International Finance - January 2020

Jan 2020

Issue 14 Volume 10

UK £4 Europe ¤5.35

www.internationalfinance.com

US $6

Securing

the future of Saudi citizens

Alinma Investment: Saudi funds management leader Russian stocks: Best 2020 value picks?

Investors turn to African fintechs

Tech giants make a banking play

International Finance | January 2020 | 1

Working tirelessly & going the extra mile to serve you.

Thus, being cited by the International Finance Awards 2019 as

The Fastest Growing Fiber Internet Service Provider in the Philippines.

2 | January 2020 | International Finance

january 2020 Volume 10 Issue 14

Editor’s note Samuel Abraham Editor, international finance magazine

Innovating in Saudi funds management

P

art of Saudi Arabia’s Vision 2030 is the Financial Sector Development Programme which seeks to stimulate investments and private savings in the Kingdom. Among the top companies providing Shariah-compliant investment products, solutions, and services to Saudi citizens is Alinma Investment Company. The uptake of financial technology or fintech is very high among the young Saudi population. Alinma Investment Company is building sophisticated investment products, solutions, and services for this tech savvy Saudi population by being on top of technology innovations and dynamically delivering investment and fund solutions that meet market demand. Today, Alinma Investment operates the largest three real estate development funds in Saudi Arabia, the largest public real estate income-generating fund in Saudi Arabia, and the highest number of endowment funds in Saudi Arabia. In our cover story, Mazin Fawaz Baghdadi, CEO of Alinma Investment Company tells us about the breadth of the company’s investment options and its investment strategy that has positioned it as a leader in the Shariah-compliant investments and funds sector in Saudi Arabia.

Google and Facebook are in the initial stages of what seems to be a calibrated and calculated banking, money transfer and currency play. Already the power that these companies wield over governments and ordinary human beings is immense. We look into what this money and banking play mean for users and the impact of the ensuing power equations.

We also look into the ramifications of the UK adopting the open banking framework – what is the state of innovation and who are the gainers in our feature story.

It is time for the annual International Finance Awards in Dubai and Bangkok. We also have a special editorial on the International Finance magazine and the International Finance Awards.

sabraham@ifinancemag.com www.internationalfinance.com

International Finance | January 2020 | 3

inside

if January 2020

34

in conversation emerging 24 Powering markets green bonds IFC is at the forefront of mobilising private capital for the environment

Building sophisticated products Alinma Investment is dynamically creating investment products for young and tech savvy Saudis fintech

fintech

Analysis

58 Are Russian stocks the best value picks for 2020?

62 African fintechs catch global

12

18

UK: Open banking unleashes business lending race

Why Kenya needs fewer banks Kenya’s banking sector is ripe for consolidation

The UK’s open banking directive is starting to propel SME growth

investor attention

72

epayments have caught fire in Saudi Arabia

insight

104 Saudi Arabia’s budget 2020 boosts Vision 2030

International finance Awards

Celebrating

Telecom Business Dossier

International Finance Award

excellence 2019 International Finance Awards is recognising top performers among global organisations

48 4 | January 2020 | International Finance

76 Should Google and Facebook be venturing into banking?

As the tech giants make a banking and money play what could go wrong?

30

Al Wateen: A unique banking digital factory

52

Long-term strategy pays off for Cocolife funds

98

DOF Ajman: Building a competitive economy

www.internationalfinance.com

Thought leadership Rubem Herzog Offshore investing for Brazilians

44

Offshore investments are becoming easier to manage for wealthy Brazilians

84

Hani Hagras XAI is the future of AI in banking

AI-led customer intermediation can plague banking – that’s where XAI helps

86

Michele Tucci Credit scoring with privacy

Mobile phone metadata provides a unique opportunity for developing privacy-proofed credit scores

Director & Publisher Sunil Bhat Editor Samuel Abraham Editorial Adriana Coopens, Jessica Smith, Lacy De Schmidt, Sangeetha Deepak Production Merlin Cruz Design & Layout Vikas Kapoor Web Developers Prajitha Rajesh Prashanth V Acharya

Javed Khattak Proptech transforms realty

Business Analysts Sid Nathan, Sarah Jones, Christy John, Gwen Morgan, Alex Carter, Janet George, Maria Mamtha, Henry James, Indra Kala, Mohammed Alam, Chris Harris

Technology offers a fresh approach to property investing – domestically and globally

Business Development Manager Steve Martin

96

Business Development Sunny Shah, Sid Jain, Ryan Cooper Accounts Angela Mathews, Jessina Varghese Registered Office INTERNATIONAL FINANCE is the trading name of INTERNATIONAL FINANCE Publications Ltd 843 Finchley Road, London, NW11 8NA Phone +44 (0) 208 123 9436 Fax +44 (0) 208 181 6550

regular Editor's note

03 08 06

Delivering value to Saudi investors

News Singapore beats global rivals in hedge fund returns

Trending Apple is working on a secret satellite project

Email info@ifinancemag.com Press Contact editor@ifinancemag.com Associate Office Zredhi Solutions Pvt. Ltd. 5th Floor, Sai Complex, #114/1, M G Road, Bengaluru 560001 Ph: +91-80-409901144

International Finance | January 2020 | 5

# trending Tec hnology

Photo by David Fitzgerald/Web Summit via Sportsfile

Bitcoin: X-factor of investing?

Apple's secret satellite team

Apple is developing a secret satellite team ito make advancements in wireless tech. The team will focus on strengthening Apple’s ability to transmit data to its devices using satellite technology to beam data directly to mobile devices circumventing data connections. CEO Tim Cook is making the satellite project the company’s top priority. The satellite team comprises aerospace, satellite and antenna design engineers whose goal is complete the project in the next five years.

Whatever may be the issues surrounding it, regulatory or trading related, bitcoin outclassed most traditional asset classes in 2019. The price of bitcoin zoomed 90 percent in 2019 while undergoing wild price swings.

In fact the cryptocurrency enjoyed a solid bull market rally in the first half of 2019.

In 2020, bitcoin might be the asset to add an X-factor to your investment portfolio.

At a Glance Total accumulated GDP growth in Europe* UK

4.9% France

Travis Kalanick exits Uber completely

Billionaires: Arnault briefly pips Bezos

Uber CEO and Mobility founder Travis Kalanick left the board of the company on December 31 ending his last ties with the business he founded. Kalanick, who was forced out of the company by the board of the Uber and replaced with Dara Khosrowshahi had been successively selling his shares in the company since his exit from the CEO’s position. By the third week of December Kalanick had reduced his holdings in the company to less than 10 percent. It was reported that Kalanick was likely to have sold his entire stake in the company by the end of December.

French luxury conwe a lt h glomerate LVMH CEO Bernard Arnault reached the status of the world’s richest man with a net worth of $109.6 billion for a short period. According to Forbes' Real Time Billionaire rankings, Arnault was marked with $109.3 billion to his name on December 17, while Amazon CEO Jeff Bezos had $110.1 billion after Amazon shares rose 0.7 percent later that day. Arnault ranked second in the global wealthiest list after adding an impressive $34.3 billion to his net worth in 2019. Bezos beat Bill Gates as the richest person on Earth.

6 | January 2020 | International Finance

5.8% Belgium

4.7% Germany

4.7% Italy

3.2% (*November 2019)

NEWS | INSIGHTS | UPDATES | DATA

Ones to Watch

Markets

Contrarian stock picks 2020 Global equity investors are presented with two opportunities as major indexes have risen over 20 percent in the US. They can either capitalise on the growth or look for laggards, such as Malaysia and Hong Kong.

Founder and CIO of Chartwell Capital Ronald. W. Chan expressed his view in his Bloomberg article that Malaysia KLCI Index looks attractive despite its slump in five of the past six years. Reasons such as economic decline, US-China trade war and rising oil prices have affected demand for Malaysian products.

Earnings of companies are expected to grow 11 percent in 2020, pushing price-earnings ratio to 16.6.

According to Bloomberg, over the past five years, the index has traded at an average multiple of 18.1 times earnings.

The forward price-book ratio is 1.57

times, versus a five-year average of 1.78.

In Hong Kong, contrarians should focus on companies hurt by the antiextradition protests, Chan noted. The economy is anticipated to face an annual contraction for the first time since the global financial crisis in 2009.

Overall, companies that are cash rich despite profit decline are the strongest choices for value buyers.

Chan notes that since the strikes broke out the value the shares of many such companies have fallen by more than 10 percent.

By the Numbers

Carlos Ghosn Ex-CEO, Renault-Nissan said in an interview in Beirut that the French ambassador had warned of a plot against him in Japan. Will the Lebanese legal system hand him over to Japan?

And what is the future of the Renault-Nissan alliance?

Boris Johnson Prime Minister of the UK All eyes are on Boris Johnson as he executes his promise to take the UK out of the EU by January 31.

Johnson is racing against time to get a Brexit deal ratified before the deadline.

Will he succeed?

Mobile money metrics of Sub Saharan Africa - 2019

1.7 bn

Volume of transactions

2.3 mn

$26.8 bn

395.7 mn

Value of transactions

registered agents

registered accounts

Elon Musk Elon Musk’s SpaceX launched 60 more Starlink satellites into earth’s low orbit in the first week of January. This makes SpaceX the company with the most satellites in space. What is Musk’s next move?

International Finance | January 2020 | 7

in the news

finance

banking

industry

technology

Singapore is home to two of the top 10 hedge funds — and its hedge funds industry heavily beat global rivals in terms of returns in 2019

KPMG China forecast that China's AUM will reach $5.6 trillion by 2025, making it the second-largest asset management market in the world

Chin asset management sector to hit $5.6tn China’s asset management industry is set for expansion after funds overseen by financial institutions rose by 61 percent to 6.7 trillion yuan in 2018. The industry is primed for further growth in the coming years, according to Fitch Ratings.

KPMG China forecasted that assets under management will reach $5.6 trillion by 2025 — making it the second-largest asset management market in the world.

The mainland’s assets under management by 1,984 mutual funds increased 52 percent to 4.5 million yuan in 2018. The rise was mainly driven by growing demand from retail investors.

The Fitch report said that the asset management industry is becoming competitive on the back of government deregulation. That said, regulators have released a set of rules for security firms and insurers to launch mutual funds.

In fact, intense competition among asset managers and other financial institutions such as banks, securities firms and trust companies will make the industry more challenging for asset

8 | January 2020 | International Finance

managers in future. Currently, only ten Fund Management Companies (FMCs) that are beneficiaries of the industry’s growth control 51.3 percent of China’s market share. These FMCs have been the main beneficiaries of China’s asset management growth over the years.

According to KPMG, their market control will be challenged by increasing competition levels through new products and services. The anticipated competition will additionally come from China’s domestic technology giants with heavy capital, innovative business models, and robust distribution channels. This sector diversity in turn will spur innovation in China.

The country is on its way to become the second largest fund market following the US. In last November 2018, Beijing introduced reforms to speed up China’s growth in investment industry. Its investment management market is set to reach $17 trillion by 2030; however, there will be significant challenges for foreign players in the country. But China is a high-growth asset management market and it is prepared to beat the US in the coming years.

Singapore hedge funds top world in returns Singapore, one of the wealthiest economies in the world, is home to two of the top 10 hedge funds — and its hedge funds industry heavily beat global rivals in terms of returns in 2019.

Hedge funds in Singapore generated an average return of 9.4 percent for clients last year, observed Eurekahedge.

In turn, that beats Asia’s 7.6 percent return and Europe’s 6 percent return. The Eurekahedge North American Hedge Fund Index was up 7.6 percent last year. Eurekahedge is a leading hedge fund database provider.

The value of assets under management at Singapore’s hedge funds are at $47.3 billion, while North America is at $1.6 trillion and Europe is at $462.7 billion. Despite that, it shows investors in small funds are comfortable with risks compared to their peers who demand lower volatility even if that results in lesser returns.

One factor that contributes to Singapore’s evolving hedge funds industry is a pool of data-science graduates. The city-state’s lack of

natural resources coupled with stock market illiquidity has spurred an innovative education system over the years. With that, graduates are well equipped with quantitative tools and techniques.

Another supporting theory behind Singapore’s success in hedge funds is that rich Asians are big risk takers. They are willing to invest millions into funds that might have huge volatility.

A professor at the NUS Business School pointed to the fact that there is a lot of money coming in and investors are willing to take risks. An example of that is Vanda Global Fund that gained more than 300 percent last year.

The firm’s annualised returns are 39 percent — and its founder Chong Chin Eai manages $222 million. In another example, Singapore's Quantedge Capital became one of the world's best quant funds last year. The company manages more than $2.1 billion and has over 600 clients to date.

In the big picture, Singapore’s global investment outlook has lured brokers and investors from around the world.

International Finance | January 2020 | 9

in the news

finance

banking

industry

technology

The National Petroleum Agency announced that in November Brazil had created a record in crude oil production by churning out 3 million bpd

With a thaw in the US China trade war the Thai baht is suffering heavily. The trouble has worsened with falling yields on local bonds and equity outflows

Andrew Bailey | Photo by www.bankofengland.co.uk

Bailey to lead BoE through Brexit

Brazil sets oil production record

Andrew Bailey has been appointed as the chief of Bank of England (BoE) by the new British government.

Having been a part of BoE for 30 years, Bailey played a crucial role in keeping the British banking apparatus together amid the economic slump worldwide.

In 2016, he shifted to his present position of heading the Financial Conduct Authority that monitors monetary irregularities.

As Britain’s exit from the European Union looms large over the horizon, Bailey said he was privileged to assume charge at this crucial juncture from his predecessor Mark Carney.

The 60-year-old banking veteran is expected to be at the helm of BoE’s affairs for eight years.

The National Petroleum Agency of Brazil nnounced that in November Brazil had created a record in crude oil production by churning out 3 million barrels a day.

It added that the overall oil and gas production soared to 3.95 barrels a day, also a record in itself.

Lula, the country’s largest oil field, lies in the presalt belt and it churned out 1.063 million bpd last month. After the compromise with Petrobras, the Brazilian government invited tenders to two of the four blocks and they were bagged by two Chinese firms: CNODC and CNOOC. These two blocks belong to the Buzios field that already produces 600,000 bpd and lie amid the most fertile presalt regions.

Real estate capital flows from US to Asia 2019 India

China

Australia

Hong Kong

$1.8 bn

$2.1 bn

$3.2 bn

$3.25 bn

489% YOY increase 10 | January 2020 | International Finance

32%

33%

781%

Goldman halts fossil-fuel funding

Crisis hits Thai Baht

Goldman Sachs has decided to stall sponsoring for the drilling of fossil fuels in the Arctic region.

This decision has made it the first key American bank to cease the drilling funding in the Polar belt.

Goldman, while declaring this policy shift in mid-December, emphasised on preserving the Arctic National Wildlife Refuge.

But, this initiative from Goldman Sachs failed to impress the leading environmental crusaders such as Sierra Club and Rainforest Action Network (RAN), who expect more from the top US investment banker.The Goldman policy arrives following years of study from RAN and other eco-friendly organisations that have estimated around $700 billion fossil fuel funding by mega investment bankers across the globe.

Asia’s major currency of strength, the Thai baht, seems to have hit rough weather despite witnessing an eight percent surge last year. This slump can be attributed to sluggish growth and a national bank that’s adamant on reining in the currency.

With a thaw in the trade war between the US and China, the Thai baht is suffering heavily. And, the trouble has only worsened with falling yields on local bonds and equity outflows.

Despite the typical vulnerability exhibited by other Asian currencies, the baht had bucked the trend owing to its robust current account surplus and a significant chunk of foreign reserves that attracted global investments. But, from being such an assured bet for investors, the Thai currency is now scratching the bottom of the barrel.

Chinese venture capital funding of Indian startups

2016

$495 mn

2018

$2.02 bn

2019

$3.9 bn International Finance | January 2020 | 11

Banking and Finance

feature Banking

UK open banking

UK: Open banking spurs business lending race Experts predict fi by 2022 Sangeetha DeePAK

In the coming months, the UK SMEs will find themselves in the midst of numerous financing opportunities

I

n 2018, the UK’s Competition and Market Authority enforced open banking to benefit financial services consumers through the use of open-source technology. The new directive has forced the UK’s nine largest banks and building societies to share consented consumer information with authorised third parties in a secure, standardised format to ensure consumer control over data and to foster banking innovation.

“The original aim of the Competition and Markets Authority’s order was to provide consumers with more choice, create better customer engagement with banking services and stimulate innovation across

12 | January 2020 | International Finance

the financial sector,” Jim Wadsworth, Senior Vice President of Open Banking at Mastercard, said in an email interview with International Finance. These are all important efforts, which have made worldwide open banking adoption a required norm.

Today open banking in the UK is the most advanced in the world. All of the CMA9 banks have rolled out open banking

feature UK open banking

APIs, with some of the non-CMA9 banks voluntarily adopting it. Brian Hanrahan, Chief Commercial Officer of Nuapay, a pioneer in open banking, said in an interview with International Finance, “I think it is fair to say that for the last 18 months the UK has been going through the learning curve, and developing its basic open banking infrastructure and connections.”

Currently, there are 110 third party providers approved in the country and there was a 25.3 percent increase in the number of API calls made between August and September,

according to UK regtech Konsentus data, as of November 2019.

Prescriptive approach to open banking creates positive outcomes These developments stem from a robust API standardisation as banks and financial services companies are testing prototypes and beta versions of their new operating models.

“Research in fact shows that the country’s

International Finance | January 2020 | 13

Banking and Finance

feature Banking

API framework is entirely capable of supporting the banking sector’s ambition in opening itself up to open banking opportunities,” Adrian Cannon, Managing Director at Omnio, a financial technology company, tells International Finance. Another reason for this is that the approach taken by the UK regulator has always been fairly prescriptive compared to other markets. The regulator provides levels of standardisation across banks which make it easier for third party providers to build services across APIs of various banks.

“The prescriptive API framework or approach taken by the regulator in the UK has also led to some really positive outcomes from a customer perspective as well,” Hanrahan says.

“For example, the UK banks were required to implement an app-to-app journey, where consumers authenticate themselves in their mobile banking app.

This implementation has been critical in improving customer experience.”

But it has taken a long time for the APIs to be up and running successfully in the country — particularly in the payments landscape where the API framework is facing teething troubles, however. Its functional design and the banks’ reliability are sufficient to carry on with customer propositions. Earlier this year, the Open Banking Organisation said that there are more than 135 entities approved by the Financial Conduct Authority to provide open banking-led services for consumers and SMEs. In the coming months, the UK SMEs will find themselves in the midst of numerous financing opportunities — as open banking is disrupting the whole financial services landscape. It allows SMEs to provide their account history of cash flow and creditworthiness to external lenders to obtain a quick

14 | January 2020 | International Finance

UK open banking

Jim Wadsworth, Senior Vice President of Open Banking at Mastercard

loan application. The crucial point, however, is that it helps those SMEs to generate a richer set of data on a particular customer to facilitate better lending decisions — and develop closer levels of integration into their existing CRM, ERP, or accounting packages.

As it appears, “SMEs is one particular area where there are a lot of declines, simply because of insufficient data to make a decision, and we are expecting open banking will help change this,” Hanrahan explains.

New use cases of bank-fintech collaboration to benefit SMEs The UK lenders like GrowthStreet and iwoca are beginning to use open banking to accelerate decision making and reduce fraud in the underwriting process. In fact, there are a number of emerging use cases of banks and fintechs collaborating

to develop new innovative products and services targeting SMEs in the UK. “We’ve seen a particular focus on new products and services to benefit SMEs following the Capital Market Authority’s open banking order which came out of review in the retail banking sector,” Wadsworth says. These innovative tools and apps can analyse open banking data drawn from small business bank accounts and find valuable insights that can help them with better credit access, improve financial management and fulfill other legal obligations. “This is hugely important as it encourages SMEs to focus on being productive while an app or tool will support their budgeting, cash flow and borrowing capacity,” Wadsworth adds.

Although it is nearly impossible to measure the current impact of open banking in the UK and other European markets — this new directive is creating

feature UK open banking

The threat to British banking

31%

profits at risk due to digitisation

$100 billion current profits

$50 billion

potential drop in profits due to digitisation in 2020 Source: McKinsey

greater competition among business lenders, especially as the lending market suffers from a lack of competition.

For now, “open banking has increased competition and has encouraged innovators to enter the market — and these pioneers are willing to break the mould and do things differently,” Canon says.

“With regard to SMEs, there is no doubt that open banking has produced efficiency gains for them, not least spurred on by the integration between non-banking and banking API-based platforms.”

But in order for third party providers to be able to operative effectively — the banks’ underlying APIs will have to be powerful. To that end, the current

APIs need building out for more sophistication on both availability and stability fronts.

Recently, Nuapay published data from its study which compares banks in the UK over two categories. The first is the total time to initiate payment through open banking and the other is the number of customer interactions required to achieve that. Its data found a slight variation in how banks adopt an API-based approach. For example, one of the banks that Nuapay interviewed said that they had taken a step back after a slow start to completely rearchitecture their system and the API connections to deliver better customer experience. In another example, the bank had taken an API-based approach, where all external APIs made available to third party providers were the same used for internal communications.

“So I think the open banking has not just been about automating their existing experiences, but it has forced them to rethink some of their existing approaches and think from an API first approach to their technology stack,” Hanrahan exclaims.

UK remains the most innovative open banking market While the UK remains the most innovative open banking market — it is worth remembering that when the regulations came into effect last year — it subsequently suffered unintended consequences in terms of security and trust. In fact, McKinsey published a report titled A Brave New World for Global Banking, which estimates that banks in Europe and the UK currently have $35 billion, or 31 percent of profits at risk due to digitisation — emphasising that further digital disruption could cut profits by half to $50 billion in 2020.

The country’s regulatory landscape is transforming systematically, with more focus on full implementation and compliance with the existing regulations over the next two years. Also, there could be a wide scope for extending new regulations in the future.

“One area which we can assume that will be flooded with regulation is the use of data to which regulators have already expressed concerns. Sensitive information must and will become carefully controlled. While the exact timing is hard to predict, what is certain is that when problems arise, the regulator will catch-up with innovators,” Canon emphasised, stating that “in the UK, we enjoy a robust regulatory framework which encourages innovation. Despite Brexit, we are seeing an impressive volume of inward investment in the open banking sector.”

That said, it does not reduce the impact of regulatory and technical challenges that banks have been persistently facing in recent months. The regulatory challenge mainly stems from the deadlines set by the regulator. For example, the deadline for introducing customer authentication was delayed by 18 months as banks in the UK were unable to meet the requirements within the stipulated duration. This in turn could lead to technical challenges for banks as they are expected to meet requirements and justify huge technology transformation costs under excessive strain. In addition, the availability of the right skill sets for the job is extremely hard to find, especially because of highly complex regulatory compliance and risk management frameworks involved.

Another challenging scenario is that an emerging generation of banks are struggling to extract value from their

International Finance | January 2020 | 15

Banking and Finance

feature Banking

assets and infrastructure. In today’s circumstances, commercialising APIs is a huge necessity — and many banks are moving toward the concept of premium third party providers, or APIs which these providers are willing to pay for.

Against this background, “We expect the Open Banking Implementation Entity will make an active push, using its mandate to ensure the banks are complying with their obligations to provide a service that is as good as their own internet or mobile banking channels,” Hanrahan says.

Then there is the ultimate concern of data security for banks across the world as they adopt open banking technologies. Wadsworth explains, “With a range of different technical standards across Europe, it’s crucial that financial institutions are clear on how they will safeguard their data against fraudulent activity.”

UK open banking uplifts next-gen banking capabilities in Europe But certainly the Open Banking Implementation Entity has secured the leading role in uplifting the nextgeneration of European banking capabilities. This is because “the UK was arguably the first country to develop open banking standards and continues to be a leader in the field. Many other countries are looking carefully at the UK’s experience as they develop their own models,” Wadsworth explains. The UK has made it easier for customers by providing them with modest complex banking arrangements and other European banks are following suit.

In future, it might be easier to persuade financial customers to adopt open banking, according to the PwC report, which found that 39 percent of them would share their financial

16 | January 2020 | International Finance

UK open banking

Photo Caption

Open banking impact

135 25.3%

entities approved by FCA to provide open banking-led services for consumers and SMEs increase in the number of API calls made between August and September

Source: Open Banking Organisation, Konsentus

data with banks and third party providers. However, this will depend on whether they receive benefits such as a comprehensive banking app, or are able to compare bespoke offers from third party providers. An app-to-app journey will be the next big focus to enhance customer experience — with a major

shift anticipated toward open finance rather than just open banking in the UK and the rest of Europe — as in the case of Australia.

editor@ifinancemag.com

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Banking and Finance

feature Banking

Kenya banks consolidation

Why Kenya needs fewer banks

18 | January 2020 | International Finance

feature Kenya banks consolidation

Around 80 percent of the profits made by the Kenyan banking sector go to the top five to six banks

IF Correspondent

T

he Kenyan banking system is the fourth largest in sub-Saharan Africa. With 44 licenced banks operating in its banking sector, Kenya is overbanked, given its population is around 50 million. Let’s not forget the microfinance institutions and fintech startups that are also fighting for a share in the overall financial ecosystem of Kenya. Statistically, Kenya has one bank per million Kenyans, compared to 0.3 in South Africa and 0.1 in Nigeria, two of the largest banking systems in subSaharan Africa. According to a Moody’s Investors Services analysis report, around five top banks in Kenya controls about half of the assets in the system, as of 2018.

The question today is does Kenya need so many banks?

What is the ideal number of banks in Kenya? Is more consolidation the way ahead for Kenyan banking and how do es the Kenyan banking sector ensure consolidation is in the interest of the consumer?

Mergers and acquisitions in the Kenya banking system In the fourth quarter of 2018, NIC Bank and Commercial Bank of Africa (CBA), two of the largest banks in Kenya, announced that talks are in place for a potential merger.

Earlier in September this year, the Central Bank of Kenya announced that it had approved the merger between the two banks.

In April 2019, KCB (Kenya Commercial Bank), the largest bank in East Africa by total assets, announced its intention to acquire all of the ordinary shares of the state-owned National Bank of Kenya (NBK).

International Finance | January 2020 | 19

Banking and Finance

feature Banking

Kenya banks consolidation

Access Bank, which is Nigeria’s biggest bank, is acquiring a 93.57 percent stake in Kenya’s Transnational Bank in a bid to build a stronghold in the East African market. The bank recently received a nod from the Competition Authority of Kenya. This year, Mauritius-based SBM Holdings also bought assets from Chase Bank Kenya and the entire capital of Fidelity Commercial Bank.

To put things into perspective, the Kenyan banking sector has witnessed a total of seven acquisitions and five mergers in the last 10 years.

So what is driving the consolidation in Kenyan banking?

Mergers often lead to economies of scale which results in higher returns for shareholders. In Kenya, economies of scale is one of the major drivers for consolidation amongst the smaller banks.

The entry of international banks in the Kenyan banking sector is also driving consolidation in the sector. Many international banks continue to eye the local market and this adds to the reasons for the larger banks to consolidate their position with increasing competition. In Kenya, so far nine foreign banks have set up representative offices in the country.

Some of them are HDFC Bank, JP Morgan Chase, FirstRand Bank and Bank of China.

The number is expected to increase as more and more foreign banks look to increase their regional presence in African economies such as Kenya and also increase their customer base. The entry of foreign banks with strong financial muscle makes it difficult for smaller local banks to compete as they often face tough funding conditions. In such situations, a merger or an acquisition by a bigger bank seems to be the most suitable option.

Also, around 80 percent of the profits made by the Kenyan banking

20 | January 2020 | International Finance

sector go to the bigger banks. Smaller banks, on the other hand, find it difficult to sustain their existing market share.

This also pushes many small banks in the path of a potential merger. Richard Njoroge, an assurance partner and a member of PricewaterhouseCoopers (PwC)’s specialist financial services group, told International Finance, “My view is that the smaller banks will struggle to survive in the long run in the current environment unless they operate in very niche markets. The level of investment that they require to keep up with technology and to cope with ever-increasing regulatory compliance requirements will make it more difficult for small banks to cope. We saw a deposit flight from the smaller banks

to the larger banks after the collapse of three banks in Kenya, which has resulted in some of the smaller banks experiencing liquidity challenges. It will take time for the confidence crisis to wane. Smaller banks also tend to have a higher cost of funds as they have to pay more to attract depositors, making them less profitable.”

Regulators are also playing an important role when it comes to consolidation in the Kenyan banking sector. Supervising a large number of banks always proves to be an arduous task and requires significant resources.

However, fewer banks enhance their capacity to rigorously monitor and improve their banking systems’ overall supervisory framework.

feature Kenya banks consolidation

Banks per 10 million citizens Kenya

10 3

South Africa

The introduction of IFRS 9, which is another global financial reporting standard, is likely to sustain the flow of consolidation in the Kenyan banking sector. IFRS 9 became effective in 2018.

The biggest impact of the standard for banks is the level of provisions on loans (and other financial assets) that banks are required to make. According to Richard Njoroge, the standard requires provisions to be based on a forwardlooking expected loss method, instead of the “incurred loss” method in the old standard. The higher provisions will reduce the level of profits reported by banks and reduce their capital ratios.

The impact on profits was not that discernible in 2018 as banks were able to charge to reserves the initial adjustment

Nigeria

1

on opening loan loss provisions. We expect the impact on profits reported to be more noticeable going forward.

The regulators in the region announced transition rules for banks to cushion them against the immediate impact of IFRS 9 on regulatory capital.

However, banks have had to re-assess their capital adequacy plans in light of IFRS 9, and for some, this may mean raising more capital in the coming years or cutting back on dividend payments.

IFRS 9 has triggered banks to revise their pricing strategy on loans, although the scope for this in Kenya was restricted by the interest rate capping rules. With the lifting of interest rate caps, banks will have more flexibility in pricing. Banks are also being forced to invest in systems such

as IFRS 9 requiring the use of complex models and collection, maintenance and analysis of greater volumes of data.

Sufficiency and quality of data has been a challenge for many banks in the region in implementing IFRS 9.

With regard to the possibility of banking system disruption as a result of consolidation in the Kenyan banking sector, Christos Theofilou, vice president and senior analyst at Moody’s Investors Services told International Finance that, “Kenya’s consolidation has been industry-led, unlike other systems where this was a consequence of systemic weakness and authorities may have taken a leading role. As such, there is a more limited disruption to the overall banking system.”

Why is consolidation necessary?

Many small banks in Kenya do not have the resources to compete with the bigger banks, to invest in infrastructure and keep up with technological advancements. As a result, they suffer from weak risk management capabilities. Also, they face tough funding conditions. They incur higher funding costs and hold lower capital.

Such banks face a greater risk of collapsing, which will be catastrophic for the banking sector such as Kenya’s.

Hence, if such a weaker bank is acquired by a bigger bank, it gets access to its infrastructure, expertise, technology and also financial muscle. In other words, consolidation brings stability to the banking sector.

According to Moody’s, consolidation increases banks' economies of scale and improves income stability due to geographical and product diversification. It also reduces the number of very small, fundamentally weak banks within the banking sector,

International Finance | January 2020 | 21

feature Banking

Banking and Finance

Kenya banks consolidation

Kenya has too many banks – many of them small and weak Tanzania $58 bn

55

Kenya $75 bn

Number of banks

45

35

Ghana $66 bn Angola $108 bn

25

15

Mauritius $14 bn Nigeria $422 bn

South Africa $368 bn Botswana $19 bn

5

-5 -50%

0%

50%

100% 150% banking assets as % of GDP

200%

250%

3000%

Note: The bubble size shows the Nominal GDP in terms of USD billion as of 2018 | Source: Central Bank of Kenya, Moody’s

improving its overall credit profile.

Christos Theofilou, vice president and senior analyst, at Moody's Investors Services told International Finance that, “Consolidation leads to a smaller number of stronger banks in Kenya, a credit positive for the country's financial stability. Kenya's banking sector is overbanked with close to 40 commercial banks. Smaller banks often face tougher funding conditions, hold lower capital, and have less efficient operations.

Tighter supervision, higher global regulatory requirements and the need to invest in new innovative infrastructure and digital technologies are additional challenges. Accordingly, we expect continued merger and acquisition activity as banks seek synergies, efficiencies, and economies of scale.”

22 | January 2020 | International Finance

Consolidation also lowers the level of systemic risks in a banking system.

It improves regulatory oversight by reducing the burden of monitoring a large number of very small, fundamentally weak banks.

Many would argue whether the consolidation would guarantee that the Kenyan banking sector will be in a strong position in the next five to 10 years? When International Finance asked the question to Richard Njoroge, he said, “To be successful in the future, banks will have to embrace rapidly evolving technology; respond proactively to changing customer needs and deal with more demanding compliance requirements.

To achieve this will require significant investments in systems and smaller

banks may struggle with making these investments.

Rapid technological advancement could, therefore, become a trigger for consolidation. Consolidation by itself is not necessarily a guarantee that the remaining individual banks will be in a stronger position, but an industry with fewer larger banks will stand a better chance of success.”

How many banks does Kenya actually need?

With 44 licensed banks operating in its banking sector, Kenya is slightly overbanked, given its population is around 50 million. The financial sector nowadays is not just limited to the banks. Many fintech startups are popping up every year and causing major disruption in the Kenyan

feature Kenya banks consolidation

banking system. To add to it, Kenya witnessed a mobile money revolution in the last decade. M-Pesa revolutionised how an ordinary Kenyan handled or spend his money and completely changed the financial landscape of the country. Also, besides the commercial banks, 73 foreign exchange bureaus, 13 microfinance banks, and 19 mobile money remittance providers are part of the Kenyan financial sector.

What the Kenyan banking system needs is its top five to six banks to control 60 percent of the market shares, Moses Muthui, the director of strategy at Barclays Bank Kenya told a business forum earlier. According to him, the sector also needs around ten to fifteen smaller banks to operate in the system and take over the other 40 percent of

the market share. The niche players in the system can play an important role as they serve a very specific market segments which often the top banks does not tap into.

Kenya needs fewer banks Despite the consolidation of the sector, authorities will not refrain from issuing new licences. Instead, they are expected to continue granting new banking licences in the future. That said, we can also expect more mergers and acquisitions in the sector as experts predict the consolidation will continue in the coming years.

According to the Central Bank of Kenya, banks that will embrace innovation and adopt new technologies will have unprecedented opportunities

to change and improve how they provide financial services and products. At the same time, they must manage the risks created by the new digital economy, The Kenya Bankers Association’s State of the Banking Industry report 2019 revealed that financial technology is increasingly changing the shape of the banking industry in the sense that competition in the provision of financial services is well beyond the formal regulated institutions. It further states that new entrants with digital prowess will gain prominence, while many incumbent lenders will be forced to alter their strategies to compete. There will be greater industry fragmentation and blurring of industry boundaries, with financial services increasingly offered by an emerging breed of nonbanks.

Richard Njoroge told International Finance, “Consolidation can be regulator driven, such as through requirements for higher capital levels as was the case in Nigeria, or market-driven. Attempts by the regulator in the past to increase the level of minimum capital have not gone far as these proposals have been blocked in Parliament. In my view consolidation will be driven by business imperatives, which make it difficult for banks below a certain scale to be competitive. Consolidation has taken a while, but we are already seeing this starting to happen. I expect that we will have fewer banks in 10 years’ time.”

editor@ifinancemag.com

International Finance | January 2020 | 23

in conversation

Banking and Finance

Jean Marie Masse Global Head and CIO of Private Equity Funds at IFC

IFC is leading the mobilisation of private capital in the form of green bonds to address climate change in the emerging markets

IFC is powering green bonds in emerging markets Samuel Abraham

Private institutional investor capital in the world amounts to $147 trillion. Much of this amount is located in developed markets and Organisation for Economic Cooperation and Development (OECD) countries alone account for $84 trillion. Institutional investors commonly have little exposure to emerging markets and long-term infrastructure financing projects, possibly due to the scarcity of appropriate investment opportunities. Leveraging this capital remains a challenge. However, addressing this issue has sparked a recent growth in new and innovative financial solutions.

In developed and emerging markets, green bonds have been receiving significant attention from policy makers, issuers, and investors. Green bonds or climate bonds are bonds earmarked to encourage sustainability and to support climate-related or other special environmental projects. Green bonds finance projects aimed sustainable water management, the deployment of environment-friendly technologies, increasing energy efficiency, pollution control, the protection of aquatic and terrestrial ecosystems, clean transportation, sustainable agriculture, and fisheries and forestry. For example, recently the European Union (EU) took significant steps in setting up an EU Green Bond Standard. Given that emerging markets nations are bearing the brunt of the impact of climate change, the emerging markets should be the hub of green bond activity. However, the mobilisation in emerging markets has not taken off at the same level as in other markets, and investors are not very aware of relevant investment opportunities.

International Finance Corporation of the World Bank (IFC) offers a holistic approach to the development of green bonds as an issuer, investor, provider of advisory services, technical assistance and risk mitigation instruments to

24 | January 2020 | International Finance

FINANCE

Emerging green bonds markets

create and develop the green bond market. Jean Marie Masse chief investment officer, financial institutions, IFC talks exclusively to International Finance about the IFC’s active role in promoting the green bond market and the challenges and solutions for promoting green bonds in emerging markets.

How do green bonds fit into IFC’s climate strategy?

In accordance with its Climate Implementation Plan, IFC is now helping clients to issue their own green bonds. There is also opportunity to create new aggregation models through IFC’s work with financial institutions, including green bonds. IFC will also support green bond issuances of its manufacturing, agribusiness, and commercial services clients, targeting those who have made public climate-related commitments. This support can be in the form of direct investment in green bonds or through IFC’s partial credit guarantees that can accompany a bond, which, among other benefits to the issuer, will guarantee payment to bondholders up to a specified amount. This provides emerging market clients with access to a wider investor base and paves the way for

future issuances without enhancement. While green bonds can support a range of climate-related activities, they are an ideal aggregation tool to finance IFC clients’ energy efficiency improvements. As one of the leading issuers of green bonds, IFC and the World Bank have helped to develop the standards for green bonds issuance. IFC works with financial institutions to issue their own green bonds, enabling banks to further develop green financing.

IFC offers a holistic approach to the development of green bonds: we are an issuer, investor, provider of advisory services, technical assistance and risk mitigation instruments to create and develop the green bond market.

Since launching the Green Bond Programme in 2010, IFC remains one of the world’s most prolific issuers of green bonds. In 2013, IFC was the first issuer to list a billion-dollar green bond in the global market.

The largest green bond ever issued at the time. This was heralded as a landmark transaction that proved green bonds as a mainstream product. To date, IFC has issued around 150 green bonds in 16 currencies amounting to almost $10 billion.

International Finance | January 2020 | 25

Banking and Finance

in conversation

Jean Marie Masse Global Head and CIO of Private Equity Funds at IFC

“Green bonds in emerging markets are at the beginning of what we expect will be a fast-growing pace of new issuances meeting mainstream investors investment criteria, mobilising critical funding to help emerging markets cope with the consequences of climate change”

IFC’s Green Bond credentials

150

Green bonds issued

16

Currencies

$10 bn worth of bonds

IFC has played a key role in developing the market infrastructure needed to promote the product in a number of ways such as the establishment of the Green Bond Principles (GBP) for which IFC has served as a member of the Executive Committee since its inception. The GBP are the most accepted guidelines for the issuance and reporting of green bonds globally. In addition, on impact reporting, IFC was instrumental in co-drafting the initial Harmonised Framework for Impact Reporting, a template for issuers to use as a basis for their impact reporting. This document remains the basis for most public issuer reporting.

IFC channels investments through financial institutions such as commercial banks to support climate-related credit lines. Since 2005 IFC has worked with more than 180 institutions in 61 countries through 219 climate projects, providing $9.8 billion in long-term financing from its own-account and in core mobilisation.

Over the last two years, IFC has helped nine banks

26 | January 2020 | International Finance

FINANCE

and non-bank financial institutions issue green bonds worth $1 billion – all of which were first-time green bond issuances.

As a mobiliser of green bonds, IFC is taking the lead in deploying innovative ways to mobilise private capital to fill the financing gap required to tackle climate change. For example, the Amundi Planet EGO Fund, the world’s largest green bond fund in emerging markets, was launched in February 2018.

The fund, managed by Amundi, will ultimately invest in emerging market green bonds issued by financial institutions. It was closed at $1.42 billion, with a $256 million investments from IFC, and is expected to deploy $2 billion in green bonds over its seven-year investment period. The fund aims to increase the capacity of emerging market banks to fund climate-smart investments and increase the scale and pace of climate finance in emerging markets.

Through the IFC-facilitated Sustainable Banking Network (SBN), IFC shares green bond expertise and supports financial sector regulators and industry associations in emerging markets to develop green bond frameworks and catalyse local issuances. Established in 2012, SBN represents 36 countries and over $43 trillion in banking assets in emerging markets.

IFC also supports capital market regulators in the development of national green bond frameworks, and then socialises these funding instruments with other players (notably issuers, but also investors, second opinion providers, auditors) to support first green bond issuances in regional markets. This work in turn facilitates the development of green bonds as a new funding instrument for the financing of climate transactions, including renewable energy infrastructure, energy efficiency measures, green buildings and climate smart agriculture, thus expanding the range of available funding sources for climate projects.

In addition, to boost the supply of green bonds in emerging markets, IFC set up the Green Bond Technical Assistance Program (GB-TAP), a crucial addition to the EGO Fund. GB-TAP, which is financed by Switzerland, Sweden and Luxembourg, and provides advisory services on green bond issuances and impact reporting in line with the Green Bond Principles.

The IFC GB-TAP is an innovative approach in supporting the mobilisation of financing for green

Emerging green bonds markets

investments and expanding the capacity for green financing and issuance of green bonds to a considerable number of new emerging markets. Over its seven-year time span, the GB-TAP intends to create and accelerate the growth of the green bond asset class in emerging markets through broad market creation activities (such as training, research, dissemination of best practices and case studies, development of templates for green bond impact reporting and information disclosure) and targeted local capacity building. The objective of the programme is to develop the green bond market and build a bigger pool of green bond issues In March 2019, IFC began offering its investment clients the option of structuring loans in accordance with the GBP. The principles, which are modelled on the GB, specify how loan proceeds should be used and projects selected in order to qualify for green-loan status. This can help businesses attract additional financ-

ing and enhance their reputation among shareholders, clients, and communities.

What more does IFC intend to do as part of its emerging market bonds strategy in future?

IFC intends to work on model green bond transactions issued by emerging market issuers, release market research reports to disseminate information about the opportunities in green finance in emerging markets, and develop tools to communicate about it.

Mobilising public and private institutional investors to deploy billions of dollars in capital for climate investments is essential to alleviate the impact of climate change. The EGO Fund does just that: as the largest green bond fund in the world, the Fund is helping to scale climate finance in emerging markets.

What more needs to be done to make the share of International Finance | January 2020 | 27

Banking and Finance

in conversation

Jean Marie Masse Global Head and CIO of Private Equity Funds at IFC

IFC has a unique green profile as a one stop shop offering a holistic approach to the development of green bonds: we are an issuer, investor, provider of advisory services, technical assistance and risk mitigation instruments to create and develop green bond markets

green bond issuance in emerging markets larger in relation to the rest of the world?

IFC has identified a gap in the market: the absence of a global standard for the external review of green bonds.

As a result, green bond investors often receive incomplete or incomparable information across their green bonds’ investments. The harmonisation of external reviews (including second opinions and other related services) aims to contribute to the development of accountability and quality standards for the green bond markets.

One of the key concerns of green bond investors is the use of the proceeds. How good and reliable is the reporting on the use of proceeds in emerging markets?

The use of proceeds, as defined by the GBP, should be disclosed in the form of external reviews at the time of green bond issuances, and in the annual impact reports released by green bond issuers. IFC conducted a study to analyse the scope and quality of ESG data collected by leading ESG data providers. A summary of findings on market constraints identified by IFC is as follows: ESG data providers use proprietary ESG scoring frameworks, which differ with respect to materiality, indicator selection and weightage. Each provider uses different definitions of materiality and varying methodologies to normalise this materiality across companies, such as a universal sustainability framework versus benchmarking issuers by industry or peer group. ESG data providers also use proprietary methods to aggregate and weight ESG factors for summary scores. These differences result in conflicting ESG analysis and scores.

ESG reporting standards and guidelines differ.

Even when companies report on the same topics, the data they report may not be comparable. Without the ability to compare ESG performance, investors find

28 | January 2020 | International Finance

FINANCE

it difficult to meaningfully integrate ESG data into investment decisions.

One of the key challenges that organisations operating in the green bonds space in emerging markets face is the capacity to manage E&S risks. How can this lack of capacity be overcome? What can governments, financial institutions, and companies do?

Indeed, there is often a capacity issue, at times it is just a market perception, for emerging markets bond issuers to disclose and manage E&S risks in a way which meets mainstream investors requirements. To address these constraints, IFC is undertaking the following holistic solutions to advance emerging market environmental, social and governance (ESG) data: IFC has explored ways to encourage emerging market capital market issuers, including green bond issuers, to disclose material ESG performance indicators to drive greater investment in emerging market capital markets.

This includes working with an ESG data provider to increase the scope of coverage of emerging market issuers as well as broadening the coverage of collected ESG indicators. IFC is seeking to identify ESG data providers to support with the collection and analysis of ESG information for emerging market issuers. IFC will use this information to benchmark emerging market issuers using its risk-weighted methodology.

IFC is also exploring ways to use artificial intelligence and machine learning to support ESG data collection and analysis. There are opportunities to complement IFC’s work with ESG data providers to expand coverage of emerging market issuers and widen real-time information collection. Possible areas for development include encouraging AI-ESG data providers to use existing platforms to analyse data from emerging markets through the lens of IFC’s ESG Performance Indicators.

Overall these efforts will play a key role in increasing market transparency and catalysing additional opportunities and investments in quality emerging market green bonds.

editor@ifinancemag.com

aditi@bricsaconsulting.com

30th - 31st January, 2020

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30 | January 2020 | International Finance

Islamic banking Warba Bank

digital banking Middle East

Warba Bank is pioneering digital banking innovation with an in-house centre to develop exclusive digital products and services

Al Wateen: A unique digital factory in Kuwait banking

W

IF Correspondent

Warba Bank was established on February 17, 2010 by an Amiri decree with the aim to boost the Kuwait economy after the crisis witnessed by Kuwait at that time. On April 7, 2010, Warba Bank joined the Islamic banks register at the Central Bank of Kuwait. Over the years, Warba Bank has strived to meet the financial aspirations of Kuwaitis and has earned their trust. In a short time, Warba Bank has managed to position itself as a leader in Islamic digital retail banking solutions in the Kuwait banking sector. Warba Bank is steadily advancing on its vision to become an Islamic corporate and investment banking champion in Kuwait with a lean digitallyenabled retail business. Warba Bank reached a critical milestone in its digital journey when it launched ‘Al Wateen’, the bank’s ‘digital factory’ or digital centre of innovation. Through Al Wateen, the bank’s team develops exclusive digital products and services for customers placing them at the forefront of the bank’s interest.

In an exclusive interview with International Finance, Shaheen Al Ghanem, Warba Bank's CEO, talks about the bank’s digital transformation journey, the key digital milestones achieved by the nank, and how the bank overcame challenges in its digital journey.

International Finance: Why did Warba Bank embark on this digital journey?

Shaheen Hamad Al Ghanim: Warba Bank is steadily moving into a new era of development and innovation by enhancing its digital infrastructure. This is the result of a number of achievements that the bank has accomplished over the past few years. We have infused investments into our digital infrastructure to keep abreast of the

International Finance | January 2020 | 31

BUSINESS DOSSIER

Warba Bank

Islamic banking

technological innovations in the banking industry.

Our goal is to cater to growing customer demands for digital banking services at a time when smartphones have become virtual banks enabling customers to undertake several banking transactions smoothly, safely, and easily. Today, Warba Bank has topped its digital innovation efforts by launching our digital factory ‘Al Wateen’, through which the bank's inhouse team develops and innovates exclusive digital products and services that will pave the way for a revolutionary new era in the Islamic banking sector in Kuwait. Al Wateen is the output of the bank’s digital strategy that aims, among other things, to position the bank as a champion in digital banking services and increase its market share using a digital innovation framework.

expansion. Based on our strategy, we are glad to declare that Warba Bank is steadily moving into a new era of development and innovation in enhancing its digital infrastructure. We have been able to complete the first phase of the strategic transformation which resulted in the development of a digital infrastructure to deliver sales growth and profitability. In 2018, the bank started the second phase of its digital strategy that focuses on strengthening its digital capabilities and making all possible efforts to innovatively compete and catch up with the global digital trends in the banking industry. This deliberate approach enables the bank to overcome competition in the retail banking sector in Kuwait by providing distinct digital services.

What are the key milestones achieved by Warba Bank in its digital journey?

In 2017, we set a five-year digital strategy for the bank and we have been able to achieve a series of objectives, such as achieving profitability growth and offering pioneering services to customers while continuing to build corporate franchises, setting up the bank’s digital banking capabilities, and ensuring careful

How do you envision the digital future of Warba Bank? Can you describe your digital plans across the various sections of the bank?

Today, Warba Bank is firmly determined in its approach for enhancing and driving digital transformation in the Kuwait Islamic banking sector in accordance with the highest international standards. With the launch of

32 | January 2020 | International Finance

Warba Bank’s milestones Amiri decree establishes

2010 Warba Bank

Sets five-year digital

2017 strategy

Starts second phase of digital strategy

2018

the first digital factory in the Kuwait banking industry, ‘Al Wateen’, which functions as a digital innovation centre based on teamwork and cooperation across the bank’s departments and groups, the bank has reached a key digital transformation milestone. At the digital factory, we apply the customer-centric approach placing customer interest as our top priority, investing our focus and attention on providing customers with top-notch, fast, reliable, and secure services while proactively meeting their financial needs.

What kind of challenges have you encountered in your digital transformation journey? How did you overcome them?

We have faced challenges since the inception of Warba Bank. Since its early days, Warba Bank’s main focus has been to introduce a new era in the Kuwait Islamic banking industry. It has emerged as a leading Kuwait bank that serves all sections of the Kuwaiti society. When Warba Bank embarked on its journey, we faced all the challenges and economic difficulties that plagued the region at that time. Warba Bank went on its journey with determination and perseverance driven by its responsibility towards shareholders and customers whose confidence and trust provided us with solid support and motivated the bank to launch innovative services, products, and solutions that have been exemplary in the Islamic banking industry in Kuwait. So, our ten-year journey of hard work enabled Warba

Bank to become one of the leading and the fastest growing banks in the Kuwaiti banking sector, making its way through severe competition and enhancing its footprint in the development of the sector by leveraging digital innovation. That said, despite all challenges, today Warba Bank is firmly determined in its approach to enhancing and driving digital transformation in the banking sector in Kuwait in accordance with the highest international standards.

What was behind the Bank’s decision to develop Al Wateen? How do you see this as an enabler for digital sustainability within the bank?

Under the slogan ‘ONE OF YOU’, Warba Bank’s priority is to ensure that Al Wateen is a source of inspiration to the entire Kuwaiti community from which it has emerged. We see each Kuwaiti as a shareholder in Warba Bank, which increases the bank's responsibility to care for each one in the society and establish strong communication channels with the Kuwaiti people while meeting all the global standards of digital banking services that we seek to establish. At the digital factory, we apply the customer-centric approach placing customer interest as top priority of our focus and attention to provide customers with top-notch, fast, reliable, and secure services while proactively meeting customer needs. We can say that Al Wateen will drive our digital journey into the future through which the bank's team will challenge the traditional banking industry and introduce digital evolution into the Kuwait banking sector to benefit customers and create communication channels connecting Kuwaiti Islamic banking customers and the Islamic banking ecosystem. It is set to be an important source of inspiration for everyone interacting with Warba Bank whether they are customers, employees, or shareholders. Al Wateen’s early achievement is the development of the first application of its kind in Kuwait to offer solutions that solidify relationships with customers. The new digital banking application is designed to give customers an enjoyable user journey through its intuitive features.

The application provides easy and versatile access to many services that enable customers to conduct transactions quickly and easily. editor@ifinancemag.com

International Finance | January 2020 | 33

Building sophisticated products 34 | January 2020 | International Finance

cover story Asset management

Alinma Investment Company is dynamically creating investment products for one of the youngest and most technology savvy populations in the world Samuel Abraham

A

linma Investment Company, a Saudi closed joint stock company wholly owned

by Alinma Bank, was established by the bank with a capital of SAR1 billion and a paid-up capital of SAR250 million.

The purpose and scope of the company was to become a leader among the top investment companies in the region that offer Shariah-compliant investment products and services. The company is known for the use of the best and latest communications technologies and advanced technological systems to drive customer centricity.

Alinma Investment obtained its Capital Market Authority licence on April 2009 and launched its operations at beginning of 2010. The company is currently involved in a number of activities including operating as a principal and agent, conducting underwriting, investment funds management, portfolio management, arrangement, as well as providing advisory and custodial services for securities business. As of end of 2019, the total assets under management of the company surpassed SAR60 billion ($16 billion).

International Finance | January 2020 | 35

Banking and Finance

cover story

Asset management Alinma Saudi Arabia

Today, Alinma Investment operates the largest three real estate development funds in Saudi Arabia, the largest public real estate income-generating fund in Saudi Arabia, and the highest number of endowment funds in Saudi Arabia. The company’s vision is to be the preferred financial investment partner of Saudi citizens and it is steadily working toward becoming the leading company that provides innovative and Shariah-compliant investment products, solutions, and services in Saudi Arabia. In an exclusive interview with International Finance, Mazin Fawaz Baghdadi, CEO of Alinma Investment Company, speaks about the key role it is playing in to increase the investment options of the sophisticated Saudi investor with sound and viable investment products and its track record of successfully managing the investments of Saudi citizens.

International Finance: How will the Makkah Real Estate Development Fund impact the development of the Holy City and the diversification plans of the Kingdom?

Mazin Fawaz Baghdadi: Our new Makkah fund will be investing in the development of seven hotel towers and two commercial complexes within the King Abdul Aziz Road project. The fund’s investments will assist in the completion of King Abdul Aziz Road project which is one of the most promising infrastructure development projects in the Kingdom.

The increase in hospitality rooms supply aims to benefit from the ambitious planned increase in the number of pilgrims to the Holy City of Makkah to 30

Key milestones of Alinma Investment Company 36 | January 2020 | International Finance

2011

First equity fund started operations

million by 2030. This will in part help the Kingdom’s vision to diversify the Saudi economy away from oil.

Increasingly Saudi investors are investing in funds for their retirement. What is Alinma’s advice to such investors?

For any investor, retirement is very special moment in their life that they have to carefully plan for.

The financial preparation needed for a retired life can be summarised in the phrase ‘balanced and rewarding savings’. Funds come in different types and investment styles that make available a variety of investment vehicles of different returns and risk levels. The variety in the funds enable different investors to choose their investment options according to their own investment objectives. Therefore, the objectives are to be built upon on a number of factors including expected age at retirement, current wealth and expected wealth at retirement, and expected basic needs at retirement such as housing, health care, and education needs. Our recommendation is to always balance your savings from return and risk perspectives by diversifying your investments into different asset classes through investments in several funds spread across equities, money markets, income generating funds, and so on.

What is the impact of the Aramco IPO on the Saudi mutual funds sector?

Of course, Saudi Aramco is the largest company in the world in terms of both profits and market capitalisation and is expected to be a major part of any equity

First money market fund started operations

2013

First multi-assets fund started operations

cover story finance

“The variety in the funds enable different investors to choose their investment options according to their own investment objectives. Therefore, the objectives are to be built upon on a number of factors including expected age at retirement, current wealth and expected wealth at retirement, and expected basic needs at retirement such as housing, health care, and education needs.”

investment either directly or through mutual funds. We also expect Aramco’s listing on the Tadawul to further attract more local and foreign investors to Aramco and to the Saudi market in general, which will enable more research coverage as well as more liquidity sources in the market, which are healthy signs of any market. We are confident that such a giant company like Aramco is a viable investment for the long-term investors, and it is already part of global benchmarks as we have already witnessed with MSCI indices, among others.

How is the Alinma Enayah Endowment Fund expected to impact patient care in the Kingdom?

The fund distributes dividends in order to support spending on healthcare expenditure. It employs profits to enhance healthcare support through the Charity Foundation for Healthcare ‘Enayah’. Such

2013

First real estate fund started operations

2015

First IPO fund started operations

services and overheads of expenditure include: Offering free medical services at the private or governmental hospitals and mobile clinics Providing nursing services for the chronically ill, disabled, and patients who lack family support Providing medicines that are either not available or are too expensive and are for long time use.

Providing prosthetic devices or supporting diagnostic assistance Increasing awareness and health education, fighting epidemics, training staff and assisting with qualifications as well as organising seminars and conferences Providing disease preventive services and vaccinations With increasing private investment in Saudi

2018

First endowment fund in Saudi Arabia started operations

2020

First ETF investing in Sukuks approved

International Finance | January 2020 | 37

Banking and Finance

cover story

Asset management Alinma Saudi Arabia

Arabia, a sophisticated client base is expected to demand a broader range of products and lower fees from Saudi asset managers. How will Alinma Investment meet this challenge?

Of course, any investment is a cooperation between all parties involved including investors, assets managers, and end users. We at Alinma Investment Company are following a strategy to not only build certain products and services, but also to involve clients in structuring and introducing some products that are suited to such clients’ investment objectives.

If you look at our current products range, you will find that we are covering a full range of products and services including products investing in equities and money markets, real estate as well as education and religious tourism, among others. In addition, we are introducing these investments through different investment vehicles including public and private funds and discretional portfolios.

As for fees, we are not reluctant to cooperate with our clients to have fair and justified fees levels. We are also confident that our clients value the quality and sophistication we provide when structuring and executing our products that satisfy their investment objectives.

What is Alinma’s role in the development of Awqaf investment funds and what role do these funds play in the development of endowments in the Kingdom?

AIC led the initiative to launch the first endowment fund to contribute to achieving the vision 2030 goals by attending and speaking in workshops that were managed by the General Authority of Awqaf and CMA. The Kingdom's Vision 2030 encourages endowments to enable this sector to obtain sustainable financing sources, and to facilitate the establishment of non-profit organisations for the affluent. The vision also encourages leading companies to activate their role in social responsibility and expand the scope of the non-profit sector, and enabling non-profit institutions and associations to attract the best talents capable of transferring knowledge and applying best management practices. In addition, applying this well organised and regulated vehicle in the form of mutual

38 | January 2020 | International Finance

funds will help the non-profit sector contribute more effectively to important sectors such as health, education, housing, research, social programmes, and cultural activities.

What are the challenges facing the funds sector in Saudi Arabia and how is Alinma preparing to face these challenges?

The good news is we see the challenges we face as motivation for improvement and growth. So, we believe that we need to widen the reach of clients to these types of investment vehicles. Fortunately, we are currently witnessing changes in Saudi Arabia including implications of the Vision 2030, which aims through its Financial Sector Development Programme to stimulate investment, finance, and savings. We at Alinma Investment Company are striving to introduce as many viable and sound products to attract more clients who

cover story finance

are targeting investment and savings or in need for financing for all time horizons (short, medium, and long terms). We hope that with professional teams and advanced technology and by using our partnerships we can acquire even more market share in this large and promising sector in Saudi Arabia.

What is the role that the Saudi funds industry and Alinma are playing to achieve the Kingdom’s Vision 2030 goals?

As we said earlier, one of the major programmes in Vision 2030 is the Financial Sector Development Programme that aims among other goals to stimulate investment, finance, and savings. Alinma Investment Company and other asset managers are continuously surveying markets to be able to introduce as many viable and sound products satisfying all types of clients and different investment objectives and risk appetites.

Alinma Investment has become a market leader in Alternative Investment Funds. What is Alinma’ s vision for Alternative Investments Going forward and how will it contribute to the Vision 2030?

Alinma Investment has been successful in attracting and managing over SAR50 billion across multiple alternative investment funds. Our vision is to continue in meeting our clients demand for such asset classes and to continue offering and creating tailormade Shariah-compliant financial structures. In doing so, we aim to contribute to the kingdom’s 2030 Financial Sector Development Programme.

How does Alinma see the Saudi securities market develop to cater to the needs of the sophisticated retail investor in the next five to ten years?

We clearly see several improvements in the Saudi markets that certainly will be of value for such

International Finance | January 2020 | 39

Banking and Finance

cover story

Asset management Alinma Saudi Arabia

investors including: Improvement in market regulations in line with international regulations More integration between investment and financing activities Opening local markets to foreign investors Introduction of short selling, futures, and other derivatives Introduction of new markets (Nomu-parallel market is an example) All these improvements in addition to the healthy competition between asset managers is leading to the introduction of more viable and innovative products and to the deployment of more advanced technologies.

Among the younger generation in the Kingdom, the uptake of technology innovations, especially fintech innovations, is quite high in Saudi Arabia compared to the rest of the region. How is Alinma Investment evolving to meet the financial needs of this digitally savvy segment of the population?

Alinma Investment Company along with its partners are at the forefront of the technologically innovative asset managers to get into this domain and we are capable of capturing the fast growth enabled by technological innovations. It is worth mentioning that nowadays, all of the products of the company are easily accessible online including through mobile applications.

What is your outlook for the Saudi funds industry for the next five to ten years and what is the role that Alinma Investment will play in it?

We expect a smooth growth in the exposure of investors in Saudi Arabia to funds considering the interest of the Saudi government in its vision 2030.

This is supported by Financial Sector Development Programme that aims among other goals to stimulate investment, finance, and savings. All these factors lead to improvement in fund operations and size considering the need for professionalism in asset and risk management in volatile markets.

The company will certainly be at the forefront of such activities and we hope to be one of the best fund managers in the market. The company is not only taking initiatives to present viable products

40 | January 2020 | International Finance

“We expect a smooth growth in the exposure of investors in Saudi Arabia to funds considering the interest of the Saudi government in its Vision 2030. This is supported

by Financial Sector Development Programme that aims among other goals to stimulate investment, finance, and savings”

and services to investors but it is also considering investors’ suggestions and requirements in building the company’s products. As such, for the coming five to ten years, we expect to continue our current plans in diversifying our products in classical investments such as equities, money markets, and real estate and to possibly cover new geographical regions and new sectors. In addition, we expect to introduce further new products covering additional sectors such as new technologies and financial derivatives and so on. All of this will, of course, be in accordance with Shariah regulations.

What is your opinion of the Saudi Arabian regulatory environment for funds and where do you see scope for improvement?

cover story finance

In any market, fund regulations are very dynamic and change with time especially when the need to strengthen and improve the investment environment and to consider changes in technologies and investor attitudes is pronounced. We believe the Saudi Arabian authorities are taking all measures to correct and improve all shortcomings in the regulatory environment and make the Saudi markets a focal point of regional as well as global investors considering the size and importance of the Saudi economy in the world.

Among the fund and asset managers that operate in Saudi Arabia, what are Alinma Investment Company’s key differentiators?

Alinma Investment Company is among the best

in market and the following are our noteworthy differentiators: Providing a full range of Shariah-compliant investment products and services Striving to lead the Saudi investment funds market Innovation-based approach wherein we are open to discussing all ideas and improving products and services according to investors’ needs As part of the Saudi community, we strive to impact this community and we seek to be impacted by this society Developing interrelationships with and among competitors to ensure the health of markets and to enhance the Saudi economy. editor@ifinancemag.com

International Finance | January 2020 | 41

The Access Bank UK Limited

Winner of International Finance Award 2019

The Access Bank UK is a wholly-owned subsidiary of Access Bank PLC, a Nigerian Stock Exchange listed company. We provide trade finance, commercial banking, private banking and asset management products and services for customers in their dealings with Organisation for Economic Co-operation and Development (OECD) markets and support companies wishing to invest in and trade in the Sub-Saharan African, MENA, and Asian markets.

We are authorised by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA) and the PRA. The Access Bank UK Dubai Branch, situated in the iconic Gate Building of Dubai International Financial Centre (DIFC), is regulated by the Dubai Financial Services Authority (DFSA).

Like our parent, we are committed to developing a sustainable business model for the environment in which we operate. This is reflected in our moderate appetite for risk, our passion for customer service, and our commitment to build long-term relationships by working in partnership

with our customers. We play a key role in our group’s vision to be the world’s most respected African bank. As such, we refuse to chase unsustainable yields as a route to growth. Instead, we focus on building our business through the strength of our customer relationships.

Herbert Wigwe, Chairman and Non-Executive Director of The Access Bank UK said, “The Access Bank UK was founded to establish a credible, sustainable OECD hub for the Access Bank Group. This was achieved with commendable efficiency while also becoming a successful and profitable business on its own right."

In 2018, the bank became a direct member of the three key UK payment clearing systems: Bacs (Bankers’ Automated Clearing Services), C&CCC (Cheque and Credit Clearing Company’s Image Clearing System) and Faster Payments. The Access Bank UK’s Managing Director and Chief Executive Officer Jamie Simmonds said, “This is a great landmark for us, enabling us to build a sustainable platform with direct entry into the UK payment clearing system.

Throughout my experience in financial services, my guiding principles have been to deliver excellent customer service and provide innovative solutions for the customers and markets that we serve. I have been involved in the turnaround of several existing businesses by going back to these basic principles and rebuilding from the ground up. When I established The Access Bank UK in January 2008, it was a turbulent time in banking but we set the risk appetite, the processes and procedures and developed products that our customers wanted. We have built the bank steadily but sustainably, and have a balance sheet of over £1.5 billion.

Jamie Simmonds, MD and CEO, The Access Bank UK

This will enable us to enhance the level of service our customers receive. We have a clear commitment to strong customer service and we anticipate and respond quickly to market needs with the right technology, products and services. Joining the UK payment clearing system is a clear example of meeting the needs of our customers.”

Fundamental to the bank’s growth is our operational culture built upon strong customer relationships and the delivery of high quality services.

Many high net worth customers who utilise The Access Bank UK for trade finance and commercial banking services also use our asset management and private banking for their UK personal financial interests. Such duality has proved beneficial for customers at a time when business and financial environments across SubSaharan Africa, Europe, and the USA remain challenging.

The Access Bank UK provides a number of services to support business activities in Sub-Saharan Africa and across the world.

We were awarded confirming bank status by the International Finance Corporation as part of their Global Trade Finance Programme, thereby strengthening our trade finance capabilities further. We were the first Nigerian bank in the UK to be appointed as correspondent bank to the Central Bank of Nigeria to undertake infrastructure work on behalf of the Nigerian government. We also issue Letters of Credit on behalf of the Nigerian government and Nigerian National Petroleum Corporation (NNPC).

Our commercial banking team offers relationship-based services for corporate and individual customers. We offer a wide range of products and services with a choice of competitive rates, market leading systems and top quality service.

Our global private bank has been built around our passion for delivering excellent service. We deliver innovative investment solutions to our discerning clients who value trust, integrity, and accountability as well as investment performance. We take a proactive approach to product and service delivery and offer unique investment solutions, that are tailored to our customers’ needs by a highly experienced private banking team.

The Access Bank UK Dubai branch offers a broad range of products and services to assist customers with trade and investment needs in Nigeria and Sub-Saharan Africa. The DIFC branch is committed to building a long-lasting relationship in the region in line with the approach that has proven so effective for The Access Bank UK. The combination of the Dubai office together with our presence in the UK and Nigeria delivers a wealth of expertise that significantly benefits our customers.

We take time to build long-term relationships and work closely with our customers to understand their goals in order to create a strategy designed to meet their needs. We provide constant support and development opportunities for our employees, which reflects in their dedication and professionalism. The bank is led by a team of accomplished individuals determined to deliver superior financial solutions for business and individuals. Our staff are highly experienced and many have spent time working in the Sub-Saharan, West African and international marketplaces. We are firmly committed to the diversity of our workforce. We encourage a sense of individual ownership while also fostering team spirit. Our endeavour is to help employees realise their potential through the provision of continuous learning opportunities and the tools and training to support professional growth.

Jamie Simmonds said, “Our people are fundamental to our bank’s continued development. They provide the skills that deliver our focus

Strong results from The Access Bank UK Limited The Access Bank UK has recently announced its annual report and accounts for 2018. The bank has recorded yet another year of significant all-round growth, achieving and exceeding targets for all the main growth strategies. Operating income was up 47 percent yearon-year to £53 million, with all four strategic business units performing well. Pre-tax profits overall grew significantly by 50 percent to £33 million and the pretax return on equity rose to 18.3 percent, up from 16.6 percent in 2017.

The bank’s trade finance operation continues to be the largest strategic business unit. Income grew by 20 percent year-on-year to £23.7 million, of which £9.3 million was accounted for by correspondent banking, representing annual growth of 45 percent.

Commercial banking had another exceptional year, with income growing by 90 percent to £21.9 million while asset management income rose by 13 percent to £1.7 million.

The bank completed the return of the initial investment to establish the operation in Dubai a year earlier than anticipated. Income of £2.1 million represents year-onyear growth of 213 percent, in what was only our second full year of operation, and reinforces the fact that this market offers considerable potential. on service and customer relations. Reflecting this, during the year we selectively recruited additional members to the team and also invested more in professional development. We were the first Nigerian bank to achieve Investors in People accreditation. We have now advanced our status to Gold. We believe that our consistently low staff turnover rate reflects in part the advances we have made in training and development. The bank is currently working in partnership with the Chartered Institute of Personnel and Development (CIPD) programmes.”

Jamie Simmonds commented on the recently published results, “The bank’s growth has flowed naturally from the strength of dynamic customer relationships and the trust that comes from the continuity of delivery by the same team.”

Herbert Wigwe added, “The completion of The Access Bank UK’s first decade of trading was one of the year’s major milestones. It has been a period during which the bank earned a reputation for innovation and flexibility, outperformed its targets and, thanks to the enduring strength of its customer relationships, has built the foundations for its continued progression.”

Banking and Finance

thought leadership

Wealth management Brazil wealth

Rubem Herzog Senior Wealth Manager at Geneva Management Group

Wealthy Brazilians should pursue offshore investment opportunities as they become easier to manage

Brazilian investors should invest offshore Spurred on by strong economic growth between 2004 and 2011, wealthy Brazilian investors had little reason to invest outside Brazil for a number of years. In recent times, however, economic and political uncertainty, coupled with historically low interest rates and inflation have meant that traditional fixedincome investments are no longer viable. The recent decision by the Central Bank of Brazil to trim its key Selic rate (Brazil’s basic interest tax defined by the government) by 50bps to 5.50%has only exacerbated the situation, forcing investors to consider other options In the quest for high returns, many have turned to the stock market, with a record 1.4-million people now investing on the BOVESPA. While the exchange has provided solid returns over the

The BOVESPA Index 120K 100K 80,000 60,000 40,000

past few years, it’s vital that investors maintain a diverse portfolio. It’s also worth bearing in mind that, globally, investors are moving away from equities, a scenario that’s likely to be repeated in Brazil. With that in mind, a growing number of wealthy Brazilians are increasing their offshore exposure. Once they realise the advantages offshore investing brings, it’s not unusual to see affluent investors aiming to hold 20 to 30% of their assets overseas, roughly double the percentage of five to ten years ago. Here’s why more investors should follow in their footsteps.

1. Investing offshore is getting easier for Brazilians In fact, it’s getting easier for Brazilan investors looking to take a portion of their wealth abroad. The Comissão de Valores Mobiliários, the country’s equivalent of the Securities and Exchange Commission, has successfully adopted new rules, enabling high net-worth investors to put greater sums overseas. One of the smartest ways to do this is to invest through PIC structures (Professional Investment Company), a mechanism which allows investors to defer taxes.

2. Overseas investment protects against currency devaluation and inflation

20,000 2012

2014

44 | January 2020 | International Finance

2016

2018

With the Real showing incredible volatility, investors tied up in investments linked to the

local currency are exposing themselves to more risk than they might want to. Investing in hard currencies, such as the US dollar, serves as a hedge and thus protects investors from the impact of local inflation and exchange rate fluctuations.

3. Diversification limits the country risk for wealthy Brazilians The benefits of diversifying an investment portfolio across different geographic regions have been internationally recognised for decades. It’s inevitable, however, that money will flow to areas of high returns, as it did in Brazil throughout the mid-2000s and early 2010s. The recent state of affairs is a powerful reminder to Brazilian investors on the dangers of concentrating investments in a single location or entity. Having a diversified portfolio when it comes to asset classes allows for reduced total risk without sacrificing long-term returns. The same is true when it comes to geographies.

The emergence of tech-enabled alternative asset classes, such as cryptocurrencies is also helping limit this risk and is something that all investors should look at.

4. Brazilians can sustain wealth for future generations The desire to maintain and grow family wealth over

generations is entirely understandable. Doing so requires the same, if not higher, levels of common sense and savvy as investing for oneself. Diversified portfolios with exposure to more developed markets and hard currencies can help affluent families sustain their wealth for future generations. One of the best vehicles to ensure that diversified portfolios are being put towards intergenerational growth is the family office. It’s particularly important in Brazil, which has a large number of high net-worth families.

It’s important to note that the family office has also evolved beyond a single point of contact dedicated to ensuring that wealthy families’ needs for financial solutions including structuring and preserving their wealth are served. Today’s family offices typically provide broader services such as dedicated wealth planning, financial expertise in asset management and importantly, tax and legal guidance through an evermore complex compliance landscape.

Moving beyond 2019, family offices will continue to expand their focus to include much more than conventional services such as legal and traditional wealth management. Other areas that will see a lot of attention include alternative investment strategies, participation in fintech opportunities, digital transformation of families’ related businesses, real-

International Finance | January 2020 | 45

Banking and Finance

thought leadership

Wealth management Brazil wealth

time consolidated reporting and soft factors such as philanthropy and governance.

5. Globalisation presents new realities While high net-worth individuals have always spent a lot of time abroad, investing overseas can make the process much simpler. Legally having bank accounts overseas can simplify and reduce costs with international travel (exchange rates, taxes etc). It can also support investment in overseas real-estate assets due to easier and cheaper access to mortgages and other debt instruments. And in a world where members of a family can easily find themselves living, studying, and working on several different continents, this kind of global diversity is more important than ever.

There are also an increasing number of financial vehicles aimed at catering to these needs. A good example of one such product is Private Placement Life Insurance.

Effectively an investment wrapped inside an insurance policy, a PPLI policy’s cash value depends on the performance of the investments within it. These investments can include hedge funds, mutual funds, and other potentially lucrative assets. Ultimately, it’s down to the policyholder to choose what kinds of investment they’d most like to have, meaning that they have a lot more freedom than they would with an ordinary life insurance policy.

A PPLI policy is generally by nature a globally focused vehicle. So, for instance, approved banking partners and advisors in Switzerland can work with Brazilian citizens, to provide an investment vehicle that has a global focus. The policy would purchase global funds and will be managed by a global advisor who is outside the US but understands the US market. This makes it perfect for anyone who wants to diversify from traditional Brazilian Real denominated investments but wants to maintain tax compliance and work with international advisors.

Investing offshore a sign of economic maturity In a global environment faced with very low interest rates, Brazil should celebrate its new reality as a sign of an economy achieving economic maturity.

It’s far from alone in the challenges it faces and is better off embracing the opportunities presented by its new

46 | January 2020 | International Finance

With a PPLI policy, approved banking partners and advisors in Switzerland can work with Brazilian citizens, to provide an investment vehicle that has a global focus. The policy would purchase global funds and will be managed by a global advisor who is outside the US but understands the US market

reality than simply trying to turn back the clock.

Additionally, it should understand that it has a clear foundation to enable sustained economic growth that differs from the turbulence experienced over the past few years. As for investors, only time will tell how quickly they adjust to this new reality. But the sooner they realise that investing overseas is a legal, proven and necessary strategy, the better they will be in the long run.

Rubem Herzog is a senior wealth manager at Geneva Management Group. He has experience in asset management and the regulatory environment surrounding investment funds. He has exetensive compliance and risk management knowledge and holds an MBA from the University of Chicago. editor@ifinancemag.com

If you are interested in taking part as a delegate or sponsor please register your interest at www.ohsleaders.com.au

THE 9TH ANNUAL OHS LEADERS SUMMIT AUSTRALIA 25 - 26 March 2020 | Sofitel Hotel, Brisbane, Australia

2020 SPEAKERS INCLUDE

KYM BANCROFT Head of Health and Safety, Queensland Urban Utilities

LAURA TANKENSON VP, Environmental Health & Safety (EHS), Paramount Pictures

LOUISE DUBOIS Director Safety and Recovery, NSW Ambulance

LAURIE SHELBY VP EHS, Tesla

CRAIG JOHNSON Senior Manager Safety Health and Environment Asia Pacific, CHEP

JAMIE ROSS Head of Zero Harm, Spotless

AWARDS 2019

Celebrating

International Finance Award

excellence 2019

Seven years covering emerging markets 48 | January 2020 | International Finance

International Finance is a London-based premium finance and business magazine with the prime focus to engage, inform and connect investors, business leaders, and decision makers in key industry sectors in the Middle East, Asia, Europe, Africa and Latin America.

The magazine brings you a delectable choice of analysis, features, interviews, thought leadership articles, and insight pieces from our own editorial staff, C-suite executives, and industry analysts.

Dubai: 23rd Jan 2020

|

Thailand: 31st Jan 2020

International Finance is steadily growing its audience reach while delivering value to global its clientele

Between June 1 and December 31 2019, the International Finance website achieved over 280000 unique page views. The print magazine enjoys a substantial private cirulation. The International Finance magazine and website have a strong readership in Europe, the Middle East and Asia-Pacific with a growing audience in Africa and Latin America.

The magazine in covers trending stories on banking and finance, Islamic finance, asset management, wealth management, hedge funds, pension funds, sovereign wealth funds,

real estate, fintech, currencies, oil and gas, telecom, ports and shipping, logistics, technology, commodities, brokerages, and healthcare across key markets.

International Finance | January 2020 | 49

AWARDS 2019

Our clientele enjoy maximum visibility through the magazine’s extensive outreach in forms of print and online native advertising, media partnerships in key markets and acknowledgement of corporate excellence through the annual corporate awards.

International Finance hosts the annual International Finance Awards which aims to recognise and reward industry leading performances and leadership at organisations from around the world.

The sixth edition of International Finance Awards 2018 was held in Dubai and Bangkok last year.

International Finance Awards have recognised the industry-leading performances of organisations and leaders in finance, banking, energy, oil and gas, healthcare, and logistics among other sectors.

The first International Finance Awards was held in

50 | January 2020 | International Finance

Dubai in 2013. The company’s subsequent awards have been held in major business hubs like London, Singapore, Dubai and Bangkok.

The chief dignitaries for International Finance Awards 2018 were H.E.Engineer Walid Faris Al Faris, Director General of King Abdul Aziz Dammam Port and Mr. Nathan Hunter, who headed business development

International Finance Awards focus on honouring the outstanding performances of organisations and leaders at the Department of Economic Development, Ras Al Khaimah. The seventh edition of International Finance Awards 2019 will be held in Dubai and Bangkok this year. The chief dignitaries for the awards are H.E. Saud Salim Al Mazrouei, Director of Hamriyah Free Zone and Saif Zone and H.E. Ms. Sania A Ansari, CEO and Chairperson of Ansari Group.

Some of the past dignitaries for the International Finance Awards were H.E. Hani Al Hamli, Secretary General of Dubai Economic Council, H.E. Dato’ Ilango Karuppannan, High Commissioner of Malaysia to Singapore and Jeremy Tan, Honorary Secretary and Singapore, Enterprise Chapter Chairman of SGTech.

Finalists for the awards are informed of their status after our in-house research team conducts a deep performance analysis.

In recent years, global corporations including Saudi Telecom Company, First Abu Dhabi Bank, Emirates NBD, Mashreq Bank, HSBC, Standard Chartered, Saudi Hollandi, Doha Bank, Abu Dhabi Ports, Dubai Metro, Saudi Global Ports Company, Bupa Arabia, Zain, Damac, and Bank Muscat, among others have won the International Finance Awards.

International Finance | January 2020 | 51

Business

Dossier

asset management Cocolife Asset Management Company

Long-term strategy pays off for Cocolife funds

C Cocolife Asset Management Company’s funds have delivered superior returns since inception – here’s how

52 | January 2020 | International Finance

IF Correspondent Cocolife Asset Management Company Inc. (CAMCI) of the Philippines has distinguished itself in the Philippines asset management market with all its funds delivering superior returns since inception.

The history of Cocolife Asset Management started in November 1993 when United Fund Inc. (UFI) was launched with United Coconut Planters Bank (UCPB) as the investment manager and distributor.

Accordingly, UFI was among the five member funds that organised the Philippine Investment Funds Association (PIFA) in 1996.

The management of UFI was then transferred to COCOLIFE (United Coconut Planters Life Assurance Corporation) in 2001. Two years later, CAMCI was incorporated and was appointed as the investment manager and principal distributor of United Fund, Inc. Soon afterward, Cocolife Asset Management launched the second fund, Cocolife Fixed Income Fund, Inc. (CFIFI) In 2008, CAMCI also launched the Cocolife Dollar Fund Builder, Inc. (C$FB) and in 2011, it reached a milestone when CAMCI’s total assets under management (AUM) breached the P1 billion mark.

The company reached yet another milestone when Cocolife Fixed Income Fund Inc.’s total assets under management hit P2 billion in 2017. And in 2018,

Asset Management Philippines

CAMCI celebrated its fifteenth year of operations. At the same time, the three funds also commemorated anniversaries: United Fund reaching 25 years; Cocolife Fixed Income Fund, Inc., 15 years; and Cocolife Dollar Fund Builder Inc., ten years.

In an exclusive interview with International

Finance, Artemio A. Tanchoco Jr., President, and Mirasol Z. Sanchez, Senior Manager and Head of Portfolio Management at Cocolife Asset Management Company Inc., explained how the company’s funds achieved their leadership positions in the Philippines asset

International Finance | January 2020 | 53

BUSINESS DOSSIER

Cocolife Asset Management Company

asset management

management market, its investment strategy, and its outlook for the Philippines market.

International Finance: Could you please tell us more about Cocolife Asset Management’s investment strategy?

Artemio A. Tanchoco Jr. and Mirasol Z. Sanchez: In general, our investment strategy is to stay long enough to weather the inevitable ups and downs of the market. Nevertheless, it also depends on the objective of the funds we are managing. For our equity fund, our strategy is to trade the volatility of the stock market and employ stock selection and allocation. For our fixed income fund, the company

Artemio A. Tanchoco Jr.

is keen on maintaining its accrual-based investments so as to minimise the impact of interest rate volatility, consistent with its policy to preserve capital.

How have Cocolife Asset Management’s key funds performed over ten, five and one years?

Cocolife Asset Management’s mutual funds have shown their resilience over the past years, overcoming the extreme volatility in the mutual fund industry and the financial markets as a whole. The funds under its management have historically yielded superior returns since their inception. In fact, they won individual recognitions for their 2018 performances in terms of one-year, three-year, five-year, and tenyear returns. Notably, CFIFI topped the rankings of peso-denominated bond funds as it garnered first place in all the one-year, three-year, and five-year return categories, surpassing ten other competing funds in the industry. UFI was also awarded third place for the one-year return category of the peso-denominated equity funds.

Likewise, it placed second for both three-year and five-year returns. C$FB, meanwhile, bagged first place for the one-year, five-year and ten-year return categories, displaying excellence in the dollar-denominated balanced funds category.

Could you please tell us more about the performance of Cocolife’s Peso denominated equity fund and Cocolife Fixed Income Fund and how they have delivered value to customers over time?

In the previous years, United Fund, Inc. (equity fund) was a ‘lag¬gard’ among the company’s funds. But we have already corrected our strategy.

We made alterations to our stock selection strategy to be at par with the index in terms of sectoral and company weight. This strategy was aimed at minimising the deviation between the index and fund’s performance. True enough, the management’s strategy shift did bode well for the fund, as UFI’s performance in the past five years was in synch with the local index. In fact, UFI has even outperformed the local market.

Tagged as the ‘consistently consistent fund’, Cocolife Fixed Income Fund, Inc. (CFIFI)

54 | January 2020 | International Finance

topped the ranking of the peso bond funds in the Philippine Investments Funds Association (PIFA) rankings under one-year, three-year and five-year categories, notably for two consecutive years now. Also, since 2014, the fund has been the leader in the one-year performance ranking as it continues to keep hold of the first spot.

Furthermore, the fund has been awarded by international bodies including the International Finance and Thomson Reuters Lipper Fund as the best peso fixed income fund in the Philippines.

What is Cocolife Asset Management’s investment focus for the next year?

Cocolife Asset Management shares the responsibility of helping the Filipino people become financially strong and sound through financial education and financial solutions.

The company plays a vital role in the capital markets and the Philippine economy, especially in mobilising resources and channeling investments to help drive inclusive growth and prosperity for the nation. Cocolife Asset Management has been taking part in the industry-wide efforts to improve the financial

Mirasol Z. Sanchez

We believe valuations will play a key role in bringing the PSEi back near its all-time high. At 9,000, the PSEi will most likely trade within its 10-year historical average of 17 times literacy of Filipinos. It conducts financial literacy campaigns all year round targeted at specific groups of individuals, such as overseas Filipino workers and graduating college students.

Cocolife Asset Management strongly believes that good stewardship is a good business practice. The company is guided by the principle of empathy, putting it into practice by making its services personalised. The company seeks to understand what the specific needs and requirements of its clients are and tries to provide them in ways that will meet their budgets.

Over the years, Cocolife Asset Management has grown to be one of the leading asset management companies in the Philippines,

committed to providing customer service of the highest standards along with quality investment advisory services, putting Filipinos on a path to wealth-building and prosperity. Moving forward, the company will continue to uphold its vision “leading the way toward financial freedom”.

What is your outlook for the stock market in the Philippines for in the short term and what are the factors that could influence the stock market’s performance in the short term?

For the Philippine stock market, 2020 will most likely be another challenging year in the backdrop of heightened regulatory risk tied with the political factors in the local front. This overhang could

International Finance | January 2020 | 55

BUSINESS DOSSIER

Cocolife Asset Management Company

asset management

continue especially in the short-term, although a few surprises, such as the GDP’s potential outperformance and benign inflation data in the first half of 2020 could provide momentary relief to Philippine equities. Overseas, trade and global growth uncertainties could serve as market drags especially on emerging markets like the Philippines.

Thus, in this scenario, we can infer that the trading circumstances may be difficult, but opportunities will still be available since the recent correction wave has pushed valuations to attractive levels.

Which sectors are likely to outperform in the next year in the Philippines market?

Given the potential cuts in local interest rates and required reserves for banks, we are looking at the banking sector as the bright spot in the Philippine stock market. The property sector could also be on

Cocolife funds performance - 2018 Fund Rank Category

Years

CFIFI

1st

Peso-denominated bond funds

1,3, 5

UFI

3rd

Peso-denominated equity funds

1

UFI

2nd

Peso-denominated equity funds

3&5

C$FB

1st Dollar denominated balanced funds

1, 5, 10

the positive side, although this could be balanced out in case the unsolved POGO issue and slowdown in office take-ups resurfaces. For consumer stocks (food, beverage and retail), earnings could recover but will be tamed by headwinds such as tight competition and price shocks. Regulatory issues will most likely keep power and utility companies at bay, with related conglomerates being on the tailend of uncertainties.

What is your outlook for the stock market in the Philippines for the long term and what are the factors that could affect the stock market’s performance in the long term?

For the long-term, our view on the local stock market

56 | January 2020 | International Finance

is tied with out optimistic view on the Philippine economy. Currently, infrastructure projects are being rolled out, regulations are being improved, and the foundation for sustainable growth is being set through structural reforms.

We are also on the eleventh year of a bull run that commenced in March 2009, and as of March 23, the ten-year return of the PSEi is at 160 percent. It has also weathered the changes of the times, including the Fed’s winding down of its asset purchases, geopolitical tensions, and slowing global growth concerns. Therefore, we think that as long as the Philippine growth story is intact, the PSEi will continue to deliver.

What is your outlook for the debt funds in the Philippines in a three to five-year horizon and what are the factors that could affect the performance of debt funds in that horizon?

We maintain our bullish view on the fixed income market for the next three to five years as the benign inflation provides leeway for more accommodative policy. We expect the BSP to cut policy rates at least twice in 2020 and RRR between 200bps to 400bps, in line with the BSP’s target of single-digit RRR by 2023.

Likewise, policy tightening pressures externally have been showing signs of moderation, particularly the dovish statements from the world’s largest market. We expect a dovish move from the Federal Reserve in 2020, with another rate cut on the horizon.

Will the PSEi breach 9000 levels in 2020?

If so, why?

With earnings catching up, valuations looking attractive and GDP appearing to be at a stable level, a revisit of the 9,000-level is not a farfetched idea. Listed corporations appeared to have faced growing pains this 2019, and we will see recoveries across these sectors this coming year, as bottlenecks are addressed. We believe valuations will play a key role in bringing the PSEi back near its all-time high. At 9,000, the PSEi will most likely trade within its 10-year historical average of 17 times. editor@ifinancemag.com

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Banking and Finance

analysis

Markets Russian stock market

Higher dividend payouts and the USChina trade war distracting Russia’s faceoff with the US has strengthened investor sentiment in Russian stocks

Are Russian stocks the best value picks for 2020?

Sangeetha Deepak

In 2019 the Russian stock market rallied strongly as it delivered some of the highest returns among markets across the world. The MSCI Russia Index, a tracker to measure the performance of 23 largest publicly-listed companies in the country, had risen by 44 percent around the second week of December.

According to Bloomberg, 15 of the 23 Russian members of the MSCI Index delivered The MSCI total returns exceeding the Russia Index, expected average of 14 percent had risen by in 2019. Since the annexation 44 percent of Crimea 2014, the Russian around the Trading System (RTS) Index second week surpassed the 1,400 level of December for the first time in June. The RTS Index has increased 46 percent since January 1 till December 25, 2019. Russian stocks outclassed their developed world and emerging market peers by quite some distance.

In comparison, the Dow, the Nasdaq and the S&P have seen new record highs in 2019 but with lower returns. The S&P 500 showed an annual gain of 27.9 percent as of December last week. Meanwhile, the Nasdaq returned 14.2 percent on average and the Dow was up more than 21.5 percent over the same period.

Even China’s stock market rose 33 percent this year, suggesting it is one of the best performing stock markets in the world. China’s market rose

58 | January 2020 | International Finance

so much in 2019 because of high investor interest in its technology companies and relatively cheap value compared to other emerging markets. As for India, the sensex recorded a 13.7 percent growth as of December 17, 2019.

Why Russian stocks outperformed emerging markets peers Russian investment firm TKB Investment Partners’ consensus view is that Russian equities offer strong value investment case and opportunities for increasing growth. “The trend, which started about five years ago will continue, should the global jitters and Russia sanctions topic to subside. We still trade at significant discounts to emerging market peers like Brazil, China, India and South Africa and have plenty of room to make a hefty catch up. The RTS Index reflects more than 50 percent discount to the MSCI Emerging Markets Index on FY19e P/E basis,” a spokesperson at TKB Investment Partners tells International Finance. Undervalued Russian stocks became one of the cheapest in the world — available at half the value of its emerging market peers.

The one factor that helped RTS Index outperform peers in Europe, the US and BRICS markets is the measure undertaken by the Central Bank of Russia in terms of stabilising the ruble and financial markets and de-escalation of conflict rhetoric. “Russian market is historically very cyclical but it took RTS index about five years

Analysis Russian stock market

to restore its USD value (1,500 points) from the pre-Ukraine crisis. The strong balance sheets, high FCF yields, buybacks and solid dividend payments compared to international peers have also supported the Russian stocks in 2019,” Boris Krasnojenov, Head of Research, Senior Metals and Mining Analyst, Alfa-Bank, said in an interview with International Finance.

Another reason for its outperformance is that large capitalisation companies materially increased dividend payouts. This is especially true for companies in which the Russian government is the majority shareholder, such as Sberbank and Gazprom. Russia’s dividend yields were more than seven percent in 2019, which is twice the MSCI Emerging Markets Index dividend yield of 3.2 percent.

In fact, the 44 percent return on MSCI Index includes income which came from dividend payments.

According to the TKB spokesperson, “The Central Bank of Russia’s decision to cut rate four times during the year, from 7.75 percent to 6.5 percent, coupled with a strong value case for the Russian equity market,” have subsequently led to the stock boom. That in turn made the Russian market’s dividend yield among the highest in the world at 6.7 percent, compared to just 2 percent on the S&P 500, a tracker for the biggest US-listed companies. But there were other factors that can be attributed to soaring Russian equities than just a high dividend yield. To investors, the fact that

the escalating trade war between Beijing and Washington is more intense than Russia-US face off has made the Russian stock market rather attractive. The fear of sanctions has reduced. 'Rebound in oil prices in 2019 and no fresh EU or US sanctions,' uplifted Russian stocks as the best global value pick for the year, Michael Guo, professor in finance at Durham University Business School tells International Finance.

Will Russian stocks remain the best value picks for 2020?

What was clear is that increasing global risk appetite and search for higher-paying assets on the back of interest rate cuts have unleashed a tidal wave in Russia’s stock market.

That hugely benefits stocks that are perceived riskier and have low liquidity levels — pointing to the fact that even a measly increase in demand might raise share prices. In the base case scenario, an average of 12 percent in sustainable free cash flow yield is expected for the market over the next two years.

But in Guo’s view, “It is highly unlikely that Russian stocks will remain the best global value picks going into 2020.” This is only because the risks far outweigh the opportunities. On the geopolitical front, the uncertainty surrounding oil prices and the US-China trade war is expected to affect the Russian stock market.

Also, the sanctions regime is limiting Russia’s evolvement and has cut two percentage points off its growth as the Ministry of Finance and Central Bank of Russia has developed a hostile approach to reinforce economic safety. “Recent news about German officials finding ‘sufficient indicators’ that suggest Russia ordered the killing of Chechen rebel in Berlin, could

International Finance | January 2020 | 59

Banking and Finance

analysis

Markets Russian stock market

raise fresh sanctions from the EU, which is yet another risk that could spoil the party,” Guo says.

Americans dominate Russian free float Interestingly, North American investors accounted for more than half of the Russian free float, observed Moscow Exchange, while their representation in the European markets was only 26 percent.

“According to an article in IR Magazine, as of end of June, the US institutional investors held $43.9 billion in Russian stocks from $35.3 billion at the close of 2018. The UK and Scandinavia upped their holdings to $16.5 billion and $8.1 billion respectively,” Guo says. “It is the US institutional investors that are driving the recovery in the Russian stock market.”

The US fund managers like Allianz invested billions of dollars of American investment capital into Russia’s publicly traded companies, leading to a 58 percent increase in US investment since 2015. The RTS Index has a market capitalisation of nearly $170 billion.

“On one hand foreign investors have more than 50 percent share in Russian free float. It is unlikely that material move on the market can happen without their contribution, the TKB spokesperson says. “On the other hand, since the beginning of 2019 there was around $3.6 billion net outflow from the Russian market from foreign investment funds, according to EPFR Global data presented by Financial Times.” Many global emerging markets funds with five star ratings from Morningstar are overweight on Russia. “It is likely

60 | January 2020 | International Finance

Russia’s GDP growth

1.2% 1.6% 1.8% 2019

2020 (e)

2021 (e)

Source: World Bank

that this position had a positive contribution to these funds’ excess return in 2019,” he adds.

Krasnojenov points out that despite the bitter dispute between Russia and the US on global affairs — it is European investors who lost their market share while UK investors merely kept their niche.

“So, given those proportions in the free float of the Russian stocks, we would assume that money managers from the US will benefit the most. The share of foreign investors in the total trading volumes on the Moscow Exchange remains around 50 percent. The high quality Russian blue-chip stocks find strong demand across overseas investors,” he explains.

Economic warning signs for investors Russia has earned a BBB investment grade rating from Fitch, like India and China. Its spending is controlled unlike Brazil and has a Finnishstyle National Wealth Fund of $124.14 billion, which was seven percent of Russian GDP at the start of 2019. “The World Bank predicts

that Russian economy is set to see a growth in GDP in 2020. The current forecast indicates increase from 1.2 percent in 2019 to 1.6 percent in 2020 and to 1.8 percent in 2021,” Guo says.

Whatever the current optimism, investors are perplexed about high returns from paid out dividends in many Russian companies without the stock price moving at all. The Finance Ministry insisted that all state-owned enterprises should pay out 50 percent of their income as dividends to benefit investors.

While most managements resisted the pressure, Gazprom agreed to increase dividends by 10 rubles per share, which was further hiked to 16.6 rubles per share. After that, its total payout under international accounting standards increased from 7.5 percent of net profit to 27 percent. This has forced investors to question whether the new higher dividends will be permanent or not. Krasnojenov calls volatility of the Russian stock market the “number one enemy to the portfolio investors” for two reasons. First, “The free float is dominated by the hedge fund managers who actively

Analysis Russian stock market

Comparative returns: Global indexes

21.5%

14.2%

44%

33%

Dow

Nasdaq

RTS Index

Shanghai Composite

As of the second week of December 2019

trade in pairs, such as Russia vs Turkey, or Lukoil vs Sasol.”

Secondly, he said “The Russian stocks are exposed to commodity price swings. We have to recognise that the oil price dynamics remains essential catalyst for the Russian equity universe.”

The economics of Russian stocks are changing. Guo adds that timing is crucial while investing in Russian stocks as the index is extremely volatile, considering how the volatility index, on average, was 31.25 in 2016, 21.63 in 2017, 24.53 in 2018, and 20.71 in 2019.

OPEC is gearing up for more cuts in 2020, however. Russia is yet to agree to further cuts. “With non-OPEC countries set to add to the oil supply in 2020, there is always the risk of further fall in oil prices, which could be damaging to Russian Stocks. With increasing uncertainty around oil prices and the threat of fresh EU sanctions looming, the level of volatility is not expected to go down anytime soon.”

As well as taking into account the alliance between Russia and China, “delay in the anticipated US-China

deal might impact the Russian markets,” Guo adds.

Although the trade war might potentially undermine the demand for export companies and squeeze their margins, consumer sectors and those companies benefitting from local demand should get moving rapidly in 2020. “We also recommend to pick companies which have solid dividend policy for investors including Gazprom, Lukoil, Nornickel and integrated Russia steel majors like Novolipetsk Steel and Severstal,” Krasnojenov says.

The TKB spokesperson in fact, stresses that, “it is better to pick stocks rather than sectors on the Russian equity market.” In his view, the “difference between stock performance within one sector can be tens or even hundreds of percentage points over several years. It is useful to select a good stock picker.” That said, for investors who are seeking an opinion on sectors can consider companies in oil and telecommunications.

Even the metal and mining sector has performed well with marginal negative returns of 0.04 percent.

More recently, Russia has started exporting natural gas to China through an 1,800 mile pipeline called the Power of Siberia headed

by Gazprom, and therefore, the oil sector continues to look promising.

Defining the next big prospect What brings optimism right now is that “Russian corporates have gone through a massive deleveraging process that obviously supports equity value growth,” Krasnojenov explains. But the deteriorating geopolitical conditions are weighing on investor sentiment — creating uncertainty around 2020.

That is why a cautious approach is necessary while investing in Russian stocks in the long-term.

“However, if everything goes as planned RTS Index will touch the 2,500 level of 2008 in the next five years,” Krasnojenov says.

editor@ifinancemag.com

International Finance | January 2020 | 61

Banking and Finance

analysis

Fintech African fintech

Sub Saharan Africa is now among the fastest growing fintech investment zones globally with trade war weary Chinese flying in with cash

African fintechs are riding global investor sentiments Sangeetha Deepak

Africa’s financial services value chain is rapidly changing. The continent’s fintech revolution started because the continent has the highest levels of mobile penetration and unbanked population in the world.

A study published by Disrupt Africa on active fintech startups over the last four and a half years in 28 countries found that African fintechs have incrementally increased in Nigeria’s number to 491 in 2019. In payments November alone, Nigeria’s companies payments companies received received $400 $400 million in investments— million in pointing to venture capitalists’ investments— and especially China’s deep pointing interest to gain advantage to venture from the continent’s capitalists’ expanding fintech ecosystem. deep interest The recent developments in fintech investment pose the big question—why is Africa slated to outmatch the top fintech investment destinations of the world?

Sub Saharan Africa is the fastest growing fintech investment zone A new GSMA research found that Sub-Saharan Africa is one of the fastest-growing investment zones for fintechs. “The region’s fintech landscape has grown at an annual rate of 24 percent over the last 10 years,” Dapo Adewole, who is responsible for leading

62 | January 2020 | International Finance

the Technology and Digital Practice across Ernst and Young West Africa, tells International Finance.

The region’s fintech segment comprises more than 260 active companies, with 20 percent of them being international players. A leading independent newswire Medici conducted research last year that found that Nigeria and Kenya are the two African countries that boast the highest number of startups working toward financial inclusion.

These fintechs have already made a profound impact on the local people with rational approaches and nimble technologies. That coupled with a unique economic and demographic environment has established the Sub-Saharan Africa as an ambitious rival to evolving markets like Latin America and Asia. The fact is “it is characterised by a less-developed financial infrastructure and an unbanked population of about 66 percent as of December 2018,” Adewole explains, is the prospect for massive new fintech opportunities.

“Not hampered with what is now considered ‘old tech’ such as fixed phones, Africa has used the mobile phone revolution to increase financial inclusion across the continent. This wave of innovation has continued to develop, not just geographically, but as payments are linked to most parts of a digital merchant experience the growth of smartphone is bringing new opportunities to fintech. Consequently there are new opportunities in over the top smartphone-led initiatives such

Analysis African fintech

as PalmPay and OPay in Nigeria,” Greg Reeve, Director at PalmPay tells International Finance.

Mobile money startup OPay is capitalising on Nigeria’s 123 million unbanked, who account for 60 percent of the total population. “At OPay, we see this challenge as a major opportunity to deliver financial services for everyone with free, safe and easy to use mobile products under the promise of financial inclusion. Financial services should be available for everyone without regard for physical borders, boundaries or even social status,” Iniabasi Akpan, country manager at OPay Nigeria, said in an interview with International Finance.

In another example, ecommerce retail platform Jumia is helping to build the industry by solving every day challenges, including bills payment,s airtime recharges, loan approvals, or investment access. “The African fintech ecosystem offers tailormade solutions that address local and specific customer circumstances,” Adewole explains, making them very attractive to global investors.

African fintechs: Major global investors at play Venture capitalists have channelled huge investments into African fintechs highlighting Africa’s fintech revolution. In March, Mastercard invested $300 million in Africa’s largest payments processor Network International.

Investors put in $400 million in three

payments startups in November alone. OPay, which is incubated by Chinese internet browser Opera, received $170 million funding in two series led by famed Chinese investors, including Sequoia China, IDG Capital and Source Code Capital — an equivalent of one fifth of all venture capital funds raised in Africa in 2018.

Visa announced a $200 million investment in Lagos-based Interswitch and local fintech PalmPay. Additionally, PalmPay received $40 million in a seed funding led by Chinese mobile phone maker Transsion.

An American investment firm Partech Ventures found that the total funding raised by the three fintechs represent a significant portion of the $1.2 billion in venture capital across the continent in 2018. Those fintechs emphasised that they would use the cash to expand into select parts of the region where only one-third of adults have bank accounts.

This ties back into the formula that the unbanked population lacking access to the current financial developments have become one of the biggest boosters for Africa’s fintech modernisation — and for expanding investor interest.

“Global corporates like Visa and Stripe prefer to buy shares in Nigerian payment platform Interswitch and Paystack respectively considering their interest in Sub-Saharan Africa,” Adewole explains. Interswitch in a media report said Visa’s investment has valued the company at more than

International Finance | January 2020 | 63

Banking and Finance

analysis

Fintech African fintech

$1 billion — making it the first homegrown unicorn in Africa.

Also, three Nigerian fintech startups Kudi, OneFi and TeamApt raised $5 million each in funding in 2019. OPay, on its part, has been able to attract major investments because of a tremendous growth trend observed in Lagos, which ranks among the top 100 cities with a robust fintech ecosystem.

Also, Lagos-based Flutterwave has established its own partnership with Visa and Chinese third-party mobile and online payment platform Alipay to offer a raft of digital payments between Africa and China.

“Things can move quickly when you get the right formula and are addressing the real underlying customer issues. There are now a number of companies with good investments addressing a number of areas. Some unfortunately will fail, others will pivot and find new opportunities and some will grow to be successful. I suspect that some will become very large over the 10 year timeframe. The important thing is that currently there is opportunity, market and talent — and that’s a strong mix. With the right investment and a bit of luck we will see more big success stories coming out of Africa,” Reeve explains.

Chinese money hot after African fintechs trail China has become vital to Africa’s financial services scene with internationally recognised firms investing in local fintechs. In August, Qingliu Capital, Jiuhe Venture Capital and Shaka Ventures poured an undisclosed amount into Lagos-based mobile

64 | January 2020 | International Finance

African cities ranked among the top 100 globally for fintech ecosystems Africa’s most important fintech ecosystems - world rankings

Johannesburg

62

Nairobi

63

Lagos

71

Cape Town

87

Accra

123

Kigali

132 168

Kampala Source: Global Fintech Index City Rankings

payments provider Gona.

The two Chinese giants Huawei and Transsion are collaborating with Africa’s fintechs through partnerships and smartphone sales. A year ago, Chinese investors would have set eyes on Silicon Valley for investment potential but that has now shifted. Their focus is being redirected toward Africa because of the prolonging trade war with the US and the continent’s sudden tech eruption.

Experts believe that Chinese investors constantly need to explore new investment markets — and for that reason, the next obvious destination would be

Africa — where business and consumer landscape is primed for development in the coming decade.

Are African fintechs the hottest in the world now?

Sub-Saharan Africa leads the world in per capita registered and active mobile money accounts, outlets, and volume transactions which have set the region apart, in terms of observable trends in fintech growth and investments.

It should be noted here that early developments on the part of some companies have made African fintechs the hottest in the world now.

The challenges Kenya’s first mobile

Analysis African fintech

wallet M-Pesa faced in cross-border paymensts is being addressed by a Nigerian startup Flutterwave.

The startup has integrated Africa’s fragmented payments system through a single API allowing local merchants to make transactions anywhere on the continent and to accept payments from an M-Pesa user. In fact, a large number of mobile payment providers in Kenya have transformed the payment landscape to an extent that 45 percent of the country’s GDP came from mobile payments infrastructure.

Now the fintech presence can be strongly felt across most urbanised African countries. Sami Louali, who is the Executive Vice President for corporate development and financial services at Jumia, makes a valid point to International Finance, “Africa has the world’s youngest workforce with a rapidly increasing rate of smartphone use.”

Although the continent is a latecomer to the fintech revolution, it has leapt straight into it with a a modern mobile infrastructure.

“Mobile ubiquity enables scale and speed-to market that makes the cycle of innovation and experimentation much faster than in other sectors,” MFS Africa founder and CEO Dare Okoudjou says in an interview with International Finance.

Jumia is focused on mobile technology and the creation of supporting infrastructure. Even OPay is opening up a suite of digital offerings because “Technology and infrastructure are key components for the adoption of fintech services around the world,” Akpan says.

“Currently, OPay has greater ambitions to consolidate the brand

Overall, the sector exhibits promising signs of accelerating growth, ample investment and business opportunities.The merits of this ambitious mindset for growth among African entrepreneurs are pulling venture capitalists from around the world toward them

positioning in Nigeria and plans to bring more vertical services such as ORide and OFood. It also has further plans of expanding brand visibility to other African countries like Kenya, Ghana and South Africa.”

Does the fintech regulatory ecosystem suppport growth?

A majority of evolved fintechs are closely tied to the region’s payments infrastructure creating new business models and unconventional practices.

For example, Lagos-based startup PalmPay’s new payment app will be preinstalled on Transsion’s mobile brand Tenco as part of a tie-up, with an estimated reach of 20 million phones in 2020.

“Complementary business models in Sub-Saharan Africa have made fintechs attractive to both private and public investors worldwide and targets for mergers and acquisitions,” Adewole says.

“Overall, the sector exhibits promising signs of accelerating growth, ample investment and business opportunities.” The merits of this ambitious mindset for growth among African entrepreneurs are pulling venture capitalists from around the world toward them.

Africa requires a powerful regulatory framework, presaging a new fintech era. “While current laws in certain jurisdictions offer guidance and moderate protection, they will need to be continuously updated to cover issues that will arise from the development of fintech products.

It is already happening, but pan African companies such as Jumia would like to see more alignment and coordination between the central banks of the continent,” Louali says.

Some African countries’ regulatory frameworks have already put financial inclusion and innovation on the forefront for further development. “The regulatory environment across the continent is certainly adapting to the growing demand for fintechs as governments are starting to establish incentives.

The regulations are aimed to balance the growth of the sector while providing appropriate protection for consumers. In a few other African countries like Uganda or Tanzania, regulators are receptive to fintech developments and they see fintechs as an important driver for financial inclusion,” Adewole explains.

Countries such as South Africa, Kenya, Ghana and Uganda International Finance | January 2020 | 65

Banking and Finance

analysis

Fintech African fintech

have developed an advanced data regulation framework. Yet, they face challenges such as nonexistence of centralised approach to fintech regulations and no single regulatory policy on fintech.

“Fintech regulations can vary among different countries, which is why we’ve seen that a localised approach is necessary to ensure success,” Akpan explains.

Regulators believe that a traditional prescriptive regulation might suit stable sectors, while it is not ideal to define a set approach for fintechs as they will always encounter last moment crisis. As Akpan describes, “It’s not a ‘onesize-fits-all’ approach, so being thoughtful about expansion and actively monitoring the regulatory environment is essential as these companies scale.”

Another unique challenge Louali states is the differences in African ecosystems, where some economies are led by banks and others by telcos. So the venture capital investments are naturally pulled toward larger economies — making it difficult for fintechs operating in smaller markets.

In Okoudjou’s view, “Regulation must be progressive, proportionate, and pro-mobile.” It is now the mobile channels are more easily accessible and affordable for the marginalised and poor customers. So these customers should be positioned at the centre of any regulation.

Secondly, the proportionate factor that Okoudjou mentions points to the fact that low risk of low-value transactions will not increase as they cross a border. The risk of those transactions decreases

66 | January 2020 | International Finance

Fintech Funding Investors Opay $170 mn Sequoia China, IDG Capital and Source Code Interswitch $200 mn Visa PalmPay $40 mn Transsion

considerably when using a mobile channel over cash. Thirdly, it is of utmost importance to embrace mobile that is the present and future of digital transformation.

“Regulators can focus on ways to leverage the strengths of mobile channels, rather than the ways in which mobile money is ‘less than’

traditional banking services,” Okoudjou explains, as it will reinforce the benefits of the promobile period for people in Africa.

Despite that, many African fintechs are facing challenges related to a somewhat uncertain regulatory landscape. According to Adewole, “The gap in adequate ICT

Analysis African fintech

and economic impact assessment to outline regulatory priorities.

That in turn will help to identify areas with insufficient domestic demand — or cherry pick the segment, technology or solution with the highest potential gain for the economy at large.

The unbanked frames the future of African fintechs

Regulators can focus on ways to leverage the strengths of mobile channels, rather than the ways in which mobile money is ‘less than’ traditional banking services

infrastructure across Sub-Saharan Africa is a major challenge that leads to the failure of some fintech startups.” Paga, for example, started operations two years after being established because of constraints in obtaining an operating licence from the government.

Okoudjou says that real

infrastructure challenges across the continent can be addressed with the help of platforms like MFS Africa that aim to connect various service providers including banks, mobile network operators and fintechs.

For many, the continent’s fintech regulatory environment can be further improved by using social

Africa’s fintech outlook heavily relies on favourable demographics, high mobile technology use and existing gap in financial inclusion.

“Fintech innovation is expected to increase in the region within the next five to 10 years. The number and diversity of African fintechs will multiply to provide innovative financial solutions to the large demography and customer segment including the untapped financially excluded market,” Adewole says.

Sub-Saharan Africa’s fintech sector will continue to be dominated by payments solutions until the gap in financial inclusion is bridged. “It can be expected that the smaller segments will expand their footprints in the sector as consumers shift their attention to solutions that satisfy other previously underserved financial needs,” he adds.

The industry foresees a lot of market consolidation, especially in the next three to five years. “By examining the current ecosystem it will only become simpler and simpler to link mobile wallets at a continental scale,” Okoudjou concludes.

editor@ifinancemag.com

International Finance | January 2020 | 67

in conversation

Banking and Finance

Laurent Bertrand co-founder, BetterTradeOff`

Singapore fintech startup BetterTradeOff’s solution solves the loss of human touch and contextualisation in financial planning

Automating holistic lifetime financial planning samuel abraham

Behind the evolution of fintech startups and virtual banks across the world is the insight that customers, especially millennials, are increasingly frustrated that they are being sold to by their traditional banks instead of being provided contextualised and personalised financial savings solutions. Ideally human beings need to be able to plan and save for important life events and goals such as higher education for self or their children, marriage, buying a house or retirement. Walk into a traditional bank and ask for a final solution for one of these goals and you are likely to be sold a product that is profitable for bank or the agent rather than the customer. How do customers understand that the financial services options that they are choosing are contextualised to their lives and goals?

To answer this question, Laurent Betrand and Robert Lonsdorfer founded Singapore fintech startup BetterTradeOff on the belief that by leveraging technology they could offer individuals as well as financial institutions solutions that provide transparent and unbiased financial information to make better decisions about their future. The fintech startup’s flexible, modular, white label SaaS solution Aardviser can quickly and efficiently capture the financial status of a new or existing client of a financial institution to help it engage the customer with relevant financial solutions to build trust in financial institution-client relationships.

In November 2019, the startup launched a direct to consumer solution Up which helps individuals develop their own financial plan online helping anyone, regardless of financial acumen, to explore and plan a better future. Based on the concept of holistic lifetime planning, the platform

68 | January 2020 | International Finance

Fintech financial planning solutions

dramatically simplifies the financial planning process. For advisors it provides a collaborative tool that allows them to give clients a meaningful and intuitive understanding of their current financial situation, while enabling the advisor to deliver a transparent and unbiased plan for achieving a client’s future goals and dreams.

The direct-to-consumer solution provides people with a do-it-yourself tool for exploring and understanding different financial choices and outcomes.

Interactive, highly visual, and fun to use, ‘Up’ makes it easy for people to see and understand the impact of each decision they make, while exploring a wide range of financial situations, including family composition; life events (such purchasing a new home); expenses and income; savings and investments (including tax implications); education costs and financing; insurance and debt. In an exclusive Interview with International Finance, the co-founder of BetterTradeOff Laurent Bertrand speaks about how the fintech startup’s twin solutions help individuals achieve holistic lifetime planning instead of piecemeal financial solutions that don’t serve the purpose. Bet-

terTradeOff has raised over $3 million in its Series A, and is planning to instigate a Series A2 institutional fund raising of $10 million in the first half of 2020.

International Finance: How does BetterTradeOff’s product differ in the application of the concept of holistic lifetime planning compared to other financial planners? Among the many B2C financial planning solutions out there in the market, what is Up’s unique value proposition?

Laurent Bertrand: Up significantly differs from other platforms. Theplatform provides a comprehensive picture of all the elementsi mpacting a person’s financial plan, with real-time data, delivered in a way that’s interactive and visual, making it easy to see and understand the financial impact of every decision. This provides transparency and clarity with respect to a person’s financial needs, as well as the potential risks they face – helping them build a plan to both finance and protect their dreams. With all the elements at their fingertips, users can build a plan they can trust and find the peace-of-mind that comes with knowing they are covered. You can’t

International Finance | January 2020 | 69

Banking and Finance

in conversation

Laurent Bertrand co-founder, BetterTradeOff

We use advanced analytics and statistics taken from every country of operation, to ensure that the life plan is not just comprehensive, but hyper-localised and market-relevant. We incorporate the relevant rules regarding family, taxes, property, social security, retirement, healthcare, insurance, and investments

financial possibilities – ultimately – building the plan that’s right for you. The tool also allows you to simulate risk, such as visualising what would happen to the financial stability of your loved ones in case of your death, or should you face permanent disability – so that people can see the importance of incorporating the right level of protection, such as insurance, into their plan.

When you speak of financial advisors, what is the profile of the typical financial advisor that you are targeting? dream if you can’t sleep. In addition, our solution has been designed to be easily deployed across jurisdictions (we typically open a new country in four to six months including incorporating all the relevant rules such as those involving taxes). This makes it easy and convenient to maintain our solution up-to-date with regulatory and economic changes, so large financial institutions can deploy our solution across their geographical footprint effectively.

How does the solution work?

It starts with a quick onboarding where we only capture the basics: age, household composition, housing, income, existing assets and retirement assumptions.

Having pre-populated your plan based on advanced statistics like salary evolution and living expenses and all the relevant rules like taxes, property and social security, we bring you immediately to your dashboard where you’ll see visualisations of your current financial situation – savings, net wealth and cashflow.

Rather than answering a hundred questions before getting any insight, you gradually increase the accuracy of your plan while acquiring an intuitive understanding of the financial impact.

This is where the fun starts – planning the future.

You can select different financial goals, or dreams as what we call it in the tool – from retiring, buying a house, travel, sending kids to university, and so on – and simply drag and drop them into your plan. As you do, your financial situation is immediately updated, so you can see the impact of each selection.

This allows you to explore endless dreams and

70 | January 2020 | International Finance

Currently we partner with some of the world’s leading financial institutions, enabling their financial advisors to provide clients with a transparent and unbiased plan for achieving their life goals and dreams.

Our B2B solution can be found in four countries: Singapore, the Philippines, the UAE and Switzerland.

Since BTO’s solution is available in Asia, the Middle East, and Europe, how does the solution ensure relevance across markets?

We use advanced analytics and statistics taken from every country of operation, to ensure that the life plan is not just comprehensive, but hyper-localised and market-relevant. We incorporate the relevant rules regarding family, taxes, property, social security, retirement, healthcare, insurance, investments to ensure that the results are reliable, and users can explore all their options.

In markets where people have not warmed up to algorithm driven financial planning how do you sell BTO’s value proposition?

There isn’t a single market where people don’t want to plan for a safer, better financial future. They might plan with Excel, on paper or with the help of a certified financial planner but in the end, in developing and developed markets alike, every one of us want to know how much is enough and how to achieve our goals and dreams.

BetterTradeOff takes care of the complexity for you and makes the process fast, intuitive, transparent and fun, helping you to feel confident in taking better decisions for your future. Armed with the knowledge of what you need to achieve your dreams, you can

Fintech financial planning solutions

We collect only necessary data to build a reliable plan for the clients. They can see transparently how the information is impacting their financial future.

They can input all their data manually or through secured API with data sources like bank accounts

then easily use robo-advisors or traditional financials institutions like banks, insurances or brokers to trade or buy the financial products they need.

Can you quantify (if possible with numbers) the value financial advisoirs and their clients can derive by using your solution over a life time vs the traditional methods of financial planning?

Having deployed our solution in four countries with multiple leading banks and insurance providers in various setups, we have observed consistently the following key results • Effectiveness: investment size up to two times larger • Efficiency: up to 15 percent closure in the first meeting compare to the norm of three to four percent; • Acquisition: seven out of 10 surveyed clients recommend our solution • Activation for dormant and orphan clients

From the client’s side, what kind of data does the solution gather and what are the integrations required?

We collect only necessary data to build a reliable plan for the clients. They can see transparently how the information is impacting their financial future. They can input all their data manually or through secured API with data sources like bank accounts.

Uploading existing client data to avoid unnecessary re-entry is key in terms of change management.

We naturally collect all activities happening on our platform for audit purpose as well as to support improved client experience through advanced analytics.

Our solution has been designed so our clients can gradually integrate with it from Single Sign-On for security to quotation engine and fulfilment.

To build momentum early-on, most of our clients start with light integration (upload of existing client data, existing financial products and white labelling) and gradually increase integration to generate further efficiency gains and seamless experience.

Which are your main markets today and which are your target markets? As far as your B2C solution Up is concerned what are BTO’s plans for markets outside Singapore?

The B2B platform is currently deployed in Singapore, the Philippines, the UAE and Switzerland. Discussions are already underway to add markets in Asia, the Middle East and Europe. Our direct-to-consumer tool – Up – was launched in Singapore last month (November 2019). We hope to launch in two new, to be determined, markets next year.

Rarely do fintech companies offer both B2B and B2C solutions. How do you plan to balance the demands of having both B2B and B2C offerings?

We are obsessed with making a difference for the end-client and that obsession applies to both our B2B and B2C solutions. What we observed very early on is that once end-clients are convinced about a financial decision, the next question becomes where to find the relevant financial products.

Our B2B and B2C solutions reinforce each other: we offer a broader distribution channel for financial institutions with our B2C platform while our B2B solutions can be used by professional advisors to provide the human touch so often required for life-decisions. editor@ifinancemag.com

International Finance | January 2020 | 71

Banking and Finance

analysis

Fintech Saudi Arabia epayments

Saudi Arabia achieved 36% epayments out of all payments in 2019 against a target of 28% for 2020. Is this growth sustainable?

Cashless society: epayments catch fire in Saudi Arabia IF CorresPonDEnt

epayments in the Kingdom of Saudi Arabia accounted for more than 36 percent of all payment types, including cash, in November 2019, according to a study by Saudi Arabian Monetary Authority (SAMA) and Saudi Payments Company. According to this metric, the Saudi government has overachieved Saudis, on its target of achieving 28 especially percent epayments by 2020 the young from the base of 20 percent population, epayments in 2018. adopt According to the Saudi innovations Vision 2030 envisioned by and Crown Prince Mohammed advancement Bin Salman of Saudi Arabia, at a faster pace the Saudi government’s than other goal is to achieve 70 percent countries epayments by 2030. Why did epayments suddenly catch the imagination of Saudis in 2019? What are the underlying factors and motivations? How likely is Saudi Arabia to achieve its goal of a cashless society and 70 percent epayments by 2030? What are the challenges that the Kingdom faces to achieve this goal?

Why epayments are seeing quick uptake in Saudi Arabia Fintech innovation has disrupted the payment system globally. The Middle East is no different in this

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respect. The study published by the Saudi Arabian Monetary Authority (SAMA) and Saudi Payments Company revealed that most of the epayments carried out in Saudi Arabia were through debit or credit cards. While card transactions accounted for almost 30 percent of all payments, other types included the SADAD platform and other electronic payments. The achievement revitalises the Saudi Arabian Monetary Authority’s plan to drastically reduce cash transactions and enhance transparency and efficiency in the Kingdom’s economy.

The study further revealed that Mada Sale Service Points recorded a significant increase in the number and value of purchase transactions as well. At the end of 2016, epayments enabled points of sales (POS) grew by 33 percent, while in 2017 and 2018 the growth rate was 35 percent and 46 percent respectively. Over a period of time, the availability of Mada electronic payment devices has also increased at places like gas stations, pit stops, and convenience stores. As of September 30, 2019, there were around 421,000 Mada devices in operation in Saudi Arabia. It is noteworthy that at the end of 2013, there were only 107,000 Mada devices functioning in the kingdom.

With regard to the quick uptake of epayments in Saudi Arabia, Ovais Shahab, Head of Financial Services at KPMG Saudi Arabia told International Finance that, “The payment ecosystem has become more diversified, most notably with the launch of

Analysis Fintech

STC Pay and Mada Pay in late 2018 and the arrival of Apple Pay to Saudi Arabia in early 2019. The pickup of near field communication (NFC) payments in 2018 were also exceptional. It is essential to emphasise that Saudis, especially the young population adopt innovations and advancement at a faster pace than other countries.”

international transactions. Simultaneously, epayments also help boost the ecommerce sector in the country. It effectively helps solve the complicated and physical problem of collecting cash for a product sold online. ePayments has also drive the sale and purchase of new digitised products and services.

A disruption planned by the government

To achieve its target of 70 percent epayments by 2030, the kingdom of Saudi Arabia has undertaken a number of initiatives. The launch of the Financial Sector Development Program (FSDP) is one of them. One of the key functions of this programme is to promote epayments and convert Saudi society to a cashless society by increasing the share of noncash transactions to 70 percent in 2030. Another important function of the programme is also to improve the availability of financial services in the kingdom. Saudi Arabia aims to increase the number of banked adults in the Kingdom to 80 percent by 2020, from 74 percent in 2016. The fact that Saudi Arabia has overachieved its own epayments target this year is an affirmation of the programme.

Ovais Shahab told International Finance, “The Saudi central bank SAMA has a forward-looking vision for a shared infrastructure and in 2018 it established its payment infrastructure department as an independent organisation, Saudi Payments. Serving both banks and fintechs, it aims to provide a level playing field and interoperability and standardisation, this organisation is now also working on a faster procession platform for interbank transactions. Secondly, the SAMA Sandbox and Saudi Fintech, as support hubs are two

ePayments will help the Saudi government tackle issues such as money laundering, terrorism financing more efficiently as epayments are often logged and can be tracked back whereas cash transactions can’t be. In short, digital payments increase accountability.

According to World Bank data, formal banking reaches about 40 percent of the population in emerging markets, compared with a 90 percent penetration rate for mobile phones or mobile money or fintech services. Providing digital payment options allows easier market access for consumers as well as merchants. Currently, there are 21 entities under test permit in the SAMA Sandbox, including fintechs specifically focusing on payments. These startups disrupt the payment model, and while some will work with the banks, they will all push the banks for more efficiency and cost-reductions of their payment models. Some startups focusing on crowdsourcing or loans will also take financing roles from the banks, all the way to managing

How can Saudi Arabia achieve its epayments target?

International Finance | January 2020 | 73

Banking and Finance

analysis

Fintech Saudi Arabia epayments

initiatives of the government to grow epayments by supporting fintechs from outside the traditional banking sector to grow.”

The SAMA Sandbox is an experimental programme undertaken by Saudi Arabia’s central bank. The programme creates a platform for banks, regulators and financial service providers to come together and collaborate on the development, testing and creation of products that support new ways to pay. It also creates a regulatory environment to analyse and interpret the impact of new technologies in the financial services market in the kingdom and to help transform it into an intelligent financial center.

Simultaneously, it provides a platform for financial technology companies and financial institutions that seek to provide innovative financial services to Saudi markets.

The initiative is expected to enhance innovation in financial services and digital payments services. It will help financial technology companies test their products in a much-relaxed environment which will ultimately lead to the betterment of the financial

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sector and also increase epayments in the kingdom.

In the last two decades, SAMA has also introduced a number of epayment systems such as the Saudi Arabian Riyal Interbank Express and the online bill payment portal SADAD in a bid to increase online transactions in the kingdom. The recent launch of real-time payments in Saudi Arabia could serve as a catalyst for Saudi Arabia to achieve the 70 percent epayments target.

For it to work, it is important that financial institutions in the country truly embrace real-time payments and the improvements it will bring to their customer experience.

epayments challenges ahead for Saudi Arabia When International Finance asked Ovais Shahab about the challenges Saudi Arabia faces to overcome in order to achieve its goal of 70 percent epayment transactions by 2020, he said, “Saudi Arabia has to embrace an omnichannel approach to its epayments infrastructure.

Realtime gross settlement (RTGS) transactions are still done from

bank to bank through SAMA, which only operates during business hours, so further integration and a faster platform are necessary.

In other countries, such bank-tobank transfers are already possible, and almost for free and such new systems have proven to be true catalysts for cashless transactions.

Another possible challenge could be the focus on cash and low adoption rate of point-of-sale (POS) terminals outside of the major cities.”

Despite the availability of digital payment options now, many users may be accustomed to dealing with cash especially in rural areas and may be reluctant to adapt to epayments.

Saudi Arabia must also tackle the issue of trust and security to achieve its target of turning the kingdom into a cashless economy. The only way a consumer can be persuaded to make payments digitally over and over is by building his trust in the platform that he uses to make the epayments from. 40 percent of consumers in the Middle East have been victims of cybercrime, and almost 71 percent of them have

Analysis Fintech

Growth of epayments enabled points of sales in Saudi Arabia (POS)

33% 35% 46% 2016 2017 2018 Number of Mada devices available in Saudi Arabia

107,000 421,000 2013 2019 witnessed cybercrimes one way or the other. Those who are have witnessed cybercrimes first hand in Saudi Arabia will be reluctant to transact digitally. The Saudi authorities must create a safe and secure environment for Saudi Arabians and safeguard its citizens and prevent cybercrimes.

Another challenge that any country pushing for digitalisation must address is cross-border payments. Payments made from one country to another could be expensive, slow and at the same time inefficient. Often national banking infrastructures fail to handle crossborder payments. Saudi Arabia must invest in innovation and technology that ease the process of cross-border payments such as remittances. Also, the payment merchants must help businesses who operate globally compete in international markets by allowing their customers to pay in their native currencies. Often multi-currency cross-border transactions are difficult as one has to go through the regulatory hurdles in each national market. To boost epayments in the

kingdom, Saudi Arabia must offer ease of payments when it comes to cross-border payments as well.

For fintechs to flourish in the kingdom, the government of Saudi Arabia must create a favourable regulatory climate for them. But stricter regulations and bureaucracy should not strike down the potential growth of the companies that facilitate epayments.

Saudi epayments platforms do their bit The SADAD payment portal, introduced by the Saudi Arabian Monetary Agency, is one of the topmost epayments platforms in the country. SADAD connects businesses in Saudi Arabia with local banks and provides a platform to collect payments electronically through all the banking channels in the kingdom 24 hours a day.

Besides SADAD, there are some other payment gateways that are operating in the Saudi Arabia payment scene.

UAE-based startup PayFort provides payment solutions to customers across the Middle

East through FORT, its payments gateway. Fort facilitates SMEs, startups and even government organisations to accept payments through debit and credit cards. It is also the most widely used online payment gateway in Saudi Arabia.

Saudi Arabia-based HyperPay, which was launched in 2014, has established itself as one of the fastest growing internet payments services providers in the Middle East and Northern Africa region (MENA).

The startup provides a wide range of smart, technology backed online payment processing solutions to businesses ranging from the SMEs to multinational companies.

Similarly, PayTab has established itself as one of the most trusted payment gateways in Saudi Arabia.

It also provides a platform for businesses to accept payments online and in 168 different currencies.

PayTab provides its services to SMEs, ecommerce companies as well as large multinational companies.

The success of the Kingdom’s cashless society goal also depends upon the wider acceptance of the epayment platforms by the local and expatriate population. The government on its part has created a relatively positive regulatory environment and innovation ecosystem for these companies to flourish. But fintech innovation and better customer experience are key to Saudi Arabia achieving its target of a cashless society.

editor@ifinancemag.com

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Technology

feature Banking

Banking technology

Should Google and Facebook be venturing into banking?

A never-ending quest for more data and control over customers is forcing Google and Facebook to make a banking and money play – what could go wrong?

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feature technology

Facebook and Google are companies controlled by a select group of individuals who are already powerful enough to challenge governments

Samuel Abraham and IF Correspondent

T

he global banking industry is a trillion-dollar industry and technology giants Google and Facebook are making a slow but sure banking and money transfer play.

Over the last decade, fintech innovation has disrupted banking and financial services globally to a certain extent. And the rate at which things are changing in the banking industry is only expected to accelerate in the future. Technology is bound to take over traditional banking practices and usher in significant changes in the industry.

Many neobanks or challenger banks have popped up in several economies around the globe. However, these fintech startups or challenger banks are comparatively small in size, with limited funding and resources to cause major disruption in the global banking sector.

Moreover the focus of neobanks have been on underserved markets left out of the banking system by mainstream banks.

The entry of technology behemoths such as Google and Facebook could change the very face of the banking system. So why are these big techs jumping into the banking and money transfer space? Is it the trilliondollar banking sector and financial services margins that are attracting them? Not really.

The main reason Google and Facebook are entering the banking and money transfer is for data. They already have volumes of data on users personally, but not on what users spend, when they spend it, and general consumer behavior. Of course, these companies sell advertising, and they can be more successful if they can see whether their advertising is working, and whether users are purchasing products which their targeted ads are pushing at them. In short, they want consumer’s financial data to improve their existing offerings.

Google steps into banking with Cache When the Wall Street Journal first reported that Google is stepping into the banking scene, it shocked many. The announcement was a source of major speculations as Google is battling various legal cases related to data privacy in the courts of law.

The project, called Cache, will see Google take on banks in the consumer finance segment. Its services will be available in the US next year, however, it is unknown if Google will extend its services across all continents anytime soon. Google will offer the current account services in partnership with CitiGroup - the third largest bank in the

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Technology

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Banking technology

Google and Facebook’s sway over humanity US and a credit union based at Stanford University. Google’s Cache, is projected as an extension of Google’s ewallet digital payment system called Google Pay. So the big question in everyone’s mind is, will Google’ Cache bring in a change to the global financial services landscape? With regard to this, Bjorn Cumps, Professor of Digital Banking at Vlerick Business School told International Finance that, “I think the launch of this will make the traditional banks wake up, and become more digitally savvy at a faster pace. Financial services firms see the need to digitally transformed, and companies like Google entering the market encourage the industry to become more digital, more quickly. Not only this, but I think it is likely to accelerate the decrease in physical branches, which we have already begun to see. The role of financial companies and their employees will change, with traditional employment likely to go down, and new skills needed for employees, and even new jobs being created. Financial companies may also look to enter more markets, not just focusing on banking, but also insurance and market strategy too.

From a consumer perspective, I think the financial services landscape is likely to become a lot more confusing, with so many more services and products available. There will be increased ways for consumers to purchase products, and various payment systems, which of course will have an impact on consumers.”

Even though Google has not disclosed much about the new services as of yet, we may see collaborations between traditional banks and tech companies as a result of it, and banks might be forced to massively invest in AI. Therefore, thanks to AI, and big data, financial solutions would probably

78 | January 2020 | International Finance

Google key user metrics Google’s search market share (October 2019)

Chrome mobile installations (April 2019)

Chrome desktop market share (April 2019)

Gmail’s mail client market share (April 2019)

Android OS smartphone market sharee

Facebook key user metrics

88%

Facebook monthly active users

5bn

WhatsApp daily active users

70%

Instagram monthly active users (June 2019)

(Q1 2019)

(Q1 2019)

2.45bn 500mn 1+ bn

27.8% 87%

(2019e)

better suit the customer by being able to anticipate each individual’s future financial need. The only thing unkown is the cost of the individuals ability to control his or her data.

More banks to partner with Google in the future?

While there are many advantages for a commercial bank to form partnership with Google, we may see other banks getting onboard with Google to launch Cache in other countries. But since Google is new to the banking scene and Cache is a new product, only time will tell whether other banks will collaborate with Google.

But when Citi Group decided to partner with Google, other banks must be considering or at least carrying out a feasibility study. Collaborating with Google could provide a tremendous competitive advantage compared to other banks. However, on the other hand, the very DNA of banks is their commitment to customer privacy. The biggest risk for Citi Group beyond privacy is if Google’s real motivation is to acquire expertise, retaining new costumers, testing algorithms on financial data, and finally reaching enough market power to dictate the rules, squeezing partners’ profits,

feature technology

Bjorn Cumps, professor of digital banking at Vlerick Business School, Belgium

or even becoming ultimately a fully autonomous financial institution.

The decision will also come down to the bank’s strategy and their motto. If a bank is customer-centric and focused on the experience of customers, they may not decide to partner with Google, as they will then become a provider to them, and have little influence on customer-facing services. Firms that value providing this side of their service to customers are not likely to partner up with big tech.

However, some banks may decide to partner with Google given its popularity and customer reach. Another factor that a bank might consider is Google’s international presence. The majority of banks act on a national basis, and big tech firms could allow them to reach a much wider audience. Some banks may want to relinquish a bit of control in order to become more international.

This could mean, them having control

in their local markets, but offering international services, which would be controlled by big tech firms.

Facebook’s formidable attempt to change the financial system While Google is partnering with traditional banks to venture into the banking space, Facebook announced its ambiguous plan to disrupt the global financial system by launching its own cryptocurrency. Called Libra, the social media giant announced that it will launch the services in June 2020 and users will be able to use it through Facebook’s digital wallet Calibra. The cryptocurrency app will allow Facebook users to send, receive or withdraw money by just tapping on their devices’ screen. The users will also be able to pay bills, share tabs in restaurants, buy a cup of coffee and ride the local public transit without the need to carry cash.

Libra, which is a type of stablecoin, is backed by traditional money and other securities. While Libra too is a cryptocurrency like bitcoin, the latter is not backed by traditional money and is more volatile in nature. Facebook launched Libra in collaboration with 27 other companies and says the digital currency would be overseen by a Switzerland-based independent nonprofit organistation called the Libra Association.

However, Facebook’s announcement of Libra was met with skepticism and lambasted by global leaders and regulators. While Facebook claims it is building a better payment network, broadening access to essential financial services, and lowering costs for billions of people, many central bankers, lawmakers, and top data protection officials from the US and Europe voiced their concerns about the usage of personal as well as financial

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Banking technology

Samuel Ouzan, assistant professor of Finance at NEOMA Business School, France

data by Facebook, and about the regulatory challenges of Libra. Many even fear that the launch of Libra could dampen the global fight against money laundering, terrorism financing, and global financial stability.

After being bombarded by constant criticism, a quarter of Libra’s original backers including payments giants such as Mastercard and Visa have abandoned the programme. As things stand, only time will tell whether Facebook’s Libra has future or is set to be one of those big projects which were meant to change the world but never actually took off.

When we asked Samuel Ouzan, assistant professor of Finance at NEOMA Business School the same question, he told International Finance, “I don’t think so. Particularly because

80 | January 2020 | International Finance

of the increasing public mistrust of the Facebook platform, and the massive governments’ opposition we observe all around the world, following Libra announcement.

The success of Facebook’s cryptocurrency would depend on how decentralised Libra really is. Facebook's data dominance is a real concern. Therefore, in the short term, I have a hard time to imagine Facebook planning to propose checking accounts to its customers.”

Bjorn Cumps, however, thinks otherwise. He told International Finance, “Yes, I do think there is a future for Facebook’s Libra. I, in fact, saw them present in Brussels just last week, and I think that the way they are navigating the industry means that they do have a future. They are actively working with

regulators in the industry, to ensure that Libra is legitimate, something very different from innovative Fintech companies we’ve seen enter the market recently, who’ve boasted about ‘smashing the industry’ and ‘not caring about the banking rules’.”

Facebook Libra is actively working with regulators, answering the questions that they have over the currency, and ensuring that it meets their expectations.

They are changing their model because of this, actively adapting and coming up with new solutions to fit in with the legalities of the industry – this is why I think that there will certainly be a future for the currency.”

But Libra’s troubles are multiplying and those who reject Libra in its current form are powerful people. The

feature technology

"I I expect new political forces will emerge very soon against this kind of control. The rise of totalitarian technology controlled by very few individuals represents an unprecedented

threat for democracy. Cognitive

science provides plenty of evidence that people tend to react very strongly when behavioral freedoms are at risk. Altering or controlling how people all over the world perceive reality is certainly unconsciously by far one of the biggest threats to our freedom ”

president of Switzerland where the cryptocurrency is seeking regulatory consent said in late December that Facebook’s Libra project has failed in its current form and needs reworking to be approved. “I don’t think (Libra has a chance in its current form), because central banks will not accept the basket of currencies underpinning it,” Ueli Maurer, who is Switzerland’s finance minister and outgoing president, was reported as telling Swiss broadcaster SRF. In October, French Economy Minister Bruno Le Maire sharply criticised Libra, saying, "Libra is not welcome on European soil." "We will take steps with the Italians and Germans, because our sovereignty is at stake.” In November, a US Federal Reserve o􀁷icial expressed American

reservations.

"Without requisite safeguards, stablecoin networks at global scale may put consumers at risk," Fed Governor Lael Brainard said in a speech in Frankfurt. Among those who have criticised Facebook’s unrestrained expansion into all aspects of users Iives through Libra is the chair of the powerful US House Financial Services Committee Maxine Waters.

What is the impact of big tech’s entry into the banking system Besides announcing the controversial cryptocurrency Libra, Facebook has launched its payment platform Facebook Pay in the US. According to Facebook, the service will be available in Messenger at first; however, it will soon be rolled out to other social media

platforms owned by Facebook such as WhatsApp and Instagram.

So what impact will the entry of these tech giants into the banking system have?

Firstly, there will be a huge amount of increase in activity on behalf of regulatory bodies, who will be working overtime in ensuring that Facebook and Google’s practices are legal and correct. Also, companies currently in the market will act either one of two ways; clubbing together to challenge and compete against Google and Facebook, or actively working with them to provide solutions. Clubbing together to fight Facebook and Google could be fighting a losing battle due to companies like Google and Facebook’s international reach and funding.

Bjorn Cumps told International Finance that, “I foresee big tech companies entering the market impacting current banking services to rapidly increase their digital transformation.

Firms will need to be as digitally savvy as possible to compete, and the introduction of tech companies in the market will force traditional banks to change and adapt at a quicker pace.”

What will be the impact on fintechs and challenger banks?

Bjorn Cumps too believes that the niche players such as fintechs and neobanks should be worried. According to him, Cache is offering financial management services to a number of consumers, something banks had not traditionally offered, and fintech startups often plugged the gap for. Financial advice, purchasing tools and so on, was something we were likely to see offered digitally by traditional banks in one to two years’ time, but this is likely

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Banking technology

to accelerate with big tech firms also beginning to offer these services. Of course, companies like Google have an international reach in offering these services, whereas banks do not – that makes big tech firms more of a threat in this area to fintech startups.

When we asked the question to Samuel Ouzan, he too agreed that fintech startups must think proactively and prepare for battle with the big techs. He told International Finance that the tech giant hasn’t disclosed yet what would be the new analytical tools and smart features of Cache’s checking accounts.

He believes, given Google’s position in the Artificial Intelligence landscape, it may provide its consumers with smart budgeting tools and new features that will strongly disrupt user experience in personal finance.

Should Google and Facebook venture into banking after all?

In the last couple of years, both Google and Facebook have been part of major controversies. Despite its popularity, Google has been taken to court numerous times with matters related to privacy, advertising, patent, as well as gender discrimination. Recently, it was alleged that Google tracked the personal data of four million iPhone users. The Federal Trade Commission (FTC) found Google liable for misrepresenting ‘privacy assurances to users of Apple's Safari Internet browser’. Even way back in 2010, Google was accused of breaching several electronic communications laws with the launch of its new product Google Buzz.

The Facebook–Cambridge Analytica data led to Facebook losing more than $100 billion in market capitalisation.

So how willing will be consumers to share their personal as well as financial

82 | January 2020 | International Finance

Cambridge Analytica scandal led to Facebook losing more than

$100 billion

in market capitalisation. So how willing will be consumers to share their personal as well as financial data with these big tech companies? data with these big tech companies?

Bjorn Chumps believes this really is something that should be left up to the consumer to decide.

He told International Finance, “Some consumers may object to handing over so much of their financial data, including what they purchase, how much money they spend and so on. Of course, this may be due to these big tech companies already having amassed a huge amount of other personal data on us, which coupled which our financial data could make these companies much more powerful. This is something we need to reflect on as consumers when deciding which company to give our data to.”

Underpinning all concerns is the

ethical dimension of Facebook and Google, companies controlled by a select group of individuals who are already powerful enough to challenge democratically elected governments, controlling even more granular user data and, more importantly, how people perceive reality. The power this will give to these individuals over ordinary human beings is frightening.

Samuel Ouzan told International Finance that, “I am not sure if it is judicious for our societies as well as for big tech companies, who already have more power than many countries, to have access, for example, to account balances of individuals and businesses.

Any scandal involving this kind of financial data might have an irreversible impact on public trust. “ He added, “I expect new political forces will emerge very soon against this kind of control. The rise of totalitarian technology controlled by very few individuals represents an unprecedented threat for democracy.

Cognitive science provides plenty of evidence that people tend to react very strongly when behavioral freedoms are at risk. Altering or controlling how people all over the world perceive reality is certainly unconsciously by far one of the biggest threats to our freedom.” editor@ifinancemag.com

WADE FOSTER

STACY ELLIOTT

LORI MCLEESE

NOMADIC MATT

ANDY TRYBA

International Finance | January 2020 | 83

Technology

thought leadership

Artificial intelligence AI in banking

Hani Hagras Chief Science Officer, Temenos

If not handled well, AI-led customer disintermediation could plague banking; but that’s where XAI helps

XAI is the future of AI in banking While there’s no doubt that AI adoption is on the rise in banking, there are still some challenges the industry needs to overcome. Some critics have argued that AI in banking comes at a cost – the disintermediation of banks from their customers and loss of the ‘human touch’. One of the biggest barriers to AI in banking has also been the lack of transparency around how AI decisions are made.

In this regard, Apple recently made headlines for allegations that its Apple Card uses biased algorithms to set credit limits and as a result discriminates against women who apply for the card. It was even claimed that men who apply for the card receive between 10-20 times higher credit limits than their wives. The outcry led to reputational damage and an investigation by

36%

bankers believe ML, AI, and blockchain will have biggest impact on banking in 2020 Source: Economist Intelligence Unit

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30% share of AI-powered digital advisors and voice chats in all banking digital investments

the New York State Department of Financial Services.

Outside of the financial industry, others have also fallen on the wrong side of “AI bias”.

Amazon, for example, tried building an artificial intelligence tool to help with recruiting, only to later find it discriminated against women because it had combed through male-dominated CVs to gather its data.

Perhaps most worrying, however, is the potential for these flawed, opaque AI systems to ‘teach’ themselves, reinforcing bias as their decision making develops. This problem is exacerbated by the investment in opaque ‘black box’ AI systems, which cannot communicate how decisions have been made to the operator, regulator or customer.

Since these ‘black box’ AI systems rely on data, they can learn from interactions and rapidly accelerate poor decision making if the data they are fed is corrupt.

The only solution to this is ‘white box’ explainable AI (XAI) systems which explain in simple language how the software operates, how decisions have been made and that are able to answer follow up questions in order to maximise customer financial wellbeing.

Transparency is key. By explaining how and why decisions are made, XAI helps consumers and companies understand what they need to do to get a different outcome. This could

involve turning a rejected mortgage application into an acceptance, for example.

The technology helps consumers take appropriate action, while also opening new business avenues for banks and other institutions who have the insights they need to offer more suitable products.

The potential that XAI has to improve customer experience in the banking industry is huge. Today, crucial decisions are already made by AI on loans, wealth management, and even criminal risk assessments. Other key applications of AI include robo-advisory, intelligent pricing, product recommendations and debt-collection.

Easy to see that XAI is going to play a key role When we consider the real value that AI brings to the table, it’s not hard to see why its use is becoming so widespread in the global financial industry. It has the ability to sort through vast amounts of data in real-time and process both structured data (such as a filled out forms) and unstructured data (such as a voice messages).

And let’s not forget that it can do this much faster than a human and is less prone to error.

Regulators see this value and recognise that in this era of open banking and PSD2, there is a real need to provide a framework in which the vast amounts of data being shared can be used to provide customer-centric

solutions through intelligent AI-driven algorithms.

Because of this, we are likely to see stronger regulations in the future that ensure AI algorithms do not apply bias and remain transparent.

In this future scenario, it’s not hard to see why XAI technologies are set to play a key role.

Looking towards 2020 and beyond, digital banking channels and AI technologies will increasingly become the main way that customers interact with banks. If not handled correctly, customer disintermediation could plague the banking industry. However, by adopting customer-centric technologies like XAI, the customer intimacy that’s played such an important role throughout the history of banking can not only be regained, but taken to new heights.

Hani Hagras is the Chief Science Officer at Temenos and is also a professor of Explainable Artificial Intelligence, girector of research and director of the Computational Intelligence Centre at the University of Essex, UK. His major research interests are in the real-world applications of Explainable Artificial Intelligence, data science, data predictive analytics and machine learning. He is the author of over 350 papers in international journals, conferences and books. Hani’s research has won numerous prestigious international awards from academia and industry. He is a Fellow IEEE, Fellow IET and Principal Fellow HEA. editor@ifinancemag.com

International Finance | January 2020 | 85

Technology

thought leadership

Artificial intelligence Credit Scoring

Michele Tucci Chief Product Officer Credolab

A unique opportunity comes in the form of smartphone metadata as a means of developing credit scores for individuals and small business

Credit scoring: Keeping privacy at the core Consumers’ privacy and protection are at the core of efficient data collection. The personal information of consumers is at high risk of being misappropriated by entities seeking to utilise that data for personal gains. Consumers have experienced their data being exposed through company breaches that have left many consumers vulnerable. According to Bloomberg, about 100 million customers from Capital One Financial Corp had their data illegally accessed after a former cloud services employee broke into the bank’s server. These kind of breaches have affected consumers in varying degrees and has left some consumers to seek their own counter measures to protect against data being misappropriated. AI-based credit scoring utilising smartphone metadata offers a mutually beneficial solution to both consumers and institutions that consumers wish to conduct

Developed regions, including those in the the EU, are in the driver’s seat to enhance financial inclusion by providing better alternatives to credit scoring for the unbanked population

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credit financing by putting customer privacy at the forefront of the process.

How safe is customer data?

According to the RSA Data Privacy and Security Report, for which RSA surveyed 6,387 consumers in France, Germany, the UK and the U.S., 78 percent of the UK consumers said identity theft resulting in financial loss was a top concern. The report further noted that there was a widening disconnect with how companies capitalise on customer data and consumer expectations around how their data should be used and secured. The trade-off between consumers’ need for protection of their data and companies’ need to be more competitive in a rapidly growing digital marketing place, have aggravated the issue of data protection.

Artificial intelligence (AI) is used to convert metadata into credit scores. Metadata refers to data about other data, the non-personal, binary (1s and 0s) version of the same data. AI-based credit scoring assesses smartphone metadata to detect predictive patterns. Reliable credit scores are generated from this alternative data. These methods are in full compliance with local data privacy laws, including General Data Protection Regulation (GDPR). The GDPR has changed the data landscape in the European Union since its implementation in May 2018. According to a survey of UK consumers by Data and

Marketing Association (DMA), 62% of consumers indicate GDPR will improve their confidence in sharing data with companies. The use of smartphone metadata complements the GDPR protocols and may help to offer consumers confidence when sharing data for potential credit facilities with companies.

AI based scoring, what’s in it for the user?

Anonymised data collection sounds good, but how does AI-based scoring benefit financial institutions (FIs) and their customers?

First, through the use of anonymous, non-intrusive smartphone metadata to provide scoring for customers.

This helps businesses to confidently rely on the credit scores from customers without imposing conditions on their privacy needs.

Second, AI-based scoring allows for multidimensional risk assessment. This credit score is used by underwriters along with their existing credit models to assist in more informed decision making. Customers of the financial institutions are assessed based on their willingness to repay, not just based on their ability to repay. As a result, they have higher chances of being approved for credit because they are able to receive feedback to their loan application even if they have a thin credit bureau report, or no report at all.

Third, the use of smartphone metadata allows for real-time analysis. A credit score is generated within seconds of accessing the phone’s metadata. As a result, AI and machine learning can enable a faster processing time and, in some cases, an immediate approval.

Last, non-traditional scoring methods based on the homogeneous collection of metadata produces opportunities to explore entering new markets globally as business are able to cater to wider range of customers regardless of their country. This results in more accuracy in the application of consistent credit policies based on the same data being collected.

The impact of AI-based credit scoring is global Regions including emerging economies in Africa, Asia, and Latin America have benefitted thus far from AIbased credit scoring and alternative data collection practices. These regions have financial inclusion and innovation at the forefront of advancing the lives of the unbanked population. Alternative credit scores have become more relevant in economies where the unbanked or underbanked population is relatively large. These individuals have little access to traditional banking services due to limited credit history. Adoption of alternative methods to access credit for those individuals leads the drive forward for greater financial

International Finance | January 2020 | 87

Technology

opinion

Technology Artificial intelligence

inclusion and locked improvement in financial literacy among the wider unbanked or underbanked population.

According to International Finance Corporation, AI is driving innovation in financial services through better data processing. It plays a key role in improving traditional credit scoring methods, which have left many persons outside of mainstream economy because of inadequate credit history records.

Though alternative credit scoring solutions have targeted emerging economies, more developed regions including Europe do stand to benefit from these solutions. About 40 million citizens across the European Union (EU) do not have access to a bank account. Alternative credit scoring solutions can help close the gap between the financially included and excluded. The businesses will benefit from that untapped segment of their market and the consumers will benefit from greater inclusion in the mainstream financial services. Additionally, the smartphone metadata complements the privacy and data concerns in the EU, allowing consumers to feel more confident that their personal information will not be misused.

What’s next in AI-based credit scoring?

Alternative credit scoring continues to grow more integrated in the decision making process, allowing businesses to leverage its uses and consumers to expand their opportunities. Data holds the key to unlocking the possibilities of alternative credit scoring for individuals and data protection should be central in all uses of personal data. The successes of using smartphone metadata methods, leave trails that other more developed and developing nations can take guide from as financial inclusion grows globally.

A unique opportunity comes in the form of smartphone metadata as a means of developing credit scores for individuals and small business owners.

Developed regions, including those in the the EU, are in the driver’s seat to enhance financial inclusion by providing better alternatives to credit scoring for the unbanked population. Nations within the EU should take advantage of this wave of innovation as the benefits positively impact both the micro and macroeconomic aspects of nations seeking to reduce the unbanked and financially excluded segments of their population. AI-based credit scoring still

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AI-based credit scoring still has far more to offer and smartphone metadata will continue to enhance the effectiveness of anonymised data collection among users

has far more to offer and smartphone metadata will continue to enhance the effectiveness of anonymised data collection among users.

Michele Tucci is the Chief Product Officer of CredoLab, the largest developer of bank-grade digital credit risk scorecards based on mobile device data. An enthusiastic strategic thinker and business developer, Michelle has 19 years of demonstrable track record of building and marketing online, mobile and offline payments products, consumer lending, cards, and FinTech solutions. Before joining CredoLab, he worked with Intesa Sanpaolo Bank, Capital One Bank, MasterCard, Telecom Italia Mobile and conducted business in 43 countries across the US, Asia, Australia, Europe, Russia, the Middle East, and Africa.

editor@ifinancemag.com

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industry

analysis

Real estate European Golden Visa

The Golden Visas introduced by south European nations have heated up the property markets; is there still value for foreign investors?

Is there value in south European real estate?

IF CorresPondent

The South European nations of Greece, Portugal, and Spain introduced Golden Visa initiatives after the financial crisis when they were keen to attract foreign investment to their economies to bolster demand and shore up weak housing markets.

The Golden Visa programmes have led to the heating up of the real estate markets in the South European countries where it is the most popular – Portugal, Spain, and Greece.

Chinese The question now is does buyers lead residential real estate in the property these countries hold value for purchases international investors? in Portugal.

Buyers also come from Brazil, Turkey, South Africa, and Russia

Qualifying for a Golden Visa in Portugal, Spain and Greece

Launched in 2012 by the Portuguese government, Portugal's Golden Visa programme has helped attract investments of around €5 billion into the Portuguese economy. The Portuguese Golden Visa is available to anybody who is not a citizen of Portugal or belongs to a European Union member country. To qualify, one must make an initial investment of €500,000 in real estate and maintain it for a minimum period of five years.

The investor also needs to spend a minimum of seven days in Portugal each year during the period.

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Investors can also become eligible for a Golden Visa by investing in refurbished older properties in certain locations for $350000.

In Spain, a minimum investment of €500,000 in Spanish real estate would make one eligible for the golden visa. This would earn the investor a one-year residential permit. However, contrary to Portugal, an investor is not required to spend any number of days in the country as compared to Portugal. He can apply for permanent citizenship after completion of five years.

Paul Williams, chief executive at La Vida Golden Visas, believes the Spanish Golden Visa programme offers investors less value than other European programmes on the market. It also has far less government support in promotion of the programme and has apparently minimal direct economic benefit, in his opinion.

Greece, on the other hand, provides the lowest investment level of any citizenship by investment programmes in Europe. An investment of just €250,000 would make one eligible for a Golden Visa in Greece. The investor can choose to invest either in residential or commercial properties.

He can invest in multiple properties or acquire one with joint ownership. Successful applicants and their families are able to benefit from visafree access to Europe's Schengen Area within two months of applying.One can apply for citizenship and a passport after the completion of seven years.

Analysis Real estate

After acquiring permanent citizenship, they are free to dispose off their investment as further visa renewals are not necessary.

Prices surge in Portugal and Greece; slow growth in Spain Despite an economic slowdown, property prices in Portugal are on the rise. In the third quarter of 2019, property prices in Portugal increased by 7.92 percent year-on-year. According to reports, Portugal has become the Eurozone’s hottest property market ahead of Spain, seven years after introducing the Golden Visa programme.

Interestingly, even although Portugal is a hot real estate investment destination, home prices in Portuguese cities remain low. Home prices in Lisbon are among the lowest when compared to other Western European capitals such as Paris, London, Amsterdam, and Madrid. Besides Lisbon, housing prices in other Portuguese regions such as Porto, Amadora, and Seixel have also increased significantly. While Porto witnessed a 15.6 percent increase in 2018, Amadora and Seixel recorded growth of 14 percent.The 2008 financial crisis hit Spain hard.

So bad was the impact that housing prices in Spain declined for eight consecutive years. Only in the first quarter of 2016, did housing prices witnesse a growth in Spain. However, the market is changing and changing for the good. In Spain,

housing prices grew by 5.3 percent in June 2019 year-on-year. However, the growth of housing prices in Spanish cities such as Madrid, Barcelona, Burgos, Valladolid, Malaga, Zaragoza, Valencia, Tarragona, and Palma de Mallorca has slowed down.

Greece too, was hit hard by the financial crisis.

Between the crisis of 2008 and 2017, Greece’s property prices fell by 42 percent. But like Portugal and Spain, the country’s real estate has recovered from the crisis. Residential property prices in Greece increased by 7.7 percent in the second quarter year-on-year. It also happened to be the sharpest growth witnessed by the sector in more than a decade. The uptrend was witnessed in all the market segments throughout Greece. In Athens, property prices have increased by 11.1 percent yearon-year; mainly due to the Golden Visa programme.

Positive outlook for south Europe’s real estate market For the prospective global real estate investor, the Portuguese real estate market might still be of good value because prices are comparatively low compared to other destinations in Europe. Luiz Felipe Maia, an international property specialist with a focus on European and the Brazilian market, and the founder of Maia International, told International Finance that he believes that there are a small percentage of investors that do not intend to live in the country, and this could have an

International Finance | January 2020 | 91

industry

analysis

Real estate European Golden Visa

impact on the properties that cost between 500,000 to $600,000.

According to him, the non-habitual residence NHR programme that has been very popular will be able to fill a part of this market. The NHR has considerable tax benefits and to be part of this programme you must stay for at least 183 days per year in Portugal. This programme does not require its holders to purchase a property but they still need a place to live in, which has an impact on the rentals and sales market.

Even though Portugal is set to review the Golden Visa Programme, it is expected to have a limited impact on the real estate market.

Kate-Everett-Allen, the head of International Residential Research at Knight Frank pointed out that there were some 7,498 properties purchased through the initiative according to government data since 2012 while 761,000 residential properties were sold nationwide during this period.

The outlook for Spain’s real estate investment is upbeat, with sales expected to increase from about 500,000 units last year to between 625,000 and 650,000 in 2019. In fact, real estate transactions are at the highest level since 2008.

Sebastian Nieblas, chief executive at Amrein Fischer, a real estate agency based in Spain told International Finance, “The Spanish economy grew by about 2.6 percent in 2018, after growth rates of 3 percent in 2017, 3.2 percent in 2016, 3.6 and percent in 2015, The European Commission expects Spain’s economy to expand by 2.2 percent this year and by another 2 percent in 2020. Foreigners have a right to buy and resell all kinds

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of property – residential, commercial or land, with no limits.

All indicators show and positive and stable economic growth at least until 2023 and property value is increasing year by year, which gives investors a very positive picture.

Greece too is emerging as a rising destination for the acquisition of second homes by international buyers. The number of real estate investors investing in Greece is expected to increase in the next five to 10 years.

According to Natalie Leontaraki, who holds the post of Managing Director at Engel & Völkers, the

agency’s decision to expand in Greece is based on this sole factor.

She told International Finance that Greece recorded the highest number of visitors globally in 2018 and the country is set to break its own record this year.

Top investment destinations in Portugal, Spain, and Greece A major portion of the real estate investment coming into Portugal through the Golden Visa goes to Lisbon and Porto. However, cities like Braga and the outskirts of Lisbon have very attractive industrial and commercial real estate assets.

Analysis Real estate

Property price increases in south Europe (yoy)

Average rental yields in South Europe’s top cities

Areas such as Acropolis, Koukali, and Metz are also in high demand.

Portugal

Lisbon

Rental yields in Portugal, Spain and Greece

in Q319

Spain in H12019

Greece in Q22019

7.9% 5.3% 7.7%

Algarve, which is known for its Atlantic beaches and golf resorts, is one of the most popular holiday destinations in the country.

The region too, has seen substantial investment in recent years through the Golden Visa programme.

While the Golden Visa programme in Portugal has attracted many Chinese homebuyers, according to Luiz Felipe Maia, people from Brazil, Turkey, South Africa, Russia, and Hong Kong have been leading the enquiries for the last three months. He believes Brexit could attract many UK nationals as well.

Spain, with the Mediterranean Sea, sun and beaches, attract a lot of second homebuyers. While Madrid and Barcelona have always been the top investment destination for investors, Valencia and Málaga have also become very interesting options in the last three years.

Sebastian Nieblas highlighted the Costa del Sol, also called de European Florida, has also become a hot spot with cities such as Marbella, Estepona, Benalmadena, Torremolinos, and Fuengirola also attracting a lot of second homebuyers through the Golden Visa programme.

Barcelona

Athens

5.6% 5% 4.2%

Chinese buyers dominate in Spain too, when it comes to the number of second homebuyers, accounting for almost 70 percent of the total visas issued. Second to China is Russia, however, the number of investors from Russia has been decreasing since the last two years. Interestingly, in 2015, Russia was the leading country when it came to Golden Visa investors. On third position is the US, followed by Venezuela and Iran in fourth and fifth.

Paul Williams told International Finance that while Spain attracts investors from all across the world, many inquiries come in from the Middle East and Latin American countries.

Demand for properties in Greece has soared 25 percent this year compared to 2018. Besides Athen, properties in regions such as Santorini, in Glyfada and in Mykonos attract a lot of real estate investors from the US. The Athenian Riviera- coastal area in the southern suburbs of Athens attracts affluent, international clientele, as some of the most luxurious properties in Greece are found along this coast.

Rental yields in Lisbon, Portugal range from around 4.5 percent to 6.7 percent, and smaller apartments fall on the higher end of the yield range.

Apartments in smaller cities like Cascais and Oeiras can expect to yield about 6.7 percent and 6.15 percent, respectively. Letting out properties on the short-term rental market has become increasingly popular with property investors in recent years in Northern Portugal. It allows the tenor to enjoy higher rental yields and increased flexibility.

In Spain, the median rental income of popular expat areas gives a yield of 4.8 percent. Rental investments in Barcelona are achieving an average return of 5 percent; however, the Costa Daurada region, south of Barcelona, offers particularly high yields. The average is around 5.3 percent. Similarly, Tarragonès has a rental yield of 5.8 percent. Also, rental yields in cities like Madrid are the highest in Europe.

In Athens, rental yield stands at around 4.2 percent for apartments of 120 square metres. Surprisingly, the gross rental yield in the suburbs of Athens is also good. In Glyfada, 50 square metre apartments can yield 6 percent, whereas, rental yield for a 120 square metre apartments can be around 4.7 percent.

The real estate sector in European countries such as Greece and Spain were hit hard by the financial crisis of 2008. But after the global financial crisis in 2008, banking and financial laws in these countries have been

International Finance | January 2020 | 93

industry

analysis

Real estate European Golden Visa

reinforced and changed, in order to guarantee that the banking system offers nowadays guarantees, stability, and safety to investors. Kate Everett-Allen told International Finance that average prices in Spain and Greece still sit 22 percent and 37 percent below their pre-financial crisis highs suggesting prices remain good value. In addition, these countries offer good climates, easy accessibility, low mortgage rates and for investors, strong tenant demand.

When International Finance asked the question to Luiz Felipe, he responded by saying,” Definitely, not only for Asian investors but from all parts of the planet.”

He said, “It is important to understand that Portugal is a country in a process of rehabilitation and renovation of properties and not so much about new constructions.

When comparing with Miami where you put a house down and then erect a building with 200 apartments.

In these Portuguese cities, in 90 percent of the cases, the same old building with the same number of

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apartments will get rehabilitated or renovated with the same number of units, it had 200 years ago. We are not oversupplying the market.”

Natalie Leontaraki, believes the market in Greece has potential and provides get real estate opportunities to investors. She told International Finance that since the end of 2016, the number of real estate investors in Greece is increasing. She anticipates the market to keep increasing for the next seven years and then stabilising.

High ROIs, high yields, a low Real Estate Transfer tax of 3 percent, an easy process to purchase real estate along with the correction of the market are all factors that someone should be paying close attention to.

In Spain, the crash of 2008 was driven by excessive lending which led to an effective bailout of the Spanish property market by the ECB with funds channeled to the SAREB. At the time up to one million homes were sitting on the books of the banks to be sold off at a fraction of the price. Currently in 2019, 11 years after the crash, Spain is still selling

properties below their peak prices.

According to Paul Williams, what has changed over the years for international investors, in particular, is the perception that a real estate market can keep rising indefinitely. The same can be said for the lenders who believed this and who also have greater controls today. He said, “So provided we don’t forget the lessons of the past we should all be fine. History never repeats itself of course.”

Constanza Maya, Head of Operations and Expansions of Engel & Völkers in Spain, Portugal and Andorra told International Finance, “So the recommendation is to invest, either in residential homes in the centre of large cities such as Barcelona, Madrid, and Valencia, or in newly built offices and surfaces of more than 500 square metre in modern business centres, sometimes located in specific districts of the city, such as 22@ district in Barcelona.” editor@ifinancemag.com

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industry

thought leadership

Real estate PropTech

Javed Khattak UK Actuary and Co-Founder Zisk Properties

Technology provides investors with a radical approach to property investing – domestically and internationally

PropTech transforms real estate The emergence of PropTech has resulted in more transparent and efficient property transactions and has even impacted the wider construction scene and planning of cities. PropTech has already transformed the ways in which real estate businesses, including investors and service providers, operate.

Listing platforms (Rightmove, Zoopla and OnTheMarket), hardware (smart thermostats, sensors and IoT), materials (batteries for solar panels and smart concrete) and manufacturing (3D printing, offsite manufacturing and mobile construction platforms) – all these are PropTech disruptions noticeable throughout the value

Leading destinations of PropTech funding

57% US

12.4%

10.8 %

Spain

UK

Source: Savills

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chain. PropTech also takes data, automation, and artificial intelligence (AI) under its roof to help improve the processes of real estate, in particular logistics and supply chain processes.

The property sector is already realising the opportunities that innovative technology can bring. According to the annual report of KPMG 2018, a survey of 270 decision makers within real estate sector globally revealed that organisations in the property market are highly aware of PropTech’s potential impact – 97 percent respondents of the survey affirming it. With positive views about technology and innovation, a total of 73 percent consider PropTech an opportunity and an additional 25 percent consider it both a threat as well as an opportunity.

The report also shed light on the slow progress compared to last year – mainly because of intentions not being acted upon. It shows that the potential threats are only likely to materialise if these real estate incumbents fail to grasp the opportunities PropTech offers.

The amount of capital invested into PropTech is evidence of its potential and the likely transformative effect it can have on the real estate sector globally, benefiting everyone involved. In an analysis carried by Savills, it determined that the US was leading the way in PropTech investment, amounting

to 57 percent of the investments by value. In second place was Spain with 12.4 percent of the investment volume. and the UK received 10.8 percent, making it number three on the list.

PropTech’s value proposition: Flexible, easier options There are many examples of how PropTech has provided more, flexible and easier options to real estate investors. Starting from the traditional model of real estate investment – that is buying a buy-to-let property – Proptech has introduced alternative solutions. Now an investor doesn’t have to worry about tight regulations, time-consuming management of the property as well as a huge initial outlay required to be able to buy the property or to put down as a deposit for a buy-to-let mortgage (the criteria to qualify for which keeps getting tighter).

Through unit trusts, property funds and property crowdfunding platforms, PropTech has reduced the threshold of minimum investment, in most cases with improved liquidity and requiring no management of the property assets. Also, the risk is likely reduced as it is being spread over different assets as part of a more diversified portfolio.

The findings above all help to validate the successful growth trajectory the PropTech sector has been on, and moving forward it has the potential to add increased value to the real estate industry and the global economy too.

Incumbents must evolve or be left out The scope for PropTech will continue to evolve with the passage of time. It is certain that with the everchanging digital landscape, the potential disruption of real estate sector is significant, led by the emergence of new companies in the PropTech space to solve real-life challenges. As these newer entrants begin to lead the way, industry incumbents will have no choice but to follow in their footsteps, or risk facing a similar fate as Nokia in the smartphone industry.

Javed Khattak is a qualified actuary (FIA), a London School of Economics graduate, an award winning C-suite executive, and a serial entrepreneur. He advises startups, governments, central banks, and companies valued at over £100 billion. He is the co-founder of Zisk Properties, a leading FCA registered PropTech company in property investment solutions.

International Finance | January 2020 | 97

Business

Dossier

Economy Ajman Department of Finance

DOF Ajman: Building an open, competitive economy

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Economy emirate of Ajman

The award-winning department is at the forefront of deploying intelligent financial systems in the UAE

T IF Correspondent

The Department of Finance in the Emirate of Ajman is key to creating an open, green and competitive economy to support sustainable businesses in the UAE. The department has been making steady progress toward achieving the goals of Ajman’s Vision 2021.

It has also been at the forefront of deploying intelligent systems for financial planning in the UAE. In an exclusive interview with International Finance, His Excellency Marwan Ahmed Abdullah Al Ali, Director General for development, financial planning and budget at the Department of Finance of Ajman speaks about the awardwinning performance of the department, the progress of smart transformation, the deployment of industry 4.0 platforms, and the work culture of the department.

International Finance: To start with, could you please brief us about the foundation of the work in your esteemed department?

H E Marwan Ahmed Abdullah Al Ali: Based on the directives of the Chairman His Highness Sheikh Ahmed bin Humaid Al Nuaimi, we at the Department of Finance in Ajman seek to create a professional and distinguished work environment in the Department of Finance. The Department of Finance, which was established in Ajman in 2010, is the competent authority in the government of the emirate of Ajman to manage all financial affairs by building financial systems in accordance with the best practices and international standards in this field. Our goal is to direct the financial resources of Ajman to achieve outstanding government performance, based on our responsibilities and regardless of our positions, by developing a financial system that supports the development of Ajman and provides prosperity and welfare to the citizens while contributing to the development of our beloved country and raising the prosperity levels of the future generations.

What are the functions within the purview of the department and what are the tasks assigned to the Department of Finance, Ajman?

The Department performs various tasks, the most important of which are preparing draft laws and local decrees related to financial affairs. It supervises their implementation by government departments of the emirate, conducts periodic reviews of all local legislation related to applied financial affairs, and submits recommendations to the relevant authorities to update them. The Department of Finance prepares a draft general budget for the government of the emirate in cooperation and coordination with all government departments, and takes

International Finance | January 2020 | 99

business Dossier

Ajman Department of Finance

ECONOMY

the necessary measures for its approval in accordance with the Unified Financial System for the government of the emirate. It also supervises its implementation, monitors the spending from it after its approval, prepares a draft annual general final account of the government in cooperation and coordination with all government departments and manages the procedures necessary for its approval in accordance with the unified financial system of the emirate’s government. The department also prepares financial and consolidated periodic statements and reports for the government of Ajman within the dates specified under the unified financial system. It regulates and reviews government accounting rules, issues instructions necessary for their application by government departments, monitors their implementation, supervises bank accounts of the government departments, manages the general reserve account, oversees public revenue for the government of the emirate and monitors revenue collection. In addition, the department provides consultation and technical support to various government departments and reviews agreements that the government of the emirate or one of the governmental departments is a party to, to ensure compliance and protect them from any legal risks. The department also prepares and reviews economic feasibility studies for government projects, conducts research and financial studies and represents the emirate’s government at conferences and committees related to financial governance.

2021. As the financial arm of the government we are working to create sustainable financial resources. Our vision is to start employing the basic pillars in the projects to achieve the best results according to global standards for distinguished government performance. On this basis, we in the Department of Finance believe in working hard to achieve the strategic goals of Ajman Vision 2021 by creating an advanced work environment that supports the sustainable development of an open, green and globally competitive economy.

Since you took over the management of the institutional work in the department, what has been your vision for the work of the department?

We believe in hard work to achieve the goals of the Ajman government’s strategic vision to create a sophisticated work environment that supports the sustainable development of an open, green and globally competitive economy. On this basis, Ajman Department of Finance is working to lay the basic pillars to achieve this vision as the financial arm of the government that creates the financial resources for the projects. Our goal is to achieve the best results according to the standard criteria for distinguished government performance.

government financial system at the level of the local government and we are working to enhance its competitiveness, through efficient management and development of financial resources leveraging financial policies and legislations and innovative systems with a qualified cadre and effective partnerships.

The Department of Finance spares no effort to support all projects and development initiatives in various fields that broadly offer support to investors and businessmen, and links financial planning with strategic planning affirming the permanent objective of the Department of Finance to deploy the best practices in the field of public finance. This is done by strengthening strategic companies and strengthening relations with partners and customers by providing an attractive environment that supports investors.

How does your vision at work relate to the of Ajman’s Vision 2021?

The Department of Finance in Ajman is working on setting the basic pillars to achieve Ajman Vision

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How does the Department of Finance seek to enhance its strategic partnerships?

Our work at the level of the Department of Finance in Ajman is based on a pioneering

What is the progress of the smart transformation programme?

The Department of Finance is steadily progressing toward completing the smart transformation in all its services, and applying the vision of the Government of Ajman to move towards a fully intelligent governance model by December 2021, based on the wise guidance and close monitoring of Crown Prince of Ajman and Chairman of the Executive Council His Highness Sheikh Ammar bin Humaid Al Nuaimi, and his directives that call for facilitating business through adopting innovation and techniques of the fourth industrial revolution. We plan to use this as a platform to serve the business community, to enhance business competitiveness, and the role of business in the economic development of the emirate by

Ajman Department of Finance won the award for best financial planning in a government department, how do you see this award?

The sincere directives of Member of the Supreme Council and Ruler of Ajman, His Highness Sheikh Humaid bin Rashid Al Nuaimi, may God protect and preserve him, and close monitoring and great support from Crown Prince of Ajman and Chairman of the Executive Council His Highness Sheikh Ammar bin Humaid Al Nuaimi paved the way to win this award. This award highlights our contributions to realise Ajman Vision 2021, by enhancing financial planning processes at the Government of Ajman and developing them within a framework that guarantees development, by linking the financial plan to the strategic plan of the Ajman government, to achieve government strategic goals as well as

We believe in hard work to achieve the goals of the Ajman government’s strategic vision to create a sophisticated work environment that supports the sustainable development of an open, green and globally competitive economy.

taking advantage of the supporting environment.

The department's current initiatives reflect our continuing innovation and creativity in the service of customers, partners, and businessmen.

solvency and financial sustainability. In addition, it shows our keenness to involve the central authorities in financial planning to ensure the highest levels of governance and transparency.

You recently won the award for ‘best director general for development, financial planning and budgets.’ What is your comment on this?

I would like to point out at the outset that any success in the institutional work is mainly due to the unity and team spirit among the best, competent national cadres in the various departments of the Department of Finance.

Here hard work, continuous development, and exchange of expertise makes each individual able to provide and add value and guarantee business sustainability. This award is a motivation for further efforts and contributions in this regard.

What does this award add to your track record?

This award adds to the pioneering track record of the Government of Ajman in particular, and its various institutions, and the UAE in general, as it contributes to enhancing the image of the emirate in terms of global competitiveness. It positively reflects on the institutional performance and services provided by the department, in accordance with the global best practices. The international awards won by any government agency in the United Arab Emirates is the fruit of implementing good leadership directives, and the continuous follow-up of the implementation processes.

International Finance | January 2020 | 101

Ajman Department of Finance Providing outstanding financial services for sustainable development

T

he Department of Financial Affairs of the Government of Ajman was established by Amiri Decree No. (8) 2002. In 2010, it was reorganised as the Department of Financial and Administrative Affairs under the Amiri Decree No. (4) of 2010 then further reorganised as the Department of Finance by Amiri Decree No. (15) of 2012. The department plays a key role in providing outstanding financial services that contribute to the sustainable development of Ajman and enhancing the competitiveness of the country.

The Department of Finance strives to achieve this by supervising all the financial affairs of the government of the emirate by establishing the general annual budget of the Government of Ajman and implementing it in cooperation with all local government bodies, issuing the final accounts, and verifying the collection of public revenues, in addition to transferring funds to all government agencies.

The Department of Finance supervises the preparation, adoption, and development of government resources, in cooperation with the concerned government agencies. It is also involved in preparing bills of laws and local decrees related to financial affairs as well as providing consultation and technical support to government departments in line with the Unified Financial System of the emirate.

102 | January 2020 | International Finance

The Government Budgets Division The Government Budgets Division is responsible for carrying out the following activities in the Department of Finance.

1. Prepares, reviews, and updates the methodologies of the budget and financial planning in accordance with the best practices.

2. Studies and analyses the draft of the annual budget relating to each department and co-ordinates with other government departments and authorities regarding the execution of any amendments.

3. Prepares the draft of the general annual budget of the government of the emirate in co-operation with the relevant government departments.

4. Supervises the execution of annual budgets of all the government departments of the Emirate after the official issuance of the budget, controls and monitors spending and analyses the results in comparison with the financial revenues.

5. Prepares periodic financial reports on government-wide financial performance along with KPIs 6. Studies the budgetary amendment requests (transfers and additions) and executes them in light of the laws and policies contained in the Unified Financial System 7. Recommends new methodologies and best practices for the preparation and execution of the annual budget.

8. Prepares government-wide revenue and expenditure forecasts 9. Studies the drafts of decrees and resolutions especially those with

expected financial ramifications on the emirate's government budget and provides recommendations on the same 10. Performs any other tasks assigned as required within the scope of its expertise.

display information and data, which in turn paves the path to more informed decision making by the leadership.

Strengths and innovations of the Government Budgets Division

 Helps the government plan and analyse problems using logic.  Recognises and analyses inputs to deliver outputs that meet

1. Preparing medium-term financial plans 2. Integrating financial planning with strategic planning 3. Implementing AI systems such as the Smart Financial Planning and Analysis System The Smart Financial Planning and Analysis System is a strategic initiative launched by the Department of Finance (DOF) aimed at developing the public finance management of the Government of Ajman by transforming its budgeting system towards the performance-based budgeting. The Smart Financial Planning and Analysis System enhances the planning, analysis, and preparation of the Ajman Financial Plan and Budget by a partnership between the Department of Finance and various government departments in the Emirate of Ajman.

The Smart Financial Planning and Analysis System represents a qualitative shift in the management of government resources in Ajman, from the control of spending to planning, analysing and monitoring government performance. The system builds a mediumterm plan to integrate strategic planning and financial planning to rationalise spending, create financial discipline and financial sustainability, as well as support diversified and sustainable economic growth in the emirate.

In line with the global digital revolution driven by artificial intelligence, the Smart Financial Planning and Analysis system is based on the principles of artificial intelligence with reports and dashboards to

Features of the Smart Financial Planning and Analysis System

government needs with high efficiency.

 Supports continuous development, whereby the analysis process is automatic and self-controlled without supervision.

 Manages the vast amount of data and information entered into it.  Deduces data patterns  Enables ease of use with its simple and familiar screens.  Enables follow-up and reliability through the business process tree and the credits passed by the data before being submitted for approval.  Supports follow up and analysis of financial risks.  Helps study the financial impact on future projects.

4. Applying PEFA indicators One of the innovations of the Government Budgets Division is applying PEFA, a strategic initiative launched by the Department of Finance (DOF) aimed at strengthening the capacity to assess the status of the country’s public finance management (PFM) systems and to develop a practical sequence of reform and capacity development actions.

PEFA is a methodology for assessing public finance management performance. It identifies 94 characteristics (dimensions) across 31 key components of public finance management (indicators) in seven broad areas of activities (pillars). The goals of the PEFA programme are to strengthen the capacity to assess the status of country PFM systems and develop a practical sequence of reforms and capacity development actions.

International Finance | January 2020 | 103

economy

insight

Saudi arabia budget

Saudi Arabia attracted FDI to the tune of $2.3 billion in 2019, an increase of 10.3%

KSA budget 2020 strengthens Vision 2030 Dr Abdullah al Fozan and ismail daham alani, kpmg saudi Arabia

With the central aim of transitioning the economy away from its dependency on the oil sector, the government of Saudi Arabia continues to push ahead with its diversification efforts. In addition, the government focuses on balancing fiscal stability and economic growth amid the oil market volatility that occurred last fiscal year. KPMG expects the government to continue with the same rigour in the forthcoming year.

The Saudi Arabian expenditure budget for fiscal year 2020 is estimated at SAR 1,020 billion, with a continued focus on promoting economic growth and improving spending efficiency. KPMG views the government’s decision to maintain the same level of public expenditure as last year despite the volatility in the oil market as a testament of its commitment towards achieving fiscal, social, and economic targets.

The planned Saudi Arabian budget focuses on maintaining fiscal stability and sustainability, improving the diversification of revenue sources, and taking measures to advance the economic and social development of the country.

104 | January 2020 | International Finance

Lower GDP estimate due to decline in oil prices According to the Ministry of Finance (MoF), real GDP growth is expected to reach 2.3 percent in 2020, a downward revision on last year’s estimate of 2.7 percent. The reduction in the GDP growth estimate is due to the decline in oil prices amid the trade war between China and the US, and the decrease in oil production as a result of the OPEC+ agreement.

The focus of spending in 2020 remains on building the non-oil sectors with high economic and social return, and creating more jobs. Additionally, the government will continue to spend on education and healthcare to raise the standard of living, and improve the quality of life for its citizens.

Total public revenue is forecasted to reach SAR 833 billion in 2020, 9 percent lower than total expected public revenue in 2019 (SAR 917 billion).

Oil revenues are expected to represent 62 percent of total revenue in 2020. The budget deficit in 2020 is expected to be SAR 187 billion (6.4 percent of the estimated 2020 GDP), compared to SAR 131 billion (4.7 percent of GDP) in 2019, owing to

insight economy

Saudi Arabia budget 2020 Expenditure

Revenue

SAR

1020 bn

Budget 2020 balancing fiscal sustainability and economic growth

Total public debt SAR

SAR

833 bn Deficit SAR

187 bn (6.4% of GDP)

754 bn (26% of GDP)

Public revenue is budgeted to be SAR 833 billion, 62 percent of which is attributed to the oil revenue and 38 percent to the non-oil revenue. The budgeted expenditure for 2020 is SAR 1,020 billion, out of which about 50 percent is allocated to employee compensation. At 19 percent, education has the largest allocation in terms of sectors, followed by military, with an allocation of 18 percent a higher rate of projected revenue decline against expenditure in 2020. Public debt in 2020 is expected to reach SAR 754 billion (26 percent of the estimated 2020 GDP), compared to SAR 678 billion (24 percent of GDP) in 2019.

KPMG echoes the government’s sentiments of driving economic growth by increasing the role of the private sector. The government continues to take notable measures to strengthen the private sector and enhance its contribution to achieve its goals and targets, in line with Vision 2030. For example, to support and develop the private sector, the government designed important initiatives such as The Private Sector Stimulus Package (PSSP) and the privatisation programme.

In line with its aim to attract more foreign direct investment (FDI), the government has made noteworthy progress in 2019. Saudi Arabia received US$2.3 billion in FDI in 1H19, a year-overyear growth of 10.3 percent. The addition of Saudi Stock Exchange (Tadawul) to the MSCI Emerging Markets Index in August 2019 is further expected to enhance the country’s market efficiency.

The government’s efforts and focus towards achieving sustainability and fiscal balance is expected to be beneficial for businesses and public policy planning. With the volatility in oil prices anticipated to decrease in 2020, KPMG expects Saudi Arabia to continue progressing towards achieving its Vision 2030 objectives

International Finance | January 2020 | 105

insight

economy

saudi arabia budget

Change in budget 2019 -2020 Estimated in 2019 (SAR billion)

Budget in 2020 (SAR billion) Oil revenue -14.8

602

513

Non-oil revenue 16

315

320

Expenditures -2.7

1048

131 678

Deficit 42.7 Public Debt 11.2

Supporting diversification efforts Continuing the diversification efforts: For the second time in two years, Saudi Arabia announced budgeted expenditures of more than SAR 1 trillion for 2020. With budgeted expenditures of SAR 1.02 trillion, spending will continue to support the government’s initiatives of diversifying the economy and achieving its fiscal, social, and economic targets.

Achieving fiscal sustainability: The budget focuses on maintaining fiscal stability and sustainability, improving the diversification of revenue sources, and taking measures to advance the economic and social development of the country. Additionally, strengthening the private sector and creating more jobs will remain key focus areas for the government in the next financial year Aiming for growth amid headwinds: Real GDP growth is expected to reach 2.3 percent in 2020, a downward revision to last year’s estimate of 2.7 percent, due to the decline in oil prices amid global trade turbulence, and the cuts in oil production as part of the OPEC+ agreement.

Managing the debt-to-GDP ratio: The budget

106 | January 2020 | International Finance

1020

187 754

deficit in 2020 is expected to be SAR 187 billion (6.4 percent of GDP), compared to SAR 131 billion (4.7 percent of GDP) in 2019.

This deficit increase can largely be attributed to the oil price volatility and the turbulence in the global economy that faces risk from trade war. revenue is expected to reach a new high of SAR 320 billion in 2020, compared to SAR 315 billion expected in 2019, an increase of 1.6 percent.

Strengthening non-oil sectors: Non-oil revenue is expected to reach a new high of SAR 320 billion in 2020, compared to SAR 315 billion expected in 2019, an increase of 1.6 percent.

This boost is driven by the government’s continued efforts to develop non-oil sectors with higher economic and social return Vision 2030 projects have started positively impacting society In the more than three years since Vision 2030 was launched, Saudi Arabia has taken notable measures to diversify its public sector-dominated economy into a private-sector-driven system.

The government is continuing to implement

insight economy

Saudi Arabia 2020 Revenue Public Revenue SAR 833 billion

Non-oil revenue SAR 320 billion

Non-Oil revenue

8% Other taxes on income, profits and 5% Taxes capital gains

38%

Taxes on international trade

5% and transactions

44% 38%

Oil revenue

62%

economic and social reforms to realise the Vision 2030 goals with the help of numerous initiatives including the creation of one of the world’s largest sovereign wealth funds and the launch of privatisation programmes to divest state-owned companies. Under the Vision 2030 initiative, several projects and mega projects have already started positively impacting the economy, especially in the non-oil sector that saw revenue increase nearly threefold since 2016. The Saudi Stock Exchange’s (Tadawul) full inclusion in the MSCI EM Index in August 2019, marked the government’s continued efforts towards attracting international investors.

Saudi Arabia has attracted US$2.3 billion in FDI in the first half of 2019. With the addition of Tadawul to the MSCI EM Index in August 2019, this figure is expected to further increase in future.

However, despite the government’s continued efforts towards improving the domestic economy, the global economy is facing the consequences of a trade dispute between the US and China, which also impacts the country’s economic growth outlook, especially in the oil sector. Saudi Arabia’s oil sector growth in in the first half of 2019 was -1.0 percent due

Taxes on goods and services Other non-oil revenue

to a decline in the oil prices amid the trade war, which impacted global oil demand, and a production cut which was imposed by the latest OPEC+ agreement.

To support oil prices, on December 5, 2018, OPEC and some non-OPEC countries decided to cut 1.2 million barrels per day (mb/d) starting January 1 2019 for an initial period of six months. In July 2019, the OPEC+ countries extended the oil production cuts until March 2020. Furthermore, in December 2019, OPEC+ countries decided to increase the oil production cut by 500,000 barrels per day (bpd) to 1.7 mb/d until March 2020.

Due to these external factors, the contribution of real oil GDP to the overall GDP H119was -1.0 percent. In contrast, on the back of the government’s continuous efforts towards realising its Vision 2030 goals, the non-oil GDP growth of 2.5 percent in H119 was the main contributor for the H119 GDP. growth of 1.1 percent.

Real non-oil GDP Saudi Arabia’s economy is diversifying away from oil, and going forward, the growth is expected to be supported by the non-oil sectors. In 2019, the

International Finance | January 2020 | 107

economy

insight

saudi arabia budget

Real non-oil sector GDP growth and non-oil sector contribution to GDP

0.58

0.58 0.57

0.56

0.56

2.0

2.1

2.0

0.56

0.58 2.9

0.57

2.5

2.5

0.57

0.56

0.58

0.58

2.2

2.1

4Q18

1Q19

0.56 0.3

0.5

0.54

0.7 0.1

-0.6 1Q16

2Q16

3Q16

0.7

4Q16

1Q17

2Q17

Real non-oil GDP growth

execution of mega projects had a positive impact on all the sectors — including the construction sector that outperformed the other sectors and witnessed growth for the first time in three years.

Reforms and improved confidence in the country improved Saudi Arabia’s position in the World Bank’s ease of doing business rankings. The country jumped 30 places to rank 62 with an overall score of 71.6 out of 100. The government’s ongoing efforts indicate that the country is moving forward in the implementation of the VRPs to achieve vision 2030’s main objective of diversifying the economy and decreasing its reliance on oil.

According to the GASTAT, in 1H19, real nonoil GDP grew by 2.5 percent compared to 1H18, primarily due to improved economic activity and the implementation of non-oil revenue development initiatives, such as execution of mega projects. While the non-oil private sector witnessed a growth of 2.9 percent in 1H19, the non-oil government sector grew at an average of 1.8 percent during the same period. Additionally, the actual real non-oil GDP annual growth for 2Q19 was 2.9 percent, accounting for 58 percent of the total GDP.

108 | January 2020 | International Finance

3Q17

4Q17

1Q18

2Q18

3Q18

2Q19

Non-oil GDP/Total GDP

On the back of the strong performance of both private and government non-oil sectors, which grew 3.4 percent and 1.8 percent, respectively in 2Q19, the growth of non-oil sector in 2Q19 was the highest in the previous 15 quarters.

We, at KPMG, believe that in medium and long term, the economic growth of Saudi Arabia will be driven by the contribution of the non-oil sector, and the progress the government makes in implementing the Vision 2030 objectives.

Dr Abdullah Al Fozan

is chairman and senior partner

KPMG in Saudi Arabia, and Ismail Daham Alani is the head of public sector, KPMG Saudi Arabia

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