middle East and Central Asia Department at the IMF said that there are two challenges facing oil exporters. They are—the need to reduce spending and job creation in the government and oil and gas sectors. Additional concerns to these challenges are the possibility of growth being too low for too long;

6 page 6-7 News Analysis.indd 6

interest rates also being too low for too long impacting profitability for the financial sector; and the continuously low commodity prices.

“Despite recent increases, oil prices are projected to remain low over the coming years. Oil exporters are making strides in adjusting their fiscal positions, but much remains to be done.

For oil importers, macroeconomic stabilisation has advanced thanks to sound policies and lower oil prices, yet reforms need to be accelerated to be able to further boost inclusive growth and jobs,” he said.

OIL EXPORTERS

Oil exporters in the region—Algeria, Libya, Saudi Arabia, Iraq, Iran, Yemen, Oman, UAE, Qatar and Bahrain—are

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NEWS ANALYSIS

in an adjustment phase to cheaper oil.

Despite the slight increase this year (the key driver of the MENAP outlook), oil prices are projected to remain low over the coming years—between $5060 per barrel. Economic activity across the GCC is projected to remain slow this year despite continued expansion in hydrocarbon output.

Fiscal tightening and declining liquidity in the financial sector are projected to reduce non-oil growth in the GCC to 1.75 per cent in 2016, down from 3.75 per cent last year.

GCC non-oil growth is projected to pick up to three per cent next year as the pace of fiscal consolidation eases.

Over the medium term, less fiscal drag and a partial recovery in oil prices are projected to raise GCC non-oil growth

Weak growth Growth for the Middle East, North Africa, Afghanistan and Pakistan will remain modest this year as oil prices and ongoing conflicts continue to weigh on outlook, (real GDP growth, per cent change)

Middle East, North Africa, Afghanistan and Pakistan1 Oil exporters2 Oil growth Non-oil growth Gulf Cooperation Council Oil growth Non-oil growth Oil importers3 GCC and Algeria

2015 2.3 1.6 3.3 0.6 3.4 3.1 3.8 3.8 3.4

Projection 2016 2017 3.4 3.4 3.3 2.9 7.7 7.6 1.4 3.1 1.7 2.3 1.8 1.4 1.8 3.1 3.6 4.2 2.0 2.4

Source: National authorities; and IMF staff calculations and projections.

1Data exclude Syrian Arab Republic.

2Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, United Arab Emirates and Yemen.

3Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Sudan and Tunisia.

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20/10/2016 16:54

to 3.5 per cent, well below the seven per cent average during 2000-2014.

According to the IMF, the negative impact of fiscal consolidation and tightening liquidity on growth could be larger than anticipated—regional conflicts could intensify, a deeper slowdown in China could further weaken commodity prices, while a faster-than-expected US monetary tightening could increase global financial volatility, thereby reducing the availability of international financing, especially for lower-rated issuers. One of the main priorities for countries in the region should be the ability to sustain growth over the medium term. In this context, authorities could make faster-than-expected progress in implementing structural reform plans.

However, considering the scope of the economic transformation, such plans could run into obstacles, which could lead to reform fatigue.

The significant deficit-reduction efforts which began last year are continuing, with the aggregate 2016 non-oil fiscal deficit expected to improve by more than five per cent of non-oil GDP. Despite recent consolidation measures, including welcome reforms to domestic energy prices, deficits are projected to remain large—all countries are anticipated to record fiscal deficits this year, and only Iraq, Kuwait, and the UAE are set to post surpluses by 2021. Further fiscal adjustment is needed, which will require difficult policy choices and the adoption of well-calibrated measures to protect the vulnerable.

On top of that, the IMF has urged countries to accelerate structural reforms to diversify their economies away from hydrocarbons, boost the role of the private sector, and create jobs for their rapidly growing labour forces. The envisaged economic transformation, as reflected in country diversification plans, will take time.

The key to a successful implementation is to conduct it in a cautious and steady manner. As economic diversification proceeds, new skills will be required for new and existing workers to succeed.

Upgrades to education and training programmes should focus on reducing skill mismatches, while anticipating future needs of the private sector.

OIL IMPORTERS

Operating in a challenging environment, oil importing countries—Mauritania, Morocco, Tunisia, Egypt, Sudan, Jordan, Lebanon, Syria, Djibouti, Somalia, Afghanistan and Pakistan—are called upon to foster inclusive growth. Although recent reforms and lower oil prices have helped improve macroeconomic stability in these countries, growth remains weak and fragile, projected to be 3.5 per cent this year before strengthening to 4.25 per cent in 2017.

conditions—amid China’s rebalancing, the normalisation of US interest rates, and/or the fallout from Brexit—could reduce the availability of financing.

Looking at the other side of the coin, exports could rise faster if, for example, more progress is made on trade pacts with the EU. China’s rebalancing may also expand opportunities for consumption-oriented exports.

Stepping up reform momentum is crucial in this challenging environment, said the IMF. Energy subsidy reforms and revenue-enhancing initiatives have created more room for spending on infrastructure, health, and education, as well as targeted social assistance. Yet investment and productivity growth are still too low to boost growth, fiscal space is limited by high debt service costs and large wage bills, and, in some cases, external vulnerabilities are still high.

In oil importers, macroeconomic stabilisation has advanced thanks to sound policies and lower oil prices, yet reforms need to be accelerated to be able to further boost inclusive growth and jobs — Dr. Masood Ahmed, Director, Middle East and Central Asia Department, IMF Continued progress in reforms, lower fiscal drag, and stronger external demand, especially from the Euro area, are expected to support the recovery. However, amid lingering structural impediments, medium-term growth is likely to remain too low to tackle high unemployment and improve inclusiveness. Furthermore, risks such as slow improvement in job creation and living standards could aggravate sociopolitical frictions, and setbacks to political transitions and reform implementation could undermine the recovery.

On top of that, global macro-external factors such as intensified regional conflicts could deepen the adverse spillovers. Tighter global financial

Continued fiscal consolidation is needed to improve public debt profiles and strengthen buffers. It can focus on targeted revenue measures— eliminating tax exemptions, making income taxes more progressive, and strengthening tax collection—as well as the continued reprioritisation of spending from general energy subsidies toward targeted social assistance, investment, and other growth-enhancing areas. Moreover, greater exchange rate flexibility would help enhance competitiveness.

Structural reforms—especially in the areas of business, trade, labour and financial markets—are needed to foster private sector expansion and job creation.

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NEWS

BITES

UAE Cabinet adopts final draft of bankruptcy law The UAE Cabinet earlier this month has adopted the final draft of the federal law on bankruptcy in the UAE. The law strengthens the financial, economic and legislative system in the UAE, through putting in place a separate and modern law to avoid bankruptcy cases, including financial restructuring, composition procedures, restructuring debts and liquidation funds. Companies and individuals are now able to restructure their debt while avoiding bankruptcy liquidation.

Central Bank of the UAE approves five-year strategy Following a retreat held in August, the Central Bank of the UAE has discussed and approved its five-year strategy for the federal government’s fourth strategic cycle (2017-2021).

The new framework includes ‘Major Strategic Objectives’ focusing on the bank’s role in enhancing financial stability in the UAE, strengthening the monetary and reserve management, enhancing the regulatory and supervisory framework for banks and other financial institutions, defining the central bank’s role in the national economy and UAE’s competitiveness, improving banking operations services and ensuring safe, sound and efficient clearing and settlement systems within the UAE. The major initiatives that the central bank will focus on according to the strategy include upgrading the legislative and regulatory system for banks and financial institutions and improving financial institutions’ licencing procedures and processes. The central bank will also focus on supporting and encouraging the banking sector to finance SMEs, in addition to reinforcing the legislative, regulatory, and supervisory environment for Islamic finance.

Furthermore, Emiratisation of the banking sector is also a priority in the coming period, in addition to enhancing anti-money laundering plans in line with the international criteria and the UAE’s competitiveness in these areas. Additionally, the promotion of a culture of innovation was also added as one of the objectives to the bank’s new strategy in line with the National Innovation Strategy.

RATINGS REVIEW Entity Abu Dhabi

Bahrain Egypt

Lebanon

LT IDR/LT Rtg (FC) AA BB+

B

B-

Kuwait

AA

Turkey

BBB-

Ras Al Khaimah

Saudi Arabia Qatar

ST IDR/ST Rtg (FC) F1+

A

AA-

AA

B B B

8 page 8-10 News Bites.indd 8

B-

F3

BBB-

F1+

AA

F1+

ST IDR/ST Rtg (LC) F1+

B

B

AA

F1

Positive Negative Evolving Stable

Under Review

BB+

F1+

KEY

UR

LT IDR/LT Rtg (LC) AA

A

AA-

OUTLOOK

B B

F1+

ST IDR/ST Rtg (LC) AA+

BBB+

B

B-

AA+

F1

AA+

F1+

AA+

F3

F1+ WATCH

BBB

AA+

DFM issues draft rules on Shari’ah-compliant hedging Dubai financial Market (DFM) has published draft rules on Shari’ah compliant hedging.

According to industry reports, the rules set the parameters for valid Shari’ah-compliant hedging tools, with an emphasis on their underlying contracts, and expands on the rationale behind them. The document defines possible substitutes for conventional derivatives-based hedging, including hedging tools for currency exchanges, liquidity management and protecting against fluctuations in index-based returns.

The new standard is the latest in a series of DFM Shari’ah-compliant standards issued, along with the DFM Standards on acquiring and trading of Sukuk and shares. The stock exchange have provided a consultation period up to 10 November 2016 for industry feedbacks.

Saudi banks to benefit from SAMA’s support The Saudi Arabia Monetary Authority (SAMA) last month, announced that it would provide Saudi banks with approximately SAR 20 billion ($5.3 billion) of time deposits on behalf of government agencies, and introduce seven-day and 28-day repurchase agreements. SAMA’s SAR 20 billion injection of time deposits adds to an approximately SAR 12 billion provision earlier this year and this should help stabilise banks’ regulatory loan-todeposit ratio for the next six months.

The repurchase agreements, when combined with a robust stock of liquid assets to total assets of around 25 per cent, will allow banks to access short-term borrowing at a lower and more stable cost than available in the challenged wholesale markets, reducing their funding costs. Despite the likelihood of continued pressure on banks’ cost of funding into 2017, these SAMA facilities should also support profitability.

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NEWS BITES

UAE establishes Emirates Trade Bank, strengthens ties with trading partners In its bid to transform Dubai into the Capital of the Islamic Economy, The Dubai Islamic Economy Development Centre (DIEDC) together with the Department of Economic Development (DED) has announced the establishment of the Emirates Trade Bank.

A founding committee comprising HE Mohammed Al Gergawi (Chairman), HE Sami Al Qamzi, HE Essa Kazim, Hussain Al Qemzi, Dr. Ahmed Aljanahi and Saed Alawadi are in advanced discussions with the UAE Central Bank regarding a provisional approval for an Islamic wholesale banking licence for the bank.

Specialising in international trade and commodity financing, Emirates Trade Bank will be the first of its kind—a global Shari’ah-compliant bank exclusively offering integrated trade and international commodity financing solutions, through leveraging and mobilising the infrastructure and logistics ecosystem of the UAE. The bank will fulfil Dubai’s strategic goal of supporting the Islamic financial sector and integrating investments from this domain towards doubling UAE trade flows (about AED 1.4 trillion in 2014) by 2020.

Testament to the country’s strength in trade, a recent study conducted by the Dubai Chamber of Commerce and Industry (DCCI) found that Dubai’s non-oil trade with Latin America reached AED 17 billion in value in 2015, a 26 per cent growth compared with the AED 13.5 billion traded in 2010.

Brazil and Mexico top the list of Dubai’s non-oil trade partners in Latin America, followed by Suriname and Argentina.

Apart from the West, the country also has strong trading ties with the Far East. Jebel Ali Free Zone (Jafza), the UAE’s flagship trade and logistics hub, recently held the Japanese Business Forum, to explore future investment opportunities between the two countries. Trade figures worth $2.7 billion—a growth of 36 per cent over the past five years, and the addition of new Japanese companies on an annual basis—is believed to reflect the positive movement of trade within the UAE and the wider region.

GCC bond market to witness an uptick in volume Indosuez Wealth Management in a recent research note expects the region’s bond market to continue experiencing an increase in the volume of issuances on the back of increased demand from international investors due to relative stability and appealing spreads. The Saudi Arabia and Kuwait’s inaugural bonds are expected to generate significant interest from a broad range of international investors, similar to that experienced with recently issued bonds from Abu Dhabi and Qatar.

Although the performance of GCC corporate bonds remains subdued compared to high growth markets around the world, the attraction to GCC bonds will become even more compelling due to general spread compression and market conditions elsewhere, with a large proportion of Euro zone bonds currently trading at negative rates, Asian bonds being stable but with tight spreads and Latin America continuing to be highly volatile despite yielding high returns.

Looking ahead, oil price recovery, structural reforms and better credit ratings should result in a positive re-rating of the region and trigger more spread tightening.

Sluggish growth in Islamic finance to continue into 2017, says S&P S&P Global Ratings in a recent report conveyed that the drop in Islamic finance growth is likely to continue in 2017. Nevertheless, the industry’s total assets is expected to reach $2.1 trillion at year-end 2016. There are two factors hindering this growth—the impact of policy responses to the decline of oil prices in core markets and the lack of standardisation in the industry. The sector will maintain a five per cent growth in 2017 and potentially be worth approximately $3 trillion in the next decade.

Financial services firms urged to prepare for taxations KPMG in a recent industry seminar has called upon UAE financial services firms to prepare for the changing tax landscape.

A number of international and local changes have been proposed, including, i) the value added tax (VAT) proposals across the GCC, with planned implementation date of 1 January 2018 in the UAE; ii) new transfer pricing regulations stemming from the OECD’s BEPS initiative, which will impact UAE firms with international operations; and iii) updates to the global Automatic Exchange of Information (AEOI), which will result in greater transparency and sharing of tax payer related information with tax authorities in other countries.

According to Emilio Pera, Head of Financial Services at KPMG in the UAE, financial services firms in the country will be directly affected, and are urged to analyse the impact of these developments on their businesses.

Gulf equities looking up over the next six months On the back of a more positive outlook on oil prices, stabilising earnings forecasts and better technicals, Credit Suisse, in a recent research alert, conveyed a positive sentiment towards Gulf equities.

“Technicals suggest the worst is behind us, though we believe it is too early to turn outright bullish. We recommend that investors stay selective. We are positive about the UAE (particularly Dubai) and Oman, and are cautiously optimistic on Kuwait. We see further downside risks to Saudi Arabia, Qatar and Bahrain,” stated the report.

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NEWS

BITES

Saudi Arabia issues $17.5 billion bond, the largest from an emerging market Garnering orders worth $67 billion, Saudi Arabia has raised $17.5 billion in one of the year’s most anticipated bond issuances, overtaking Argentina’s $16.5 billion paper earlier this year.

According to industry reports, the transaction comprised three maturities of five, 10 and 30 years and was priced more cheaply than expected, at 2.60 per cent, 3.41 per cent and 4.63 per cent, respectively. The $5.5 billion five-year tranche was launched at 135 bps over US Treasuries, the $5.5 billion 10-year tranche at 165 bps, and the $6.5 billion 30-year tranche at 210 bps. Citi, HSBC and JPMorgan reportedly led the sale with Bank of China, BNP Paribas, Deutsche Bank, Goldman Sachs, Morgan Stanley, Mitsubishi UFJ, and NCB Capital also involved in the issue.

Separately, the world’s oil giant, Saudi Aramco, has announced that it is targeting 2018 for what could be the world’s largest public listing as it expects oil prices and market conditions to improve. All markets including New York, London, Hong Kong and Japan were still being considered for the IPO of up to five per cent, though the exact size of the offering will be determined by the Saudi Supreme Council.

GCC bond market gaining momentum The GCC bond market, which saw record sales in the first half of 2016, is expected to continue experiencing an increase in the volume of issuances, conveyed analyst note from Indosuez Wealth Management. The report observed that Saudi Arabia and Kuwait’s inaugural bonds issuances are expected to generate significant interest from a broad range of international investors, similar to what was experienced with recently issued bonds from Abu Dhabi and Qatar.

The firm expects the GCC bond market to witness continued increase in the volume of issuances. There will also be an increased demand from international investors due to relative stability and appealing spreads.

Attraction towards GCC bonds will become even more compelling due to general spread compression and market conditions elsewhere, with a large proportion of Euro zone bonds currently trading at negative rates, Asian bonds being stable but with tight spreads and Latin America continuing to be highly volatile despite yielding high returns.

However, the performance of GCC corporate bonds will remain subdued compared to high growth markets around the world. Oil prices recovery, structural reforms and better credit ratings should result in a positive re-rating of the region and trigger more spread tightening.

UK’s Economic Outlook Slashed in Brexit Aftermath Leading forecasters cut UK’s 2016 and 2017 GDP growth projections drastically in wake of referendum 2.5% 2016

2.3 2.2

2.2

2.2

2.1

2.0% Jan 28 UK 2015 GDP data released. The slowest growth in 3 years

1.5%

Feb 20 Cameron sets date for UK vote

2.1

2017

2.1

2.0

1.9

Jun 23 EU referendum.

The UK votes to leave

Apr 15 Referendum campaign kicks off

1.4

1.0% May 5 Elections across Britain

0.5% 0.3

0%

January

February

March

FocusEconomics Consensus Forecast United Kingdom

April

May

28 June 2016

FOCUSECONOMICS

Brexit to have limited impact on the MENA The IMF in its recent regional economic report conveyed that Brexit has thus far had a limited impact on MENA. The regions’ financial markets weakened immediately after the Brexit result, in line with global developments, which included a five per cent drop in oil prices and a one to five per cent losses on the stock markets. Currencies weakened marginally, but there was no significant impact on forward currency spreads in the GCC, which peg to the US dollar.

However, Brexit has increased uncertainty about global economic prospects. This is likely to take a toll on confidence and investment, with repercussions on trade and financial market conditions—particularly in advanced Europe—and key commodity prices. Bilateral economic linkages between most MENA countries and the UK are limited, however the reliance of some banks in Bahrain, Egypt, Qatar, and the UAE on wholesale borrowing from the UK, which may become an issue in the event of a spike in funding costs.

A sharp increase in global risk aversion could push up external financing costs for MENA countries and banks. Countries with vulnerable fiscal positions (Egypt) or those expected to tap international markets in the coming months to finance their budget deficits (for example, Egypt, Pakistan, and Saudi Arabia), as well as banks relying on offshore funding (especially in Bahrain and the UAE), are also vulnerable through this channel. Cross-border exposures to European banks are sizable for Morocco and Tunisia. A growth slowdown in the euro area stemming from Brexit would also have a significant impact on MENA. Ties to the euro area are strong through trade, remittances, FDI, and tourism, especially for MENA oil importers in the Maghreb region (Morocco, Tunisia).

Source: FocusEconomics

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T H E

Q U E S T

F O R

E X C E L L E N C E

BME PRODUCT AWARDS 2016 QATAR

Nominations will be open shortly for the Banker Middle East Product Awards 2016 in Qatar.

What has your institution done this year that makes you feel proud? Celebrate your achievements in financial product design, development and marketing by nominating your products in the most prestigious product recognition programme in the MENA region’s financial services sector.

VOTING OPENS

3 NOVEMBER

VOTING CLOSES

24 NOVEMBER

NCED WINNERS ANNOU

27 NOVEMeBinER to featur December BME

For more information, contact: events@cpifinancial.net Tel: +971 (0)4 391 4682 Fax: +971 (0)4 390 9576 CPI Financial FZ LLC, 1209 Shatha Tower, Dubai Media City, Dubai, United Arab Emirates

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18/09/2016 11:43

THE MARKETS

An outlook on the Saudi debt market Philipp Good, Head of Portfolio Management, Fisch Asset Management, discusses the potential of Saudi Arabia’s debt capital market

Philipp Good

S

audi debt market anticipation has, first and foremost, been focused on the Kingdom’s benchmark bond market funding exercise. Having raised $17.5 billion in its debut sovereign issue, the Kingdom easily exceeded Qatar’s highly successful $9 billion bond issued earlier this year.

Under ordinary circumstances, expectations of such a large single issuer in the primary market would have weighed heavily on secondary

12

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credit spreads. In the case of Saudi Arabia, we have not seen such pricing pressure in the secondary market. If anything, we have seen the opposite.

While Saudi Arabia doesn’t have any existing external debt, it is helpful to look at a company such as Saudi Electric, which is majority governmentowned, as a market proxy. Saudi Electric’s 5.5 per cent 2044 bond credit spread is trading near YTD lows. There are a couple of factors that contribute to this constructive spread performance.

At a macro level, emerging markets are benefitting from a number of positive trends, which include improving fundamentals after a three year adjustment period, a low global interest rate environment, and a very strong technical backdrop underpinning demand for credit products. At issuer level, Saudi Arabia has taken prudent steps towards communicating its vision for economic development, preparing market participants for the jumbo bond issuance. These factors, combined with oil prices that have now stabilised above their earlier lows, have created an investor demand dynamic to easily meet the sovereign issuance. Saudi Arabia has been well prepared for their roadshow and the goals for

the coming years are ambitious but plausible. A balanced budget by 2020 is a big challenge but investors seem to be giving the Kingdom the benefit of doubt. Most of the bonds were absorbed by US and European investors.

Investor type had a bias towards fund managers and institutional buyers such as insurance companies and pension funds.

Now that the sovereign bond has been announced, we expect to see a strong pipeline of debt issuance activity among the Saudi banks. At the moment, the banks seem to be fairly well positioned, but stress testing indicates that some may perform poorly in the future. This is largely due to the recent period of low oil prices and its consequences: slower economic growth, higher unemployment, asset quality deterioration and increasing credit defaults. The negative impact of these factors on Saudi banks may be reinforced by the high correlation that exists between the banks’ core businesses, oil prices and government spending.

Generally speaking, Saudi’s leading banks are characterised by strong risk management, core equity and financial metrics. However, a number of the Saudi banks are also characterised by relatively high volatility and questions regarding strategic development.

Our view is that Riyad Bank will be supported by the Saudi government, which indirectly holds a majority stake, should it encounter difficulties.

Samba Financial Group, by contrast, has a robust buffer in the form of its high capitalisation and entrenched funding franchise, protecting it against potential pressure on earnings and asset quality.

The only outstanding bond among the banks is that of Saudi Fransi’s Sukuk ($750 million, 2.947 per cent, 5/22/17). Saudi Electric bonds ($1.26 billion, 4.211 per cent, 4/03/22) are cont. on page 14

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THE MARKETS

cont. from page 14

trading with a risk premium of 150 bps over US Treasury and are still A-rated.

On that basis, we would envisage a risk premium among the stronger banks for five-year bonds at US Treasury +175 bps as a good indication for new issuances. For example, were Banque Saudi Fransi to issue debt now, we would consider 175 bps as a fair credit spread for a five year tenor USD-bond.

In the case of Saudi Hollandi Bank,

Once a sovereign bond has been announced, we expect to see a strong pipeline of debt issuance activity among the Saudi banks. At the moment, the banks seem to be fairly well positioned, but stress testing indicates that some may perform poorly in the future.

— Philipp Good, Head of Portfolio Management, Fisch Asset Management we would consider 200 bps as a fair credit spread for the same bond.

Another method for pricing issuances would be on the back of the sovereign issuance. We would consider 50-75 bps over the five-year sovereign bond to be a fair premium.

Following the issuance of the Saudi sovereign bond, we will be looking to actively participate in new issuances by selected Saudi banks. Our own credit assessments of the banks have rated them in the BBB range, clearly lower than the official ratings, however probably higher than their marketimplied ratings. According to our in-house ratings, government-owned banks have been given an uplift of one notch on their standalone ratings.

14

Where do we see the banks today?

Banque Saudi Fransi (BSFR)  A combination of solid capitalisation, a high share of low cost deposits, a good track record in asset quality and robust revenues compensates adequately for concentration risks, event risks and a deteriorating asset quality.

Saudi Hollandi Bank (AAAL)  Robust profitability and adequate capitalisation should provide a sufficient buffer for normal cyclicality and AAAL’s concentration risks. In terms of capitalisation and cheap funding, AAAL appears somewhat weaker than its stronger peers, SABB, BSFR and SAMBA. Saudi British Bank (SABB)  Our assessment for SABB (applying also to its senior unsecured liabilities) reflects solid capitalisation, robust revenues, a more mature retail and SME loan book and material concentration risks.  SABB’s stronger funding franchises should help contain its funding costs if liquidity becomes scarce, and puts less pressure on management to compete aggressively for new retail/SME loans.

Samba Financial Group (SAMBA)  Our assessment of SAMBA recognises its high capitalisation and entrenched funding franchise providing a robust buffer against concentration risks on its balance sheet and potential pressure on earnings and asset quality in 2016-2017.  We have assigned a one notch uplift for senior unsecured liabilities in order to reflect potential government support (share of ownership and SAMBA’s importance for the Saudi economy).

Riyad Bank (RIBL)  Our assessment for RIBL reflects its stronger reliance on time deposits, relatively high loan/deposit ratio and its higher reliance on related party deposits.  RIBL’s senior unsecured liabilities would benefit by one notch following state support.

Arab National Bank (ARNB)  We assessed ARNB as a stand-alone credit, with a rating that also applies to its senior unsecured liabilities.  Despite its relatively strong capitalisation, ARNB’s risk profile is more vulnerable than stronger Saudi peers such as SABB, SAMBA and BSFR, due to its business mix and asset quality dynamics.

Source: Fisch Asset Management

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LEGAL FOCUS

Iran—nine months on Chris Macbeth, Till Müller-Ibold and Paul Marquardt of Cleary Gottlieb Steen & Hamilton shed light on the business environment in Iran following the lifting of sanctions, and how it could impact both stakeholders and interested parties

T

here was great excitement in January 2016, when the Joint Comprehensive Plan of Action (JCPOA) between Iran, the E3+3 (the US, China, Russia, France, Germany and the UK) and the EU came into effect. Investors and advisers, especially those in the UAE, packed Tehran-bound planes and booked out hotel rooms. Yet nine months later, the anticipated gold rush has stalled. To appreciate why, one must understand the laws behind the politics.

This article explains how Middle East entities might still be caught by US and EU sanctions that continue to hinder investment in Iran, despite the majority of US secondary sanctions and significant EU sanctions being lifted. The risk is both legal (especially in the US) and practical (especially regarding banking).

US SANCTIONS

US direct sanctions administered by the US Department of Treasury’s Office of Foreign Assets Control (OFAC) remain virtually unchanged following the implementation of the JCPOA and are the primary ongoing obstacle to business with Iran. All transactions and dealings directly or indirectly involving persons and entities in Iran, entities controlled by its Government, and persons and entities listed on OFAC’s ‘Specially Designated Nationals

16

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and Blocked Persons’ (SDN) List (or 50 per cent or more owned by them) remain prohibited if they involve any nexus to US jurisdiction.

This means US persons (including US citizens, green card holders, legal entities organised in the US and their overseas branches) may not deal with Iran except pursuant to an OFAC licence, and entities owned or controlled by US persons must comply with a complex licencing regime. In addition, non-US persons may not cause the export or re-export of goods and services from the US to Iran, take any action in the US in connection with an Iranian transaction, or otherwise involve the US or a US person in their dealings with Iran. Most notably, US dollar bank transfers relating to Iran will generally involve prohibited clearing through the US financial system (even if made between two banks outside the US).

Prior to the JCPOA, the US maintained numerous ‘secondary’ or ‘indirect’ sanctions targeting foreign persons engaged in certain dealings with Iran outside US jurisdiction, who (although technically not violating US law) risk themselves becoming the subject of US sanctions. The majority of these have been lifted, but important secondary sanctions remain.

Non-US persons remain exposed to secondary sanctions by knowingly cont. on page 18

Chris Macbeth, Counsel (Abu Dhabi)

Paul Marquardt, Partner (Washington, DC)

Till Müller-Ibold, Partner (Brussels)

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LEGAL FOCUS

cont. from page 16

engaging in significant transactions with designated SDNs in Iran or SDNs outside Iran designated in connection with the Iranian Islamic Revolutionary Guard Corps (IRGC) or Iranian weapons of mass destruction or terrorism activities. Secondary sanctions continue to target activities supporting human rights abuses, surveillance and censorship, as well as transactions (even if otherwise permitted) that conceal the interest of Iranian sanctioned persons.

EU SANCTIONS

EU sanctions on Iran can be separated into so-called ‘nuclear-related sanctions’ and ‘human rights-related sanctions’. The former are quite limited following implementation of the JCPOA. Companies may now invest in Iranian oil, gas and petrochemicals, and provide financing for most export or import transactions, but some restrictions remain, including an arms embargo and an authorisation requirement for the export of nuclear-related technology. The latter, mainly export prohibitions on items used for internal repression or intercepting communications, were unaffected by the JCPOA and remain in force.

Moreover, certain Iranian persons remain subject to asset freezes, so that it is not practically possible to transact with them. A number of these institutions (major banks and, especially, the IRGC and entities controlled by it) are important players in the Iranian economy.

Middle East companies do not normally need to comply with EU sanctions, unless acting within the EU, through entities incorporated in the EU, or using any aircraft or vessel under the jurisdiction of an EU Member State. Further, EU sanctions apply to EU citizens anywhere, including if involved in decision-making for

18 page 16-18 Legal Focus.indd 18

Middle East entities. Any EU parent company could be caught if its Middle East subsidiary, following its directions, breaches EU sanctions. Broad and illdefined anti-circumvention rules also create a risk that an EU person could infringe EU sanctions by investing in a Middle East target known to engage in sanctioned activities.

THIRD-PARTY CONCERNS

Middle East companies doing business in Iran should be prepared for more complex diligence and negotiations.

All business in US dollars remains prohibited. Furthermore, many international banks are still unwilling to support business in Iran in any currency, even if the transactions are technically legal, because of the perceived risk of enforcement action or adverse regulatory consequences in the US and Iran’s continuing designation by FATF among the highrisk and non-cooperative jurisdictions for AML/CFT purposes.

with Iran and be aware that the negotiation of such agreements could be more complex in the future. Other suppliers, particularly from the US, may also have concerns to ensure that the goods and services they are providing to Middle East customers are not ultimately destined for Iran.

IN A NUTSHELL

If investors are waiting for remaining sanctions to be lifted before moving into Iran, they may be in for a long wait. Important sanctions against Iran remain, and regardless of the outcome of the US presidential election in November, there is little prospect that any of the remaining sanctions relating to terrorism or human rights (including the main US OFAC sanctions) will be lifted.

In the meantime, Middle East companies not owned by US persons can do business in Iran, but should be cautious, conduct due diligence on their counterparties, obtain legal

If investors are waiting for remaining sanctions to be lifted before moving into Iran, they may be in for a long wait.

— Cleary Gottlieb Steen & Hamilton Even with respect to business not directly involving Iran, many banks are likely to require extensive diligence and representations regarding Iranian activities, and many banks have internal guidelines prohibiting or restricting client relationships with companies doing more than a specified level of business with sanctioned persons (often five per cent or 10 per cent). Middle East companies contemplating doing business in Iran should review existing financing agreements to ensure that none of them contains representations that would be violated by dealing

advice and, unless acting pursuant to a licence from OFAC, be sure that their transactions do not involve any US persons or other US jurisdictional nexus (including US dollar payments or other goods and services sourced in the US for direct or indirect provision to Iran). They should also clarify in agreements that they are not required to take any action that violates or may be sanctionable under applicable law at any time, due to the risk of reimposition of sanctions without warning if the IAEA, US or EU believe Iran has breached its obligations under the JCPOA.

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LEGAL FOCUS

Managing bribery and corruption in the UAE Winston & Strawn examines how UAE companies should remain compliant when faced with potential corruption investigations

W

ith investigations into alleged bribery and corruption becoming more prominent globally, it is increasingly important for organisations (no matter where they are based) to have in place robust procedures to respond to the emergence of allegations and to react to regulators and prosecuting agencies when they engage in such investigations.

BRIBERY IN THE UAE

In recent years, a number of international surveys and reports have benchmarked countries on the basis of their perceived levels of corruption. The UAE’s position, 23rd lowest of 168 countries, suggests that combating bribery and corruption are key areas on which organisations should focus. Globally, increased perceived levels of bribery and corruption, coupled with emboldened prosecuting agencies using established (e.g. the US’s Foreign Corrupt Practices Act 1977) and newer (the UK’s Bribery Act 2010) legislation have raised the importance of being properly prepared. In the UAE, enforcement of its established anti-corruption laws has received a boost with the Abu Dhabi Executive Council announcing the establishment of a new Anti-Corruption Unit in May 2015.

20 page 20-22 Legal Focus.indd 20

Justin McClelland, Partner, Winston & Strawn (London)

Bibi Sarraf-Yazdi, Partner, Winston & Strawn (London)

THE INVESTIGATION PROCESS

(ADAA) and/or the Ministry of Justice (MOJ), or from an internal process e.g. internal whistleblowing, internal audit work or routine accounting checks.

Once notified, the UAE organisation should establish an internal management team tasked with the responsibility for managing the investigation. That team should be small, separate, senior and independent (from the matters giving rise to the bribery allegations) to ensure the team has the authority to get things done quickly and efficiently. Depending on the size of the investigation, the team typically includes: legal; the head of the relevant business unit; a representative from the IT function; and a representative from human resources.

It is not possible to map out every individual component of an investigation as each will have its own features depending on the nature, scope and jurisdictional spread of the alleged behaviour.

However, it is possible to identify the key phases for any investigation and to highlight some of the important issues to bear in mind.

RESOURCES

Notification of the bribery offence having been committed by an organisation in the UAE may take a number of forms including contact from the Abu Dhabi Accountability Authority

cont. on page 22

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LEGAL FOCUS

cont. from page 20

At this stage consideration should be given to engaging external specialists, including forensic accountants, IT experts or even public relations teams (if necessary, in multiple jurisdictions).

Complex factual investigations and legal analysis may need to be conducted quickly, making it likely that the organisation will engage external legal advisors. As the investigation evolves,

these issues should be reviewed to ensure that the investigation remains properly focused.

THE REGULATORS AND PROSECUTING AGENCIES

It will be important from the outset of an investigation to set a co-operative but firm tone with the ADAA, the MOJ, and other regulators and/or

The internal investigation

During the first management meeting, an internal team should be set up to investigate the alleged behaviour and develop an investigation plan, building in flexibility to accommodate challenges to resources and timings as the work progresses. Key tasks and issues for the investigative team include: Gathering and securing evidence—preserving all relevant, or potentially relevant, evidence relating to the alleged behaviour will be crucial, and is likely to be requested by the ADAA and/or the MOJ. Gaps in evidence, either because the data was lost or destroyed, may impede the organisation’s own ability to understand what happened and could cause significant problems in subsequent associated litigation, or in further investigations by the regulators or prosecuting agencies.

Data review—the review process can be assisted using document management platforms to allow a proportionate, targeted and prioritised review.

Interviews—conducting interviews with relevant (both current and ex) employees and (possibly) external third parties should be planned. Timings of interviews should be considered carefully as internal investigations conducted in parallel with investigations by regulators may be objected to by such agencies in the course of an investigation. Interviews should be conducted by experienced interviewers and accurately recorded in a note, with the privileged status of that note made clear.

Employees—a challenging issue in any investigation is whether, and at what stage, to suspend employees who may have engaged in the bribery or corruption. Much will depend on the information available when the management team makes this decision and whether a suspension would be deemed compliant with the disciplinary rules of the UAE labour Law, Federal Law No. 8 of 1980, as amended.

Written report—it may be appropriate for the investigative team to prepare a written report which would include: a description of the nature and extent of the internal investigation; an overview of the factual findings; the conclusions reached; and the steps taken as a result of the factual findings together with a list of future intended actions. Care should be taken in reaching any conclusions regarding any criminal or regulatory infringements.

Source: Winston & Strawn

The internal team and external advisors will need to focus on obtaining answers to the following pivotal questions:       

Identifying what appears to have happened and when, and who was involved.

Whether the behaviour is continuing (and, if so, how to stop it).

Whether there is any foundation to the allegations.

Who is affected by the allegations (both internally and externally).

The risks to the organisation.

The jurisdictions affected by the bribery.

How the organisation can communicate its position at an appropriate time (both internally and externally).

Source: Winston & Strawn

22 page 20-22 Legal Focus.indd 22

prosecuting agencies. Where the behaviour under investigation extends across more than one jurisdiction, the management team will need to take into account the possibility of having to self-report the behaviour which raises a number of challenging issues.

As to the final outcome, there may be scope to persuade regulators and/or prosecuting agencies that insufficient evidence or public interest exists to justify action, or that early co-operation justifies a less aggressive regulatory response and/ or a mitigated penalty. However, the organisation must not lose sight of the fact that any settlement which involves the admission by an organisation of criminal behaviour will very likely affect its position in civil proceedings and under its insurance policies.

ASSOCIATED LITIGATION

Litigation associated with the (alleged or admitted) bribery and corruption may come from a number of potential sources and arise across different jurisdictions. To address associated litigation risks, the management team should formulate an initial defence strategy early in the investigation following an initial internal audit of the immediately available evidence.

This enables the organisation to take a preliminary view on whether there is any evidential or legal foundation for potential allegations or for the matters being investigated. The strategy should take into account preservation and gathering of documents relevant for the defence of any litigation and preserve privilege in the documents from disclosure in any litigation.

With the increased likelihood of bribery and corruption allegations arising, having a plan to manage the myriad issues that they generate from initial emergence of the allegation will help UAE organisations in addressing these challenges efficiently and effectively.

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Photo credit: Andrew Moore/Flickr

COVER STORY

In spite of macro-economic challenges, the Kingdom strives to maintain an upward trajectory.

Jordan in transition Regional geopolitical conflicts continues to pressure the Jordanian economy, but with external support in place and possible improving sentiments, not all is depressing for the Kingdom

T

ucked in between politically conflicted countries, the Hashemite Kingdom of Jordan’s economic progress has for several years suffered from spillover effects brought on by its neighbours.

Conflicts in Syria and Iraq continue to drag on Jordan’s economy, deeply affecting trade, construction, tourism and investor sentiment, while the influx of a large number of refugees continues to strain public infrastructure.

ECONOMIC STABILITY

With an estimated population of 9.5 million in 2015, according to the Central Bank of Jordan, the country’s GDP last year was estimated at JOD 26,637.4 million ($37,570.4 million), growing at an average rate of 4.3 per cent per annum between 2005 and 2010, and around 2.5 per cent

24

from 2010 onwards. Jordan is a market-oriented economy and classified by the World Bank as an ‘upper-middle income’ country; however, approximately 14.4 per cent (as of 2010) of the population lives below the national poverty line.

Jordan has been rated of speculative grade, BB-/ Negative/B, with a negative outlook by S&P. The ratings agency lowered its outlook on Jordan to negative in April 2016 because the consequences of regional political instability and building conflict that are obstructing meaningful policy course. Low oil prices are bolstering the country’s fiscal and current account position as an oil and gas importer, while consumption and industrial competitiveness are also improving. Nonetheless, Jordan’s debt burden is still high and expenditure pressures remain substantial, despite ongoing external support.

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The IMF in August approved a $723 million loan under an Extended Fund Facility (EFF) for Jordan and will immediately disburse $72.3 million of the funds, with the rest spread over 36 months. Jordan’s Ministry of Finance expects the new agreement to help release $1.9 billion in additional donor grants to help cover the cost of hosting refugees and $1 billion in US-guaranteed bonds.

The additional donor grants and the policy support for fiscal consolidation that the IMF programme provides are expected to bolster government finances and boost the country’s balance-of-payments position, according to a Moody’s report dated 29 August 2016.

According to the report, Jordan’s public finances have been declining since 2009, and government debt surpassed 90 per cent of GDP in 2015, compared to 65 per cent in 2009. However, due to the support of an IMF Stand-By Arrangement programme, which also unlocked access to additional funding, structural fiscal reforms have begun to produce positive results, slowing the debt build-up. The central government’s fiscal deficit, excluding foreign grants, narrowed to 6.8 per cent of GDP in 2015 from 7.2 per cent in 2014 and 8.2 per cent in 2013, despite the expense of hosting an influx of refugees from neighbouring Syria and Iraq. Under EFF and its corresponding fiscal reforms, the Government expects to post a JOD 170 million (0.5 per cent of GDP) budget surplus by 2019 (including grants).

The Government also expects to remain in surplus through 2021 as a result of structural reforms and access to further donor grants, but also as the country continues to benefit from lower oil prices.

Having recorded large and volatile current account deficits since 2005, the funding also boosts Jordan’s balance-ofpayments position. These deficits have reportedly increased the country’s reliance on private capital inflows, the majority of which have been in the form of foreign direct investment from oil-exporting GCC countries. Larger grants are projected to improve the country’s current account position, while the IMF’s financial assistance will provide an additional buffer to the country’s foreign reserves, which fell to $14.3 billion in the first quarter of this year from $15 billion at the end of 2015.

Most recently, Jordan signed an agreement for a $300 million soft loan with the World Bank Group. The loan’s soft financing conditions accord with the International Development Association’s terms, which are usually reserved for very poor countries and not, in principle, available to Jordan, according to a ministry statement. To be paid back over 35 years, the first payment is expected to be disbursed by November, with the remaining payments extended over a three-year period.

Top 10 Banks by Assets (USD ‘000) Arab Jordan Investment Bank Capital Bank of Jordan Bank of Jordan Bank Al-Etihad Jordan Ahli Bank Cairo Amman Bank Jordan Kuwait Bank Jordan Islamic Bank The Housing Bank for Trade & Finance Arab Bank

2,529,206 2,799,842 3,111,737 3,369,717 3,518,518 3,571,315 4,012,315 5,358,239 11,174,469 49,044,593

Source: CPI Financial

Top 10 Banks by Liabilities (USD ‘000) Jordan Commercial Bank Arab Jordan Investment Bank Capital Bank of Jordan Bank of Jordan Bank Al-Etihad Jordan Ahli Bank Cairo Amman Bank Jordan Kuwait Bank The Housing Bank for Trade & Finance Arab Bank

1,903,500 2,216,640 2,340,657 2,594,185 2,957,021 3,076,319 3,137,495 3,371,619 9,708,545 41,029,012

Source: CPI Financial

Top 10 Banks by Revenue (USD ‘000) Arab Jordan Investment Bank Capital Bank of Jordan Bank Al-Etihad Jordan Ahli Bank Bank of Jordan Jordan Kuwait Bank Cairo Amman Bank Jordan Islamic Bank The Housing Bank for Trade & Finance Arab Bank

98,083 106,580 127,391 169,022 176,616 180,395 186,092 189,673 488,391 1,908,360

Source: CPI Financial

Top 10 Banks by Net Profit (USD ‘000) Jordan Commercial Bank Jordan Ahli Bank Arab Jordan Investment Bank Bank Al-Etihad Jordan Kuwait Bank Bank of Jordan Cairo Amman Bank Jordan Islamic Bank The Housing Bank for Trade & Finance Arab Bank

22,224 32,204 32,701 40,667 55,588 56,506 58,065 68,717 175,921 442,123

Source: CPI Financial

BANKING LANDSCAPE

Being placed in a challenging environment does not isolate banks from these spillover effects. Although they have benefitted from gradually improving operating conditions, the hurdles are still present. Heightened political risk, weak external finances despite falling oil prices and continued cont. overleaf

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25 20/10/2016 14:56

COVER STORY

concern over the country’s public finances have adversely impacted the country’s banking sector.This is evident from a special review report from Fitch Ratings in May, which conveyed a negative outlook on the market segment.

Jordanian banks in general have high exposure to domestic sovereign debt or sovereign credit exposures, which significantly increase the correlation between the banks and their operating environment. Nevertheless, Jordanian banks have continued to demonstrate healthy liquidity, adequate capital ratios and resilient profitability. Total credit facilities extended by banks rose 9.5 per cent in 2015, which was mainly driven by government lending as part of the government’s investment drive.

Photo credit: Waj/shutterstock.com

cont. from page 25

A brighter outlook on Jordan as the World Bank expects deficits to narrow in 2017.

Low oil prices are bolstering the country’s fiscal and current account position as an oil and gas importer, while consumption and industrial competitiveness are also improving. Nonetheless, Jordan’s debt burden is still high and expenditure pressures remain substantial, despite ongoing external support. — Moody’s Liquidity remains healthy with an average loans-to-deposits ratio of about 70 per cent, which is expected to be maintained given banks’ stable domestic funding base and projected slow credit growth in 2016. Banks are largely funded by customer deposits and deposits are more granular than in the GCC, with a higher proportion of retail deposits. Capitalisation is adequate with a sector-average capital adequacy ratio of 18.5 per cent at end-1H15, which should be viewed in light of the banks’ high concentration risk, the still tough operating environment and zero risk-weighting on government securities. The growth of the banking sector this year is expected to be more sluggish than the last on the back of slow credit growth due to cautious risk appetite.

Jordan’s banking system is large and has high overseas exposure, mainly in the MENA region, resulting in increased systemic risks and a risk of contagion given

26

weaker operating conditions in some of these countries.

Moody’s in a report earlier this year suggested that new regulatory and structural reforms, including the establishment of a credit information bureau and the ongoing rollout of Basel III capital and liquidity frameworks, will strengthen the resilience of the country’s banking sector. This is in addition to the improving asset quality as banks are adequately tackling legacy problem loans while provisioning coverage. However, credit risks remain high due to rising household indebtedness and high sector concentrations, especially to the Jordanian Government. Modest growth in risk-weighted assets and some profit retention will support solid capitalisation that compares well with peer countries.

CAPITAL MARKETS

Jordan has recently issued its inaugural local currency Sukuk to a threefold oversubscription. The amortised Ijarah-based Sukuk has a tenor of five years and expected profit rate of 3.01 per cent. The Sukuk raised JOD 34 million ($47.9 million) maturing in 2021, auguring well for the Kingdom’s full-fledged four Islamic banks, providing them a badly needed tool to manage their excess liquidity (estimated to be JOD 1.4 billion).

Prior to that, the Central Bank of Jordan (CBJ) launched is its first Individual Savings Bonds issue. With a stipulated issue date of 3 July 2016, the five-year bonds will mature on 3 July 2021 and offer a coupon of 4.25 per cent, payable in two equal semi-annual payments. The CBJ had announced cont. on page 28

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COVER STORY

cont. from page 26

the first issuance of Individual Savings Bonds in May and accepted bids totalling JOD 27,947,900. The bank later in July made a commitment for a second issuance in 2016.

On the equity side, the total value of shares that were bought by non-Jordanian investors at the Amman Stock Exchange (ASE) since the beginning of the year until the end of September 2016 was JOD 388.1 million, according to a statement by the exchange. This represents 23.9 per cent of the overall trading value, while the value of shares sold by them amounted to JOD 268.2 million. As a result, the net of non-Jordanian investments showed an increase of JOD 119.9 million, compared to a decrease by JOD 4.4 million for the same period of 2015. Non-Jordanian inventors’ ownership in companies listed at the ASE by end of September 2016 represented 48.7 per cent of the total market value, 38 per cent for Arab investors and 10.7 per cent for non-Arab investors. At the sector level, the non-Jordanian ownership in the financial sector was 55.3 per cent, in the services sector was 22.4 per cent, and in the industrial sector was 48.8 per cent.

CROSS-BORDER PARTNERSHIP

The Jordan Securities Commission (JSC) earlier this year signed a new partnership agreement with Abu Dhabi Global Market (ADGM) to enhance regulatory cooperation and foster cross-border activities between the two countries.

The Financial Services Regulatory Authority (FSRA) of the ADGM and JSC signed an MoU establishing a framework for both authorities to co-operate on supervisory matters and exchange of information to maintain the stability and well-being of the financial systems in each respective capital market. The MoU establishes a framework for assistance, regulatory information exchange and co-operation in supervising and overseeing the compliance of financial institutions with their respective legislations. The agreement enables JSC and FSRA to promote the integrity, efficiency and financial soundness of their markets through effective regulation, and robust supervision of cross-border transactions in both jurisdictions.

Separately, the UAE’s Ministry of Finance recently signed an agreement on the avoidance of double taxation and tax evasion on income with Jordan. The agreement aims to enhance joint cooperation in economic and tax fields, and encourage investment activities and trade exchange between both countries.

OUTLOOK

The prospects for Jordan may seem bleak, but there is still hope for a brighter future. In their most recent world economic outlook released early October, the IMF projected Jordan’s GDP to grow by 2.8 per cent in 2016 and 3.3 per cent in 2017,

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Jordan’s GDP to grow by

2.8

% in 2016 and

3.3

% in 2017

Economic growth is expected to remain at

2.3 % 2.7 % 3.1 %

in 2016,

in 2017 and

in 2018

while the World Bank said the Kingdom’s economic growth is expected to remain flat at 2.3 per cent this year, 2.7 per cent in 2017 and improve in the medium term to 3.1 per cent in 2018.

Should there be no further deterioration of security spillovers, the World Bank expects confidence in the macroeconomic framework to strengthen due to the EFF agreement. Furthermore, pressures on the external account are expected to subdue as of 2017 with a pick up in exports and investment, due to diversification efforts and the opportunities afforded by simplifying the EU’s rules of origin and energy supply diversification plans, as well as stabilisation of remittances and travel receipts.

Despite expectations of higher oil prices and resulting higher energy imports, the World Bank expects Jordan’s current account deficit to narrow in 2017. The international financial institution urged for speedy implementation of planned reforms related to the labour market. Jordan’s external position would face further pressure if expected grants and concessional financing fail to materialise. Thus improving the investment climate and unlocking access to finance are vital for stimulating economic activity and improving welfare.

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20/10/2016 14:56

11th Islamic Business & Finance

Awards 2016

Excellence through innovation Rewarding pioneers in Islamic finance

23rd November 2016 The Godolphin Ballroom, Emirates Towers Hotel, Dubai 7pm cocktail reception followed by dinner and the awards ceremony

SUPPORTED BY:

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Falcon Private Bank confident despite FINMA and MAS rulings Bank is penalised by both financial authorities and has Singapore licence evoked

F

alcon Private Bank has had penalties issued against it by the Swiss Financial Market Supervisory Authority (FINMA) and the Monetary Authority of Singapore (MAS). The two authorities completed their investigations around Falcon Private Bank’s involvement in the 1MDB case and have notified the Bank about their decisions. Both authorities found that Falcon Private Bank Ltd. had seriously breached money laundering regulations (AML) by failing to carry out adequate background checks into transactions and business relationships associated with Malaysian sovereign wealth fund 1MDB which were booked in Switzerland, Singapore and Hong Kong.

FINMA has ordered Falcon Private Bank to release its illegally generated profits amounting to CHF 2.5 million, and banned the bank from entering into business relationships with foreign politically exposed persons for a period of three years. Furthermore, the bank could have its licence withdrawn in the event of any further breach.

30 page 30-31 Special Report.indd 30

FINMA has also launched enforcement proceedings against two of the bank’s former executives.

In addition, the Monetary Authority of Singapore (MAS) announced that it is withdrawing the merchant bank status of Falcon Private Bank Ltd, Singapore branch (Falcon Bank) for serious failures in AML controls and improper conduct by senior management at the head office in Switzerland as well as the Singapore branch.

In a statement, Falcon Private Bank and its shareholder Aabar stated that they welcome the completion of the investigations and plan to focus on building the Falcon Private Bank franchise going forward.

“With its committed staff, strong capital base and high liquidity ratio, Falcon Private Bank will now concentrate on further growing its franchise,” read the statement. “Safeguarding the Bank’s reputation and the adherence to all laws, regulations and rules is of highest importance to Falcon Private Bank and its employees. Since 2013,

the Bank has further enhanced its compliance, invested in additional resources as well as reviewed the organisational setup and relevant processes. Furthermore, based on the findings of the regulators, Falcon Private Bank has initiated additional measures to prevent future issues.”

Falcon’s management stated that although the withdrawal of the Singapore banking licence was ‘regrettable and disappointing’, the decision would be unlikely to impact the strategic development of the Bank. Falcon Private Bank says that it is committed to finding optimal solutions for all parties involved and guaranteeing an orderly wind down of the Singapore operation.

“We have been in close collaboration with the regulators and welcome that the 1MDB case has been closed with the regulators. Falcon Private Bank adheres to all rules and regulations, is well capitalised, enjoys a strong balance sheet and the full support of our shareholder Aabar. The Bank will now focus again on growing our businesses in the core

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19/10/2016 17:24

locations Switzerland, Middle East and London. We are highly confident of our expertise to create a long-lasting, positive customer experience,” said Walter Berchtold, Chief Executive Officer of Falcon Private Bank.

FINMA INVESTIGATION

FINMA launched enforcement proceedings against Falcon Private Bank Ltd. at the beginning of 2016, based on allegations that the Bank had breached Swiss money laundering regulations during its business relationships and transactions in the context of the alleged corruption scandal surrounding the Malaysian sovereign wealth fund 1MDB. An investigating agent appointed by FINMA analysed the transactions, internal processes and the bank’s control organisation.

“In the period under investigation between 2012 and the summer of 2015, FINMA identified serious shortcomings in Falcon’s anti-money laundering activities and in risk management. Assets amounting to approximately $3.8 billion were transferred to accounts at Falcon and associated with the 1MDB Group during that period. These funds were generally moved on quickly. The business relationships and transactions booked in Switzerland and at Falcon’s Singapore and Hong Kong branches were unusual and involved a high level of risk for the bank both through their nature and the amounts transacted. Although management’s attention was drawn to these matters, it repeatedly failed to properly investigate the business relationships, specifically those with politically exposed persons (PEPs), and high-risk transactions; it also failed to adequately analyse or monitor the risks involved,” according to a statement

by FINMA. Falcon had a number of business relationships with domiciliary companies within the 1MDB Group, according to the statement, and executed transactions amounting to approximately $2.5 billion

via the accounts of two of these offshore companies. FINMA states that the bank failed to adequately check the background and risk profile of these complex transactions in sufficient depth.

“The issues surrounding 1MDB form one of the largest cases of suspected corruption in recent times. The global financial system has been blatantly misused. Suspect financial flows in the billions have been shifted through banks of multiple nationalities and financial centres on three continents, and warning signals ignored,” said FINMA CEO Mark Branson.

Falcon also had a client relationship with a young Malaysian businessman with links to individuals in Malaysian government circles, according to FINMA. The bank did not verify how this individual had been able to acquire assets of $135 million in an extremely short period of time or why a total of

of SGD 300,000 for these breaches. MAS then instructed the merchant bank to strengthen its AML controls. Falcon bank did not manage to do this, leading to the 2015 inspection uncovering an even larger number of regulatory breaches, as well as serious failings on the part of head office senior management and the Singapore Branch Manager.

The conduct of the Singapore Branch Manager and certain senior managers at the Head Office were also called into question and MAS ruled that they had impaired the effectiveness of the Singapore branch’s compliance function in discharging its responsibilities.

“Their interference was wrongful and egregious in nature, and contributed to substantial breaches of AML regulations.

MAS has been informed that the Singapore Branch Manager, Jens Sturzenegger, has been arrested by the Commercial

The Bank will now focus again on growing our businesses in the core locations Switzerland, Middle East and London.

— Walter Berchtold, Chief Executive Officer of Falcon Private Bank $1.2 billion was transferred to his accounts at a later date—a transaction which was clearly at variance with the information he had provided when opening the account. Falcon also failed to adequately investigate the commercial background to pass through transactions amounting to $681 million and the repayment six months later of $620 million via these accounts despite conflicting evidence.

MAS INVESTIGATION

MAS conducted inspections on Falcon Bank in 2013 and in 2015. The 2013 inspection found weaknesses in the bank’s controls for client acceptance and transaction surveillance that led to breaches of MAS’ AML requirements, according to a statement by MAS. After the initial investigation, Falcon Bank was found guilty and paid a composition fine

Affairs Department on 5 October 2016,” according to the MAS statement. “Falcon Bank has demonstrated a persistent and severe lack of understanding of MAS’ AML requirements and expectations. Taking into account the totality of Falcon Bank’s conduct, MAS’ assessment is that the merchant bank will be unable to comply with these requirements and expectations going forward.”

Due to the above breaches, MAS imposed financial penalties amounting to SGD 4.3 million for 14 breaches of MAS Notice 1014 on Prevention of Money Laundering and Countering the Financing of Terrorism, on Falcon Bank.

MAS is currently working closely with FINMA, the home regulator of Falcon Private Bank Ltd, to oversee an orderly closure of the merchant bank branch in Singapore.

www.bankerme.com

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31 23/10/2016 16:57

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9/7/16 2:09 PM 07/09/2016 14:17

PRIVATE EQUITY

Survival of the fittest Tushar Singhvi, VP Corporate Development & Investments at Crescent Enterprises provides his views on how private equity firms can maintain a sense of control in GCC’s changing business landscape

T

he GCC is entering a period of change, indicators suggest that a combination of sluggish demand for oil, and a shift towards renewable energy resources will keep the price of oil uncertain over the next few years. While GCC economies are able to withstand the effects of low oil prices in the short term, with the backing of healthy reserves and well-provisioned sovereign wealth funds, governments are accelerating the search for alternative revenue streams. Effectively, the question currently being asked is, ‘how can GCC governments continue to build a sustainable future while successfully diverting away from their reliance on oil as their dominant source of revenue?’ This presents a direct opportunity for the private sector to ride the diversification bandwagon and benefit greatly from the region’s growing investment appetite.

According to the MENA PEA Annual Private Equity & Venture Capital report, 2015 was a solid year with the number of investments increasing from 72 (in 2014) to 175. In 2016, private equity firms have so far been confronted by unique opportunities and challenges as a result of the transforming economic climate. At the moment, the most lucrative areas for private equity firms in the GCC are the defensive

34 page 34-36 Private Equity.indd 34

Tushar Singhvi

sectors—from fast-moving consumer goods, to sectors including healthcare, real estate and education, correlating with the growing population and its constant demand for these goods and services. There is significant growth in technology venture capital investments with the number of deals more than trebling as an evolving technology driven and entrepreneurial ecosystem continue to attract the interest of investors. Further, with the help of favourable government reforms and

lowering barriers to entry, private equity firms will look to gain entry into industries that have significant growth potential, such as transport infrastructure, information and communication technology, financial services and manufacturing.

As anyone active in the private equity space would agree, these sectors are only as lucrative as the value they hold for investors. Value creation has become sacrosanct as new market forces such as slower economic growth,

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19/10/2016 17:01

tightening of the credit markets and industry consolidation have come in to play. Long gone are the days when private equity firms could create value simply through multiple arbitrage and leverage. As a result, operational improvement, on both the cost and revenue sides of investee companies is now the main source of value created by private equity. This is just as relevant in the GCC’s diversification context, where value creation is affected by factors including a high prevalence of family businesses that work with a unique set of business dynamics, restrictive government regulation and other unfavourable goings-on in the region.

Consequently, with no cookiecutter approach that can be applied to realising operational alpha, private equity firms are experimenting with a variety of models, each defined by the internal operational value infrastructure created by the firms.

With over

85

%

of the region’s businesses being family-owned, there are fewer businesses open to diluting to third party capital and having a lesser degree of control

astutely addressing and mitigating tax liabilities. Properly executed financial engineering should support effective development and broadening of a portfolio company’s opportunity set: from geographic expansion, to platform acquisitions, and even to dividends for owners as deal-specific events warrant.

Value creation has become sacrosanct as new market forces such as slower economic growth, tightening of the credit markets and industry consolidation have come in to play.

— Tushar Singhvi And so the question at hand is how corporates and private equity management teams create value across different investment strategies?

Private equity firms typically generate returns in three ways—through financial engineering, operational engineering, and governance engineering.

FINANCIAL ENGINEERING

Financial engineering encompasses a sleeve of different strategies, including using debt to finance the investment, changing the capital structure of the investee company in addition to

However, in the aftermath of the financial crisis and despite the low interest rate environment, regulatory curbs on leverage have resulted in the drying up of bank financing for leveraged buyouts. Multiple arbitrage, another commonly used lever for value creation by private equity firms, has also become very challenging to achieve with rising valuation multiples, fueled by intensified competition due to record high levels of dry powder.

The average enterprise multiple (EV / EBITDA) for acquisitions in the period 2010-2015 was 10.6 in comparison to

8.9 in the preceding five years, so the ‘buy low, sell high’ mantra is becoming increasingly difficult to achieve. Hence, the impact of financial engineering on overall returns and value creation has diminished significantly over the last few years and with continued low levels of debt and high acquisition premiums, this trend is expected to continue in the short to mid-term.

In the regional context, given leverage was never widely available for transactions, operational engineering, and governance engineering remain the key tools for value creation in the MENA Region. With over 85 per cent of the region’s businesses being familyowned, there are fewer businesses open to diluting to third party capital and having a lesser degree of control. This, compounded by an increased gap in valuation expectations, has resulted in a huge amount of dry powder chasing a smaller number of deals, driving up asset valuations and hence diminishing value creation opportunities through multiple expansion.

OPERATIONAL ENGINEERING

This involves enhancing the fundamental value of a business, as reflected in a growth of earnings.

This can be achieved through professionalisation of management, the introduction of best practises, successfully accessing new markets, the scaling up of business footprints and reach, the streamlining of processes and the generation of cost efficiencies. However, the relentless focus on cost cutting in response to the financial crisis making companies much leaner means that there will be fewer ‘quick wins’ available for bottom-line operational improvement.

As a result, the ability to generate operational value will increasingly depend on a firm’s ability to develop and grow the business and improve the top line of its portfolio companies. cont. overleaf

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35 19/10/2016 17:01

PRIVATE EQUITY

cont. from page 35

To achieve this task, private equity firms have been adopting a variety of operating models, ranging from building internal operational capability either by getting functional operating partners on board or building entire operating teams with functional and sector-specific expertise within the firm; or models which rely on a network of external advisors to provide leadership on operational value creation.

Given the muted outlook for global economic growth, delivering value accretion through operational engineering presents a stiff challenge.

A BCG study estimates that in order for an investor to yield an internal rate of return of 25 per cent in the current market environment, the business will have to deliver an average annual growth in earnings before interest, taxes, depreciation and amortisation of 11 per cent. Successfully creating operational value through this approach also requires a new kind of partnership between general partners/investors, operating personnel and the company management, which would involve increased professionalisation, new ways of teaming, with more explicitly defined roles and responsibilities.

GOVERNANCE ENGINEERING

Governance is equally important and includes improving corporate governance practises and strengthening the management of the firm through active engagement and providing best practises with a long-term focus. Steps to achieve this include but are not limited to: establishing a strong and independent board structure supported by strong committees, ensuring transparency, ethical business conduct and integrity, and most importantly, devising objective incentive schemes through stock options and other performance linked instruments to ensure full alignment and to be used as a

36 page 34-36 Private Equity.indd 36

tool to motivate management to achieve the long-term business objectives.

While firms usually do not prioritise corporate governance, this should be an integral part of their plans for several reasons. Firstly, by ensuring transparency, open lines of communication and integrity, the firm will look more attractive to investors and promotes market confidence.

Secondly, it mitigates risk and can well be the difference between the success and demise of a business, preventing fraud and sustaining the enterprise value of a business.

Good corporate governance leads to more efficient management, a lower cost of capital, better asset allocation and greater efficiency improvements.

prefer short-term cash bonuses, which makes aligning their incentives with long-term goals difficult. Furthermore, Moody’s recently downgraded three GCC country’s sovereign reflecting the lack of clarity around specifics and/or implementation risks in response to the oil price shock; further proving the need for institutions to place corporate governance high on their priority list.

STAYING AFLOAT

The business culture of the GCC is also critical to the future of private equity.

An important aspect to consider is the dominance of family run businesses in the region. While many of these businesses will soon be passed down to the next generation, the current drop in oil-prices

Firms that can quickly and effectively transition from thinking as acquirers to executing like value creators will be able to unleash the alpha that will increasingly separate the winners from the losers. — Tushar Singhvi, VP Corporate Development & Investments at Crescent Enterprises Creating a robust corporate culture from the top down results in the firm being more sustainable over time, simultaneously teaching the younger generation the importance of trustworthiness as a pillar for success in the world of business.

With regards to achieving corporate governance, the biggest challenge in the GCC is the less developed capital markets infrastructure and legal institutions for financial transactions, which undermines the enforceability of contracts. Due to limited experience with equity-linked compensation in the region, the complex tax implications in some jurisdictions, as well as the absence of large, liquid public markets to fairly value such instruments, these compensation structures are not popular. Managers continue to

could lead to certain percentages of these firms being sold as families might prefer liquid assets. If this is the case, private equity firms could take the opportunity to obtain shares in previously unattainable markets controlled by these family conglomerates.

The complexity of transitioning from financial engineering to operational improvement and more effective governance engineering in value creation will require firms to adapt to the evolving market environment, professionalise their management processes and change practises that are no longer effective. Firms that can quickly and effectively transition from thinking as acquirers to executing like value creators will be able to unleash the alpha that will increasingly separate the winners from the losers.

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20/04/2016 11:26

SMEs

The unsettling lack of financial aid for SMEs Markus Massi, Partner & Managing Director of BCG Middle East, highlights the pivotal role of banks in unlocking SME growth in the GCC

T

oday, around the world, small and medium-sized enterprises (SMEs) play a critical role in their countries’ economies. In fact, they often serve as powerful catalysts for job creation and economic development. In the Middle East, specifically, SMEs have made comparatively low economic contributions in past years, but are forecasted to become a main driving force as economic diversification efforts unfold. In the GCC, the SME sector is steadily diversifying, which means that SMEs will be fundamental in developing the regional economy across more innovative sectors.

In the United Arab Emirates, SMEs are estimated to contribute about 36 per cent of the GDP, and in Saudi Arabia they up make about a 20 per cent contribution. While these figures might seem relatively low compared to those of more mature economies— such as Germany’s, where 54 per cent of the GDP is owed to SME activity, or Singapore’s, where 51 per cent is SME-generated—these numbers are expected to rise in the coming years.

Nonetheless, despite their significant contribution to the regional economy, there is no denying that SMEs face major challenges in obtaining the resources that they need to reach their full growth potential.

38 page 38-40 SMEs.indd 38

Markus Massi

Primarily, a shortage of financing hinders SME development in the GCC. In the UAE, only about four per cent of commercial loans are given to SMEs and in Saudi Arabia, SMEs typically receive a mere two per cent. Compared to developed and emerging markets, where about 14 per cent of commercial loans are given to SMEs on average, these GCC figures paint a rather bleak picture of the sector’s financial barriers.

Moreover, in general, SME owners in the GCC have low levels of business education and sometimes even a lack of financial competence, which, coupled with limited access to accounting software, generates real obstacles when it comes to managing

the business financials—especially when they are required to submit convincing applications for loans and financing to banks.

Essentially, banks tend to be prudent in their decisions to fund SMEs which, compared to larger enterprises, pose higher financial risks. As a result of insufficient funding, many SMEs must rely on friends and family for basic financial support, particularly in their early stages.

Even when afloat, to continue to grow, SMEs must secure the funds needed to embrace technological evolutions. The reality is, in this day and age, there is an undeniable correlation between the aggressive adoption of new technologies and strong business performance among SMEs. In short, the companies that stay ahead of mainstream IT adoption are the companies that lead the SME sector. And since SME prosperity boosts economic prosperity to a large extent, governments and financial institutions must prioritise the empowerment of SMEs to make full use of their resources in favour of adopting the latest technologies.

Across the GCC, strides towards this end are already being taken.

Of course, it certainly helps that embarking on an entrepreneurial journey is, today, more widely accepted among GCC communities. cont. on page 40

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Sources of SME financing % of surveyed SMEs 100% 88 80% 60% 40%

5

5

4

2

2

Bank loans (Islamic)

Angel investors

VC investors

Loan guarantee fund

Leasing

Family and friends

0%

loans, as well as faster loan approval times. They should also consider digital offerings where they combine financial products with non-financial advice and support in the form of training, software access, business networks, and the like, as banks in well-developed economies (like those in Europe) have done.

Looking ahead, there is significant potential to intensify the relationship between financial institutions and the SME sector, especially with the support of well-targeted government programmes, such as loan guarantees or government-sponsored initiatives.

To further assist SMEs, banks must expand their product offerings, to include leasing offerings and the like, and they must tailor their existing products to meet SMEs’ specific needs.

— Markus Massi, Partner & Managing Director of BCG Middle East Despite these efforts, however, SMEs are still having trouble securing the funds they need to get off the ground.

Why? Because historically higher default rates are holding banks back from fully investing in the region’s SMEs. To further assist SMEs, banks must expand their product offerings, to include leasing offerings and the like, and they must tailor their existing products to meet SMEs’ specific needs. For example, they could provide more flexibility and less stringent rules on submissions for

But to truly reap the economic benefits of SME growth in the region, the multiphased solution boils down to this: banks must review their models with a cost-toserve approach, offer innovation services that leverage digital technology, have a streamlined web browser interface and loan submission process in place, be equipped with an enhanced riskassessment framework and ensure that loans can be pre-approved in real time.

Banks will not just have to act on this, but also act fast.

Source: BCG

Above everything else, over the past ten years, the banking space has been severely disrupted by new fintech players that offer leaner and more specialised services mainly in cross-border transaction banking, trade finance, foreign exchange and SME financing. In line with this, SME funding via fintechs is slowly becoming a growing trend.

In addition to low costs and strong data analytics, the vast appeal of fintechs lie in their ability to rely on digital platforms to ensure end-to-end business value, provide a truly differentiated business model and guarantee a personalised customer experience.

That is precisely what has allowed the fintech market to become a hotbed of customer-centric banking innovation—beyond providing pure financings.

Today, SMEs in the GCC have diverse financial needs that must be met in order for them to achieve their innovation capacity, meet their growth targets, and thrive in a fiercely competitive marketplace. And with the right strategy, banks can remain ahead of the curve and position themselves as instrumental to helping SMEs reach these very objectives. Fintechs can even be an ally in this quest as banks can partner up with these companies to provide a better value proposition and speed up the go-to-market time.

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page 38-40 SMEs.indd 39

1 Other

11 Bank loans (conventional)

25

20% Personal sources

This in turn has prompted governments in the region to become progressively more active in their interventions to push the SME agenda. However, current backlog of government projects and a strained liquidity situation are harming SMEs, as they do not have a financial buffer in place.

This is where banks’ support comes into play.

Some banks in the GCC have already taken important steps—ranging from providing tailored loans that meet SMEs’ precise requirements to creating leaner processes for loan applications— designed to spur the growth of the SME segment. Investment activities (PE and venture capital) are primarily focusing on SMEs, specifically to tap into their potential and to cover existing financial gaps. Banks are also beginning to educate their own sales forces to support SMEs in identifying the right products for them, which are usually cash loans.

Furthermore, some banks are providing business training and assistance to their SME clients to help support them in managing their financial affairs and their business in general.

39 23/10/2016 17:00

ADVERTORIAL

Banking on IP Video Roy Alves, Business Development Manager, Middle East and South Africa, Axis

Banking institutions

Given the critical importance of back-office activity in support of brokerage offices and banking business, risks and threats to security of the premises are always lurking in this area too. It is equally important to ensure a secure and efficiently functioning environment for managers, staff and visitors on the premises. In this case Axis solutions allow you to select the right level of monitoring for all different needs, from perimeter surveillance to main entrance monitoring and control of all access points. In particular, to ensure better control, it is possible to integrate video systems with alarm systems and access control in various parts of a building, such as executive management offices and trading areas.

Branches

Roy Alves

T

echnology evolves at a faster pace every day. And with every new step financial institutions take—from adding more ATMs and self-service stations to enabling mobile banking—criminals try new ways to circumvent security measures. The high demands for reliable security systems are valid for all of these areas, but depending on the location there are different specific challenges that put different demands on the security system. Being able to rely on dependable video surveillance systems that are able to easily and successfully identify faces and objects thus becomes crucial. In this context, the high definition images that only digital cameras can supply is an absolute must.

40 page 40 Axis Advertorial.indd 40

Branches are today facing numerous challenges and threats, from robberies perpetrated in the most inventive ways to vandalism and fraud, while at the same time ensuring a high-quality service to customers in terms of security. Axis, for example, is developing perfect solutions for improving security, efficiency and quality of service through multi-view streaming and 360° panoramic cameras.

IP cameras are also equipped with WDR (Wide Dynamic Range) technology, an innovative feature that can cope with backlighting produced by reflecting surfaces, and which guarantees excellent results even in critical lighting situations. For secure recognition of people who come into the branch, WDR cameras, along with ultra-discreet cameras mounted at eye level, allow you to get perfect images to accurately identify anyone entering or leaving a particular area.

Finally, a perfect solution for banks that want to start a gradual migration towards fully-digital solutions are video encoders that can connect to your existing video surveillance equipment to allow you to immediately enjoy the benefits of IP technology.

Data centres

Although data centres are not concerned with cash or customers, they are true nerve centres for the entire organisation, so requiring surveillance that is reliable, continuous and permanent. Network video solutions ensure seamless management of data through strict access control and general surveillance of the internal and external environments. The special Corridor Format display format of Axis cameras favours areas with vertical rather than horizontal orientation, such as corridors and aisles, ignoring video data not required and thus helping to save bandwidth and storage space.

A perfect solution for these integrated management systems for video data, access control and intruder alarms that allow you to capture high-resolution images from every point of entry and exit to provide visual identification and detect possible security threats. Moreover, with Axis Zipstream compression technology, you can save significant bandwidth and storage space for all recordings and transmissions of video data while Lightfinder technology allows you to obtain superior detail and ideal colour rendering even in dimly-lit areas such as server rooms.

Cash deposits

Cash deposits are a tempting target for thieves, but also for employees. A video surveillance solution with integrated alarm system and high-quality recording allows for full control of the area, making it particularly secure. HDTV technology and megapixel resolution also enable better colour rendition, sharper images and fine details so that it is possible to use the video information to document the handling and management of cash and to perform quality control. Vault security is also very important. Therefore, ensuring accurate video surveillance is essential to meet the requirement for security for the customer who is alone in the area and might need help in case of illness.

With Axis network video solutions, you can add more functionality at your own pace—from encoders and cameras to proactive security measures and video intelligence. You can also connect Axis solutions with other IP based systems, such as fire alarms and access control systems.

www.bankerme.com

24/10/2016 09:52

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20/10/2016 18:13

IN-DEPTH

Creativity in financial engineering Norman Villamin, Chief Investment Officer, Private Banking, UBP, speaks exclusively to Banker Middle East on how private banks are distinguishing themselves today and the current state of the market

Norman Villamin

W

hat are your views on private banking in the Middle East market?

We are global investors and we invest around the world in both equity and bond markets. On the private side the more interesting deal that we have done recently is a transaction involving A380s with one of the big airlines in the region, which

42 page 42-43 In Depth.indd 42

garnered substantial interest from our clients. From this transaction, we learnt that it’s about looking at our clients in the region and seeing what type of opportunities they are looking for. As you can imagine in this current environment there is a lot of interest in not only yield, but what I would characterise as high-quality yield. This mainly means that there is low default risk and there is not a lot of volatility in the underlying price of the asset.

Historically we would have bought very safe assets such as government bonds—in fact even the highest quality corporate bonds would have done that for you—but as we know today, because yields are so low due to issues such as quantitative easing and a lot of other policies, investors have had to move in other directions, such as taking higher credit risk for high yields for example, or they going into areas where traditionally investments have not gone. And I think the participation in the lease of A380s with a creditworthy company is an example of this.

I do think being innovative is part of it, but also knowing your clients. There are many ways to use financial engineering in structuring products and I think that is one aspect of it [knowing your clients].

Finding different structures attractive to clients while meeting their needs is important but understanding clients, and the kinds of risk and opportunities they would take, is really where private banks are distinguishing themselves today. It’s not the plain vanilla mix of having some stock and bonds, clearly we have to do that, but on top of that we have to be creative and innovative in identifying other non-traditional opportunities.

What is your outlook on asset classes for the coming year?

We currently have a lot of investors looking for safety in yield and as a result things like high-performing corporate bonds and anything with a reasonable amount of yield has done well so far. This includes high-quality corporate bonds and high-yield bonds in the developed markets. Emerging market bonds on the other hand are slightly more risky.

High-yielding equities, traditional safe names as well as REITs’ are doing quite well. However, one of the interesting things happening right now is the valuation of those assets—they are no longer as attractive. If you look at the investment grade bond space, the spread is now below where it usually is.

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We are not at the lows we saw prior to the crisis, but investors are no longer being overcompensated beyond that risk as compared to the beginning of this year.

In the equity markets you can see the low volatility names and many strategies promising people a little bit more safety at a higher price. In terms of how much higher it has become, the last time we saw this spread between low volatility companies and high volatility companies has been in 20022003, immediately after the bursting of the tech bubble, where people exited anything related to dotcom and scrambled to safe assets. We are seeing a similar scenario today.

What is your opinion on equities in emerging markets and how does it compare with this region?

I would put this region in the broader emerging market bucket. I have been looking at emerging markets since the early 1990’s so I have seen many different cycles. When you speak to people in the US or Europe, the first reaction would be that they are all risky and not entirely interesting.

When you talk about consumer staples, those type of stocks are viewed as very safe and not risky, buy yet again the market is not really rewarding you because those sectors are very expensive. The same goes for this comparison between emerging markets and developed markets such as US, Japan and Europe. The perception is emerging markets are very risky and developed markets are safer but if you look at the average company in developed markets, they will roughly generate a return on equity of 10 per cent—which is reasonable.

If you look at the average company in an emerging market, they will also generate a return on equity of 10-11 per cent, which is about the same. However the difference today is, if you’re an

investor in emerging markets, you will pay on average a 30 per cent discount for that 10 per cent return compared to what you would have to pay in a developed market.

So again yes, perception is more risky but the returns are similar and at a discount. So the trend in the West is that people are overpaying for perceived safety and underpaying for this perceived riskiness and we see the same in this developed versus emerging market comparison.

Therefore we actually quite like emerging markets. The best performing emerging markets have been the likes of Asia and Brazil just because they had such a bad time last year.

but again you are paying a discount for the same kind of return plus the added advantage of the economies momentum going in your favour.

What is your economic outlook on Q4 and what does 2017 have in store for us?

If we look at trends, the US in 2009 had a peak in employment. If you look at average hourly wages in the US after the crisis, high-end employment was slowing down in terms of growth until 2010-2011 and stabilising only in 2013 -2015 with a gradual acceleration. We have seen a slower but normal recovery dynamic in the US and we think that continues into next year.

Finding different structures [that are] attractive to clients while meeting their needs is important but understanding clients, and the kinds of risk and opportunities they would take, is really where private banks are distinguishing themselves today.

— Norman Villamin But where we are starting to see value, the momentum would be in Asia because these economies started from the bottom and they are not going to reaccelerate very rapidly, particularly in China, India and Korea.

After slowing for two to three years, the economies are at the bottom and starting to pick up.

Initially some of these countries are starting to see inflation rollover.

Some were realising their currencies were weakening and inflation started to come down. What that means is the central bank in these countries will see inflation coming off in 2017 and interest rates being cut and ultimately begin to see earnings increase. So from that perspective we think there will be a recovery of the emerging markets and it will not be a big boom market,

The fed raises its rates in December 2016, which we do not think will be a very rapid rise as we move into 2017, but enough to take off what I call the froth in the economy moving forward.

We think the US economy is starting to reaccelerate where it will do about 2.4 per cent this year and maybe a little bit better in 2017.

The challenge is that the global economy keeps getting surprised with shocks that are forcing policy makers to be agile and give support when in need for example when the Bank of England came in very aggressively after the Brexit vote. Generally speaking, central banks within the course of the year have lost a little credibility because markets are uncertain about what they are trying to do and what tools they are going to use.

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IN-DEPTH

The value of healthcare investments In turbulent times, many firms make exits, scrambling towards safer pastures. Karim El Alaoui, Managing Director at Boehringer Ingelheim Middle East, Turkey & Africa evaluates of the buoyancy of pharmaceuticals in the region

S

ince the plunge in oil prices, the world economy started seeing relatively high levels of volatility across the board, triggering a slowdown in global growth. It is at times like these investors seek to rebalance and diversify their portfolio in a bid to manage and mitigate potential risks. When it comes to alternative investments, many tend to prefer the classics—financial instruments (hedge funds, managed futures, derivative contracts, etc.), commodities and real estate.

An increasingly popular area of investment—apart from consumer staples—has been the healthcare industry. Many wealth managers have highlighted it as one of the safest industries to be in right now. According to the latest GCC Healthcare Industry report by Alpen Capital, the UAE healthcare market is projected to reach $19.5 billion by 2020, achieving an annual average growth of 12.7 per cent.

“The GCC pharmaceutical sector is one that is both interesting and dynamic, mainly driven by two countries—Saudi Arabia (KSA) and the UAE. This landscape is due to the economic growth, demographics and prevention from diseases.

44 page 44 In Depth.indd 44

Karim El Alaoui

If you look at statistics, you will see clearly that we have high prevalence of hypertension and diabetes. So when these two diseases are projected into the future, there is commitment from the government toward the each segment, driving the dynamic we are seeing in the region. In general we are seeing commitment from all GCC Governments especially KSA and UAE, where they are actually putting it into their agenda with clear commitments of their support. An ageing population, prevention of diseases, life cycle and the commitment of the Government are driving the projection of the health sector of the GCC,” said Karim El Alaoui, Managing Director at Boehringer Ingelheim Middle East, Turkey & Africa.

Testament to this growth, the GCC market has this year witnessed Saudi Arabia’s Middle East Healthcare Company (Meahco) (which owns Saudi German Hospitals) raising $3.2 billion from its IPO in March. The IPO involved the sale of 27.61 million shares, representing 30 per cent of MEAHCO’s share capital. Furthermore, business and employment-oriented social networking service, LinkedIn also reported that more than 3,000 recent graduates are currently employed in UAE hospitals and healthcare industry, and noted that the Government is playing an important role in driving the popularity of careers in the industry.

“The Government has made it a part of their agenda to emphasise local production for pharmaceuticals and creating an environment to attract foreign investment to kickstart local production. Focusing on the two illnesses mentioned earlier—hypertension and diabetes— the WHO expects the number of patients in this region to double by 2030 increasing the need for better services,” El Alaoui added.

Apart from that, global trends that skew in favour of the healthcare sector include an increase in ageing population particularly amongst the Baby Boomers; people surviving chronic diseases for a longer period of time; obesity and diabetes epidemics; technological advancements, global reach of diseases as well as innovation in personalised medicine.

Industry projections have suggested that the healthcare and pharmaceuticals sector in this region will witness a double-digit growth compared to other European countries.

“Even with the low oil prices, GCC countries are still able to maintain a double-digit growth. Although not as strong as the past five years, we are still able to grow by about 12 per cent for the next five years in the healthcare sector.

A 12 per cent growth would be worth $71 billion by 2020,” said El Alaoui.

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23/10/2016 17:11

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14/12/2015 08:47

PAYMENTS

Staying ahead of the curve Pankaj Kundra, Head of Payments at Mashreq, paints his picture of the future in payment solutions

W

hat are your views on the development of payment solutions in this region?

The Middle East has seen an exponential growth in the development and adoption of payment solutions.

From a card being swiped at a Point of Sale (POS) terminal to complete a transaction, the geography is seeing an exponential increase in contactless tap and go payments. Financial institutions are investing in contactless technology to ease the life of a customer.

46 page 46-48 Payments.indd 46

Another area with great innovation is in e-commerce. The GCC e-commerce market is expected to grow to $20 billion by 2020 (from $5.3 billion in 2015), as online shopping grows in the region. In order to support the exponential growth in this segment, financial institutions have invested in state of the art payment gateways which allow fast and secure transactions. With one of the highest mobile phone penetration in the world, mobile payments are fuelling the eCommerce growth in the GCC.

Mobile optimised payment solutions are changing the way consumers are paying for their purchases. Payment service providers (PSPs) and aggregators are partnering with banks to allow ease of integration and encouraging smaller businesses to go online.

Mobile wallets are the next big thing in payments. Global wallets such as Samsung Pay, Apple Pay and Android Pay are set to launch next year in a few Middle Eastern markets. Banks are therefore preparing themselves for customers to add their cards on these

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19/10/2016 17:04

wallets including upgrading their POS infrastructure to facilitate these wallet payments. Apart from global wallets, banks are also working towards launching of their own wallets.

Photo credit: ESB Professional/shutterstock.com

Multi-faceted kiosks is an increasingly popular trend in the region. What important features should a payment kiosk have?

The GCC e-commerce market is expected to grow to

$20 million by 2020 from

$5.3 billion in 2015

A payment kiosk should be integrated end-to-end with the billing/inventory system of the merchant/provider. The customer should have an easy user interface where he/she can select the product/service for which they need to pay for. From a payments perspective, the kiosk should provide the most mode of payments it can such as Card Present Chip and PIN payments, as well as contactless payments (including NFC based wallets). Additionally, the security of the transaction is a key feature that will drive the kiosk use. EMV compliant, chip and PIN transactions should also be accepted.

Mashreq provides kiosk solutions to its partners. When you want to drive customer experience towards using selfservice kiosks, security is of the essence.

Merchants are also demanding secure solutions to ensure their customers are not exposed to risks. Mashreq provides EMV compliant kiosk solutions which cater to the best security standards.

Mashreq has deployed these kiosks in cinemas, where customers can buy their tickets and pay using cards; as well as with property management companies where the kiosk is integrated with the system of the company. Here, customers can log into their account, look at their bills and pay using their credit/ debit cards. The receipt contains the details of the payment made, which is a seamless experience!

Another factor which needs to be considered while deploying payment instruments on kiosks is the place where the kiosk would be deployed.

Pankaj Kundra

Considering the high temperatures in the UAE, providing specialised card readers in the kiosk to withstand the heat is key if the kiosks are placed outdoors. Â Â

What challenges do you face in the payments landscape?

The challenge to grow contactless payments is more of an eco-system challenge. The merchants/banks have to upgrade the POS network to accept contactless payments and more wallets need to develop with use cases that can become part of daily life transactions.

Banks and merchants need to increase awareness amongst customers of the secured transaction processing capability to boost e-commerce transactions.

While millennials make up the bulk of e-commerce transactions, there is still significant ground to cover when it comes to opportunities to move from cash to card and to e-commerce. Some banks have launched apps such as Card Control

by Mashreq, where the customer has the ability to manage many features such as the card limit, temporary blocking, etc, being fully empowered to control their card transactions with a peace of mind. cont. overleaf

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PAYMENTS

cont. from page 47

There is a risk of card skimming around the world and the Middle East is no exception. Acquirer banks and associations have to increase their efforts to educate merchants not to double swipe or double dip the customer credit cards on POS/ cash registers and expose credit/ debit card holders to potential risk. In many developed markets, merchants

safe and fast payments whilst providing easier reconciliation. Additionally, Mashreq is also capitalising on new terminals that are capable of accepting loyalty programmes, instant loan programmes, contactless payments as well as transactions from global wallets such as Apple, Samsung Pay and Android Pay, whenever they launch in the UAE.

Payments in the future will not happen through traditional cards but will happen through form factors such as mobile phones and wearable technology.

— Pankaj Kundra, Head of Payments, Mashreq do not even touch the customer’s credit cards during the transaction.

That is the ideal solution along with providing customer an incentive to go contactless. Mashreq endeavours to pioneer contactless payments in UAE through a solution such as ‘Tap & Go’ for credit card holders while providing platforms such as fully integrated and secured POS solutions for merchants.

What’s in Mashreq’s payment solutions pipeline?

Mashreq has been a pioneer in innovation in the payments space.

There is a great suite of innovative products which have been launched and many are lined up for launch in the coming months. Mashreq is also investing in e-commerce payment solutions with industry first features such as social media in-stream payments as well as SMS and email based payments. Interactive customer facing devices are expected to be launched by first quarter of 2017.

Mashreq has also launched specialised integrated solutions for the hospitality merchants. This integrates various points of payment such as front desk, F&B, leisure, etc—resulting in

48 page 46-48 Payments.indd 48

How do you envision the payments system of the future?

Payments in the future will not happen through traditional cards but will happen through form factors such as mobile phones and wearable technology. The mode of doing a transaction will change from swipe/ dipping a card, to contactless or e-commerce payments. The use of big data around payments will allow financial institutions to provide

relevant offers to their customers, driving loyalty and repeating purchase behaviour. Omni-channel payments will be the flavour of the future—a single payment experience to the customer whether it is online, in the shop or on the mobile.

On the issuing side, rewards or loyalty platforms will only be relevant if the redemption is seamless and frictionless. Customers will not be required to call the bank or bank partners such as airlines, telco’s, etc., to redeem their rewards but use mobile apps or at redemption to enjoy 24/7 access to their loyalty points. With investments in block chain technology picking up, crypto currencies is also something to watch out for in the future as a bedrock of payments innovation.

For a bank, self-service kiosks for payment services is the future. Banks like Mashreq have instant issuance of credit cards at branches already. With further improvements in technology, ATMs or standalone kiosks can be used to sell banking products such as credit cards which traditionally take a few days to deliver to the customer.

Most interesting innovations in the market: The most interesting innovations are in the contactless space, eCommerce payments, mobile payments, mobile wallets, cross border payments. These innovations stand out because they have a clear use case for the end consumer:  Contactless—ease of checkout and quicker transactions.  Ecommerce payments—the Middle East is one of the fastest growing markets in the world for eCommerce. This growth needs to be complemented by robust payment solutions.  Mobile payments—the form factor of consumers to search, view and transact is changing rapidly from laptops to mobile devices. With the advancement in mobile technology, mobile payment solutions use the power of the smartphone for functionalities other than payments like analytics, user experience, contextual offers etc.

With the penetration of smartphones on the rise, there may be a scenario in the near future where the form factor to transact for customers will change from physical plastic to mobile means. The payment eco-system is therefore bracing itself for this change with investment in the mobile wallet by all players.

Source: Mashreq

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23/10/2016 17:13

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ADVERTORIAL

The future of payments— correspondent banking fights back Khaled Moharem, Head of Middle East & North Africa at SWIFT talks about the rapidly evolving nature of the payments landscape and SWIFT’s global payments initiative

Khaled Moharem

W

e are living in a time of extreme change.

A wave of money is flowing into financial technology on a global level as a result of increased customer service expectations. Disruptive fintech companies have identified opportunities

and are challenging existing banking models.

However, banks are fighting back. They are exploring how to harness disruptive technologies to support their businesses. Through its work with the financial community and through innovation in products and services, SWIFT is also helping to make real world change for the financial industry.

The shift towards real time payments is a global phenomenon, changing the shape of payment systems around the world. At the same time, financial institutions are under increasing pressure to meet financial crime compliance obligations which requires close monitoring of all transactions.

Fintech start-ups all over the world are trying to identify gaps in the market, and huge investment is taking place in the payments space. Globally, more than GBP 4 billion of investments were made in financial technology between July 2015 and January 2016 alone,

much of that targeting the payments business.

New, disruptive innovations such as block chain/distributed ledger technology are being investigated with the potential to create a new era of payments.

Abu Dhabi is working to establish itself as the new fintech capital of the GCC through a new initiative from the Abu Dhabi Global Market, announced in March 2016. The aim of the initiative is to develop new and creative services to support economic expansion in the region. With slowing growth rates in China significantly impacting growth rates across the Middle East, the UAE has seen a need to diversify its economy and to drive local innovation— in financial services and elsewhere— to support development and be less vulnerable to economic slowdowns in other parts of the world.

Correspondent banking serves as the backbone of the finance industry facilitating millions of secure cross-border payments every day. cont. on page 54

50 page 50-52 Advertorial.indd 50

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However, both retail and corporate customers are becoming increasingly demanding in terms of the services that they receive. They want transparency and speed.

Many banks have made headway in improving their services and are exploring how disruptive technologies can support their businesses. To really step this up, the industry is now working together in unprecedented ways to improve the experience and reduce costs for end-customers.

to deliver an enhanced payments service directly to their corporate customers. It includes several key features such as same day use of funds within the time zone of the recipient, transparency of fees, end-to-end payments tracking, and remittance information transferred without alteration.

There are 21 banks in the pilot, and a number of other banks are already preparing for the service to go live in 2017. Mashreq Bank is one of the first banks globally to implement the new

The shift towards real time payments is a global phenomenon, changing the shape of payment systems around the world.

— Khaled Moharem, Head of Middle East & North Africa, SWIFT One such initiative is the SWIFT global payments innovation (gpi) initiative. Announced in December 2015, this initiative by SWIFT and the global banking community is designed to improve the customer experience in correspondent banking by increasing the speed, transparency and end-to-end tracking of cross-border payments.

So far, more than 85 leading banks have signed up to the initiative. Several Middle Eastern banks are taking part in the pilot programme including Dubaibased Mashreq Bank. Participation will enable both banks to provide input on the gpi process and start thinking about how they can build products and services around the new rule book.

The initial service from the gpi initiative targets business-to-business payments. Designed to help corporates grow their international business, improve supplier relationships, and achieve greater treasury efficiencies, the SWIFT gpi service will enable banks

52 page 50-52 Advertorial.indd 52

service into its everyday operations.

“Being part of the SWIFT gpi initiative means being a leader of change,” said Sandeep Chauhan, Group Head of Operations & Technology at Mashreq Bank. “Payments and correspondent banking are undergoing changes at a very fast pace and we want to be a leader in reshaping the Operating Platform for benefit of our clients.

To enable the end-to-end tracking, SWIFT is developing a database ‘in the cloud’ hosted at SWIFT, to provide visibility on the status of a payment transaction, from the moment it is sent until it is confirmed - similar to the tracking services provided by international shipping companies.

The solution has been designed for the corporate treasurer, enabling banks to dramatically improve their customers’ cross-border payments experience. Because of the advantages offered by SWIFT’s global community combined with the application of

its proven technology, banks are continuing to join the initiative around the world, and strongly believe that this initiative will help to reinvigorate the correspondent banking landscape.

Looking beyond the corporate crossborder payments space, SWIFT aims to incorporate further new services and harness new technologies through the gpi initiative. SWIFT will work together with the industry to define additional service level agreements that will cater for other client groups, further reducing the costs and frictions arising from compliance, liquidity management and processing efficiency involved in cross-border payments.

As part of the initiative, SWIFT will also continue to develop new and enhanced services, partnering with Innotribe, the innovation arm of SWIFT, to further engage the FinTech community and explore the application of new technologies such as distributed ledger technology. It will also work together with FinTech hubs around the world such as Abu Dhabi, to support new entrants and collaborate to provide creative solutions that best serve the customer.

The SWIFT gpi initiative is a significant step forward in cross-border payments innovation, helping banks to provide a faster, more information-rich and more transparent payments service.

Together, the banks that have already signed up account for 71 per cent of all cross-border payments on the SWIFT network. More are joining every day.

Such strong participation from major global banks illustrates the importance of this initiative and the industry’s commitment to offering greater speed, transparency and traceability in crossborder payments.

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Photo credit: NicoElNino/shutterstock.com

TECH FOCUS

Saudi Vision 2030: roadmap to financial services innovation

Ahmed Al-Faifi is Managing Director of Saudi Arabia and Kash Al Aziz is an Industry Principal for Financial Services at SAP, whose software runs more than USD 1.6 trillion worth of Middle East banking assets.

Real-time analytics, risk management and omni-channels are the foundation for improving business environment and supporting SMEs, says SAP

54

www.bankerme.com

T

he banking and financial services industry has always been a pillar of the Kingdom of Saudi Arabia’s economy, enjoying strong levels of government spending, and high levels of capital and liquidity. With the recent launch of Saudi Arabia’s Vision 2030, the over-arching and far-reaching series of reforms and programmes that will re-shape the Kingdom as one of the world’s most competitive digital economies, the financial services sector is set to play an even more important role.

We believe that Vision 2030 and the accompanying National Transformation Programme 2020, will enable the Kingdom’s financial services sector to improve growth through facilitating foreign direct investment, and by fostering growth in the domestic private sector as well as small- and medium-sized enterprises (SMEs). All financial sector participants, regulators, banks, and insurers need to have critical digital capabilities: real-time analytics, compliance and risk management, and omni-channel services.

IMPROVING THE BUSINESS ENVIRONMENT IN THE KINGDOM

To achieve the country’s goal of rising in the World Economic Forum’s Global Competitiveness Index from Top 25 to Top 10 by 2030, the financial sector will be essential in driving an enhanced business climate, especially by boosting private sector contribution to GDP and foreign direct investment. Commercial banks and finance companies will continue to support and diversify their financial products to support the inflow and growth of foreign direct investment in the Kingdom. Special commercial regulations are likely to be introduced

to boost investment possibilities and diversify government revenues for industrial zones.

Banks are likely to structure their products to include medium- to longterm commercial lending for industrial projects, such as structured syndicationbased lending, supply chain financing, and trade finance-driven products for corporates. Increasingly, banks will seek to improve traditional treasury and investment management services for corporate customers to gain a competitive edge by enhancing relationship management and customer segmentation.

ACTIVATING THE KINGDOM’S SMES

In Saudi Arabia, SMEs comprise 90 per cent of all businesses, but their contribution to the economy remains low—only 25 per cent of jobs and 20 per cent of GDP, compared to an average of 50 per cent of GDP in European countries, according to a recent industry report.

Everyone in the public and private sector recognises the strengths of SMEs—they serve as catalysts of entrepreneurship, innovation, provide jobs and diversify the economy. However, SMEs face a major challenge in accessing capital, both in equity and debt.

We foresee a global market potential of $60 billion in capital markets technology in the coming years. — SAP Commercial banking products will evolve to bundle payments, investments, and lending against invoicing, liquid assets, and asset or collateral-based lending especially for emerging sectors in focus such as healthcare, logistics, and tourism. While corporates, investment conglomerates, and regulators are demanding more, banks cannot rely only on legacy systems and will need to upgrade their analytics and customer engagement tools to remain competitive.

Examples of foreseeable system upgrades are predictive analytics towards effective credit funds allocations across sectors and counterparties, using real-time liquidity and risk management catering to compliance, and cash flow requirements arising from competitive lending and investment.

Lastly, upgrading relationship management and customer segmentation tools to provide consistent quality of services seamlessly across channels.

Vision 2030 aims to boost the SME sector—increasing their contribution to GDP from 20 per cent to 35 per cent by creating new business incubators and venture capital funds, and by encouraging banking and financial institutions to allocate up to 20 per cent of funding to SMEs. In the Kingdom, banking and financial institutions have traditionally taken a conservative approach towards providing comprehensive services to SMEs. Banks have lacked a consistent approach towards evaluating SMEs and have a dearth of commercial, operational, and financial information on the companies themselves which has prevented banks from reliably segmenting potential clients by size, value, and business model.

Over the next few years, we foresee strong competition amongst banks for SME business, especially in the traditional areas of short-term deposit and lending rates and trade financing terms. cont. onverleaf

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TECH FOCUS

cont. from page 55

In addition, we anticipate banks taking a stronger role in insourcing SME’s finance operations and by providing the omni-channel platform for SMEs— helping ease the provision of services and support, while improving the digital banking experience across staff, processes and organisations addressing the SME sector in the Kingdom.

As part of this push to win with SMEs, we believe that more active banks will be prepared to make significant organisational changes, tasking parts of commercial banking or even creating independent dis. They will appoint dedicated heads for SME and digital banking, with the mandate, specific key performance indicators (KPIs) and targets to drive this sector. We foresee go-to-market strategies whereby, in the short term, banks tailor and bundle existing products for SMEs, while in the medium-term, they introduce new lending, trade finance, payments and investments products designed for SMEs. In particular, we also believe that Saudi banks will seek to become ‘one stop shops’ for SMEs by bundling insurancedriven products to cover employees, equipment and trade facilitation.

With the Saudi Stock Market, Tadawul, working to finalise rules for a new stock market dedicated to SMEs soon, SMEs will be able to take advantage of lower minimum capital requirements and disclosure to tap into new streams of investment and capital to expand.

SMEs in the Kingdom will soon demand faster, personalised, digital services from banks at competitive pricing and terms.

In order to remain agile and digitally relevant, banks will seek upgrading their landscape specifically in the areas of digital customer engagement and segmentation to improve customer acquisition and retention. In addition, banks will strive to enrich their front-end commerce solutions to provide real-time offers and product comparisons to attract digitally empowered SME prospects.

56 page 54-56 Tech focus.indd 56

In Saudi Arabia, SMEs comprise

90% of all businesses, but their contribution to the economy remains low—only

25% 20% of jobs and

of GDP, compared to an average of

50%

of GDP in European countries

DIGITAL CAPABILITIES DRIVE INNOVATION

Real-time analytics will be a crucial capability in this new Saudi digital economy—whether for a government regulator seeking to monitor sectorwide compliance, for a large financial institution managing its credit exposures, for a small bank pricing its products competitively, or an SME seeking to improve channel consistency—the ability to sense and respond in real-time will be the key to success. The ability and speed of change is also key.

In a rebounding business climate and a rapidly-growing digital economy, the Kingdom’s banking and financial firms should adopt an affordable and easy-touse digital core, use agile front-end tools to deliver customer innovations quickly and easily while being fast and dynamic.

With the Saudi Government encouraging transparency, there is a strong and growing demand for the latest risk, auditing, and compliance solutions. These can enable system consolidation, simplification and growth that reduces costs and complexity, and drives innovation. We foresee a global market potential of $60 billion in capital markets technology in the coming years.

Saudi financial institutions are also looking to invest in additional solutions to foster their digital banking initiatives. They seek solutions to enhance payment, real-time intraday liquidity and risk management to better steer cash flows and compliance.

All players want to improve their front office experience to enhance customer engagement and grow digital commerce as well as to automate account origination and optimise the loan cycle times and reduce risks. The more innovative are investing heavily in intelligent customer segmentation analytics to improve campaign performance and hit ratios.

Lastly, larger banks are also considering transformation of their entire omni-channel platform to improve consistency and deliver alwaysavailable, real-time digital and mobile services in a seamless experience to their customers.

As a business software and applications company, SAP works closely with the Kingdom’s leading financial institutions to embrace digital disruption and deliver new banking services that enhance the customer experience, from emerging technologies such as blockchain, to back-end analytics and front-facing mobile apps. We applaud this new era for banking and finance in the Kingdom, with transparency, datacentric decision-making and SMEs driving the diversified economy for generations to come.

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06/09/2016 16:51

EVENTS

IFRS 9: where are banks right now?

In an engaging roundtable dialogue, UAE bankers deliberate on the obstacles they face in their race to compliance

M

arket observers and industry participants have long pointed out that IFRS 9 is a rather late response to the financial crisis. Issued on the 24 July 2014, IFRS 9 Financial Instruments is the International Accounting Standards Board’s (IASB) replacement of IAS 39 Financial Instruments: Recognition and Measurement.

The standard includes classification, requirements for recognition and measurement, impairment, de-recognition and general hedge accounting. The version of IFRS 9 issued in the 24 July 2014 supersedes all previous versions and is mandatorily effective for periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement requirements).

In collaboration with multinational cloud applications and platform services provider, Oracle Financial Services, Banker Middle East’s IFRS 9 Challenges Roundtable gathered key representatives from 10 leading banks in the UAE to discuss issues surrounding the implementation of IFRS 9 Financial Instruments.

Held at Jumeirah Emirates Towers, Dubai on the 21 September 2016, attendees to the roundtable included: Ali F. Ghani, SVP-Group Head of Risk Models & Decision Analytics at Emirates NBD; Sanjay Khanna, Chief Information Officer of RAK Bank; Anthony Murphy, Chief Financial Officer of United Arab Bank; Dr. Yousef Padganeh, Head of Enterprise Risk Management at Commercial Bank International; Talal Soubra, Chief Risk Officer for Ajman Bank, Ali Asif Sheikh, Financial Controller at National Bank of Fujairah; Anil Kumar Parimoo, Chief Risk Officer of Dubai Islamic Bank; as well as Ian Gilmour and Anthony Varghese, both Directors at PwC.

Attending the roundtable: Ali F. Ghani, SVP-Group Head of Risk Models & Decision Analytics at Emirates NBD; Sanjay Khanna, Chief Information Officer of RAK Bank; Anthony Murphy, Chief Financial Officer of United Arab Bank; Dr. Yousef Padganeh, Head of Enterprise Risk Management at Commercial Bank International; Talal Soubra, Chief Risk Officer for Ajman Bank, Ali Asif Sheikh, Financial Controller at National Bank of Fujairah; Anil Kumar Parimoo, Chief Risk Officer of Dubai Islamic Bank; Ian Gilmour and Anthony Varghese, both Directors at PwC; as well as Rohan Chopra, Solution Architect and Sachin Dhadwal, Sales Director, of Oracle Financial Services.

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The roundtable discussion was hosted by Robin Amlôt, Chief Executive Officer of CPI Financial, together with Akhil Arora, Principal Consultant, Rohan Chopra, Solution Architect and Sachin Dhadwal, Sales Director, of Oracle Financial Services.

are amongst the main concerns for banks in gearing up to comply by 2018. Nevertheless, in spite of the many qualms towards this directive, the IFRS 9 is indeed a much needed guideline that is better late than never.

A LITTLE TOO LATE

Since the issuance of the final version of IFRS 9 in 2014, many have come to question its method of implementation, as the new standards bring almost a 360 degree change in the manner banks currently govern and report their balance sheet as well as their regulatory capital requirements. For example, IFRS 9’s move from an ‘incurred loss’ model to an ‘expected loss model’ could trigger sharp movements in a bank’s debt and share prices when changes in expected losses are revealed. It is a known fact that more information is needed in the system, however this should be done in a manner that is reliable as any disclosures are part of audited financial statements.

An apparent lack of clarity and guidance from the Central Bank of the UAE (CBUAE) as well as the UAE Banks Federation (UBF) on the implementation was also cited as an impediment.

cont. overleaf

All photographs by Florante Magsakay/CPI Financial

Replacing IAS 39, IFRS 9 is an International Financial Reporting Standard issued by the International Accounting Standards Board (IASB).

The package of improvements introduced includes a logical model for classification and measurement, a single, forwardlooking ‘expected loss’ impairment model and a substantially-reformed approach to hedge accounting. To be fully effective on the 1 January 2018, the new set of regulations is said to be a comprehensive response to the financial crisis.

Deemed to be a little too late by many, industry players have voiced their concerns regarding the implementation of the new rules. Apart from still having complications with IAS 39, adjusting to the new requirements by IFRS 9 has brought on more woes for banks. Issues such as cost, risks, as well as impact on profit and losses (P&L) [apart from the sheer lack of understanding],

MURKY WATERS

The discussion raised concerns regarding the central bank’s interpretation of the new accounting standards, including its impact on balance sheets. Banks are eager for the regulators to shed light on the capital impact of the new standard but were urged not to wait and move ahead with the transition process due to obvious time constraints.

This predicament of clarity does not only lie within the UAE or wider GCC per se, it also resonates with the global banking fraternity, as many reports reveal their frustration with the lack of information on bearings of the new rules. These impacts should not only be assessed on a micro-level but also a macro-level as the new standards have the potential to not only affect the financial markets but also a country’s economic stability. In this context, the process of complying with IFRS 9 will instigate change in the portfolio mix for banks, and this in turn will have an impact on pure pricing.

Nevertheless, things are projected to move rapidly as the central bank recognises that there is a need for clarification on these matters and would move as quickly as possible to address them.

Robin Amlôt, CEO of CPI Financial opens the discussion on their views of IFRS 9.

A candid discussion on the many hurdles UAE banks face in complying with the new regulatory framework.

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EVENTS

cont. from page 59

HOW READY ARE BANKS?

Market players are in unison as they agree on being fully geared up for the standard by the first quarter of 2017, ahead of it coming into full effect on 1 January 2018. Most banks are in the process of implementation in spite of the feared impacts on profit and loss as well as capital. Amongst the other challenges highlighted during the roundtable is the potential effect of Basel III as it comes into effect in 2018/2019 (at the same time as IFRS 9 becomes binding), and the impact on pure pricing.

As banks are currently in the midst of transitioning, most have narrowed down their selection of a tech provider. However it was pointed out that tech solutions are just enablers and not a process in itself.

Unfortunately for industry constituents, there is no ‘one size fits all’ solution for both IFRS 9 and Basel III. On top of these issues, investors are becoming increasingly impatient for banks to communicate how the rules could impact their balance sheets, thus educating the respective boards and shareholders on these matters are of utmost importance but rather intricate at this point of time due to the inconsistency and lack of CBUAE/UBF guidelines on the matter. Unfortunately as of now, the only form of guidance for banks is the GPPC paper.

Different banks are all at different stages, but it seems highly unlikely for them to be able to implement the necessary preparations in less than nine months. Some have selected a solutions provider, some have not; and according to PwC, some have also decided to opt for an interim solution first then at a later stage finalise a tech provider. Because it is quite a substantial change for a bank, they prefer to get their internal workflow, calculations, and all the controls in place then the technology will follow.

This however obviously depends on the size of the bank.

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Oracle’s IFRS9 solution is built on an integrated finance and risk architecture and catering to IFRS 9 guidelines related to:  Classification & measurement  Impairment & provisioning  Hedge accounting It seamlessly integrates with other finance and risk applications, including financial accounting, performance management, risk management, and reporting systems, while providing advanced stress testing and modeling capabilities.

The solution has a common data model, analytical infrastructure and business intelligence layers that are leveraged from application to application to ensure data consistency, traceability and availability throughout the enterprise, thus offering a ‘UNIFIED’ platform for an integrated risk & finance transformation required for achieving IFRS 9 objectives.

Source: Oracle Financial Services

Many have mentioned that it would be much easier if there were one platform serving both IFRS 9 and Basel III requirements—similar to what Oracle provides through its unified platform for integrated risk and finance. If the data and the actual governance around the IFRS 9 process is sound, an institution is said to be quite far down the line in terms of completing the implementation process.

It must also be noted that technology is only an enabler and not a process in itself.

Another hurdle that bankers expect to encounter in complying with IFRS 9 is the availability of a ‘teething period’ and its recommendations during this time.

The implementation of IFRS9 could hit a bank’s P&L and with the external audit process (and central bank reviews) coming up, the fear of irregularities and strength of a bank’s books is a main concern; and while there is no definition of ‘correct’ [implementation of IFRS 9] just yet, banks are urged to work closely with their external auditors in solving these issues.

Apart from these, inconsistencies between central bank guidelines and international regulations such as the IFRS 9 and Basel III need to be addressed. The banking community has urged UBF to drive consultations on these matters to facilitate a smooth transition for the whole industry. This could also be done vice versa with banks approaching regulators on these matters rather than being responsive towards the regulator’s directives.

TOWARDS PROGRESS

Many expect 2018 to be extremely complicated—unlike the Basel III where the central bank has a degree of flexibility, the IFRS 9 is something that the regulator has no control over. The fact that both frameworks come into effect at about the same time, makes it pertinent to find out what impact this will bring. A suggestion was to use Basel III as a safety valve in the event provisions are affected by IFRS 9.

Powering through, banks should be agile in adapting to everything— be it customer demand, modelling, regulation or competition. The wheel should perhaps be reinvented, as other banks all across the globe are more or less on the same page right now. IFRS 9 will change the key performance indexes of a bank’s business performance. Solutions and modelling was said to come ‘hand in hand’. In selecting a solutions provider, it was agreed that it would be better to involve them at the earlier stage rather than later.

As 1 January 2018 is rapidly approaching, the industry expects an increasing cadence in terms of information, not just from the ‘Big Four’ but also from the Central Bank as they start to get up to speed. The next three to six months is seen to be absolutely critical in ironing out critical issues.

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PERSONALITY

Shailesh Dash Founder and CEO of Al Masah Capital

I’ve been associated and part of the MENA alternative investment sector for the last 16 years and have been involved with the investment industry for more than two decades. I founded Al Masah Capital with various investors in 2010 and have gone ahead to promote other businesses in financial services, healthcare, F&B, retail, logistics and education in the last six years.

After completing my MBA I worked as an analyst in India in some of the most impressive private business deals and I had a good bit of learning and growing for six years before I moved to research and money management. In 2000 I moved to the Gulf and was involved in private equity, corporate finance and research activity and started buying and selling of private businesses in the region. This gave me an immense sense of achievement in helping private businesses grow and the value that was created for the shareholders was very exciting.

The achievement for any investor is to make a certain kind of return on his investments. If you are managing money for people, the big achievement for any money manager will be to give a certain amount or multiple ROI back to the investors.

More than that, I think it’s starting new businesses. I think that gives a lot of satisfaction. It gives more satisfaction when you get into sectors where you deal with consumers and benefit them. Healthcare and education are two social segments where you can contribute to society and at the same time make returns for investors. So the satisfaction comes from not just making return on investment, but also being able to build something and contribute to society.

There’s a lot of work that goes into my daily routine. It involves a mix of reading, meeting different kinds of people, entrepreneurs, looking at different ideas, how to make different sectors perform better and devise ways to perform better, in addition to keeping myself healthy both physically and mentally. But I think the biggest part of the day goes into trying to see how differently and efficiently businesses can operate, look at various process and practises in the economy or the sectors that I can implement today and that would help me plan for the future.

I think the most important part of any job is the challenge that you face daily. Every day is a different day for us, every day is a new challenge. Every day there is something new happening around the world—be it in healthcare, education, F&B or logistics. This keeps my work exciting.

What keeps it even more exciting is meeting different kinds of people and learning more about them.

Learning from their achievements and adding value to your business and to your investors.

I’m currently reading The Essays of Warren Buffet. It’s a compilation of the investor letters to his shareholders, which gives a lot of insight into the various businesses and his thought processes. I’m also a foodie. So the other book that I’m reading is Indian Superfoods.

The GCC financial sector does have its strong points and areas which it can definitely improve. As a business person and an individual, I always look at the positive side of things. Weaknesses are something where one can work towards to make them better. I think for one, more financial knowledge is required— financial education for investors and companies, and better technical skillsets of the investors and the people in the financial sector. It is important to have thriving private businesses and help develop them so that they can benefit from the financial sector, and in turn contribute in generating more jobs and help to build a better society.

Although technology has made sure that ideas and financially engineered products are available all over the world, almost at the same time, there is a lot that is not present here.

One of the biggest announcements recently has been the bankruptcy law. I believe things are changing. Newer things which support the private sector and the financial sector are slowly being added to the economies and the outlook is very positive about the region’s financial market.

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