Navigating Turkey’s project finance industry

Turkey is a key market for global investors, and continues to offer growth and investment opportunities. Erdem&Erdem is a full service independent law firm with offices in both Istanbul and Îzmir, Turkey. The company’s project finance team regularly advises clients on developing innovative financial structures that support infrastructure investment, and can address the specialised needs of lenders and developers in financing both public and private infrastructure projects, including acquisition finance, project finance and debt capital markets.

The highly skilled cross-disciplinary team of lawyers at Erdem&Erdem is one of the company’s major strengths. Each member provides integrated legal advice required for the development and financing of successful infrastructure projects. These include the negotiation and preparation of concession agreements, leases, direct agreements, construction contracts, operation and maintenance agreements, joint bidding agreements, joint venture arrangements, letters of intent, term sheets and other financing documentation.

Over the last 20 years, Erdem&Erdem has been involved in a large number of transactions that represent developers, sponsors, investors and financial institutions seeking to develop, acquire, bid on or sell infrastructure assets privately, under government privatisation, or as part of public-private partnership (PPP) programmes.

The team has developed a significant presence across many sectors with a strong insight into how to structure these transactions, as well as how to conduct efficient, in-depth and useful due diligence on the underlying assets and relevant documents. This is done by offering services across a full breadth of financial infrastructure techniques, and the financial engineering that improves asset value from structured finance within the infrastructure, energy, construction and engineering industries. This should also occur within the corporate, securities and real estate sectors, transportation, ports, airports, hospitals and power plants.

Recognised practice
A number of Erdem&Erdem projects have been recognised as landmark transactions. In Turkey, the company represented YDA Group on the construction and financing of Dalaman Airport’s domestic terminal, and assisted on the Kayseri Integrated Health Campus. Dalaman Airport received the first prize in Bonds & Loans’ Transportation Finance Agreement of the Year category, and second price in the Syndicated Loan of the Year category. The financing of the Kayseri Integrated Health Campus received third prize in Project Finance of the Year, Syndicated Loan of the Year and Structured Finance of the Year categories by Bonds & Loans in 2015.

In Kazakhstan, Erdem&Erdem advised the Yıldırım Group on financing Voskhod Chromium, with $245m of the term loan facility raised through UniCredit and the European Bank of Research and Development (EBRD), as the first chromium mining project financing in the history of EBRD. Voskhod Chromium financing won the Best Project Finance Deal award and the Best Natural Resources Deal award from the EMEA Finance Institution in 2016.

Legal enforcement, compliance and sustainability all play key roles in achieving reliable outcomes for infrastructure financing

In Ecuador last year, Erdem&Erdem represented Yılport Holding for the operating rights transfer of Port Bolívar in Machala for a period of 50 years, conditional for a return investment of $750m by Yılport Holding, sealed in an agreement with Ecuador’s government.

Dalaman Airport’s investment comprised EBRD financing from a senior A/B-loan to YDA Havalimanı Yatırım ve Îs˛letme, a special purpose vehicle company of YDA Construction, part of the YDA Group of Turkey. The financing by EBRD consisted of an A-loan portion of up to €87.5m ($92.3m) and a B-loan portion of up to €87.7m ($92.5m), syndicated to UniCredit Bank Austria. The funds were provided to support the construction of a new domestic terminal at Dalaman Airport, together with auxiliary structures.

Due to its proximity to major tourist resorts in the southern Turkish Riviera, Dalaman Airport is one of the key airports in Turkey. The deal is a benchmark one in the private sector and of airport infrastructure across Turkey. Dalaman Airport’s financing is historic, as it is the first regional airport financed by EBRD, one of the most respected players of infrastructure financing projects.

Erdem&Erdem’s approach has always focused on minimising the subjectivity across financing agreements and planning a development strategy through to procurement. The firm aims to create contracts and the management and operational phases permitted for future investments under the main contractual framework, tailored specifically for airport construction financing.

Prior to the negotiation of financing agreements, Erdem&Erdem’s focus was first and foremost on identifying unique issues facing the public authority, and the sensitivities of commercial considerations of private institutions as developers and operators, which may be particularly complex across different levels (with respect to individual infrastructure projects implemented for the first time), as in the case of Dalaman Airport.

A healthcare focus
PPP projects are officially introduced by an explicit reference to the term itself under the Building and Renewal of Facilities and Procurement of Services law through the PPP model. Historically, Turkey’s first and foremost implementation of PPP projects was targeted at the construction and rehabilitation of hospitals in a structured legal framework introduced by the PPP law in healthcare. However, it opened up the path to future PPP growth in infrastructure investments – particularly transportation – with toll roads, railroads, toll bridges and educational facilities.

Erdem&Erdem advised the YDA Group on project financing that was worth €330m ($347m), which included design, construction and management of the Kayseri Integrated Health Campus project – the first PPP project in Turkey implemented under the requirements of PPP law. The company adopted a coordinated and multidisciplinary approach, with sensitivity to the special issues related to critical infrastructure assets.

One of the main challenges in attracting private sector investment is the difficulty the public institutions encounter arranging a sustainable delivery framework to prepare PPPs effectively. Setting benchmarks for socio-economic and environmental impact, affordability, risk identification, bankability and similar comparative assessments requires project-specific methodologies.

Clearly a greater number of PPPs are structured to be bankable for different levels of investment with comprehensive technical, financial, business and legal assistance. Therefore experts such as Erdem&Erdem are able to advise and present well-structured projects that are indispensable for the effectiveness of projects such as the Kayseri Integrated Health Campus.

Voskhod Chromium, a major chromium mining facility in Aktobe Oblast, north-western Kazakhstan, is an example of a landmark cross-border transaction that includes six different jurisdictions involving both A and B-loans, each making two separate tranches that equal $260m in aggregate. EBRD’s financing as the lender in Voskhod is significant as the company’s first transaction in chromium mining.

Yıldırım Group’s financing provided Turkey with an industrial conglomerate of mining and port operations, which will be used to restructure and rehabilitate the operation of Voskhod Chromium and improve its efficiency and competitiveness, while reinforcing its overall environmental and operational health and safety standards. Voskhod Chromium is expected to have a transformational effect on the mine operations by introducing new technologies into Kazakhstan for the first time.

In contrast to a typical project finance contract based on the assumption that the lenders will have step-in rights, granting security in Voskhod Chromium’s financing was challenging due to a restriction of securities given over minerals in Kazakhstan. From an early stage, Erdem&Erdem’s advisory planning on the securities has been instrumental to the success of Voskhod Chromium’s financing.

PPP opportunities in Turkey
The most significant obstacle to financing infrastructure projects is the difficulty in delivering financial demands through tax revenues. Taking into account Turkey’s past, which is similar to other high-growth markets, the country has strong potential to generate landmark PPP projects with high-level support from its government with an extensive PPP agenda.

Legal enforcement, compliance and sustainability all play key roles in achieving reliable outcomes for infrastructure financing

With a successful track record across other industries, PPP will certainly generate exciting opportunities for both Turkish and foreign investors and lenders – particularly across mega-infrastructure projects where there are great incentives from the Turkish Government. Roads and railways have not yet been revitalised, but there are a number of projects currently underway.

So far, healthcare is the most recent and successful industry where the PPP model has been implemented. The Turkish Government has planned to develop 18 integrated healthcare facilities using the PPP model, with the purpose of promoting a diversified network of medical services and raising standards in healthcare in line with the technological innovations and new trends in medicine.

Regardless of the financing model selected, there are basic considerations required for successful infrastructure investment with project financing. The project finance team’s ability to prepare the project cycle – including preparation, concessions, procurement, contract management and an efficient dispute resolution mechanism – is instrumental in providing strong development, leading to a positive economic return.

Legal enforcement, compliance and sustainability all play key roles in achieving reliable outcomes for infrastructure financing, either from private institutions as lenders or through public sector support. This will also ensure the credibility of public institutions by selecting sustainable PPPs. Another key issue is the concern over handling renegotiations and disputes over the financing agreements. The determination to prevent disputes needs to be coupled with appropriate dispute and renegotiation mechanisms. If credible and effective dispute settlement mechanisms such as arbitration and mediation are introduced with clarity, this will serve to safeguard potential ramifications and deter opportunists targeting project – regardless of PPPs or traditional project financing.

Stock markets run on ‘gut feeling’

On the trading floor, every top professional knows the value of a strong hunch. While stock trading strategies focus on conscious reasoning as the key to success, traders themselves place great importance on ‘gut feeling’ to guide them towards lucrative deals.

In the wake of the 2008 banking crisis, this financial sixth-sense has often been dismissed as an industry excuse for reckless stock market gambling. Yet, according to a new study led by the University of Cambridge, such gut feelings do indeed play a very real role in the world of trading.

“I set up this study to answer a simple question: are gut feelings merely the stuff of trading mythology, or are they real physiological signals?” said former Cambridge University research fellow and Wall Street trader Dr John Coates. “I suspected from my days of trading that hunches were real and valuable, that when I scrolled through the range of possible features, one just felt right.”

Sensitivity equals success
In order to test this theory, researchers at Cambridge University recruited 18 male traders involved in high-stress trading in a volatile period towards the end of Europe’s sovereign debt crisis. These test subjects then underwent a series of experiments to measure their awareness of the subtle physical changes happening to their bodies during a high-pressure work day.

Collectively, the traders performed significantly better in the heart rate test than the control group, demonstrating a heightened awareness of their body’s sensations

“Within physiology, the term ‘gut feeling’ is a colloquial synonym for interoception – the branch of our sensory system that monitors our internal, homeostatic condition”, explained Coates. Sensations such as breathlessness, body temperature, heart rate and fullness of the gut and bladder are continuously passed to the brain from the body’s tissues by interoceptive signals. Although most people are unaware of this transmission of information, sensitivity to such sensations can vary greatly, with some experiencing stronger physical reactions to certain
stimuli than their peers.

As the most common test for interoceptive sensitivity is heart rate awareness, the traders participating in the study were asked to count their own heartbeats while at rest, without feeling their pulse or touching any other part of their body. Collectively, the traders performed significantly better in the heart rate test than the control group, demonstrating a heightened awareness of their body’s sensations. What’s more, within the group of traders, those who more accurately counted their heartbeat also performed better on the trading floor.

Not only did traders with a better heart rate score generate more profits than their peers, they also survived longer in high-pressure financial careers. The findings suggest successful traders have a heightened awareness of the body’s stress responses, and are thus able to unconsciously read the physiological signals that steer them away from high-risk, dangerous decisions.

Disproving theories
As well as deterring traders from making reckless financial decisions, these subtle interoceptive sensations can lead to success. With their brains and bodies acting as one in moments of high stress, traders can feel drawn towards a profitable stock, without even being able to articulate the reasons for the hunch.

The scientific confirmation of a trading gut feeling may well have implications for economic theory and, in particular, the controversial ‘efficient markets’ hypothesis. The hypothesis, similar to the ‘random walk’ theory (which says past movements or trends in stock prices cannot be used to predict the future movement of the same stock), suggests the market is entirely random, making it impossible for traders to improve or even control their performance through skill, knowledge or experience. This would make it impossible for traders to ‘beat the market’ and earn excess profits from stocks.

The scientifically proven importance of gut feeling in financial risk-taking may give human traders the edge over their emerging
digital competitors

Conversely, the newly discovered link between gut feeling and trading success suggests an instinct for anticipating price movements does indeed exist, and comes into play every day on the trading floor.

According to Coates: “Academic economics and finance is so focused on conscious reasoning that they completely miss the real action, which is taking place in the dialogue between the brain and the body.”

Man versus machine
The results of the study may also have a significant impact on the very structure of what is a rapidly digitalising industry. Bolstered by the aforementioned efficient markets hypothesis, which also argues machines are better than humans at trading, digital trading systems have come to dominate stock exchanges the world over. Today, openly shouted trading is largely a thing of the past, with the rise in electronic trading limiting face-to-face bidding between professionals. However, the scientifically proven importance of gut feeling in financial risk-taking may just give human traders the edge over their emerging digital competitors.

Unlike machines, successful traders appear to have an innate physical predisposition for effective risk taking. While digital systems rely entirely on hard data, humans have unconscious access to a world beyond numbers. Where computers fail to beat the system through an automatic analysis of available information, traders are able to do so thanks to the physiological clues provided by their bodies.

In highlighting the role of the human experience in financial trading, the study reignites the debate between classical and behavioural economists. Followers of the classical school tend to believe psychology and neuroscience are irrelevant to economics, whereas behavioural economists see these elements as essential to financial decision-making. Both theories, however, have failed to consider the role of the body.

Until now, physiology has been largely ignored in economic academia, which widely regards trading as a purely intellectual activity. This new evidence undermines the established belief, potentially prompting a profound reassessment of our understanding of financial markets and the decisions that govern them.

According to Coates, the landmark study shows just “how exquisitely we are constructed for rapid pattern recognition”. Armed with this new evidence, the Wall Street veteran now believes “humans can indeed compete against the machines”. For many finance professionals, the results confirm what they have long suspected: that trading skill cannot be taught and, more importantly, cannot be programmed.

YDA Construction builds investor confidence

This year marks the 42nd anniversary of the creation of AKSA Construction, YDA Group’s first construction and contracting company, and the 22nd anniversary of YDA Construction Industry and Trade. The flagship of the group, YDA Construction carries out a wide range of works, including turnkey projects, build-operate-transfer (BOT) airports, hospitals, schools, shopping malls, hi-tech business centres, industrial plants, highways, railway lines, bridges, intersections and mass housing projects. With subsidiaries operating across a wide range of sectors and completed projects amounting to $6.8bn by the end of 2016, YDA Group is one of the most influential private companies in Turkey.

Although the Turkish corporate sector is well versed in bank financing, longer tenor bond financing is relatively scarce

While continuing its operations in the construction (contracting and property development) sector to meet ever-changing market expectations, YDA Group has branched out into a range of periphery sectors, such as airport management, energy, PPP healthcare, agriculture, mining, insurance and even outdoor digital advertising.

Since extending its operations to international markets in the 2000s, YDA Group has carried out various projects in countries such as Kazakhstan, Ukraine, the UAE, Russia, Saudi Arabia, Afghanistan and Moldova. Along this vein, it continues to spearhead in BOT and PPP infrastructure projects, particularly for city hospitals, both in Turkey and abroad.

A pioneering bond issuance
Although locally issued corporate bonds are not a market norm in Turkey, YDA’s banks and lawyers have structured highly comprehensive documentation, which includes financial and non-financial covenants in order to maximise investor confidence.

One of the major constraints to the long-term development of the Turkish corporate bond markets has been the limited floating rate issuance that is priced from a market-relevant benchmark index. Consequently, the market is dominated by floating issuances that are based on a two-year government bond index, which is impossible to hedge and thus introduces basis risk for investors.

The issuance was YDA’s first bond issue and only the third in the Turkish market to be based on TRLibor as a reference rate. Hence, the issuance represented an important step that demonstrated the successful use of a different index in the market, while also eliminating non-hedgeable interest rate exposure.

Although the Turkish corporate sector is well versed in bank financing, longer tenor bond financing is relatively scarce compared to the size and potential of the market. As a consequence, the ongoing development of a functional and hedgeable floating rate index, the TRLibor, has great appeal for international investors.

Since 2010, the tenors offered are mostly two years in length, with limited issues of three years. Moreover, there is also very limited liquidity in the market. As such, the local currency corporate bond market has substantial potential for further improvement, which could include longer maturities and could be based on floating rate indices. At 1,457 days – or almost four years – the YDA transaction was the longest tenor in the TRL corporate bonds market. Before this issue, the maximum tenor in the market was 1,154 days.

42 years

YDA Group’s experience in the construction sector

$6.8bn

The group’s overall completed business volume

$7.2bn

Its ongoing and planned business volume

The YDA issuance thus demonstrated the viability of longer tenor issuances and increased the maturities available in the market. Naturally, this will attract more issuers and investors, which in turn will potentially increase liquidity as well.

In 2015, 51 local currency bond issues – amounting to TRY 3.1bn ($971m) – were placed with only one issue size of more than TRY 200m ($62.5m). The YDA issue size, on the other hand, is currently TRY 250m ($78m), which almost triples the average corporate bond issue size in Turkey. As the transaction was the biggest issuance of 2016 – and the third biggest in the last six years – it is considered to be a remarkable achievement and a real game changer by the Turkish authorities. Furthermore, the timing was especially significant: the issuance created a positive impact on Turkish markets shortly after the failed coup attempt of July 2016, and the subsequent state of emergency declaration.

These events caused a significant S&P rating downgrade and, as a result, an outflow of foreign capital, which witnessed numerous defaults and increased tension in the local private bond market. In response to this fragile environment, all possible shock scenarios were tested before the completion of the YDA deal. Thanks to its sustainable cash flow stream and its close dialogue with all major stakeholders, YDA’s corporate bond was oversubscribed.

Our new plan of action is to further improve the company’s disclosure standards, thereby raising business practices well beyond Turkey’s current regulations to the best possible international principles. Indeed, YDA has agreed to higher disclosure requirements in comparison to those that are applicable for issues to qualified investors in Turkey. These practices target disclosure in a similar manner to public issuances: they include the preparation of a company’s detailed information; obtaining a rating from a well-renowned rating agency, which will be updated and published periodically; and publishing semi-annual financial statements.

Unique factors
The issuer is a holding company operational in multiple sectors and is headquartered in Ankara. Although construction firms are not usually the first option when it comes to investing in Turkey’s private bond market, YDA Ìn˛saat’s corporate bond was oversubscribed thanks to the sustainable cash flow stream of the company and the company’s strong track record and close dialogue with all major stakeholders in the local bond market.

There were many unique features of the deal, including the strong, steady and easily predictable cash flow generation capability of the issuer. As mentioned, it also had the longest maturity on record and even attracted institutional investors. To sum up, the deal has unique qualities in terms of its four-year maturity, its spread, the size of the deal, the deal’s distribution, and the market conditions as well.

Consequently, international institutional investors invested in the second tranche, which has the longest tenor so far among real sector bonds. This tranche’s benchmark is TRLibor, which indicates the market will soon evolve into longer tenor bonds. Besides tenor, diversified benchmarks also attracted the attention of local and foreign investors. Due to the government securities’ low roll-over rates and spread with bank deposit rates, TRLibor was chosen for the benchmark of this deal to boost investor appetite.

In order to present the deal, we conducted a one-week roadshow along with 21 different institutional investors. In addition to one-on-one meetings, teleconferences were conducted as an opportunity for investors to ask questions. We found investors really appreciated the firm’s publicity and responsiveness, even before the deal was closed.

It is also notable that the transaction was realised in a highly volatile market environment, at a time when issuers were hesitant to issue. The successful issuance has proved Turkey’s corporate bond market is becoming a stable funding market for issuers, despite its relatively short history. While investors appreciated the firm’s sound financial structure, the bond yields in question were particularly attractive.
The high number of investors who were contacted prior to the book building is also an important aspect of this successful bidding. Other factors in this success included the company’s strong track record in the capital markets, its transparency with potential investors, and the close communication it kept with all the major stakeholders of the local bond market over the last three years.

Finally, YDA’s debut issuance was paid off on June 16 last year, thus marking another significant step. Essentially, YDA was able to demonstrate its financial soundness by paying off its debut issuance with its own resources, rather than relying on capital markets to play a crucial role in the successful bidding process.

Cyber-insurance providers can’t hack it

In October 2015, UK telecommunications company TalkTalk reported a cyber-attack on its website. Nearly 157,000 customers were affected. The data accessed included bank account numbers, sort codes and even some credit card details. While the compromised information was not substantial enough to allow serious fraud to be committed, the costs to TalkTalk were significant. Figures released by the company in February 2016 indicated the incident had cost it £60m ($76.5m) and prompted the departure of 95,000 customers. To add insult to injury, the heist had been pulled off by a teenager.

By the very nature of online systems, there will always be the potential for similar attacks to occur in the future. While companies have a number of defensive tools at their disposal, no security measure will ever be bulletproof. In fear of suffering a similar attack, businesses have done what they always do in the face of an unavoidable risk: they have taken out insurance. Established insurers have subsequently developed products to cover this risk, mitigating the potential costs of a hack or breach.

 The benefits insurance typically provides to motorists and property owners are yet to fully translate to cyber-policies

While fundamentally a sound idea, there are a number of questions surrounding cyber-insurance; principally how insurers treat it, its effectiveness in reducing cyber-attacks, and its breadth of coverage. These are questions that need to be answered. For a risk that is evolving as quickly as cybercrime is, a company’s requirements of their cyber-infrastructure are shifting faster than their insurers are. Additionally, insurers are currently underutilising data that could entirely change the face of cybersecurity. As digital infrastructure becomes ever more important, these changes
cannot happen fast enough.

Leaky ships
The large-scale attacks on companies like TalkTalk and Sony have fuelled CEOs’ fears that their businesses could be next; making cyber-insurance seem like the next logical step when protecting their investments. Generally, cyber-insurance policies cover a mixture of first and third-party losses that stem from a cyber-attack. First-party coverage accounts for the direct cost to the business: cleaning up in the immediate aftermath of a cyber-attack by replacing damaged systems and compensating for the loss of productivity while the breach is examined in greater detail. Third-party coverage then deals with the claims of those individuals who have suffered at the hands of the cyber-attack – through the leak of personal information, for example. Defining a cyber-attack can be a little less straightforward, however. These events can range from an employee losing a USB stick containing critical data, to a full-scale breach on an international level.

Although the market has recently slowed, the cyber-insurance sector has proven to be one of the biggest growth areas for insurers in recent years. A report compiled by PwC in September 2015 estimated the global cyber-insurance industry could grow to $7.5bn in premiums by the year 2020 – suggesting companies will continue to attribute greater value to both their data and digital infrastructure. Traditionally, security measures were thought to be enough to protect against intrusions, but, with the seeming inevitability of a breach, insurance has become a necessary supplement. However, the benefits insurance typically provides to motorists and property owners are yet to fully translate to cyber-policies.

Fast food
In 2014, PF Chang’s – a casual dining restaurant chain with over 200 locations in the US – fell victim to a data breach. The breach affected 33 branches and compromised the credit card information of 60,000 customers. The company was covered by a Chubb cyber-insurance policy taken out with the Federal Insurance Company. The policy covered the costs associated with investigating the breach, legal advice and the management of its obligation to notify both customers and the authorities.

$7.5bn

Predicted value of cyber insurance premiums by 2020

48%

of cybersecurity professionals think their coverage is adequate

Despite this, in May 2016, an Arizona court rejected PF Chang’s efforts to recover the additional $2m it required to reimburse the issuing companies whose credit cards had been used to make fraudulent transactions. The policy stated it was designed “to address the full breadth of risks associated with doing business in today’s technology-dependent world”, and, as a result, PF Chang’s believed this cost would be covered. Chubb, however, successfully argued the policy was not liable for any external contract or agreement the company held. By extension, PF Chang’s dispute with the company was its own to manage.

The case of PF Chang’s is one that should have any business pouring over the wording in its own cyber-policy, ensuring it has a comprehensive understanding of exactly what it is, and what it isn’t, covered for. However, the complexity of these policies, and the number of parties involved in a cyber-breach, make cases like this inevitable.

Risky business
Sasha Romanosky, a policy researcher at the RAND Corporation, is investigating the way cyber-insurers assess risk and calculate their policy fees. Speaking to World Finance, Romanosky said policies often include or exclude certain events based upon the insurer’s past experience of a product – cyber-insurance has inherited a lot of these conditions. “Say we’re talking about kinetic warfare and a government or country is bombing a whole city, the insurance company isn’t going to be able to pay out all of those losses on all of those claims”, Romanosky said.

Cyber-insurance – now almost 15 years old – is far younger than the majority of insurance markets, meaning laws and coverage are still being tested. Romanosky believes that as more cases emerge, policies will evolve. Unfortunately for PF Chang’s, the company acted as the proverbial canary in the coalmine of cybersecurity litigation.

Romanosky said: “I suspect this will reach an equilibrium, where people will kind of understand what the playing field is. The early companies that try to file these claims under the policies and were denied, that will change. There’s a self-correcting mechanism going on where companies should be informed, either by their brokers, insurance companies or their peers, to clarify these rules and help them figure out what’s covered and what’s not.”

But this lack of clarity isn’t exclusive to companies; insurers are still coming to grips with their cyber-policies, too. A recent survey conducted by PivotPoint Risk Analytics, SANS Institute and Advisen found a number of major gaps exist between the cyber-insurance market and cybersecurity professionals. One problem is the terminology different professionals use, particularly when discussing the concept of ‘risk’. Security experts see the term as meaning vulnerabilities to a security system, while insurers interpret it as the monetary cost of a breach. Another problem is the varying standards attributed to the most important cybersecurity measures, and the amount of money that should be invested in cybersecurity in comparison to cyber-insurance. All these issues have culminated in a lack of confidence. According to the study, only 48 percent of chief information security officers and other security professionals find cyber-insurance ‘adequate’ when recovering from a breach.

With the figures cyber-insurance companies have access to, they have the potential to provide unrivalled insight into cyber-attacks and why they happen

Given most companies are now highly dependent on their cyber-infrastructure, its easy to wonder why cyber-insurance is a separate product to general liability insurance. Romanosky said that, while he did not know for certain, there was a chance this was because policy limits on cyber-products are much lower. Romanosky said: “So they have an interest in creating a separate book of business that is cyber-policies, where the limits are a lot lower, to manage their costs. I’m guessing because of uncertainty in any kind of claims that might be filed. That’s a speculation of strategy, I don’t know if that’s actually true, but it’s an interesting story that I heard.”

Many will be hoping the research conducted by Romanosky will provide more clarity and transparency within the industry.

Missed opportunity
It’s unfortunate cyber-insurance is deficient in all these areas. With the figures cyber-insurance companies have access to, they have the potential to provide unrivalled insight into cyber-attacks and why they happen. By analysing this information, they should be able to determine the biggest risk factors and ultimately encourage better general cybersecurity as a result. Despite this, Romanosky says insurers are yet to address this issue: “I don’t know why they don’t do it. It seems crazy to me because you’d think they have floors of actuaries who would do this kind of thing, but in my conversations no one has really gotten there.”

While still offering clear benefits to organisations around the world, the cyber-insurance market is still relatively immature. Substantial redevelopment is required before companies can be confident in their decisions and feel fully protected by their policies. Insurers have already achieved this feat in the automotive and property sectors, so there seems little reason the same can’t be accomplished in the cyber domain. Cyber-attacks don’t just harm companies, but individuals as well, so the sooner insurers make the effort the better. Enforcing greater protection standards through well-formulated policies could greatly reduce the exposure of personal details, breeding confidence and providing clarity in a sector riddled with uncertainty.

World leaders have a mountain to climb at Davos

This January, the world’s richest and best connected will descend on a sleepy village in the Swiss Alps for the annual meeting of the World Economic Forum (WEF). Since 1971, the global elite has gathered at the small mountain resort of Davos to discuss the world’s most pressing issues. This time round, more than 2,500 guests are expected, with attendees paying upwards of $20,000 for the privilege.

2017’s gathering will focus on a number of global events that have caused great concern, particularly in terms of the world economy

Founded by Klaus Schwab in 1971, the WEF operates under the motto “committed to improving the state of the world”. From Canadian Prime Minister Justin Trudeau and the IMF’s Christine Lagarde to leading business minds such as Bill Gates, the wide array of speakers always makes for an impressive showing.

The range of issues is broad too, with recent discussions ranging from the impact of 3D printing to global gender equality. However, there is usually some sort of overarching theme to the discussions. The 2016 edition focused on the world’s ‘fourth industrial revolution’, a concept first put forward by Schwab himself. In his most recent book on the topic, Schwab argued we are once again undergoing a revolution in economic production techniques, one that will have profound consequences for our world. Whether it is mobile supercomputing, artificial intelligence and cognitive computing, self-driving cars, or neuro-technological brain enhancements, the way society and economies are organised is set for a huge shake-up. How world leaders should approach this seismic shift was the central theme for 2016.

This year’s meeting, it appears, will take a slightly more political turn. The headline theme will be ‘responsive and responsible leadership’. Indeed, 2017’s gathering will focus on a number of growing trends and global events that have caused great concern, particularly in terms of the future direction of the world economy. According to the overview: “The weakening of multiple systems has eroded confidence at national, regional and global levels. In the absence of innovative and credible steps towards their renewal, the likelihood increases of a downward spiral of the global economy, fuelled by protectionism, populism and nativism.” How to stem this tide will be the primary concern of this year’s meeting.

The rise in anti-globalisation
Davos 2016 focused partly on the then-upcoming referendum concerning the UK’s membership of the EU. Since then, the UK electorate voted narrowly to leave the bloc, surprising most observers. Of immediate concern for WEF attendees this year will be how this decision is handled.

UK Prime Minister Theresa May has said the formal exit process will begin no later than March, with the activation of Article 50 of the Lisbon Treaty. The UK will then have two years to negotiate the terms of its exit. The direction of the UK’s departure and what terms it should both seek and receive will be a hot topic for all involved.

Questions will be raised about the precise nature of the separation; specifically, whether or not the UK will remain in the single market. The answer to this question will have serious implications for firms around the world that currently use the UK as the base of their European operations. Financial institutions based in the City of London, for instance, will be keen to maintain passporting rights in order to operate in the EU. However, these may be lost should the UK go for a ‘hard Brexit’ and leave the single market altogether.

Economic implications aside, the sentiment behind the vote will also be up for discussion at the WEF meeting. For many commentators, the Brexit vote was indicative of a rising populism across the continent, which the WEF has identified as one of the key threats facing the future of the global economy. Panellists are likely to discuss the recent surge in populist and anti-EU groups, including Germany’s Alternative für Deutschland and France’s Front National.

Davos in numbers:

444

people attended the original meeting in 1971

$20,000+

The cost of attending

30%

Fall in local CO2 levels during the annual meeting

2,500

delegates travel to the summit every year

$50m

The amount the World Economic Forum contributes to Davos each year

For many attendees, this ideological shift will raise the spectre of a growing sentiment against globalisation, chiefly in its forms of international governance and increased mobility of labour. Speakers and panels will explore why growing numbers of people are becoming disenchanted with, and hostile towards, globalisation – with many now sceptical of its outcomes and processes. The focus will be on how leaders around the world can maintain a global and open economy, while also placating the fears and concerns of their electorates.

This will involve finding solutions to some of the most pressing issues faced by Europe today. Top of the agenda in this respect will be Europe’s migration crisis. Since the last WEF gathering, millions of migrants have entered Europe from war-torn countries, including Syria and Afghanistan, in order to claim asylum. Europe was woefully underprepared for this mass movement, and rifts quickly emerged within countries and even within political parties as to whether to welcome or turn away those in need. With migrants still making their way into Europe, how the continent can coordinate a coherent and unified strategy will be of vital importance.

Likewise, other perceptions of the EU are likely to be addressed. While the southern European debt crisis was largely out of the news during the latter half of 2016, questions over the currency union’s viability and Greece’s financial health persist. Other threats to the fiscal health of the continent are also likely to be on the agenda, including Italy’s weakening financial position, the effect of the European Central Bank’s negative interest rate policy, depressed profitability for European banks, Hungary’s own referendum vote to reject EU migrant quotas, and Deutsche Bank’s increasing volatility. On an existential level, attendees will have to grapple over whether European integration should continue, and how it could continue in a way that is acceptable to the citizens of Europe.

Talking about trade
After years of ever-greater advances in global trade, voters in many countries have started to assert their dissatisfaction with the direction of the trend. In the US, both of last year’s presidential candidates opposed the Trans-Pacific Partnership (TPP). Donald Trump called it a “bad deal”, while Hillary Clinton – once a TPP advocate – reversed her policy to oppose it on the campaign trail. This rare point of agreement between the two figures was reflective of a rising anti-trade sentiment within the US.

Now, with the victory of Donald Trump, the US’ commitment to free trade seems very much in doubt. Even without the consent of Congress, as president, Trump will be able to impose tariffs on other states. The extent to which he will pull the US away from its commitment to free trade – and, indeed, globalisation in general – is yet to be seen. But, with his campaign for office staked on the promise of ending the US’ reliance on other nations – and the backbone of his support coming from Americans who ranged from disillusioned about to openly hostile towards global collaboration – the US’ long commitment to free trade appears to be coming to an end.

Indeed, after decades of growing trade, momentum appears to be slowing worldwide. In September, the World Trade Organisation announced it was revising its estimates for global trade growth in 2016 to just 1.7 percent, from an earlier estimate of 2.8 percent. This new figure is the slowest predicted rate of trade growth since the start of the 2008 financial crisis.

Economic implications aside, the sentiment behind the Brexit vote will also be up for discussion at the meeting

Trade growth, relative to GDP, has been weak since the end of the global recession. As an analysis by the Peterson Institute for International Economics noted: “Following the recession of 2008-9, global trade and FDI performance did not resume their accustomed growth rates, unlike in the aftermath of previous recessions.” Since 2008, the world has seen “the longest post-war period of relative trade stagnation”.

It will be of vital importance then for the bigwigs at Davos to discuss the future of international trade. Generally a pro-trade crowd, top on the agenda for meeting participants will be how to reverse this slowdown.

Economic inequality
In addition to worries over trade and growing protectionist sentiment, as well as populist sentiment within in the EU and beyond, another topic is of increasing concern among the global elite today: economic inequality. The subject is rife in today’s political and social discussion: Thomas Piketty’s book Capital in the Twenty-First Century is one of the most popular economic tomes of recent years; think tanks and charities regularly publish reports measuring inequality around the world; and indeed, Barack Obama himself labelled economic inequality as the “defining issue of our age”.

Many economic commentators see the issue as holding back growth through lowering aggregate demand, and much of the anti-trade sentiment in the US stems from growing inequality. Trade has, it is argued in some quarters, damaged the US’ middle class through offshoring and reduced wages. A hot topic at last year’s WEF gathering, attendees will once again hold counsel on how to address the growing gap between top-end wealth and average incomes.

On the surface, the focus on responding to the threats facing the world economy seems overtly political. However, embedded in these political challenges are deeper social, economic, financial and existential ones. At the heart of the WEF discussion will be how leaders can make the global economy and its integration more palatable and more inclusive for the world’s citizens. Political trends reflect a growing malaise with the globalised economy and world at large, and the meeting at Davos will provide a forum for the sharpest minds to work out the cause of this sentiment, and how best to address it.

Teva Pharmaceuticals has acquired success with Actavis Generics

The best deals are not always the quickest to close, as Teva Pharmaceuticals learned in 2016 after its much-lauded acquisition of Allergan’s generic business, Actavis Generics. In its acquisition of the firm, Teva’s dealmakers coupled two leading generics businesses with complementary strengths, research and development capabilities, product pipelines and portfolios while matching their geographical footprints, operational networks and cultures.

Although regulatory reviews lengthened the deal, those timeline delays ensured a smooth and seamless transition between companies, resulting in improved operational capabilities and efficiencies and a harmonious ‘day one’ transition that transformed Teva into the largest global generic pharmaceutical company in the world.

Generics drugs are low-cost copies of expensive, branded drugs. Today, Teva’s generics division is a $14-15bn pro forma revenue company, with nearly 16,500 employees operating in 80 markets. It utilises the most advanced research and development capabilities in the generics industry.

Following its acquisition of Actavis, Teva now has around 340 product registrations pending FDA approval and holds the leading position in first-to-file opportunities, with approximately 115 abbreviated new drug applications pending in the US. In Europe, after divestitures, Teva will have a pipeline capable of sustaining over 5,000 launches. In Teva’s growth markets, including Asia, Africa, Latin America, the Middle East, Russia and the Commonwealth of Independent States, there are now approximately 600 pending product approvals. Overall, Teva is planning 1,500 generic launches globally in 2017.

Behind the deal
The story of the deal began in July 2015, when Teva announced the acquisition of Allergan’s generic business for a total consideration of $40.5bn, consisting of $33.75bn in cash and approximately 100 million Teva shares. The $33.75bn cash component was to be funded through a combination of equity and debt financing, and was backstopped by a $33.75bn bridge loan facility.

In late November 2015, Teva announced a public equity offering of approximately $6.75bn, consisting of $3.375bn of its American Depositary Shares (ADSs), each representing one ordinary Teva share, and $3.375bn of its Mandatory Convertible Preferred Shares (MCPSs).

Teva sells approximately 120 billion dosages per year, or nearly 20 tablets for every person in the world

The outcome was an additional 54 million ADSs priced at $62.50 each, significantly above the 30-day average price, and 3.375 million seven percent MCPSs at $1,000 per share. Significant demand led to a three-times oversubscribed common equity order book and 1.8-times oversubscribed mandatory convertible preferred shares order book. Shortly thereafter, the offering’s underwriters exercised in full their option to purchase an additional 5.4 million ADSs and 337,500 MCPSs. As a result, approximately $7.4bn was raised from this public equity offering.

The decision to split the offering between common and preferred shares was driven by a desire to deepen demand and offer investors an additional and unique investment vehicle.

In July 2016, Teva issued a multi-currency bond offering in the US and Europe for a total notional amount of $20.4bn at a blended rate of 2.17 percent. The combined bond financing represented the second largest debt offering ever in the healthcare sector, and the fifth-largest corporate debt issuance ever.

The decision to split into two road show teams – one led by CEO Erez Vigodman, and the other by CFO Eyal Desheh – was instrumental in the company’s success in meeting with over 260 global investors, and driving 4.3-times and 6.4-times oversubscribed order books in the US and Europe respectively. While one team marketed and priced the US deal, the other began marketing in Europe. The US team then flew overnight to join the marketing effort, before meeting up to price the euro and Swiss franc offerings in the following days.

The $20.4bn that was raised in combined capital across three currencies in three days is evidence of credit investors’ commitment to Teva’s long-term strategy. To complete the financing, Teva also put in place a $5bn term loan with a group of global relationship banks.

Teva’s strong credit rating and disciplined financial policy were key to providing the financial flexibility and wherewithal to access capital markets across a range of financial instruments, in both jumbo size and at historically attractive terms.

The acquisition’s close was delayed due to an extensive antitrust review and requested divestitures. The deal was then approved just over a year later in August 2016. The resulting firm positions Teva as a top three generic pharmaceutical company in over 40 markets, offering more than 16,000 different products to patients around the world. Teva sells approximately 120 billion dosages per year, or nearly 20 tablets for every person in the world.

Savings strategy
Throughout the Actavis deal, Teva focused on building a strong financial foundation, while also examining new ways to introduce increased efficiencies from existing assets. Recent network optimisation and efficiency improvements have delivered tremendous value across Teva’s global generics business, which has proven to be a key strength. Additionally, a strategic decision to focus on larger markets, coupled with the larger scale of delivery offered by Actavis, has significantly improved the efficiency of the overall business.

Cost synergies and an intelligent acquisition, while important, are not the whole story. The generics industry remains one of the most attractive in the world in terms of profitability and investor returns (see Fig 1), but its contribution to healthcare systems and societies across the globe represents its key mission.

Worldwide, governments – as well as other public and private players – are struggling with increased healthcare costs. Generic medicines are a crucial part of the solution. With an older population, increasing instances of chronic disease and the changing landscape of the middle class has meant that, for billions of patients, their healthcare must be delivered at the highest quality standards while presenting an ever-improving value proposition.

The transaction between Teva and Actavis Generics transformed the playing field by combining two of the industry’s best generic companies in a way that brings tremendous healthcare savings for patients globally.

According to the 2016 Generic Drug Savings report produced by the Generic Pharmaceutical Association (GPhA), nearly 3.9 billion of the 4.4 billion prescription drugs distributed in the US during 2015 were not brand name drugs, but instead the FDA-approved generic equivalent. In a recent report, GPhA noted that generic drugs represent 89 percent of prescriptions dispensed in the US, but make up only 27 percent of total drug costs. This presented more than $227bn in 2015 savings to the US healthcare system, and more than $1.46trn of savings between 2006 and 2015.

What’s next?
Teva’s recent Actavis acquisition proves there is strategic power in smart mergers. A thoughtful acquisition that introduces new capabilities and global efficiencies can create the foundation for positive growth for a pharmaceutical company, while also benefiting the patients it serves. Teva’s acquisition of Actavis will improve speed to market, introduce new market capabilities and create innovative platforms for growth, all of which will prove to be essential tools as Teva works to serve unmet medical needs in the therapeutic areas of respiratory problems, movement disorders, pain and neuro-degeneration.

This deal positions Teva to compete aggressively on commodity products while simultaneously contending with some of the most complex products in the world, thanks in large part to the firm’s extensive manufacturing network and the high standards it meets. That commercial breadth, coupled with a strong market scale and operational network, will consistently deliver high-quality products on time.

Every day, Teva serves 200 million patients through the largest portfolio of drugs in the world, with one of the largest, most competitive, fully integrated, operational networks in the industry. This portfolio enables Teva to maintain its role as a transformative healthcare company that delivers ever-improving value to our shareholders, healthcare systems and patients around the world.

The need for speed

At the Royal Calcutta Golf Club in India, there is a ‘monkey rule’. This states: “Play the ball where the monkey dropped it.”

Monkeys randomly pick up and drop the golf balls, meaning a player’s position may sometimes be advantaged, sometimes disadvantaged. Club officials tried everything to control the monkeys, from high fences to loud noises to chemical repellents. Nothing ever worked so, in the end, the monkey rule was added.

Like the exasperated golf rangers in Kolkata, regulators, venues and participants in finance have already attempted a long list of measures to counteract the effects of speed in the markets. We’ve seen rules for equal length cables in co-location facilities, Reg. 603(a) for price distribution, and everything in between. The introduction of IEX’s speed bump is the latest attempt to control the ‘speed monkey’.

Slow, not steady
IEX’s recent approval has reignited the debate about speed and its role in today’s financial markets. This debate polarises people into two camps: speed is good for markets, and speed is bad for markets. The polarised nature of the debate is evidence of a fundamental misunderstanding of the nature of speed in finance and its role in market structure.

Regulating speed is futile, and it is impossible to eliminate the effects of speed from the equation unless computers are banned completely. All attempts to regulate and control speed will ultimately prove ineffective, just as the fences and klaxons were useless in controlling the monkeys.

Speed’s impact on market price is like the weather: a complex natural phenomenon that changes constantly

The IEX speed bump may, in all likelihood, have a negative effect on markets. Blocking off a speed play at one venue typically creates multiple new speed plays across interacting venues. It is this speed asymmetry that creates the opportunity for speed arbitrage. And with a mix of fast venues and slow venues, it is harder to figure out the likely execution outcome. This results in a proliferation of new order types, rules and infrastructure enhancements to exploit or prevent the exploitation of this effect. Thus, the speed bumps can add complexity – and therefore more possible failure points – to the market.

Markets acclimatising
The approval of IEX shows that even the US Securities and Exchange Commission (SEC) harbours misunderstandings about speed in markets. Evidencing this is the recent declaration that one millisecond be considered de minimis for events in US equities markets.

Unfortunately, the SEC declaration is off by a factor of 1,000. A decision to trade can be made in 10 microseconds or less, so it would be more accurate to name one microsecond as de minimis.

If we were to attempt to handicap the markets to this scale, all participants and venues would need to be co-located on the same computer chip. Clearly this is not a practical solution, so we have to live with the realities of speed, and we have to be able to deal with the impact of co-location, speed bumps, direct data feeds, consolidated data feeds, random delay gateways, random traffic congestion and venues at distant locations.

So, what is a realistic solution to speed problems in the market?

The nature of speed and its impact on market price is like the weather: a complex and highly interdependent natural phenomenon that changes constantly. If we decided that it was unfair for all humans to experience different climates, the only way to standardise humanity’s weather experience would be to move all mankind to the same location, or to build some system that precisely controlled the weather everywhere. Most would recognise these ideas as ridiculous and futile.

Instead, we have learned to adapt to the weather. We attempt to gain better insight into weather patterns to make better forecasts. Our ability to predict major storms and quickly take appropriate measures has arisen from the necessity of dealing with something that is effectively random and impossible to control.

I propose a similar approach to markets. Understanding appropriate granularity and having visibility is key in understanding and regulating for speed. The root challenge, therefore, is not speed: it is time. The lack of precision-synchronised time is the real, urgent problem that must be solved by regulators.

If we can’t see what’s going on and what order it happened in, we lack the ability to properly explain events and we will never have a market structure that everyone accepts to be transparent, fair and robust.

Becoming weathermen
There are signs that this understanding is happening. MiFID II in Europe mandates that all business clocks involved in high-speed trading must be synchronised to within 100 microseconds of Coordinated Universal Time with a timestamp granularity of one microsecond or better – although 100 microseconds might still not be detailed enough to reliably catch market abuses.

With this granular transparency, we can reasonably judge the validity of the information and make an informed decision to trade or not trade based on our prior experiences and knowledge of the environment. This approach is agnostic of speed – in fact, a strong market structure must be able to handle diversity and unforeseen actions. Our market structure should allow for any expression of speed, or variability in speed, whether they arise naturally or are employed purposefully.

We cannot try to control the weather, nor the monkeys. Instead, we have to be the best weathermen we can be, ready to play the ball where it lands. That is how we have always approached the markets: we deal with the speed environment that exists, and make informed decisions to trade that make the best of the situation.

If regulators, venues and participants don’t address the fundamental need for an accurate understanding of time, we will continue to pursue ineffective agendas and ultimately fail to build trust and confidence in the operation of our electronic financial markets.

Cashing in on blockchain technology

The technology behind bitcoin, known as ‘blockchain’, has been touted as revolutionary, holding the potential to transform anything from the insurance industry to international aid. However, it is in the hands of central bankers that the technology could reach its true potential.

Central banks around the world are currently devoting their resources to research the concept of a central bank digital currency – a kind of ‘digital cash’. The reason for its potential power: it gets to the heart of the function of a central bank, and, indeed, the very nature of money. “Prospectively, it offers an entirely new way of exchanging and holding assets, including money. It’s an irony, therefore, that some of the economic questions it raises have actually been around for a long time, for as long as economics itself”, said Ben Broadbent, Deputy Governor of the Bank of England, in a speech earlier this year about the possibility of a central bank issued digital currency.

The nature of money
Of course, electronic money is nothing new– in fact, the majority of money in our system exists in electronic form. However, a key difference between electronic money and a possible digital currency is the latter would allow people to transfer money to one another without the need for a commercial bank. People could have a digital wallet, of kind, and move money in a secure way without commercial banks acting as the middleman – much like ordinary cash.

This is a crucial difference, because commercial bank money and currency are different types of capital. World Finance spoke to David Clarke from Positive Money, an organisation campaigning for monetary reform that supports the idea of a central bank issued digital currency. Clarke explained how commercial bank money differs from cash: “The money in your bank account is just an IOU from the bank, created from thin air when the bank issues a loan. It doesn’t correspond with any physical currency or commodity, and it’s technically the property of the bank.” A central bank issued digital currency, on the other hand, would be an extension of cash – a direct claim on the central bank. It would, by definition, be fully protected from default.

Individuals have been excluded from… hold[ing] such a digital currency, but this could change thanks to blockchain technology

Not only is currency a different type of asset, it enters the economy in a different way. While central banks have control over the creation of physical currency, the amount of commercial bank money in the economy is determined by decisions made by the commercial banks. Banks inject fresh money into the economy each time they extend a new line of credit, and thus the quantity of commercial bank money in the economy depends on the willingness of banks to lend. Central banks, however, can only influence money supply indirectly, through monetary policy and regulation.

In a sense, a central bank currency in digital form already exists, as commercial banks can already hold accounts with ‘central bank reserves’. These reserves are the currency deposits that form the basis of a banks’ payments system. When a customer withdraws cash, commercial banks must be able to provide real currency on request, so they need to hold enough in reserve to meet the demand of withdrawals. Similarly, when someone makes a transfer, banks settle payments using reserves.

Individuals, however, have so far been excluded from the ability to hold such a digital currency, but this could change thanks to blockchain technology. If central banks issued a digital currency that was open to all, people could hold their money as digital currency rather than in a commercial bank – with potentially radical implications. For example, if everyone banked with the central bank, “in principle, it would… make for a safer banking system. Backed by liquid assets, rather than risky lending, deposits would become inherently more secure. They wouldn’t be vulnerable to ‘runs’ and we would no longer need to insure them”, said Broadbent.

Set for takeoff
Digital currency could pave the way for ‘helicopter money’ being used as a viable tool by central banks. According to Clarke: “The idea of helicopter money has got a considerable intellectual pedigree – the term was actually popularised by Milton Friedman, who imagined the central bank dropping dollar bills from the sky as a way of boosting spending. But technological innovation has given the idea new relevance.” The concept of helicopter money has most recently been brought into the spotlight after being aired by Ben Bernanke as a possible addition to central bankers’ tool kits.

In economic terms, helicopter money is a tax cut financed by a permanent increase in the money stock – an action that could be administered in order to combat deflation. It would technically be possible without a digital currency, but given a scenario where each person held a digital cash account, the central bank could easily dispense a newly created digital currency to every citizen. Each person’s account would simply be credited with fresh electronic money in a move akin to ‘helicopter drops’ spreading newly printed money.

Helicopter money is, of course, an unconventional monetary policy, and administering it would come with a host of complications (World Finance, however, has argued that it could be useful if administered in a disciplined and moderate form). It has similar economic underpinnings to quantitative easing, but Clarke argues it can avoid one of the key failings attributed to asset purchase programmes: “Compare it to how the government injects money into the economy through quantitative easing ­– one of the main effects of which is to inflate the wealth of those who own pre-existing assets.” It may sound drastic, but there was a time when quantitative easing was entirely off the cards, so helicopter money should certainly not be dismissed along the same lines. Moreover, with the emergence of blockchain technology, the discussion is gaining momentum.

A brand new tool
The nature of the change created by issuing a digital currency would depend on many factors. For example, if digital cash did not acquire interest, it is unlikely that many people would convert their deposits. However, in a scenario in which it did acquire interest, the macroeconomic effects could be huge.

The digital currency revolution could… eliminate commercial bank money altogether; leaving only paper cash and digital currency issued by the central bank

The Bank of England released a working paper earlier this year investigating the idea of introducing an interest-bearing, digital currency. The authors, John Barrdear and Michael Kumhof, note that there is “very little historical or empirical material that could help us to understand the costs and benefits of transitioning to such a regime, or to evaluate the different ways in which monetary policy could be conducted under it”. In short, it has never been done before.

To forecast such a scenario, the pair created a model based on the US economy, envisaging a world in which digital currency makes up 30 percent of the GDP, but ordinary commercial bank money continues to exist. Under such a set-up, the dynamics of the financial sector would see a dramatic change. Ordinary banks would have to compete with the central bank for deposits in order to maintain cash flow; offering relatively higher interest rates as a result. Their modelled scenario comes out with many notable implications, including the economy gaining a three percent boost to GDP. Perhaps most interestingly, the central bank would acquire an entirely new monetary tool.

Because the digital currency would be held directly by households and businesses, changes in interest rates would have a direct effect, meaning when central banks changed rates it would affect the real economy directly. This contrasts to policy rates as they are currently administered, which only work by indirectly influencing the banking system. The new tool would complement the policy rate, as both would exist simultaneously. Control over the digital currency could help central banks respond to deviations from target inflation. For instance, during an economic expansion they could increase the spread between the policy rate and the (lower) digital currency rate in order to hold back inflation.

Going all in
The digital currency revolution could go even further and eliminate commercial bank money altogether; leaving only paper cash and digital currency issued by the central bank. This could occur if there was a full shift in deposits from commercial banks to the central bank and electronic commercial bank money was no longer used to make payments. This would move the system towards what is known as ‘narrow banking’ – a concept that has a long intellectual history, and notably, was favoured by David Ricardo and Adam Smith. The concept gained ground during the Great Depression of the 1930s, when a group of economists at the University of Chicago proposed the ‘Chicago Plan’. The famous plan, supported by Irving Fisher, envisioned an end to the destructive boom and bust cycle. Under the plan, only the central bank would be able to issue new money, reducing the role of banks to pure intermediaries. The idea has experienced a resurgence following the global economic crisis of 2008, with economists exploring it as an opportunity to bring about an end to the financial instability that shook the global economy.

A paper by the International Monetary Fund published in 2012, named The Chicago Plan Revisited, lent further support to the concept, claiming: “The Chicago Plan would indeed represent a highly desirable policy.” The paper further explains how an economy would look under such a plan: “Credit, especially socially useful credit that supports real physical investment activity, would continue to exist. What would cease to exist however is the proliferation of credit created, at the almost exclusive initiative of private institutions, for the sole purpose of creating an adequate money supply that can easily be created debt-free.”

Positive money argues such a scenario – in which central banks have control over money supply – could have far-reaching benefits, and be achieved through the means of a central bank digital currency. That said, Clarke explained they do not advocate implementing digital cash all at once: “We think the starting point is for the Bank of England to introduce a certain amount of digital cash. It could offset this over time by reducing the amount of bank-created money by raising reserve ratios. Under the system we propose, decisions about how much money is created – and when it is created – will be a matter for the monetary policy committee.”

Never say never
The potential implications of a central bank digital currency are certainly radical. However, the concept is quickly gaining momentum, with research taking place in Germany, England and China. In Sweden, the central bank has initiated a debate over the issuance of a digital currency with the stated aim of making a decision within the next two years. Meanwhile, Switzerland is set to hold a referendum regarding a potential ban on commercial banks creating new money after a petition reached 100,000 signatures. Iceland has also issued similar proposals.

Furthermore, private banks themselves have taken an interest in harnessing blockchain technology, which has the potential to undermine the central bank’s role as a trusted third party through which transfers can be made. Moreover, a decline in the use of ordinary cash is rendering the power of central banks to issue cash progressively less relevant. As Clarke said: “It is a radical idea, but we are living through a time where the nature of money and the nature of cash is changing rapidly. In our lifetimes, we will probably see the demise of physical cash as we know it, and central banks will have to respond to that. We have to ask ourselves the question – are we prepared to completely give up control of our money and means of payment to the private sector?”

Bank of Japan releases optimistic outlook

On December 20, the Bank of Japan announced that policy rates would stay put, in addition to releasing forecasts for a rosier future for the economy. The bank’s statement predicted a “moderate expansion” of the economy and that domestic demand would continue its positive trend, with “a virtuous cycle from income to spending being maintained in both the corporate and household sectors”.

While an improved outlook could signal an end to Japan’s era of expansive monetary policy, commentators
remain hesitant

Despite administering a large-scale monetary stimulus, the bank continues to grapple with extremely low inflation, which is currently around zero percent. This struggle appears to be coming to an end, however, with new forecasts predicting that inflation will reach its target of two percent in the medium to long term.

The bank will continue to apply its negative policy rate of -0.1 percent, with long-term interest rates remaining at “around zero” percent. Furthermore, the scale of monetary stimulus is to remain steady, with government purchases of government bonds, equities and corporate bonds to continue at a yearly pace of JPY 80trn ($679bn), JPY 6trn ($50m) and JPY 3.2trn ($30m) respectively.

The improved outlook has been attributed in part to expectations that exports will increase in response to healthy overseas economies. Domestic demand is also expected to receive a further boost due to the continued effects of the government’s fiscal stimulus, as well as positive financial conditions. The bank appeared optimistic about the nation’s business outlook, noting that business fixed investment is on an upward trend due to high corporate profits and improved business sentiment.

While this improved outlook could signal an end to Japan’s era of expansive monetary policy, commentators remain hesitant. According to the Financial Times, Bill Adams, Senior International Economist at PNC in Pittsburgh, said: “Until Japan shows signs of a sustained and self-reinforcing cycle of rising wages and consumer prices, the Bank of Japan will leave policy in its current, highly expansionary stance.”

It is therefore unsurprising that the bank did not hint at any future tightening of policy, with its statement claiming that the monetary stimulus would continue “as long as it is necessary for maintaining that target in a stable manner”.

Ukraine nationalises largest bank

PrivatBank, Ukraine’s largest deposit holder, has been nationalised in full after being declared insolvent by the National Bank of Ukraine. On December 18, the Cabinet of Ministers of Ukraine approved the takeover, leading the government to acquire 100 percent of the bank’s shares.

The state is to contribute to the recapitalisation of Privatbank and take on full control of its operations, with Ukraine’s former finance minister Oleksandr Shlapak taking over as president of the bank.

Privatbank currently holds the deposits of 20 million Ukrainian citizens, making up almost half of the Ukrainian population

A joint statement by the Ministry of Finance of Ukraine and the National Bank of Ukraine claimed: “This move will ensure the security of funds and savings deposits placed with this bank, help avert systemic risks to the banking system, and will pave the way for preserving financial stability in the country.”

The bank currently holds the deposits of 20 million Ukrainian citizens, making up almost half of the Ukrainian population. Notably, this includes the deposits of 3.2 million pensioners, all of which will remain fully protected. “They all will have unrestricted access to their accounts”, the statement explained.

Privatbank is the most systemically important bank in Ukraine, and has been widely regarded as being too big to fail. Ukraine has experienced ongoing struggles relating to the health of its banking sector, which threaten to further exacerbate the nation’s fragile economic state. The Ukrainian economy remains unstable amid the nation’s ongoing conflict, and was recently hit by a sharp recession, wiping out 17 percent of GDP over the course of just two years.

The decision to nationalise PrivatBank was made in response to a worsening in the state of its balance sheet, which has seen ongoing solvency issues. The bank’s precarious position was brought on by irresponsible lending and related capital losses. It is reportedly struggling under the weight of billions of dollars of unpaid insider loans, which have burned a $3.39bn hole in its finances.

Addressing the fragility of the nation’s financial sector has been a key target of a $17.5bn loan programme from the International Monetary Fund. Over the past two years, the Ukrainian Government has been undergoing a major cleanup operation, and has shut down more than 80 banks that were allegedly involved in illegal activities.

Ukrainian Finance Minister Oleksandr Danyliuk said: “The government will allocate funds to stabilise the bank, and the required amount of financing for the recapitalisation of the bank have been earmarked in the budget… The budget parameters will remain within the targets set by the IMF programme.”

The takeover of the nation’s largest bank marks a crucial move in ensuring stability for the country’s future, as a crisis in PrivatBank would have had far-reaching implications to Ukraine’s already struggling economy.

US launches trade complaint against China

On December 15, the office of the United States Trade Representative (USTR) filed a new complaint with the World Trade Organisation (WTO), claiming Chinese trade management of rice, wheat and corn is creating an uneven playing field for US exporters.

This marks the 15th time in seven years that the Obama administration has filed a challenge against China to the WTO, and comes at a time when trade relations between the two countries are fraught with tension and trepidation for the future.

According to a USTR press release, US Agriculture Secretary, Tom Vilsack, said: “When China joined the WTO, it committed to implementing an agriculture regime that would facilitate market access consistent with international obligations. However, China has frustrated exporters through generous price support and unjustified market restrictions.”

The US claims that Chinese management of its tariff rate quotas (TRQ), is “opaque and unpredictable”, thus limiting access to Chinese markets for exporters.

TRQs are a type of trade measure that, if properly enforced, should provide lower duties on a certain volume of imported grains every year. However, according to the same USTR press release: “China’s application criteria and procedures are unclear, and China does not provide meaningful information on how it actually administers the tariff-rate quotas.”

According to the US, this unreliable method of administration has resulted in an unfair trade barrier, without which China would have imported an extra $3.5bn-worth of crops during 2015 alone.

United States Trade Representative Michael Froman said: “Today’s new challenge… demonstrates again the Obama administration’s strong and continued commitment to enforcing the rules of global trade, and protecting the interests and livelihoods of American farmers.”

Also on December 15, the US put extra pressure on a previous challenge against China. This complaint, which was launched in September, accused China of creating artificial incentives for Chinese farmers to increase production of wheat, rice and corn. The US requested that the WTO establish a dispute settlement panel, in a move that will take the challenge to the next stage after initial consultations failed to resolve the issue.

The USTR has so far won every trade dispute it has raised with the WTO, implying that this latest claim is likely to succeed. Nevertheless, what remains uncertain is how the trade landscape will unfold in the future as US President-elect Donald Trump takes the reins. Such disputes such may rise in frequency, particularly after Trump’s campaign rhetoric hit out at China for allegedly creating an unfair advantage in trade.

Amid speculation about an impending trade war between the US and China, the WTO will be forced to mediate between the two countries, putting its role further into the global spotlight.

HSBC Retirement Monitor helps bridge Hong Kong’s protection gap

Hong Kong’s mortality protection gap is now more than $500bn, according to reinsurer Swiss Re. How can this gap be closed? The issue isn’t just life cover, explains HSBC Insurance’s Candy Yuen. It’s also about coverage for critical illness, and making sure you don’t outlive your retirement savings. It requires thinking about protection in a holistic manner. She discusses the latest research HSBC has conducted on this issue in Asia, and the online tool the company has launched to help people save more. Based on real retirees’ spending patterns and your personal expectations, the HSBC Retirement Monitor can help Hong Kongers understand how much they need to be saving – and how soon they need to start.

World Finance: Hong Kong’s mortality protection gap is now more than $500bn, according to reinsurer Swiss Re. How can this gap be closed? Joining me is Candy Yuen from HSBC Insurance Hong Kong.

Candy, it’s a big question, but what can be done?

Candy Yuen: Yes indeed. The mortality gap in Hong Kong per working person with dependents is ranked the second highest in Asia.

According to our own study, more than three in five people with self-paid cover do not know the actual pay-out from the policies, or they don’t think that it’s enough.

The coverage is not only about protecting your loved ones when you die; we also need to consider coverage for critical illness, or outliving your savings at retirement. So we also have to think about protection in a holistic manner.

At HSBC, we’re committed to address this mortality gap issue, by creating the awareness and also offering the right products. We launched the HSBC Retirement Monitor last year, to help people plan for retirement, and we also launched, for example, a comprehensive critical illness plan, and a term online product – what we call the HSBC Term Protector. A very simple term online that you can buy within five minutes, without any need for medical underwriting.

World Finance: As you say, you have launched this retirement planning tool – an award winning retirement planning tool – tell me more; how does it work?

Candy Yuen: So it’s basically to answer the fundamental question: how much do I need, when I retire in Hong Kong? And we try to give how much you need for basic retirement life, comfortable, and affluent retirement life. Based on real data, statistics, and analytics on retirees’ consumption behaviours.

So a single person retiring needs about $3,000 per month, as their expenditure for a comfortable retirement. So: think about that. The average woman’s life expectancy is about 86 years. So if you want to retire at 60 years old, you have 26 years needing $3,000 per month: even if you exclude inflation you’re talking about a million US dollars that you have to plan.

When you start having these conversations, then you start to understand: wow, you know, I do need to start planning, perhaps now in my 30s, rather than in my 50s.

So having this awareness, to start planning – or at least having the conversation earlier – definitely helps.

World Finance: But is consumer behaviour changing? Are people saving more?

Candy Yuen: I think people start to at least be aware that this is a problem, or a challenge that they can’t just hide from. Because people in Hong Kong do care deeply about savings for retirement. The last thing they want is to create a financial burden for their kids or their loved ones.

However, not every one of us knows exactly how to prepare for retirement, and exactly how much we need to save for retirement and starting from when. So those are the questions that people are struggling with.

Because you either start saving earlier, and more disciplined. Or you have to adjust your realistic assumption, what kind of retirement lifestyle you’ll be having.

World Finance: What particular challenges do you face understanding and communicating with modern consumers?

Candy Yuen: Nowadays I think digital becomes an integral part of our daily lives. Absolute relevance is the only entry point. Because if you think about it, how many irrelevant messages do you get every day?

So, getting a better understanding in terms of how people behave, and how people think. What clicks with them. It’s absolutely critical.

At HSBC we invest heavily in customer analytics, big data, customer insight. We regularly commission a study on understanding online behaviours of our target segments, and also the broader market segments as well.

Because through this we can actually develop products that are most relevant, and also create and add value to our customers. And in this way we aim to develop the right products, and provide them at the right time, and via the right channel, as well. Because nowadays with digital technology advancement we have new media, new platforms to interact with our customers. And so that’s why we are crazy and passionate about this customer-centricity approach. Because only then we can win the hearts and the minds of our customers.

World Finance: Candy; thank you.

Candy Yuen: Thank you.

Alistithmar Capital: Saudi Arabia’s Tadawul needs more product diversity

Saudi Arabia’s Vision 2030 is its deputy crown prince’s $2tr project to create a post-carbon future for the kingdom. Creating the largest sovereign wealth fund the world has seen, it’s a dramatic shift that has been welcomed by politicians and business people around the world. Hesham Abou Jamee and Mazen Al-Sudairi from investment company Alistithmar Capital discuss its impact. The renewed focus on education will help Saudi Arabia’s youth become the human capital designed to drive the oil-dependent kingdom’s economy forward. Reforms in land and investment regulation will unleash potential in religious tourism and real estate. And the ongoing shake-up in the Tadawul exchange will enhance business opportunities even further.

World Finance: Saudi Arabia’s Vision 2030 is its deputy crown prince’s $2tr project to create a post-carbon future for the kingdom. Creating the largest sovereign wealth fund the world has seen, it’s a dramatic shift that has been welcomed by politicians and business people around the world. With me to discuss its impact: Hesham Abou Jamee and Mazen Al-Sudairi of Alistithmar Capital.

Hesham: what are the highlights of Vision 2030? What are you most excited about?

Hesham Abou Jamee: 2030 focuses on education: how to have one of the best education systems in the world. We aim also to have five of our universities within the best 200 universities in the world.

Fifty percent of our population is below 25 years. By educating these people we can have a good future, and we can reach the 2030 goals.

Mazen Al-Sudairi: I totally agree with Hesham that human capital is the most important driver in our economy. For that the reforms create the basis of perpetual growth, which is the most important thing: education, enhancing transportation, infrastructure, communication to create an ICT economy. And regulation: we saw so many reforms last year.

The last thing is the R&D in Saudi Arabia. The weight of R&D is too low in Saudi Arabia, compared to GDP; and we hope to see Saudi Arabia as a big competitor to Korea after 10 years, to reach four percent investment to GDP.

World Finance: Naturally this is a long-term plan, but we’re already seeing some dramatic changes. So what are the sectors that are going to be benefiting in the next few years?

Mazen Al-Sudairi: Food and agriculture – it’s related to the population growth. The trade quality in Saudi Arabia is going to be enhanced, with the FDI that’s going to come, we’re going to see the creation of jobs, and we’re going to see new products and new markets.

For example, the land reforms that happened, to the investment in the holy cities. Those are going to drive so many sectors: for example the real estate sectors, the cement sector, the healthcare sector.

Banking is always banking: people are going to borrow and they’re going to deposit. And in Saudi Arabia we have one of the most solvent banking and monetary systems. So we could say the majority of sectors are going to benefit from the reforms. Some of them are going be in the mid-term, some of them are going to be in the long-term.

World Finance: The Saudi stock market has been responding positively to all of this news, but to really achieve its full potential, do some reforms need to be made there?

Mazen Al-Sudairi: Lately we have adapted to so many reforms in the Tadawul system, and this year they have accepted so many new products. But we believe that instead of equity assets, we need to attract many other products. For example, ETFs, REITs, riyal-denominated bonds. That’s going to attract so many investments to us.

Even related to the market cap. We have only one market. In so many emerging economies there is a market for small-cap, middle-cap. I think we need this step too.

These steps and reforms are going to enhance our stock market.

World Finance: So how does Alistithmar Capital translate that potential into returns for your investors?

Hesham Abou Jamee: Alistithmar Capital is an investment company owned 100 percent by the Saudi Investment Bank. Our market share currently is about 10 percent, and we rank number four between our competitors.

In brokerage we have a state of the art platform called Istithmarcom, which is one of the best platforms in the kingdom for local and international brokerage. We invest a lot on our platform. Actually, we spent a lot in the last few years in IT; but now we get the results.

In asset management we have very good, talented staff – most of them Saudi – with a high level of education and a high level of certification, like CFA.

In corporate finance we have a young team, but within two years we’ve had a lot of success in this field.

World Finance: You have been enjoying successes significantly above local benchmarks, so, what are your targets and what’s your strategy?

Hesham Abou Jamee: In asset management we have talented staff. That’s why we have achieved over the benchmark for the last two or three years. And our rank is number one or number two of all of our funds.

We created two real estate funds last year, and also two mutual funds. Both real estate and equity were the best funds in the kingdom.

In corporate finance we are trying to benefit now from SMEs and family companies. We have four or five companies between family and SMEs to be listed in 2017, with the new market.

World Finance: So how else is Alistithmar Capital differentiating itself from your competitors?

Hesham Abou Jamee: We don’t have any wall between us and our customers. We have good services. Most of our customers are high net-worth institutions. They find it easy to reach us; all our division heads, even me.

This year was a challenging year, because of the economic situation. But we have one of the best divisions in the kingdom, in asset management, in brokerage, in advisory, in corporate finance.

We try to be the best; we have to be creative in the market. And we hope that we will succeed in the future.

World Finance: Hesham, Mazen, thank you both very much.

Hesham Abou Jamee: Thank you Paul.

Mazen Al-Sudairi: Thank you.

Ercüment Erdem: How to invest in Turkey’s $100bn PPP projects

Turkey’s infrastructure renewal continues apace, despite 2016’s political upheaval. In 2015 the Turkish government invested $30bn in construction, with the total value of projects scheduled through to 2023 worth over $100bn. Project finance expert Professor Dr H Ercüment Erdem, founder and senior partner of Erdem & Erdem Law Office, outlines the most exciting projects happening in Turkey right now, including the New Istanbul Airport, scheduled to begin operation in 2017. He outlines the laws governing PPP projects in Turkey, and explains how partnerships are typically structured; and identifies the key risks and considerations for international investors who want to engage in the country’s development.

World Finance: Turkey’s infrastructure renewal continues apace, despite 2016’s political upheaval. In 2015 the Turkish government invested $30bn in construction, with the total value of projects scheduled through to 2023 worth over $100bn. Joining me is project finance expert Professor Dr Ercüment Erdem.

What are some of the most interesting projects happening in Turkey at the moment?

Professor Dr Ercüment Erdem: We have many interesting projects, but let me give you only three examples.

The first one is Yavuz Sultan Selim Bridge. It’s a very new bridge, the third bridge on the Bosphorus, and it’s part of the Northern Marmara motorway project.

The second one is the New Istanbul Airport. It will be one of the major airports in Turkey; we expect it to be in operation in 2017, probably.

My third example is Osman Gazi Bridge. This crosses Ismit Bay, and it’s part of the Izmir-Istanbul motorway project. It reduces more than 50 percent the distance between Istanbul and Izmir. It’s been in operation since 2016, and it cost $1.1bn – it was a major project for Turkey.

World Finance: What are the laws governing PPP projects in Turkey?

Professor Dr Ercüment Erdem: We have two sets of rules. The first one is the PPP law; we call it the PPP law, but in fact it’s a law with respect to healthcare facilities. PPP projects are very important for Turkey, in particular for healthcare facilities. So, this is the first time that we have mentioned PPP projects in the law.

The second is the public tender law. It’s a general law, but it provides some guidance for the public tender, and organises how they have to be structured – with confidentiality, reliability, and many other main principles.

World Finance: How are these projects typically structured?

Professor Dr Ercüment Erdem: These projects are typically structured as joint ventures, in the form of joint stock companies.

We have long-standing experience with BOT projects in Turkey, since we have a particular law for that respect, enacted in 1994. This law provides some guidance, some general guidance, for BOT projects, and some variants to BOT projects: like Build-Operate, or Build-Lease-Transfer models.

And what we are doing in practice, in Turkey, is: we are using the model contract prepared by international institutions such as FIDIC or ICC.

World Finance: What unique risks do foreign companies need to be aware of when they’re looking to invest in Turkey?

Professor Dr Ercüment Erdem: Whatever risks are equivalently valid for foreign investors and Turkish investors. And foreign investment is a top priority for the Turkish government. But I would like to draw the attention of investors mainly to three points.

The first one is the management risk: how you manage the contract obligations and the project. There might be some failure for obtaining permits, environmental risk, and many other.

The second one is the legal risk, or the limitation of liabilities; in particular force majeure, step-in rights, or public order issues.

The third risk is the enforceability of security. As you may know, we are taking many securities for project finance, and these securities should be easily enforceable. So this is an important point as well.

World Finance: Finally, what’s the most important thing for businesses to be aware of, if they want to engage with Turkey’s development plans?

Professor Dr Ercüment Erdem: They have to understand the opportunity, and they have to evaluate the risk. Opportunity and risk go together, so they have to be prepared, and your legal, financial, and tax advisers have to have a strong background for project financing and in PPP projects.

And they have to be ready for the worst case scenario: the non-performance of the contract. So we may need a reliable, user-friendly, and easily implemented dispute resolution mechanism. For that respect I strong suggest to use international arbitration.

World Finance: Ercüment, thank you.

Professor Dr Ercüment Erdem: Thank you.

Mashreq Bank: Mobile is enabling completely new capabilities in banking

The UAE’s smartphone penetration is among the highest in the world, and financial service providers have rapidly capitalised on this platform to differentiate their offering. Subroto Som, Head of Retail Banking Group for Mashreq Bank, explains how competitive and advanced the UAE’s banking industry is in terms of technology offering. The paradigm of mobile banking has shifted from replicating existing banking functions, he explains, to enabling brand new capabilities. For Mashreq, driving these innovations is a team of engineers, designers, data scientists and business analysts, all focused on easing customer pain points. Finally he suggests that traditional banks collaborating with new fintech players could drive even better customer experience and improve financial inclusion.

World Finance: The UAE’s smartphone penetration is among the highest in the world, and financial service providers have rapidly capitalised on this platform to differentiate their offering. Subroto Som from the UAE’s Mashreq Bank joins me now.

How competitive is the UAE’s banking sector in terms of technology offering?

Subroto Som: Very competitive is how I’ll start! There are over 50 banks which operate in the UAE, out of which over 36 work in the retail space. This is across 3.5 million consumers, and about 12 million cards.

Of the 36 retail banks that operate there, almost 25 of them offer an online platform, and about 16 of them offer an online and mobile platform.

In the UAE, even today more than 75 percent of transactions happen through cash. So as you will see, there is a huge opportunity going forward. There is new development coming into customers’ hands almost every day, and that makes it very exciting.

World Finance: How advanced is this technological offering, then? And talk to me about your app, Snapp Mobile: what’s new there?

Subroto Som: Technologically, not all the platforms are equally capable, from a customer’s perspective. Three or four of them are quite advanced, and Mashreq is one of the leading ones.

Snapp is very intuitive, trendy, and customer-centric. The app integrates the mobile banking for banking, for cards, for rewards platform, for various information that the bank sends to the customer in form of notifications.

It’s been continuously evolved over time: we integrated with Siri to give simple instructions to remit money on voice recognition. If you have lost your card, you want to immediately block it, and if you can’t find it, you will actually ask for a replacement, and if you find it you will unblock the card. You may want to restrict the maximum size of a transaction on a card, the number of transactions in a day, your supplementary card holders – who can spend how much at a time. All of this is possible through Snapp.

We have gone beyond what is possible in banking, that you offer on mobile.

World Finance: And how about with corporates and SMEs? How are businesses going mobile?

Subroto Som: We have a dedicated app, Mashreq Edge, for our larger corporates which operate out of multiple countries. It has very sophisticated controls about authorisation, tokenisation, and verification for transactions.

We also have an extension of Snapp – what we call SnappBiz – which is targeted at small business entrepreneurs. You can initiate a transaction on the online platform, and you can complete it on the mobile platform. It also allows one particular transaction to be completed by two or three different people, because in many cases companies need multiple levels of authorisation. It allows you to track where the transaction is.

This SnappBiz has just been launched – we are the first bank to launch a specific, SME-based mobile banking application in the market. I do see this to be a big driver of transactions for SMEs.

World Finance: Talk me through the learning curve of producing these apps; what’s been the process there?

Subroto Som: The biggest thing is, we have a team – not comprised of bankers – these are engineers, analysts, designers, a set of data scientists and business analysts who actually review all the transactions that are taking place in our network. Whose focus is: customer convenience, customer pain points, and how to find a solution better.

We work with this team, along with our technology partners. We have a team dedicated in Bangalore. We have vendors in London and Milan with which we work. And I think it is that very close teamwork that makes a difference. Because we are able to respond quickly, we are able to make changes quickly, we are able to bring things very quickly. And that I think is the key to the development.

World Finance: Finally, what do you see as the next step in digital banking?

Subroto Som: Mobile banking was about: what you did in normal banking, you brought to the mobile. You will now have capabilities in mobile and digital banking that do not exist in normal banking.

Second, we have seen and heard a lot of fintech come into the space, bringing enormous value to the customer and experience. And I feel in the next phase, fintechs and banks will work closely, to reduce pain points and bring better customer experience.

Third, what digital and mobile and banking is bringing, will actually improve financial inclusion to a large extent.

I’m excited about the opportunities. And while it brings new competition, it also creates opportunity to address consumer needs in a very different way. So good times are ahead of us.

World Finance: Som, thank you very much.

Subroto Som: Thank you very much; nice talking to you.