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Banking in Dubai


A new frontier for internationalization Banking in Dubai identifies key global trends in politics, society, technology and economics which affect the financial services & banking industry. It recommends selling highly customized financial services, setting up business intelligence units and innovating new currency derivative products in the domestic environment of Dubai.

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Client Report Banking in Dubai identifies key global trends in politics, society, technology and economics which affect the financial services & banking industry. It also recommends selling highly customized financial services, setting up business intelligence units and innovating new currency derivative products in the legal, political, social and the economic environment of Dubai. Compiled by North Polar Consultancy Services Client: Cater Allen, private banking services.


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Executive Summary There is an increasing amount of involvement by government agencies to prevent future systemic collapse of financial systems.


he financial services industries of most emerging economies such as the South American and Middle Eastern economies have showed quick recovery from the 2008 financial crisis. Liquidity impact in these economies was much less compared to Western counterparts. Financial services institutions need to readily make use of “Big Data” intelligence and mobile banking to better understand their customers and enhance value. Special attention needs to be given to Islamic demographics by offering Islamic financial services. The high net worth demographic in Dubai is attractive for customized wealth management services. There is strong state involvement in the UAE. There are also structural flaws present in the government which have resulted in a culture of limited transparency and an economic environment with risks in single borrower large lending projects.

A monetary union of the Middle East with a single currency “Khaleeji” is to be instated by 2015. Opportunities for delivering innovative currency derivatives in such a scenario are strong. Cater Allen can also benefit from establishing research and intelligence units to gain a better competitive understanding of the local market.


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Contents Trends & Issues: Global State Capitalism Fragile Economies Aging Population Big Data Trends & Issues: Dubai & UAE The Free Trade Zone The State of UAE High Net Worth Individuals The Monetary Union

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Next Steps Recommendation for Action


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Introduction New Territories


he global banking industry has amassed strong trends in the aftermath of the 2008 financial recession. New regulatory frameworks such as the Basel III will push for business model restructuring and a new competitive environment. This report will higlight key trends and issues in the global environment and then in Dubai, the global heart of Islamic financial services sector. It will finally recommend courses of action for Cater Allen in regards to their plans to internationalize into the Middle East in the banking industry.

This report will utilize resources from the following: • • • • •

Boston Consulting Group The World Bank Earnst & Young Standard & Poor McKinsey & Company

to draw recommendations for internationalizing into the Gulf in the complex global banking environment.


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Global Trends State Capitalism


here is an increasing involvement of governments in financial services to help prevent systematic risks erupting in future. This has resulted from the after effects of the 2008 financial crisis. The World Bank (2013) outlines that countries with weak regulation and supervision suffered the most in the crisis and encourages state agencies to provide regulation and enforce transparency. Regulators around the world are expected to enforce higher capital & liquidity rules, for profit trading restrictions and structural changes such as guarding the retail arm of banks from the investments side (The Economist, 2013). A significant proportion of respondents to the World Bank Regulation and Supervision survey (2013 have stated that revisions to current financial regulatory frameworks are under consideration (Figure 1). Affected banks will need to have a risk committee with a chief risk officer, reporting directly to the board of the company. Another highlight of concern is the impact that Basel III will bring. Basel III will enforce a deduction on less loss absorbing assets such as minority interests, goodwill, net deferred tax assets, investments in unconsolidated subsidiaries, and mortgage servicing rights. This is of key concern in the Latin America (Figure 2) where almost 30% of total assets will need to be deducted, removing toxic ones. The impact of fore coming regulatory pressures will bring structural and operational changes. This will affect current finance industry operations as illustrated in Figure 3. On the other hand, this also brings the opportunity to partner with local governments & regulators. Resource and expertise constrained governments should welcome the operational skills that private sector banks such as Cater Allen can offer (Earnst & Young, 2013).

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Figure 1: Of the instutions surveyed by the World bank, a large percentage assert that revisions are being considered to existing financial operations Source: World Bank, 2013

Figure 2: After Latin America and the Caribbean, the Middle Eastern and North African financial institutions face the strongest pressure to consolidate and minimize toxic assets, Source: Worlds Bank, 2013

Figure 3: The World Bank survey asks, to what extent the new regulatory changes will affect current financial operations, Source: Worlds Bank, 2013


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Global Trends The Fragile Economy


tandard & Poor has cut down Europe’s rating to AA- from AAA (Phang, 2013). Similarly, Asian economies have shown woes in trade export and currency strength (Mukoyama, 2013). After showing speedy recovery from the 2008 crisis, Indonesian & Thai economies have started to decelerate. Both Indonesian & Indian economies suffer from currency depreciation, inflation and rising interest rates. The Chinese economy is producing concerns for sustainable economic growth. South Korea faces economic restructuring issues, attempting to migrate from its Chaebol led economy to a creative economy, producing complex issues that can hamper internationalization to the country. Adding to this complexity is an Asian movement to unify 16 countries into a trade union. The bank industry performance of South American countries is much stronger when contrasted with the rest of the world. The economic profit of the industry in Middle Eastern countries is also favorable (Figure 4). Middle Eastern banks have proven to be resilient to the 2008 crisis, showing delayed impact and also less severe impact (Dayal et. al., 2010). Profit & revenues of banks have continued to grow in the Middle East since 2010 and strongly outpaces the global average (Figure 5). Internationalization strategies should take into consideration the local regulations regarding financial institutions in these growing economies, especially in the Middle East where Islamic finance is practiced.

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Figure 4: South American banks show the most economic profit while European ones have costs that surpass income Source: Boston Consulting Group, 2013

Figure 5: Middle East and South America strongly outperform the global average , accumulating more profit with inclining profit growth, Source: Boston Consulting Group, 2013

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Global Trends The Aging Population


lobal demographics are set to drive the future of banking. Figure 7 shows the aging population of several countries in the world and Figure 8 shows increasing global urbanization. This will effectively pose two long term issues for financial institutions. Products need to be developed that meet this ageing population. Business models need to be reconfigured to understand and cater to this changing population (Earnst & Young, 2013). Standard & Poor (2013) reports that median age related public expenditures for developed economies is expected to rise from 17% of GDP in 2010 to 27% in 2050. In contrast, emerging economies are pegged at 11% to 17%. The aging population will be living longer and healthier lives, delivering a strong financial impact on governments. Opportunity for internationalization is strong here and multi-faceted. Strong ties with governments to provide financial product to suit these needs will increase revenues while independent financial services are also an attractive opportunity. Opportunities to manage government assets, funds and develop specific financial products for public healthcare and social security are available. The pressure for highly customized offerings is strongly felt, particularly in the Middle East where demographics are highly religious and banking practices are governed by Sharia law (Aerni, 2013). Regulatory constraints aside, global industry players have opportunities to trade Islamic banking products for an Islamic demographic. These products are derivatives of Islamic concepts of moral behaviour, supportive ventures, mitigated risks and transparency. Such products can prove sustainable alternatives to toxic products such as poorly sourced CDO’s in the West (Iqbal & Mirakhor, 2013).

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Figure 6: More population forcasted to become over 60 years of age, globally, Source: Earnst & Young, 2013

Figure 7: Global rural population shrinking, Source: Earnst & Young, 2013

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Global Trends Big Data & Innovation


he regulatory, technological & infrastructure challenges occurring throughout the global financial system are inevitable while organizations endeavour to increase revenues and minimize risk & operational costs. The avoidance of systemic future risks depend on innovative products to support the financial sector (British Telecom, 2013). In addition to this, customers are more connected to financial services, requiring immediate real time services from banks and financial institutions. There are common trends among banks to present “mobile� money. With the increasing presence of smartphones & tablets (Figure 8), Cater Allen needs to provide functional technology solutions to consumers. These include apps on smart devices with the capability of accessing a fully featured set of the banks services. Customers however, have shown to also demand a hybrid human and online interaction system from their financial service providers. This shows that physical bank branches have become alternate channels of services delivery instead of primary, first point of contact ones. Alongside this, there is a stronger than ever need to understand consumers in this industry. Big Data technologies are key trending buzzwords in global financial services. These Big Data systems deliver unprecedented analytic capabilities and form the basis for future innovation in the financial services market. Cater Allen will need to innovate its business model and improve the way it engages with customers and instil trust, a trait that this industry has lost over the recent years.

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Figure 8: Opportunities to leverage growing technology platforms to enhance customer centricity in banking, Source: Gartner, 2013


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Domestic Issues Free Trade Area & Wage Protection


ubai’s banks are typically subject to federal and local regulations outlined by the Abu Dhabi based Central Bank of the UAE (CBUAE). The CBUAE is the chief regulator of the domestic banking sector. The Dubai International Financial Center (DIFC) is the local financial hub which promotes the growth & development of financial services within the UAE(United Arab Emirates) economy. Members of the DIFC are regulated by the Dubai Financial Services Authority. These registrants can be 100% foreign owned, however non membership will require the financial institution to be 51% owned by UAE nationals. Registering with the DIFC may be beneficial in internationalizing into Dubai because Cater Allen will not be subject to UAE/ local laws. Despite this, Dirham (the local currency) fund management is prohibited, meaning registrants are primarily banks with global operations. Local activities may be undertaken but this will depend on the license granted by the DIFC. Zero tax rate on income and profits are available for Cater Allen. There are also no restrictions on foreign exchange transactions or limits on the deportation of capital from the country. This zone also enjoys a dollar denominated environment and encourages flexible corporate structures. Employment laws in the UAE however, are set by the Ministry of Labour and Social Affairs. Employees have a right to a minimum 30 days of paid leave, sick leave and maternity leave. The Ministry has also recently introduced a local Wage Protection System. The system is enforced to ensure that workers are treated fairly and are paid wages as agreed in their contracts.

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Domestic Issues The State of UAE There is considerable overlap between government agency personnel and financial sector staff in the UAE. The UAE government is an important shareholder in numerous banks and corporations (Oxford Business Group, 2013). They played major role in the 2008/09 financial crisis, injecting capital into the financial system. Moody’s (2013) anticipates that the UAE banking system will maintain strong funding and liquidity profiles into 2014. Moody’s furthers on the highlight that the “cash-rich federal government will continue to remain a key and stable source of deposits, limiting the system’s dependence on confidence sensitive market funding”. Forthcoming Basel III liquidity ratios will also force banks in Dubai to focus on liquidity management. Cater Allen will need to be cautious in Dubai where exposure to government-related issuers will remain to pose asset-quality risks. Structural flaws still remain present such as limited transparency, related party lending along with high loan and deposit concentrations. This also leaves the banking sector susceptible to single borrower or sector specific risks such as real estate and construction. A recent realestate bubble that burst in Dubai remains as an illustration of caution to single borrower lending.


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Domestic Trends High Net Worth Individuals Dubai’s real estate and hospitality sectors are set to experience increased investments from high net worth individuals. Cluttons, a global real estate consultancy states that “Dubai has emerged as a top investment target from the UAE�. The Gulf is home to over 100,100 millionaires, 5% of the population (Astorri, 2013). The number of wealthy individuals is also estimated to have grown by up to 6% per year. Astorri (2013) also asserts that the rich in the Middle East are also very entrepreneurial and more active than their counterparts in the rest of the world. Despite this, private banking here is complex, fragmented and opaque. Industry players have vast opportunities here in private banking, provided that they have the right strategies and the ability to execute them through the complexity. It should also be noted that the 61 institutions that provide private banking services in Dubai target either high net worth individuals or a mass of affluent customers but never both. There also exists general consensus that the private banking sector is developing more rapidly in the Gulf than in developed markets such as Europe and North America (Jeffreys, 2013). The market structure of private banking also shows increasingly competitive trends for onshore banking. Despite this, assets booked offshore still dominate at 70%, sourced from traditional booking centers such as Switzerland and London. Universal banks are competitively acknowledging the growing high net wealth client bands and extending their current services to offer customized services to these individuals, onshore.


Domestic Issues Middle East Monetary Union The Gulf Cooperation Council proposed a currency union in 2000 (Saidi, 2013). With a recent push by Saudi Arabia, Bahrain and Qatar, the unified currency is expected to enter circulation by 2015. The sovereign debt crisis and the 2008 financial crisis in the USA had hindered the progress of this union. The new currency is to be pegged to the US dollar, being the de facto currency for oil sales in the region. Saidi (2013) furthers on to highlight that the unified currency should strengthen bilateral trade and spur investment exchanges in the region. In addition to this, the key outcome will be the creation of new finance that can be directed into trade deals with commercial associates. Furthermore, the currency could also compete with today’s reserve currencies such as the dollar, euro and the yen and serve a common purposea regional central bank, similar to the European Central Bank. This would give the region a powerful global voice, backed by a behemoth economy. The strategic benefits of the union pose another perspective. The integration will lead to investors wanting to increase their returns in the unionized market. Once in circulation, the new currency may also bring adverse conditions for some investors where their assets may devalue inernationally (Aerni, 2008). This uncertainty may spur interest in sophisticated capital management products and derivatives that Cater Allen can provide, minimizing the depreciation of their assets.


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Recommendations For Action Customized offerings for Islamic consumers can bring strong competitive advantages. Cater Allen needs to develop not only personalized services and products but also needs to deliver actual financial products instead of just “red carpet� private bank treatment. Offerings will need to be customized in two ways, Cater Allen need to be able to offer a range of Islamic financial products to cater to an Islamic demographic. Big data analytics and mobile banking can further increase value for Cater Allen’ services. Cater Allen will also need to cater specifically to the high net worth individuals in Dubai. This may be in the development of personalized wealth management services. This can be done by developing competencies in relationship management which can help understand the needs of high net worth individuals in this region. Given the increased competition in private banking in the Gulf, Cater Allen will need to maximize its knowledge and expertise of the local environment. This can be done by organizing specialist intelligence units that employ local personnel. These research and advisory teams will help Cater Allen attain competitive advantage by customizing its financial products that factor complex issues such as culture, seasonality and consumer value. It is imperative that Cater Allen make this a priority because a lack of local understanding has recently caused several international banks to close their operations in Dubai.

Once the sector has made full recovery, there will be and increased competitive environment. Cater Allen can gain first mover advantages with currency derivatives. There will be a high demand for these in the aftermath of the monetary union. Close business relations with DGCX (Dubai Gold and Commodities Exchange) should help bring knowledge and expertise business intelligence that will enable Cater Allen to structure customized futures options and other currency derivatives.

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References Astorri, F. (2013) UAE tops Gulf list for most millionaires. Available at: http://www. -tops-gulf-list-formost-millionaires-503457.html Arabian Business Publishing. (Accessed: 11/10 2013). Badi, M., Razali, N. A., Vathje, S., Storholm, K. and Chin, V. (2008) Islamic Banking, Can you Afford to Ignore it. Available at: https://www. institutions_islamic_banking/ Boston Consulting Group. (Accessed: 11/18 2008). Bank, D. I. (2014) Wage Protection System. Available at: Dubai Islamic Bank. (Accessed: 11/10 2013). Cainey, A. (2013) Technology: The Impact on Asian Finance. Finance. 2013/01 edn. HIng Kong: Fung Global Institute. Company, M. (2013) McKinsey Global Private Banking Survey 2013. Available at: com%2F~%2Fmedia%2Fmckinsey%2520offices %2Fswitzerland%2Flatest%2520thinking%2Fpriv ate_banking_survey_2013.ashx&sa=D&sntz=1& usg=AFQjCNHLVofAN1sr8Ut_7Q44nhNPKhgTiw McKinsey & Company. (Accessed: 11/10 2013). Deloitte (2013) 2013 Financial Services Industry Outlooks. Available at: http:// OutlooksConsolidatedDocument_021813.pdf Deloitte. (Accessed: 01/03 2013). Dietz, M. (2013) A new trend line for global banking. Available at: financial_services/a_new_trend_line_for_global_ banking McKinsey & Company. (Accessed: 11/10 2013).

Earnst & Young (2013) Buiding the bank of 2030: top eight global trends. Available at: http://www. vices/ Banking---Capital-Markets/8-trends-shaping-thebank-of-2030 Earnst & Young. (Accessed: 11/10 2013). Grasshoff, G., Bohmayr, W., Coppola, M., Erlebach, J., Garside, T., Martin, D., Pfuler, T. and Luckoff, P. (2013) Global Riak 2013-2014: Breaching the Next Banking Barrier. Available at: https://www. institutions_strategic_planning_breaching_next_ banking_barrier_global_risk_2013_2014/ Boston Consultng Group. (Accessed: 11/26 2013). Howladay, K. (2013) UAE’s banking system outlook changed to stable from negative. Available at: ing-system- outlook- changed-to stable-from-negative--PR_286411 Moody’s. (Accessed: 11/10 2013). Jeffreys, A. (2013) The Report Saudi Arabia 2013. The Report. 1st edn. Oxford: Oxford Business Group. Jeffreys, A. (2013) The Report: Dubai 2013. The Report. 1st edn. Oxford: Oxford Business Group. Lagarde, C. (2013) The Global Financial SectorTransforming the Landscape. Available at: http:// htm International Monetary Fund. (Accessed: 11/10 2013). Iqbal, Z. and Mirakhor, A. (2013) Economic Development and Islamic Finance. 1st edn. Washington DC: The World Bank.

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Mohiedin, M. (2013) Rethinking the Role of State in Finance. 1st edn. Washington DC: The World Bank. Mukoyama, H. (2013) Asian economic growth for 2014 set to exceed previous yar’s level. Available at: AJ201312280013 Japan Research Institute. (Accessed: 11/17 2013). Phang, S. (2013) European Union Stripped of AAA Credit Rating. Available at: com/news/2013-12-20/european-union-losesaaa-credit-rating-at-s-p-on-weaker-cohesion.html Bloomberg L.P. (Accessed: 11/10 2013). Saidi, N. (2013) Gulf Monetary Union still has currency despite Eurozone Crisis. Available at: bridging-the-gulf/2013/05/06/Gulf-MonetaryUnion-still-has-currency-despite-Eurozone-crisis. html Al Arabiya News. (Accessed: 11/12 2013). Stokes, A. (2013) Global Trends in Financial Services- Strategy. Available at: http://www. Morgan McKinley. (Accessed: 11/10 2013). Sun Gard (2011) SunGard Idetifies Ten Trends Impacting Financial Services in the Middle Ease. Available at: pressreleases/2011/fs111301.aspx SunGuard. (Accessed: 11/10 2011). Tang, T., Holley, B. and Juniac de, C. (2008) The Financial Crisis: Acting on Lessons and Opportunities. Available at: https://www. institutions_financial_crisis/ Boston Consulting Group. (Accessed: 11/15 2008). Tang, T., Holley, B. and Juniac de, C. (2008) Navigating the Complexities of the Middle East. Available at: content/articles/financial_institutions_middle_ east_complexities/ Boston Consulting Group. (Accessed: 11/10 2008). Tang, T., Luther, L. and Dayal, R. (2010) Banking in the Middle East. Available at: https://www. institutions_corporate_development_creating_ value_in_banking_2010_banking_in_the_ middle_east/ Boston Consulting Group. (Accessed: 11/20 2010).

Thiab alTamimi, A. (2013) Gulf Countries take steps to achieve monetary unity. Available at: http:// gulf-gcc-monetary-union-central-bank.html# Al Monitor. (Accessed: 11/15 2013). The Economist (2013) The bite is worse than the bark. Available at: news/special-report/21577190-new-regulationposes-threat-investment-banks-and-more-waybite The Economist. (Accessed: 11/10 2013).

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Banking in Dubai  
Banking in Dubai  

Banking in Dubai identifies key global trends in politics, society, technology and economics which affect the financial services & banking i...