International Finance - July 2020

July 2020

Issue 17 Volume 13

UK £4 Europe ¤5.35

www.internationalfinance.com

US $6

How Saudi banks are coping with the pandemic SAMA issues measures and guidelines to mitigate risks

Berlin's new fintech play in European market 1 | July 2020 | International Finance

Africa supports Opec+ in oil curb

China begins work on 6G

More than...

40 Years serving Egyptian Economy 227 Branches in all Egyptian governorates 6800 Banking professionals at your service 490 ATMs

2 | July 2020 | International Finance

JULY 2020 VOLUME 13 ISSUE 17

EDITOR’S NOTE SAMUEL ABRAHAM EDITOR, INTERNATIONAL FINANCE

The world economy is changing

T

he Saudi banking industry has received a ‘cautious optimistic’ outlook from analysts on the back of the protracted pandemic. It is clear that the pandemic is having a devastating impact on developing and developed countries. In this context, the Saudi Arabia Monetary Authority has injected $13.3 billion capital into the industry in the wake of economic challenges.

The Kingdom’s banking industry started this year on a promising note, with 13 local banks offering services to a population of more than 30 million people. But as experts have emphasised the long-standing effects of the pandemic on the industry, the scale of the impact could be significant on its asset growth through this year.

For the cover, we have exclusively interviewed Ovais Shahab, Head of Financial Services, at KPMG Saudi Arabia, who has spelled out the pandemic’s impact on the banking industry and the apex bank’s new measures to mitigate risks.

The fact of the matter is not only how the pandemic is affecting the countries’ GDPs but pointing to their response mechanisms — and how effective they have been so far. For example, the Philippines has entered a recession in the first half of the year. Although its policy, fiscal and monetary responses by the government and the central bank to wrestle the crisis was considered appropriate, some economists are not fully convinced on the approach.

Another sector deeply affected by the pandemic is oil and gas.

Interestingly, the Opec’s oil curb agreement is having a ripple effect on the African oil producers in terms of GDP and revenue.

We have also featured exclusive interviews highlighting Berlin’s transformation as the European financial hub and the new game in Russian ecommerce. This edition is focused on understanding the pandemic’s impact on the global economy at large.

sabraham@ifinancemag.com www.internationalfinance.com

International Finance | July 2020 | 3

INSIDE

IF JULY 2020

IN CONVERSATION GAME IN RUSSIA'S 40 NEW ECOMMERCE Ingenico is helping international merchants foray into the market

HAS FINTECH 22 BERLIN POWER

The country is becoming a popular European fintech hub on the back of Brexit

26 SAUDI BANKS IN A NEW SETTING The banking system's resilience and strength will cushion the economic fallouts of Covid-19 FINANCE

ECONOMY

16

50

BRAZIL'S NEW LOAN FACILITY FOR SMEs

THE PHILIPPINES IN A RECESSION

ANALYSIS

SMEs are vital to strengthen the country which is one of the worst affected by the pandemic

The ripple effects of the pandemic has led to a sharp economic downturn seen in 20 years

36 China is aiming at 6G — what next?

44 Africa supports Opec+ TECHNOLOGY

INSIGHT

agreement on oil curb

12 What UK fintechs can expect

58

54

AFRICA'S CRYPTO SURGE IS COMING

THE DECLINE IN GLOBAL ECONOMY

Facebook's Libra and CBDCs are increasing the popularity of cryptocurrency on the continent

IMF expects the global economy to shrink over 3 percent in 2020

4 | July 2020 | International Finance

after Brexit comes through

www.internationalfinance.com

THOUGHT LEADERSHIP INVESTMENT BANKING THE RISE OF MONOPOLY

34

Retail investors lack fair access to primary capital market investments

48

INSURTECH INNOVATIONS THE POTENTIAL OF AI IN INSURANCE

The technology can transform the industry from 'detect and repair' to 'predict and prevent'

64

API MANAGEMENT WHY APIS ARE SO IMPORTANT

Security and governance for banks and enterprises will be ensured

68

DIGITAL CURRENCY STABLECOIN IS A NOVEL CONCEPT

It promises a frictionless way for people to transfer and use funds in the future

Director & Publisher Sunil Bhat Editor Samuel Abraham Editorial Adriana Coopens, Jessica Smith, Lacy De Schmidt, Pritam Bordoloi, Sangeetha Deepak Production Merlin Cruz Design & Layout Vikas Kapoor Web Developer Prashanth V Acharya Business Analysts Sid Nathan, Sarah Jones, Christy John, Gwen Morgan, Alex Carter, Janet George, Maria Mamtha, Ravi Madas, Indra Kala, Mohammed Alam, Edwin Christopher, Rohit Samuel, Priscilla Salt, Peter Berkman Business Development Manager Steve Martin, Sunny Shah, Sid Jain, Ryan Cooper Accounts Angela Mathews 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 06 08

The world economy is changing

TRENDING Telkom Kenya rolls out 4G balloon

NEWS Dubai real estate set for V-shaped recovery

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 | July 2020 | 5

# TRENDING TELEC OM

Photo by By technologyreview.com

China aviation sees $4.9 bn loss

Telkom Kenya rolls out 4G balloon Telkom Kenya seeks to expand its internet subscribers by 4.8 million users with the launch of Loon. The telco rolled out Loon in a partnership with Alphabet. In theory, Loon is a network of stratospheric balloons enabling 4G connectivity to rural and remote communities globally. The solar and wind powered balloons are designed for faster 4G network. It was reported that 10 of 35 loon balloons went live for users in 14 countries, covering 10 percent of each country. This marks the first commercial launch of Loon balloon technology.

China’s aviation industry has suffered 34.25 billion yuan loss in the second quarter, according to the data published by the Civil Aviation Administration of China. In the first quarter, the industry lost 38.1 billion yuan. It is reported that the country’s aviation industry has been recovering faster than most countries in the world on the back of strict lockdowns. In June, it had regular cargo flights with over 100 overseas destinations.

At a Glance Reasons for investing in niche real estate sectors in Southeast Asia

27%

demographic demand drivers

Singapore enters technical recession

The UAE introduces Overnight Deposit

Singapore has enEC ONOMY tered a technical recession on the back of its 41.2 percent economic contraction in the second quarter compared to the first quarter, according to the Ministry of Trade and Industry. By definition, a technical recession is based on two quarter-on-quarter contractions. It appears that economists polled by Reuters expect the Southeast Asian economy to reduce by 37.4 percent quarter-over-quarter. It is reported that the Singapore economy contracted by 12.6 percent in the second quarter compared to the previous year.

The Central Bank of B AN K I N G the UAE has introduced a new deposit facility for banks.

The facility is known as the Overnight Deposit Facility. With the new facility, conventional banks operating in the country can deposit their surplus liquidity on an overnight basis at the apex bank. In fact, the introduction of the Overnight Deposit Facility marks the first step toward the implementation of Dirham Monetary Framework which was announced earlier this year. It will be the main facility for managing surplus liquidity in the UAE banking sector.

6 | July 2020 | International Finance

22%

higher yields

20%

stable income returns

13%

less competition from other investors Source: PwC

NEWS | INSIGHTS | UPDATES | DATA

Ones to Watch

ENERGY

The UK's increase in renewables

In the first quarter of the year, renewable energy accounted for almost half of the UK’s electricity generation. A surge in wind power was observed in that period, setting a new record for the industry. The government’s official data showed that electricity in the country is drawn from wind farms, solar panels, hydropower plants and bioenergy. Bioenergy was generated by burning wood instead of coal. In fact, a ‘substantial increase’ in wind and solar power have contributed 47 percent to the UK’s electricity generation — beating its previous record of 39 percent set last year. Offshore wind farms accounted for the largest increase in renewable energy, rising 53 percent compared to the previous year.

Increase in renewable energy combined with a good supply of nuclear power has accounted for 15 percent of the UK generation mix. This has significantly lowered the use of fossil

fuels power plants in the first quarter of the year. More specifically, gas-fired power plants made up less than a third of UK generation in the first quarter of the year and coal-fired power plants accounted for 3.8 percent of the country’s electricity generation.

It is reported that the development of wind farms coupled with the UK’s unusually windy weather owing to storms Ciara, Dennis and Jorge have helped to generate wind power at a record high.

By the Numbers

MUKESH AMBANI CHAIRMAN OF RELIANCE INDUSTRIES With the launch of Reliance Jio, Mukesh Ambani has revolutionised the Indian telecom sector. Over the last 12 weeks, Ambani has raised more than $15.7 billion in investments.

VLADIMIR TENEV CO-FOUNDER OF ROBINHOOD Vladimir Tenev co-founded Robinhood, an US-based online commission free trading platform. It also offers an app and website to invest in stocks. Recently, the startup raised $320 million in fresh funding.

Qatar’s economic forecast outlook for H2 2020

Overview

Q3

Q4

1.5%

0.2%

Unemployment rate

0.4%

0.4%

Inflation rate

1.9%

2%

GDP growth rate

Interest rate

2.5%

2.5%

Source: Trading Economics

MA HUATENG CEO OF TENCENT Ma Huateng, also known as Pony Ma, is a Chinese business magnate, serving as the CEO of Tencent. Under his leadership, Tencent has emerged as one of the most profitable companies.

International Finance | July 2020 | 7

IN THE NEWS

FINANCE

BANKING

INDUSTRY

TECHNOLOGY

In June, Dubai real estate transactions jumped by 60 percent compared to the previous month

Apac's aviation industry is anticipated to incur losses of around $29 billion this year

Dubai real estate sees transaction growth In June, the real estate transactions in Dubai jumped by 60 percent compared to the previous month — and has signalled a potential V-shaped recovery, according to real estate portal Property Finder. A report published by Property Finder showed that the real estate sector in Dubai has been recording more than 570 sales transactions on average over the past several weeks as the secondary market bounced back to pre-Covid levels.

The secondary market accounted for only 28 percent of total sales in April and 33.5 percent of total sales in May. However, in the following month, the market returned back to the normal trend prevailing in 2019 as the secondary market accounted for 53 percent of total sales transactions.

Rizwan Sajan, founder and chairman of Danube Group, said that Dubai has an excellent track record for bouncing back from adversities.

In his view, Dubai’s real estate market is one of the safest and lucrative investment markets in the

8 | July 2020 | International Finance

world — resulting in one of the highest returns on investment of around 6 percent to 8 percent which is expected to increase in the coming months.

The real estate sector recorded the best first-quarter performance in the last six years, despite the coronavirus pandemic, according to ValuStrat’s May 2020 report. The first quarter of this year saw cash sales of ready homes up 30.4 percent annually with no quarterly changes.

The report on the emirate’s real estate sector further noted that cash sales transaction and volume performance in April was just half of what was reported in the previous month. Ready homes sales volume witnessed a steep monthly fall of 75 percent and off-plan homes sales declined 32 percent compared to March.

In fact, Dubai has become the first city of choice for property investors on a global scale. The Dubai Land Department has launched its new Invest in Dubai under the theme Discussing the opportunities that arise from Dubai as a real estate investment destination to further strengthen its position in the sector.

Apac aviation is hurt by Covid-19 The aviation sector in the Asia-Pacific region will be severely affected by Covid-19 crisis as carriers are set to incur losses of around $29 billion this year, according to the International Air Transport Association (IATA). The association also said that the global aviation is set to lose around $84.3 billion due to the pandemic this year. That said, Europe will suffer losses of around $21.5 billion and North America will incur losses of around $23.1 billion in 2020.

The aviation sector in the Asia-Pacific region was the first to face the brunt of the pandemic with the new coronavirus outbreak detected in the Chinese city of Wuhan last year. According to IATA, the region's airlines will see passenger demand measured in revenue passenger kilometres collapse by 53.8 percent this year, while capacity in available seat kilometres will be lowered by 39.2 percent.

Conrad Clifford, IATA's regional vice president for Asia-Pacific, told the media that 2020 is the worst year in aviation history and airlines

are in survival mode. The carriers in the region will experience huge losses of nearly $29 billion. That is equivalent to a loss of $30.09 per passenger. He further added that the region’s governments need to facilitate the restart of air connectivity in line with the International Civil Aviation Organisation's Takeoff guidance and principles against the industry’s bleak outlook.

In essence, it will take a few years for the aviation industry to return to pre-Covid levels. He also stressed on the importance of government interference and their role to ensure the aviation sector in all countries don't collapse. IATA forecasts that Japan will be among the worst hit countries in Asia-Pacific as its revenue will decline by $23.9 billion year-on-year in 2020.

In the last few months, airlines have slashed jobs and salaries significantly in an effort to cope with the protracted pandemic. In India, domestic traffic is expected to drop 55 million and international traffic to fall to 20 million to 27 million during the current fiscal year.

International Finance | July 2020 | 9

IN THE NEWS

FINANCE

BANKING

INDUSTRY

TECHNOLOGY

Google will invest a significant amount through the fund to speed up digital adoption in the country

The leasing tender for the floating platform will mark the seventh FPSO in Buzios

Google to invest $10 bn in India

JD.com raises $4 bn in Hong Kong

Google has announced that it will invest $10 billion in India over the next five to seven years. Google will make investments in the country through India Digitisation Fund. The company will invest in the fund through a mix of equity investments, partnerships, operational, infrastructure and ecosystem investments. According to Google, the investment will focus on four key areas. First: It will enable affordable access and information for every Indian in their own regional language. Second: It will focus on building new products and services that are deeply relevant to India’s unique needs. Third: It will empower businesses as they continue to embark on their digital transformation. Fourth: It will leverage technology and AI across areas such health, education and agriculture.

Chinese ecommerce giant JD.com has raised around $4 billion in its IPO debut on Hong Kong Stock Exchange. JD.com’s IPO was the second largest share sale in 2020. It is reported that the online retailer’s shares jumped 5 percent after its IPO debut. This is JD.com’s secondary listing. In 2014, the company sold its shares on Nasdaq.

JD.com is the second largest ecommerce company in China.

The Chinese giant’s close rival Alibaba also went public during the same time. In 1998, JD.com was founded by billionaire Liu Qiangdong, also known as Richard Liu. In an interview with Asia Business Report, Ling Chenkai, vice-president of JD Retail, said that the listing was an important step for JD.com.

Return of capital invested in airlines in 2020

North America

Europe

Asia Pacific Latin America

-10.5% -14.3% -12.7% -16.6% 10 | July 2020 | International Finance

Source: IATA

Petrobas' new leasing tender

Nigeria to fully digitalise ports

Brazilian state-owned oil giant Petrobras is planning to launch a tender for the country’s largest-ever oil platform, the media reported.

Petrobras is planning to launch the leasing tender for the floating platform, known as floating production storage and offloading (FPSO) by the end of August. It will be the seventh FPSO in Buzios, Brazil’s second most productive field and one of the biggest deepwater discoveries in this century.

It is reported that four platforms in the Buzios field recently achieved a record output. These platforms known as P-74, P-75, P-76 and P-77 produced a total of 674,000 barrels per day and 844,000 barrels equivalent per day. Petrobas is progreassing with investments despite recent contraction of crude prices.

The Nigerian Shippers’ Council (NSC) has announced that it is planning for a full digitalisation of Nigerian ports by the end of 2021. This means that by the end of next year, all clearing processes and all other ports transactions will be carried out online.

According to the Executive Secretary of the NSC, Hassan Bello, around 65 percent of the activities in the Nigerian ports are carried out digitally.

He further pointed out that certain transactions such as bills of lading and other invoicing are not generated online. At present, the Nigerian Shippers’ Council is holding meetings with shipping companies, terminal operators and banks to digitalise cargo clearing processes at ports within the stipulated deadline.

Largest global logistics companies by revenue in 2020

UPS

Deutsche Post

FedEx

CSX Transportation

XPO Logistics

$71.86

$67.11

$65.45

$38.2

$16.65 $ in Billion

International Finance | July 2020 | 11 Source: BizVibe

BANKING AND FINANCE

ANALYSIS

FINTECH FINTECHS POST-BREXIT

London is anticipated to remain the financial capital of Europe with increasing fintech investments despite looming uncertainties

What UK fintechs can expect post-Brexit PRITAM BORDOLOI

Over the years, London has established itself as a financial district with corporate friendly regulations and convenient time zones. It is reported that the UK is the highest net exporter of financial services.

However, London’s reputation as a financial hub is under threat with looming Brexit uncertainties.

Since the UK started negotiating with the European Union (EU) about a possible exit, hundreds of fintech Fintech companies have either exited firms in the the UK or moved some part UK received of their financial assets to the EU. In 2020, the UK finally the highest exited the European Union amount of after years of negotiations. So investments how will Brexit impact the in Europe, country’s fintech sector?

accumulating $48 billion worth of investments

The UK fintech scene as Brexit looms

The UK finally withdrew from the EU earlier this year.

However, both parties have entered a transition period that will give them time to work on a new trade agreement.

In 2019, a report published by Robert Walters — one of the leaders in recruitment for financial services and technology revealed that fintech firms in the UK received the highest amount of investments in Europe, accumulating $48 billion worth of investments.

12 | July 2020 | International Finance

However last year, around 275 financial firms moved a combined total of $1.2 trillion in assets out of the UK to other parts of Europe, a report showed. Dublin alone accounted for more than 100 relocations, while Luxembourg had 60, Paris had 41, Frankfurt had 40 and Amsterdam had 32. That said, a report published by Bovill showed that around 1,400 EU-based firms have applied for permission to operate in the UK after Brexit, with over 1,000 of those planning to establish their first UK office, which seems positive for the country in a post-Brexit setting.

Earlier this year, German neobank N26 informed its customers that it is closing its business in the UK due to Brexit. According to the neobank, it no longer has a licence to operate in the country post-Brexit.

In this context, the neobank has asked its customers to transfer assets to alternate accounts.

N26 started its business in the country just five months prior to its exit. Brexit has encouraged investment banking giants such as Bank of America Merrill Lynch, Citigroup, Goldman Sachs and JP Morgan to shift a significant proportion of their operations to Europe.

A report published by EY said that Deutsche Bank has shifted €400 billion from its balance sheet to Frankfurt, while JP Morgan moved €200 billion to Germany. Another report by thinktank New Financial found that 332 financial services firms have already moved jobs out of London because of Brexit.

Tom Bull, head of UK Fintech at EY told International Finance, “While some fintechs have moved parts of their financial assets out of the UK in preparation for Brexit, over the past few months we have seen a noticeable pause on firms announcing any operational changes to their businesses, as relocation announcements have dwindled. When it comes to the impact this has had on the country’s business landscape, our data suggests that firms have built out the infrastructure they need on the continent to ensure they will be able to serve clients once Brexit happens — be that with or without a deal.

“While fintech is still seen as a major foreign direct investment attraction for the UK, Brexit has pushed many fintech firms to create optionality in their business models by considering other locations for parts of their business. Going forward, firms are

likely to be focusing on fulfilling their commitments to regulators in the EU and the UK to establish their new operations, while also deciding whether to operate multiple hubs across the Eurozone and in the UK or consolidate and restructure operations.”

It is quite evident that Brexit will significantly change the financial services in London and the UK at large.

Changes are expected when it comes to regulations, trade deals and investments. However, how big and impactful the changes will be remains to be seen.

London continues to be the fintech capital of Europe London is now dubbed as the fintech capital of Europe.

The number of startups and companies in the city have grown significantly — creating a positive impact on its fintech landscape.

It is reported that job creation has also increased over the years. According to London-based recruitment firms operating, job creation has increased by 61 percent over the past year. This growth is making financial technology the fastest growing sector in the city.

Interestingly, the fintech sector in the UK has

International Finance | July 2020 | 13

BANKING AND FINANCE

ANALYSIS

FINTECH FINTECHS POST-BREXIT

continued to progress since the Brexit vote. The UK has always encouraged innovation, creating a surge of growth along with corporate friendly regulations and less bureaucracy, thus increasing investment opportunities for both local and foreign investors. This in turn has helped fintechs in the region grow at a fast pace. Brexit, on the other hand, seems to be limiting the growth of UK fintech companies working with European companies, especially with trade and employment becoming a cause for concern.

Experts believe that London will continue to be the fintech capital of Europe despite the changes that Brexit will bring to its business landscape. In fact, Brexit might even foster fintech growth in Dublin, Amsterdam and Frankfurt.

“At this point in time, no solid alternative has emerged to challenge London as the preeminent financial hub in Europe. London remains the most attractive destination for foreign direct investment in Financial Services, securing 67 projects in 2019, more than double that of Paris, the second most popular city with 29 projects,” Bull explained. “London’s dominance as the preeminent European financial centre remains unrivalled, however there is competition from financial centres around the globe and as such, we should not be complacent about London’s position as a top financial hub.”

Talent crunch might not take place Many in the industry worry that the UK could find it difficult to get

14 | July 2020 | International Finance

A noticeable trend was observed in UK fintechs with ground-breaking investments worth

$4.9 billion, which surpassed

$3.6 billion record in the previous year—catapulting the country to second in global rankings for venture capital investments

the right talent following its exit from the EU amid the potential loss of passporting rights. However, it is very unlikely that the UK will go through a talent crunch postBrexit. The UK being a key financial services centre houses famed universities and demonstrates an impeccable academic culture.

Certain fintechs are likely to choose to set up in an EU country rather than the UK, thus potentially drawing talent to particularly EU cities and fintech hubs. Even though many fintechs are moving their businesses out of the UK to the European Union, they are still likely to retain some part of their business in the UK. Many fintechs have also moved some part of the financial assets out of the UK. Many of those fintechs will only establish a small presence in a new EU market and look to maintain their current UK operations. In fact, roles and

opportunities should remain in the UK which should continue to prove attractive to talent. The evident changes will be seen in the mix of the talent pool driven by the impact on immigration both into and from the EU as a result of Brexit.

The UK government had assured companies operating in the country that it will support retaining talent post-Brexit. In fact, skilled employees will be given the rights to remain in the country because of their skillset and vast experience.

Fintech investment in a post-Brexit setting The big question is whether investors would show the same interest in British fintech startups post-Brexit? Even though Brexit negotiations have been ongoing for the last five years, investors have not shied away from investing in UK fintechs. Despite looming Brexit

ANALYSIS FINTECHS POST-BREXIT

UK financial firms relocate to other European countries in 2019

100 Dublin 32

Amsterdam

41

Paris

Luxembourg

60

40 Frankfurt

uncertainties, investments in UK fintech startups have expanded by nearly 500 percent over the past five years, eclipsing the investment growth of 170 percent recorded by the US in the same period. The UK also outperformed the rest of Europe which recorded a 133 percent increase. This implies that investors are still willing to invest in the UK despite those uncertainties.

Investors will continue to invest in fintechs in the coming years due to financial services requirements transitioning toward a digital, cloudbased industry.

A noticeable trend was observed in UK fintechs with ground-breaking investments worth $4.9 billion, which surpassed $3.6 billion record

in the previous year—catapulting the country to second in global rankings for venture capital investments.

UK fintechs have attracted huge capital and completed significant deals than the rest of the top 10 European countries combined.

Seven of the top 10 deals in Europe involved UK fintechs. Greensill led the way with an $800 million round and OakNorth with $440 million.

However, the scene on the continent saw its own impressive growth with total investment hitting $8.5 billion, up from $5.7 billion. German digital bank N26 raked in $470 million, with payments outfit Klarna raising $460 million.

“Investor sentiment from April this year suggests that the

UK financial sector is in a strong position to adapt to the changes and continue to be a leading destination for overseas investment — with fintechs being no exception. How this continues after Brexit will depend on a number of factors, such as the incentives the UK will provide for foreign investors and the trade deals that will be negotiated with new countries. However, the UK is likely to continue driving growth in the sector,” Bull concluded.

editor@ifinancemag.com

International Finance | July 2020 | 15

BANKING AND FINANCE

FEATURE FINANCE

16 | July 2020 | International Finance

SMES IN BRAZIL

FEATURE SMES IN BRAZIL

Brazil's new loan facility for SMEs IF CORRESPONDENT

SMEs are vital to strengthen the Brazilian economy which continues to be one of the worst affected countries by coronavirus in Latam

S

ince the detection of coronavirus in China last year, the infection has spread far beyond the mainland to Latin America. It seems that Brazil is one of the worst affected countries in the region. In recent years, the country has established itself as an emerging economy and it accounts for nearly half of South America’s overall output.

Currently, Brazil is ranked the world’s eighth largest economy. However, the country has projected a fragile economy in the last few quarters — and the pandemic is only adding to its economic woes. According to the International Monetary Fund, Brazil’s 2019 nominal GDP stood at $1.868 trillion.

On the downside, the country’s growth and fiscal outlook is shaping up to be worse than official government forecasts for this year. According to Treasury Secretary Mansueto Almeida, the public sector primary deficit this year excluding interest payments could reach $152 billion, or more than 11 percent of gross domestic product.

That said, the economy is set to shrink around 6 percent to 7 percent.

International Finance | July 2020 | 17

BANKING AND FINANCE

FEATURE FINANCE

It is also a highly indebted country with a government debt totalling to nearly $2 trillion. With Brazilian debt being a major component of most emerging bond portfolios, many believe a Brazilian economic crisis has the potential to roil world financial markets.

Brazil in the pandemic The World Bank forecasts that the Brazilian economy will shrink 8 percent this year due to the Covid-19 crisis.

The lockdown and social distancing measures introduced to help curb the spread of the infection has had a negative impact on its economy. Economists believe that the country could be one of the worst affected Latin American nations, overtaking Peru. Many fear that a contraction of around 8 percent to 10 percent of Brazil’s GDP could possibly lead to corporate bankruptcies, soaring government debt and surging unemployment in a country with abject public finances.

Another issue that worries many experts is the issue of unemployment in the country. It is reported that only a third of the Brazilians have access to savings. The unemployment rate in the first quarter of 2020 was already soaring at 12.2 percent, which means around 13 million people are currently unemployed in the country. The crisis could see the number soar which is a very distressing factor for economists and policymakers. In fact, analysts say that the Covid-19 cases could rise to almost 19 percent this year leaving a devastating impact on its economy.

The pandemic has also impacted the consumption level in the country. In April, retail sales plummeted to a record month-on-month decline of 16.8 percent, according to reports. Sales excluding autos and construction materials fell

18 | July 2020 | International Finance

SMES IN BRAZIL

The unemployment rate in the first quarter of 2020 was already soaring at

12.2 percent, which means around 13 million

people are currently unemployed in the country

16.8 percent during the period between March and April and from the same period a year ago, observed statistics agency IBGE. Both records were steeper than the 11.9 percent monthly decline and 13.6 percent annual fall forecast.

According to IBGE, the level of sales is now at its lowest since the series began in 2000 and down 22.7 percent from the peak in October 2014.

The sectors hardest hit in April were clothing and footwear which saw a 60.6 percent fall in sales. Also, books, magazines and newspapers fell 43.4 percent and other personal and domestic goods dropped 29.5 percent during that month. Supermarket, food, beverages and tobacco sales fell 11.8 percent, while pharmacy, medical and cosmetics sales dropped 17 percent, IBGE said.

This is particularly a huge blow for the Bolsonaro-led administration which has introduced measures to boost public spending after coming into power.

The pandemic has severely impacted the vast informal sector that takes in about 40 million workers who are not included in official jobless statistics.

People working in the informal sector are adversely affected by the pandemic in Brazil and other parts of the world.

To address the issue, Brazil’s economy ministry implemented a $120 monthly stipend to help sustain lowincome and informal workers during the pandemic. Also, the administration is working on a broader basic income scheme for Brazilians bearing the blow of the economic crisis, however, it is constrained by the country’s fragile finances. Goldman Sachs has predicted a fiscal deficit equal to 19 percent of gross domestic product this year.

As things stand, Brazil is one of the worst affected countries by the pandemic, second to the US. As of July 13, Brazil had recorded around 1.87 million cases and reported casualties of

FEATURE SMES IN BRAZIL

around 72,151. The states of Sao Paulo and Rio De Janeiro point to the worst affected. Earlier this month, Brazilian President Jair Bolsonaro was tested positive for coronavirus

Brazil’s response to economic crisis To deal with the double whammy of the economic slowdown and the impact of the Covid1-19 crisis, the Brazilian administration has introduced a myriad of measures this year. In March, the federal government published provisional measures that altered a series of labour regulations during the pandemic with the aim of helping companies and preserving jobs. KPMG reported that the provisional measures points to the adoption of telecommuting, anticipation of individual vacation and collective vacation concession with notice to the employer within 48 hours, use of holidays, special hours

compensation scheme in the future in case of interruption of working hours and suspension of administrative requirements for safety and health at work.

During the same period, the Brazilian Senate approved a bill to provide $8.5 billion as aid to Brazilians and especially workers involved in the informal sector. The bill will result in the granting of emergency aid of $116 to informal workers and $232 to mothers responsible for supporting the family.

In April, the Ministry of Economy formalised the creation of 12 strategic task forces to address the economic impact of the protracted pandemic.

The initiative aimed at supporting the Brazilian productive sector is being monitored by the Ministry of Economy through the Special Secretariat for Productivity, Employment and Competitiveness.

This was followed by the National

Monetary Council (CMN) approving a series of measures to devise actions related to rural credit more flexible, ranging from extending deadlines for contracting credit to guarantee social distancing, according to the Ministry of Finance. As a result, rural producers in Brazil were able to access the credit line until June 30, 2021, to finance investments in works, purchase machinery and facilitate expansion of grain storage capacity. In addition, CMN also decided to relax rules for rural credit operations already contracted, aiming to adapt them to social distancing. In a remote session, the Senate approved a bill that provides financial assistance from the union to states and municipalities to try to reduce the impacts caused by the crisis.

The union will transfer R$ 60 billion directly to states and municipalities, divided into four monthly instalments.

The resources will be divided as follows:

International Finance | July 2020 | 19

BANKING AND FINANCE

FEATURE FINANCE

SMES IN BRAZIL

R$ 50 billion: compensation for drop in revenue R$ 10 billion: health and social assistance actions Brazilian President Jair Bolsonaro signed the Complementary Law 173/2020 in May allowing a grant of R$ 60.15 billion federal aid to states, municipalities and the federal district to strengthen actions of combating the pandemic. The new law establishes the Federative Program to Combat Pandemic caused by Covid-19 and changes the Law of Fiscal Responsibility.

The programme's objective is to support states and municipalities in combating the pandemic though suspension of debts with the union until the end of 2020, renegotiation of credit operations with the financial system and multilateral credit organisations, including debts guaranteed by the federal government and union financial assistance to federation entities in four equal monthly instalments totalling to R$ 60 billion.

Why are SMEs vital to Brazil?

Small and medium enterprises (SME) play a crucial role in building the Brazilian economy. The sector is reportedly responsible for the creation of employment for more than 56 million Brazilians. That the country is the world's fifth largest economy by area and the sixth most populous in the world necessitates positive employment rate.

The role of SMEs in the economy has been long recognised. Their contributions include job creation, poverty reduction and achievement of higher levels of economic development.

In fact, SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development.

20 | July 2020 | International Finance

They also play an important role in economic growth and social inclusion in Brazil, accounting for 62 percent of total employment and 50 percent of national value added, slightly below the corresponding OECD averages of 70 percent and 55 percent respectively.

Their role in terms of production, employment generation, contribution to exports and facilitating equitable distribution of income is very critical. So stimulus packages for SMEs is vital for Brazil without which businesses might not be able to successfully weather the Covid-19 crisis.

If businesses are forced to shut down at a greater level, it would have severe economic consequences for the Brazilian economy. Over the years, the

Brazilian government has introduced measures for the upliftment of the SME sector. Government loan subsidies are the main direct policy instrument used by the federal government to foster SME development.

The share of business loans by BNDES granted to SMEs increased significantly from 30.6 percent to 46.8 percent of the total during the period between 2016 and 2018. However, the SME sector in Brazil demands special attention from the administration during the pandemic.

The new credit programme for SMEs To help SMEs weather the Covid-19 storm, the Brazilian government has

FEATURE SMES IN BRAZIL

come with a credit programme. SMEs in Brazil represent 99 percent of the Brazilian enterprises in the country.

They are responsible for 20 percent of the gross national product with $320 billion and 60 percent of all formal employment posts in Brazil which stands at 56.4 million, according to a report by Springer.

The new credit programme, known as Pronampe, is now available at Banco Cooperativo do Brasil. The programme was instituted by Law No. 13,999, of May 18, 2020 and aims to guarantee resources to stimulate and strengthen small businesses, in addition to maintaining jobs. Productivity and Competition Secretary Carlos da Costa said in a press conference that another

12 institutions, including two fintechs, are in the evaluation process to operate the programme.

The programme is designed to help SMEs to continue operations despite an economic crunch through the injection of credit. Authorities have allowed banks to extend loans to SMEs, to reduce reserve requirements — lowering banks’ requirements for contingent liabilities provisions and allowing firms to use real estate as collateral for new loans.

The credit programme launched by Brazil for small and midsize enterprises seeks to support lending in the segment while limiting its impact on banks' credit risk, according to a Moody's report. The programme is designed by Brazil's government to inject funds to an investment guarantee fund, known as the FGI, that will leverage millions of dollars as loans to SMEs in Brazil, a segment heavily hit by the pandemic.

The government has announced that it will guarantee up to 80 percent of loans disbursed to companies with revenues between 360,000 reais and 300 million reais.

That said, the government has also boosted the guarantee coverage under a separate programme that extends lowcost credit facilities to small companies to 100 percent from 85 percent.

According to Moody’s, other measures in the programme could include an interest rate limit on loans made under the programme.

In April, credit facilities and advances on credit card receivables used by small businesses in Brazil recorded a drastic drop in sales as a result of the counter measures introduced to deal with the protracted pandemic. Banks in Brazil have also taken prudent risk policies in approving loans to the segment, despite total loan origination

to corporate clients, including SMEs, rising 14.1 percent year-on-year in April.

Brazil's central bank to introduce new measures Brazil's central bank has revealed that it will implement a series of new measures with a potential value of more than $53 billion that are intended to increase smaller businesses' access to loans and boost economic growth.

A good portion of the 2 trillion reais from the previous government’s programmes implemented to counteract the coronavirus impact on the economy have been directed to bigger companies — and that needs to change. In fact, Brazil's private-sector banks have been reluctant to boost lending amid the healthcare crisis. As a result, many SMEs are making no profits and a few of them are recording huge losses.

The central bank won't rest until necessary measures are introduced to keep credit flowing. It will buy corporate debt with a rating of BB- or higher, with a minimum maturity of 12 months to inject more cash into secondary markets.

In addition, the bank will temporarily reduce capital requirements for Brazilian banks, freeing up cash that can be loaned to businesses and loosen the rules on using property as collateral for loans.

In June, it was reported that Brazil's central bank could lower the benchmark Selic interest rate below a previously expected 2.25 percent to ease the impact of the pandemic on the economy.

Interestingly, President of the Central Bank of Brazil Roberto Campos Neto said that the economy is anticipated to recover from the coronavirus crisis in the fourth quarter.

editor@ifinancemag.com

International Finance | July 2020 | 21

BANKING AND FINANCE

IN CONVERSATION

ELLIOT LIMB CHIEF CUSTOMER OFFICER, MAMBU

The UK’s draining talent pool as a result of Brexit is giving Berlin a competitive edge in Europe’s fintech community

Is Berlin turning into Europe’s fintech capital?

SANGEETHA DEEPAK AND PRITAM BORDOLOI

As the UK prepares for Brexit, Berlin is poised to become the EU’s new Silicon Valley. This is especially true with the rise of Silicon Allee — an evolving community of Berlin startups and technology companies. The German state is emerging as a real competitor among fintech destinations, especially with its conducive business climate for entrepreneurs. In fact, a recent study observed that 26 percent of EU entrepreneurs have faith that Berlin will become the EU’s new business centre. That said, other respondents firmly believe that Frankfurt is the next fintech destination, while only two respondents said London will remain on top.

The reason Berlin is gaining an edge as a notable fintech destination can be attributed to a pool of skilled labour and swift access to the rest of the EU. That said, the American tech presence is quite prominent in Berlin — with companies such as Airbnb and Facebook having established their offices in the German state. Even incubator programmes are backing several German startups such as EyeEm and N26.

In this context, a report published by Ernest and Young found that there are 2,500 active startups with $2.7 billion in venture capital in total — meaning that Berlin is attracting more venture capital than any other destination in the EU. Elliot Limb, chief customer officer of Mambu in an exclusive interview tells International Finance: how the fintech community is sprouting in Berlin as it emerges as the next fintech destination in the EU — and Mambu’s role in fostering neobank innovation. With over 20 years in banking and fintech, Elliott has been named as one of the most influential people in fintech — and is an entrepreneur running a myriad of

22 | July 2020 | International Finance

FINTECH BERLIN FINTECH HUB

businesses across multiple sectors. Elliott is focused on a customer-centric approach to doing business, growing revenue and helping banks build flexible and scalable solutions.

IF:Berlin is emerging as one of Europe’s leading fintech hubs in Germany. What is the role played by Mambu in supporting the country’s neobanking innovation?

Elliot Limb: Berlin is our headquarters and it is an important market for us. Our relationship with the likes of N26 has been fundamental as we grew with them. That said, we operate and like to be a part of the fintech community helping neobanks and the wider fintech ecosystem grow.

Obviously, there is a lot of focus on Berlin. I think we support it in every way possible. It is an interesting time as everything changes and we are continuously reassessing — taking a lot of pride in the fact that we are a Berlin-based company and want to give as much to the local community.

Neobanks are changing the highly competitive playing field of banking for traditional banks, while Goldman Sachs and Santander have hit back with their own

digital platforms Marcus and Asto. Is a similar trend seen in Berlin?

I think it is happening everywhere. If you look at all the banks that are out there, I don’t think there are any geographical boundaries.

In fact, we are seeing that neobanks are growing but what is happening differently with the older and most established banks, especially with the tier 1 banks is that they initially got disrupted by neobanks.

Certainly, they can launch something quick, provide propositions similar to neobanks and have their capital to grow. For example, Deutsche Bank always has a good capital reserve and the regulation legislation in Germany has been pretty good. If you closely look at N26, they are taking a global view as a neobank expanding into the US. I think it is much easier for the longer-established banks to follow them and take the learnings.

How does Mambu’s cloud banking platform power digital-first banks like N26, B-North and Nimble to pivot mainstream banking?

We can help lenders and neobanks that are evolving to become bigger banks. The way we empower is that

International Finance | July 2020 | 23

BANKING AND FINANCE

IN CONVERSATION

ELLIOT LIMB CHIEF CUSTOMER OFFICER, MAMBU

We are not directly looking at how we implement blockchain but at how we are making banking simpler.

At present, we are deeply focused on providing the best services rather than blockchain

we look at banking and businesses in an innovative way by offering them a composable approach, where they choose and integrate the best solutions for their architecture.. With that, we help banks build for today and to become future-ready. In this aspect, we work with all our technology partners for something that is relatively at a low cost of entry and can be implemented quickly. The SaaS model from a pricing viewpoint means that you can grow with the business. We have become a part of the business ecosystem and align everything from strategy to value.

Berlin is perceived to be the crypto capital of Europe.

Does Mambu plan to innovate blockchain to drive the future of neobanks in the country?

I think it is interesting for blockchain in general. We are not directly looking at how we implement blockchain but at how we are making banking simpler. At present, we are deeply focused on providing the best services rather than blockchain.

Sophisticated cyber attacks have stoked fear in the financial and banking sector globally. What is Mambu doing to guard against attacks and hacks?

Cyber attacks have been taking place for years. I think anyone who is working in a highly regulated industry such as banking has to be aware of it and the repercussions that follow. We build our solutions with robust security processes and conduct due diligence on a technical level and business level too.

As we remain at the core of banks, it is important for us and our partners to keep in mind all aspects of cyber security.

How are highly regulated markets like the UK, Germany and emerging markets like Africa encouraging SaaS innovation in fintech?

I think we are evolving. In fact, more people are be-

24 | July 2020 | International Finance

ginning to invest their trust in SaaS. From a regulated environment, major players such as MAS in Singapore and ADGM in Abu Dhabi are ahead of the game with forward thinking. It also largely depends on what the bank is trying to use Mambu for.

At this point, SaaS is pretty much accepted everywhere and most of the nations have SaaS service. A lot has to do with a mindshift of the bank. So it is really about getting the mindshift around from capitalisation to operation.

In the big picture, the economy should make sense and we will have to decommission the old system and the old way of thinking to drive the SaaS solution.

Otherwise, it could be a barrier to entry for people who do not understand SaaS. I think the only way forward in banking is to use the SaaS model.

What are the technology and banking regulatory challenges that Mambu is facing while supporting neobanks in Berlin? How can they be addressed?

I would say there are no real technology challenges as Berlin and Germany at large are a very well regulated market. However, as we move into larger banks, launching the speed boats is the first step. We are not seeing a shift from taking more volume and complexity to modern SaaS — pointing to a need in mindshift. So bringing that change in mindset is the real challenge, in addition to building trust to make people understand that SaaS solutions are just a redefined, agile version of what they have been using.

How will the year 2020 play out for Mambu in terms of competitiveness and technology development?

I think if we continue on our roadmap to develop our technology or have continuous release cycles, we will have a lot of new functionalities and find new ways of working. From a business perspective, we certainly see that Europe is our home and that is where the majority of our business has been. Also, we have been doing very well in Apac and Latam. That said, we would like to strengthen our focus in the US, grow in the Middle East and Africa as we recognise them to be high-growth markets.

editor@ifinancemag.com

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What the

pandemic means for

Saudi banks

SAMA has injected $13.3 billion capital into the banking industry in the wake of economic challenges SANGEETHA DEEPAK

26 | July 2020 | International Finance

COVER STORY SAUDI BANKS

The Kingdom of Saudi Arabia is known for having one of the oldest banking industries in the region — dating back to the 20th century. It currently comprises more than 27 percent of the GCC’s total banking assets — positioning itself as the second largest banking industry by assets and the largest in terms of market capitalisation.

International Finance | July 2020 | 27

BANKING AND FINANCE

COVERSTORY SAUDI BANKS

In 1952, the Saudi Arabian Monetary Authority was established by two royal decrees and continues to monitor the banking industry to date. Following the establishment of the regulator, it licenced a significant number of local and foreign institutions which introduced new products and services to both retail and commercial customers in the Kingdom. That has led to the creation of today’s key players including the National Commercial Bank and Riyad Bank.

Cut to recent times, the Kingdom’s banking industry has demonstrated strong financial performance compounded with promising profit growth in 2019. The total assets of the Kingdom's five largest banks increased by 16 percent to reach $453.2 billion. The banks’ combined loans and advances expanded by 15 percent to $266.6 billion, with an impressive 30 percent growth in profits totalling to $9.1 billion from $7 billion in 2018.

Saudi banks see a new wave of mergers and acquisitions Another notable event which took place last year was the merger of Alawwal Bank and the Saudi British Bank leading to a structural change in the industry. Also, the Saudi Arabian Monetary Authority granted two new banking licences to Credit Suisse and Standard Chartered Bank.

Despite the pandemic, it appears that there is room for new establishment of banks in the Kingdom.

For example, the National Commercial Bank which is the Kingdom’s largest bank by assets is likely to acquire rival Samba Financial Group.

Under the terms of the proposed deal, the National Commercial Bank has offered to pay $15.6 billion to Samba Financial Group at a premium of 27.5 percent to the latter’s share price. It is anticipated that the consolidation will create the third largest lending in the region with total assets of approximately $210 billion, put behind Qatar National Bank and First Abu Dhabi Bank.

In this context, Christos Theofilou, a senior analyst at Moody’s, told the media, “NCB would benefit from Samba’s strong corporate and investment banking franchise and well-established risk management practices. The merger would

28 | July 2020 | International Finance

combine NCB’s large franchise across most business lines and mass retail capabilities with Samba’s upper-middle-income retail presence and well-established corporate banking franchise.”

Even prior to the pandemic, the Kingdom and the wider GCC were on the brink of a new wave of mergers and acquisitions to boost competitiveness, reduce operating costs and increase capital amid slow economic growth. The Saudi Arabian Monetary Authority is also processing additional applications for two traditional and one digital banking licences. In fact, the regulator has accelerated the application process for banking licences — making the Kingdom an attractive hub for banks seeking to foray into the domestic market in the future.

Are Saudi banks equipped for the pandemic’s distress?

Truth be told, the Kingdom’s banking industry started this year on a promising note, with 13 local

COVERSTORY SAMA’S NEW MEASURES

Financial performance of 11 Saudi listed banks in Q1 2020

Net profit after Zakat and tax:

Total customer deposit:

6.9% 1.5% 3.9% 93.3% Total assets:

Source: KPMG

ECL Change:

banks offering services to a population of more than 30 million people. But as experts have emphasised the long-standing effects of the pandemic on the industry, the scale of the impact could be significant on its asset growth through this year. This is despite the fact that the Kingdom’s banks have strong capabilities to remain profitable over looming difficulties — as was the case in the past.

For example, the Saudi Arabian Monetary Authority experienced its first complexity in the 1960s when a number of non-performing loans established by Al Watany Bank led to the collapse of a major financial institution. This in turn had an impact on the regulatory framework governing the banking industry.

The Saudi Arabia Monetary Authority has provided support for domestic banks by rolling out a myriad of measures in response to the pandemic. These measures include funding to help companies maintain employment levels, support banks customers who have lost jobs, restructure loans without additional fees, waive off charges for accounts holding below minimum balances, refunds for customers on currency exchange fees during travel plans.

In March, the Saudi Arabia Monetary Authority introduced the  Private Sector Financing Support Programme to strengthen financial stability and support the government’s efforts to protect businesses worst affected by the pandemic. The programme seeks to allocate $13.3 billion in loan guarantees for the sake of deferred payments and direct funding for lending.

The long-standing impact of the pandemic But in the midst of a protracted pandemic causing global recession — what is the impact on the Saudi banking industry? Is the industry prepared to fight the downside effects of the pandemic? Will the pandemic undermine the industry’s asset growth?

It is certain that declining oil prices and the pandemic in early 2020 are posing great challenges for the global banking industry. In this context, Ovais Shahab, Head of Financial Services, at KPMG Saudi Arabia, told International Finance, “In 2020, the majority of banks across the world will

International Finance | July 2020 | 29

BANKING AND FINANCE

COVERSTORY SAUDI BANKS

inevitably face challenges, and the Saudi banking sector is no exception. However, the resilience and strength of the Saudi banking system will allow it to cushion the economic fallouts of Covid-19.”

S&P Global Ratings in a report titled Saudi Banking Sector 2020 Outlook: Risks Contained Despite Higher Credit Growth noted that the profitability of the Kingdom’s banks could lower slightly on the back of softening monetary policy and rates decline. That said, in another report titled Banks In Emerging Markets: 15 Countries, Three Main Risks, the ratings firm expects the credit losses to stabilise with the help of steadying economy and mortgageled lending growth. In fact, S&P has praised the Saudi Arabian Monetary Authority for keeping a good track record. Last September, the long-term rating on banks stood at BBB+ in line with a stable outlook.

Now the domestic banks seek to expand beyond competitive corporate and retail segments in the long term — extending their services to underserved market segments such as smaller enterprises and microfinance. In the first quarter of 2020, the Kingdom’s banking industry saw 13 locally licenced banks, of which, five of them held total assets worth more than $53.2 billion.

Banking performance in 2020 — an overview In March, the central bank foreign exchange reserves dropped at its fastest rate in at least 20 years — and the Kingdom’s budget deficit dropped to $9 billion in the first quarter as oil revenues crashed.

“With the dissemination of financial results for the first quarter of financial year 2020, the magnitude of the pandemic impact on the banking industry has unfolded. The banking sector has reported an average increase of 93.3 percent in expected credit losses for the first three-month period and significant declines in market valuations

30 | July 2020 | International Finance

SAMA’S NEW MEASURES

In the first quarter of 2020, the Kingdom’s banking industry saw 13 locally licenced banks, of which, five of them held total assets worth more than

$53.2 billion since December 2019,” Shahab explained. “Nonetheless, healthy credit underwriting until February 2020 enabled total assets to rise 3.9 percent to SAR 2,540 billion ($677 billion), while total customer deposit edged up 1.5 percent to reach ($489 billion). Total gross loan book also posted an average growth of 4.96 percent.

Despite the hike in expected credit losses, a substantial amount of income in the form of SAR 1.12 billion government grant resulting from Saudi Arabian Monetary Authority support measures have restricted the decline in net profitability only to 6.9 percent, relative to the same period of financial year 2019.”

The consequences of the pandemic for the banking industry in the Kingdom and globally is still unclear. But the consensus among economists is that there will be a slowdown in activities and a downward revision in GDP growth targets for 2020. For that reason, most governments have developed inducement measures to sustain the economy and protect the core of the banking system in the long-term.

SAMA issues measures to preserve the core banking system A report published by KPMG said that the Saudi Arabian Monetary Authority has issued a myriad of measures and guidelines for banks and financial institutions in the Kingdom to cope with the pandemic’s distress. For example, it has introduced a Private Sector Financing Support Programme with a total value of SAR 50 billion.

In theory, the regulator has introduced key financial support programmes and qualitative measures through commercial banks.

COVERSTORY SAMA’S NEW MEASURES

The support programmes comprise allocation of SAR 30 billion stimulus package for banks and financing companies to delay SME dues for six months from the original date, provide concessional finance of nearly SAR 13.2 billion for SMEs by granting loans from banks, allocation of SAR 6 billion for MSME sector to facilitate secure financing for banks under the Kafalah SME Loan Guarantee Programme and support the ecommerce sector by bearing the costs for point of sales and ecommerce services.

That said, the qualitative measures include extending working capital finance to all corporates to meet short-term liquidity requirements, flexibility in repayments of consumer finance to individuals who have lost their jobs due to the pandemic, waiver off all fees in the use of digital banking, waiver off minimum deposit balance requirement for up to six months and review credit card interest rates by adjusting them to reasonable APR rate.

The regulator has been quite responsive to the current situation and has injected $13.3 billion into the banking industry as they prepare to resume operations. Shahab said, “The stimulus package has aimed to enhance the liquidity, as well as enable banks to continue providing credit facilities to their clients. The central bank’s decision to inject such a large amount of cash into the banking sector in the form of a one-year free deposit which is rooted in its role of promoting financial stability. It will further help the wider banking sector to continue to provide credit to borrowers during this challenging period.”

The amount was injected in an effort to ensure the banking industry is able to continue lending to private firms on the back of slow economic recovery. The regulator said in a statement that the banking industry remains strong with assets up 14 percent in the first quarter of 2020 compared to the previous year.

It appears that banks are relatively high on liquidity compared to the pre-covid period, observed the KPMG report. Shahab further explained that “The Saudi Arabian Monetary Authority has always made sure there is enough liquidity in the monetary system in general and in the banking industry in particular. Such support is part of several financial stimulus programmes spearheaded by Saudi Arabian Monetary Authority since the start of Covid-19 outbreak. Its ongoing support to banks through liquidity and relief, amplified by recently announced measures, has been the key mitigant to combat the impact on the banking industry.

“A robust support programme by the apex bank suggested that panic-driven measures such as foreclosures, uneconomical debt restructurings and forced liquidations have not been rampant. These measures have been a breath of fresh air not just for corporates, primarily the micro, small and

International Finance | July 2020 | 31

BANKING AND FINANCE

COVERSTORY SAUDI BANKS

SAMA’S NEW MEASURES

The Kingdom’s foreign assets have dropped to

$464 bn

— marking its lowest record in 19 years as it combats economic fallout medium enterprises (MSME) sector, in addition to banks as they combat the economic fallout on the front lines.”

Finance Minister Minister Mohammed Al Jadaan said that the Kingdom must reduce expenditures to mitigate the negative economic effects of the pandemic. “Saudi Arabia is committed to protecting itself from the economic fallout of the Covid-19 pandemic through any necessary financial measures despite plunging oil revenues,” the Finance Minister told the media. The Saudi Arabian Monetary Authority confirmed that the Kingdom’s foreign assets have dropped to $464 billion — marking its lowest record in 19 years as it combats economic fallout.

KPMG’s ‘cautious optimistic’ outlook explained Against this background, KPMG conducted a survey on C-suite executives to fully understand the severity and duration of the pandemic’s impact and the banks’ preparedness to strategies undertaken by the regulator and the government. The first point emphasises 10 percent to 20 percent of the loan book for more than half of the banks' need to undergo restructuring changes. The second point highlights that SME financing is the most impacted followed by consumer and corporate banking. The third point notes that banks consider Saudi Arabian Monetary Authority’s plans to be highly comprehensive and sufficiently focused on all business segments.

The KPMG report also pronounced the fact that it is important for banks in the Kingdom to assess whether the credit risk on a financial instrument has increased since initial recognition. However, the rising challenge for the banks is to

32 | July 2020 | International Finance

incorporate predictions associated with the economic impact of the pandemic. In fact, the report has expressed ‘cautious optimism’ for the domestic banking industry.

“The financial trends identified by KPMG’s analysis for 2019 were mostly positive, and particularly impressive, given the unique political and economic circumstances the region has witnessed in recent years, reflecting the continued resilience of the Kingdom’s banking sector. Saudi Arabia’s 11 listed banks reported an asset growth of 12 percent to $652 billion during the fiscal year 2019, with a healthy 40.9 percent growth to $12.03 billion in net profit. Our evaluation of the key financial indicators for the past year suggests growth and a positive outlook for the banking environment in the Kingdom, fuelled by a proactive government and bespoke initiatives by the regulators,” Shahab said. “However, banks that are agile, flexible and willing to transform their business models will succeed, and secure their financial strength for future growth, while those that rest on their laurels will be left behind. Of late, the Covid-19 situation has not only tested strong capitalisation and high profitability of the sector but indicating a dynamic shift in investment towards digital platforms and omnichannel functionalities. Looking forward, KPMG’s key predictions for 2020 include continued customer focus through innovation, cost and operational efficiencies to remain a priority, limited asset and profit growth, increasing capital and fundraising activity, further consolidation and rethinking of business models.”

editor@ifinancemag.com

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International Finance | July 2020 | 33

BANKING AND FINANCE

THOUGHT LEADERSHIP

INVESTMENT BANKING CROWDFUNDING

ANAND SAMBASIVAN CO-FOUNDER & CEO, PRIMARYBID

Retail investors do not have fair access to primary capital market transactions that underpin corporate strategy and growth

Monopoly in investment banking Retail investors are often misinformed about market conditions and when it comes to engaging and onboarding—there is a lot of hard work involved. This is not only a problem for those investors who miss out on great investment opportunities, but also for listed companies that overlook the tangible benefits.

In essence, retail investors do not have fair access to primary capital market transactions that underpin corporate strategy and growth.

To date, institutional investors have been facing monopoly when it comes to investing in those listed companies’ fundraises which often take place at a discount to market price.

On a rare occasion, it appears that retail investors get access to a new share issuance and get nothing when there is a good deal to be had. Statistically, 40 percent of the market is being owned by a group of retail investors, but institutions are getting a much better deal when purchasing newly issued primary shares.

Retail investors are significant to investment market In Europe, there are 57 million individuals actively investing in equities. Retail investors represent a significant proportion of the investment market. Last November, a study found that 82 percent of AIM stocks and 75 percent of main market stocks had an average trade size below £10,000. However,

34 | July 2020 | International Finance

individuals on average represent 25 percent of the shareholder register on AIM, a sub-market of the London Stock Exchange.

That said, individual investors accounted for 7 percent of FTSE 100 ownership and 17 percent of the main market in June 2019. New research from the Economist Intell unit shows European households today own 15.6 percent of listed shares across the EU, up from 12.7 percent in 2007.

These figures clearly indicate that it makes no sense for retail investors to be excluded from the best deals offered by those institutions.

Retail investors are responsible for the strong growth in individual equity ownership following the 2008 financial crisis—and yet, are overlooked during capital formation process.

Listed companies may not realise the impact of this monopoly and the fact that they are missing out on potential liquidity. Retail investors could hold between 20 percent to 30 percent of their share register but because small stocks held by a few institutions tend to trade only by appointment, this opportunity can be missed.

So the big question is—what can be done to level the playing field for retail investors and listed companies to mutually benefit?

This is where fintechs come into play. They are democratising the financial system across a number of streams. Since the financial crisis in 2008, it was recognised that savers and

individual investors need more power and better access in regard to where their money was invested.

Crowdfunding—key to democratising investments In terms of democratising investment into companies, the first mover was the crowdfunding industry. This worked as it broke the vicious cycle of a company being refused funding owing to lack of proof of concept—but they had no proof of concept because of lack of funding to help them reach that point. With crowdfunding, the investment opportunities are taken directly to the crowd allowing startups to be able to reach their potential customer base, build a brand and establish product loyalty.

This in turn gives customers a feeling of control and removes any concerns related to their money. Initially crowdfunding started as a reward-based investment, but it has now evolved into an equity-based investment.

This was an excellent first step toward democratisation of investing. While its value is still in place it has highlighted certain unsophisticated elements of this form of investing and the lack of services that gave retail investors access to public markets.

The public markets come with a number of benefits to both the company and investor that most

crowdfunding platforms do not offer. Due diligence is one such benefit. Crowdfunding platforms rarely have resources to carry out extensive levels of due diligence, but companies must go through extensive checks prior to listing on the stock market. This is not the case in most crowdfunding events.

Furthermore, investors focused on crowdfunded companies are reliant on the discretion of the board to pay dividends to see any kind of return: Companies involved in crowdfunding very rarely go public and thus liquidity is hard to come by. In short, crowdfunding is not a sophisticated enough platform to bring quality investment opportunities to retail investors.

Corporations are beginning to recognise the need for democratisation of equity markets which go beyond crowdfunding. They see that retail investors bring important benefits by driving strategic objectives when raising capital for listed companies.

Anand Sambasivan is the co-founder and CEO of PrimaryBid. He is responsible for driving strategy, cultivating key strategic relationships and overseeing general operations.

Previously, Anand co-founded Darwin Strategic, an institutionally-backed alternative investment fund manager providing capital to alternative investment market listed companies. editor@ifinancemag.com

International Finance | July 2020 | 35

INDUSTRY

ANALYSIS

TELECOM CHINA 6G

Huawei, ZTE and China Unicorn have already kickstarted the global race to 6G by setting up their own research units

China is aiming at 6G — what next?

PRITAM BORDOLOI

A notable trend is observed in 5G as many countries from across the world have rolled out the technology over the last few months.

Despite that, 5G technology has not reached many parts of the world yet — and the race for 6G has already begun.

Chinese tech giants Chinese tech such as Huawei, ZTE giants and China Unicorn have such as started research on 6G Huawei, ZTE independently besides a research unit set up by the and China government. Last year, the Unicorn have US President Donald Trump started tweeted that he would like research on 6G to see 6G roll out in the US independently alongside 5G at the earliest possible. Even Japan has announced similar plans on this front, although it has lagged behind in 5G rollout compared to other world economies.

It is early to predict what 6G might turn out to be but experts believe that it will target speed of 1 terabyte per second. The idea of it might seem unrealistic at present, but in a fast-changing high paced technological landscape, 6G might be exactly what we need to break the speed barrier in years to come. Also, the launch of 6G will have a long way to go — and is expected to take place by the end of this decade, or even possibly in the next.

36 | July 2020 | International Finance

China is accelerating efforts in 6G While 5G has soon become a reality — its benefits are yet to be seen. Against this background, Chinese mobile operators are expected to deploy more than 600,000 5G base stations by the end of the year.

According to Lu Chuncong, deputy director of the Information and Communications Administration of the Ministry of Industry and Information Technology (MIIT), leading telecommunication companies such as China Mobile, China Unicorn and China Telecom have already built more than 250,000 5G base stations across the country.

In fact, shipments of 5G phones in the country are expected to exceed 180 million by the end of the year.

Chuncong also highlighted that there are over 400 5G innovation applications in the country, covering sectors such as industry, transport and medical treatment. According to official data, the number of 5G subscribers in China currently exceeds 36 million.

The reason China is engaging in a full scale 5G deployment is to boost its digital economy. For example, China Mobile which is the world’s largest operator in terms of subscribers said that it added 29.17 million 5G subscribers in the first quarter of 2020. According to the operator, it had a total of 31.72 million 5G subscribers by the end of March, compared to 2.55 million 5G customers at the end of last year. It is also aiming to acquire over 232,000 5G base stations in an effort to extend coverage to 28 regions across the country.

With a full scale deployment underway, China is now taking the lead in the nextgeneration technology. In another example, ZTE which is a major international provider of telecommunications, enterprise and consumer technology solutions signed a strategic cooperation agreement on 6G with China Unicorn. Under the terms of the agreement, both parties will share their data on 6G and jointly explore the development of the technology. It is also reported that Huawei has started research on 6G. China’s Ministry of Science and Technology said in a statement that it will set up two working

China Mobile sees tremendous growth in 5G subscribers

2.55 mn

December 2019

6.74 mn January 2020

groups to carry out research on 6G. In theory, the first group will consist of relevant government departments who will be responsible for promoting 6G research and development in the country. The second group comprising 37 universities, research institutes and enterprises will lay out the technical aspects of 6G. Although 6G is still a decade away, its research has already begun and is in its nascent stage. Vice Minister Wang Xi at the Ministry of Science and Technology said that the technical route for 6G remains unclear and further emphasised that the key indicators and application scenarios have not been standardised yet.

Last year, Huawei’s chief executive Ren Zhengfei told the media that even though the company is working simultaneously on 5G and 6G, it is in its early phases and has a long way to go before commercialisation begins.

Key differentiators between 5G and 6G To common knowledge, 5G would point to greater internet speed despite being the nerve centre of world economies. This means, 6G would only operate at an even greater speed and lower latency. Experts suggest that 6G will go beyond a wired network with devices acting as antennas using a decentralised network which will not be under the control of a single network operator.

In practice, if everything is connected through 5G — then 6G will set those connected devices free as higher data speeds and lower latency make instant device-

International Finance | July 2020 | 37

INDUSTRY

ANALYSIS

TELECOM CHINA 6G

to-device connection possible. In addition, experts believe that 6G will target speeds approximately 8,000 times the speed of 5G. So the question is — can 6G achieve that speed?

5G is expected to drive the technological innovation behind concepts such as autonomous cars, drones and smart cities. In the years to come, 6G could transform these concepts into a reality. While the concept of an autonomous car is still relatively new, companies are looking to capitalise on advanced concepts powered by 6G. NTT Docomo has explained the possibilities of 6G in cyberspace to support human thought and action in real-time using wearable technology and microdevices mounted on the human body.

Who is working on 6G? Although China has understood the importance of 6G — it is only a matter of time before major companies and governments begin their own projects on this front. Japan has joined the 6G bandwagon along with China.

Earlier this year, Japan announced in a press conference that it seeks to lead standardisation efforts and examine potential challenges in 6G development and deployment.

In Finland, the 6G flagship research programme is backed by Nokia, the University of Oulu and other telecoms as well as business bodies. Interestingly, a 6G summit was held last year to discuss the various implications of 6G. Both Samsung and LG have research centres in South Korea which is also conducting research on Terahertz band technology for 6G. It is reported that they are planning to make 6G

38 | July 2020 | International Finance

100 times faster than 4G LTE and 5 times faster than 5G networks.

That said, SK Telecom, Nokia and Ericsson are collaborating on a 6G research project. Last February, US President Donald Trump tweeted that he wants to deploy both 5G and 6G in the country as soon as possible.

Key enablers of 6G technology While 5G has made us familiar to technologies such as Artificial Intelligence (AI) and Internet of things (IoT), 6G will be developed on the back of existing and new technologies.

Millimetre wave technologies: Millimeter wave, also known as millimeter band is the band of spectrum between 30 gigahertz and 300 gigahertz. Telecoms and research units across the globe are testing 5G wireless broadband technology on millimeter wave spectrum.

Using millimetrewave technologies opens up the possibility of having a wide channel bandwidth. With huge data speeds and bandwidths required for 6G, the millimetre wave technologies will be further developed, possibly extending into the TeraHertz region of the spectrum.

ANALYSIS CHINA 6G

Massive MIMO: MIMO stands for multiple-input multiple-output.

This technology is a wireless network that allows transmitting and receiving of more than one data signal simultaneously over the same radio channel. Standard MIMO networks often use around three to four antennas, while massive MIMO makes use of a higher number of antennas, going up to thousands. In recent times, China’s ZTE has used massive MIMO technology with as many as 96 to 128 antennas. Although MIMO is being used in many applications such as LTE and Wi-

Fi, the number of antennas is fairly limited. In the coming years, as research on 6G reaches advanced stages, massive MIMO technology is expected to play an important role in its implementation.

On-demand artificial intelligence: AI has huge potential and when it comes to the telecommunications landscape, it is bringing a radical change in an era of advanced digitisation and technological development. The low latency and high capacity of 5G will also allow AI processing to be distributed among the device, edge cloud and central cloud — enabling

flexible system solutions for a variety of new and enhanced experiences.

This wireless edge architecture is adaptable and allows appropriate tradeoffs to be made per use case. For example, performance and economic tradeoffs may help determine how to distribute workloads to reach the required latency or compute requirements for a particular application.

Bret Greenstein, senior vice president and global markets head for AI and analytics at Cognizant told Forbes that smart, AI-based devices that operate at the edge for buildings, cities and vehicles can make complex decisions in real-time based on the data they see. Imagine a camera that can understand what it is seeing in real-time and decides what actions to take based on the images it sees. This whole system will fit on a chip in an image sensor that can be mounted almost anywhere.

So, if all the decision making takes place in this smart edge device, why do we need 5G? Truth be told, each device only knows the data local to itself—images, sound, temperatures and much more. However, bringing in high speed data can give that AI-driven device more context. For instance, an image sensor in a car can use AI and detect a road hazard. And if it can communicate in high speed with low latency, it can share that data with other cars to help them avoid the hazard, or it can incorporate data from other cars to optimise a route to ensure on-time arrival, taking into account traffic and weather across multiple routes.

editor@ifinancemag.com

International Finance | July 2020 | 39

INDUSTRY

IN CONVERSATION

MIKE GOODENOUGH GM FOR INGENICO EPAYMENTS, EMEA

Ingenico is breaking down barriers for international merchants to foray into the Russian market by partnering with Sberbank

Stepping up Russia's ecommerce game SANGEETHA DEEPAK

The Russian ecommerce market is growing ten times faster than the real economy and traditional retail. In the first half of 2019, the market grew 26 percent year-on-year to $11 billion. In fact, statistics show that the number of online shoppers that engage in more than 15 purchases annually increased by 25 percent. That said, online sales represented 4.5 percent of the country’s total retail turnover—and is leading to achieve 8 percent of turnover by 2021.

Against this background, Ingenico has cut through the barriers and opened up Russia to international merchants with its unique solution.

Mike Goodenough, general manager for Ingenico ePayments, EMEA, in an exclusive interview with International Finance explains the Russian ecommerce and payment markets dynamics and how the company is effectively establishing its local presence.

IF: What is the potential growth of the Russian ecommerce market?

Mike Goodenough: Russia is one of the world’s largest and most dynamic ecommerce markets. When we first launched our Russia Payments Solution it was growing by 17 percent a year and has clearly continued to expand as the solution is now one of our fastest growing payments offerings. The online sales of physical goods were expected to reach 19.74 billion euros at the end of last year and this number is predicted to reach 45 billion euros in 2023.

Although it has traditionally been a difficult market to crack for western businesses, many consumers in the country have a taste for western goods and services—making this market ripe for growth. This is applicable for many sectors from retail to travel to digital goods—so businesses that penetrate this market early on will significantly benefit from its growth.

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ECOMMERCE RUSSIA EPAYMENTS

How is the Russian ecommerce market different from the European market?

The Russian ecommerce market differs from the European market due to its unique domestic financial system and preferred local payment methods. These normally act as a barrier to entry. For businesses without a Russian legal entity, payments are usually processed as cross-border transactions which can be hugely detrimental to authorisation rates. Even international merchants that have a Russian legal entity face issues surrounding VAT and repatriation of funds remitted locally.

As a result, consumers in the market often prefer domestic payment methods that allow them to shop for their favourite goods, with the greatest chance of authorisation. This includes Mir cards which accounted for nearly 25 percent of total payments in Russia at the end of last year—and more than 70 million of these cards have been issued since they were introduced in late 2015.

What is the value proposition of Ingenico ePayments that will distinguish it from other offerings in the Russian market?

Our Russia Payments Solution provides unique local

acquiring and payment capabilities for international businesses selling online to Russian consumers in sectors such as digital goods, retail, travel and much more. We have broken down barriers to entry into the market by partnering with Russia’s leading financial institutions, including the largest acquirer in Europe, Sberbank.

This gives online businesses access to the Russian financial system so they can provide services to Russian consumers using their preferred payment methods, including Mir cards and Russian ewallets such as Qiwi and Yandex. Money. Using the solution, online businesses can offer payments that are fully compliant with Russian regulations to improve authorisation rates and in different currencies such as the Rouble, EUR and USD.

What are the challenges faced by Russian consumers on the payments front? How is Ingenico addressing the issue with its solutions?

Prior to the launch of our solution, Russian consumers had limited options when it came to buying from western businesses. Now they are able to easily make

International Finance | July 2020 | 41

INDUSTRY

IN CONVERSATION

MIKE GOODENOUGH GM FOR INGENICO EPAYMENTS, EMEA

Russian consumers had limited options when it came to buying from western businesses—and now they are able to easily make payments with the launch of our solution

payments to international ecommerce businesses using their preferred payment methods and in the currency of their choice.

As a result, the solution has opened up a whole new market for Russian consumers, with products and services that otherwise would not be available in their country.

Ingenico has recorded an impressive $1 billion transaction in the first 18 months. What do you credit the firm’s success to?

The growth and success of our solution can be accredited to Ingenico’s in-depth understanding of the Russian financial system and the partnerships we have established within it. These partnerships have formed the basis of the solution and have granted us access into a market that has been extremely difficult to enter in the past.

In addition, the partnerships have allowed us to provide a diverse range of preferred local payment methods to Russian shoppers, such as Mir cards. In turn, this has improved conversion and authorisation rates for our customers—making these businesses an attractive option for consumers.

China’s Singles Day also largely contributed to the success of the solution and acted as a proving ground for its effectiveness. On that day we experienced record breaking transaction volumes and payment authorisation rates, which saw many of our customers making a profit by servicing the growing market.

To common knowledge, Russia is a tough ecommerce market to crack. What is Ingenico’s strategic approach to build its local market presence in the country?

The Russia Payments Solution was built as part of our ongoing strategic approach of helping businesses penetrate high growth markets, such as Brazil, Russia,

42 | July 2020 | International Finance

India and China. The most integral part of entering these markets is ensuring that we offer payment methods that are relevant to the general population, enabling them to make payments swiftly and easily.

That is how we are going to continue servicing the Russian ecommerce market, with locally relevant solutions that reduce shopping cart abandonment and create returning customers.

We are continuously adding new capabilities to the solution, such as our billing and settlement plan (BSP) feature for airlines, which includes local acquiring, single report and single remittance. This will ensure that merchants from all industries have the tools they need to operate in the market.

What are Ingenico’s plans in the pipeline targeting European and Russian consumers in the next three to five years?

Ecommerce across Europe was rapidly evolving, even before Covid-19. This has mainly been caused by regulatory updates that are altering the way people pay for goods and they will continue to impact the market in the coming years. This is where our focus will lie.

The EU Payments Service Directive (PSD2) and Strong Customer Authentication (SCA) have forced businesses and banks to reconsider the payments services they offer across the continent. Many are looking to reach new customers using open banking and P2P payments, as many ecommerce businesses see them as a cheaper alternative to what is already being offered. As a result, we have seen a growth in the popularity of alternative payments.

Legislation brought in to limit card payment costs will result in international payment methods becoming more expensive. This will open up new markets and business opportunities for those using alternative payment methods.

Furthermore, transactions made on mobile will increase in value, while online payments services, such as WeChat Pay, are moving into face-to-face territory— meaning that we will experience an omnichannel orientated future in Europe. We will ensure that businesses and customers have the tools they need to offer and make payments that are fast, secure and relevant. editor@ifinancemag.com

International Finance | July 2020 | 43

INDUSTRY

ANALYSIS OIL AND GAS

AFRICAN OIL-RICH NATIONS

Why oil curb is getting worse for Africa SANGEETHA DEEPAK

I

t is a known fact that the pandemic has had a destabilising effect on global oil production in the last few months. In fact, the Opec drastically reduced oil production to the lowest levels since the Gulf war in 1991 in an attempt to revive global markets. In March, Mohammad Sanusi Barkindo, Opec Secretary General, told the media, “There is no doubt that in the last four weeks all the indices have deteriorated, be it in the economy, stocks, equities, financial instruments, metals, commodities and of course oil.�

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ANALYSIS AFRICAN OIL-RICH NATIONS

Nigeria and Angola have agreed to cut oil production in line with Opec+ agreement, despite having an impact on their GDPs

On the bright side, Opec has built a robust model with a deep focus on collaboration, discussion and informationsharing — highly effective to member countries, oil producers and customers largely dependent on stable economic conditions.

Opec and all of its allied countries except one have agreed to extend oil production cuts through July. The countries even include Russia and Mexico who had pledged to slash oil production by 9.7 million barrels a day in May and June — marking the deepest cut agreed to by the world’s oil producers. This in turn has helped to increase prices on the back of resurging demand for crude. In fact, it was reported that the output adjustment in May and June has provided relief to the market and demand has picked up as economic activity is slowly resuming to normal.

African oil-rich countries take a hit But the same cannot be said for African oil-rich countries heavily hit by Opec’s production cuts. It started in May when Opec and its member countries decided to cut oil output by 23 percent each. With that, it is worth noting that the decision has had a negative impact on African oilrich countries majorly relying on revenue generated from petroleum commodities.

This is especially true because 14 countries in subSaharan Africa produce oil, which accounts for a major chunk of their export income. The major oil producers in Africa include Nigeria, Angola and Gabon. In fact, Angola, Algeria, Nigeria and Libya among others are increasingly dependent on hydrocarbon sales — making them the main casualties of reduced oil output. It appears that an increase in prices between $50 to $60 would allow them to

Top African producers oil output in May

Angola

1.28mn bpd

Nigeria

1.61mn bpd

earn the necessary amount of foreign exchange to further carry out development projects.

Despite that, the African Petroleum Producers Organisation showed its support for the resolutions that were determined during the 9th Opec and non-Opec Ministerial meeting. Established in 1987, the African Petroleum Producers Organisation is a body of African countries producing petroleum — and seeks to foster cooperation and harmonisation of efforts among oil producing countries on the continent. The body’s efforts in supporting the resolution is aimed at resolving the global oil crisis caused by the coronavirus outbreak and a price war between the Kingdom of Saudi Arabia and Russia.

It appears that the petroleum ministers and representatives of member countries

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INDUSTRY

ANALYSIS OIL AND GAS

AFRICAN OIL-RICH NATIONS

of the African Petroleum Producers Organisation have taken a stand to support the decisions and processes undertaken by all parties to address the complexities and volatility of the global oil market. The African Petroleum Producers Organisation said in a statement that “Furthermore, we urge the G20 countries to offer assistance to Africa as we struggle to wade off this pandemic and price stabilisation process in the oil markets and encourage the most equipped laboratories and medical institutions in the world to find effective measures accepted by all (proven and consensual scientific results) to rapidly eradicate the progression of the current Covid-19 pandemic.”

Angola resists steeper production cut at first Earlier this month, Angola was resisting Opec’s request for a steeper oil output cut in line with the agreement between all member countries. As stated earlier, the Opec and allies led by Russia have been slashing output since May, with a record of 9.7 million barrels per day following the pandemic-led crisis.

At first, it was reported that Angola was unwilling to compensate for its overproduction during the period between July and September, however, it would be able to do so between October and December. Against this background, Nigeria and Algeria had to reach out to Angola to encourage it to execute the agreement.

On a close note, Angola saw oil production cut by Opec, its allies and other top oil producers as an insufficient measure to balance global markets.

Minister of Mineral Resources and Petroleum Diamantino Azevedo, told the media, “It is up to everyone to understand that, despite the measures

46 | July 2020 | International Finance

taken by Opec, oil producers in various countries should be aware that they may be called to take more drastic measures.”

One of the more serious problems identified in increasing production was lack of storage capacity. Angola had pumped 1.28 million barrels per day in May, observed Opec data. This is equivalent to 100,000 barrels per day exceeding its target. That said, the oil producing country slashed its production to 1.24 million barrels per day in June, resulting in 60,000 barrels per day above its target, based on a Reuters survey.

The production cut has had an impact on its long-term supply contracts. In the country, oil accounts for 90 percent of total export revenues and the value of oil exports dropped by approximately 50 percent during the period between April and May. Angola is the second largest oil

producer on the continent. This points to Angolan economist Carlos Rosado de Carvalho’s view in an interview with a local media report that “oil is the biggest source of revenue for the Angolan State, and if the State is going to have less revenue, it means that it will invest less, that way the economy ends up suffering.”

But Angola has received a lot of pressure from the joint ministerial monitoring committee to comply with the supply cut agreement. In addition, other countries including Iraq, Kazakhstan, Nigeria and Gabon have been pressured to commit to the agreement as well. More recently, the country agreed to comply as per its supply cut agreement with the joint ministerial monitoring committee and is willing to compensate for its previous overproduction by reducing output between July and September.

ANALYSIS AFRICAN OIL-RICH NATIONS

Nigerian economy to suffer from oil slump Even Nigeria is expected to feel the pinch on the back of slashing oil production.

The World Bank forecasts that the country will shrink by 10.6 percent this year, especially with it bringing down its oil production to 1.412 million barrels per day in an effort to comply with the agreement with OPEC and its allies.

In May, the country implemented only 52 percent of the defined output when it pumped 1.613 million barrels per day. Now Nigeria requires to slash approximately 67,000 barrels per day over the next three months to offset the overproduction. Last month, Group Managing Director of the Nigerian National Petroleum Corporation, Mele Kyari, told the media, “Definitely by the end of June, we’ll see full compliance from Nigeria. It will be done in the first

half of July in the worst-case scenario.

Over the past 10 days, the country has been cutting more than required under the OPEC+ pact.”

That said, the country had reassured its commitment to Opec and its allies on the new extension deal which points to 9.7 million barrels per day. It has promised to show support and collaborate with all parties involved in the deal to rebalance and stabilise the oil market.

The impact of the price slump on African countries is well understood and exporters are bearing the brunt of it on a large scale. In many cases, it is also having a residual effect on the GDP and revenue from sale of hydrocarbons.

Another alarming factor is that Nigerian banks will face serious consequences from oil producers determined to survive the pandemic.

This means that traditional firms will be forced to have restructuring discussions with their lenders if the current market conditions continue beyond the next few months.

Truth be told, oil and gas companies account for 30 percent of all banking loans in the third quarter of 2019 and borrowing accounts for 24 percent of all non-performing loans in the country. Some of the lenders with heavy exposure to Nigerian oil companies are First Bank, GTB, Zenith and Access Bank — meaning that when oil prices fall it will directly impact naira and have an indirect effect on the banking industry. Also, power producers and manufacturers might suffer from a weaker naira and further impact banks’ capacity to provide loans.

World Bank, IMF predict GDP drop for African oil producers A report titled Global Economic Prospects was published by the World Bank in June which found that Nigeria’s energy sector will shrink 10.6 percent this year.

In response, the government introduced a revised budget altering the oil price

from $57 a barrel to $25 a barrel. In addition, the officials have approved $5.5 billion in loans to finance the new budget deficit.

Austin Avuru, CEO of Seplat Petroleum, told the media, “Overall, our target is to get close to a neutral cash flow position in 2020. So the main target of our budget restructuring is to be able to survive FY 2020, with the hope that during 2021 prices will climb back and we will manage to resume our planned investments. Meanwhile, in 2020 the key word is survival.”

The World Bank said that energy importers on the continent will be protected from the downside effects of the pandemic. Analysts have also expressed views that a reform of subsidies in energy-importing countries could result in releasing public funds toward economic recovery.

The World Bank has pointed out that African countries including Djibouti, Egypt, Morocco and Tunisia are expected to experience a 0.8 percent drop in GDP this year, compared to the 5 percent contraction predicted for oil exporters in the MENA region last year.

Even sub-Saharan Africa exporters are anticipated to experience a 3 percent drop in GDP which is above the average of 2.8 percent GDP. The International Monetary Authority (IMF) released a report earlier this year which projected that Algeria’s economy on the back of high debt levels and a nil sovereign wealth fund will contract by 5.2 percent this year but revive by a 6.2 percent growth next year. The postpandemic era might be a challenge for African oil-rich countries to reach market stabilisation in the long-term.

editor@ifinancemag.com

International Finance | July 2020 | 47

INDUSTRY

THOUGHT LEADERSHIP

INSURANCE AI IN INSURANCE

PAMELA NEGOSANTI GLOBAL VP OF INSURANCE AT EXPERT SYSTEM

AI has vast potential to transform the industry from ‘detect and repair’ to ‘predict and prevent’

The new reality of AI in insurance Industries from around the world are facing disruption as a result of using artificial intelligence (AI) in key operations. But the insurance industry, in particular, is slowly capitalising on this technology leading to the evolution of insurtechs.

So the big question is—what is the reason for AI and insurance to go hand in hand? In the past, carriers have been conservative in technology adoption compared to those in the banking industry—creating an obvious gap between technology adoption and industry transformation.

Now insurers are individually and collectively seeking to innovate their operations, products and solutions to strengthen the global insurance market at large. For example, disruptors are entering the current market scene and changing the standard model of micro insurance.

Imagine, how will it play out if Google or Amazon forayed into the insurance industry?

The existing insurance companies would not be able to sustain a massive transformation overnight, especially with a limited use of technology. For that reason, it is essential for insurance companies globally to adopt and use AI to cope with industry setbacks and unprecedented changes in the future.

AI is a game-changer for insurers In fairness, insurance companies globally

48 | July 2020 | International Finance

have realised the potential of AI to synchronise the insurance ecosystem and streamline processes. This in turn will help them to work on the existing layers of complexities to develop a sustainable customer-centric approach in the long-term.

AI has now become a game-changer for the industry. AI-enabled chatbots are being implemented to simplify the claim process run by insurers. In translation, this touchless insurance claim process eliminates excess human intervention and can seamlessly report the claim, capture damage, update the system and communicate with customers without any supervision.

For insurers, the customer-centric approach is no longer an option. So it is disappointing to think that there are insurance companies that still remain short-sighted in their approach while trends across customer demographics are rapidly changing.

New model is on the rise How can technology concretely help insurers in practice? In this context, AI can help monitor and predict risks by giving customers indications on how to reduce risk. For example, having healthy behaviour can prevent health problems, and in turn, reduce the premium rate. The final purpose is to reduce the frequency and severity of losses over time.

Because insurance is a highly regulated industry, carriers have been slow in adopting this technology compared to other industries. That said, they are now rethinking their customer engagement and in this evolution, insurance is ideally shifting from its current and traditional state of ‘detect and repair’ to future ‘predict and prevent’, transforming every aspect of the industry during this process. In another example, road accidents can be reduced as a result of using autonomous vehicles—and health damages can be lowered owing to healthy behaviours. Also, home and property damages can be prevented through the adoption of IoT devices.

Developing an ecosystem approach In recent years, technology products, even the most advanced and AI-driven ones have important limited value when used alone—but can substantially increase in value when used with complementary applications. This is known as an ecosystem approach. In a nutshell, there is no one-size-fitsall technology or AI software which can solve all the problems on-the-go. Multiple technologies and technological methodologies, if combined together, can provide tangible benefits.

Skepticism slows AI adoption It is worth noting factors that slow down insurers in AI adoption and where does their resistance to change come from?

Skepticism is definitely a relevant variable and is the typical resistance to change. Disruption can easily polarise reactions and behaviours: convinced promoters and supporters vs. strong and inflexible detractors.

However, one of the most deep-rooted causes to resist change in the insurance industry is culture.

To innovate, insurers have to experiment, pilot and redesign their processes and offerings. Insurers have always focused on avoiding failure. However, evaluating the risks in detail which can be a timeconsuming but worthwhile activity will make a difference and increase the pace of change.

Pamela Negosanti is the global vice-president of insurance at Expert System, where she leads the Insurance Centre of Competence, serving and guiding customers in AI implementation. With more than 10 years of experience in technology, she seeks to transform the insurance industry into an innovative market in the coming years.

editor@ifinancemag.com

International Finance | July 2020 | 49

ECONOMY

FEATURE THE PHILIPPINES RECESSION

ECONOMIC REBOUND

Is the Philippines prepared for the Covid-19 recession?

Experts predict fintech volume in Mexico to SANGEETHA DEEPAK reach $68 billion by 2022 The pandemic has steamrolled the country by forcing it into a recession — a first in 20 years

T

he shadow of the pandemic is now having a ripple effect on the Philippines, as economists have downgraded its economic outlook for 2020. It is reported that the Philippines economic recovery will lag behind its Southeast Asian peers because of slow coronavirus containment.

The impact of the pandemic can be seen on global trade, tourism, job loss and economic growth. In the first quarter of the year, the Philippines’ gross domestic product contracted by 0.2 percent year-on-year. Notably, it marks the end of 84 quarters of growth since 1999 as a result of the Taal Volcano’s eruption and the protracted pandemic.

50 | July 2020 | International Finance

Assessment on the Philippines economy in 2020 In March, the central bank of the Philippines was ready to cut lending rates and purchase billions of dollars in government debt in an effort to preserve its $350 billion economy.

The central bank Governor Benjamin Diokno told the Financial Times that they will do everything necessary to prevent the country from slipping into a recession.

Despite all efforts, the Philippines has entered a recession as economic contraction

FEATURE PHILIPPINES DIGITAL BANKING

deepened in the second quarter of the year. The country’s lockdown was at its peak in April and May largely affecting production sectors. The Philippine Statistics Authority’s latest report found that the volume of production index fell 59.8 percent year-on-year in April — recording a 20year low. Exports and imports in the country had also dropped severely during that month.

In June, the International Monetary Fund downgraded the Philippines economy, projecting its gross domestic product to contract by 3.6 percent this year. The World Bank, on the other hand, has pointed out that the Philippines economy is likely to contract by 1.9 percent

this year on the back of local volcanic eruption and the pandemic.

Even the Institute of International Finance had lowered the country’s economic output forecast for ASEAN-4 region comprising the Philippines, Indonesia, Malaysia and Thailand to -3.2 percent. A report titled ASEAN-4: Worst recession since the Asia crisis said, “Widespread lockdowns and travel bans will have a substantial impact on the tourism industry as well as domestic demand, while weakening activity in major trading partners

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ECONOMY

FEATURE THE PHILIPPINES RECESSION

will be a drag on exports. Forecast downgrades are largest for Thailand and the Philippines, where Q1 data already show substantial weakness, and Malaysia, where a longer-than-expected lockdown will be challenging for the economy.”

The Philippines is among the worst affected in Southeast Asia Oxford Economics, a leader in global forecasting and quantitative analysis, in its report found that the Philippines, Malaysia, Thailand and Vietnam were the Southeast Asian economies affected by the pandemic at the same time. In March, the five governments began implementing stringent restrictions on the movement, especially in the Philippines and Thailand.

Meanwhile, an independent macroeconomic research consultancy Capital Economics cited that the economic recovery is the brightest in China, Taiwan and Vietnam, while the Philippines, Indonesia and India are performing at a low level. “In Vietnam and Taiwan, which appear to have eliminated the virus, the Recovery Trackers are not far off pre-crisis levels… In contrast, in the Philippines, Indonesia and India, where restrictions on movement and commerce are still in place and case numbers are showing little sign of coming under control, our Recovery Trackers are still at least 40 percent below normal levels,” it added.

Oxford Economics in a report said that the two countries have made progress in terms of containment but not decisively. Since the end of April, the impact of the coronavirus pandemic along with restrictions on mobility and the economy have been quite significant in Malaysia and the Philippines.

Another key finding in the report

52 | July 2020 | International Finance

ECONOMIC REBOUND

The Philippines Stock Exchange index bounced back to level above 6,500 in midJune on the back of easing lockdown restrictions — pointing to the fact that investors are eagerly waiting for the country’s economic rebound is that it measured the recovery paths of 12 economies across Asia Pacific based on the following criterion: health and economic vulnerability, series of lockdowns, efficiency in containing the infection and macro policy support.

The Philippines recorded the secondlowest score after India, while Vietnam demonstrated positive recovery prospects in the region. “At the bottom are India, Philippines, and Indonesia.

All three are clearly still struggling to get past the peak of the pandemic, which is a major headwind to their outlooks,” the report said.

For Southeast Asia, the Institute of International Finance is positive that central banks will continue to inject liquidity through bond purchases and open market operations while continuing to implement policy rate cuts. The organisation expects the region to perform better than most emerging markets with a healthy recovery next year. Based on Oxford Economics’ scorecard, Vietnam, South Korea, Taiwan, Japan, China and Hong Kong have demonstrated stronger prospects

for economic recovery compared to their regional peers.

The Philippines’ response to the pandemic The Philippines’ pandemic response is conflicting. It was reported that the country’s policy, fiscal and monetary responses by the government and the central bank of the Philippines to wrestle the social and economic crises stirred by the pandemic were suitable.

On the contrary, Oxford Economics in its report added that “At the same time, the fiscal policy response has been quite meager in both India and Philippines, especially compared to the stringency of lockdowns they had imposed — which at one point were not only among the most severe in Asia but also globally.” The Asian Development Bank’s Covid-19

FEATURE THE PHILIPPINES RECESSION

policy database also showed that the Philippines government’s response package to the pandemic is the sixthlargest in Southeast Asia and the fifthsmallest in terms of population.

It appears that the implementation of the Enhanced Community Quarantine had faced negligences. For example, the authorities failed to implement similar preventive measures introduced by neighboring countries and had understimated the infection. In addition, the lockdown being its last resort led to a myriad of problems including public health and safety.

Because the lockdown stalled the country’s economic growth to a significant extent, the government is required to provide monetary assistance to low-income households and displaced workers. In fact, economists remained

The country will have a potential rebound in 2021

country will revert to a 6.8 percent growth in 2021. In another example, the Institute of International Finance has forecasted that the country’s gross domestic product will rebound to between 8 percent and 9 percent next year.

First Metro said “The 2021 outlook appears brighter with the 2020 lost output overtaken by a rapid 8 percent to 9 percent GDP expansion. With a huge $30 billion stimulus plan in the works and normalisation of business operations, we project a notable rebound in GDP growth in 2021.” On top of that S&P Global Ratings recently published a report reaffirming the country’s BBB+ credit rating two points above minimum investment grade standard with a stable outlook. Even the Japan Credit Rating Agency has given the Philippines -A grade.

The pandemic has pushed crude oil prices down, impacting the Middle East economies — with high unemployment rate and job losses for overseas workers in the region. This means the impact is likely to be felt on the world economic growth and also reduce consumption spending in the Philippines.

But it is important to realise that the Taal volcano eruption followed by the new coronavirus pandemic and strict lockdown have reduced tourism and overseas remittances. As a result, these events have disrupted supply chains, manufacturing and trade plus financial market upheavals which are all contributing factors to the World Bank’s overall assessment of the Philippines economy. That said, international investors have demonstrated strong interest in the economy — reinforcing confidence in its potential to rebound.

On the bright side, the Philippines is expected to show economic recovery in 2021. For example, the International Monetary Fund has predicted that the

editor@ifinancemag.com

doubtful whether the government had enough existing and new resources to support the people if necessary. However, the Philippines Stock Exchange index bounced back to level above 6,500 in mid-June on the back of easing lockdown restrictions — pointing to the fact that investors are eagerly waiting for the country’s economic rebound.

In fact, investment corporation First Metro had anticipated the pandemic to alter consumer behaviour and slash corporate profits by 21.9 percent in the first quarter of the year.

International Finance | July 2020 | 53

ECONOMY

INSIGHT

PANDEMIC’S IMPACT

The International Monetary Fund expects the global economy to shrink by more than 3 percent in 2020

The coronavirus is a disaster for global economy SANGEETHA DEEPAK

When the coronavirus outbreak was first detected in the Chinese city of Wuhan last December, nobody reasoned it would impact the global economy in the way it has today. The International Monetary Fund expects the global economy to shrink by more than 3 percent in 2020 — pointing to the fact that it is the steepest slowdown since the Great Depression of the 1930s.

Earlier estimates observed that should coronavirus become a pandemic, economies will lose at least 2.4 percent of their GDP value in 2020, forcing economists to reduce their estimate from 3 percent. Even global stock markets are experiencing dramatic declines — and the Dow Jones has reported its most significant single day fall of nearly 3,000 points on March 16, 2020. This beat its previous record of 2,400 which took place four days earlier.

Experts have warned about the high possibility of global conditions worsening on the back of the protracted coronavirus pandemic. In fact, Kristalina Georgieva, managing director of International Monetary Fund, explained that a ‘global recession

54 | July 2020 | International Finance

at least as bad as during the Global Financial Crisis or worse’. Even Bloomberg Economics has warned that the ‘full-year GDP growth could fall to zero in a worse-case pandemic scenario’.

The protracted pandemic has deeply hurt several economies across the world forcing them to impose lockdowns to flatten the curve of the infection.

Whenever a pandemic takes place, economic contraction is never far behind. To second that, the World Bank said that the pandemic is expected to push most economies into recession this year, with per capita income contracting in a significant capacity globally since 1870. It further stated that “The crisis highlights the need for urgent action to cushion the pandemic’s health and economic consequences, protect vulnerable populations and set the stage for a lasting recovery. For emerging markets and developing countries, many of which face daunting vulnerabilities, it is critical to strengthen public health systems, address the challenges posed by informality, and implement reforms that will support strong and sustainable growth once the health crisis abates.”

INSIGHT PANDEMIC’S IMPACT

World Economic Outlook growth projections for 2020 Advanced economies

The US

Euroarea

Japan

The UK

Canada

GDP projections

-8%

-10.2%

-5.8%

-10.2%

-8.4%

Source: IMF

“The crisis highlights the need for urgent action to cushion the pandemic’s health and economic consequences, protect vulnerable populations and set the stage for a lasting recovery" - World Bank This year, the US, Japan, the UK, Germany, France, Italy and Spain are expected to shrink by 5.9, 5.2, 6.5, 7, 7.2, 9.1 and 8 percent respectively, observed the International Monetary Fund. More specifically, developed countries have been hit harder by the pandemic — meaning their growth rate is by -6 percent in 2020. That said, developing countries are expected to shrink by -1 percent.

China’s declining economic growth rate affects other countries

For China, the growth rate is disturbing. The country’s GDP dropped by 36.6 percent in the first quarter of 2020, while South Korea’s GDP fell by 5.5 percent. It appears that South Korea did not impose a lockdown but followed a strict regime of testing, contact tracing and quarantining.

It is worth noting that the downside effects of the pandemic on businesses in China will further impact other countries from around the world because the mainland is globalised and interconnected on so many levels. As Diane Swonk, chief economist at the Advisory Firm Grant Thornton, points out that several countries have multinational companies operating in different parts of the world because their economies are global. This points to China again. The mainland has established its presence in most economies because of its global supply chain over many years.

With that, a company’s production shutdown in China will force it to implement the same actions in its US plant as well.

To make matters worse, China recently lifted restrictions on lockdown resulting in a second

International Finance | July 2020 | 55

ECONOMY

INSIGHT

PANDEMIC’S IMPACT

European countries see GDP drop in Q1 2020 Italy

17.5 Spain

19.2% France

21.3% Source: IMF

wave of infection. India, China, Indonesia, Japan, Singapore and South Korea account for 85 percent of coronavirus cases in Asia.

What will happen to the troubled oil and gas industry?

The adverse effects of coronavirus have spread far beyond China’s supply chain. The problem is that it has hurt powerful industries such as oil and natural gas which is experiencing its third shock in 12 years — and experts believe that this time is different.

The reason it might be different is because the pandemic has caused a major imbalance in supply and demand forcing the Opec and its allies to cut production. Also, the pandemic has lowered gas demand by 5 percent to 10 percent against growth projections. It is even anticipated that regional gas prices could drop lower than in the previous episodes. A report published by McKinsey shows that demand for refined products has reduced by at least 20 percent — and the recovery will not take place before two years at least. On the bright side, oil could recover in the next two years to precrisis levels ranging from $50/bbl to $60/bbl.

56 | July 2020 | International Finance

China recently lifted restrictions on lockdown resulting in a second wave of infection.

India, China, Indonesia, Japan, Singapore and South Korea account for 85 percent of coronavirus cases in Asia Suggested measures to cope with the pandemic The World Economic Forum in its assessment observed that small and medium size enterprises are vital to maintain employment and financial stability. For that reason, many developed countries have introduced support packages.

Japan has rolled out its economic stimulus package which is 21.1 percent of its GDP. This is followed by the US with a stimulus package of 13

INSIGHT PANDEMIC’S IMPACT

Developed economies introduce support package to fight the pandemic

21.1% 13%

Japan

The US

12%

Sweden

10.7%

Germany

percent, Sweden at 12 percent, Germany at 10.7 percent, India at 10 percent, France at 9.3 percent Spain at 7.3 percent and Italy at 5.7 percent.

In this context, the World Economic Forum noted that “there is concern that the size of packages may prove insufficient for the duration of the crisis; that disbursement may be slower than is needed; that not all firms in need would be targeted; and that such programmes may be overly reliant on debt financing.”

Against this background, Kristalina Georgieva informed the media about four measures that need to be taken to curb the spread of the infection and minimise losses for the greater good. First: Countries should continue with essential containment zones and support health systems.

Second: Protect people and companies hurt by the pandemic with timely fiscal and financial support.

Third: Lower stress on the financial system. Fourth: Plan for recovery and minimise residual effects of the crisis through robust policy action.

The International Monetary Fund’s recent report titled World Economic Outlook said “Where lockdowns are required, economic policy should

10%

India

9.3% France

7.3% Spain

5.7% Italy

continue to cushion household income losses with sizable, well-targeted measures as well as provide support to firms suffering the consequences of mandated restrictions on activity. Where economies are reopening, targeted support should be gradually unwound as the recovery gets underway, and policies should provide stimulus to lift demand and ease and incentivize the reallocation of resources away from sectors likely to emerge persistently smaller after the pandemic.”

According to it, companies will slowly begin hiring people and expanding their payroll on the back of output uncertainties in the future. It is clear that broad monetary and fiscal stimuli will help economies to accelerate their recovery process.

editor@ifinancemag.com

International Finance | July 2020 | 57

TECHNOLOGY

FEATURE BITCOIN ADOPTION

AFRICAN CRYPTO MARKET

Facebook’s Libra and CBDCs are contributing factors to increase the popularity of cryptocurrency in Africa

The rise of crypto adoption in Africa PRITAM BORDOLOI

58 | July 2020 | International Finance

T

he adoption of cryptocurrency is seen on the rise in Africa.

In recent times, Africa has witnessed greater crypto ownership, trade volume and regulation.

A report published by Arcane Research and Luno found that African nations such as Uganda, Nigeria, South Africa, Ghana and Kenya are frequently among the top 10 countries to Google Search about bitcoin.

The report titled The State of Crypto in Africa recognises Africa as one of, if not the most promising continents for adoption of cryptocurrencies.

FEATURE AFRICAN CRYPTO MARKET

The report observed that African countries share key similarities and trends despite the continent being so diverse. Economic problems ranging from high inflation rates and volatile currencies to financial issues such as capital controls and lack of banking infrastructure create a fertile ground for alternate developments. Apart from bitcoin, other cryptocurrencies such as Dash and Lisk are used in African countries including Botswana, Ghana, Kenya, Nigeria, South Africa and Zimbabwe. That said, there is a long way to go for cryptocurrencies in Africa.

Cryptos are becoming popular in Africa Mobile money has been a revolution in Africa and investors across the globe are recognising its scope. On the

back of formidable success of mobile money in Africa, a race to capture the African crypto market is driven by increased investment interest in cryptocurrencies. More recently, Twitter’s CEO Jack Dorsey announced his interest in the cryptocurrencies market in the African continent.

Nicolo Stoehr, host of the prestigious Crypto Finance Conference (CFC) which was held in January this year in St Moritz talked about Africa’s potential in cryptocurrencies.

In the last few years, African countries such as the Seychelles, have been actively positioning themselves as global crypto hubs — quite like

International Finance | July 2020 | 59

TECHNOLOGY

FEATURE BITCOIN ADOPTION

Zug in Switzerland and offshore island states like Malta, Gibraltar, Jersey and the Caymans. All of them are known for their progressive stands on this front and have offered positive regulatory frameworks for cryptocurrencies and blockchain in a tax-neutral setting.

In light of the growing popularity of cryptocurrencies, South Africa’s top financial regulators released a policy paper with 30 recommendations for the regulation of cryptocurrency and related service providers earlier this year. The purpose of the policy paper is to comply with cryptocurrency standards set by the Financial Action Task Force (FATF).

According to a BBC report published last year, many Kenyan businesses have started accepting bitcoin as payments for their services and products, despite warnings issued by the Central Bank of Kenya in regard to the volatile nature of cryptocurrencies. Last year, the total number of bitcoin transactions in Kenya was estimated to be worth more than $1.5 million, according to the Blockchain Association of Kenya.

The number is expected to significantly increase as cryptocurrencies gain popularity on the continent.

Even Nigeria is experiencing a surge in the adoption of cryptocurrencies.

Interestingly, the country has a number of local platforms that support purchases and sales of cryptocurrencies with the national currency. One such notable platform is Nairaex which is the largest local cryptocurrency exchange supporting several payment methods to buy and sell BTC including bank transfers and bitcoin remittance platform Bitpesa.

According to buybitcoinworldwide.com, a growing number of Nigerian companies already accept payments in cryptocurrencies.

60 | July 2020 | International Finance

AFRICAN CRYPTO MARKET

Bitcoin drives crypto adoption in Africa Bitcoin is a digital or virtual currency created in 2009—and has evolved to become one of the most widely used cryptocurrencies over the years. The popularity of cryptocurrencies in Africa has much to do with the popularity of bitcoin. Also, since the inception of bitcoin, over 6000 different alt-coins have been created similar to it. What makes bitcoin interesting and risky is the fact that the digital currency is run by a decentralised network of computers owned by private individuals and not by a centralised system such as a bank.

This means that no single institution controls the currency in contrast to other physical currencies such as the dollar or the pound.

While central banks around the globe regulate and oversee the process

of currency creation, bitcoins are created in a process called mining. Mining is a process where privately held computers provide processing power to the network to verify transactions that occur directly between users. In this process, these computers build a publicly available list of transactions called blockchain. As a reward for verifying this blockchain, miners are issued with a small number of newly created bitcoins released incrementally based on the original code.

Bitcoin’s decentralised system is based on encryption and verification which means regulators or central banks have little control over it. That was one of the main reasons why many countries have banned the digital currency. According to reports, around 100, 000 businesses across the globe accepted bitcoin in 2015— and of the most notable companies include Microsoft. These factors have contributed

FEATURE AFRICAN CRYPTO MARKET

Facebook launched Libra in collaboration with 27 other companies and the digital currency would be overseen by a Switzerland-based independent non-profit organistation called the Libra Association

heavily to the popularity of bitcoin in Africa. Over the last few years, a few African countries have seen exponential growth in cryptocurrencies.

To them, bitcoin is seen as an opportunity and not as a threat. The digital currency’s characteristics provides Africa with a platform to reduce corruption, promote development and good governance. It is reported that 15 cryptocurrency-related operations began in Africa in the past year. Luno Exchange which was established in 2013 in South Africa is now boasting 1.5 million customers in over 40 countries worldwide. Luno Exchange was the first of its kind to be based in Africa.

Others, particularly cryptocurrencybased remittance services, are sprouting across the African continent. Launched in 2013, Kenya’s BitPesa facilitates virtual remittance transfers to both

African and international locations, to and from individuals’ mobile wallets, where cryptocurrency is stored.

LocalBitcoins.com in Kenya reported trading volumes in excess of $1.8 million as of December 2017, underlining the lucrativeness of the business.

Industry experts believe that cryptocurrency will be around for years.

With that, bitcoin users can send money to just about anywhere there is an internet connection for relatively small fees and with no third-party interference is an advantage that standard governmentissued currencies cannot offer.

Another recommendation is that transactions are anonymous and users’ information is private and safe. It appears that there is a little possibility of identity theft which is common with other forms of digital payment. As of December 2017, the global demand for cryptocurrency had increased to an extent that each bitcoin was sold for $20,000. Its value had been $1,000 in the previous year.

The start of crypto renaissance in Africa Cryptocurrencies have been around for more than a decade now, but what is really driving the crypto renaissance

in Africa now? This has to do with various factors such as the willingness of Africans to adopt new technological changes when it comes to finance.

The fintech sector has been growing in Africa and this is especially true in sub-Saharan countries such as Nigeria, Kenya or even South Africa.

The popularity of cryptocurrencies also has to do with Facebook’s Libra.

This stems from the fact that Facebook is seeking to disrupt the global financial system by launching its own cryptocurrency services in 2020 and users will be able to use it through 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 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 the digital currency would be overseen by a Switzerland-based independent non profit organistation called the Libra Association.

Considering that a large number of Africans still use Facebook in Africa, the announcement of Libra has helped the concept of cryptocurrencies gain popularity in Africa. Facebook recorded 139 million users a month in Africa in 2018, of which, 98 percent were connected to the social media platform through their mobile phones.

Costly remittances and cross-border payments is also another factor plaguing many Africans. Cryptocurrencies, on

International Finance | July 2020 | 61

TECHNOLOGY

FEATURE BITCOIN ADOPTION

AFRICAN CRYPTO MARKET

the other hand, can enable lower-cost and faster remittance payments. It is estimated that over 25 million people are expats from sub-Saharan countries as of 2017. Remittances also account for a large share of gross domestic product (GDP) in sub-Saharan countries.

Remittances below $200 to subSaharan countries cost an average of 9 percent compared to the global average of 6.8 percent, while payments between countries are expensive. These higher percentages are attributed to inefficient and uncompetitive banking markets — and are reliant on legacy financial communications systems such as SWIFT.

Lack of crypto infrastructure is a challenge Even though Africans are opening up the ideas of cryptocurrencies, the continent lacks adequate infrastructure on this front. If the adoption of cryptocurrencies were to be fast tracked in Africa, what it needs is the government to declare its stance regarding cryptocurrencies.

As things stand, over 60 percent of the African regulators are yet to clarify their position on cryptocurrencies, given that many non-African countries have placed a ban on bitcoin and other cryptocurrencies. According to a report titled The State of Crypto in Africa, 20 of the 10,267 bitcoin nodes worldwide are located in Africa. For Ethereum nodes, the number is even smaller, with only 12 of them existing on the continent. Of the existing nodes, a vast majority of them are based in South Africa and are not equally distributed. Bitcoin’s Lightning Network is also immature. Africa accounts for just 0.24 percent of BTC Lightning nodes, contributing just 0.07 percent of total network capacity, with almost all contributions stemming from South Africa. Also, a report by CoinShares shows that there is zero meaningful bitcoin mining activity across Africa.

Internet penetration in Africa: When it comes to internet penetration,

62 | July 2020 | International Finance

Africa has an average of 39 percent, compared to a global average of 59 percent. For cryptocurrencies to boom in African countries a greater section of its population needs access to good internet. As of last December, only Kenya and Libya had good internet penetration at 87.2 percent and 74.2 percent. Other developing economies in

Africa such as Egypt have an internet penetration rate of only 48 percent, according to Internetworldstats.com.

It is noted that Madagascar has topped average broadband speed rankings among African countries in 2019.

However, the internet landscape in Africa, especially in emerging economies is swiftly changing. Telecom

FEATURE AFRICAN CRYPTO MARKET

Mobile money transactions in the country stood at

$38.5 bn

in 2018, a 10 percent increase compared to 2017 Kenya’s financial sector changed with the establishment of M-Pesa in 2007. By the end of 2017,

83 percent

of Kenya’s population had access to financial services

companies such as MTN are leading the internet revolution in countries such as Kenya, South Africa and Nigeria.

Also the fast paced adoption of mobile money in Africa is pushing telecom companies on the continent to improve internet penetration. Africa does seem to be moving in the right direction, as digitalisation is also picking up pace on the continent, especially in emerging economies. With greater internet penetration, cryptocurrencies could possibly have a bright future in the African continent on the back of regulator’s approval and positive public sentiment, Competition from mobile money services: Even though mobile money is influencing internet penetration on the continent, it has emerged as a hindrance

in the path of crypto adoption. It is no doubt that mobile money has been a revolution in Africa.

In recent times, mobile money has brought in a revolutionary change on the continent and countries like Kenya have embraced that change. Data released by the Central Bank of Kenya revealed that mobile money transactions in the country stood at $38.5 billion in 2018, a 10 percent increase compared to 2017. The face of Kenya’s financial sector has also changed with the establishment of M-Pesa in 2007. By the end of 2017, 83 percent of Kenya’s population had access to financial services, according to its apex bank. Cryptocurrency adoption may struggle in the face of such dominance due to business moats and network effects that have developed around these services.

Given the fast-paced adoption of mobile money in Africa, it may be difficult for alternative mobile solutions such as cryptocurrencies to boom in such an environment. However, when compared to mobile money, cryptocurrency solutions can compete on cost. While mobile money services rely on a centralised business model to operate, extracting fees from customers of up to 11 percent, cryptocurrencies can often function with negligible costs to users.

The use of mobile money has significantly surged in Africa in the last few months as the continent has joined forces to curb the spread of Covid-19.

In fact, the widespread use of mobile money has stopped the use of cash in Africa — a conduit for the spread of the disease as pointed out by the World Health Organisation (WHO). According to experts, mobile money has also played a huge role in curbing the spread of the Covid-19 in Africa. Also, it has facilitated the continuous functioning of the African retail sector by allowing its citizens to shop digitally. Mobile money provides an easy way of completing a financial transaction and has also led to

a rise in online shopping in Africa amid the lockdown.

It also has the potential to accelerate financial inclusion in African countries.

By definition, what mobile money can do is tap into underbanked or unbanked African populations which the banking sector failed to bring under their financial umbrella. The growth of mobile money in Africa is expected to help the continent tackle unemployment issues as well. It appears that more players will foray into the mobile money market and will lead to the creation of various jobs within the sector.

Low smartphone penetration: Most cryptocurrency wallets only work on smartphones unlike mobile money services which operate on more basic devices. In recent years, as digitalisation picked up pace in sub-Saharan Africa, mobile phone penetration has increased dramatically. According to GSMA, an association of mobile network operators worldwide, there are 747 million SIM connections in sub-Saharan Africa in 2019, representing 75 percent of the population. However, it can be difficult to predict how many people own a smartphone among the populous. In 2013, 58 percent of Kenyans who did not own a mobile phone said that they shared one, causing difficulty to predict exactly how many Africans own a smartphone.

In 2017, a survey was carried out pointing to the fact that around 51 percent of South Africans owned a smartphone.

However, the penetration is relatively low in emerging economies such as Nigeria and Kenya. Around 32 percent of Nigerian population owned a smartphone according to the survey, compared to 48 percent who owned a basic mobile handset. In Kenya, the figures stood at 30 percent and 80 percent respectively.

Overall, smartphone and internet penetrations need to increase for greater crypto adoption on the continent. editor@ifinancemag.com

International Finance | July 2020 | 63

TECHNOLOGY

THOUGHT LEADERSHIP

OPEN BANKING API MANAGEMENT

APIs ensure security and governance for banks and enterprises—protecting customer data at large

STEPHEN WALSH DIRECTOR FOR EMEA, SENSEDIA

Why APIs are so important When the EU’s Payment Services Directive (PSD) in 2007 called for a single market for payments to ensure more security and innovation, it signalled the start of a new transactional era, streamlining systems and processes.

PSD2 legislation followed in 2018, increasing customers’ rights, while introducing new surcharging and currency conversion rules, enhanced security through Strong Customer Authentication (SCA) and a new framework for payment and accounting services with thirdparties accessing account information.

The European Banking Authority was mandated to support this Directive by developing Regulatory Technical Standards (RTS) for SCA, including a requirement for all businesses to offer online payment services and multi-factor authentication on electronic transfers.

Alongside security, this call to operate in a new Open Banking (OB) environment and share data is prompting banks and other financial services providers to re-think their business models. Even before OB is fully embraced, the UK’s Financial Conduct Authority has called for input to its 2020 Open Finance (OF) consultation paper.

PSD2 is a catalyst for change PSD2 is clearly a catalyst for change. By facilitating exposure of data, products and services to third-parties and competitors, market

64 | July 2020 | International Finance

players will be forced to develop new products and find ways to engage with customers.

It will impact the future competitiveness of financial services providers and transform the way people use and move money. Digital change enables businesses to reach new revenue streams, increasing service line efficiency and flexibility.

The goal is to prompt innovation, increase competitiveness and help businesses or consumers better understand and utilise their finances. No business can compete in this new ‘open’ world, without an Application Programming Interface (API).

Digital glue connects systems It is the digital glue that connects different systems, enabling businesses to better connect with partner clients and the whole ecosystem, reach new channels, monetise data and services, provide customers with digital and omnichannel experiences, develop platforms for partners, boost innovation and create viable products that reach the market quickly, enhancing customer experience.

An API moves a business from single or multi-channel customer communications to multi-experience ecosystems. It also ensures firms meet security, performance, governance and access-control guidelines, protecting customer data and their technology.

A more connected world dictates that customer data can no longer be held in different systems. It should be stored in a single database and shared internally or externally. Legacy technology and closed systems or infrastructure are barriers to creating API connections.

API management software specialists, OB technology vendors or in-house IT teams are capable of delivering the required APIs. However, less sophisticated software could lack the transformation elements and those relying on in-house solutions could create potential update issues and security exposures.

In order to roll out the best model for an open economy, sector players need to take the following actions into consideration.

Understand the API value: Data consumption and regulation compliance alone will not create a competitive advantage. It is important to understand where the API adds value and how it aligns with strategic objectives.

Identify new partners: Another important factor is to create an ecosystem with fintechs, other financial services providers and third-parties.

Recognise security: Companies providing data through APIs will have to comply with security and access-management regulations—developing a clear understanding of who is consuming the data and

where it is flowing to. This equally applies to thirdparties in relation to security around accessing and manipulating customer data.

Message variations With differing global open banking implementation messages, players can be forgiven for their uncertainty.

According to Innopays Open Banking Monitor, markets such as the EU, UK and Australia are taking the lead, passing their own regulations and forcing banks to share data. Others, including New Zealand, Mexico, Hong Kong, Singapore and Japan are setting up pilots and publishing API documentation.

When it comes to compliance, in the EU it applies to retail and corporate banks offering online accounts—whereas in Mexico, it is all financial institutions. In Australia and New Zealand, it is the top four major banks.

For mandated countries, OB regulators have set a timeline between 18 to 24 months to share data.

Regulators are keen to foster innovation and let their markets develop solutions.

For example, the Monetary Authority of Singapore issued its API Playbook in 2016, the Financial Conduct Authority mandates higher levels of standardisation allowing Third Party Providers (TPPs) to more easily build and connect to banks’ APIs in the UK and the

International Finance | July 2020 | 65

TECHNOLOGY

THOUGHT LEADERSHIP

OPEN BANKING API MANAGEMENT

Data Standards Body has set customer experience guidelines in Australia.

In some markets, banks are building standardised APIs and making bilateral agreements with TPPs. When it comes to global security and accessibility standards, PSD2 provides maximum detail, acknowledging the difference between gaining access to TPPs through screen scraping information from dedicated web pages and using a dedicated, more secure API.

API economy is the way forward Whatever the variations, it is clear that an API economy is the way forward. Firms using APIs in Brazil report significant increase in revenues, reduced support costs and enhanced service offerings.

For example, when Banco Topázio implemented an API strategy and exposed its foreign exchange service to partner—over 70 fintechs were connected, increasing its currency exchange and debt issue revenue. In 2018, Banco Topázio recorded R$1 billion in forex and debt issue transactions over a nine month period. In 2019, it reached the same figure in four months.

In another example, traditional insurance company SulAmérica integrated its systems with IBM Watson to create a chatbot and reports that around 60 percent of common queries are answered without human intervention.

Even Brazilian retailer ViaVarejo exposed APIs to partners through a marketplace proposition, and today it represents 25 percent of its gross merchandise volume.

Redesign customer journey for better value Interestingly, connected societies tend to create greater demand for API-delivered online solutions and apps.

Statista reports that there are over 3 billion smartphone users worldwide and this forecast is expected to increase by several hundred million in the next few years. In 2013, 73 percent of internet usage was through computers and 27 percent of usage through smartphones. Now internet usage between both devices is at par.

The Global Digital Report says internet users grow by one million a day and over 125 billion devices are expected to connect to the internet by 2030. This

66 | July 2020 | International Finance

The Global Digital Report says internet users grow by one million a day and over 125 billion devices are expected to connect to the internet by 2030

prompts a competition shift which suggests that in order to create new ecosystems and guarantee business continuity, companies will have to connect with other businesses.

New ecosystems are forcing companies to rethink strategies. For example, multinational corporations such as Google and Amazon are ecosystem players having hubs within a wide network of customers, suppliers and producers of complimentary services—in turn creating value through relationships and networks.

Stephen Walsh is Sensedia’s director of sales for EMEA. Founded in 2007, Sensedia is an Application Programming Interface specialist with offices in Brazil, Peru and the UK. The firm has recently provided inputs into the FCA’s Open Finance consultation paper. editor@ifinancemag.com

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TECHNOLOGY

THOUGHT LEADERSHIP

CRYPTOCURRENCY ADOPTION TOKEN ERA

Digital currency promises a frictionless way for people to transfer and use funds

PAVEL MATVEEV CEO OF WIREX

The future of digital currency Despite the rapid proliferation of technology and connectivity during the last halfcentury, the transition from commoditybacked currency to fiat has represented the most significant and enduring change in the international monetary order in recent memory. In 2008, it was the enigmatic Satoshi Nakamoto who released the bitcoin whitepaper, popularising the idea of cryptographicallyverified, decentralised digital currencies as an alternative to government-backed fiat money and ushering in the start of the token era.

A brave new world?

Blockchain-powered cryptocurrencies represent an alternative to traditional systems of money like fiat. By removing the influence of governments and central banks, digital currency can, in theory, take control of money away from institutions and hand it back to the people. Unfortunately it has taken the world a while to come round to this idea.

Despite its inherent potential, cryptocurrency has suffered something of a reputational nightmare during its first decade.

Enterprising criminals, insalubrious investors and institutional reticence have altered the public perception of the nascent asset class.

The crypto bubble of 2017 certainly did not help, as speculators and initial coin offerings (ICOs) capitalised on the opportunity to make

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a quick buck—often at the expense of naive investors.

Fortunately, the focus has since switched firmly from cryptocurrencies as a speculative asset to attempting to solve many of the issues faced by consumers and businesses globally, from faster and cheaper crossborder remittance to banking the unbanked.

However, most ordinary people still face significant hurdles when it comes to using cryptocurrencies in their everyday lives— and that needs to be addressed if digital currency is to achieve mainstream adoption and ultimately replace fiat as the dominant monetary system.

Offboarding and regulation are highly complex For many, cryptocurrency exchanges remain the sole means of buying, trading and storing digital tokens. Although a series of high-profile incidents received a great deal of coverage in the press, major exchanges such as Kraken, Coinbase and Bitfinex are relatively safe to use and any funds stored online are subject to a degree of risk from unscrupulous hackers.

However, it’s not security that represents the biggest challenge for consumers—it is the difficulty of withdrawing funds or offboarding from conventional cryptocurrency exchanges.

Offboarding, whether to another exchange,

wallet or account, usually requires users to convert their cryptocurrency into bitcoin. To physically withdraw funds, further exchange from bitcoin to fiat currency is necessary. Thanks to the inherent volatility of most conventional cryptocurrencies, the value of funds withdrawn or transferred is likely to be different from the original amount.

In addition, there is the thorny issue of regulations.

As financial regulators globally struggle to match the pace of developing the cryptocurrency market, some exchanges continue to operate in regulatory grey areas. This implies that customers’ funds do not enjoy the same degree of protection as they would in a regular bank account.

The solution: crypto-enabled debit cards Several innovative fintech companies that aim to provide alternatives to cryptocurrency exchanges have flourished in recent years. These include solutions that enable consumers to easily buy and exchange a range of digital and fiat currencies using their mobile devices. Wirex cards, for example, can seamlessly convert any fund into fiat allowing customers to spend it like traditional money in stores and online.

Exchanges are still a necessary part of cryptocurrency infrastructure, but they do not

provide the practicality and convenience to support everyday spending. For that reason, crypt-enabled debit cards provide a solution by bridging the gap between traditional money and cryptocurrency.

The likes of Wirex are prioritising the acquisition of local financial licences to offer protection for customers’ assets. In fact, the company is authorised by the UK Financial Conduct Authority under the Electronic Money Regulations 2017 for issuing electronic fiat money and payment instruments, with similar licences in Japan and the US expected soon.

High degree of market volatility is seen Unlike conventional fiat currency, cryptocurrencies are subject to a high degree of market volatility. This means the value of tokens like bitcoin, XRP and ethereum can rise and fall rapidly over the course of a single day. Case in point was at the end of 2017 when the value of a single bitcoin rose from $5,940 to more than $19,190 before plummeting in January 2018.

Volatility can be the result of skewed wealth distribution, with a few high-net-worth individuals or institutions wielding a disproportionate influence over pricing. But the digital currency market is also extremely sensitive to macroeconomic factors and public perception.

International Finance | July 2020 | 69

TECHNOLOGY

THOUGHT LEADERSHIP

CRYPTOCURRENCY ADOPTION TOKEN ERA

Cryptocurrency’s inherent volatility makes it an unsuitable medium of exchange, despite the fact that its underlying blockchain technology allows for secure low-cost payments and remittance outside conventional banking rails.

Stablecoins are a novel crypto concept Stablecoins are a novel class of cryptocurrency backed by stable assets such as fiat money or commodities, allowing them to mitigate the volatility that is characteristic of normal digital currencies. Because they retain value over a period of time, stablecoins are ideally suited for transference of value instead of market speculation.

Cross-border remittance is one example of an industry where stablecoins are poised to revolutionise.

Traditional overseas transfers carried out through methods like Swift or SEPA can take several days to complete and require the participation of various middlemen to facilitate transactions. This is both costly and time consuming. By circumventing standard payment rails, stablecoin-powered remittance is fast, scalable and low-cost allowing people to seamlessly transfer funds around the world. Fiat-backed stablecoins do not even require recipients to convert them for offboarding because they are pegged one-forone to a particular currency such as US dollars or euros.

Mainstream adoption of digital currency will take time Cryptocurrency enthusiasts are an idealistic bunch.

Decentralised digital currency is supposed to represent an alternative to conventional fiat money that takes control away from the agendas of central banks and government institutions and puts it back into the hands of ordinary people. The irony is that widespread adoption of digital currency is unlikely to occur without the collaboration of such organisations.

After all, replacing a system of money that has dominated for nearly 50 years is no mean feat and requires a profound overhaul of the world’s financial infrastructure.

The financial establishment has often been dismissive about the potential of cryptocurrencies to become a mainstream monetary system, citing historical cases of fraud, criminality and a lack of

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Fiat-backed stablecoins do not even require recipients to convert them for offboarding because they are pegged onefor-one to a particular currency such as US dollars or euros

regulatory oversight. As Fran Boait, executive director of advocacy group Positive Money explains, central banks “have been asleep at the wheel over the future of our money system being determined by a small number of banks, payment companies and now tech giants.”

However, government-backed and private organisations around the world are now beginning to recognise the benefits of a tokenised economy over the current system of fractional reserve banking. The Bank of England, Sveriges Riksbank, Bank of Japan and European Central Bank are among those investigating the potential of Central Bank Digital Currencies (CBDCs).

Pavel Matveev is the CEO and co-founder of Wirex,. an industry-leading blockchain payments platform that integrates both traditional and digital currencies. With 15 years of experience in software development and IT management, he has worked with Barclays Capital, Morgan Stanley, BNP Paribas and Credit Suisse. editor@ifinancemag.com