2014 | World Finance

GCC region: a global investment hub?

Posted on January 15, 2014February 20, 2014 by Ashton Wenborn

Harvesting fast economic growth, the GCC region has emerged from vast oil and gas wealth, and years of unspent surplus income. In the last decade the GCC nations have developed, with these rich economies adopting similar structures to the west. These economies are dominated by Sovereign Wealth Funds (SWF) that account for approximately 32.6 percent of the global SWF assets, valued at $6trn. According to the SWF Institute, among the GCC states Saudi Arabia’s Monetary Agency (SAMA) holds the prime position in the volume of assets, with an estimated $675.9bn.

This is followed by the UAE’s Abu Dhabi Investment Authority at $627bn; and subsequently Kuwait’s Investment Authority at $386bn; Qatar’s Investment Authority at $115bn; Bahrain’s Mumtalakat Holding at $11bn; and Oman’s State General Reserve Fund at $8.2bn. It is not surprising that the origins of these funds emanate from oil and gas revenues, and four of the funds are all ranked within the global top 10 by country.

Dream results made a reality
It has been widely reported that both the SWF of Abu Dhabi and Kuwait had made sizeable profits of $30m from their acquirement of shares in the UK’s Royal Mail, after the shares surpassed the issuance price by up to 40 percent in October 2013. The Abu Dhabi Investment Authority (ADIA) and Kuwait Investment Authority (KIA), invested $79m each, giving an immediate return on investment. This is considered an investors’ dream.

It has been widely reported that both the SWF of Abu Dhabi and Kuwait had made sizeable profits of $30m from their acquirement of shares in the UK’s Royal Mail

However, change is on the horizon. The recent instability in western markets, including the downfall in the euro and the US Government Shutdown, have resulted in the GCC shifting its focus of SWF spending to local markets. KPMG reported that this redirection of sovereign wealth would benefit local infrastructure ambitions and accelerate growth and development of local economies. The GCC has initiated mammoth infrastructure development, and it is estimated that by 2020 spending will surpass $142bn on projects in rail, road, sewage and bridge development.

Not only have certain western downfalls contributed to local SWF investment, but the Arab Spring had a very positive impact on three GCC states, as an influx of both local and foreign investors pulled away from affected territories and redirected their investment into other neighbouring states – in particular the UAE, Qatar and Saudi Arabia. This has resulted in property cash buyers in cities such as Dubai creating a rise in property prices, which in turn has resulted in mixed reactions over whether another property boom is imminent or avoidable.

Investing to recoup
Despite speculation that office vacancy rates in Dubai are above 40 percent, Dubai International Financial Centre (DIFC) made headlines as it announced a further AED15bn in expansion over the next 10 years. The attraction of tax free wholly owned entities and being an independent jurisdiction with DIFC laws and regulations written in English and defaulting to English law in the event of ambiguity are all key sellers.

Standard Chartered Bank is one of many to be based in the DIFC area as it moved into a purpose built $140m building. Looking onwards we can expect to see the GCC develop its domestic growth and increase income. Saudi Arabia remains in pole position as the largest Arab exporter, having exported goods and services in the region of $410bn in 2012, accounting for 28 percent of the international total Arab Exports (see Fig. 1).

However, the banking sector raises concerns in regards to short-term stability, as one major issue is the absence of regulated credit agencies. For the last decade both international and local banks have been lending aggressively to consumers without any credit history data.

The UAE proposes to introduce the first credit bureau agent – known as Al Etihad Credit Bureau – by 2015. The UAE Central Bank has been actively working with top banking industry representatives, led by the UAE Banking Federation (UBF) to execute this project.

Once fully operational, it is predicted lending may be at a standstill for up to 12 months, as the banks will be gathering data on the borrowers and their repayment habits. Consumers acquiring up to four credit cards from different lenders, and the absence of credit checks, has historically fuelled a debt driven society.

The use of Post Dated cheques has also caused more moral harm to the economies. Central Banks in the GCC are all actively working to overcome these hurdles. As their economies grow, naturally the banking system requires increased sophistication, however, the west has not given a positive model in regards to banking practices and ethics.

The use of Post Dated cheques has also caused more moral harm to the economies

The rise in domestic lending in Saudi Arabia has been evident in the last few years. In both the first and second quarter of 2012 it added $22.78bn in credit, compared to the whole of 2011, which saw $23.96bn. The local banks have immensely benefited from a retail-spending spree. According to SAMA data, an average of $14.39bn was withdrawn from Saudi ATM’s on a monthly basis over the summer of 2012. The government is determined to heavily develop infrastructure and housing projects.

This will create a national boom for the local financial services sector and the banks will exhibit steady growth in the coming years. With this opportunity, Farazad Investments has the ability to attract institutional lenders to invest into these safe haven economies, as the risk of default is minimal as consumer demand is high.

The UAE has experienced an over saturated banking industry, as more than 50 local and international banks compete in being the best in retail commercial and investment banking to a population of only eight million.

This has impacted negatively on international banks that have cut losses and retreated. In September, Barclays announced plans to sell its retail bank operation in the UAE, as foreign banks cannot compete against cash rich local rivals. The exit of such high profile banks are attractive to local ones, as they are able to increase their retail portfolio – Barclays is not the first UK bank to fall victim. In 2010 the Royal Bank of Scotland retail operations was bought by Abu Dhabi Commercial Bank in a $100m deal. Not only are local lenders on the lookout for buyouts, but international banks such as HSBC Holdings bought Lloyds Banking Group’s onshore retail, corporate and commercial banking operations in the UAE.

Making sacrifices for longevity
Banking worldwide has witnessed bleak times as further job cuts were announced. Unfortunately, these job losses have resulted in major players in Dubai such as Nomura, Deutsche Bank, Credit Suisse and UBS making labour cuts locally. Interestingly, Credit Suisse relocated some of its labour to Qatar, with UBS moving its regional investment banking headquarters to Doha. Morgan Stanley has also moved part of its equities business to Saudi Arabia.

Approximately $3bn of securities were affected in July this year, when Moody’s downgraded 12 GCC banks. The downgrade was necessary to capture the evolving risk of subordinated debt. Within the next few years Basel III will be implemented in all GCC States, and subordinated debt instruments expect to have mandatory loss-absorbing features, triggered by the provision of government support. Moody’s however has noted the government’s in the Gulf have unrivalled support for local banks – in particular State owned – compared to the West, which is not fully supported. In our experience, the best mechanism to provide maximum protection is to combine both subordinated and un-subordinated debt by cushioning the risk rating in the event of a default.

Farazad Investments has introduced a unique in-house formula, which internationally recognised Institutions are in the process of adopting. This formula evolves how traditional funding has been done in the past.

Farazad Investments has introduced a unique in-house formula, which internationally recognised Institutions are in the process of adopting

The possibility of sanctions being lifted on Iran will gravely impact GCC States as oil and gas revenues will deplete. The GCC has profited from the trade embargos on Iran, however, once the veil is lifted it’s every oil state for themselves.

Iran boasts the original location where oil was first discovered in the Middle East, which is now over 100 years old. The Islamic Republic is also the second largest oil producer in the world, and ranked first for largest proven natural gas reserves, with Qatar ranked in third. The UN Conference on Trade and Development (UNCTAD) reported that despite sanctions imposed on Iran, foreign direct investment (FDI) in 2010 exceeded $3.6bn and in 2011 made a new record high of surpassing $4.15bn. The Economist Intelligence Unit (EIU) estimated net FDI would rise by 100 percent by 2014, bearing sanctions in mind. As of 2012, over 400 foreign companies have been reported to have invested in Iran.

These investors include developed nations such as Russia, the UK, Germany, France, South Korea, Norway and even companies from the US – both Pepsi Cola and Coca-Cola have joint ventures with Iranian companies. The UNCTAD positioned Iran in 2010 as the sixth global country to attract foreign investment. Iran has a vision, and by 2025 it aims to attract $1.3trn of foreign investment into the country. Should sanctions be lifted, this vision may become a reality, and Iran’s neighbours will feel the impact.

Many Iranians who have heavily invested in the GCC region have experienced resident visa issues and so those within the GCC States would gladly reinvest back into their motherland. The market in the Middle East in the next few years will undergo a drastic reform – some nations will rise and others may fall. I envisage Saudi Arabia, Qatar and Iran will be among the victors. The change in regime will fuel this positive development and the younger generation will ascend.

For further information email enquiry@farazadinvest.com

BAF supports investment in Latin American agriculture

Posted on January 15, 2014January 9, 2014 by Ashton Wenborn

While much of the attention of the investment community has been focused on Asia over the last few years, Latin America is quietly establishing itself as a serious contender on the global financial stage. Despite a history of turbulent economies, political unrest and financial mismanagement, many global observers believe that the region will offer huge opportunities to investors in the coming years.

Perhaps the region’s most important sector is agriculture, with many Latin American countries producing considerable amounts of food that is then exported to the rest of the world. However, with a lack of modern infrastructure in many countries, as well as difficulties in raising the necessary finances to boost exports, many companies have struggled to translate their potential into international trade.

According to the World Bank, Latin America is set to be a key provider of food for the rest of the world over the next few decades. However, fluctuating exchange rates, stifling tax regimes and restrictive regulations mean many of these agriculture industries might struggle to remain competitive.

Latin America is set to be a key provider of food for the rest of the world over the next few decades

International investors are increasingly looking at providing the finance to help these industries grow. However, there are firms that have provided these facilities for a number of years, including Swiss corporate finance specialists BAF Capital. The company has been in operation since the 1990s, providing finance to many agriculture-based firms from across Latin America.

In 2008 it launched its BAF Latam Trade Finance Fund, which was the recipient of the World Finance award for Best Emerging Markets Fund in Latin America, 2013. World Finance caught up with BAF Capital co-founder and CEO Ernesto Lienhard to discuss the region’s potential, how his firm has successfully built up its operations, and how it is well placed to support the region in the future.

Regulation and customers
Lienhard says that the changes to the banking industry seen over the last decade and a half mean that firms like his are especially well placed to offer the necessary financing to businesses that banks may not be able to fully provide.

“The huge change in the banking industry that has been taking place during the last 15 years – particularly since the crisis of 2008 – led us to take advantage of certain inefficiencies in the sector. Back in the 1980s, while we were still working in the banking sector in Latin America, we realised that the banks as a whole were becoming more bureaucratic year after year. Part of this bureaucracy stems from the fact that the banks have been growing and becoming more standardised. Therefore, more and more time is devoted to complying with regulators rather than to servicing customers.”

It was during the initial stages of the business back in the 1990s that BAF Capital saw the potential for targeting specific regional businesses. “When we started our business back in the 90s as an independent working capital provider we foresaw a very attractive market niche: we noticed the opportunity to become an alternative lender to regional companies that needed higher quality services than the ones provided by the banks. This worked well for several years and became even better for our strategy after the 2008 collapse.”

When the global financial crisis hit in 2008, the problems facing the banking industry were revealed and opportunities for the likes of BAF emerged. “Banks were overloaded with leverage,” says Lienhard. “As a result of this, regulators required additional capital and stricter norms. In this scenario, direct lending became a unique opportunity for investors.”

Despite being headquartered in Switzerland, BAF has affiliates throughout Latin America. “Although the investment management company, BAF Capital, is based in Switzerland, its affiliates BAF Capital SA Brazil, BAF Capital SA Argentina and BAF Capital SA Uruguay are based in Latin America. BAF Capital holds the investment committee.”

The reason, says Lienhard, is to remain in close proximity to its primary clients. “We work very hard to be the best alternative funding source in Latin America. To achieve this goal, we need to be close to our borrowers, understand their businesses and, of course, their financial needs. Therefore, we are present in the countries where all the borrowers are located.”

Direct lending
Typical clients tend to be in the agricultural sectors from across South America. These include “dairy producers, sugar mills, soybean oil crushing companies, slaughterhouses, grain exporters, and juice exporters. All of them are long established medium and large companies with important investments in fixed assets, state-of-the-art facilities and excellent track record as exporters. All of these companies have gone through many political and economical crisis and have managed to overcome them all.”

The fund offers businesses in Latin America direct lending, helping them to boost their exports to the rest of the world. “We have built our own network through many decades of being involved in corporate finance,” says Lienhard. “In a nutshell, we provide pre-export financing of export contracts signed with well-known international buyers. In some instances we take in addition warehouse receipts over inventories or trusts over collection accounts as collateral. In fact, all our transactions are self-liquidating and 100 percent collateralised structured.”

Latin America has been fluctuating since 1492 and in our opinion it will continue fluctuating in the future as well

Because of the unique way the fund has been structured, it is not restricted in the same way as banks in terms of capital requirements. “The group is a niche player, fully focused in a specific region but without the constraints and regulations of a traditional bank,” says Lienhard. “As we do not use leverage we don’t have any restrictions on capital requirements or any ratios to be maintained. The golden rule in our strategy is based on diversification of borrowers, sectors and countries.”

The team of employees the company has built up in recent years has a wealth of experience in corporate finance, as well as in the region.

“BAF Capital’s team has always worked in corporate finance within the banking sector in the region before joining our firm. Most of them worked for institutions like Rabobank, Banco do Brasil, Citibank or Lloyds Bank. We are a team of 64, the majority of us located in the affiliates of Latin America,” says Lienhard.

Through its various fully integrated elements, BAF Capital’s employees focus on deal sourcing, risk analysis, and structuring. While the key team members have been with the company since the beginning and have plenty of banking experience, many of them also have family histories related to the agricultural sector, giving them an advantageous insight into the Latin American industry.

Old fashioned lending
Although there is vast potential in Latin America, many investors are still concerned about the risks posed by the continent. BAF Capital’s strategy is both conservative and old fashioned, says Lienhard. “We apply two key rules regarding mitigation of risk – be close to your borrowers, and diversify. BAF Capital analyses each borrower at the credit committee at least twice a year, and we currently have relationships with more than 100 companies.”

The BAF Latam Trade Finance Fund has enjoyed almost six years of positive returns, defying the fluctuations seen across the continent. The volatility that Latin American economies traditionally see is not a phenomenon of just the last few decades, according to Lienhard. “Latin America has been fluctuating since 1492 and in our opinion it will continue fluctuating in the future as well. Latin America is all about economic cycles. We understand the region from that point of view and try to adapt our strategy to that principle.”

Again, the agricultural sectors are ones that BAF Capital are seeing the most opportunities in. “We are fully concentrated in financing food exporters in the region because this is a traditional activity here, where the comparative and competitive advantages are very clear. The region is the world’s largest exporter of agricultural products. The food exporters that we work with have consistent track records. They have been honouring the export contracts signed for decades.”

The firm’s flexibility also enables it to navigate fluctuations in exchange rates. “Exchange rates and liquidity play a very important role in profitability,” says Lienhard. “The weaker the domestic currency is, the more profitable the export sector becomes. That’s why whenever there is a crisis or volatility that affects the region, our strategy performs so well. Because we are able to provide financing to food exporters that have an excellent business, but are unable to fulfil all their needs from the traditional lenders.”

While the BAF Latam Trade Finance Fund has been the focus of the firm, BAF Capital says it is open to new ways in which it can lend directly to companies in the region. Its focus will remain on the region, and it’s the deep historic ties that the key members of staff have for it that attracts them to Latin America.

“Our families arrived to the region from Switzerland almost 100 years ago. We were born here, so we know the region, the agricultural cycles and their players. In our view it is still an undeveloped market with plenty of potential.”

As Samra wastewater plant expansion continues

Posted on January 15, 2014January 9, 2014 by Ashton Wenborn

The Hashemite Kingdom of Jordan faces significant challenges in its water sector due to a combination of scarce water resources, high population growth and increasing demand. The water sector receives special attention from the government and donors because it represents the backbone for integrated socioeconomic development of the kingdom.

Jordan is the fourth most water-poor country in the world. As per Jordan’s Water Strategy for 2008-22, about four million Jordanians (63 percent of the population) are served by sewerage systems producing about 100 million cubic metres of effluent per year that is reused primarily in agriculture. In fact, in 2011, more than 60 percent of crops in the Jordan Valley were irrigated with treated wastewater.

In the medium-long term, with a growing population and increasing demand, Jordan is unlikely to be able to satisfy the corresponding needs from renewable water resources. Therefore, sustainable patterns of water use are being established to meet the requirements of Jordan’s social and economic development objectives, including basic agricultural production. No single action can remedy the country’s water shortages and the Government of Jordan, with the assistance of institutional donors, has launched coordinated actions to increase overall water availability.

One of these actions is the procurement of an expansion of the As Samra wastewater treatment plant (WWTP) launched in 2009 by the Government of Jordan (represented by the Ministry of Water and Irrigation (MWI)). In 2010, the Millennium Challenge Corporation (MCC), a US Government development institution, committed $275.1m for development projects in Jordan, including substantial grant financing toward the expansion of the As Samra plant, among other projects in the water sector.

Awarded in 2002 through an international competitive tender to a consortium composed of SUEZ Environnement/Degrémont and Morganti/CCC, and completed in 2008, the initial As Samra Wastewater Treatment Plant (phase one) was designed to treat the wastewater of 2.3 million inhabitants of Amman. This modern plant replaced the old polluted system of stabilisation ponds, dramatically improving both the quantity and the quality of water available to the downstream agricultural areas that rely heavily on treated water for irrigation purposes. The equivalent of 4,000 farms (10,00ha) are irrigated with As Samra high quality water.

To address the needs of a growing population, the Government of Jordan decided in 2009 to expand the plant, putting in place a 25-year build, operate and transfer (BOT) contract. The expansion project provides for an increase in treatment capacity from 267,000 to 365,000 cubic metres per day, and includes the refinancing of the project company’s existing borrowing. The expanded plant will be fully operational in 2016 and will serve 3.5 million inhabitants of Greater Amman through to 2025. It came into force on July 12 2012 after a long and challenging negotiation.

As Samra key figures

37,500m³

Total concrete poured

6,100t

Concrete reinforcing steel

270t

Stainless steel pipes

141km

Process cables

6.4km

Underground fibreglass pipes

840people

Peak labour force on site

Investment structure
Investment decisions in the infrastructure sector through private sector engagement, and their implementation, remain a challenge, especially where there is a lack of excludability. Water infrastructures often have high social but an unacceptable commercial rates of return: substantial investments, long gestation periods, fixed returns, etc. It is therefore essential that governments support infrastructure financing through appropriate financial instruments and incentives.

Capital grant as an instrument to make social projects commercially viable is an accepted economic proposition. It can be a challenge though to make it socially acceptable. A diverse mix of financing was required to successfully finance the $270m project:

A total of $27.4m generated by the project company out of the cash flows up to completion is reinvested into the expansion; A $93m grant from the MCC; and
A JD105m (approx. $148m) debt package from a syndicate of local banks led by Arab Bank (including $42m for the refinancing of the outstanding phase one loan).

The sponsors managed to mobilise $175m of debt and equity despite the profound political and social changes taking place in the region and the adverse financial impact these have had on Jordan.

The tenor on the commercial loan is 20 years. It marks the longest maturity Jordanian banks have ever offered for a Jordanian dinar-denominated limited-recourse loan. This loan offers the MWI a natural and efficient hedge against potential devaluation.
The interest rate during operation is a floating rate based on the average of the prime lending rates announced by a syndicate of four local banks, minus 50 basis points, which is again extremely competitive.
The debt-to-equity ratio is 80:20. Cash flows from the phase one operation were securitised to support the sponsors’ equity contribution towards the expansion; i.e. no fresh money is injected by the sponsors, limiting their exposure in Jordan. This unique source of funding is one of the key features of this transaction. It was accepted by the MWI, the lenders and the MCC based on the existing plant’s proven performance and Degrémont’s technical know-how.

While the events of the Arab Spring did not directly impact Jordan, they had some indirect effects, which in turn prolonged completion of the transaction. Additionally, the contagion of the European debt problems and the implementation of Basel III by international banks always threatened to constrain liquidity for the expansion. The politico-economic climate in Jordan changed dramatically between 2010 and financial close in July 2012:

Increased scrutiny of the actions and decisions of ministers and public officials. In Jordan this led, on at least one occasion, to the replacement of the whole cabinet of ministers or a collection of ministers, including the Minister of Water and Irrigation. This inevitably affected continuity in terms of the administration of the transaction.
Interruption to the supply of natural gas from Egypt. This affected profoundly the budget deficit of Jordan, and thus the economic outlook of the country. In November 2011, S&P lowered Jordan’s long-term local currency sovereign credit rating.
Decision of the Central Bank of Jordan to increase interest rates several times in 2012. Significantly, the Arab bank-led syndicate held their pricing as per their 2011 commitment, which meant the sponsors avoided having to reopen discussions with the MWI in the lead up to financial close.

The expansion would not have been possible without the grant funding from MCC. However, the development of a finance structure to accommodate MCC’s funding conditions presented the sponsors and lenders with a significant number of challenges. MCC was created as an independent government corporation by the US Congress in January 2004 to provide grants to developing countries. Unlike an export credit agency or a multilateral donor, MCC is not required to secure a return on its investments.

However, MCC requires strict adherence to its policies and regulations and many of these had a direct impact on the structuring of the project and finance documentation. As the expansion was the first BOT co-financing with the private sector undertaken by MCC, and also because the expansion was not subject to a competitive tender, MCC was closely involved in all aspects of the transaction. This had a significant impact on the timetable for closing the expansion.

Cost analysis
As with many international financing institutions, MCC will typically seek to select the private sector partner through a open competitive bidding process. However, in the case of the As Samra project, the BOT contract between MWI and the project company (the ‘project agreement’) provided for direct negotiation between the parties in the expectation that the plant would be expanded before the expiry of the BOT contract.

[E]ffective stakeholder engagement plays a critical role in the successful completion of all stages of infrastructure projects

Therefore MCC’s teams developed a methodology to complete a cost analysis on the non-competed proposal of WWTP expansion to ensure that the proposed construction price is based on reasonable cost build up and includes a defendable level of overhead and profit.

The financing was also complicated by the inability of the MCC to enter into any direct contractual relationships with the sponsors or the lenders. The challenges included:

Inability of the lenders to enter into any form of inter-creditor agreement with the MCC;
Structuring the project agreement such that the project company has appropriate remedies in the event of non-payment of the MCC grant funding;
Processing and administration of payments in accordance with the MCC’s requirements;
The absence of MCC credit support in the form of a letter of commitment or any other security;
No mechanism for the MCC and the lenders to consult and collectively make decisions, e.g. on matters requiring MCC and lender consent, such as waivers or amendments to transaction documents;
Separate approval paths in connection with disbursements of MCC funding and debt.

Probably the most challenging aspect of the expansion financing were the conditions that had to be be satisfied by the project company for the drawdown of MCC funding. These are strict, even in comparison to some multilateral disbursement conditions. Lenders would be exposed to a very significant funding shortfall in the event any of these conditions were not satisfied and MCC funding is not forthcoming. This necessitated structuring the documentation in such a way as to mitigate this risk to the lenders. Both the MCC and the lenders were reluctant to fund ahead of each other.

As a result, financial close and satisfaction of the initial conditions of the MCC disbursement had to occur at the same time. A creative solution was devised whereby notices, certificates and drawdown requests were simultaneously exchanged on the day of financial close so as to achieve satisfaction of the conditions for initial disbursement of MCC funds contemporaneously with first drawdown of the debt.

Similarly, the MCC’s ongoing obligation to provide its funding is dependent on the funding commitment of the banks. This resulted in the sponsors having to accept the MCC and lender drawdown tests designed to ensure that neither the MCC nor the lenders are ever in a position where they have funded in excess of threshold ratios of debt to MCC funding and other threshold ratios involving equity investment and cash from operations. Despite these challenges, the grant funding enabled the sponsors to offer an affordable tariff, benefiting the government and local ratepayers without subsidising the private sector.

As Samra Plant –

Key Stakeholders

Client:

Government of Jordan represented by the Ministry of Water and Irrigation

Project companies:

Samra Wastewater Treatment Plant Company and Samra Plant Operation and Maintenance Company

Sponsors:

Suez Environment, its subsidiary Degrémont, and the Morganti Group – Consolidated Contractors Company

Donor:

Millennium Challenge Corporation; an innovative and independent US foreign aid agency that is helping lead the fight against global poverty

Grant fund manager:

Millennium Challenge Account; a limited liability company owned by the Government of Jordan. It was established in June 2010 to manage and implement the programmes funded by the Millennium Challenge Corporation in accordance with the compact agreement and international best practices

Lenders:

Lender syndicate led by Arab Bank

Beneficiaries:

Amman, Zarqa and Al Hashimiyya populations, as well as farmers irrigating crops with King Talal Reservoir water and along Wadi Zarqa

Stakeholder engagement
In the long and complex process of designing, financing, building, and operating major infrastructure projects, stakeholder engagement has often been something of an afterthought. The effective stakeholder engagement plays a critical role in the successful completion of all stages of infrastructure projects; the operation of the As Samra plant, as well as the development of the expansion, illustrates the benefits of an inclusive approach. Affordability is a must but represents only one aspect of acceptability.

Stakeholder engagement refers to effective communication and coordination with all the individuals or groups who have a stake – be it commercial, financial, political, personal, or otherwise – in the outcome of an infrastructure project. Owing to its complexity and wide-ranging impacts, the As Samra WWTP has a large and diverse array of stakeholders, ranging from the banks that risk capital to politicians who risk reputation, from those concerned about nature protection to the neighbourhood leader concerned about local economy preservation.

As soon as operations started on the phase one plant, attention was paid to the acceptability of newly built infrastructure. Work on perception and expectations started with local stakeholders aiming to improve understanding and knowledge about the plant. Contribution to local development takes place through site visits all year long; the QHSE department of the As Samra WWTP, the municipality and the primary local stakeholders (mainly farmers), jointly define priorities and develop action plans (treatment of insects, sidewalks etc.)

During the planning phase of the expansion, early engagement with citizens impacted by the project provided the opportunity to build consensus around the purpose of the expansion and its benefits. Participants showed interest in job opportunities created during expansion phases, and asked about the accessibility to these openings. Working opportunities for women were explored with special care, identifying the necessary points in the job advertisement to motivate women to apply.

Construction of the expansion started in October 2012 for a total of 36 months; a workforce of about 1,950 workers and staff will be mobilised on site at the peak period. The emphasis was put on clear communicating, whether with politicians or the public. Additionally, a joint recruitment programme was established with the municipality to promote local employment.

The PPP (public-private partnership)/BOT model is well established and understood. What made Samra different was the role and requirements of the MCC that in many instances conflicted with the expectations of the sponsors and the MWI and, to some extent, with the lenders. However, throughout the whole negotiation period, and even now while the construction of the expansion is underway, the Government of Jordan, the MCC and the sponsors worked together to set up this innovative financing.

This was critical to developing a sustainable project with an affordable tariff for the community and the country while offering high performance service. The MWI and the MCC’s trust in the sponsors’ ability to develop the expansion was a key element to the negotiation, and will make As Samra one of the largest and most modern wastewater treatment plants in the Middle East.

Myanmar: investment soars ahead as economy matures

Posted on January 14, 2014February 3, 2015 by Ashton Wenborn

The investment prospects in Myanmar have taken flight in recent years, and although the burgeoning nation is partway through a phase of economic transition, investors remain guarded in light of the inherent pitfalls of committing to a developing nation. World Finance spoke to Aung Ko Win, Chairman at KBZ Group of Companies, about the investment landscape in Myanmar, the reasons underpinning recent economic growth and the many opportunities to be realised there in the near future.

What is your position within the local Myanmar economy?
KBZ Group is a Myanmar-based and local-owned conglomerate, which was founded over two decades ago and represents market leaders in the fields of banking, insurance, aviation, mining, agriculture, infrastructure, trading, manufacturing, healthcare, hospitality and so forth. Our core business, however, is in the financial and transportation sectors.

We represent Kanbawza Bank (KBZ Bank), which is the largest privately owned bank in Myanmar in terms of capital base and branch network coverage. McKinsey & Company reports that KBZ Bank represents 51 percent of the overall private bank market share, and in 2013 KBZ Bank accounted for 36 percent of loans from domestic private banks, according to the Central Bank of Myanmar.

Due to our charitable activities, people in Myanmar have great trust and confidence in the KBZ brand and, as a result, we are able to leverage this reputation in expanding upon our market share. For example, we also represent Myanmar’s leading insurance provider, iKBZ (insurance Kanbawza), which is the first private insurance company of its kind to exist after 50 years of monopolisation by the government.

In the transportation sector, we have two airlines – AirKBZ and MAI. Established in 2010, AirKBZ (Air Kanbawza) is a domestic airline that spans 30 destinations and represents 30 percent of the domestic market share, according to Reuters, whereas Myanmar Airways International (MAI) is a legacy airline and the national flag carrier of Myanmar. KBZ Group recently acquired a 100 percent stake in MAI, and as a result occupies a dominant position in the region in terms of travel routes and destinations across East Asia.

KBZ Group is also known for its various CSR initiatives and, due to its contributions to various causes in the health and education sectors, along with religious, social and disaster relief, KBZ Group has come to be recognised as the most charitable enterprise in Myanmar. Moreover, the company demonstrate a willingness to strengthen transparency and accountability in Myanmar, and has been recognised as the highest national taxpayer for several years running now.

Myanmar in pictures

A man is seen farming land in Myanmar. The country has a strong agriculture sector ripe for investment.

A gem dealer examines the quality of a jade stone before purchasing it at a market in Mandalay, Myanmar. The country generates considerable income from the mining of precious stones.

KBZ Group employees seen assisting customers in its flagship bank.

Leading by example, I was awarded the first ever State Excellence Award on April 30, 2013 in Myanmar. The award is conferred by the President of the Union of Myanmar for being the highest tax-payer for successive years and the largest contributor to the welfare of its people and societies. This is a very progressive movement from the Myanmar government to encourage the CSR initiatives in Myanmar and acknowledge me as a role model for future generations.

What are the challenges that KBZ Group faces on a daily basis?
At KBZ Group, we uphold an entrepreneurial spirit in the face of adversity, which is why we see challenges as opportunities to excel. On a group level, we need to make sure that our existing businesses continue to be the market leaders in their respective sectors. We also focus heavily on corporate development activities – structuring partnerships into new areas of lucrative businesses; and we are finding ways to create synergies via internal M&A activity and restructuring.

On the portfolio company level, we focus on a few key points, which include how we can maximise our profitability and the interests of our stakeholders. We also look into how we create a good corporate culture, how we build an outstanding management team, and how to create enterprises with strong corporate governance.

We want to serve the interests of all our stakeholders, including our employees, suppliers and customers. We believe doing good for the people is excellent business practice, and will pay dividends in the long run. In order to do that, we want to create a strong corporate culture based on meritocracy, accountability and transparency. With a strong corporate culture we can instil strong corporate governance so that we can institutionalise our businesses and transform them from SMEs to public companies.

What is the corporate culture at KBZ Group?
True to our roots, KBZ Group has always focused on serving the people of Myanmar. Although we have grown in size, we are still very much focused on giving back to the communities in which we work. All of our businesses revolve around a simple core mission, and that is to provide quality services to the people of Myanmar.

We want to serve the interests of all our stakeholders, including our employees, suppliers and customers

The company has a relatively flat corporate structure. Even at our portfolio company level, senior management are actively involved in managing the day-to-day operations of their respective businesses.

On the group level, we also actively monitor the performance of our portfolio companies. We believe such an approach facilitates faster and more efficient decision-making by leveraging the synergies of our diverse businesses and our sector-based specialisations.

At KBZ Group, we consider every one of our employees a part of our extended family, so we go out of our way to show that we care. For example, we provide one of the most comprehensive compensation package programmes in Myanmar, which includes daily transportation, subsidised rent and mobile purchase, educational assistance, meal and uniform allowance, generous pension and healthcare plans, and an annual bonus.

How do you position your firm in such a transitional period?
At KBZ Group we are well aware of the challenges at hand. After being isolated for half a century, we have had to catch up with a lot of things and for this reason our core strategy is to focus on our people. For example, at our KBZ Bank, we have hired expatriates at key positions and our banking executives come from regional banks such as MayBank and United Overseas Bank (UOB), as well as international banks such as UBS, Citi, and Bank of America.

Through our correspondent banking partners such as Japan-based Sumitomo Mitsui Banking Corporation, Thailand-based Siam Commercial Bank and Singapore-based UOB, we have been sending our local executives for extensive training on a regular basis.

We will no doubt continue to depend on foreign experts until the local talent pool is capable of providing services of an international standard, although I believe our progressive hiring practices will allow us to be better positioned to negotiate future challenges.

An equally important component of our strategy is to strengthen our financial position. We believe that it is essential that we be fully prepared to take our portfolio companies for initial public offerings.

As a result, to remain competitive, we will need to raise additional capital to fuel our expansion in the next five years. Taking our companies public will not only provide capital, it will also allow the participation of strategic investors whom we can partner with to take our portfolio companies to the international markets.

We will also be able to structure more competitive compensation packages, which will include performance-based stock options to attract and retain key employees across all of our portfolio companies.

Has Myanmar progressed recently?
A newfound openness in Myanmar is bringing a new breed of traveller. Instead of the regular tourist crowd, we are seeing more businessmen in expensive suits, striking deals in crowded business lounges at various five-star hotels across Yangon. There is good reason for their interest in Myanmar.

This country boasts many green-field investment opportunities across various sectors and, despite the numerous challenges associated with newly developing nations, we are cautiously optimistic that Myanmar will prove a financially rewarding investment proposition in the long term.

This country boasts many green-field investment opportunities across various sectors

First of all, the global investment landscape favours positive development in Myanmar. With China’s transition from export-driven to consumption-based economy, the southeast Asian region as a whole will benefit.

More importantly, ASEAN’s commitment to move towards the integration of one regional market will benefit Myanmar via export opportunities to more than three billion customers in ASEAN countries and markets.

As a newly appointed developing nation, Myanmar harbours huge potential for growth. Between 1990 and 2010 Myanmar’s GDP growth averaged 4.8 percent – still significant growth in a new world order of sluggish global economies hit hard by worldwide recession.

Once Myanmar opened its doors, it grew 5.3 percent, 5.5 percent and 6.5 percent respectively for FY2011, FY2012 and FY2013 respectively. The World Bank estimates that Myanmar will grow 6.8 percent for FY2014 and the Asian Development Bank (ADB) has also reported similar figures of 6.8 percent for FY2014 and 7-8.0 percent for every year until FY2030.

This forecast coincides with McKinsey’s predictions that Myanmar’s economy will quadruple in size by FY2030 (see Fig. 1). We believe, given the rapid and positive pace of reforms, Myanmar could continue to grow in this way, fuelled by a steady inflow of foreign direct investment (FDI). The World Bank previously reported that FDI accounted for 3.7 percent and 5.2 percent of GDP respectively for FY2012 and FY2013, and FDI continues to increase as Myanmar rolls out the red carpet for foreign investors and drafts more investor-friendly laws.

Most importantly, in July of this year, Myanmar acceded to the New York Convention on the Recognition and Enforcement of Arbitral Awards, which was another significant legislative reform. This allows the government to move ahead with ratifying domestic legislation in line with the New York Convention.

We believe that the scale of opportunity far outweighs the challenges associated with developing nations. First of all, Myanmar needs to have the right regulatory framework in place to create a favourable investment landscape and, in the meantime, such changes should not come at the price of compromising the interests of the people in Myanmar.

Capacity building is also another pressing issue in rebuilding the country. Myanmar must take into consideration the required infrastructural developments that so often coincide with economic growth, but most importantly, the country needs to focus on corporate governance and transparency in order to keep on winning confidence from foreign investors.

What type of companies would benefit the most by investing in Myanmar?
In terms of growth sectors, McKinsey has highlighted seven key areas for consideration. These range from energy and mining, manufacturing, agriculture, infrastructure, tourism, financial services and telecommunications.

Manufacturing, agriculture, infrastructure, energy and mining in particular will be the essential catalysts in driving growth, as when they’re combined they represent 85 percent of the total growth opportunity.

Myanmar offers a comparative cost advantage in manufacturing, which is unusual in that high labour-intensive industries are so often relocated to a country with lower labour costs. Therefore, the manufacturing sector will be another key driver for Myanmar in sustaining economic growth and boosting employment.

Currently, the manufacturing sector constitutes less than $10bn in GDP and employs fewer than 1.8 million people. However, if labour intensive companies were to move their operations to Myanmar, manufacturing could contribute as much as $69.4bn in GDP and employ more than 7.6 billion people.

Of the various sectors, we believe that the agriculture sector will continue to play an important part in the development of Myanmar. We estimate that this sector employs more than 52 percent of the total workforce, accounts for a significant share of total exports (see Fig. 2), and contributed 44 percent of the $21bn GDP in FY2010.

The extractive industries also represent an important area for consideration and due to half a century of economic isolation, Myanmar still harbours significant reserves of oil and gas. Of all the country’s exports, natural gas has been the key economic contributor in that it accounts for the single largest export item on Myanmar’s books. Natural gas exports surpassed the $4bn mark in FY2013 and exhibited 14.3 percent growth on the previous year, which accounted for $3.5bn.

The World Bank expects natural gas production in Myanmar to increase significantly in FY2014 as new fields come online. Currently, major offshore oil and gas operations are taking place in Yadana, Yetagun, and Shwe, while Zawtika is in the pipeline. Moreover, major onshore oil and gas operations are centred on Yenangyaung. These resource bases account for 67 percent of Myanmar’s total exports income. Similarly, Myanmar is the world’s largest producer of jade and is also the world’s top producer of ruby and sapphire. For the FY2010, official data shows that a government auction sold $1.7bn in value on jade alone.

The telecommunications, media and technology industries offer tremendous opportunity for growth, being a sector that will allow Myanmar to leapfrog into the 21st century and move towards more sustainable development. The penetration rate of mobile subscribers stands at less than 10 percent of the total population.

However, the government has recently awarded two mobile telecommunication licenses to Norway-based Telenor and Qatar-based Ooredoo, which will pave the way for IT vendors and suppliers to participate in the sector. As a result, this industry could see dramatic changes made to areas of government, banking, health and education.

The infrastructure sector is also promising, yet it is unable to support the current rate of economic growth, especially in accommodating the gross scale of urbanisation. Currently, Myanmar’s urban population remains very low; however, we anticipate a demographic change in the near future, requiring that investment be made in infrastructure to accommodate a growing urban population.

What advice would you give to a firm considering investing in Myanmar?
I believe that macroeconomic and geopolitical factors will make investing in Myanmar very lucrative in the long run. Most importantly, we believe that for many green-field investments, the government is willing to make major concessions (for example extended tax breaks, 50+10+10 land leases), which will ensure investment opportunities are made extremely accessible.

As with any developing markets there are risks, including the operational risks for many firms without the experience of operating in Myanmar. However, a lot of the risks can be eliminated by means of embarking upon a joint venture with a local partner who is reputable, profitable and accountable.

Under KBZ Group, we have over a dozen businesses which have been operating successfully for a long period of time. Our partners can capitalise on our experience and expertise in expanding their presence in Myanmar.

Due to the progressive nature of our group, we have already hired a significant number of foreign executives, including investment bankers, who are well versed in structuring intricate deals that can be mutually beneficial to us and to our partners.

What would benefit the country’s economy?
We believe that it is a classic catch-22 scenario. The regulatory framework is not ready to accommodate all the needs of foreign investors, while at the same time regulators cannot create regulations for industries that are yet to exist in Myanmar. We also understand that it will take a bit of time to come up with a comprehensive regulatory framework.

A lot of critics have been commenting that the changes happening in Myanmar are too slow. In pursuit of economic growth, some of the developing countries have completely ignored political reform, which could have adverse effects on the country as the developing nation transforms into a developed nation.

Within the last 24 months, we have made significant progress with regards to political reform and once we have laid the foundations in our political system, economic reform will become more effective and easier to implement.

What do you think of the Yangon Stock Exchange at the moment?
Other than investing in land, there are no venues to channel investment in Myanmar. This is one of the reasons why the land prices have been skyrocketing in Myanmar. A stock exchange in Myanmar will drive down the land price and make investing in the country more viable for a greater portion of investors. Furthermore, with the availability of capital markets, more SMEs will receive the funding they so desperately need to grow their companies to the next step.

What are your final thoughts for the readers of World Finance?
China took 30 years to become a world-class economy. Due in large part to increased globalisation and technological advancement, Myanmar can cut that time frame by half. For this reason I believe that companies should take heed of the first-mover advantage in Myanmar and take advantage of concessions that may well not be available down the road. Of course there are challenges, but in the case of Myanmar, I do believe that ‘better late than sorry’ might be a questionable judgement.

VTB Capital adapts to changing asset management landscape

Posted on January 14, 2014January 9, 2014 by Ashton Wenborn

Russia’s waning economic growth has quite understandably had an effect on financial markets. However, there remain a few players who’ve successfully adapted to the changing climate and now look set to capitalise on an influx of new opportunities. World Finance spoke to the CEO of VTB Capital Investment Management (VTB Capital IM), Vladimir Potapov, about the ways in which the country’s economy has been affected in recent years and how the business of asset management has shifted its focus accordingly.

How have recent changes to the economy affected asset management in Russia?
Changes are inevitable when growth slows and down-to-earth expectations replace trend extrapolations. The most positive of these changes is that the investment management industry is being cleansed of non-committed players and those who survive are becoming more robust, efficient and client-oriented.

Our business strategy has seen a very logical shift from growth to efficiency. The investment process has improved, risk management has become a more integral part of the business, incentive schemes have become long-term oriented, and the focus has shifted from simply selling a product to selling it properly.

How would you describe VTB Capital Investment Management’s position in the Russian market?
VTB Capital IM is one of the key business divisions of VTB Capital, Russia’s leading investment bank. This connection provides VTB Capital IM with unrivalled insight and access to the markets, as VTB Capital holds a leading position in the debt and equity capital markets internationally, as well as in the Russian and CIS league tables.

We believe that our local presence and extensive experience, focusing on Russia and the CIS, combined with the global distribution of our products to a diverse group of investors, sets us apart from our competitors. We offer a full spectrum of investment strategies for active investment in Russia and CIS stocks, bonds, balanced strategies, absolute return, real estate and venture capital vehicles. We are our own product, and our task is to ensure that this product is of the highest quality, so that if an investor – be they an individual, educational endowment or international sovereign wealth fund – is interested in Russia and the CIS, they will choose VTB Capital Investment Management.

In just three years, VTB Capital IM’s total AUM has increased by 1,323 percent from $0.4bn to $6.2bn (approximate figures). This has been made possible by a strong development strategy, a high degree of professionalism from our team and having an optimal risk management structure in place. We plan to further expand our range of investment products, which will offer clients interesting investment solutions and strengthen our market position.

What services do you offer and how do they differ from those of your competitors?
We believe that our on-the-ground presence, research, vast local market experience, and dedication to compliance and risk management set us apart from our competitors. Our main products and services include the management of open-end and close-end funds; investment fund advisory; discretionary managed accounts; as well as venture capital vehicles.

We bet on growing demand for unique technology and innovative business models specifically tailored for different industries

Institutional clients are one of the key segments for us. Our client list includes 30 of the largest pension funds, insurance companies and endowment funds in Russia, making us a top asset manager for Russian institutional clients.

VTB Capital IM offers a diverse line-up of 32 mutual funds with varying investment strategies, including investments in foreign assets. The company offers money market funds, bond funds, hybrid funds, index funds, diversified equity funds and Russian sector funds.

Our venture business has backed over 30 companies, rapidly growing sectors of the Russian economy including cloud technology, artificial intelligence, nanotechnology, energy efficiency, Russian e-commerce and internet consumption. We bet on growing demand for unique technology and innovative business models specifically tailored for different industries.

VTB Capital IM’s award winning Portfolio Management Business has 35 front-office professionals headquartered in Moscow. We take the protection of our clients’ assets very seriously and insist on gaining a firm understanding of their investment goals and restrictions. We thoroughly monitor fund portfolios to ensure we comply with fund regulations, fund-specific investment restrictions and objectives.

Tell us a little about your background in asset management
I started my career in investment management at the beginning of 2003 after graduating from the People’s University of China in Beijing, and the Higher School of Economics in Moscow. I worked at Troika Dialog Asset Management for over seven years as chief portfolio manager and became an associated partner in 2006. I joined VTB Capital IM as global head of the portfolio management business and CIO in 2010, and took on the role of CEO in February 2013. As a member of the Young Presidents’ Organisation, I take an active role in fostering entrepreneurship in Russia.

How have you changed the firm’s strategy?
After I joined in 2010 we developed a three-year strategic development plan for VTB Capital IM, which was successfully implemented. This plan focused on the fastest-growing segment of the Russian and CIS AM industry – institutional money – and also called for diversifying our business, building effective distribution in retail with our mutual funds and launching the first funds for international investors. This was all done based on three steadfast principles of investment management: understanding the needs of our clients, outstanding investment performance, and reliability.

Today, these principles have become the pillars of our business. Our team has the ability to identify and profit from niche emerging market investment opportunities where inherent, exploitable market inefficiencies exist. I believe the strategic development, professionalism and risk management structure at VTB Capital IM have helped transform the company into the leading investment management business it is today.

A new three-year strategic plan is now underway, with a focus on diversifying our client base to international institutional clients and the region’s emerging middle class, offering our award winning Russia and CIS-focused products and mutual funds.

What changes do you expect to see in Russia’s economy in the near future?
We see Russia’s growth slowing down due to softer demand for commodities and a high-base effect coming into play. But for the first time in many years the Russian economy is entering a period of low and stable inflation. We believe this process, which Russia has experienced since 1998, to be the most important macro development yet to be appreciated by financial markets.

Disinflation supports both the equity and fixed income markets and promotes healthy savings and investment processes. Russia has relatively high national (see Fig. 1) and personal savings rates, but only a small fraction of savings are being channelled through the domestic investment management industry.

fig1

The reasons for this are that the industry is relatively young, bank deposits have a preferential tax treatment compared to investments in securities, and deposit rates for individuals are strong in real terms. We expect this to change as the domestic investment management industry develops and banks’ appetite for deposit funding subsides. Another important area of change is the pension system. We hope that the regulatory overhaul of non-state pension funds will result in better industry oversight, as well as a better alignment of investment processes with a view to long-term capital appreciation.

Do you have any plans to expand to new markets or launch any new products in the near future?
VTB Capital IM’s most recent business line is an international strategies platform catering to international institutional investors. The investment team places strong importance on a diversified and fundamental stock and bonds selection process, while focusing on liquidity and preservation of capital. The actively managed strategies offer accredited investors exposure to undervalued Russian and CIS equity and fixed-income markets.

In 2014, VTB Capital IM plans to offer a Russia and CIS Debt Fund in UCITS IV format domiciled in Luxembourg and available to professional investors in Europe. The fund’s investment objective is to achieve medium/long-term capital appreciation by investing in a portfolio of Russian and CIS fixed-income instruments, denominated in local and international currencies. Investments may include fixed income securities issued by governments, local municipalities, corporate and other issuers in Russia or other CIS countries, including Eurobonds and convertible bonds.

The fund is denominated in US dollars and utilises the same portfolio management team of other award winning VTB Capital IM fixed-income strategies, with a total AUM of more than $3.6bn. This Luxemburg-based UCITs fund will borrow the investment strategy of the well known and top performing VTB Treasury fund, which has more than doubled the investment performance of the IFX- Cbonds Index since inception.

Aside from new products, VTB Capital IM has big global expansion plans. To attract large amounts of capital and achieve top quartile investment performance, it was necessary to utilise an institutional approach to investing, with a rigorous investment and risk management process run by experienced individuals. As asset management is a very scalable business, VTB Capital IM’s investment process and team can be utilised to manage additional products with similar strategies, for a wider range of investors in different countries. Now we have preliminary plans for PIFs for Russians, UCITs for Europeans, hedge funds for offshore investors, and mutual funds for US investors.

Now, VTB Capital IM is launching UCITs funds with these same equity and fixed income investment strategies for European clients. Many European investors are interested in the Russian and CIS markets because yields on European and US bonds are at extreme lows, with 10-year yields at 2.85 percent. In the current environment, with the 30-year US bond market rally coming to an end and a slow down in global GDP, we think long/short equity strategies will be able to generate significant alpha. Emerging markets like Russia and the broader CEEMEA region provide much inefficiency to be arbitraged by active traders focused on beta-neutral pair trades.

VTB Capital IM places a higher priority on top quartile performance and risk management than on growth through asset gathering. Growth needs to be managed carefully, and creating value for clients over the long term is the best way to ensure growth.

Serbia sets sights on EU

Posted on January 14, 2014January 9, 2014 by Ashton Wenborn

After experiencing an extended period of stagnation, various Serbian sectors are beginning to show promise for the immediate future, with one of the best prospects being insurance. As the country’s second-largest provider and a specialist in various life and non-life sectors, we at Delta Generali Insurance are well acquainted with the country’s many challenges and opportunities in this space.

Given Generali’s presence in over 60 Serbian cities and our 1.7 million customers, the company accounts for a sizeable share of the country’s overall insurance market, and is set to spearhead a stint of expansion in this sector.

The pathway to the EU
Serbia has only recently acclimatised to the economic complications that came with internal conflict, and is setting out to repair its fragile economy by echoing the advances of its closest neighbours and securing EU membership. However, for the country to qualify it must first demonstrate the various ways in which its economy shows promise.

With a seven-million strong population and a land mass that spans 88,000 square kilometres, Serbia is still a scarcely populated country where agriculture accounts for as much as 12 percent of national GDP, which, as of 2012, stands at €30bn. This preliminary data represents the sheer scale of the challenges to come, and serves to illustrate the importance of a stable and sustainable economy if the country is to match ambitious EU targets.

Serbia by numbers

7m

Population of Serbia

12%

Percentage agriculture contributes to Serbia’s GDP

€30bn

Serbia’s GDP (2012)

This past year, just shy of one percent of Serbian GDP has suffered from the economic difficulty, with one of the main sectors affected being the country’s insurance market. Life and non-life combined equate to as little as €600m, and the sector has shown very few signs of growth in the last three years, which at first glance appears to have stagnated alongside the economy due to a lack of insurance culture, an absence of government tax incentives, and low family income.

Having said that, there exist a fair few bright spots in the industry. To name a few, motor third part liability (MTPL) is the main driver of the non-life market and represents 40 percent of total premiums, and life insurance has exhibited a slow but steady eight percent CAGR in the last three years.

Ready for Solvency II
Foreign companies, particularly those of an Italian or Austrian origin, are dominating the Serbian insurance space at present. A recent government decision to dispose of Dunav Osiguranje, a local state-owned insurance provider, is representative of the ruling authorities’ willingness to exit the insurance business. However, with a commitment to capital investment and IT investment accompanied by 15 years of experience in the market, Generali’s position is an incredibly strong one.

Capital and technology are key factors for the future success of the Serbian insurance market, and only large insurance groups with economy of scale, such as Generali, are positioned to comply with soon-to-come Solvency II requirements and negotiate new market conditions.

Provided that this scenario remains unchanged and the few pockets of growth continue to behave in this same way, Serbia’s insurance sector shows promise due to the low frequency of claims, and a high standard of driver behaviour compared to that of neighbouring European markets.

Regardless of these issues, the future for the Republic of Serbia looks relatively bright, and the country is still the go-to destination for those looking to invest in the Balkans. More than €1bn per year have been poured into the country in the last five years, due in large part to government incentives, good logistics and an exceptionally well-trained labour force.

This newfound attractiveness in Serbia’s burgeoning business climate is turning an agricultural-driven country into a manufacturing base. Given time, Serbia will be primed to export industrial products to Europe, particularly to Russia.

This expected inflow of hard currency, combined with developments in sectors including insurance, will see Serbia’s GDP expand in the future, and its prospects for EU membership rise quite substantially.

Morocco must demonstrate commitment to CSR

Posted on January 14, 2014January 9, 2014 by Ashton Wenborn

At 18 years of age, Moroccan-born Miloud Chaabi founded his first business YNNA Holding, then a modest start-up specialising in construction and real estate, though one that would later play host to 20,000 employees and rank among the region’s largest economic contributors to date. Boasting over a half-century’s worth of experience, the group has since diversified its operations to encompass four major divisions, which each align with the conglomerate’s ethos of social commitment.

Spanning industry and construction, property development and hospitality, retail, food and renewables, YNNA’s constituents represent a spread of sectors and specialties united by a distinct sense of social responsibility in all they do. Far from the short-termism that so often typifies major emerging market players, Chaabi has instilled YNNA with a culture of responsibility in order to improve upon the business’s chances of long-term success.

We can no longer focus only on economic performance without paying attention to what is happening around us. It is our responsibility to become involved in social and societal lives by promoting equal opportunities

“We can no longer focus only on economic performance without paying attention to what is happening around us. It is our responsibility to become involved in social and societal lives by promoting equal opportunities, and we have been encouraging that for more than 65 years now,” says Chaabi.

“Our group’s operations are supported by the development of society as a whole, so proceeding with our growth strategy and expanding our business requires consideration of our impact on the global environment and community. By tapping into the kingdom’s immense potential, our group is contributing to a bright and prosperous future for Morocco through its diverse investments.”

Business philosophy
Chaabi is among Morocco’s richest men, second only to Othman Benjelloun, and remains one of Africa’s brightest business minds. However, despite what appearances may suggest, his focus is far from confined to moneymaking, and extends to a great many philanthropic causes.

The 84-year-old, whose fortune stands at $1.9bn, according to Forbes, heads the Miloud Chaabi Foundation, which remains one of the region’s largest and most forward-thinking charitable organisations to date, and one that typifies YNNA’s philosophy of how to do business.

Since its creation a half century ago, the foundation has fought for equal opportunities in Morocco, this being an objective that has grown in both complexity and stature over the years. Historically, the majority of businesses in Morocco have been family-owned enterprises, though the recent introduction of international competition and a higher degree of professionalism has brought with it a need to advance the country’s business landscape beyond what it once was.

For this reason, one of the main aims of the foundation is to improve upon Morocco’s local workforce, particularly in southern regions, where there are very few opportunities for education and training.

The foundation supports approximately 7,000 Moroccan families with subsidies, and in this way affords an acceptable standard of living to those who would otherwise live under threat of poverty. In addition, Chaabi has dedicated 10 percent of his personal fortune to building an American-style university in Morocco. These plans are being conducted in partnership with Indiana State University (ISU) and will see Chaabi contributing financial support, as well as technical assistance and administrative leadership, to the project’s continued development.

Chaabi’s focus on education is one that dates back to 1995, at which time the foundation founded Al Qalam, an educational institution authorised by the Ministry of National Education, Higher Education Staff Training and Scientific Research. The institution exists primarily to prepare future engineers, managers and executives, and to better the overall standard of education in the region, being a cause that remains integral to Morocco’s workforce development.

Although Chaabi’s philanthropic work at first glance appears entirely isolated from the wider dealings of YNNA, the two are in fact linked by a desire to advance the region’s broader economic prospects.

At the dawn of the 21st century, new strategies and styles of management came to the fore, and companies such as family-owned YNNA were believed to be under threat from global players. However, YNNA in particular has since demonstrated a capacity to advance alongside the best in international business, due in no small part to the group’s focus on social development.

A changing landscape
Morocco’s economy has been quite resilient in recent years, with the country’s GDP having expanded 3.2 percent in 2012 and forecast to expand a further 4.6 percent in 2013, according to the African Development Bank Group. Although the country has been impacted by the slowdown in Europe, which remains its primary trading partner, Morocco’s economy is expected to grow further still, driven by internal demand and structural reforms.

Morocco’s market overhaul has seen the gates opened to global players who previously found it nigh on impossible to enter the region. The influx of experienced international players quite clearly poses a threat to local companies, which is why existing players must seek to demonstrate how it is they can benefit the Moroccan economy ahead of new market entrants.

With an impressive portfolio of companies in a number of key industries, YNNA looks likely to spur a series of sizeable improvements to the national economy. “We genuinely strive to accommodate for excellence in everything we do. Our group is ceaselessly contributing to a bright and prosperous future for Morocco through its diverse investments, with the ultimate goal of offering Moroccans quality and wisely priced products,” says Chaabi.

The recent introduction of international competition… has brought with it a need to advance [Morocco’s] business landscape beyond what it once was

One of the key ways in which YNNA has adapted to recent changes is by growing its business overseas and extending its reach to nations as far afield as the UAE, Jordan, Egypt and Tunisia, to name a few. However, YNNA’s efforts go beyond the simple fix of expanding abroad and extend to matters of sustainability.

The group’s focus on this facet has aligned its practices alongside those of the very best in international business. Understanding that sustainability is central to the long-term success of a business, YNNA ensures that each of its holding companies factor this same ethos into their company cultures in keeping pace with wider advances in the Moroccan economy.

Among Morocco’s major domestic contributors is YNNA Bio Power, a clean energy company that is attempting to offset the monumental costs of importing energy from abroad and lessen the environmental implications of dirty energy. The company began construction of two wind-powered parks in 2007, which will produce 70MW of power when they are fully completed.

The plants jointly equate to a MAD 1bn investment in clean energy. The first of the two parks was set up in Essaouria in 2009, will produce 20MW of power and cost MAD 300m, while the second was established in Tangier in 2011, will produce 50 MW and cost MAD 700m in total. The energy produced will be used to power numerous YNNA subsidiaries and also underlines the group’s broader commitment to matters of sustainability.

In keeping with this same commitment is YNNA’s environmental charter, which was first introduced in April 2009 and distributed among employees a year later in order to raise awareness of the group’s environmental aims and initiatives.

However, YNNA Bio Power is not alone in incorporating sustainability into its operations. First opened in 1999, Mogador Hotels is another subsidiary whose approach is representative of the group’s commitment to social development.

The hotel’s strategy, termed the ‘3 Es’, is a three-pronged approach pertaining to energy, water and energy efficiency and is in large part inspired by YNNA’s business philosophy. By using solar and thermal energy to heat water, the hotel effectively does away with 150 tonnes of CO2 emissions each year; furthermore, conventional lighting has been replaced with LED lamps, which has cut CO2 emissions by a further 480 tonnes; and finally, aerators have been installed on faucets in order to reduce water flow by 30 percent, in effect saving energy equivalent to the cost of heating 8,000 cubic metres of water.

Granted, initiatives of this sort can often appear tokenistic, but when implemented across the entirety of a company’s dealings, as is the case with YNNA, they amount to quite a considerable economic contribution. Given local companies’ somewhat precarious position in Moroccan markets, it is important that companies such as YNNA exhibit how it is they can contribute to the country’s social development in a way that new market entrants cannot compete with.

Mexico divided over proposed tax reforms

Posted on January 14, 2014January 9, 2014 by Ashton Wenborn

Mexico is a booming country. Its economy grew 3.6 percent in 2012, and is set to grow again this year, according to the IMF (see Fig. 1). In a world still reeling from economic turmoil, those are impressive figures. However, Mexico is a developing economy, and as such it faces many challenges before sustainable and enduring prosperity. Central to President Enrique Peña Nieto’s development plan is a sweeping reform that will tackle many of the shortcomings in Mexico’s archaic and flawed tax system.

Mexican predicted GDP Growth

Luis Gerardo Del Valle, Managing Partner at Jáuregui and Del Valle, SC, a prominent Mexican law firm specialising in tax consulting and litigation, has many years of experience dealing with tax regulation and dodging the bullets of Mexico’s system. He believes that though archaic, the country’s system is not that different from other jurisdictions around the world.

“Having had experience working with different systems of the world, I consider that most systems work alike,” he says. “It’s just that there are systems that are more developed and systems that are less developed and in this case Mexico has the main principles, but is not as developed as other jurisdictions. There are systems like the British and the American ones that have many more anti-avoidance provisions and that have been developed through regulations.”

The ruling party in Mexico, PRI, is proposing sweeping changes designed primarily to raise revenue and close loopholes, but the change will also raise sales taxes on the regions bordering the US and include a raise in the top rate of income tax and a capital gains tax. Though there has been an unprecedented level of cooperation so far between PRI and PAN, the main opposition party, there have been growing calls for PAN to abandon negotiations and allow the tax reform to fail.

A system in flux
Del Valle is sceptical of the reforms and believes that Mexico can flourish under the current system. “Mexico would have less regulations and less precedents than the UK or the US,” he says. “There are a lot of loopholes. You just need to have a good attorney or a good tax council who can guide the transaction because there may be challenges in the interpretation of the law, [things] that are just not regulated and which the courts have not yet ruled on. So you need to have a council that understands clearly how the system has developed during the past 20 years and where it’s going in the future so that a client can receive the right advice.”

But it is undeniable that the tax system in Mexico is changing fast, even before the tax reform is fully approved. As a tax attorney, Del Valle has learned how to navigate the changes in order to offer the soundest legal advice possible for his clients.

“The environment is changing in the sense that we start out with an interpretation of a statute that establishes a tax, and in the past courts were much more literal in their interpretation of that statute. This environment favoured the taxpayer immensely and allowed tax structuring to take place,” he explains. “What is happening currently is that the tax authorities and the courts have brought in the possibilities and tools for interpretation of a statute. They went from being totally literal to justifying interpretations of the statute. The possibility for interpretation will be to the detriment of the taxpayer.”

I am optimistic in my view of the Mexican economy, because foreign investment is coming in and will finally translate into economic growth and development

For Del Valle, this change in approach can have the effect of pulling the rug out from under the taxpayer, who once relied on a literal interpretation of the law in order to structure their taxes and are now left at the mercy of subjective interpretation. “Now the tax authorities can [argue] and say ‘that’s not the way the statute should be interpreted’, and the down side of this for the tax payer is that the advice of an expert and a very capable professional with experience is required. And that means that the possibilities for the taxpayer to plan and restructure transactions are being restricted.

“We are still not close to where the English system is; there have been many precedents in the UK and we understand that they are still coming because it’s not totally clear where the line between authorised tax avoidance and unauthorised tax avoidance is. Clearly the Mexican tax system is heading more towards substance than form, while in the past it was the case that form would prevail over substance. But the principles under which Mexican taxes will evolve are still not clearly provided, either in the statutes or in precedents.”

It is a difficult place to be, and even more so because of the political implications a widespread tax reform would have. “From a policy perspective the Mexican tax system’s major role is to collect revenue, like any other tax system, and that is clearly the purpose of the Mexican tax reform as stated by the government,” explains Del Valle.

“The country is facing a deficit next year, so if the tax reform is not accepted as proposed by the government, the country will be facing even more of a deficit, and the government will have to spend less. It is not clear what that might imply from an economic perspective. What is clear is that there is a lot of investment coming into the country, but it’s still not being reflected in the numbers in terms of growth. But I am optimistic in my view of the Mexican economy, because foreign investment is coming in and will finally translate into economic growth and development.

“If the parties do not approve the tax reform then the government will just have less to spend, though I do not necessarily think that this will automatically mean less economic growth. There is an economic principle that dictates that resources are always better in the hands of the economy; that is, private entrepreneurs rather than the government. Of course if the tax reform is not approved it will affect the economy of the country in one way or another, but we will have to wait to see the results.”

Changing for the better
Mexico is currently tackling energy reform, tax reform and education reform, all at once. These are key policy changes for the current government. But political parties are failing to reach an agreement on many issues of these reforms.

“That just sends a message to foreign investors that the country is not as politically stable as the Mexican executive suggests,” says Del Valle. “But that does not mean that agreements cannot be achieved and the country is not ready to receive foreign investment. There are a lot of investment opportunities; I just don’t agree that by not approving the tax reform as proposed by the government, the executive will necessarily decrease economic growth. I also don’t consider that failing to approve the tax reform shows political instability – while that may be the message, in any democracy it is reasonable that different political forces opine differently. There just needs to be a compromise about the tax reform.”

In the meantime, while political parties scramble around legislation changing the tax codes, Jáuregui and Del Valle, SC has been investing in becoming the most comprehensive tax law firm it can be. In fact, the firm has recently announced a merger between Jáuregui, Navarrete y Del Valle, SC, and Del Valle Torres, SC, with Jauregui y Del Valle, SC as the surviving entity; another prominent Mexican firm. Together, their teams will be able to navigate the veritable minefield that is the Mexican tax code, and any future challenges tax reform might bring.

“We have decided to enter into a merger with Jáuregui Navarrete, and after the merger I will lead the firm as Managing Director,” says Del Valle. “Del Valle Torres, SC has vast experience in the tax field. Most of our staff have considerable experience in tax advice and litigation in Mexico, as well as cross border transactions with the US and Europe. Our biggest competitors are the so-called ‘Big Four’ consultancy firms, but we feel that we offer a robust alternative in the Mexican market. We feel that in the Mexican market, where the interpretation of tax statutes is so subjective, clients are better served by lawyers. We operate from a position of privilege in the Mexican market, where we offer expert opinions as lawyers and accountants who clearly understand the risk perspective from a comprehensive point of view. That’s where our added value is.”

Bank Aljazira: embracing sharia banking principles

Posted on January 14, 2014February 20, 2014 by Ashton Wenborn

Bank Aljazira (BAJ) in Saudi Arabia has a long heritage that goes back more than 36 years. During that time, BAJ has undergone several key transformations to become the bank it is today.

Global Islamic banking growth areas

Despite global economic challenges, BAJ put in place a number of initiatives that resulted in strong performance for various sectors. In addition, we managed to implement our strategy of diversifying income sources, as well as seizing favourable opportunities in pursuit of strengthening our presence and competitiveness. Today, BAJ is recognised as a leading and fast-growing sharia-compliant financial institution, and we pride ourselves on being a professional, client-driven, service-orientated bank, where we provide customers with innovative sharia-compliant services and products.

Globally, the Islamic banking industry continues to record robust growth (see Fig. 1), with the top 20 Islamic banks registering a growth of 16 percent in the last three years and Saudi Arabia emerging as the largest market for Islamic assets, according to the Saudi Gazette. Moreover, figures from Ernst & Young’s World Islamic Banking Competitiveness Report 2013 show that global Islamic banking assets held by commercial banks are set to cross $1.8trn in 2013, up from $1.3trn in 2011.

Currently there are three other fully sharia-compliant banks, all of which are growing at a faster rate than their conventional counterparts due to market demand and elevated customer awareness.

Bank Aljazira: The first of many
It was strategic decision by BAJ’s board of directors to convert the bank’s operations from conventional to sharia-compliant banking. This transformation required changes to our infrastructure, offerings and legal environment, among other aspects; and in order to remain competitive we invested heavily in product development as well as branch and ATM networks so as to capitalise on being the earliest fully sharia-compliant bank licensed in Saudi Arabia. In 2007, BAJ’s conversion into a sharia-compliant institution was complete. It simultaneously increased its paid-up capital to SAR 3bn, which came entirely from the bank’s profits.

From the early days of the transformation, BAJ established a sharia group within its core structure to ensure compliance with all sharia banking and financing principles; this led to the formation of a Sharia Advisory Board, which is composed of a number of scholars specialised in sharia-compliant banking.

Recognising that the company had a social responsibility towards the community, in 2006 BAJ launched a SAR 100m programme named Khair Aljazira Le Ahl Aljazira; since then, BAJ has been engaged in providing financial support to various charitable societies, launching apprenticeship programmes to develop young Saudi women and men. Today, we can proudly say that we have been successful in stimulating community welfare by sponsoring a vast number of productive family projects and cultural events, and we are looking forward to more.

On the business front, we achieved great success in diversifying and expanding the scope of our sharia-compliant offerings, and at the same time succeeded in developing our infrastructure by laying the foundations for governance, transparency, sharia-compliance and financial controls. BAJ pays special attention to the small- and medium-sized enterprises (SME) sector, which represents 93 percent of total awarded project value in Saudi Arabia, as per the latest statistics.

Additionally, to reflect our keenness in expanding our presence in this sector, we established commercial banking services independently from other business units to be the pivotal point in developing and tailoring sharia-compliant innovative products to best suit the sector, which will ultimately contribute to the economic growth of our nation. To that end, BAJ has financed and supported a number of entities and projects in collaboration with Kafalah Programme (sponsored by the Saudi Industrial Development Fund). Today, those entities have grown into successful organisations in their respective fields and they continue to be part of our valued customer base.

Developing infrastructure
On other fronts of business development, BAJ reached high levels by enhancing its customer experience through its various alternative delivery channels, where it has adopted state-of-the-art banking technologies, infrastructure, and standards. Among other achievements was the expansion of our retail network, resulting in attracting new customers, in addition to ATM network restructuring, online banking, telephone banking, and credit card offerings.

We continuously develop our employees and aim to attract the best talent through extensive training programmes, a culture of innovation and out-of-the-box thinking

The Treasury Group’s focus in 2010 was to develop its infrastructure, which includes human capital, premises, systems, policies and procedures and we continuously strive to achieve a better understanding of our customers’ needs to develop sharia-compliant products and sophisticated solutions. Treasury Group embarked on a substantial leap and implemented a full treasury banking solution, which included market and credit risk systems. Also, in line with BAJ growth plans and to expand our reach to our customers, a full treasury branch was opened in Riyadh and a sales office in the eastern region.

AlJazira Capital, the investment arm of BAJ, has a long success story in the Saudi Tadawul market, and has been the market leader for several years. With an objective to maintain that market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across the MENA region and international markets, and a full suite of securities business.

BAJ was also the first bank in Saudi Arabia to introduce Takaful Ta’awuni (a system of mutual cooperation for financial assistance and insurance based upon the sharia principles) and therefore commits itself voluntarily to conduct such business in full compliance with sharia principles, to adhere to ethical and moral values in its insurance operations and to satisfy the legal regulations and regulatory guidelines.

Risk and reward
With regards to risk management, BAJ maintains a prudent and balanced approach to risk and reward across its business activities, and considers risk management to be an integral part of the bank’s decision-making process. Today, much emphasis is placed on the use of sophisticated techniques to identify, measure and mitigate risk. In addition, it is through a robust corporate governance structure and leveraging on the collective experience of a disciplined management that a bank can expect to minimise risk at its source.

BAJ’s overall success is due to the loyalty of its customers, whom it serves through a network of more than 60 branches offering private banking, corporate advisory, sharia-compliant insurance and investment banking. That loyalty is earned by the bank’s most precious asset, its human capital. We continuously develop our employees and aim to attract the best talent through extensive training programmes, a culture of innovation and out-of-the-box thinking.

The collaborated efforts of the BAJ team have resulted in the successful issuance of BAJ subordinated (tier two) Sukuk certificates on March 29, 2011, the proceeds from which were used to strengthen its capital base. It is also worth mentioning that BAJ’s financial strength rating has been set at BBB with a stable outlook by Capital Intelligence and the bank’s long-term foreign currency rating has been set at BBB+.

The continuous success of BAJ could also be measured by looking at its net profit during the first nine months of 2013, which grew by 24 percent to SAR 500m from SAR 403m for the same period last year. The bank’s total assets as of September 30, 2013 stood at SAR 55.5bn against SAR 47.8bn for the same period in the previous year, an increase of 16 percent.

BAJ’s objectives when managing capital are to comply with the capital requirements set by regulators, to safeguard its ability to continue as an ongoing concern and to maintain a strong capital base. In this regard, capital adequacy and the use of regulatory capital are monitored on a regular basis to ensure that the capital is adequate for the risk inherent in its business activities.

Finally, I must take this opportunity, on the behalf of the whole bank, to recognise our shareholders, the board of directors and our customers for the confidence they placed in us. We also extend our gratitude to the Ministry of Finance, the Saudi Arabian Monetary Agency, the Capital Market Authority and the Ministry of Trade and Industry for their supervision and guidance.

TEB Private Banking launches angel investment platform

Posted on January 14, 2014January 9, 2014 by Ashton Wenborn

TEB Private Banking (TEB Private) has provided entrepreneurs and the world of private banking with a new point of view. World Finance spoke to Gökhan Mendi, the company’s Senior Assistant General Manager of Retail and Private Banking Group, about its banking platforms and business model.

What sort of business model is TEB Private based on?
As the first bank to introduce Turkey to private banking, we continue to offer our clients consultation services that include alternative investment products and innovative ideas. We believe that the ‘angel investor’ (one who provides capital for a business start-up) concept, which became possible in Turkey as the treasury began issuing private investor licenses, is going to gain in importance. For this reason, we began offering that concept to our clients as an alternative investment tool in May 2013.

At a time when traditional investment products are slowly losing their attractiveness, we regard alternative investment tools and new ideas such as becoming an angel investor as opportunities that shouldn’t be missed.

The first thing we did when we started out was to determine what our clients needed in order to become a private angel investor. Recognising our responsibility first and foremost as a bank, we designed specialised legal framework training for all of our client representatives and also trained our own personnel how to correctly anticipate and understand the questions and needs that our clients would have about the angel investor concept.

In the follow-up to this, in our capacity as the prime sponsor of meetings that would be taking place among the actors in this investing ecosystem, we decided it would be best to first understand the ecosystem and then decide what our own position in it should be. As a result, in May we created a platform that would allow us to accomplish three objectives: be beneficial both to clients and entrepreneurs; successfully bring potential angel investors and entrepreneurs together; and make both sides aware of each other. We also dubbed it the TEB Private Angel Investment Platform.

This web-based platform is built on the logic of enabling individuals to search for and categorise entrepreneurs according to their own concerns and areas of interest and then contact entrepreneurs directly if they so wish.

What kind of new projects are you involved in now the TEB Private Angel Investment Platform is up and running?
We regard the introduction of a venture-capital-specific legal basis in Turkey and the provision of tax and other incentives designed to increase the number of angel investors as an important step forward in the direction of invigorating the entrepreneurial ecosystem in our country. The new regulations make it possible for individuals to be licensed as an angel investor. We launched a major project to support such efforts and through that project we created the TEB Private Angel Investment Platform.

Besides offering our clients a brand new investment vehicle, this platform also enables us to gain new entrepreneurs for the Turkish economy by finding capital for projects that have a promising future. Our goal in this is to simultaneously benefit both TEB Private’s clients and the national economy.

Through this platform we are providing our clients with access to new ventures being undertaken in Turkey that can be financed from one of two sources at present. One of these sources involves sharing projects that are being supported through the TEB Incubation Centre. We will also see the entrepreneurs here, supported by TEB Incubation Centre, offering consulting, mentorship and training services under TEB startup banking business line. This probably represents the highest level of synergy between SME banking and private banking ever achieved in Turkey.

We have also begun making special presentations for TEB Private Banking clients at the TEB Incubation Centre and a very positive and enthusiastic climate is already taking shape there. We plan to conduct individual or small-group presentations in order to ensure that TEB Private’s clients have access to detailed information about these projects whenever they wish.

At a time when traditional investment products are slowly losing their attractiveness, we regard alternative investment tools… as opportunities that shouldn’t be missed

The other source of enterprise financing is through Etohum, with which we have a sponsorship agreement for that purpose. The promotion of outstanding startup projects selected in Turkey each year and the requirements and steps necessary for taking place in such projects as an investor will be realised thanks to Etohum’s support for this platform within the scope of TEB Private Angel Investment Platform.

TEB Private Angel Investment Platform members automatically become members of investor clubs according to the specific industries whose ventures they say they are interested in. As members of these clubs, they will also receive daily or monthly detailed reports about the ventures on offer.

TEB Private Relationship Managers, who will serve as the single contact point and main communication channel for clients wishing to be angel investors, are currently taking part in training seminars aimed at ensuring that they are up to speed on regulatory details. We continue to explore this new business line without any loss of appetite. TEB Private clients will be able to obtain all the information they need concerning the procedures they must follow in order to be angel investors. They will also, for the first time, be able to see the many e-commerce and other creative projects that are available from other sources in Turkey. We intend to invest in this area and to integrate a new and original business model into the private banking world in the second half of 2014, most likely.

Acting as a unique reference point for both angel investors and entrepreneurs in this sector is one of the greatest and most exciting goals we have identified for ourselves next year. Of course we also regularly share our local skills about such matters with our partner BNP Paribas Wealth Management. As a result of this sharing, we will soon be seeing a private banking-based business model in Turkey, which will focus on entrepreneurship and angel investment in Europe too.

The number of undertakings ready to support both e-commerce and the real sector in Turkey is growing almost day-by-day; the government is providing significant tax and other incentives in support of such effort; and our young people are playing an increasingly more active role in society. These are all indications that it will soon be possible to take medium-term decisions about investing in such areas. Turkey has begun to take steps to transform what we see as a serious potential into opportunity. We are showing our confidence in this area by continuing to invest in and incorporate the angel investor concept into as many of our products and services as possible.

How much support have you given so far? What are the criteria? What are your future plans and goals?
By supporting Startup Turkey 2013, organised by Etohum, which gave new impetus to technology- and economy-related investments and made them accessible to investors, TEB Private took its first step into this ecosystem in February 2013. To date we have supported the formation of environments in which complete details about the ‘regulation on private participation capital’ are explained to potential angel investors in both Startup Turkey and Startup Istanbul.

In 2014, we will be working on a different model in order to diversify the startup resources for our TEB Private Angel Investment Platform, bring potentials on several sectors and bring our investor clients together. As TEB Private Banking, we are designing a structure in which we will investigate entrepreneurs in real sectors who haven’t discovered startup resources in Turkey or are not aware of angel investment potential, and then get in contact with them.

We intend to conduct training programmes for TEB Private clients on all of these issues. We will also be employing our specialists to reach out to and inform as many potential angel investors as possible. To date we have been heavily involved in communication studies to inform our clients about this subject. In 2014, we plan to bring entrepreneurs and TEB Private investors together several times in different cities.

We also plan to develop and carry out projects compatible with the Startup and Angel Investor concepts through our highly innovative digital platform assets, which can be found at the URL below.

For futher information please visit www.tebozel.com or www.melekyatirimplatformu.com

UAE financial markets ‘a bridge between East and West’

Posted on January 14, 2014January 9, 2014 by Ashton Wenborn

The Dubai Financial Market and the Abu Dhabi Securities Exchange are ranked among the best performing markets in the world for 2013. World Finance spoke to Fathi Ben Grira, CEO of MENACORP, about his company’s operations.

What is your analysis of the performance of the Dubai Financial Market and the Abu Dhabi Securities Exchange?
The easiest answer to this question would be to say that these markets dropped so much since the financial crisis that the upside could only be important. I would prefer to say that the UAE’s markets, the DFM and the ADX, finally caught up with the good results of the country’s economy.

Businesses (be they real estate, tourism and hospitality, industry, retail or manufacturing) are booming, supported by strong fundamentals. Investors, seeing that the economy was back on track, started to have faith in the markets again and soon realised that it was more than a rebound – it was a strong trend from which they could make good profits. Several listed companies were clearly undervalued, so it was a good opportunity to get a cheap entry ticket.

Other factors have to be taken into consideration as well, such as the upgrade by the MSCI Index of the UAE markets from a ‘frontier market’ classification to an ‘emerging market’ status. This upgrade, effective May 2014, will automatically attract more international financial institutions into UAE markets. This announcement created a positive momentum and reinforced investors’ confidence.

On a different note, Dubai was strong favourite to be the city hosting the International Exhibition in 2020. Dubai finally won its bid to host Expo 2020 over Izmir in Turkey, Sao Paolo in Brazil and Yekaterinburg in Russia. According to a report issued by Bank of America Merrill Lynch, Expo 2020 would increase Dubai’s economic growth by 0.5 percentage points per year and two percentage points in 2020. The same report put the total cost of financing the Expo at $8.4bn, or 8.9 percent of GDP.

Such figures have been confirmed by one of the most prominent business figures in the UAE (if not the world), HH Sheikh Ahmed Bin Saeed Al Maktoum, Chairman of Emirates. The event would also create more than 277,000 jobs in Dubai, 40 percent of which would be in the hospitality sector and 30 percent in construction, two of the key sectors of the local economy. Investors are well aware of all these figures and translated them into opportunities on the stock markets.

Our company, MENACORP, was a proud official bid supporter for Dubai Expo 2020. In this capacity, we recently organised an event on the Dubai Financial Market’s trading floor to voice our full support for Dubai’s bid a few days before the official result was announced. Investors, who were present at the DFM that day, were extremely bullish on the positive impact of the Expo and confirmed that it was one of the catalysts that encouraged them to come back to the market. MENACORP’s brokerage division is the leader for securities brokerage in UAE markets.

How did your firm benefit from the recent surge of activity on the DFM and ADX?
Our brokerage division is the largest in the country in terms of trading value, sales capabilities and size of clients’ portfolios. We are competing with 50 other brokerage firms, some of them being controlled by major international financial institutions or top tier UAE banks. In such a competitive environment, to reach 15 percent of market share is not bad at all. But I believe we can do more. All our employees are working hard for that. Our brokerage team, led by our Managing Director of Brokerage, Nabil Al Rantisi, is comprised of the finest professionals you can find in the Middle East and North Africa region.

With the strong surge in trading volumes, and because of the high scalability of our brokerage business, our profitability has increased substantially; crossing the 50 percent of net profit margin. The profits realised are reinvested, first to make sure that our clients receive a premier quality of service, and second to expand our activity to other markets and other products. The whole idea is to remain constantly ahead of the competition.

In recent months, a potential merger between the DFM and the ADX has been mooted. Is this something you expect to happen?
We have been hearing this for years now, but this time I think it’s pretty serious. The relevant authorities and all the parties involved seem to agree that a merger between these two exchanges is much needed and will increase the visibility of the country as a financial hub on the international stage. It will attract more liquidity and will encourage domestic companies tempted by a listing abroad to stay in the UAE. In terms of operations, it will also make everybody’s life easier. In my opinion it’s a question of months before a clear roadmap will be announced regarding this merger.

The UAE is also home to a third exchange, the Nasdaq Dubai. Could you tell us more about it?
The Nasdaq Dubai can be approached from two angles. First, this market presents itself as the international financial exchange of the Middle East: being based in the offshore zone of the Dubai International Financial Centre and regulated by the Dubai Financial Services Authority, the Nasdaq Dubai benefits from state-of-the art infrastructure and a sophisticated regulatory framework that put it on par with the most reputable exchanges in the world.

The Nasdaq Dubai and the Dubai Financial Market co-brand themselves as ‘one exchange, two markets’

The second approach would be to consider it as a quasi domestic market. I like it. I like to see it as a local market with different rules due to its international vocation. The Nasdaq Dubai and the Dubai Financial Market co-brand themselves as ‘one exchange, two markets’, which is a good thing.

If in terms of activity, the Nasdaq Dubai remains behind the DFM and the ADX, it certainly competes in the same category in terms of creativity. I would even give a clear advantage to Nasdaq Dubai in that aspect. The new CEO, Hamed Ali, leads a very enthusiastic team of professionals who seem to have what it takes to establish Nasdaq Dubai as the market of choice for the region. I am sure that we are going to see several double listings on this market in the coming years if not months. It would be really nice to have companies listed in Istanbul, Mumbai, Cairo or Johannesburg choosing to be listed on the Nasdaq Dubai as well. At the end of the day, this is the positioning of Dubai on the global map: to be a bridge between East and West.

During one of your recent public interventions you said “Arab markets should be considered as one single market.” Can you be more specific?
When the crisis hit UAE markets few years ago, you could see the flow of cash leaving the country and going to Qatar or Saudi Arabia. Then, with the Arab Spring, we saw money leaving Egypt and Syria for Dubai and Abu Dhabi. In 2013, Saudi Arabia based investors, as well as several important investment funds from Kuwait, came back to Dubai. 2014, meanwhile, might be a good year for Bahrain, as we are noticing a renewed interest for the destination.

Our clients see it that way. We serve them that way. At the end of the day, we are talking about several countries with a population sharing the same language, culture and, for a vast majority, the same religion. This last factor is really important for the key role of Islamic finance in the region. UAE Vice President, Prime Minister and Ruler of Dubai, His Highness Sheikh Mohammed bin Rashid Al Maktoum, has recently expressed his ambition to make Dubai the world capital for Islamic finance.

We can trust him for this to be a concrete reality: few leaders have his track record in terms of achievements, and I am convinced he will get the necessary things done to reach this ambitious goal and surpass potential competitors like London or Kuala Lumpur. MENACORP will play a role in building this vision. I received a clear mandate from our Chairman, Hamad Bin Ghanem Bin Hamoodah, to position our company as the preferred financial services firm for sharia-compliant investors.

Ben Lucas on Europe’s AIFMD | EY | Video

Posted on January 13, 2014April 14, 2016 by World Finance

Speculation about the Alternative Investment Fund Managers Directive (AIFMD) has dominated the European funds industry over the past couple of years, but the deadline for EU and EEA Member States to transpose its provisions into national law was not until July 2013. Ben Lucas, Asset Management Director at EY, discusses the challenges that asset management firms are facing, and the best practices that have emerged from the directive.

World Finance: Ben, overall how would you say companies are handling the changes resulting from the directive?

Ben Lucas: Overall it’s a fairly mixed reaction, so there’s a pretty clear split between the larger players who are very used to dealing with regulatory change – be it MIFID or UCITS or whatever else it is that they’ve dealt with before – versus the alternative asset classes, who are pure-play. So a private equity house, or a hedge fund, or a real estate fund, for which it’s much more of a fundamental cultural shift, for them. So, they’re coming from, effectively, either a very low level of regulation, or no regulation at all, to actually an incredibly high level of regulation. So for them it’s a real step-change in mentality and cultural shift.

“If you’re a small start-up shop, you’re going to need quite a lot of external advice”

World Finance: And who would you say will benefit most from this directive?

Ben Lucas: In the short term, I think there’s going to be a fairly significant cost impact. So if you look at the firms, no one will benefit directly from it in the short term. But the funds that will handle it best will be the larger firms. So obviously the marginal cost, if you’re already dealing with a significant amount of regulation and regulatory change, you’ve already got the budget set aside for that. And you’ve got the change departments and compliance departments set up ready for that.

The larger firms will handle that slightly better. The other firms that will benefit immediately will be the service providers, because if you’re a small start-up shop, you’re going to need quite a lot of external advice. You’re going to need services such as depository, which are mandated by the directive. And then if you look to things like the reporting requirements of the directive, then, again you can see that there’s a lot of crossover with other regulations, and firms that are already providing services in the reporting space will very easily be able to provide reporting for AIFMD. So you’d expect that the service providers will do very well out of it.

In terms of the benefits to the managers themselves, and then ultimately the investors, they will – if they materialise – will be somewhat further down the line.

World Finance: What are the biggest challenges facing firms at the moment?

Ben Lucas: A lot of firms took advice very early on, when the directive was in its early stages. And I think the result of that is, to minimise cost, they took advice, went away, and started working on whatever that advice had been. And there’s been quite a lot of change since then, numerous iterations, lots of consultation papers, further guidance; and I think some firms have checked back in and taken further advice, had a bit of a health-check around that. Others haven’t, and are now struggling to deal with what is actually quite a changed environment from where they were when they were initially looking at this, perhaps 18 months ago, or something like that. That’s certainly one of the challenges.

The other fundamental one, as the deadline approaches, is around operational readiness. So again, a lot of the advice and a lot of the guidance that firms have had, has been theoretical. And what that means in terms of actually managing your back office or selecting your depository, and working with an outsource provider for the first time, perhaps, is very very different on the shop floor, effectively.

“Things will have settled down beyond 2018: the framework should be starting to bed into place”

World Finance: And what are some of the best practices you’ve seen develop as a result of the directive?

Ben Lucas: So in terms of actual response best practice, there is I think, very little, because it’s so varied in terms of how the market’s responding. I think there are guiding principles around how you react to the directive which are best practice.

So for example, proactivity. Don’t bury your head in the sand. If you think something is potentially – for example, your method for calculating derivative gross commitment or whatever that might be – if you think it\s potentially throwing out massive numbers? Engage, and check. So you can check with your peer group, you can check with the industry bodies at AMA, IMA, you can check with the actual regulator themselves. That early engagement, I think, is taken very well from the regulator.

World Finance: Finally, what do you expect the long-term impacts of the directive to be?

Ben Lucas: Short-term being now, medium-term being perhaps up until 2018, and then 2018 and onwards? If we look at it in terms of those three timeframes, short-term now, I think it’s very difficult for anyone to say anything other than just increased operational cost. So, I think that will hit the managers and eventually hit the investors. So I think that’s pretty widely taken in the market.

Medium-term, I think there is a real question around… it’s very clear that there is a cost, but the main problem in the medium-term is that there’s also uncertainty. So people aren’t just worried about, okay, if we want to do business in Europe there is a regulatory cost associated with that. There’s also a future uncertainty about what that might mean. Will the thresholds come down? Will the valuation methodology change? All of those questions mean that people, by choosing to do business, will then be engaging in a level of uncertainty they might not be happy with.

In the longer term, regardless of whether the net effect is positive or negative, it should at least be clearer. So you will have a framework that… the tools will be there to enable you to make your cost-benefit analysis about whether those euros are worth investment, whether it is worth doing business in Europe. Because hopefully things will have settled down beyond 2018. The framework should be starting to bed into place. And the result of that is you should be able to make a much more informed decision.

World Finance: Ben, thank you.

Ben Lucas: Thank you.

Turkey’s banking sector enters 21st century

Posted on January 13, 2014January 9, 2014 by Ashton Wenborn

Turkey is a country with a history of boom and bust, and its government has spent the last few years doing its best to pursue a more prudent economic model. However, while it has looked to stabilise things, it is also keen to attract higher levels of foreign investment to help bolster its economic growth. In particular, the government has cited the traditionally closed-off banking sector as one suitable for increased competition.

The last year has seen a number of deals where foreign firms have seized stakes in local banks. In May last year, 71 percent of the domestic firm Alternatifbank was acquired by the Commercial Bank of Qatar in a deal worth $460m, after heavy competition from the Commercial Bank of China.

That firm, and many others, is now actively seeking a foothold in Turkey’s burgeoning banking sector. The news of Middle Eastern and Asian companies taking positions in Turkey comes as many Western firms retreat from the region. Towards the end of 2012, Citigroup sold half of its 20 percent stake in Turkey’s largest bank Akbank.

The first foreign bank to obtain a license in the country for more than 15 years was Odeabank, towards the end of 2011. A fully owned subsidiary of Lebanon’s Bank Audi, it was granted its license by the country’s regulator the Banking Regulation and Supervision Agency (BRSA), leading to its incorporation the following March, becoming the 49th player in the Turkish banking sector.

Odeabank: A case study
Creating a brand from scratch presents many challenges to companies in any industry, but with such a competitive banking sector in Turkey, it is especially difficult. According to Odeabank, it achieved this through a combination of strong capital structure, shareholder power, and first-rate employees.

Launching its operations in November 2012, the firm leveraged its natural strengths as an expert in trade and investment flows between Turkey,the Middle East and the North African region. Its aim is to act as a full service bank, providing its technological infrastructure and experienced human resources to the service of the Turkish economy.

Odeabank by numbers

£7bn

Assets

800 Employees

19 Locations

This involves building value-added franchises in areas such as retail banking and in providing a wide range of financial services for medium-sized Turkish firms. By January 2013, Odeabank’s branch network had expanded to six – mostly in major cities like Istanbul, Ankara and Izmir – while the company’s headcount reached 400 employees. Since then, the bank has expanded rapidly and by the end of September (12 months after the launch of its operations) it reached 19 branches and more than 800 employees. It has now built up assets of around $7bn, making it the 14th largest in the country.

Since its establishment, Odeabank has displayed considerable progress in terms of balance sheets within a short period of time. It achieved its aim to be ranked among the top 15 banks in Turkey by the end of the year, not only in terms of asset size, but also loan and deposit size.

Looking at a regional shift
Odeabank’s main shareholder, Lebanon-based Bank Audi, is a regional group with a presence in 11 different countries. With a universal bank profile, Bank Audi covers all segments of banking activities, including corporate, commercial, retail, investment and private banking. As of September 2013, Bank Audi’s consolidated assets reached $34.5bn.

Bank Audi’s group staff headcount exceeds 5,000 employees and its shareholders base encompasses more than 2,500 holders of common shares. Bank Audi ranks first among Lebanese banks and is positioned in the inner circle of top Arab banking groups in the MENA region, and it is listed on the Beirut Stock Exchange.

The government is also keen to transform Istanbul into a financial centre capable of rivalling London, New York and Hong Kong. Istanbul is the perfect meeting point for east and west, giving it a strategic advantage over other cities vying for the region’s new financial hub. Odeabank is well positioned to benefit from a range of synergies created by the international reach of Bank Audi.

Turkey has favourable conditions to underpin the growth of its banking sector

In recent years there has been a very discernible shift in the pattern of Turkey’s trade, with emerging market countries, especially those in the MENA region, becoming progressively more important. Concurrently, the EU’s share in Turkey’s total trade has declined. Imports between MENA and Turkey have increased nine times, while exports have increased by a factor of 12 in the last decade.

Given that Bank Audi has a presence in major MENA countries – including Qatar, the UAE, Jordan and Saudi Arabia – synergies will be easily generated across the group as a whole. Additionally, with its local network and knowledge, Odeabank is well positioned to act as an intermediary between investors in the region keen on increasing their exposure to the Turkish economy.

Turkey has favourable conditions to underpin the growth of its banking sector. No more apparent is this in its successful growth despite the global financial crisis. Relative political stability in Turkey is a rarity in the region, while its young population and its geopolitical location are other features that make Turkey attractive.

While the global economic crisis highlighted the weaknesses in many countries, Turkey’s relative strengths were in the spotlight too. This is in part thanks to the strength of its banking sector, and the improvement in its fiscal indicators means Turkey has been able to bring its chronically high real interest rates down to single digits.

Whether Turkey can continue to keep its real interest rates at comparatively low levels will by-and-large depend on how well these strengths are maintained both economically and politically. A well-capitalised, profitable, closely monitored and regulated banking sector should continue to increase its penetration rate.

Large strides for greater coverage
With the confidence and support of Bank Audi, Odeabank is taking stronger steps towards its target to be among ‘the giants league’ by 2017. It is proud of breaking new grounds in the sector. For example, in April last year, it established an investment platform tailored for the retail-banking segment, a first for the Turkish banking sector.

After analysing 400 mutual funds currently managed in Turkey in terms of 20 different criteria, it collaborated with esteemed portfolio companies, offering funds to its customers. Odeabank has also begun providing branch services within the chain stores. It opened branches in Topkapı and Bostancı, Ankara Sög˘ütözü, Izmir Bornova, Bursa Nilüfer, as well as the Adana stores of Vatan Computer, which is one of the biggest retail stores for electronic devices in Turkey. It expect this chain store service to continue to expand.

[O]deabank uses state-of-the-art touch-operated, wirelessly integrated systems in its infrastructure

In June last year the bank offered its first credit card – the Bank’O Card – to customers through a wide application channel. Being free of credit card fees, the Bank’O Card is an exclusive product that fulfils customers of the bank cash needs and also provides them with many additional services. Launching the Bank’O Card Axess in October, it offers a reward programme as well as instalment facilities within more than 250,000 Akbank Merchants.

Mainly, cardholders can get instant cash back through every purchase they make and redeem them at that moment. They can also get discounts and instalments from the merchants. Mobile banking is another service provided, whether at in-branch self-service banking areas, its internet branch or at Odeabank ATMs. Those customers using mobile banking can also access the OdeaCep mobile branch using their internet banking user information without the need to register again.

The bank has also been developing cutting edge technologies that allow customers to receive a bank card online in an instant, as well as the ability to speak to bank staff through a video call service. It also aims to make life easier for its employees who have access to internal video calls. What’s more, an automated cash counter and acceptance system has proven to increase efficiency by 40 percent.

In order to provide a comfortable working environment for its employees, and to offer a faster and much more efficient service to its customers, Odeabank uses state-of-the-art touch-operated, wirelessly integrated systems in its infrastructure. Its video conference system allows all branches and head office to communicate with each other quickly and effectively, and enables branch staff to complete customers’ business processes in real time.

Offering different services compared to its rivals, Odeabank has touch-screens located in branch windows, which may be used by anyone wanting information on its banking services. It also designs the waiting lounges in its branches with customers in mind, and offers tablet devices and touch-operated tables, through which customers can access a wide range of interactive applications and games, making the time spent in the branch more efficient and enjoyable.

The waiting lounges also have information screens that, as well as displaying sequence number and advertisements, show market data and news on current affairs. Customers performing transactions in the teller area may see details of their transactions, personalised campaigns, send e-receipts or evaluate the quality of the service they receive through Windows 8 tablets placed on the counters.

The firm is also aware of its responsibility to the environment, and so its branches are designed to have a minimal impact on the environment, and are as paper-free as possible. As a whole it has paperless and eco-friendly business processes and, using business intelligence applications, scorecards can be monitored and analyses can be executed over the related data.

In the coming year, Odeabank expects to continue growing, supported by its technological infrastructure, more than 1,000 enthusiastic employees and a branch network that had reached 32 outlets at the end of 2013.

World’s first Islamic bank continues to drive industry

Posted on January 13, 2014January 9, 2014 by Ashton Wenborn

Dubai Islamic Bank (DIB) created history in 1975 when it became the first modern commercial Islamic bank in the world. Since then the bank has led from the front, establishing itself as the undisputed leader in the UAE’s Islamic banking industry, while Islamic banking in general becomes more and more globally prominent.

Formed by a decree issued from then-ruler of Dubai, the late HH Sheikh Rashid bin Saeed Al Maktoum, DIB became the first bank in the world to offer services that incorporated the principles of Islam into all of its practices. Prior to the establishment of the bank, customers did not have access to sharia-compliant banking services. DIB pioneered this form of banking, establishing an alternative based on fairness and transparency.

AED90.6bn

DIB total assets 2011

AED95.4bn

DIB total assets 2012

Four decades later, DIB is still setting the standards for others to follow, as the concept of Islamic banking has gathered momentum in the Arab world and internationally. Today, the bank competes on an equal footing with the world’s largest conventional banks by providing high quality products and services at a competitive price under the sharia-compliant umbrella.

DIB has also grown its network globally and expanded its presence in key markets around the world. The expansion strategy began with the establishment of DIB Pakistan, a wholly owned subsidiary of DIB, which today has a network of 100 branches across 36 major cities in Pakistan. The bank has also increased its footprint by entering other promising markets, including Jordan, Sudan, Turkey and Bosnia.

Through its focus on innovation and excellence, DIB has progressed from being the pioneer of Islamic finance to attaining the status of the UAE’s largest Islamic bank with a customer base of over 1.4 million customers and a wide network of more than 85 branches.

Professional service
DIB serves consumer, commercial, corporate and institutional clients through dedicated divisions staffed by the industry’s best professionals. With a strong emphasis on providing unparalleled customer service, the bank continually invests in evolving its offerings to meet the changing needs of its customers. Its Johara ladies banking and Wajaha wealth management divisions are specialised departments dedicated to serving women and high-net-worth individuals respectively. Recently, the bank has launched its Takaful (Islamic insurance) business, while simultaneously creating a new offering for the fast-growing SME sector.

With the above and more, DIB boasts a product suite that encompasses all areas of commercial and investment banking, positioning it as a major player in the overall banking and finance sector in the region.

Additionally, DIB has incorporated several subsidiaries in real estate development and other related financial services companies, including Deyaar Development in 2002, DIB Capital in 2006, and Dar Al Sharia Legal and Financial Consultancy in 2008. In 2013, the bank completed the acquisition of Tamweel, the largest home finance provider in the UAE, having previously been the majority shareholder, allowing DIB to play a more active role in supporting the country’s rapidly growing mortgage market.

The bank is committed to improving the quality of life and providing job opportunities for people in the UAE

The bank has also continued its ambitious plans to expand its physical presence across the UAE, including its in-mall network, which enables customers to conveniently combine banking with shopping activities. This is in line with DIB’s aim to enhance the range of banking channels for its customers. To this end, the bank has improved and developed new e-banking services, including a mobile application and partnerships with organisations like Emaar and Western Union.

As DIB’s branch network has expanded, as have the number of alternative banking channels available to customers, such as internet banking, telephone banking and e-branches. DIB offers online and mobile telephone banking facilities, giving customers greater flexibility to manage their relationship with the bank.

DIB has also shown that it is a bank of firsts time and time again. The bank launched Emirates REIT, Dubai’s first real estate investment trust, and was an arranger in the first fully UAE Islamic bank aircraft financing deal for the purchase of an A340-500 by Emirates Airline. In addition to this, DIB has also been involved in several benchmark sukuk transactions over the past year. In March 2013, the bank successfully tapped the capital markets with a tier one sukuk amounting to $1bn (AED 3.7bn), which was oversubscribed 14 times by local and international fixed income investors. With a rating of ‘Baa1’ from Moody’s and ‘A’ from Fitch, and with both ratings carrying a stable outlook, DIB is recognised as a critical pillar in the UAE financial sector.

DIB’s focused strategy to strengthen its balance sheet, diversify risk, and establish a robust platform for growth has yielded huge dividends in 2013. In the first nine months of 2013, the bank surpassed its full year profit number for 2012, with profits up 33.5 percent. With asset quality improving and business growing, the bank’s customer base continues to expand, with deposits reaching AED 79.6bn as of September 30, 2013, giving rise to the best liquidity position in the country.

The bank is also active in promoting Emiratisation, with the aim of encouraging UAE nationals to participate in and improve the economy of the country. DIB has achieved 100 percent Emiratisation at branch manager level and, across the organisation, the figure stands at 46 percent. This achievement was recognised in 2013, when the bank received the Dubai Human Development Award for its proven track record of developing and nurturing UAE National talent.

Community leader
A key component of DIB’s strategy has been to support the advancement of the local community and the development of the UAE. In this regard, the bank has been characterised by a strong commitment to corporate social responsibility and support for programmes aimed at developing the country. From inception, DIB has been guided by outstanding individuals who understand that the bank has a wider role to play in society than simply offering banking services.

As the country has started to recover from the financial crisis, DIB’s contribution to the local community has been vital. The DIB Foundation, a non-profit, social, humanitarian and charitable organisation that distributes millions of dirhams to critical causes at home and abroad each year, has worked tirelessly to support disadvantaged people. The organisation has helped families through a range of social and financial difficulties by helping them with education fees, paying rent on homes, settling fees for medical cases and providing medical equipment to hospitals and health centres.

Education, in particular, has been a significant area of focus. The bank is committed to improving the quality of life and providing job opportunities for people in the UAE. DIB launched the Shaatir Savings Account, a unique savings account just for children, which aims to help them develop their financial knowledge from a young age. The bank’s Masrafi programme, meanwhile, provides unique opportunities for promising young Emirati nationals by training and helping them develop a career in banking.

Worldwide recognition
For its contribution to the banking industry and the wider community, DIB has earned the respect of its peers around the world. The bank’s leading position has been reaffirmed by the more than 175 local, regional and international accolades that it has won since 2004. In 2013, the bank won 11 awards across diversified areas, including retail, corporate and investment banking, as well as corporate social responsibility and consultancy services.

Recent awards include being named ‘Best Islamic Retail Bank’ at the Banker Middle East Industry Awards, ‘Best Sukuk House’ at the EMEA Finance Middle East Banking Awards and receiving the ‘Dubai Human Development Award’ from the Department of Economic Development.

While the bank will always have a historical position as the first Islamic bank, DIB has always had its eyes set firmly on the future. With a challenging goal to become the most progressive Islamic financial institution in the world, DIB is devoted to entrenching its position even further as a cornerstone of the industry. With these objectives in mind, the bank is committed to supporting Dubai’s aim of becoming the capital of the global Islamic economy, which is currently estimated to be worth around $6.7trn.

DIB is excellently positioned to support and benefit from the increasing demand for the products and services that it has pioneered. The consumer segment will likely continue to drive much of that expansion, while the rise of Islamic insurance, or takaful, will also make a lasting contribution. Sukuk, Islamic mortgages and Islamic pension funds represent other key areas of growth.

Since 1975, the landscape of the UAE has changed almost beyond recognition. New roads and bridges have sprung up everywhere, as have awe-inspiring hotels, shopping malls and real estate developments, including, of course, the world’s tallest building. One of the few constants amid this sea of change has been Dubai Islamic Bank. As the future continues to be a promising one for the country, DIB stands firm in its commitments to be a critical part of this growth.

Angolan banks work to reduce national oil dependency

Posted on January 13, 2014January 9, 2014 by Ashton Wenborn

The Angolan economy has seen its fortunes take an oil-inspired upward turn after the conclusion of a costly civil war at the turn of the century. 10 years ago, Angola’s GDP stood at just $10bn, according to the World Bank, but has since swelled to $110bn and become the third-most prosperous economy in the Sub-Saharan region. The country’s success story is in large part due to the oil industry, so much so that economic boom and bust is inextricably tied to changes in oil prices, leading many to raise the issue of Angola’s lack of economic diversity.

Recognising that the country must diversify if it is to ensure a sustainable form of growth, resident Angolan firms and the country’s government are taking steps to supplement the country’s existing economic strength with alternative channels of growth. Banco Angolano de Investimentos (BAI) is just one of many domestic companies whose influence can not only be seen in the financial sector, but in the rise of local SMEs and the betterment of the communities in which they operate.

Founded in 1996, BAI remains the biggest bank in Angola by asset size – approximately $12bn total assets – and is well positioned to negotiate the numerous challenges posed by a financial landscape in the midst of change, with 500,000 domestic clients and a network of 120 branches and seven corporate centres.

The bank’s mission is to uphold and advance the national economy and at all times abide by a fivefold ethos of respect, transparency, customer centricity, ethicality and professionalism. Put another way, BAI promises to deliver efficient and personalised results in all it does, which reinforces its reputation as an essential partner for doing business in Angola.

Aside from offering exemplary banking products and services to individual retail customers and SMEs, BAI is also highly regarded among corporates and the Angolan community at large. However, what differentiates BAI from local competitors is its steadfast understanding of the ways in which oil props up the national economy and why it is that the country must diversify if it is to grow.

Oil contribution to Angola

45%

Of GDP

75%

Of government revenue

90%

Of export earnings

The importance of oil
Many in Angola are directing their attention towards industries other than oil and gas in an attempt to bolster the many sectors that can also offer the country opportunities for expansion. Nonetheless, the importance of the oil sector to Angola’s economy is plain to see; World Bank figures show that the industry accounts for around 45 percent of the country’s GDP, 75 percent of government revenues and an incredible 90 percent of overall export earnings.

To further illustrate the changes of this past decade, Angolan oil production increased at an average rate of nine percent between 2000 and 2012, averaged at over 1.7 million barrels per day in 2013 and is on course to reach a rate of two million barrels per day as of 2015, according to the country’s oil minister.

One of the primary ways in which the financial sector is hoping to benefit from the oil sector is through the introduction of a new law requiring foreign oil companies to pay suppliers from funds drawn from local Angolan banks. Although the policy will no doubt benefit Angolan credit markets – with the Economist Intelligence Unit estimating that it could bring an added $10bn to Angolan shores – many believe that the law could lead to delays and reductions in short-term oil production. Regardless of these concerns, however, the fact remains that financial institutions such as BAI will most definitely thrive in the face of additional liquidity.

The development will likely serve to boost Angolan coffers and provide both business and government with the necessary liquidity to invest in additional projects. Although the changes will complicate dealings, BAI boasts an in-depth, specialist knowledge of oil transactions and is well equipped to increase its operational efficiency.

In terms of facilitating finances for those in the oil industry, BAI has offered its extensive services to a great many oil companies operating in and around the region, whether on a company or individual basis. One of BAI’s biggest partners is Angola’s national oil company SONANGOL, with BAI having structured many of the organisation’s financing needs and offered a number of investment banking services in liaison with a select few international players in the field.

Bettering the community
Aside from BAI’s dealings with the oil industry, the bank’s central focus lies in advancing the wider economy and facilitating those in the local investment space. BAI has been supporting government and local businesses since its establishment, with the intention of contributing to the diversification of Angola’s economy. The most notable of these schemes is entitled Angola Investe, and draws on an annual fund of $50m to supplement those with ideas for local projects that could potentially serve to offset the need to import so many foreign goods.

Another of BAI’s goals is to bring banking to those without access to financial services in many of Angola’s local communities. According to the Angolan Central Bank, as of 2012 only 22 percent of the Angolan population had access to these services, which represents a huge challenge for all of Angola’s financial institutions and highlights an issue that has plagued neighbouring nations in the region for quite some years now.

BAI’s concerns lie not only with business but also in developing the local community

In response to this issue, BAI has delivered on many of these challenges through its subsidiary BAI Banco Micro Finanças (BAI BMF), which microfinances small businesses and entrepreneurs and has also brought banking branches and financial services for the first time to many of Angola’s unbanked population. Propelled by a substantial investment in its people, training and motivation, alongside a strong emphasis on consolidating its balance sheet, BAI BMF currently has 19 branches across the country.

In addition to BAI BMF, BAI has other member companies in its group, namely: Academia BAI (education, Angola); BAI Europa (banking, Portugal); BAI Cabo Verde (banking, Cape Verde); Nossa Seguros (insurance, Angola); Griner (construction, Angola); and Imogestin and Novinvest (real estate development and promotion, Angola). This conglomerate of companies provides synergies to Angolan businesses and acts as a platform from which they can grow outside of Angolan borders.

BAI’s concerns lie not only with business but also in developing the local community, and the bank is not only demonstrating social responsibility through its actions, but is embedding corporate social responsibility in the core values and principles of the whole organisation.

Inspired in large part by the country’s enduring social deficits, BAI dedicates its attention and resources to numerous sectors spanning education, health, sports and culture, provided that each of these projects promises a degree of sustainability and balanced development for the community in question.

The future for Angolan banking
In order to maintain its leadership in the Angolan banking sector, BAI is looking to invest a great deal more time and resources in bettering its services and products and reaching a greater share of Angola’s population.

The bank’s priorities for the coming year will be: consolidating its balance sheet, with an increase in provisions for credit; maintaining the high quality of its banking services; training and retaining employees; enhancing technological and operational support; and streamlining budget control processes. Put simply, BAI is preparing itself to consolidate its holding company so that it is adequately equipped for the challenging economic times ahead.

For the foreseeable future, the Angolan financial sector will be challenged by new market entrants as well as reduced profit margins. Therefore, banks that understand the market’s tendencies and demands while managing their balance sheets accordingly will most probably prosper.

As is always the case, attraction and retention of the best human resources, within the described business context, will be one of the key challenges posed to the boards of financial institutions – these being not just technical but also behavioural. Put in a broader context, BAI will continue to support government initiatives, businesses and local communities by investing in its people and in turn delivering professional financial services with a loyalty to local relationships.