World Finance speaks to Finovate delegates from Online Pay, Asseco SEE and Fobiss about what the conference offered to them.
Come back later for a full transcript of this video.
Month: February 2015
Bitcoin prices benefit from Google crypto-system
Google has announced it is currently testing a new payment system known as Plaso. Seen as a direct rival to Apple Pay – a mobile payments system – Plaso is believed to allow customers to carry out bitcoin transactions using their Android smartphones to purchase goods.
On Friday darkcoin, dogecoin, paycoin and litecoin all saw gains between one and
four percent
Following the news on Thursday 12, it was reported that the top 10 most valuable digital currencies all underwent a resurgence and increased in value over a 24-hour period. This is not the first time investments in the digital currency have caused a market-wide surge. In 2014 Microsoft began accepting bitcoin payments for its digital products and the prices of cryptocurrency surged by $20.
On Friday darkcoin, dogecoin, paycoin and litecoin all saw gains between one and four percent, with fuelcoin rising by more than 30 percent. Bitcoin experienced sustained stability throughout the week and soared 20 percent on the weekend to its highest price in nearly three weeks, with a price rise of seven percent and a market cap just above $3bn.
This growth was short lived as within 12 hours bitcoin had dropped 17 percent to $220, failing to advance beyond its $265 three-week high. Bitcoin payments are believed to be more efficient as it cuts out the middleman and it is hoped the success of Plaso will promote more investment and more of a long-lasting boost to the market.
PwC Sweden on the OECD’s tax action plan
As news of Starbucks, Google and other multinational corporation’s purported tax avoidance hit the headlines in Europe, regulators struggled to effectively respond to the public outcry – that is, until now. The regulatory antidote to the hysteria has been created by the OECD and trickled down to country level. World Finance speaks to Magnus Johnsson, Head of Tax Services at PwC Sweden, to find out what the regional and local impact will be.
World Finance: Magnus first, can you tell me about what’s spurred on the OECD’s 15-point action plan?
Magnus Johnsson: I think the backdrop would be as you refer to in your introduction, is the fair share of taxes debate we have seen over the last – call it – three to four years. This is not a regulatory debate; this is a morality debate around where the corporates paid their taxes and how much they payed in taxes.
World Finance: So why now are these concerns really leading to action, considering that MNCs have been operating all over the world by nature of being MNCs from time immemorial?
Magnus Johnsson: It’s a good question, I think one the aspects is obviously the consequences of the financial crisis. Territories, countries, they would like to safeguard their tax basis, they need the money. I think there is a slightly bigger question here which is; to look at the international tax system, and I think it’s pretty clear that it’s out of date, they need some reforms on the international tax system as a whole.
[Y]ou have to remember that the changes and the proposed changes are potentially the biggest changes that we will see in international tax systems for decades
I think there is a third aspect and that is that we have seen a number of different stakeholders taking part in this debate, which we may not have seen in the same way before. Stakeholders being governments and tax authorities obviously, corporates but also the public, NGOs and so on. So I think it’s a combination of these three which have put these issues on the table at the moment.
World Finance: So the manifestation of course of these grievances has really been this action plan, yes?
Magnus Johnsson: Yes, absolutely and I think that part of this is that the G20, when they saw the entire discussion after the financial crisis, they commissioned the OECD to put together an action plan in order to address these issues. So they have done, the OECD they came up with their action plan in 2013 and the final reports will come out later on this year. The main objectives of this are two-fold; one is to ensure that corporates are paying taxes in the countries where they conduct their businesses, the second is to prevent double-non taxation. So those aspects of taxes, and call it the discrepancies between different tax systems, is what you want to achieve with the OECD action plan.
World Finance: So do you welcome these changes?
Magnus Johnsson: I think they are inevitable; you have to remember that the changes and the proposed changes are potentially the biggest changes that we will see in international tax systems for decades. It’s definitely the biggest changes that I will ever see in my career. So it’s all about to take a fundamental look at how the international tax system works, so yes I think it’s absolutely necessary. You have to remember that the foundation of the current double tax treaties and modern treaties goes back to the 1970s. Quite a lot has happened since then when it comes to business and global business and global economy.
I think the other aspect of this is there is a need of behavioural changes as well, and I think that the companies and corporations out there, they are starting to adapt to an environment where taxes are not only a cost but an obligation. So there are two aspects here; the behavioural aspect, and regulatory aspect and these two have to go in balance. You have to balance those going forward.
World Finance: How would you conceive of a programme that is mutually beneficial for all parties involved and still have the right regulatory elements included? Do you think that these proposed changes for instance, go far enough to meeting all of those demands?
Magnus Johnsson: It’s a boring answer but we have to wait and see a little bit, we need to see the final outcomes coming – as I said – later on this year. I think from a corporate’s perspective, what they need and what they have to adapt to, they need certainty and they want to have predictability. So of course if we have a period of time where there are uncertainties and unpredictabilities, they don’t like that.
When we see what the final outcome will be I’m sure they will adapt, I think it’s more difficult for them to really think about the fact they also have to think about their reputation so the behavioural aspect is potentially more difficult for them to adapt to compared to the regulatory changes.
World Finance: And let’s talk about the behaviour and experience of international investors. We know that in Sweden in particular, some investors have expressed frustration over growing unease, about how these changes are going to come into play. So from an international perspective do you think that Sweden’s curb appeal as a place to invest in as well as Europe as a continent is going to be in anyway diminished?
Magnus Johnsson: If we look at Sweden I think we have had a history of quite a lot of regulations coming through over the last couple of years. And some of them have been questioned. I think in Sweden we have a situation where potentially we are looking for a bigger tax reform going forward when it comes to corporate taxation. The other aspect in Sweden is that we have seen the tax authorities being increasingly aggressive towards corporates in certain industries. This is something where we have seen international investors asking questions ‘what’s happening in Sweden’, it’s always been a high tax country but it’s always been a very predictable country, and I think that maybe international investors are looking at this and asking what’s happening.
EuroLife strengthens its position in wake of economic crisis
Cyprus is finally on the road to recovery after its devastated economy, heavily hit by the recession in 2009, resorted to a €10bn ($12.4bn) EU and IMF bailout in March 2013, becoming the fifth country in the eurozone to need rescuing. That year was one of intense economic strife, resulting in a significant scaling down in the banking sector after its second largest institution, Laiki, was closed down at the expense of non-insured depositors.
Marking “the most serious recession since the Turkish invasion in 1974”, according to Cyprus’ Finance Minister Harris Georgiades, the crisis created a troubling climate for businesses. GDP dropped 5.4 percent in 2013 – although lower than the 8.7 percent forecast by the Troika – and tourism fell 2.4 percent.
The finance sector was particularly badly hit, with insurance companies suffering under the conditions. Policy cancellations rose in the face of reduced income, as did the levels of debt and unemployment – the latter of which reached 17 percent in 2014. Those issues are likely to continue to impact the sector over the medium term.
Despite the troubling climate, Cyprus has proven more resilient than expected, with a recovery now clearly in sight
Leading insurer EuroLife was among the insurance companies affected by policy cancellations. But while competitors proved unable to respond to customer needs, EuroLife was able to strengthen its proposition, demonstrating its desire to help customers by focusing its approach on them and tailoring its services appropriately – thereby coming out stronger than before.
Despite the troubling climate, Cyprus has proven more resilient than expected, with a recovery now clearly in sight. That revival is providing EuroLife with an opportunity to grow its company through an ambitious strategy focusing on developing its digital offering, increasing the segmentation of its services and stepping up its emphasis on the customer to an even greater level.
EuroLife’s General Manager Artemis Pantelidou spoke to World Finance about how the company dealt with the crisis, what the future has in store for the firm and the wider industry, and how EuroLife is achieving its ultimate goal of helping customers in each and every stage of their lives.
How did the financial crisis affect EuroLife?
EuroLife actually came out stronger, as the crisis provided us with an opportunity to deliver our customer promises and prove our resilience against a background of very difficult financial conditions. Being able to keep customer values at the heart of our business and to immediately respond to customers’ liquidity needs, at a time when our competitors failed to do so, provided an ideal opportunity to demonstrate our strong proposition, customer focus and financial expertise. That has had a positive influence on how our company is perceived in the market.
The general economic downturn has, however, led to a reduction in the volume of our business as a result of policy lapses and cancellations. The company still has a strong capital base and is well prepared for the Solvency II requirements, which are set to come into place in 2016.
How did EuroLife protect itself from the worst of the financial crisis?
Maintaining our customer-centric business philosophy helped us to prevent an insurance run. We made sure we did what was best for our customers, acting in a transparent and responsive way and communicating the customer’s benefits and savings very clearly to them.
Our diversified investment strategy and strong risk management practices embedded in our daily business, meanwhile, protected the company’s balance sheet and ensured our overall financial robustness. We reduced our payroll costs through an early retirement offer, which several of our employees took up. Together with improving operational efficiency, that helped to reduce the company’s overall expenditure.
Cyprus’ economy is beginning to recover. What does that mean for the business?
High unemployment, reduced disposable income and high household debt mean the economic environment will remain challenging for our business in the immediate future. Sustainable growth will need to come from innovation. In the longer term, the area of retirement savings will be a big opportunity for growth and we aim to capitalise on that.
What is your growth strategy for the future?
We aim to widen out our market by attracting younger, more digital-savvy consumers. We will also focus on strengthening relationships with our existing customers, ensuring the best possible experience for them throughout their lives. In order to do that it’s important we make the service personal to each customer as well as ensuring we deliver on our promises, communicate effectively and reward customer loyalty.
We also aim to strengthen our customer segmentation and to develop a clearer understanding of buying behaviour. That will enable us to better align our services to the needs of our customers and to help them get the right insurance throughout their lives. We will focus on analysing customer data in order to identify and understand their needs, and offer them products according to their personal preferences.
How have you adapted your service model to better serve your members?
We trained our customer-facing staff to deal with panic policy withdrawals and reconfirm the need for insurance cover to the customer. For customers struggling financially, we offer alternative solutions to cancelling a policy such as partial surrender, reducing the insurance premium or even making some of the policy free of charge. For customers whose policies lapsed, we increased the period for reinstatement without underwriting them, and relaxed the partial reinstatement rules.
What challenges does the insurance industry in Cyprus face?
One of the biggest challenges is staying ahead of customer needs, as they are constantly being reshaped by changing demographics and behaviours. The customer proposition has to be continually adapted to remain relevant, necessary and desirable. Another challenge is embracing digital technology, which is rapidly transforming consumer behaviour and business models. Doing business in a more heavily regulated environment – with Solvency II, FATCA, Prips, IMD and MIFID II all coming into play – is also likely to present some challenges.
How will EuroLife use its expertise to overcome these challenges?
We have a team of talented and dedicated professionals who listen to the voice of the customer, and design products and services in line with their evolving needs and preferences. Our agents are trained to offer excellent customer service. They are also provided with innovative tools in order to assess the customer’s needs and assist with their financial planning. We are experts in underwriting, investment and claims management with a proven track record and a
risk-based approach.
How does EuroLife differentiate itself from competitors in the market?
We put the customer at the heart of everything we do and focus on building strong relationships, delivering tailored insurance solutions based on customers’ individual needs. Many of our competitors focus on pushing products and increasing business volume, often adopting practices that are in the interests of the company and its agents rather than the customer. We want our relationship with the customer to be life-long. The insurance products we offer are flexible, making us able to respond to their changing requirements. We are in a business driven by people and it’s important to serve their individual insurance needs.
Does EuroLife have any projects happening now or coming up in the future?
We are in the midst of a project that aims to strengthen the segmentation of our market. We aim to define the segments of our insurance more clearly, in line with the needs consumers have at different stages of their lives.
We intend on using customer insight, with regard to the particular segments, to tailor our services according to customers’ specific preferences. We are also developing and strengthening the workforce in our agencies, equipping our employees with the skills needed to respond to the demands and expectations of our consumers.
Embracing digital technology in order to optimise our business activities on a day-to-day basis (in terms of marketing, customer communication and the services we provide) is another of our key current focuses for development. In addition to that we are modernising our core system in order to ensure our business responds immediately to market needs, bringing out new products and services quickly.
What does the future hold for EuroLife?
We remain focused and committed to delivering value to our customers and building lifelong relationships. With a proven track record of delivery, and a determination to keep ahead of market developments, we aim to remain competitive in an ever-changing world. As the country’s economy recovers we are well placed to achieve strong growth, and we aim to remain the number one choice for Cypriots for their life, pension and health solutions.
The British Virgin Islands draws in corporate business from afar
The British Virgin Islands (BVI) is one of the world’s leading financial centres, with high-quality services able to meet the changing needs of international businesses and high-net-worth individuals (HNWI). The government wishes to build upon the country’s success, working in close partnership with the private sector to create a stable, well-regulated and neutral jurisdiction that is able to make significant contributions to the global economy.
As a premier corporate domicile, the BVI offers wealth management solutions in trust and estate planning, funds and investment business, captive insurance, ship and aircraft registration services, as well as advisement and support services from some of the world’s leading law and accounting firms. This means that the government has the right people and businesses to reach its goal of becoming an even bigger player on the world stage.
The government has the right people and businesses to reach its goal of becoming an even bigger player on the world stage
Tough act to follow
Although no one knew it at the time, the inception of the British Virgin Islands’ International Business Companies (IBC) Act, in the early 1970s, played a big part in the country’s success as a financial hub. American lawyer Paul Butler provided the initial IBC draft, and was assisted by the then BVI Attorney General Lewis Hunte, who reworked the proposal in order to make it more compatible with BVI law. The act was finalised on August 15 1984, with the BVIs Legislative Council passing the new act into law. Then Chief Minister, Cyril Romney, famously proclaimed it the most important piece of legislation to be enshrined in the BVIs history since emancipation.
The IBC Act 1984 became the crown jewel of the BVI offshore offerings and resulted in a thriving financial services industry for the territory. The act was extremely innovative and for a long time it remained the benchmark against which the company registration and incorporation laws of other jurisdictions were judged.
Since then, the BVI Business Companies Act of 2004 has taken the territory’s success to greater heights, continuing to enhance its offering with a new piece of legislation – the Business Companies (Amendment) Act 2012, which was developed alongside the BVI Business Companies Regulations 2012. Both the act and the new regulations aimed at streamlining and improving the administration of the affairs of BVI companies, which they accomplished with great success.
As a result of the new legislation, from 1989 to about 1997 there was a sudden explosion in the number of incorporations, increasing at a rate of nearly 50 percent a year. This in turn rapidly accelerated the territory’s economic growth on a scale it had never seen before. A study was completed in 1999 on behalf of the UK by accountancy firm KPMG, which estimated that the BVI had amassed a 41 percent global market share for offshore vehicles. By 2004, the BVI managed to secure its position in the global economy, achieving the 12th-highest GDP per head of population in the world.
The success of the BVIs Business Company Act had prevailed; but looking back now, it is easy to overlook how radical the legislation really was, and how many thought it could have harmed rather than helped. Instead, it streamlined the incorporation procedure, removed the requirement of corporate capacity, abolished the need for corporate benefit, recognised that companies could exist without members, and permitted companies to provide financial assistance for the acquisition of their own shares. Not only that, but it provided for true statutory mergers and created new statutory tools for restructuring and reorganisation.
For some time, the BVI has remained committed to offering the very best service structure on offer and constantly looks to differentiate itself in the market. Recent changes to the legislative regime have given it yet another edge in that direction and include offerings, such as the BVIs Approved Manager Regime (AMR), enhancements to VISTA trusts, as well as PTCs and the addition of arbitration services.
AMR, which came into force in December 2012, allows eligible fund managers and advisers to submit a simple and short application to the Financial Services Commission and then automatically commence business seven days later, unless the commission raises an objection during that period. This compares to a minimum of four weeks to process an application for a ‘Part I’ license. Under the regulations, an approved manager can act as the investment manager/adviser to any number of private or professional funds recognised under SIBA, as well as any number of closed-ended funds domiciled in the territory, which have the key characteristics of a private or professional fund. The approved manager can act for non-BVI feeder funds into BVI master funds.
However, there is one key restriction, which is that aggregate assets under management of all of the open-ended funds cannot exceed $400m and the capital commitments of all of the closed-ended funds cannot exceed $1bn.
Aircraft and shipping
The BVI is now well poised to take on a new area of business since the Mortgaging of Aircraft and Aircraft Engines Act 2011 was brought into force in 2013. The new law complements the jurisdiction’s status as a US Federal Aviation Authority Category One aircraft register under the International Aviation Safety Assessment programme by creating a framework for registration in the British Virgin Islands of security over aircraft and, separately, aircraft engines. This has improved the BVIs confidence inasmuch as it will become a leading offshore centre for aircraft registration.
The territory is an acknowledged Category One Red Ensign register, which means that the jurisdiction is one of only 10 centres around the world where mega and super yachts of up to 3,000 gross tonnages, and general cargo ships of unlimited tonnage, can be registered.
The BVIs facilities include registration of ships, mortgages, discharge of mortgages, change/transfer of ownership and full business, legal, telecommunications and courier services. Ships flying the BVI red ensign are British ships and are entitled to British diplomatic and consular support and Royal Navy protection. It also has access to the range of technical expertise of the UK Maritime and Coastguard Agency.
The BVI has also matured into a major international insurance centre and a highly favoured domicile for enhanced insurance products and services. It remains fully compliant with the International Association of Insurance Supervisors’ core principles, which simplifies it regime, as well as increasing the territory’s levels of transparency.
The BVI plays host to many fund managers and administrators, as the world’s second largest hedge fund domicile. It is a member of the International Organisation of Securities Commissions, helping it to further enhance its attractiveness to clients from emerging market jurisdictions. There is no requirement for service providers of the BVI fund such as the manager, administrator or custodian to be resident in the BVI.
However, several international service providers are present to provide services locally. Over the years, the territory has solidified its position as the location of choice for international trust settlements and operations. The 2013 amendments saw a welcome overhaul of the BVIs trusts and estate legislation, but VISTAS and PTCs remain important innovative tools in building appropriate asset protection and succession structures for international private clients and their families.
International business partner
The world’s foremost legal and accountancy firms all have a presence in the BVI and there are clear signs of a growing demand for their services, particularly in the areas of funds, insolvency practice and litigation. In 2014, the territory has also been given the green light as an arbitration centre since the recent passing of the Arbitration Act 2013, which aims to modernise the previous principles of arbitration and facilitate fair and speedy resolution of disputes without unnecessary delay or increased expense.
The BVI is a popular jurisdiction for investors from the emerging markets of China and the other BRIC countries. Many industry leaders have noted that no other corporate vehicle has had quite the impact in Asia as the BVI Business Company (BC). It has become standard practice for the expanding class of HNWI, businesses and even governments of the BRIC countries to acquire BCs for a multiplicity of investing and other cross-border transactions. BVI trusts and fiduciary services and funds and investment business are also popular in the BRIC countries for wealth management, investing, structuring ownership and control and for planning for the succession of assets.
The BVI International Finance Centre is committed to maintaining the territory’s position as a well-regulated, pre-eminent, progressive jurisdiction for international business services. The reputation of the territory has expanded across the globe and many developing markets now realise the advantage of doing business in the area. The territory will no doubt continue to lead by example, in order to prove to the world that its multifaceted products and services remain innovative, attractive and cutting-edge – all so it may best cater to every client’s need.
IMF issues Ukraine emergency bailout
Following a year of turmoil in Ukraine that has stricken the economy and caused the hryvnia to fall dramatically by over 50 percent, the IMF has announced a new emergency bailout for the troubled state. The loan replaces the $17bn fund that was allocated last year to Ukraine, of which only $4.5bn was received.
Kiev must slash its budget and overhaul the banking system
The IMF’s renewed plan was announced soon after a ceasefire was agreed between Russia and Ukraine, which took an intense negotiation period lasting 17 hours to reach. The World Bank has also agreed to lend up to $2bn to aid the fragile economy which has been edging closer towards default.
In 2014, the Ukrainian state was faced with mass protests, the ousting of President Yanukovych, the Russian annexation of Crimea and an aggressive uprising that continues to stretch out from the eastern region; an unprecedented, chaotic year in the country’s history.
In accordance with the IMF’s conditions for the $17.5bn loan, Kiev must slash its budget and overhaul the banking system. The state is also obliged to make further headway in fighting corruption. Cutting spending on social services and benefits is likely to promote additional tension among the population, which is already rife with discord amidst the deepening fiscal crisis. As the Ukrainian people face further austerity, the insurgency in the east could successfully enhance its mobilisation efforts, thereby causing further social unrest; an antithetical by-product that may arise in the latest attempts to alleviate the country’s economic decline.
Smith: 2008 crash era liquidity funded by organised crime
World Finance speaks to Dr Benjamin Smith from the University of Warwick to see if, three years on, the banks have cleaned up their act.
World Finance: Benjamin, how did this scandal come to light in 2012, and how big a problem was it?
Dr Benjamin Smith: The Officer of the Control of the Currency in the US actually kind of knew about very poor compliance and regulation in HSBC Mexico for many years, and they’d warned them repeatedly on a pretty much annual basis and told them to clean up their act. But they did very little to enforce this.
However, by about 2010, HSBC had about a 17,000 alert on different customers that had had absolutely no compliance or regulation. The US OCC started to up its investigations. When it really exploded was when a plane stashed with cocaine was captured, and it transpired that it had been bought through an HSBC Mexico account.
World Finance: A lot of illegal funds came from Mexico. How did this work exactly?
Dr Benjamin Smith: HSBC bought a bank called Bital which was relatively notorious for its links to the cartels. HSBC and the head of HSBC Mexico, a guy called Sandy Flockhart, did absolutely no investigations into the bank whatsoever.
HSBC and the head of HSBC Mexico, a guy called Sandy Flockhart, did absolutely no investigations into the bank whatsoever
They set up something called HSBC Cayman Islands, which was a dollar account. Now, what you could do it walk into an HSBC branch with a mass of dollars, put them into this HSBC Cayman Islands branch, it seems you didn’t have to give even a real name and address, and by I think 2010 there were around 50,000 clients holding $2.1bn in assets. 15 percent of these didn’t even have a file on them.
World Finance: Wow, well just how in bed were the banks with the cartels?
Dr Benjamin Smith: For example, Antonio Maria Costa, who was the head of the UN office on drugs and crime, claims that he’s seen evidence that during the crash of 2008. frankly the only liquidity in the market was the money from organised crime. His claim is that, in 2008, around £352bn worth of drug and organised crime money were absorbed into the system.
World Finance: So HSBC didn’t do anything wittingly illegal though, did they?
Dr Benjamin Smith: Given that I’m on TV, I’ll say no. At best then they were systematically incompetent, at worst they systematically ignored OCC compliance orders. None of the major players in HSBC, however, were ever prosecuted. In actual fact they’ve got off remarkably well and have very comfy jobs in the finance industry to this day.
For example, David Bagley, who was Head of Compliance and was massively incompetent, is now Head of Compliance at the Co-Op Bank in the UK. Sandy Flockhart, who was in charge of HSBC Mexico and made the purchase of Bital with no investigation into it, is now Chairman of a group called B and C. And Rona Fairhead, who is also being sued in a class action lawsuit in New York, is Head of the BBC.
World Finance: Following the probe, HSBC agreed to pay $1.9bn and enter into a five year deferred prosecution agreement to settle allegations including that it failed to catch at least $881m in drug trafficking proceeds laundered through its US bank. So three years on, and where does the bank stand now in regards to this?
Dr Benjamin Smith: Well it seems to be doing better, and the OCC alerts seems to have gone down radically, partly I imagine this is because they don’t want to incur another fine, and they’ve got rid of chronically incompetent people within their organisation, and given them to other organisations.
World Finance: Are there still weaknesses in the system where illegal proceeds can slip through?
Dr Benjamin Smith: In terms of banking, perhaps less so. So in 2010, Mexico actually set restrictions on dollar deposits, which seems to have gone a long way to eradicating this. However, there are other ways that one can launder money.
A year ago, 1000 police raided the garment district in Los Angeles and seized about $65m in cash and arrested about 10 people. According to the court document, the garment businesses were helping drug dealers ferry their proceeds from sales back to Mexico. Basically what would happen is a black market peso broker would contact Mexican importers who wanted to buy goods form these garment businesses within Los Angeles. The peso broker would then find the gang, which would pay the bill on behalf of the Mexican importer using dollars from drug trades.The importer then paid the broker in pesos. The broker took a cut and then passed it along the remainder back to the gangs.
World Finance: How is HSBC’s response of increasing its monitoring for money laundering affected its legitimate customers.
Dr Benjamin Smith: Those in Mexico probably have to go through the requirements that many of us would have to go through in a UK bank if we started to deposit large amounts of unclaimed for cash that’s not from our legitimate job.
This is somewhat problematic in Mexico because a) there is a very large informal cash economy, and secondly because much of this cash economy is actually in dollars because of remittances. There are about 11 million Mexicans within the US, many of whom do try and bring their cash back to Mexico.
World Finance: Money laundering is a problem all banks face and it seems that criminals are always one step ahead of the banks when it comes to this. So how do you say is ultimately responsible, financial institutions or governments?
Dr Benjamin Smith: The responsibility of both, but there is a degree of complicity involved, where I think governments realise that things like the market needs liquidity and liquidity can be garnered through the proceeds of organised crime. At the same time it seems that the bank turns a blind eye when it’s making large amounts of money.
KIB accelerates the growth of Kuwait’s banking sector
Lying at the tip of the Arabian Gulf, Kuwait is a member of the Organisation of the Petroleum Exporting Countries (OPEC), sitting on large proven oil reserves, and has an economy rivalling some of the world’s strongest, backed by years of accumulated budget surpluses. Supported by advantageous financial conditions and tight regulations from the country’s central bank, Kuwait’s banking sector remains secure despite economic strife elsewhere in the region.
Founded in 1973, Kuwait International Bank (KIB) has grown to become one of the country’s most active institutions – especially within the Islamic finance sector, after it became fully sharia-compliant in 2007. Massoud Antoun, General Manager and Head of International Banking at KIB, spoke to World Finance about the country’s changing financial sector, how KIB is playing a part in the national development plan – through which Kuwait is to spend $100bn – and how the bank is growing its international correspondent banking network, while holding its own in a highly competitive environment.
Kuwait International Bank (KIB) has grown to become one of the country’s most active institutions – especially within the Islamic finance sector
How would you describe the Kuwaiti banking sector, and what changes have taken place recently?
The Kuwaiti banking sector comprises of 16 conventional banks – including 11 foreign conventional
banks, six Islamic banks – including one foreign Islamic bank, and one specialised industrial bank. The Kuwaiti banking sector is solid, robust and remains relatively unaffected by the regional turmoil. It continues to benefit from a favourable business environment characterised by a strong economy, the vigilant supervision of the Central Bank of Kuwait, and the vast nation’s oil wealth and
reserves.
Above all, the Kuwaiti banking system is highly regulated and supervised by the Central Bank of Kuwait, regularly evaluating the performance and strength of each bank based on the CAMEL/BCOM rating system. Already, the Basel III framework has been introduced, and requires higher capital ratios and improved leverage positions than already in place. The full Basel III capital requirements will be gradually and fully implemented by all banks in Kuwait.
The Islamic banking model is cementing a prominent position in the local banking sector. Five of the 10 Kuwaiti commercial banks operate under Islamic sharia law. The market seems to have spoken in favour of the prudent and transparent nature of Islamic banking. Furthermore, Kuwaiti banks play an important role in facilitating the $100bn national development plan that is currently in motion.
The endeavour aims to bolster the economy through a series of mega projects that will see Kuwait establishing itself as a major attractive market in the region. At KIB, this period is considered a special opportunity to employ the innovative structures already in place at the bank towards the vision pursued by the government.
How did KIBs conversion into a fully-fledged Islamic bank in 2008 impact the bank’s current status?
In the years leading up to the crisis, the Kuwaiti banking sector was highly vibrant and competitive.
It was in this environment that our board of directors took the decision in 2007 to proceed with a two-pronged transformation: from conventional to Islamic, and from a specialised real estate bank to a fully-fledged commercial bank. KIB was in essence entering into new market segments, embracing the Islamic sharia law. This challenge was fully understood by our leadership, and we prepared to move forward in this dynamic environment.
When the global crisis entered the Kuwaiti business environment in the final months of 2008, it acted as a stress test that was successfully overcome due to the prudent measures taken as part of the economic transition process. The economic recession resulted in a reticence in the banking industry, creating favourable conditions for KIB to continue in a less competitive market restrained by the financial crisis. KIB is now actively engaged in providing the full spectrum of sharia-compliant retail and wholesale banking products and services to clients operating in all sectors of the economy, including trading, manufacturing, construction, services, real estate, and SMEs.
What is KIB doing to facilitate international banking in Kuwait?
In light of the above, it is standard to place special emphasis on international banking, as it is a major conduit for business transactions that complement Kuwait’s banking industry. Our strategy is focused on expanding and consolidating our international correspondent banking network, working diligently with banks to create flows of work beneficial to both.
By combining and sharing our local market expertise and insight to the national development plan with correspondent banks, we were able to attract EPC contractors bidding for major projects in Kuwait. Similarly, we are able to service our domestic clients’ foreign trade and contracting related requirements through our enhanced web of correspondent banks.
We have become more responsive to the needs of both our clients and our correspondent banks in an agile, lean and flexible working environment, that is able to provide a vast array of banking products and services, catering to the diverse business needs of our clients. We have also expanded into the financing of transactions outside the boundaries of Kuwait, whether in participation with international banks or on bilateral basis, tapping into the commodity trade finance and continue to expand in this sector.
We are providing banking facilities to projects ranging from oil and gas to infrastructure, and for large tickets we are entering syndicated facility arrangements with local and regional banks. Our activity in this area has expanded greatly over the last two years, with KIB having gained involvement in key mega projects associated with the national development plan.
The Kuwaiti banking sector is competitive. In what ways does KIB stand out?
As a leading Islamic bank with a 40-year heritage in the local sector, KIB offers a valuable proposition
that is difficult to imitate. The bank enjoys strong ties with key governmental and corporate entities built on decades of positive cooperation. At the same time, KIB markets itself as a flexible, modern bank operating within a lean corporate structure and in accordance with global best practices.
Most importantly, we have long recognised that KIBs continued success relies on the people who represent us. Within international banking, we have invested heavily in the long-term development of human capital, to maintain a competitive edge. These professionals are highly experienced, knowledgeable and acquainted with the diverse needs of the market.
Every member of the team is engaged with on-going training, workshops and initiatives aimed at fostering a better work-life balance. These efforts have resulted in a level of workplace confidence that permeates through to our clients. Alongside that, KIB works diligently to strengthen relations with overseas firms engaged in business activity in Kuwait.
This effort involves a dedicated unit within the bank, tasked with intense follow-ups of every mega project being floated by the Kuwaiti Government. Using this information, we are able to pursue leads effectively, while providing additional value to our clients. It is through this type of activity that we have succeeded in building a reputation as a reliable bank with powerful capabilities.
What role is KIB playing in Kuwait’s social development?
Social development is considered a key theme in Kuwait due to its burgeoning young population (see Fig. 1). With a large portion of the local population under the age of 25, KIB has adopted a
programme focused on educating the youth in Kuwait to the importance of saving for their future and practicing responsible money management.
We forged a partnership with a UNICEF-related organisation for this purpose, and are currently conducting school visits and holding student lectures on this topic. We consider KIBs reach to the youth to be central to our role as an Islamic bank, and a responsible Kuwaiti financial institution committed to social development.
Heilmann: ‘Germany needs to take a hardline on Greek debt’
Reporting from Finovate Europe, World Finance speaks to Stefan C. Heilmann, Managing Director of IEG Investment Banking Group, on whether a Troika solution is a plausible option.
World Finance: We’re talking about the prospect of Germany playing a large role in shouldering this debt; do you think that is even a wise move?
Stefan Heilmann: I don’t think it’s a real choice. First of all, I believe that the euro as it is today – and also the European Union – needs to stay in place. Including Greece, and everybody else on board. Everything needs to be done to protect that.
World Finance: It sounds like you accept that there are certain inevitabilities in terms of Germany’s role in restructuring and moving forward from sluggish economic times; are you at all worried about over-exposure of your economy to the situation in Greece?
Stefan Heilmann: Well absolutely! I think somebody has to pay the bill of overspending over a long, long, long time; whether it’s Greece or Europe.
I believe that the euro as it is today – and also the European Union – needs to stay in place
You have to treat this more entrepreneurially. Once you provide debt, whether that’s to Greece or to anybody else, and you can’t repay: I think that’s a restructuring case.
It’s a quid pro quo to basically give the European Union enough certainty that you actually will be able to in the future to come up for all your obligations: and that means restructuring measures. And I think that’s something that the Greeks will have to demonstrate to the Europeans, to the Germans, to all the taxpayers actually – to you and me – whether that’s convincing. If that’s the case, I think the Germans should support that; the Europeans should support that.
And I think that’s the process going on for the moment. I think there are too many extremes in the negotiations: you’re saying, ‘I’m not bailing out, I’m not doing this, I’m ending a pact;’ I think that’s not going to take us anywhere. So I think we have to go back on the table, sit down constructively: what are the measures to be taken to restructure and help the Greek government – and in particular the population and economy – to go forward.
World Finance: Greece’s left-leaning finance minister’s already putting out some innovative solutions to this situation in his country: they don’t necessarily include a Troika method, which is what you seem to be suggesting. Do you think that your country’s finance minister should hold hard to the idea of encapsulating all of these entities in any sort of long-term solution?
Stefan Heilmann: Well, I’m not implying that I’m a pro for the Troika; I’m not also agreeing that the finance minister has a solution, because he hasn’t presented one yet. He has told us a lot of what he won’t accept…
World Finance: And lot’s of emotion behind!
Stefan Heilmann:…and a lot of emotions! So I don’t really know what the plan is of the Greek government.
World Finance: There is none! Right?
Stefan Heilmann: I have no idea. So it’s hard to discuss that.
It’s probably a wiser idea to rethink the people to be involved in the restructuring process. So I’d rather say: it’s a good idea to break up the Troika, and rethink what are the most efficient bodies and people involved in that process.
World Finance: Of course, you’re a banking executive; how do you advise your clients to deal with the prospect of being a lender to one of the most destabilised countries in the European Union?
Stefan Heilmann: Take a summer vacation in Greece, for starters?
World Finance: Right!
Stefan Heilmann: So that’s something that I would advise. I’m a banking executive for internet and technology. So it’s very asset-light industries, and a very booming market.
My clients are not really impacted as much as you would be in energy or manufacturing. I’ve never been asked the question, ‘What’s the impact to my internet, my technology business, because of Greece, because of the European Union?’
Interestingly enough, the US investors ask me very often, ‘What’s the impact on the euro, what’s the impact on currency, what will be the impact in the future, do you think there will be a north and south euro?’ Stuff like this.
It seems that we’re here in Europe, we’re waiting to see what the solutions will be; and the first solution will be that Greece comes up with an idea.
World Finance: And if you could speak directly to your country’s finance minister, what would you tell him to do in the days and months to come?
Stefan Heilmann: Keep a hard line on not letting Greece bail out of their obligations, unless they prove a very constructive way of bringing the country forward; again on a growth path. Not on a savings path, but on a growth path.
DETAIL: Nigeria’s oil and gas sector attracts FDI
Nigeria received the largest amount of Foreign Direct Investment (FDI) of any African country over the period 2010-13. These inflows have grown in the last few years (see Fig. 1) – Nigeria’s National Bureau of Statistics recorded a total of $21.3bn of FDI in 2013, a 28.3 percent growth from the total FDI of 2012, which was calculated at $16.6bn.
On the equity side, FDI from January to May 2012 was at $648m, while in the same time frame for 2013 it was calculated at $811m. A major statistical difference however, can be seen in the Portfolio Investment (PI) for Nigeria, which indicates that investors have a preference for PI due to predictability in returns. From January to May 2012, PI in the form of equity, bonds and money market instruments was $4.42bn, $206m and $423m respectively. Similarly, in the same time frame for 2013, PI in the form of equity, bonds and money market instruments were calculated at $7.09bn, $749m and $565m respectively.
The power sector has been identified as a major growth area of the Nigerian economy
Distributing investment
The principal legislations regulating FDI in Nigeria are the Nigerian Investment Promotion Commission Act and the Foreign Exchange Monitoring & Miscellaneous Provisions Act. These laws guarantee the unrestricted transfer of dividends or profits derived from FDI and unhindered remittance of proceeds (net of taxes) in the event of sale or liquidation.
Historically, the largest beneficiary of FDI has been the oil and gas sector. Over the past year, this industry in Nigeria has witnessed divestments by International Oil Companies (IOCs). This has created opportunities for indigenous oil companies to participate in the upstream sector of the industry. However, due to the high costs involved, a number of indigenous companies have relied on FDI to fund their acquisitions of these upstream assets, mostly through international equity inflows.
The power sector has been identified as a major growth area of the Nigerian economy, with a need to boost electrical power capacity from the current 3,500-4,000MW to 40,000MW by 2020. The recent privatisation of the power sector through the sale of the successor companies set up to take over the assets of the Power Holding Company of Nigeria resulted in the inflow of FDI through direct acquisition of relevant interests by some foreign investors. Similarly, the on going sale of power plants developed under the Nigerian National Integrated Power Project has also created an influx of FDI in the Nigerian power sector.
External factors
DETAIL Commercial Solicitors has been involved in these divestments and acquisitions. We apply our in-depth knowledge of the Nigerian oil, gas and power sectors, and our expertise in mergers, acquisitions, corporate and commercial issues, to provide top-notch legal services.
DETAIL advised Aiteo Eastern E&P Company in its successful bid for the acquisition of one of the assets divested by IOCs. It advised on the acquisition of the Abuja Electricity Distribution Company by Kann Utility Company (a Nigerian company partly owned by Mauritian CEC Africa Investments). DETAIL also advised Mauritian CEC Africa Investments regarding its investment in a concession of Shiroro Hydroelectric Power, one of the hydro plants that was made a concession as part of the recently concluded PHCN privatisation.
Factors that may impact FDI in the short- and medium-term include political stability concerns as investors may seek to step down funding ahead of the elections in Nigeria due in February 2015. Also to be considered is the impact of falling oil prices, and the proposed changes in the regulatory framework in the oil and gas sector. However, considering the huge potential of the Nigerian economy – as emphasised by the recent rebasing of Nigerian GDP – as the largest economy in Africa and the current dearth of infrastructure that requires substantial investment, the long-term outlook remains positive for FDI.
Is European airline consolidation ready for takeoff?
On January 1 1914, Abram Pheil flew as a single passenger on the first scheduled commercial flight of its kind across Florida. A century later, on January 1 2014, it’s estimated eight million passengers flew on nearly 100,000 commercial flights around the world. Airports, originally little more than grassy fields, have become bustling hubs for tourism and the playing field for airlines to battle for a share of the 3.3 billion annual passengers. Over the past decade a number of mergers have taken place in the US that has halved the number of large carriers from eight to four.
Data from OAG outlines the clear difference in the European airline market, where 17 airlines battle for market share, compared to the US, where 10 firms make up the predicted airline traffic for 2015. Over 53 percent of the European market is shared between the top six airlines, whereas in the US 46 percent of the market is shared between the top two airlines. In Europe, consolidation has struggled to take hold. While large carriers have formed mergers, flag carriers and budget airlines are fuelling cut-throat competition on short-haul journeys. IAG has recently offered Aer Lingus a £1.1bn takeover bid that is widely considered the first significant airline consolidation deal in five years. This has signalled a resurgence of M&A across Europe.
Flag-carrier systems have created an abundance of airlines and have led to inefficient excess-capacity. These legacy airlines have large market positions from their government-affiliated status but they are being undercut by low-cost competitors. Operators are left with over capacity and profitability problems and unable to compete with the consolidation that has happened in the US market. This has primarily been due to differences in language, culture, political risks and government approach to the industry.
Flag-carrier systems have created an abundance of airlines and have led to inefficient excess capacity
Speaking to World Finance, James Halstead, Partner at Aviation Strategy said: “The European industry has been restricted by the continuing state ownership of these carriers by the countries. Where you have a problem with these airlines is because of restrictions in ownership and restrictions in services and the involvement of government. Do you want an airline that flies your flag or something that will be a profit?”
High fliers
Middle-east airline Etihad has taken up a 49 percent share in Air Serbia, this adds to its three percent share in Aer Lingus, 29.2 percent share in Air Berlin and 33.3 percent share in Swiss Darwin Airline. These shares allowed Etihad to acquire several significant hubs across Europe and participate in the European airline industry. SAS, the Scandinavian airline, has also been suggested as a potential takeover candidate with Lufthansa being speculated to acquire the airline. Finnair offers the shortest route from China to Helsinki and has set up a joint venture with Flybe for domestic services. The airline may consider a merge with IAG to aid with connections and retain operating independence.
IAG, formed from a 2011 merger of BA and Iberia, has already had two takeover approaches rejected by Aer Lingus with BA boss Willie Walsh first pitching €2.30 a share, then €2.40 and now €2.55. Acquiring Aer Lingus, with its highly sought after 23 takeoff and landing slots at Heathrow Airport in the UK, would be an attractive addition to IAG’s portfolio of airlines and enable them to develop Ireland into a transatlantic traffic hub. Qatar Airways has also recently announced purchasing a 9.99 percent stake in IAG, becoming its biggest shareholder. Qatar is just one of the gulf airlines challenging European carriers and, although non-EU ownership of European airlines is capped at 49 percent, should the Irish government back the IAG deal, the takeover would signal a step towards a European airline industry with just a handful of strong players.
There is also opportunity for consolidation amid Europe’s low-cost carriers. Wizz Air has revived plans for an initial share sale. The budget airline that operates within Eastern Europe could attract interest from Ryanair or EasyJet if it does issue stock. The success of low-cost airlines has boomed following EU deregulation and has forced the big airline groups to keep pace with the growing budget market.
Turbulent times
Despite incredible growth in commercial flights since 1914, airlines are failing to cover the cost of capital and companies are looking towards consolidation to increase their presence in key markets and pave their way in emerging ones. There is very little competition in the industries that supply airlines. Airbus and Boeing provide the vast majority of planes and terrorist attacks, global illness and rises in oil prices all make the industry more vulnerable.
Charlie Leocha, Director of Consumer Travel Alliance, said in a statement: “Internationally, only three airline alliances, each of which operates much like a single airline, control more than 80 percent of international traffic. This is not a healthy economic environment from a consumer point of view; it brings us only one or two mergers away from having a dominant national carrier.”
Consolidation in the European airline industry is on the rise but it is unlikely the notion will become an overnight solution. It will not sit well with regulators, who do not want to allow a monopoly, or the consumer, who will not want to suffer loss of choice and increased prices as a result. Both have to think about whether the need for consolidation outweighs the negatives, in an industry that is unable to sustain itself.
“The industry does not make returns on capital. From a consumer point of view it probably is better to have a consolidated market. Even though prices will rise it is better to have an industry that is sustainable,” said Halstead. “If the industry is in a position to consolidate, it will be in a position to sustain itself; this will have a beneficial effect on the global economy.”
Bank Aljazira rises to become top Islamic institution
Making banking more secure is now a priority for suffering Western economies ravaged by the financial crisis. Islamic finance, which bans the practice of depending on debts, collaterised debt obligations and hedging bets, was one step ahead, protecting institutions from the downturn when it struck in 2007.
That was the year Saudi Arabia saw the rebirth of Bank Aljazira as a new, fully sharia-compliant institution. Converting from an ordinary bank to one subject to Islamic law meant undergoing substantial changes in its infrastructure, regulations and services, as well as creating a sharia advisory board, made up of leading scholars in the sector. It delved further into the realm of socially responsible banking by launching Khair Aljazira Le Ahl Aljazira – a scheme to provide financial support to charities.
Since then – and in the face of challenges brewed up by the transition – Bank Aljazira has seen significant growth, expanding its operations, growing its assets, increasing its market share and extending its network of branches. As the first bank in Saudi Arabia to launch mobile apps for Android and Windows, it’s also expanding its digital reach and setting a trend in the country’s financial market.
Bank Aljazira in numbers
2007
Year fully sharia-compliant
$10.66bn
Assets
3.4%
Asset market share
$14.4bn
Deposits
69
Branches
489
ATMs
World Finance spoke to Khalid Al-Othman, Senior Vice President and Head of the Retail Banking Group at Bank Aljazira, about how its ambitious investment and expansion plans have helped it to achieve success, what it offers customers as a market leader in the mortgage sector and where the future lies for one of Saudi Arabia’s most innovative financial institutions.
Where does Bank Aljazira stand in comparison to other Saudi banks and which factors drive your market share?
In 2008 the board of directors decided to expand the bank’s operations, growing from what was primarily a brokerage firm to become a fully-fledged bank with a diverse portfolio of banking services. Since then the bank’s asset book has grown to reach SAR 40bn ($10.66bn), giving us a market share of 3.4 percent in the sector. Our deposits have grown to SAR 54bn ($14.4bn), which gives us a market share of 3.3 percent in that division.
Since 2008 there have been huge investments across all aspects of the business. We implemented ambitious growth plans within our retail banking segment. The bank planned to extend its reach through a large network expansion plan, which incorporated both branches and electronic channels. Our network has grown almost three-fold, increasing from 24 branches in 2008 to 69 branches by the third quarter of 2014. Our electronic channels have also evolved at a rapid rate, helping us to become one of the leading electronic banking channels in the market. In addition to that we rolled out an efficient ATM network, which means there are now 489 ATMs in the country, resulting in a market share of 3.2 percent during the same period.
Over the past few years the bank has attracted strong talent and expertise, forming a workforce that has been able to deliver all of the above with success, while creating innovative Islamic banking solutions. We launched one of the most competitive and flexible real estate financing solutions on the market for both housing and investment, which saw our market share grow within the sector to reach 6.9 percent in the space of three years. We also introduced competitive personal finance services, which grew our market share to 3.34 percent in the second quarter of 2014. Thanks to our balanced scorecard and compensation scheme our demand deposits have also grown, rising 225 percent since 2010.
As part of plans to diversify our revenue stream, we introduced a strategic business line in 2013 in order to tap into one of the biggest international markets – remittance. We launched Fawri, a money transfer service that opened its first remittance centre back in December 2013 and now has seven such centres in Saudi Arabia.
We believe that further investment in expanding our branch network, while continuing to upgrade our electronic channels to serve our clients more efficiently, will be the main pillars for our growth in the coming years.
What are your expectations for the development of the mortgage loan market in line with the new credit regulations?
In the short and medium term, the real estate market will introduce new laws and regulations to govern real estate finance and its impact on the market. Given the demographics of Saudi society – where young people make up the majority – and the estimated demand for real estate units (250,000 to 300,000 units per year), we expect demand for mortgage finance from financial institutions to increase. That demand will be supported by various flexible products, as well as the ‘additional finance’ product that we offer in partnership with the real estate development fund, which will help citizens to get on the property ladder.
How is the bank leveraging technology to enhance retail banking for consumers? How is that likely to grow your customer base?
We aim to introduce innovative electronic banking solutions that offer a pleasant banking experience in a convenient, user-friendly and secure manner. We have set that out clearly in our vision, ‘Retail Banking… Differentiated’. Our network of electronic banking services can add value to both existing and potential customers. That network includes the Aljazira online banking service, Aljazira smart mobile banking service, our award-winning Aljazira Phone and the Aljazira ATM Network, which has a large reach stretching across the country.
What innovative products and services does Bank Aljazira offer?
With regard to services, we were the first bank in Saudi Arabia to launch mobile banking apps on Android and Windows phones. Other banks have since followed our lead.
Bank AlJazira’s aim is to provide competitive Islamic finance products that suit our customers’ needs. For example, we offer investment mortgage finance, where customers are able to buy an apartment or commercial building and repay the loan out of the income they receive from the property – in installments that suit them. For customers who already own properties and want to repay the loan from their property’s income, we offer equity release finance.
Our clients are also able to purchase villas, apartments and actual land, whether from individuals, developers or other financial institutions. They can do that either on their own or with one of their family members. The bank also provides an optional grace period of six months where no installments are required, in order to give our customers the chance to purchase furniture and anything else they might need for the house.
Personal finance is another finance product that we offer our customers at competitive rates, using the Tawurq Islamic compliant concept; the bank takes ownership of local commodities or shares, and then transfers its ownership to the customer. The customer then has the option of either retaining the ownership or authorising the bank to sell them to a third party, with money from the sale going to the customer.
In terms of credit cards we offer classic, gold, platinum, and infinite cards, which provide one percent cash back on all purchases. We are also proud to offer the club cards branded ‘Nadeek’, which come in seven different designs that represent the football clubs in Saudi Arabia; thereby providing fans with a new way of showing support for their favourite teams.
As well as that we offer Visa low-limit cards, which are accepted worldwide and come in eight different designs, including Tamouh and Nadeek. They are easy to obtain, with the only requirement being that the applicant already has a Bank Aljazira current account. Customers can deposit their own funds to use as payment for goods and services. The card can also be used for online purchases and at outlets worldwide that accept Visa. These cards have proven to be very successful, with a large number of our customers applying for them.
How has the bank sustained its rapid growth over the past few years?
Bank Aljazira has continued to see strong growth over the past three years by focusing on an aggressive expansion project in terms of its branch network, establishing the credit card and remittance standalone businesses, improving internal operational efficiencies and ensuring we attract a workforce with exceptional talent
and expertise.
What is Bank Aljazira’s strategy for growth in terms of its network of branches?
We plan on growing our retail assets and liabilities by further expanding the bank’s branch network in the future. By the end of 2015, we plan on having 78 branches and 21 women’s branches. Our aim is to have a total of 109 branches by 2018, thereby further extending our reach to meet demand in the market.
KBZ Group on Myanmar’s developing banking sector
Economically-speaking, Myanmar’s major challenge is to create a fully developed financial system. World Finance speaks to KBZ’s Nyo Myint, Kim Chaw Su and Myint Yu Yu Khine to speak about how the banking sector is developing in the country.
World Finance: Well Nyo Myint if I might start with you, Myanmar’s banking sector is still underdeveloped, so what is the penetration rate and what needs to be done for further development?
Nyo Myint: Over the last two years, the liberalisation of the banking sector in Myanmar has witnessed explosive growth in terms of deposits, loans and customers. Customer penetration is now 20 percent, which has also doubled.
The Central Bank of Myanmar, together with other financial institutions, has stepped up its efforts to ensure this important sector develops at a pace that will support the economic growth. The Central Bank of Myanmar should continue its tight supervision of the financial institutions, to ensure the banking sector is well managed.
World Finance: Kim, how have government reforms benefitted the sector?
Kim Chaw Su: The McKinsey international organisation has predicted growth to be over eight percent. So the banking sector like any other sector in Myanmar is actually going through a process of transformation. We are talking about upscaling our human capital, ensuring that the financial regulatory compliance is there and making sure that everything is moving towards acceptable international practices.
Over the last two years, the liberalisation of the banking sector in Myanmar has witnessed explosive growth in terms of deposits, loans and customers
World Finance: Well Yu Yu, with nine foreign banks going to start operating in the country, what are local banks doing to stay competitive?
Myint Yu Yu Khine: It is a positive step that will benefit the industry, and Myanmar banks like Kanbawza Bank have also established a strong franchise in consumer and SME lending taking one third of the market share. So in terms of retail banking we have a dominant channel in bank branches and we are also expanding to electronic channels in terms of the wholesale banking, transaction banking, trade financing and cash management services.
We are also trying to build up our capabilities so we are ready to face the competition.
World Finance: Well Kimmore generally speaking, what sectors will be driving Myanmar in the coming years?
Kim Chaw Su: Myanmar is open for business so every sector needs to be developed. In the financial sector we have actually given foreign banks licences to operate. In the Telco sector in the last two years the government has given licences to Ooredoo and Telenor to actually operate, so that they come and build the infrastructure we badly needed.
In terms of developing within the special economic zones, the government is working with people from every sector to ensure that Myanmar is receiving the attention that it needs in terms of investment and growth opportunities as well as helping us to upscale our human capital and gain more investments for the future.
World Finance: Well Yu Yu, what are the challenges for foreign investors and what can be done to improve the situation?
Myint Yu Yu Khine: The foreign investors coming to Myanmar today may need to expect the infrastructure to be poor in terms of power generation distribution, telecommunications and transportation. There are also opportunities for them to contribute to these sectors.
And another issue would be the rental property market where we have more demand than supply. I think the government should establish new industrial zones and also new satellite towns near the city areas. And we have another big challenge which is the lack of skilled labourers.
World Finance: Well Nyo Myint, finally looking to the year ahead what are your priorities?
Nyo Myint: Well the further liberalisation of the banking sector in Myanmar and the entry of the foreign banks are expected to force local banks to reposition themselves for this change. And for Kanbawza we have prepared ourselves for this change for two years now. So the focus for the next two months is to strengthen our consumer banking business with new innovate product offerings as well as further enhancing customers’ experiences and also to build up our capabilities in regards to wholesale banking.
We have to leverage on our IT investment in order to enhance our transactional banking services in the area of trade financing, cash management services and operational efficiency. We would like to continue with our human capital initiative to enhance our HR capabilities; and lastly we have to collaborate more intensively with foreign banks in order to acquire technical know how and networks.
World Finance: Nyo Myint, Yu Yu, Kim: thank you.
Nyo Myint, Kim Chaw Su, Myint Yu Yu Khine: Thank you very much.
India’s Common Man deals Modi a blow in Dehli election
Just eight months after Prime Minister Narendra Modi swept to power in India’s general election, he has suffered an embarrassing setback in the country’s capital. In elections for Delhi’s assembly, Modi’s ruling Bharatiya Janata Party (BJP) was resoundingly beaten by an anti-establishment party led by a former tax inspector who campaigned for the poorest in society.
Many of the poorest in India fear that Modi is too concerned with helping businesses rather than the common man
The Aam Aadmi party, also known as the Common Man Party, is headed up by Arvind Kejriwal, a former tax inspector who has taken advantage of the chaos within the usual opposition Congress Party, which has been seen in the past as representing a tight group of wealthy families. However, the fact that his party has also defeated the incumbent BJP represents a worrying sign for Modi’s rule.
It is not even a year since he took office off the back of years of economic disappointment, promising to overhaul the country’s bureaucracy and get growth started again. However, he has faced considerable opposition to many of his key reforms, with strikes hitting the coal industry just a month ago over plans to part-privatise some of the state-owned Coal India.
The result of the election saw the Aam Aadmi party seize 65 out of 70 seats in the assembly, while Congress failed to win any seats. While the Delhi assembly election may have local implications at first, it is sure to send shockwaves across the rest of the country where many of the poorest in India fear that Modi is too concerned with helping businesses rather than the common man.
Campaigning against perceived corruption and overly powerful big business, Kejriwal captured the mood of many disgruntled Indians living near to the country’s political powerbase. Speaking to a crowd of supporters this morning, Kejriwal said he hoped to make the capital city a more equal place. “With the help of people, we will make Delhi a city which both poor and rich will feel proud of.”
Talking trash: can a zero-waste world exist?
Take, make, consume and dispose. This manner of unsustainable consumption has always played a part of the growing global economy. Waste, a by-product of economic activity, acts as a useful input to economic activity and its management holds significant economic implications. The utopian world of bountiful natural resources has faded into the growing smog and what we are left with is a reality where 11.2bn tonnes of landfill waste accumulates globally and the number is growing at an alarming annual rate.
The linear ‘throw away’ economy we currently live in is no longer a viable option and companies and countries are implementing zero-waste policies worldwide to tackle the issue. By recycling waste and then reselling the recycled waste companies have found a new source of revenue that simultaneously increases social responsibility and lowers their carbon footprint. This upsurge to create a regenerative circular economy can help to reverse the huge environmental cost the world is currently paying. With Unilever recently announcing itself as the first global company to achieve zero wastage, what was once an environmental dream is fast becoming a major business priority.
A global redesign
A linear model of consumption is no longer realistic in the burgeoning face of resource depletion. Research carried out by the World Economic Forum suggests that our linear economy is fast reaching its limits: 65bn tonnes of raw materials entered the eco system in 2010 and this figure is set to reach 82bn tonnes by 2020. Research conducted by McKinsey & Co predicts that by 2030 three billion people from developing countries will rise into the middle class. This will create an unprecedented demand for energy and resources.
The linear ‘throw away’ economy we currently live in is no longer a viable option
Speaking to World Finance, EU Commissioner for Environment, Maritime Affairs and Fisheries, Karmenu Vella said: “For 200 years of the industrial revolution, we have had one very specific type of one particular business model. We mine raw materials, make products, create demand, sell, often with inbuilt obsolescence and then at the end of the cycle the product is thrown away and becomes waste. This was always seen as the way – easy – straightforward and completely unsustainable. It is time to look at new production cycles.”
In a circular economy 80 percent of waste is created at the design stage and so products are specifically designed to be disassembled and reused to keep resources in circulation for longer. A circular economy, regenerative by intention, provides businesses with an industrial model that dissociates prosperity from resource consumption growth.
In a statement, Paul Polman, CEO of Unilever said: “The concept of a circular economy promises a way out. Here products do not quickly become waste, but are reused to extract their maximum value before safely and productively returning to the biosphere. Most importantly for business leaders, such an economy can deliver growth. Innovative product designers and business leaders are already venturing into this space.”
Breaking the status quo
Landfill waste has dramatically increased with the EU producing more than two billion tonnes of waste, including hazardous materials, every year. In Eastern Europe, Caucasus and Central Asia the situation is worse with nearly four billion tonnes produced in 2009. In order to make zero waste an effective part of business a full transformation from a linear to circular economy is required and organisations must depart from the current status quo and collaborate with interdisciplinary parties.
A transition to a circular economy is estimated to be worth more than $1trn in material savings and McKinsey & Co predicted a global saving of $2.9trn from reducing landfill waste. The rise of a circular economic model would eliminate the use of toxic chemicals that can re-enter the biosphere and ensure the minimal use of inputs. By maximising the value of the product in each stage of the process the model will focus on optimising the entire chain rather than each link allowing companies to establish mutually beneficial relationships.
If the situation is to change a paradigm shift is needed to focus sustainability at the heart of industrial organisation and business models. With several hoops to jump through the primary issue is overcoming the complex supply chains. A simple product could be built using components from a number of countries and overcoming this would involve helping manufacturers develop an understanding of how materials are sourced and processed.
Trailblazers
Unilever claims to be the first global company to have achieved zero waste in all of its 240 factories in 67 countries and they encourage a circular economy through a number of schemes. In Cote D’Ivoire waste is turned into low cost buildings while in India organic waste is composted and shared with the local community. The local team in Egypt empowers disabled employees to earn an extra income by recycling waste material from their production lines. In China, Unilever’s largest factory in Asia uses waste to manufacture bricks and paving.
In Denmark, Carlsberg is developing the world’s first biodegradable receptacle for beverages. The country has banned the construction of new incineration plants and aim to recycle 50 percent of all household waste by 2022. The Netherlands also has new targets with the aim of reducing waste-to-incineration by 50 percent and bringing waste-sorting and separation at the source to 75 percent. Sweden passed legislation that requires retailers selling electronic goods to accept the same quantity for reuse or recycling.
Vella added: “The circular economy sees product designs that facilitate effective recovery and reutilisation of components, in ways that minimise loss of value. Accordingly, companies adjust their business models to better protect their investments in valuable materials.”
As more businesses start to favour this model, the consumer can be a powerful driver towards this new circular economy. To achieve a zero-waste world a monumental effort is required by countries, companies and consumers to prioritise green waste removal methods and transform our global economy to ensure a sustainable future.
