March | 2015 | World Finance

Can Nigeria’s equities market successfully rebound?

Posted on March 5, 2015 by World Finance

World Finance speaks to Elizabeth Ebi, CEO of Futureview Group, on the potential for Nigeria’s equities market to successfully spring back from its lacklustre 2014, the economic impact of Boko Haram, and how the regulators’ efforts are preparing a stronger platform for foreign direct investment in Nigeria.

A rebound is expected for Nigeria’s equities market, this after a decline of 16 percent was recorded in 2014. Now here to shed light on these future prospects, Elizabeth Ebi.

World Finance: Elizabeth, thank you so much for joining us today. Tell me about some of the macroeconomic factors that contributed to the drop, and the successive uptake that followed.

Elizabeth Ebi: Our markets started very beautifully in the year 2014. Everything was in equilibrium, the exchange rate was in line, our inflation rate was as expected. We got good news from the National Bureau for Statistics that Nigeria had become the largest economy in Africa. Everybody was excited.

But then comes the third quarter; global markets started slowing down. China’s growth reduced, importation declined. Back home the production also was reduced, and that affected revenue inflow into the economy. The Central Bank of Nigeria (CBN) had to devalue the Naira in order to contain dwindling foreign reserves.

Boko Haram was threatening up north, with the insurgency. You are also aware that we are having elections right now: people are unsure as to what is happening for fear of currency risk. The foreign investors started taking off of the market, so that caused the market to decline.

When fund managers saw the rate of decline, they also saw opportunities. So they swooped on the market and began to pick up quality stocks again. So that saw the rebound towards the end of the year.

World Finance: Tell me about the recapitalisation efforts that have been announced by the Securities and Exchange Commission.

Elizabeth Ebi: As you are aware, our market is regulated by the Nigerian Stock Exchange and the Securities and Exchange Commission.

Since the global downturn, there has been a determination by both regulators to make sure that those organisations operate on world class standards.

For the stock exchange they have already put a robust platform – the X-Gen – to make sure that trades are executed seamlessly, efficiently, and transparently.

They’ve also ensured all their processes, corporate governance, everything is in line. And that’s why they were able to have been admitted into the World Federation of Exchanges.

With all of this in place, with a market as robust as that, it behoves the operators to have the right balance sheet, to have the right man power, to have the right processes in order to execute deals in a world class standard so that we have a perfect market.

World Finance: Everything that you say today Elizabeth, is imbued with this confidence in the ability for the market to really reassert itself and to continue this growth pattern. So investment prospects as a result you must also think are very positive for the country moving forward?

Elizabeth Ebi: We have the platform ready, the market is also in sync with these plans. The benchmark for lending has been set at 13 percent. We have inflation on a steady mode for the past 12 months. So it looks like everything is ripe!

We have Seplat shares selling at a discount of 61 percent, Dangote Cement at a discount of 40 percent, Nestle at a discount of 55 percent. That means that the market is ripe and is ready for investors.

However, I think what’s critical is for us to get this election right and have a proper transition, stabilise our currency; and we’re good to go.

World Finance: The government is going to play a decisive role, the future government that is. Tell me what sort of financial regulatory upgrades would you like to see put in place?

Elizabeth Ebi: The Nigerian Stock Exchange and SEC have really done so much to make sure we have all it takes in order to attract the world into Nigeria. And they already have a 10 year programme on what to do; and that takes off this year up to 2025.

So with all of that in place, I think what needs to be done is to make sure that we continue to stay focused.

I expect the government to provide all the necessary support, provide us with an enabling environment, a stable exchange rate, and a calm stable political environment so that people know that their monies are safe.

World Finance: Finally, what role would you like Futureview to play in the country’s growth in 2015?

Elizabeth Ebi: We’re looking at how we can support the economy. We are focusing on strategic alliances to help to deepen our products offerings, so that we can together support the growth areas in the Nigerian economy.

The oil and gas sector – there are a lot of companies that are struggling to raise finances.

We still have to explore our mining industry, which has a lot of potential to grow the market.

We are also looking at the agricultural sector: we have more than 70 percent of arable land that are yet to be cultivated. And the process, the value chain of agricultural production needs to be supported.

We’re also targeting those – the more than 70 percent of the population – that are the youths under 30, who are struggling to find their feet in the small and medium enterprises in the economy.

This is where we are as the time goes on. Futureview will continue to evolve, and as our name states we’ll always have the future in view.

Real estate crowdfunding to top $2.5bn

Posted on March 5, 2015February 7, 2017 by Ashton Wenborn

Real estate crowdfunding has climbed from $1.01bn in 2014 and is expected to raise a further $2.57bn in 2015, according to a report by Massolution. Low interest rates have made bond investments less attractive and led yield-seeking investors to crowdfunding as a way to finance their homes, or profit from commercial real estate ventures.

Technology opens the investment opportunity to more participants

Crowdfunding involves raising large amounts of money through small contributions and can help first-time buyers as an alternative method to a mortgage. There are currently 82 real estate crowdfunding platforms in operation and the emerging industry is growing at an exponential rate with speed and diversity pitting it above REITs. According to the report, technology opens the investment opportunity to more participants, while allowing activities to be conducted in an efficient way.

There is significant potential for residential crowdfunding platforms across Asia, where firms contributed $21.3m, as well as in Africa, Oceania and Latin America which contributed less than $10m to 2014’s funds. In comparison 97 percent of these funds were raised in Europe and North America with the latter raising $565m, more than doubling their 2013 total.

In the report, Massolution said: “Real estate, in a rebound over the last five years, has become a much-sought-after asset class, largely due to the search for higher current income, shadowing a growing weariness of high-valued stocks and anaemic fixed-income offerings. Residential crowdfunding has the breakout potential, as mortgage loan origination, a trillion dollar market, is opening up to distributed platform financing.”

Death of the supermarket

Posted on March 5, 2015April 20, 2018 by Ashton Wenborn

For more than two decades, big-name grocery retailers such as British giant Tesco, French group Carrefour and US superstore Walmart rode the waves of unstoppable growth (see Fig 1), mushrooming into world-dominating forces and playing on their all-important strengths. A weekly shop was becoming the norm and so large, out-of-town stores offering everything under one roof were the order of the day.

Roll on just a few years and it’s a rather different story, with supermarkets across the board suffering from slumping sales and feeling the effects of a fundamental shift in consumer shopping habits. These developments have been driven in part by changes in lifestyle, the dawn of the online era and the prevalence of tightened wallets brought on by the financial crisis.

The superstore format which drove the big names to success now seems to be failing in the face of smaller, local shops catering to a consumer market increasingly keen on convenience shopping. Those key players are also finding themselves having to battle harder than ever in an increasingly competitive market where good-quality, fresh products are becoming more affordable than ever.

Discount retailers such as Aldi and Lidl are growing rapidly, now accounting for over eight percent of the UK market (see Fig 2), 10 percent of the French market and a staggering 37 percent of the German market, according to market research firm Kantar, and they’re expected to grow further over the next few years. That’s certainly starting to threaten the larger, seemingly too-big-to-fail players that have, until now, dominated the European retail sector.

Tesco in numbers

92%

Fall in profits, H1 2014

£263m

Overstated profit guidance

43 Stores to close

£250m

Cutbacks to be made

2,000

Jobs to be cut

30%

Cuts to overheads

Big names in big trouble
Among those hardest hit by the changing landscape has been the UK’s largest supermarket chain, Tesco. The retailer – one of the biggest in the world – has been dealt a succession of painful blows over the past year, with pre-tax profits for the first half of 2014 plunging 92 percent to £112m ($170.5m) and a high-profile accounting scandal, in which profit guidance was overstated by £263m ($359.2m), rocketing it into the stratosphere of bad press. The giant suffered five consecutive profit warnings in 2014, and the Christmas period didn’t do much to bolster things, with like-for-like sales in the 19 weeks to January 3, 2015 dropping 2.9 percent. Tesco has taken to drastic measures, including making cutbacks of £250m ($380.5m) a year, closing down its headquarters, making 43 store closures across the UK, cutting 2,000 jobs and slashing overhead spending by around 30 percent.

Tesco isn’t alone in its struggles (see Fig 3). UK rival Sainsbury’s suffered its first Christmas sales drop in 10 years at the end of 2014, with year-on-year sales falling 1.7 percent in the 14 weeks to January 3. Investor concern has mounted, with shares in the business plummeting 36 percent in a year, according to a report by the BBC. Meanwhile, sales at two other dominant players in the UK grocery industry, Asda and Morrisons, fell 1.6 percent year-on-year in the 12 weeks to January 4, and the latter has resorted to desperate measures, ousting CEO Dalton Phillips on the back of tumbling profits and a failed strategy.

The trend isn’t specific to the UK: Walmart, the biggest retailer in the US, amended its growth forecast for the fiscal year 2015 from five percent to two-to-three percent, and has failed to achieve comparable sales growth for nearly six consecutive quarters. Like the UK’s struggling supermarkets, it’s now cutting capital expenditures for 2015 by $1.3bn (down to $11.6bn) in response to the slump. Rival firm Target, meanwhile, suffered a substantial $25m plunge in revenue in the second quarter of 2014. Metro Group, based in Germany, saw revenues slide four percent in the financial year to September 2014 as it felt the hangover from a weak ruble, the sale of some of its Real hypermarkets and, importantly, a slump in growth across Western Europe.

A quick glance at French multinational giant Carrefour would suggest it’s bucking the trend, with overall sales growth of 3.9 percent seen in the fourth quarter of 2014. However, these figures are skewed by strong growth in Latin America (including a staggering 33.5 percent organic sales growth in Argentina) and Asia, where it’s starting to expand. As with the other major players, growth is slow in its domestic market of France, at one percent, and in wider Europe (0.4 percent). It doesn’t appear to be speeding up any time soon.

All of this points to a glaringly apparent truth; the giant supermarket heyday seen in Europe and the US – which saw Tesco achieve 18 years of straight growth and share prices quadruple in the 20 years to 2007 – is over.

Changing consumer habits
Despite Carrefour’s overall sales growth, both like-for-like and organic sales at its hypermarket stores – once a staple in the French retail scene – fell in the final quarter of 2014, reflecting the apparent reality that large stores are on the road to their demise and smaller shops are becoming more popular. Carrefour convenience store sales grew a substantial 7.5 percent in the fourth quarter of 2014 (see Fig 4), and Planet Retail estimates that sales from convenience stores across Europe will grow at an average yearly rate of 5.3 percent among all retailers.

Andrew Stevens, Senior Retail Analyst at Verdict, considers this shift to smaller stores to be a reflection of essential changes in modern lifestyles. “We’re seeing a lot more people using stores on a daily basis, and a lot of that’s driven by more people living alone, changes in household sizes, more people commuting and so on,” he said, adding that it’s now common for consumers to do big shops around twice a month and top up after that as needed.

Stevens certainly has a point. The rise of shorter, more frequent shopping trips also seems reflective of a generational shift – a move towards a hurried, fast-paced lifestyle where people don’t want to invest massive amounts of time in doing any one thing, and where bitesize consumption (in everything from shopping to reading – as reflected in the Twitter revolution) is becoming the norm.

Stevens also puts this shift towards convenience down to changing food trends – a move towards fresh produce spurred in part by increased eco-awareness. “There’s a far bigger emphasis on food waste now. People don’t necessarily want to buy a huge pack of tomatoes when they’re going to go out of date,” he said. “It’s about people wanting to access good-quality food on a daily basis.”

The trend towards convenience shopping isn’t unique to Europe; in a bid to accelerate sales growth and return to its former glory, US-based Walmart is shifting its focus away from its megastores towards more local, city-centre shops, opening 240 small stores in 2015 and cutting back on the number of new superstores it originally planned for the year.

The fastest-growing grocery retailer in the US is now Kroger, and it’s no coincidence that the company has 786 convenience stores dotted across the country. The giant has been growing constantly for 43 straight quarters and hit nearly $100bn in revenues in 2014, approaching the throne of Costco (at $109.6bn in revenue as of May 2014). Kroger’s sales growth of 11.6 percent in the second quarter of 2014 dwarfed the 0.02 percent growth seen for Walmart, and investors clearly took note, sending stock soaring an impressive 95 percent over 2014.

This apparent shift to small-scale shopping suggests the very notion of the traditional supermarket, where everything is available under one roof, is under threat. It’s an ironic reversal of the trend that catapulted the megastars of the supermarket world into rapid growth in the 1990s and early noughties (indeed, Walmart spent years trying to close down its smaller stores), and almost a nod to bygone times where buying fresh from separate, smaller shops was the standard.

What’s different to those past times, of course, is the driver of that shift: where superstores were once the most convenient way of doing the grocery shopping, now online and top-up shops are. That’s partly behind Tesco’s struggles, according to Stevens: “[Tesco] used to rely on convenience as its main factor for holding and gaining market share… It used to be that everyone was close to a Tesco and it didn’t really matter if it was good quality or cheap food.” Now that’s not relevant any more. David Gray, author of the Planet Retail report, believes this change in habits isn’t just a short-term phenomenon. “This readjustment will be permanent rather than a temporary blip,” he told The Guardian.

That means that if retailers such as Tesco, Carrefour and Walmart are to succeed, they need to permanently change the very model which sent them soaring in the first place – something they gradually seem to be recognising.

Rise of the discounters
Stepping up to the demand for smaller, more convenient stores came the discount retailers – namely Aldi and Lidl, in the case of Europe. They grew to prominence just at the right time, providing an appealing option to cash-strapped consumers keeping an eye on the finances in the midst of the economic crisis. That increased competition seems to have been a driving factor in the downfall of the big players, with discounters proving popular across Europe and also in the US. “Consumers are becoming far more savvy, they’re far more willing to shop around to find a bargain or something a bit more interesting,” according to Stevens. As these options have sprung up, demand has likewise increased, in turn further fuelling supply.

And it’s the very lack of maturity among those smaller retailers that’s giving them more opportunity to open new stores, which is further fuelling their growth and allowing them to threaten the bigger rivals. “If they’re opening a new store, it’s not really going to cannibalise existing sales,” said Stevens. “It’s going to steal market share from the rivals, so they’re in a position where they’re able to grow through expansion.” And when a new store is opened, consumers flock for the novelty factor, fuelling their sales growth yet further – a method the big names are seemingly no longer able to achieve, as if having reached their maximum growth potential from which the only change hereon is to shrink.

That’s certainly a trend the figures seem to point to: ‘big fours’ still account for 66 percent of the market in the UK, 56 percent in France and almost 50 percent in Spain, but Lidl parent company Schwarz Group is predicted to become the biggest European grocery retailer by 2018, according to the Planet Retail report. Its sales are projected to reach €80bn ($91.25bn) compared with €65bn ($74.15bn) in mid-2014, swallowing up the sales of Europe’s current leaders and expanding five percent annually – against an estimated two percent for the likes of Europe’s current leaders (including Tesco, Carrefour and Asda).

Louder voices
Fuelling the growth of those discount retailers seems to be a removal of the stigma once attached to them, and a large part of that is down to a change in their marketing tactics, according to Stevens. “Five years ago they were incredibly quiet – they never really spoke to the press and they wouldn’t advertise often other than with their weekly special buy leaflets,” he told World Finance. That meant marketing was limited to already existing, converted customers. “Now they’re far more active,” said Stevens, with their television adverts enabling them to reach a far more mainstream market, encroaching on that of the bigger players.

It’s therefore arguably those discount retailers that the big-name supermarkets should have been targeting – rather than, as in the case of the UK’s big four, price-matching each other. “The reaction from the supermarkets hasn’t been ‘let’s fight against the discounters’, it’s been ‘let’s fight among ourselves’, and that isn’t what customers want to see,” said Stevens. That very price-matching strategy has led in part to the falls in revenue, at least in the case of Sainsbury’s, whose like-for-like sales figures declined as a result of price cuts brought about to match the cuts made by its biggest three competitors.

“What customers really want to see is good-quality products at a fair price,” said Stevens, adding that special offers, a staple for the majority of the big four in the UK, can be perceived by consumers as disingenuous. It’s indeed interesting to note that in France, where Carrefour has still seen some (albeit slow) growth, special offers aren’t ordinarily part of the supermarket model.

The consumer shift thus seems to be two-fold, constituting both a move towards online/convenience shopping, and towards the type of everyday low pricing seen among the budget supermarket chains. That strategy is also one that has been taken by Asda, and that’s helped protect it, to an extent, from the disasters seen by retailers such as Tesco.

A dying breed
In response to changing consumer habits, it seems the giants need to go beyond capital expenditure reductions and job cuts if they are to start regaining the market share they’ve been losing, and change the very model (large, convenient stores targeting everyone) they’ve relied on for so long.

A glance at market figures shows that those with a more niche, targeted market are faring the strongest in terms of growth: Waitrose has largely protected itself from the effects of the financial crisis by marketing its products to premium buyers, for example, with less of the one-size-fits-all approach that’s seen by the big four and that’s at the heart of the supermarket concept. Its strategy certainly paid off at Christmas, with overall sales growing seven percent in the five weeks ending January 3, and like-for-like sales increasing 2.8 percent.

As Stevens notes, there’s an essential polarisation among the grocery retailers that are actually succeeding – that is, between premium players and discount retailers. Both of those also have more potential for growth given their smaller size. It seems middle-of-the-road no longer works as well as it used to, most clearly shown in the case of Tesco. “Tesco can’t be the best, it can’t be everything to everyone, which is what it’s trying to be,” said Stevens. “It needs to shift how it sells food to people. And until that happens, its not going to be able to gain market share.”

What seems apparent is that Tesco and the other big-name players need to essentially reassess the entire concept around which they were built if they are to succeed in the face of changing lifestyles, changing consumer shopping habits and a fiercely competitive market that’s fuelling a fundamental transition. Where the big names go from here remains to be seen, but it’s fair to say the heyday of the supermarket – and of seemingly unstoppable expansion – seems to be well and truly over. It’s arguably the extent of that expansion that’s stopping them from getting any bigger.

Currency is key to Venezuela’s great escape

Posted on March 5, 2015March 5, 2015 by Ashton Wenborn

There has been no shortage of oil price talk in recent months – and no shortage of oil for that matter. Every week it seems a new low cost record is broken, and whereas a barrel of Brent last year clocked in at over $100, you can take one home today for approximately $50. Consumers meanwhile, are glad of the pennies saved at the pump and some countries have responded to this new low cost environment by recouping some of the money lost to subsidies in years passed. However, for the members of OPEC, whose finances rely on black gold, the storm clouds show no signs of parting, and pressure is mounting on recession-hit Venezuela to rethink its reliance on oil and its restrictive currency controls.

For too long, Venezuela has allowed oil prices to dictate its success, and with inflation running at record-breaking heights and fiscal debts mounting (see Fig. 1 and Fig. 2), President Nicolás Maduro must get a firm grasp on the country’s currency controls before basic goods are rationed and rioting takes over. Diversification is the name of the long game, but many of the more immediate concerns can be remedied by targeted reforms.

An oil producer since 1914, the realisation in 2012 that Venezuela was home to the world’s largest reserves led many to wrongly assume that the country’s success was assured for the near term. The period since, however, has shown that such distinctions do not necessarily guarantee growth, and the country’s recent macroeconomic indicators make for uncomfortable reading.

With many people of the opinion that Maduro’s ruling administration is beyond help, thousands have called for Chavez’s successor to step down and for a new government to take charge

“The freefall in oil prices, as well as its implications, will be Venezuela’s biggest challenge for this year”, says Ricard Torné, Senior Economist at FocusEconomics. “Taking into account that the breakeven oil price for Venezuela is well above $100 per barrel and that the price per barrel is now below $40, government revenues are going to fall dramatically this year. This situation will likely prompt the government to cut spending on social programmes and/or to reduce the fuel subsidy, thereby eroding President Nicolás Maduro’s political base. The parliamentary elections scheduled for Q4 2015 will be a crucial test to assess the popularity of Maduro’s administration.”

Venezuela down
The central bank unleashed findings in the final days of 2014, showing that the economy had sunk 2.3 percent in the third quarter and capping a dismal year in which the country had already contracted 4.8 and 4.9 percent in the first and second quarter respectively. To add insult to injury, inflation in the 12 months to November clocked in at a record 63.6 percent – the highest in Latin America. “In 2014, we again faced the script of destabilisation and violence”, says Maduro. However, for anyone taking a closer look at the country and its workings, it’s clear that the issues are rooted in Venezuela’s failure to improve upon inadequate currency controls, diversify its economic make up and manage inflation.

The dismal economic showing triggered widespread civil unrest last year, and when in February students in Tachiras and Merida took to the streets for greater reassurances about their future prospects, thousands across the country echoed their concerns. What initially started as a condemnation of inadequate campus security later turned into a protest against spiralling crime rates and an inability to keep a lid on inflation. With many people of the opinion that Maduro’s ruling administration is beyond help, thousands have called for Chavez’s successor to step down and for a new government to take charge.

Spearheaded by a dissatisfied Venezuelan middle-class, Maduro’s critics were soon after opposed by his supporters, and the violence that followed made for some of last year’s more disturbing pictures. With those opposed-to arguing that corruption was rife and that Venezuela amounted to little more than a failed state, those-for were willing to fight for their beliefs; a fact that brought with it terrible consequences. Only when the tanks rolled in did the situation subside, though not before 43 deaths and hundreds of arrests, failing to instil confidence in anyone that the country’s circumstances would change.

One survey carried out by Pew Research in September of last year found that more than three out of every four Venezuelan’s – that’s 77 percent – believe the country is headed in the wrong direction, yet the Caracas-born president enjoys near enough the same level of support as his opposition. A total of 57 percent believe Maduro has a bad influence on the country’s direction, whereas 52 percent believe Henrique Capriles’s opposition party has the same effect, which shows a lack of trust in the political system itself – to which 55 percent of respondents attest.

One year on from the protests and it appears that the issues that dogged Venezuela back then are little – if at all – changed. At the tail end of January, thousands gathered again in the country’s capital to highlight its less-than-effective government policies and worsening economic climate. The inflation rate is higher than it was a year ago, crime is still on the rise, and people are finding it increasingly difficult to acquire even basic goods, leaving anti-government protestors to once again urge Maduro to step down.

With empty pots in-hand, protestors illustrated that staple foods and basic medicines were becoming increasingly hard to come by. Pictures of empty shelves circulated online, as did snaking shop queues, and eventually the military was called upon to keep the commotion to a minimum. However, the president has sought to reassure citizens that the shortages were part of “an economic war” being waged against his government, and even accused four supermarket chains of hoarding and smuggling goods.

Pushing forward reforms
These events are an indication of the many hurdles Maduro must first clear if he is to win the approval of the masses. Few contest that Venezuela is in dire straits and all are agreed that changes must come fast if the country is to escape collapse. And while the president pledged in December to act swiftly and upend the country’s restrictive currency controls, reforms have not come fast in the past.

Reforming the country’s three-tier foreign exchange system constitutes perhaps the biggest part of a six-month plan to breathe fresh life into the economy this coming year, as the government looks to reduce inflation, boost international reserves and more closely manage costs. Critics, meanwhile, have launched an assault on Maduro’s history of inaction on the issue, and believe the unspecific nature of the claim is proof that the president’s pledge will come to nothing. There is reason to believe that this time could be different, however, in that falling oil pressures have piled extra stress on Maduro’s government to instil change, and quickly.

Venezuela-problems-3 — A father and daughter rest while someone holds their place in a long line to buy basic foodstuffs at a supermarket in San Cristobal, Venezuela

Inasmuch as 95 percent of Venezuela’s export earnings depend on oil, and the resource, combined with gas, accounts for 25 percent of national GDP: the success of the economy is inextricably tied to the price of oil. Without high prices, the country cannot afford to keep even basic public services afloat, and reports of inadequate hospital supplies are widespread. Add to that the local currency’s depreciation and a byzantine exchange system, and Venezuela’s current situation looks untenable for the near future.

“The government should embark on reforming the current three-tiered exchange rate system, ease price controls and rein in skyrocketing inflation”, says Torné. “In addition, the government should end its heterodox and interventionist economic policies, which have been proven ineffective.” Long-term, the president’s task is to reduce the country’s oil dependency, and in doing so, release Venezuela’s ties to any further price swings. Short-term, there’s clearly no more immediate concern than the issue of currency reform.

Triple threat
Shortly after Chavez’s death, the Latin American nation abolished a failed bolivar-dollar peg in favour of a supply-and-demand-based exchange system. Rather than a single exchange rate, the bolivar’s value is determined by any one of three methods of exchange, therein – at least in theory – eliminating the distortions introduced by black market trading. Successful in crippling the black market rate for all of a week, the unofficial rate overtook the higher Sicad II rate a few days later and rendered the new, unnecessarily complex system redundant.

The disconnect that exists between the official and black market exchange rate has brought with it wayward inflation, and for as long as the government fails to close the gap, Venezuela’s annual inflation rate could number in the four-digit territory. Maduro’s efforts to reform the exchange regime, stem the currency’s decline and protect dwindling reserves will see one key but minor modification made to the existing formula. In it, the Sicad I and II rates will be merged into one and a new third rate will bring private brokers into the mix, in the hope of narrowing the gulf between the official and black market rate.

Although Maduro stopped short of any specifics, the reform marks a vital first step in combatting the current situation, whereby high inflation rates are making even basic goods increasingly hard to come by for the average Venezuelan. Still, critics insist that the latest attempt to remedy the situation amounts to only minor tinkering of a system that requires nothing short of an outright overhaul. Then and only then can the country begin to close its runaway fiscal deficits, which, as of January, came to an estimated 20 percent of national GDP. “Details were sparse, but we can be confident that it will amount to another huge devaluation of the currency, likely exacerbating inflation”, says Gregan Anderson, Latin American Analyst at Business Monitor International.

“The government’s greatest challenge stems from the fact that the changes necessary to revive the economy – devaluing the currency, extending an olive branch to the oft-maligned private sector, and especially pulling back government spending – also threaten to alienate their dwindling base of political support. We expect social unrest will re-emerge and significantly intensify in the coming months, and the government will struggle to reverse the rising tide of discontent, and may resort to increasingly heavy-handed suppression of dissent.” Latin America’s worst performing nation requires far more than a few minor tweaks if it is to escape a looming crisis, and for Maduro to make good on his six-month turnaround, he must first introduce radical reform and concede that the concessions made so far have come up short. What’s important now is that the government takes heed of new record low oil prices and uses the opportunity to introduce much-needed structural reforms before the situation worsens.

Success from the top down

Posted on March 4, 2015 by Ashton Wenborn

Corporate governance is concerned with the work of the board of directors, as these are the individuals that ultimately determine the course a given company will take. Governance is focused around the board’s composition, its structure; providing an outline of its members’ responsibilities and daily duties, as well as laying out a framework for the board to follow, so that it remains accountable to shareholders. This is not, however, a one-way street that is only concerned with shareholder accountability. Proper governance assists the board in pursuing the vision and strategy the company is striving for.

It is far more than just the mechanisms and processes that corporations are governed by. It is the beating heart of the company. It determines the way a business runs and ensures, if applied correctly, that it operates in an ethical manner, something that is not just to the benefit of those impacted by a corporations’ vast influence, but is also key to the success of any business. There are countless examples that exemplify the value that can be added to corporates that make business decisions reflecting ethical values and principles, and an equal number of cases testify the negative impact that a company’s risk is sustaining when it chooses to act to the contrary.

If businesses want to continue operating successfully, it is imperative that they maintain trust with shareholders and consumers. Good governance from the top down is essential in cultivating and, more importantly, retaining that level of confidence between all parties. Though it doesn’t appear on the profit and loss report at the end of the year, trust is as valuable an asset as any other in business, as well as being one of the core objectives of good corporate governance.

World Finance Corporate Governance Awards 2015

European ethics
The outbreak of the financial crisis in 2008 caused member states of the EU to reassess corporate governance, partly because there is a common view that the incident could have been avoided had better governance been applied, particularly in the banking sector. The economic downturn that has caused the EU such a prolonged headache brought with it much criticism that was levied at boards, regulators and shareholders, mainly from Brussels, who were looking for someone to blame for the crisis, as well as trying to ascertain how something this catastrophic could have happened in the first place.

It has sparked big debate in Europe over governance processes and procedures, which aim to define what might be the right way to do business. It has led to a complete review of governance in both the financial and non-financial services sectors, with the EU Commission leading – for the first time at a pan-EU level – discussions about how to improve the situation. In December 2012, the debate culminated in an announcement of a new EU Company Law and Corporate Governance Action Plan.

It had three primary objectives: to enhance transparency, engage shareholders and to support companies’ growth and competitiveness. The EU plan highlights its commitment to improving harmonisation of corporate governance, something that will be essential for developing efficiency of the single market for financial services and products. It will take time to fully implement the changes, but the core objectives the EU Commission will hope to achieve in the coming years include: providing equivalent protection for shareholders and other parties concerned with companies; ensuring freedom of establishment for companies throughout the EU; fostering efficiency and competitiveness of business; promoting cross-border cooperation between companies in different member states; and stimulating discussions between member states on the modernisation of company law and corporate governance.

Across the Atlantic, public companies face increased scrutiny, but not just from the federal and state government, regulators or the press. There is a new trend and fresh source of oversight that stems from investors, better known as activist investors. The rise in this highly rigorous and demanding class of shareholders has made a big impact on public listed companies in recent years. These shareholders are both a blessing and burden for the board of directors. They come to meetings with an impressive arsenal of skills and a significant amount of capital and, therefore, are not bamboozled or intimidated by the board, allowing them to act as an alternative and impressive form of oversight.

The spaces that activist investors are willing and, more importantly, capable of scrutinising and second-guessing are wide-ranging, as Marc Gerber of law firm Skadden Arps Slate Meagher & Flom explains. “[Shareholder activists] have criticised companies and agitated for change on matters such as companies’ portfolios of businesses, capital allocation policy, operating performance, stock price performance, corporate governance and executive compensation”, says Gerber. “Moreover, activists will not hesitate to question the ability of incumbent management to implement necessary changes in business strategy, both as part of a campaign for board seats, and once they are on the board. Nor will they hesitate to question the abilities of boards of directors to oversee management and a company’s business strategy.”

As is the case in any organisation or group, the best form of oversight comes from having smart, intelligent and diverse members, who are able to stand their ground intelligently, so that if leadership does begin to steer too far to the left, there is a method for righting the ship. In the US, it seems that better corporate governance is not coming only from regulators, but from within, which is always to the benefit of all involved.

A recognisable asset
The real purpose of good corporate governance is to construct an environment that encourages businesses to make better decisions, be accountable to shareholders who provide the necessary capital for the company to perform its functions, and to ensure that the company pays attention to the manner in which it goes about achieving its goals, so that can be a positive force within the areas it operates. Since the global financial crisis, the importance of good governance has been recognised by both companies themselves and national governments.

Each party realises that through promoting better business practices they all stand a stronger chance of benefiting from stability and sustainability, which comes from corporate governance. Whether the impetus comes from within, as the US market has shown, with its unique brand of shareholder activism, or from outside forces in the form of supranational bodies, like the EU, everyone has something to gain from employing better corporate governance.

Each year World Finance recognises the firms that have improved their internal structures, mechanisms and achievements. Here are the best performers in some of the most competitive locations. Congratulations to our winners.

Corporate Governance Awards 2015

Posted on March 4, 2015March 10, 2016 by Ashton Wenborn

Angola
Banco de Fomento

Armenia
Ameriabank

Austria
Austrian Airlines

Bahrain
Batelco Group

Brazil
ULTRAPAR

Canada
Magna International

Chile
AntarChile

China
China Communications Services Corporation

Colombia
Emgesa

Denmark
Danske Bank

Egypt
Qalaa Holdings

Germany
BASF

Ghana
UT Bank

India
Suzlon Group

Italy
Atlantia

Kuwait
Kuwait Energy

Malaysia
Axiata Group

Mexico
HOMEX

Myanmar
Max Myanmar Group of Companies

Nigeria
Zenith Bank

Norway
Prosafe

Peru
FERREYROS

Portugal
EDPR

Russia
Lukoil

Saudi Arabia
Bawan

Serbia
Generali Osiguranje Srbija

Singapore
CapitaLand

South Africa
Anglo American Platinum

South Korea
Woori Bank

Spain
Iberdrola

Thailand
Thai Oil

Turkey
Turkish Airlines

UAE
Abu Dhabi Commercial Bank

UK
British Telecom

US
Intel Corporation

Dilma Rousseff: from prisoner to president

Posted on March 4, 2015April 25, 2018 by Ashton Wenborn

Last year’s Brazilian election was billed as one of the closest run in living memory, and with no shortage of headline fodder to feed the international press, the occasion delivered on its promise. At three percent, the wafer thin majority was barely enough to kickstart a second term in the chair for Dilma Rousseff. However, after months spent wading through a campaign trail of petty low blows and bitter recriminations, the former fugitive has dipped her toe in for another four-year stint in charge of the world’s seventh-largest economy. “I want to be a much better president than I have been to date,” said the newly re-elected president before a bustling crowd in Brasília. And with that, Rousseff set the wheels in motion to reassure citizens that she was in no way associated with the injustices that she herself played a key part in chasing out of society. “It is my hope, or even better, my certainty, that the clash of ideas can create room for consensus, and my first words are going to be a call for peace and unity.”

A turbulent first term
The promises were well received by the watching crowd, yet the speech was delivered against a less-than-ideal backdrop. News of a recession still lingered large on the horizon and the fallout from the World Cup protests lined the streets, meaning that not a single step of Rousseff’s campaign trail was free from criticism. For every promise made, there was a painful reminder of her first presidential term and, as the accusations of corruption grew progressively louder, Rousseff suffered setback after setback.

I want to be a much better president than I have been to date

In her first four years in charge, key macroeconomic indicators at no point impressed analysts, and with commodity prices on course to take a tumble in the coming months, many are of the opinion that the worst is yet to come. On the other hand, Rousseff’s social welfare policies have succeeded in reaching millions of formerly impoverished individuals, and while attempts to boost growth have been to little avail, Rousseff has succeeded in reducing extreme poverty and closing the inequality gap.

Arguably the most significant of Rousseff’s policy decisions was when she raised social security payments for less well-off families (‘Bolsa Família’) by 10 percent in May of last year. This commitment, coupled with a string of tax cuts, has so far found its way to more than 36 million families at a time where over 21 percent of the population is living in poverty. True, inhibitive – and at times misguided – economic policy decisions have wiped billions from the Sao Paulo Stock Exchange, and basic goods are today more expensive than they were under Rousseff’s predecessor, but following on from the example set by Workers’ Party (PT) governments of old, which lifted 40 million people out of extreme poverty through 2001 to 2012, Rousseff is credited with eradicating the problem in its entirety.

Still, the focus on social development was criticised by some, who were of the opinion that the country’s inability to keep to a 6.5 percent inflation target or drive up GDP was of far greater concern (see Fig 1). With the world’s fifth most populous country knee-deep in a recession and the national budget deficit running at an all-time high, the president’s decision to introduce costly social programmes in place of austerity measures was unusual. Add to that the small matter of falling commodity prices, uncompetitive labour costs and an overvalued currency (see Fig 2), and it’s clear why so many struggling businesses and free-market economists have hit out at Rousseff’s time in charge.

Crunching the numbers
Still, others maintain that progressive social programmes are supported by perfectly adequate macroeconomic numbers, and that this focus on poverty reduction has facilitated a more stable and inclusive environment. “During the last decade, Brazil’s strong macroeconomic frameworks have contributed to preserve macroeconomic stability, support robust growth and underpin sustained poverty reduction,” according to the IMF’s latest country report. “The key pillars of Brazil’s macroeconomic frameworks have been the fiscal responsibility law, the inflation targeting regime and the flexible exchange rate. In addition, a strong prudential framework has underpinned a sound financial sector that withstood well the global financial crisis of 2008–9. The prolonged macroeconomic stability has facilitated the adoption of far-reaching social programmes that have produced a remarkable social transformation – in particular, a substantial reduction in poverty and the increase in living standards of large segments of the population.”

Aécio Neves, Rousseff’s rival for president and candidate for the Brazilian Social Democratic Party (PSDB)

Pushing through much-needed social reforms ahead of costly economic initiatives is exactly why there was such a clear geographic divide between those voting for and against Rousseff in October. Election figures show that the poorer northern states favoured Rousseff’s PT party, whereas the more developed southern states took to the Brazilian Social Democracy Party (PSDB), in a battle that pit north against south and rich against poor. This was an election that, reduced to its base parts, saw the voting public weigh up the benefits of successful social policy against a lacklustre economic showing, arriving at Rousseff as the best candidate to lead a divided Brazil.

No matter the agreed-upon reasons for the win, history books will read only that this was a fourth consecutive electoral victory for the Workers’ Party, and the beginning of a landmark second term for Brazil’s first female president. And while there is no shortage of people who claim Rousseff’s interventionist ways are dampening investor sentiment and inhibiting growth, the win marks yet another page in an already-impressive portfolio of achievements.

Best characterised by an unerring focus on human rights abuses and a steely disposition, Rousseff’s commitment to social reform and to cajoling out corruption dates back to her years spent as a guerrilla activist. However, with the country divided on Rousseff’s policies, and some questioning just how clean her hands are of a recent Petrobas scandal, the president’s credentials have been called into question like never before.

Guerrilla origins
Born to a Bulgarian émigré in the late 1940s, Rousseff was educated in a French-speaking Catholic school and expressed a desire to train as a ballerina – though abandoned the career choice early on. In her formative years, Rousseff rejected a life of relative privilege and turned her hand to political activism, dedicating a good 20 years to opposing an oppressive and unlawfully appointed military regime.

It was in the late 1960s that Rousseff became a key figure in one far-left guerrilla group of Marxist-Leninist partisan orientation, during which time she was convicted for having played a key part in the group’s best-known transgression. The organisation orchestrated a robbery that saw it steal approximately $2.5m and earned Rousseff a place on the country’s most wanted list.

This two-decade long dictatorship marks a defining, though seldom talked-about chapter of Rousseff’s time in politics, during which time she was subjected to torture and forced to serve a three-year sentence in prison. Having experienced first hand the brutality of the country’s military rule, Rousseff, in 2012, established the National Truth Commission, whose task it was to shed light on the crimes committed between 1964-1985, when an estimated 400 Brazilians were either killed or reported missing.

“Under the military dictatorship, repression and the elimination of political opposition became the policy of the state, conceived and implemented based on decisions by the president of the republic and military ministers,” according to a 2,000-page report published in December 2014, following an almost three-year investigation into the crimes. The seven-member commission therefore rejected “the explanation offered up until today that the serious violations of human rights constituted a few isolated acts or excesses resulting from the zeal of a few soldiers”.

Though painful, Rousseff’s past experiences have carried over into her time in office, and the president’s willingness to make known instances of corruption and civil rights abuses is closely in keeping with her activist roots. “Brazil deserves the truth. The new generations deserve the truth. And most of all, those who deserve the truth are those who lost family members, friends, companions and continue to suffer as if they died again each and every day,” said Rousseff at a ceremony to mark the release of the report. “We, who believe in the truth, hope that this report contributes to make it so that ghosts from a sad and painful past are no longer able to find shelter in silence.”

This ambition to wheedle out corruption and a focus on social welfare ahead of immediate economic growth, therefore, is perhaps the most characteristic aspect of Rousseff’s government, and one that stretches beyond any one single investigation.

Anti-corruption drive
Having emerged from a two-decade long dictatorship, and having spent a lot of the time since acclimatising to a much-changed economic and social climate, corruption has emerged as a key concern for Brazilian businesses and citizens alike, whose transition to democracy has not come without consequence.

In fact, many are of the opinion that the ruling authorities are incapable of keeping a lid on corruption, not to mention reviving a flagging economy, yet Rousseff has sought to reassure people that the issues are being looked at. As soon as the votes were counted in October, the newly re-elected president pledged to narrow inflation, rein in government spending and restore any former economic promise. Chief among the president’s concerns is corruption, and clamping down on this issue constitutes a key part of cleaning up Brazil’s muddy reputation on the world stage.

In only her first year in charge, Rousseff made clear that those found guilty of corruption were laying their necks on the line, and the former activist pulled no punches in ridding of any corrupt government officials. Not content to sit idly on her laurels, Rousseff spearheaded a political upheaval in which several senior government officials were ejected from their positions.

Labour Minister Carlos Lupi, for example, was less than apologetic in November 2011 when allegations of corruption were laid at his doorstep. The official was quoted as saying “to get me out, you’d have to shoot me”, adding “it would have to be a big bullet because I’m a big guy”. However, less than a month on and the minister would tender his resignation, stating that he had been subjected to vicious and unwarranted attacks from sources in the media and in government. One local magazine, Veja, alleged that the minister had demanded kickbacks from charities, whereas the national paper Folha de Sao Paulo looked at the small – though equally illegal – matter of receiving a second government salary; enough to force him from office after all.

Former Petrobras Director of Supply Paulo Roberto Costa. His tip-off helped police unearth the company’s corruption

Most worrying, however, was that the official marked the sixth government minister to resign under Rousseff’s first year in charge, with the defence, transport tourism and agriculture ministers all having departed from the summer onwards. Lupi’s resignation was hailed as another achievement in a long line of victories for a president whose goal it was – and still is – to tackle corruption in the innermost sanctums of government. “I am not an adolescent, nor a romantic,” said Rousseff shortly after Lupi’s resignation. “I analyse objectively.”

This pledge to unite a divided society and expose corrupt officials seems to have struck a chord with formerly disenchanted supporters, and Rousseff’s approval rating at the end of 2014 stood at 52 percent, up from only 37 percent prior to the election. “The end of poverty is just the beginning,” read one presidential slogan in 2013, though there is still work to do – and undo – if Rousseff is to make good on that statement.

Petrobas scandal
Rousseff’s anti-corruption drive has succeeded in drumming up support, and was particularly effective towards the beginning of her first term in charge. However, the president’s firm stance on the matter has also left her dangerously exposed to any failures on this front. Tasked with the business of dousing political infighting and dismantling a system riddled with corruption, Rousseff has largely upheld her promise to uproot it – but recent allegations concerning state-owned Petrobras have dealt her credibility a near-fatal blow.

As the country’s largest company and a landmark Latin American name, any damage inflicted on the oil colossus brings with it its fair share of consequences for citizens and the wider economy. It was with regret, therefore, that Brazilian authorities were forced to commit 300 police and 50 tax officials to an operation that spanned five states and the capital city last November. In it, the police unearthed facts that would later result in the biggest corruption scandal in the country’s history, following a tip from former company executive Paulo Roberto Costa that Petrobras’ refinery division was diverting money to political parties.

Brazilian police would soon after arrest 23 people, 19 of whom were company presidents or executives: evidence enough that a huge discovery was in the works. Days later, 35 people were charged, and it was found that the value of the kickbacks and bribes peddled to political parties came close to BRL 4bn ($1.54bn). “These people stole the pride of Brazilians,” said the prosecutor general Rodrigo Janot at a news conference in Curitiba. “We’re far from being at the end.”

Months later and the number of executives and former public officials standing trial has reached 40, and the hundreds of millions of dollars lost has landed the oil giant in a sticky situation. The fact that Rousseff chaired the Petrobras board between 2003 and 2010 – the time in which the bulk of the crimes were committed – has also given weight to the words of those who claim the president’s anti-corruption probe is inadequate and that her credibility is questionable. Worse for Rousseff is that the vast majority of known offenders belong to the Workers’ Party, therein taking some of the shine away from a seemingly heartfelt election pledge to tackle corruption.

A new problem
For these reasons, the lead-up to Rousseff’s second term in charge was mired in corruption allegations, as opposition parties joined in pointing an accusing finger at the Workers’ Party for their failure to keep an eye on their dealings. At no other time has the president been asked to contest her involvement in such a scandal, and polls taken amid the scandal showed that Rousseff’s support was fading fast. “There is one easy way to put an end to corruption: throw the Workers’ Party out of office,” said Aécio Neves, presidential candidate for the PSDB, in response to one voter’s question on how Brazil could better tackle corruption.

With the incident weighing heavily on Rousseff’s credibility, any comments made on the subject of corruption were met with an all-too-familiar grimace among large swathes of the population as the Workers’ Party attempts to repair a rocky reputation. The president has since taken pains to reassure those concerned that the scandal need not hamper the economy, and that the punishment should stop short of tarring all those under the Workers’ Party banner with one brush. “We must know how to punish the crime, not harm the country or its economy,” she said in a speech towards the end of 2014. “We must close our doors – all our doors – on corruption, without shutting them on growth or progress and employment.”

The statement here sheds some light on what is already Rousseff’s biggest challenge, as she seeks to calm fears that her party is funded by illegal means or that she herself was aware of the Petrobras scandal. And where once Rousseff spent her waking hours fighting an oppressive regime, she now finds herself in the situation of having to reassure citizens that she is not heading a corrupt government herself.

A longstanding culture of corruption serves only to reaffirm what so many have assumed about the Brazilian Government: that little has changed. However, assuming that Rousseff is staying true to her roots, as her statements would appear to suggest, there’s no reason to believe that the president’s ambition is not to put the issue of government corruption to bed.

People demonstrate against Rousseff, corruption and govermental policies in Sao Paulo

Adapting to record-low oil prices; United Securities advises

Posted on March 4, 2015March 9, 2015 by Ashton Wenborn

“The Gulf nations have utilised their vast oil wealth to undergo rapid modernisation in the space of a few decades”, says Mustafa Ahmed Salman, Chairman and CEO of Oman-based United Securities. “Endowed with abundant energy resources, these nations have transformed themselves and are now some of the richest nations in the world.” However, the oil price pressures of the present day threaten to inflict major pains on oil-dependent nations if they fail to recognise the changes at hand, and reduce their exposure to volatile price swings and precarious financial markets.

The shale oil revolution in the US, coupled with enhanced methods of recovery, has resulted in a worldwide supply glut that, without intervention, threatens to squeeze revenues in key oil markets

As the head of Oman-based United Securities, Salman is well positioned to pass comment on the region’s changing financial landscape and the fresh challenges posed by record low oil prices. Founded in 1994 with an ambition to become a one-stop shop for all the investment needs of large institutional and retail clients in Oman, the company’s client base has since grown to 23,000, made up largely of retail investors, high-net-worth individuals, and private, public and government companies. With a talented staff of 35 professionals, the firm has expanded its offerings to include brokerage, asset management, research and corporate finance services in the years since.

Survival of the fittest
An impressive track record counts for little in today’s low price environment, and the issues facing GCC-based firms like United Securities demand that they adapt quickly if they are to survive. “The dynamics of the oil markets have undergone a full 180 and we are now entering a new era where market-based pricing will prevail, and oil-producing nations may embark on policies aimed at defending market share”, says Salman.

Historically, global oil markets have rested with the OPEC nations, which have, since the 1970s, acted as the swing producers and chosen simply to turn off the taps in times of excess supply. However, the shale oil revolution in the US, coupled with enhanced methods of recovery, has resulted in a worldwide supply glut that, without intervention, threatens to squeeze revenues in key oil markets.

The GCC, for example, is seen by many as a one trick pony, with little more to offer aside from oil-related proceeds. The reality is not quite so straightforward, and the economic turmoil induced by previous oil shocks won’t be so easily inflicted this time around, according to Salman. In today’s climate, the GCC nations are protected against the low price environment, with the benefit of sizeable foreign exchange reserves and sovereign fund holdings, low debt to GDP ratios, solid macro economic data, favourable demographics, and big ticket spending programmes. “Worst case scenario, we expect spending plans that are in the pipeline or in the planning stage may be postponed. Yet, there are differences in how each regional economy has evolved over the years and how the current environment of low oil prices affects them individually.”

Saudi Arabia, Oman and Bahrain, for example, are all on course to post deficits of between five and 10 percent in the coming year, whereas Kuwait, UAE and Qatar are more flexible when it comes to balancing their budgets, with each of the three forecast to post fiscal surpluses. “Notably, GCC non-oil GDP growth is expected to continue at healthy rates outpacing the oil GDP growth rate. The current scenario, while resulting in short-term pains, will put pressure on governments to intensify diversification efforts in order decrease reliance on oil revenues in the long run”, says Salman. “Risks in the region include severe drops in crude prices below the $35 per barrel level, which could result in drastic measures; social unrest over flat incomes and possible cuts in social welfare benefits and spending; and geopolitical risks prevalent in the region.”

For financial services providers working in the worst affected GCC nations, they must adapt to the changing climate quickly or run the risk of falling by the wayside. “We have an impressive track-record of firsts that sets us apart from our peers in Oman”, says Salman. “We were the first to introduce internet trading and other technological innovations, like SMS confirmations, web based client accounts and so on. We also maintain liaisons with both global and regional investment houses to provide our clients with the best service possible.”

United Securities was also the first entity to introduce an online trading system in Oman, after launching its proprietary trading platform e-Tawawul in 2008. The platform grants clients easy access to the Muscat Stock Market (MSM) and allows them to view their portfolios, daily executed orders and up to date market news and statistics. “With its launch, e-Tadawul has increased our retail client base and its tailor made for clients who prefer non-discretionary accounts. The launch of this service also firmly placed our company in the spotlight for being a market leader in Oman at bringing forward innovative products and services”, says Salman.

Ready for anything
The firm is not without its weaknesses, however, and a low price environment means that companies like United Securities must shift their focus accordingly if they are to weather the storm. “As a financial services provider, we are not immune to the current market downturn. We have been proactive at rebalancing our managed funds and portfolios. We have altered our asset allocations to focus more on cash- and income-yielding securities to weather the turbulence in the markets right now. We are confident we will be nimble enough to shift strategies as and when the tide turns positive.”

Global financial markets are accustomed to overreacting in instances of sudden change, and the GCC is no exception to the rule. Both the Saudi Tadawul and Dubai Financial Market have retreated by 20 percent in the three-month lead-up to December, and regional indices in general have posted losses on a similar scale. “After the strong performance in 2013, positive sentiment regarding future prospects drove markets to new highs in the first three quarters of the year”, says Salman. “However, the pull back that followed crude price declines has eroded returns amid negative sentiments. Although this may sound ominous for Gulf nations, what we now have is clarity regarding the direction oil producers are embarking on.”

The outlook for the oil sector in the GCC nations looks bleak, with regional financial markets entering into a transitional phase where investors and stakeholders are in process of re-evaluating valuations with revised projections for all sectors, according to Salman. “We expect the GCC market to find its footing in Q1 2015 and sentiments to shift towards the positive side by the second half of 2015. By then, investors will have had time to take in the information and valuations will most likely be favourable or in line with revised estimates.

“In our opinion, current price levels offer attractive value propositions in certain sectors where oil prices don’t have a direct impact on operations. However, it’s important to note that further depression in oil prices can be a catalyst for continued underperformance of GCC markets. It’s difficult to estimate with certainty what the oil price floor is going to be and until we see a modicum of stability in crude markets, it will be difficult for regional equity markets to sustain any upward momentum. As mentioned earlier, this doesn’t truly reflect the economic fundamentals of the region and is mainly a function of sentiment driving down financial markets.”

Of the GCC nations, Oman is among the hardest hit by collapsing oil prices, although the impact has been muted, due in large part to the country’s focus on economic diversification. A budding hotel and tourism industry, alongside the Khazzan Natural Gas field – expected to come online by 2017 – and the development of a logistics infrastructure hub at Duqm should give Oman’s economy the boost it needs to offset falling crude prices. “The government has also eased regulations and, as a result, the country is more receptive to foreign investment in local industries. Also, the capacity of banks to absorb any government debt, and the reserves held by the CBO should act as a solid buffer in light of any fiscal deficits”, says Salman.

Still, the challenges for firms like United Securities number in the many, and only by taking up an intelligent position in the market can they negotiate an always-challenging financial climate. “Our aim is to provide a platform where every need of each one of our clients can be taken care of. All of our services work in unison to collectively enhance our total package of solutions, and as one of the earliest companies in the investment space in Oman, we have entrenched our brand name in the regional markets and earned the goodwill of our clients through sustained excellence. With robust market share in our industry, we are known both locally and regionally as one of top financial service providers in Oman.”

The focus for United Securities going forwards is on launching a new balanced strategy fund that provides investors with long-term capital appreciation and a steady source of income. “We have a two-way approach to enhance our services offered”, says Salman. “We are working towards attracting more international investors to the regional markets and increasing our visibility in the GCC region.

“Simultaneously, we are focusing on expanding international brokerage for local clients who wish to invest in international markets. We think there is significant untapped potential in the GCC region and with regional economies gradually opening up their industries, our position is that the next few quarters will be as good as any for investors with a long-term mandate.”

Japan opens its doors to hydrogen power

Posted on March 4, 2015March 3, 2015 by Ashton Wenborn

With Japan’s energy market still reeling from the 2011 Fukushima crisis and the ensuing nuclear retreat, policymakers are looking to arrest the country’s reliance on imports by way of an unlikely saviour. Enter hydrogen: once a symbol of the country’s military surrender, the energy source is fast-becoming a vital means by which Japan is to haul its way out of a seemingly inescapable hole.

The country lost a third of its generating capacity when policy makers opted to flick the switch on nuclear, and without an immediate fix to fill the void, Japan is nearing on an energy crisis. Although the national economy sits third in the world rankings, its indigenous energy resources number in the few, and only by pumping billions into fuel imports has the country managed to keep the lights on. The same cannot be said for air conditioning, however, and reports circulated last summer that claimed those working in central government offices were forced to endure 30oC-plus temperatures with little more than electric fans.

The costs associated with building a formidable hydrogen energy infrastructure are huge, and the price of a single hydrogen station numbers somewhere in the region of JPY 400m-500m

Offering an indication of what Japan’s energy future might look like, the ruling powers have been forced to concede that without reverting back to nuclear or seeking help elsewhere, its trade deficit will reap long-term damage on the economy. With imports weighing heavy on the country’s books and the spectre of Fukushima still looming large over the country, it’s clear that the answer must come from within and from a source other than nuclear.

Conserving with hydrogen
Steps taken by the Ministry of Economy, Trade and Industry in 2013 to establish a Council for a Strategy for Hydrogen and Fuel Cells set the wheels in motion for what the same organisation would later call the ‘hydrogen society’. Published in June of last year, this Strategic Road Map for Hydrogen and Fuel Cells outlined the significance of realising a hydrogen society and the benefits this might bring in terms of conservation, security, environmental protection and regional growth. ‘To realise a hydrogen society, related systems will be formulated on a large scale, which may be accompanied by changes in the current social structure, and long-term, continuous measures for realising such a society will be taken’, reads the report. ‘In addition, the imbalance between supply and demand issues will be resolved, while academia, government and industry will collaborate to proactively engage in measures for utilising hydrogen.’

The report delves into the potential of hydrogen as a core component of Japan’s future energy mix, and although the document is among the most significant actions taken on the subject so far, it is by no means the first or the last on the road to realising this ambition. The government’s changed stance – backing hydrogen as a viable energy alternative – represents a significant departure point for a national energy policy that has for too long held nuclear on high as the country’s go-to energy source.

Japan’s nuclear retreat has also brought with it certain repercussions for the environment, and, in choosing to ship fossil fuels from abroad in place of nuclear, carbon emissions have embarked on a steep upwards curve. Whereas the country’s dependency on oil and gas pre-Fukushima sat somewhere in the region of 60 percent, that same rate is today closer to 90. The importance of hydrogen in supplementing the country’s inadequate energy supply and in mitigating climate change, therefore, mustn’t be understated, and Japan is taking major strides to expand upon its leadership in the sector.

Experts at the New Energy and Industrial Technology Development Organisation (NEDO) asserted recently that hydrogen could soon constitute approximately 10 percent of Japan’s generating capacity. By isolating the chemical element, hydrogen can generate electricity through “steam reforming”, though much of the focus so far has fallen on the role of fuel cells.

Assuming that the country continues to build on the progress made so far on this front, the hydrogen market could clock up a total market worth of JPY 1trn ($8.43bn) before 2030 and JPY 8trn ($67.45bn) before 2050. “Hydrogen, which can achieve high energy efficiency, low environmental burden and capability for emergency use, provided appropriate usage, is expected to play a central role as a secondary energy source”, according to a recent government energy policy report.

Whether the introduction of hydrogen is financially viable is an entirely separate question altogether, and one that relies primarily on government-given emissions targets and the population’s willingness to climb aboard yet another energy revolution. “In terms of hydrogen per se, one of the biggest challenges is infrastructure.

“Hydrogen is voluminous and so less efficient to store than natural gas and oil”, says Yoshiaki Shibata, Senior Researcher for the Institute of Energy Economics in Japan. “Major economies have already built a reliable energy infrastructure network and at no small cost. If hydrogen is to be brought into the existing network, this may reduce the need for investment. However, if hydrogen replaces the existing network, we have to be careful in terms of the social cost.”

The costs associated with building a formidable hydrogen energy infrastructure are huge, and the price of a single hydrogen station numbers somewhere in the region of JPY 400-500m (around $3-4m). As a means for comparison, a charging station for electric-powered vehicles comes to the much lesser sum of JPY 10m ($84,303). Still, the government has set out an ambition to build 100 hydrogen stations before March 2016 and have 1,000 in operation by 2025.

Building together
The administration’s support for the resource applies also to the commercialisation of fuel cells, and, according to last year’s strategic road map, recent developments on this front mean that this year could mark the beginning of a new era for hydrogen energy.

This is assuming however, that any hurdles in the coming years will be easily cleared and that domestic enterprises will lend their unblinking support to the building of Japan’s hydrogen society. The ambition has been handed an added ounce of credibility of late, when in January Toyota announced that it would be opening up its hydrogen patents and, in doing so, shift development up a gear or two. “At Toyota, we believe that when good ideas are shared, great things can happen”, said Bob Carter, Senior Vice President of Automotive Operations at Toyota Motor Sales in a company blog post. “By eliminating traditional corporate boundaries, we can speed the development of new technologies and move into the future of mobility more quickly, effectively and economically.”

In making over 5,600 fuel cell-related patents available, Toyota has set the wheels in motion for hydrogen-powered vehicles to make it to market quicker. The participation of the auto industry is of particular importance to Japan, where Toyota, Honda and Nissan are key contributors to the national economy and where the industry together accounts for 10 percent of the national workforce and 20 percent of exports, according to NEDO.

“The first generation hydrogen fuel cell vehicles, launched between 2015 and 2020, will be critical, requiring a concerted effort and unconventional collaboration between automakers, government regulators, academia and energy providers”, according to Toyota’s Carter. And with the first model scheduled to launch commercially this year, the success or failure of the emissions-free, four-door Toyota Mirai will determine how much mileage there is in the fuel cell vehicle (FCV) market.

The potential of hydrogen energy has fast become a much-talked about phenomenon in recent years, and the steps taken thus far to ensure the technology is both affordable and efficient for consumers have been significant. However, for those living in Japan, there is an uneasy feeling that these promises of an up-and-coming energy revolution have been made before, and with disastrous consequences.

Although the safety concerns associated with hydrogen are distinctly less than those to do with nuclear, there is a lingering air of mistrust among the Japanese public, who are less than convinced by the government’s credibility in launching a hydrogen society. “The technologies are developing very fast and people can use hydrogen safely”, says Shibata. However, the mere fact that hydrogen is explosive when in contact with oxygen is enough to rattle a public for whom safety is paramount when it comes to energy-related matters.

“People usually have an image of hydrogen in their heads that it easily explodes. But people can use hydrogen energy safely as long as they know how to manage it, same as gasoline”, said Mio Matsumoto of NEDO’s new energy technology department. “NEDO is acting to increase how socially acceptable it is for people to use hydrogen energy safely and, of course, to develop the technology for it.”

The coming months and years, therefore, will be decisive in demonstrating to the Japanese population that the transition to hydrogen does not carry with it the same risks as nuclear. Then and only then will the issue of cost competitiveness and efficiency determine how big a part the energy source will play in Japan’s future.

India doubles coal duty for second year

Posted on March 4, 2015February 8, 2017 by Ashton Wenborn

The world’s third-biggest emitter of greenhouse gases will raise coal duty after Finance Minister Arun Jaitley delivered his annual budget speech. He stated that the collected revenues will feed $2bn annually into the National Clean Energy Fund, which has grown to $6.7bn within its five-year existence, to promote renewable-energy projects.

Coal currently drives 60 percent of India’s electricity generation capacity

Jaitley said: “I propose to increase the Clean Energy Cess from INR 100 ($1.6) to INR 200 ($3.2) per metric tonne of coal to finance clean environment initiatives.” This clean energy cess levy, on both imported coal and coal mined in India, is expected to encourage investments to boost fuel efficiencies. The increase follows last year’s jump from $0.8 per metric tonne to $1.6 per metric tonne and signals a tax hike for the second consecutive year.

As one of the cheapest sources of energy, coal currently drives 60 percent of India’s electricity generation capacity and the higher tax is expected to see coal costs for every kilowatt hour of electricity rise by as much as $0.001. At present, only six percent of the fuel consumed by India includes renewable energy and, in a bid to double this share, the government aims to add 175 gigawatts of renewable-generation capacity by 2022.

The Economic Survey 2014-2015, released by the Indian Ministry of Finance, suggested a five-fold increase in coal cess to $8 per metric tonne in order to bring domestic prices on par with international prices and drastically reduce carbon emissions. Jaitley added: “With regard to coal, there’s a need to find a balance between taxing pollution and the price of power, I intend to start on that journey too.”

Fraudsters and finance: both found where there’s cold hard cash

Posted on March 4, 2015 by World Finance

World Finance speaks to barrister Guy Bowden on identifying and prosecuting internal fraudsters.

Come back later for a full transcript of this video.

Patrizia Immobilien helps companies stay ahead of real estate game

Posted on March 3, 2015 by Ashton Wenborn

The gradual introduction of regulatory changes since 2013 has sent seismic reverberations through the European real estate industry and forced many institutions to drastically alter their operations in order to comply. The new requirements have tightened national authorities’ grip on these institutions and demanded a greater degree of transparency, and while some have struggled, many have demonstrated their resilience by turning these obstacles into opportunities.

It’s important to remember, however, the regulators aren’t finished yet – Solvency II, expected to be one of the most revolutionary directives, doesn’t come into effect until early 2016, and it’s possible there’s even more to come. In a fast-paced, rapidly evolving business environment, businesses must be doing all they can to anticipate and adapt to changes or risk being pushed out by competitors.

In a fast-paced, rapidly evolving business environment, businesses must be doing all they can to anticipate and adapt to changes or risk being pushed out by competitors

One firm that has managed this is Patrizia Immobilien. For more than 30 years, the German-born company has had an active presence in 10 countries in the residential real estate and commercial property fields, providing services to a variety of private investors and institutions. Despite the various challenges it has faced, most significantly the global financial crisis, Patrizia has committed to its important role within its sector, delivering world-class expertise to its vast clientele across the globe.

World Finance spoke to Wolfgang Speckhahn, Group Head of Strategy and Corporate Developments, about the impact of the changes on the European market as a whole, how Patrizia has adapted to these challenges, and what can be expected from the firm in the future.

How is the European residential and commercial property field performing?
Generally speaking, we are experiencing growth in all markets and sectors, with European markets providing a particularly facilitating environment for the residential sector to flourish. Whether this is fuelled by investors and/or general market conditions is unclear at this point, but we are certainly witnessing increased interest from investors. In this regard, optimised regulation – such as the Spanish SOCIMI regime, which focuses on urban real estate – plays a role, as do market changes from ownership to private rental, as we’ve seen in the UK, Spain and the US in recent years. This could be due to a variety of factors, from changes to national policies to the general state of each country’s economy, but fundamentally, all contribute towards improving the state of the markets.

To what extent has regulation played a part in the way the sector has changed?
Changes to regulations, such as the introduction of AIFMD in 2013, have considerably changed certain areas of the business. For example, we’ve seen an increase in both the supervision received, and the reporting demands from national authorities. This has caused investors to call for IT systems to be updated and for a greater degree of transparency, both of which will cost. It’s unclear as of yet how these developments will be funded.

On the other hand, the positive changes brought about by these changes to regulation will fuel the industry and the opportunities it presents. Consolidation on the side of the managers will increase professionalism and lead to a higher level of transparency, as well as strengthening the relationship between manager and client. An example of this is the closed-ended business in Germany, previously deemed a grey area of the market, which now, under new regulation, has joined the white market. Furthermore, interest in internationally recognised investment vehicles such as the Investment KG is picking up among foreign investors. It’s important to bear in mind that there are further new regulations to come, and at present, the impact they will have on the industry simply cannot be known.

What are the key regulatory considerations to consider for those in your field?
The key for Patrizia has been AIFMD. While seen as a challenge in the first instance, the directive has in fact presented an opportunity for further business development. The so-called EU passport for managers (AIFMs) and products (AIFs) has created a more level playing field not previously seen in the European market and opened doors which were formerly closed to the company. In order to be best-equipped to provide services and products to investors, regardless of their domicile, European coverage combined with local presence and expertise is required. Thus, catering to local operations and investment platforms where investors are active is central to success, which Patrizia takes advantage of by basing operations in the core European markets.

What are the biggest regulatory changes to have hit the property investment sector in recent times?
Besides AIFMD, which was undoubtedly the biggest so far, Solvency II is predicted to hit the industry hard when it comes into effect in 2016. This is particularly true for core investments as they are pursued by institutions, and as yet, a solution is yet to be found by neither investors nor managers. There will of course be a change in products, as the equity requirements will make some of todays too expensive, particularly for smaller institutions. The move from direct to indirect is expected, but it’s likely to favour the equities universe as opposed to real properties, and the same will be the case for BEPS, which will render offshore investment structures useless and unattractive. Those that don’t sufficiently prepare for the arrival of BEPS will suffer, to the point that it could provoke a new crisis among capital markets – this applies not only to Channel Island structures, but Cyprus, Malta, Lichtenstein, Luxemburg, and even further afield, reaching the Bahamas and Cayman Islands too.

In what key ways do European regulations differ to those in the rest of the world?
The gap, if there even is one anymore, is certainly closing. National governments’ fears of tax revenue losses has prompted a race to the bottom in tax rate terms, but the big economies, such as the US and EU, have recognised the need to jointly act in this field when disciplining their members. Ensuring there is a common understanding of what defines tax abuse, and setting the standards to prevent it, is sought with BEPS by the OECD. Eventually, European regulations will not differ from the rest of the world, and Patrizia takes this into account when structuring investment profiles for clients.

How have regulatory hurdles forced you into changing investment strategy, if at all?
Rather than bringing about a forced change, one should say regulation has opened the door to new opportunities, which have then changed investment strategy. For example, Patrizia has been involved in the institutional investment business for over 30 years now. The AIFMD has put the closed-end business, best known among retail clients, on equal footing with the regulated Spezialfonds-Business, which is better known among institutional clients. This situation has presented Patrizia with the opportunity to expand its business, widening the capital base from solely institutional, to retail too. As a result, Patrizia is able to provide investors in Germany with what we call a ‘toolkit’ of sorts, which consists of all investment vehicles available under German regulation to suit their individual requirements.

What key steps has Patrizia taken to accommodate for changes in regulations?
As well as expanding the variety of investment vehicles offered, the decision was made to further expand our European footprint. This was achieved by establishing AIFMs in all the markets we currently have a presence in, which has in turn put us in a better position to answer demands from investors in the same way that we adapt to regulation changes on a national level.

What are Patrizia’s ambitions for the future?
Patrizia aims to become Europe’s leading fully integrated real estate investment manager. In order to achieve this, we are developing the group vertically on a country-by-country basis, and horizontally through both organic and inorganic growth. A part of this development will be further growth in European markets, such as Spain, Italy and Poland, with more to be considered in the future. We are always looking for opportunities to expand our expertise, as well as the products and services we offer.

Islamic Finance Awards 2015

Posted on March 3, 2015 by Ashton Wenborn

Best Islamic Bank, Algeria
Al Salam Bank Algeria

Best Islamic Bank, Bangladesh
Islami Bank Bangladesh

Best Islamic Bank, Egypt
Al Baraka Bank Egypt

Best Islamic Bank, Indonesia
Bank Syariah Mandiri

Best Islamic Bank, Jordan
Jordan Islamic Bank

Best Islamic Bank, Kuwait
Kuwait International Bank

Best Islamic Bank, Lebanon
Al Baraka Bank Lebanon

Best Islamic Bank, Malaysia
CIMB Islamic Bank Malaysia

Best Islamic Bank, Oman
Bank Nizwa

Best Islamic Bank, Pakistan
Bank Alfalah

Best Islamic Bank, Qatar
Barwa Bank

Best Islamic Bank, Saudi Arabia
Saudi Hollandi Bank

Best Islamic Bank, Turkey
Türkiye Finans Katılım Bankası

Best Islamic Bank, UAE
Emirates Islamic

Best Islamic Bank, UK
Bank of London and The Middle East

Special Global Recognitions

Islamic Banker of the Year
Loai Muqames, CEO, Kuwait International Bank

Business Leadership & Outstanding Contribution to Islamic Finance
Musa Shihadeh, Vice Chairman, CEO & General Manager, Jordan Islamic Bank

Best SME Islamic Finance Provider
Qatar Islamic Bank

Best Takaful Provider
Dar Al Takaful PJSC

Best Retakaful Provider
Saudi Reinsurance Company

Best Islamic Asset Management Company
KFH Capital Investment Company

Best Islamic Fund Management Company
NCB Capital

Best Islamic Finance Advisory Firm
Al Rajhi Capital

Best Islamic Private Wealth Management Company
SEDCO Capital

Best Sukuk Deal
Midciti Sukuk Murabahah, CIMB Islamic Bank Malaysia

Best New Islamic Fund
BIMB i Flexi Fund, BIMB Investment Management, Bank Islam

Best Islamic Finance Training Institution
Ethica Institute of Islamic Finance

Going against convention

Posted on March 3, 2015February 19, 2016 by Ashton Wenborn

Just over a decade ago, most people would have given a perplexed look if the phrase Islamic banking was uttered, but in a relatively short space of time proponents of this unique form of finance have forced the world to take notice. One of the key components that has led to a rise in global recognition of the sharia-compliant form of finance is due to the remarkable levels of growth that the sector has generated, with the global consultancy and accounting firm, Ernst and Young calculating that Islamic banking assets with commercial banks would exceed $778bn by the end of 2014, and that the global profit pool of Islamic banks is set to triple over the next four years. Much of this impressive growth emanates from seven rapid-growth markets (RGMs) – Bahrain, Indonesia, Malaysia, Saudi Arabia, Turkey, UAE and Qatar – which will no doubt continue to be crucial players in increasing the internationalisation of Islamic banking in the coming years.

But probably one of the most obvious indicators of Islamic banking’s proliferation into international markets has to be its rebranding. Financial institutions that adhere to the practices laid out in accordance with sharia law are now more commonly referred to as engaging in what is known as participation banking – most likely to take the emphasis off the religious element and helping to attract a wider audience. Those less familiar with participation banking may also have misconceptions about the composition of its members. For example, you would be wrong in thinking that the majority of those subscribers to Islamic banking do so for strictly religious motives. In fact, in Saudi Arabia, a country with a particularly high Muslim population, the total assets of Islamic banks represent just 48.9 percent of the overall market. What are of greater importance to consumers are the products and services on offer.

World Finance Islamic Finance Awards 2015

Sukuk’s success
One of the biggest success stories of the last decade for Islamic finance has been the substantial growth it has seen in the sukuk market (the Islamic equivalent of bonds). Rating agency Moody’s contended that the strong growth in the sovereign sukuk market that was seen in 2014 should be sustained into the next, as a result of Islamic and non-Islamic governments eager to make the most out of the high levels of demand for the sharia-compliant financial assets. Such sentiments are likely to help drive the market further, by increasing investor confidence that will no doubt bring increased volumes and, therefore, greater liquidity.

Increased global acceptance of Islamic financial products is crucial if it wishes to maintain its impressive growth figures. But that should not be a problem, at least that is the opinion of Khalid Howladar, Moody’s Global Head for Islamic finance who saw 2014 as a “landmark year” for the soverign sukuk and Islamic finance in general. His sentiments came in a year where the UK became one of the first non-Islamic countries to issue sharia-compliant bonds. Britain’s endorsement of Islamic financial products helped in attracting a lot of interest from global investors from other non-Islamic states and brought orders of over $3bn in sukuk bonds. Hong Kong and South Africa also concluded sales of sharia-compliant bonds in the same year. “All three are major non-Islamic countries, and the transactions indicate a significant change in the potential size, depth and liquidity of this market”, said Howladar.

Moody’s predicts that we will see many more new Islamic and non-Islamic sovereign issuers begin to enter into the sukuk market in 2015. Since 2001, 16 governments have issued sukuk instruments, a trend that is set to continue, with Luxembourg, Morocco, Tunisia, Egypt, Jordan, Oman, Bangladesh and Kenya all making their intentions known to begin issuing sukuk bonds in the short term and medium term. Australia, the Philippines, Russia, Azerbaijan, and South Korea have also shown considerable interest in the sector too, which will provide growth for the industry in years to come.

New initiatives
A key development in conventional banking in recent history has been the implementation of new digital technologies, particularly the increased sophistication of online banking. Participation banking is no different. In order to engage with a wider range of potential customers and keep pace with its competitors engaged in traditional banking practices, many institutions have focused towards a technology based, service-driven value propositions. This digital transformation within participation banks is aimed at tackling a larger trend within the banking sector: the shift from cash to digital payment economies. Presently, there is a drive by Islamic banks to expand their range of digital products, with the intention of improving their customers over experience, as well as hopefully having the added benefit of coaxing new customers looking for an alternative to orthodox institutions.

Social media is another avenue that has been employed by institutions engaged in Islamic finance, as it is a great way to communicate with customers, both prospective and existing. Social media analytics have proven extremely useful for leading banks in the industry, acting as an effective method for identifying client expectations, levels of satisfaction with the products on offer, as well as assisting participation banks in fine-tuning the experience in order to better accommodate customers’ needs.

Capitalism’s saviour
Since the financial crisis, conventional banking has seen its public image take a nosedive. Many consumers have lost faith in traditional banking, a sentiment that has been exacerbated by those institutions seemingly unable to stay out of the press, with many of the biggest conventional banks receiving record fines for the part they played in fixing foreign exchange markets.

Unsurprisingly, it has many people questioning if there is any room for morality in a sector seemingly obsessed purely with profits. But where conventional banks have made mistakes, participation banks have the opportunity to prosper. Interest-free banking that ensures bank loans are limited to the financing of physical assets, which offer a safer alternative should buyers default, as well as Islamic finance’s prohibition of speculative investment, offer a breath of fresh air for consumers who have grown tired of traditional banking practices.

There has never been a better time for an alternative to the economic model and business practices of conventional banks. Consumers are looking for institutions that promote a more ethical version of capitalism and Islamic finance could be the answer to banking’s current PR nightmare. Increased international issuance is only going to help attract larger numbers of global investors to the Islamic brand of finance and assist in deepening this relatively new sector. As more and more investors become comfortable with sharia-compliant products, spurred on by non-Islamic governments’ acceptance, it will improve overall liquidity, assisting in making Islamic finance a viable contender for conventional banking.

Will CSR take you to heaven?

Posted on March 3, 2015 by Ashton Wenborn

World Finance speaks to Jeremy Josse, author of Dinosaur Derivatives and Other Trades on risk, uncertainty and the Faustian pacts we all make.

World Finance: Jeremy, you discuss at length risk and uncertainty. Do you haver an alternative, what are the better methods for circumventing risk?
Jeremy Josse: I really talk about the concept of risk and uncertainty through the very ancient story of Joseph, and how he was a sort of insider dealer, not that the Bible called him that, but that he was a sort of insider dealer inasmuch as God had given him this view about seven good years and seven bad years, and this allowed him to circumvent risk. He knew the future, as opposed to having to make a bet on the future.

So the reality is that unless you’re Joseph and have a line to God, which most of us don’t, risk is an absolutely intrinsic part of the financial game, that’s why financiers are of course speculators. The trick is all about managing risk, and that partly depends on your investment strategy. It partly depends in your appetite for risk, it partly comes back to some of those financial products we’ve been talking about, many of them are actually originally created to mitigate risk, even if some of them were subsequently misused. Derivatives, credit default swaps, are really there to mitigate credit risk for banks.

[R]isk is an absolutely intrinsic part of the financial game, that’s why financiers are of
course speculators

World Finance: You refer to the term ‘legal fiction’ in describing financial instruments. Can you explain this?
Jeremy Josse: That chapter really deals with the old concept of prohibition on usury. As people will know, back in Talmudic Jewish times there was created this idea that you shouldn’t lend on interest, and that got incorporated into actually all medieval law, into Christianity, into Islam. It created a great deal of innovation in finance, which took the form of a legal fiction.

It’s not really possible to lend money without charging interest. There is always an intrinsic time value of money. So if I lend you some money and don’t charge you interest, the cost of the money is still there, it’s just I’m giving you charity.

In the Renaissance, what really happened, as industry exploded, was that people had to find ways of lending on interest without it appearing to lend on interest, and therefore what they created were a lot of legal fictions. A modern legal fiction, say, is the corporation. Corporations are deemed to be persons, legal persons and human persons, but of course they’re not really persons. They’re a device to mitigate risk, they’re a device for people to pool their capital into an entity and only be liable for the amount of money that they injected into that entity.

And then legal fictions have been used, or were used, to circumvent all sorts of usury prohibitions. So that leases are a legal fiction, they’re really a way of lending but without charging interest. Instead you lent an asset, and you were paid a rent. So it replicated lending but it did it in another fashion, and indeed leases are still used very actively under Sharia law as a form of lending.

If you look at a lot of financial innovation, it’s usually taking a problem, taking these very old concepts of debt and equity, but somehow recasting them in a mirror image to solve a particular problem, and that’s what legal fictions are really about.

World Finance: On the subject of predictions now, and what are your thoughts on behavioural economics, which is gaining popularity in certain governments?
Jeremy Josse: The rational market hypothesis wants to believe that that gap between market value and fundamental value will be arbitraged away, but it just ain’t. Sometimes it is, but regularly it does not get arbitraged away. So you just can’t deny that fact, and the behavioural finance guys have tried to recognise this fact and tried to quantify it, and tried to explain it.

[W]e’re always jumping onto herd patterns
of behaviour

One of the quintessential observations of behavioural finance is this famous test that, if you’re given the choice, would you take $100 when your buddy takes $150, or would you take $80 and he takes $80? If we were pure profit maximisers we’d say “well I’ll take $100, I don’t care about him having $150,” but actually all the behavioural finance tests show most people choose the 80-80 option.

They do that because, yes, we’re not simple profit maximisers, we’re very social beings, we’re always spending our time looking over our shoulders seeing how the next man is doing, we’re always jumping onto herd patterns of behaviour. It’s all these things that behavioural financiers try to understand, quantify, and show how they function in the market.

World Finance: You’ve mentioned modern shareholders in terms of a Faustian pact. But with organisations increasing CSR and attempting to present themselves in terms of sustainability, surely some shareholders are buying themselves into heaven?
Jeremy Josse: Look, social responsibility is very important, but I think one of the things about a Faustian pact and why I write about it quite a lot is that, again, it’s something we can’t really get away from. No one needs to go around selling their soul to Mephistopheles, right, and completely throwing away their life to materialism, becoming a sort of Dorian Gray. But, actually, to do any business, to do any professional service, we’re all entering into small elements of Faustian pacts.

I’m always, in order to earn money, throwing away a little of my autonomy, a little bit of my time, a little bit of my time with my family, sometimes I have to put up with a not particularly pleasant boss, the regime of a particular company, I’m undermining my own autonomy to a certain extent. So one of the things I wanted to bring out in the book is that, ok, Faustian pacts can be seen on these very macro terms, in terms of environmental impacts, but actually Faustian pacts are really very personal things, and we do actually all enter and need Faustian pacts in a small way in our everyday business life.