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.
It’s the size of Europe and rich in natural resources, but Kazakhstan’s economy has been suffering since the downturn in oil prices. Still, its financial services industries have been evolving, after recovering from the 2008 crisis. Abylai Jakishev, advisor to the chairman of the board of directors for Kazkom Life, explains the current state of the country’s life insurance sector, what reforms are needed to grow its nine percent penetration rate, and what changes we can expect in the next two years.
World Finance: It’s the size of Europe and rich in natural resources, but Kazakhstan’s economy has been suffering since the downturn in oil prices. Still, its financial services industries have been evolving, after recovering from the 2008 crisis. Joining me is Abylai Jakishev from insurer Kazkom Life.
Abylai; how developed is Kazakhstan’s life insurance industry?
Abylai Jakishev: Life insurance industry in Kazakhstan has been actively developing in the last 10 years. It’s only nine percent of the population in Kazakhstan who are covered by insurance; the main part of the insured are borrowers or financial institutions. And as the adjustment of the national currency in 2015, it has been issued new insurance products for customers, that are bound to the national currency.
One of the major events which took place in 2015 was the merger of two big companies: BTA Life and Kazkommerts Life. The company takes first place in insurance reserves, the second place for assets. We’re also leading in cumulative insurance – it has signed more than 30,000 insurance agreements.
World Finance: Nine percent penetration is quite low; are there reforms needed in order to expand insurance through Kazakhstan?
Abylai Jakishev: Yes, it is very necessary to develop online insurance. It will help us to clear the path to our clients, by selling new products online via internet, mobile applications, and other services. As well as leaving the insurance agents on the side.
It is very important to create insurance products that are more affordable, and more understandable for customers. We also started contacting foreign brokers as well as foreign markets for future cooperation.
World Finance: What can we expect in the next year or two: any foreign entrants coming into Kazakhstan? And what is Kazkom Life doing?
Abylai Jakishev: There are only seven participants in the life insurance market today, and we do not anticipate any change in the number of players in the market.
With the arrival of a new major shareholder, Kazkommerts Life has changed its strategy. We are improving on the quality of our customer service at the moment, and willing to get more audience and clients on the market.
Recent research has revealed Singapore’s SMEs – the engine of its economy – are exposed to worrying levels of business risk. The findings, published by QBE Insurance Singapore, reveal that one in seven SMEs have no insurance at all, and a large part of the remainder are underinsured. The insurer’s CEO, Karl Hamann, explains why so many SMEs don’t consider insurance a priority, and describes how QBE works with its agents and customers to understand each business’s unique needs and offer tailored insurance to match. He also reveals a big risk to business that many companies don’t think of addressing: losing talent and the costs of replacing it.
World Finance: Recent research has revealed Singapore’s SMEs – the engine of its economy – are exposed to worrying levels of business risk. Joining me is Karl Hamann, CEO of QBE Insurance Singapore.
Your research found that some businesses don’t see insurance as being vital – or in fact, realise that insurance can be tailored to meet their individual needs – how can this be changed?
Karl Hamann: Our research did indicate that one in seven SMEs in Singapore are uninsured; and a larger part of the six in seven are underinsured. So that’s quite concerning.
The SMEs are really thinking about what their costs of raw materials are today, how much they’re making today, and therefore the profit that they’re making today. So if they were to sit there and think about how they can ensure that they pass this down to the next generation, then I think the decision process might be a little bit different.
World Finance: Why do you think businesses resist the idea of buying insurance?
Karl Hamann: There’s really a lack of understanding around insurance. So it’s all around trying to put out more knowledge around insurance.
One of the ways we try to do it is talk about real life experiences. And one that really humbled me earlier this year was an insured that we had recently written. So, they had a fire at their facility, and a $7m loss. And at QBE we feel that our purpose is really around allowing customers to fulfil their ambitions. So having insurance protection in place was really allowing this person to get back into business, and we’re now helping them do that.
So it’s making sure that we have the products and the discussions, to ensure that they can live their ambitions in life.
World Finance: When we talk about tailoring insurance to individual business needs, what kind of unique needs are you identifying?
Karl Hamann: When people think of insurance they just think of the common types of insurance, like that an SME might buy. But there’s so many other types of risks. We want to have a holistic discussion with the SME owner. And when we talk to an individual, they might not see the risks that other SMEs see that they face.
In Singapore we do a lot of trade credit insurance. So that’s really insuring your trade receivables. So if you’ve got key customers, it could be a big part of your turnover that would be impacted if they were to fall over.
One of the top risks that SMEs saw in Singapore was around the loss of talent. And obviously that has a significant cost, doesn’t it. Because if you lose someone, it’s not just the hiring process: there’s also the retraining, the intellectual knowledge that they’ve built up. So it takes someone that’s coming on board at least six months to be fully operational.
And emerging risk is around cyber, so QBE’s developing products around cyber risk as well.
World Finance: So how can businesses insure themselves against these new, emerging kinds of risks?
Karl Hamann: Everyone’s heard of risk management, but they might not necessarily know what that means. It’s making a conscious decision around three areas: whether you accept the risk, whether you mitigate the risk, or whether you transfer the risk.
So what I mean by accept. You might see something in your business that happens every day, it’s very low cost, so it just becomes part of your operational cost.
When you mitigate, you might change procedures, you might change processes, or you might feel that a piece of machinery is old and has a high risk of breaking down, so you’ll replace it.
And then the third aspect is, you transfer that risk to an insurance company. And I think that’s what is lacking. So we spend a lot of time with our agents, training them on our products, but then also encourage them to sit more with their clients, to really understand their business. Because every business is unique.
So you can’t pick up a product off the shelf and give it to an SME, because every SME is different. And SMEs in Singapore play a huge role in the economy, so it’s very important that they understand the risks in their business, to ensure that the economy continues to thrive.
While the international spotlight remains focused on a shift towards protectionism in trade policies, new EU proposals – which will be unveiled in full on November 23 – are likely to further rein in globalisation in the financial sector.
Some details of the proposals have been addressed in a speech by Valdis Dombrovskis, Vice President of the European Commission. If implemented, the changes would see tougher capital and liquidity requirements for the subsidiaries of banks operating in the EU, leading to raised costs for overseas banks.
If implemented, the changes would see tougher capital and liquidity requirements for the subsidiaries of banks operating in the EU
Arguably, this move comes in retaliation against the protectionism of similar policies in the US. These policies were revealed in 2014 and have the similar effect of increasing costs for foreign lenders. According to the Financial Times, at the time of the US’ announcement, the EU commissioner warned the move could prompt a protectionist reaction.
When announcing the EU proposals on November 15, Dombrovskis suggested this had played a part in the decision: “Banks operate in global markets. It makes sense to implement international standards to encourage a level playing field and sound regulation internationally.”
There is good reason behind claims that such proposals create a protectionist barrier: should the EU policies be put in place, overseas banks will have to set up a separately capitalised holding company in order to operate in the EU. This could make foreign banks more reluctant to hold their operations in Europe, due to the extra costs that will arise from meeting this requirement.
An adviser to an investment bank that is to be affected by the rules told the Financial Times: “If you must create an EU holding company that acts as your hub, the question becomes: how many European hubs do you want?” Increased capital and liquidity requirements for operations in the EU were included in the proposals, which would further increase costs.
New capital requirements in the proposal include the fact that banks must hold a minimum total loss-absorbing capacity, aimed at creating greater resilience in the case of a crisis.
The proposals are also to introduce a binding leverage ratio of three percent, which will prevent excessive leverage from building up in the financial system. This would act as a backstop to banks’ internal model-based capital requirements.
While the proposals could be interpreted as nothing more than a form of protectionist retaliation, Dombrovskis stressed that the regulations are focused on maintaining confidence and stability in the banking sector, while not forgetting the mistakes that led to the crisis of 2008. In response to recent challenges, he said: “Some might be tempted to reverse the reforms we undertook during the crisis, to lower requirements, and give up on following international standards and the single rulebook.” The new requirements, according to Dombrovskis, should help “to avoid repeating past mistakes”.
Similarly, when Dan Tarullo, Chairman of the US Federal Financial Institutions Examination Council, discussed the regulation in the US, he emphasised protecting taxpayers against bank collapses: “Our regulatory system must recognise that while internationally active banks live globally, they may well die locally.”
The proposals are yet to receive the backing of EU states and European lawmakers. If successful, they would present a step away from globalisation in the financial sector. However, the regulations would be costly for many banks and will inevitably create opposition.
Nonetheless, in the case of a trade-off between stability and reducing costs, an emphasis must be placed on protecting taxpayers and economies through sensible regulation.
On November 17, Andy Davenport, CEO of Philidor, and Gary Tanner, a former senior Valeant director, were arrested and charged for their participation in an illegal scheme. The arrangement involved a covert kickback payment, through which they each hoped to receive millions of dollars in personal profits.
Valeant Pharmaceuticals International has been embroiled in a scandal for the past year regarding its involvement with Philidor, an online pharmacy that was kept secret from investors. The online pharmacy purportedly used fraudulent tactics to drive increases in drug sales for Valeant.
Valeant’s stock has dipped by over 90 percent since August 2015, as details of its drug pricing and business practices have come to light
Valeant’s stock has dipped by over 90 percent since August 2015, as details of its drug pricing and business practices have come to light.
These high-profile arrests come as another blow to Valeant amid ongoing investigations into the company’s business practices. Allegedly, the scheme concluded with Davenport earning $40m after Valeant agreed to pay $100m for the right to buy Philidor. Davenport then kicked back $10m to Tanner.
According to a statement given by the prosecutors: “The kickback payments were made in secret and laundered through a series of shell companies and transactions designed to conceal the illicit source, nature, ownership and control of the funds.”
The charges further allege that Tanner, who at the time was a Valeant executive, was covertly working with Davenport towards the ultimate goal of accomplishing a purchase option agreement between Valeant and Philidor. This involved efforts by Tanner to boost business for Philidor through various methods, including by resisting business relationships with Philidor’s competitors.
Valeant released a statement on the morning of the arrest emphasising that there have been no charges against the company, former CEO, former CFO or current executives. It further stated: “Gary Tanner ceased to be a Valeant employee on September 13, 2015, and Andrew Davenport has never been an employee of the company. The counts issued today include allegations that the charged parties engaged in actions to defraud Valeant as a company.”
As investigations into Valeant and its business partners continue, the firm and its investors are set to face more hurdles well into the new year.
The renminbi has now reached its lowest point since December 2008, dropping to 6.8729 against the US dollar. The currency has not dipped so low since its appreciation after being unpegged from the dollar in 2010.
The value of the renminbi is determined by a ‘managed floating’ exchange rate system, thus leaving it open to market forces.
US President-elect, Donald Trump, has put a spotlight on the renminbi by labelling China as a currency manipulator
This change comes at a time when US President-elect, Donald Trump, has put a spotlight on the renminbi by labelling China as a currency manipulator. Trump made accusations throughout his campaign that China was manipulating its currency downwards in order to increase the competitiveness of its exports.
He claimed at the time: “China goes down to seven percent [growth], and then what they do is devalue their currency and they take more of our business and they start to go up again.” Contrary to this accusation, the People’s Bank of China (PBoC) has in fact made efforts to prop up the currency in recent years.
Nonetheless, the currency has seen ongoing downward pressure due to capital flows as private investors continue to send their capital abroad. In response, PBoC has intervened to support the currency through open market operations, reportedly depleting its foreign reserves by $210bn this year.
A rally on the dollar is another large part of the explanation for this dip in the renminbi’s value. Upwards pressure on the dollar has arisen due to expectations that the Fed will raise interest rates in December. This push was then further intensified following Trump’s election victory, due to the predicted implications of his economic plans.
If Trump follows through with his economic promises, a fiscal stimulus is likely to result in inflation and a substantial rise in rates by the Fed.
The dollar hike has seen a similar effect on other emerging market currencies as well: the renminbi has devalued relatively less than others, and is down only 1.2 percent against the dollar. To compare, the Malaysian ringgit is down by four percent, the Korean won is down by 3.3 percent, and the Mexican peso is down by nine percent. Currency intervention by the Chinese may therefore explain why the renminbi was hit relatively gently by this surge in the dollar.
Warren Buffett’s holding company, Berkshire Hathaway, has disclosed new investments of over $1.2bn in four US airlines. The move has surprised onlookers after Buffet’s previous comments disparaging investments in the sector.
In 1989, Buffett’s investment in USAir Group suffered losses, and he has since seemed set against any further investments in the sector. In an annual shareholder meeting in May 2013, Buffett said the sector has “been a death trap for investors”. Further to this, when previously questioned on whether Berkshire Hathaway would consider buying airlines, Buffett stated: “Investors have poured their money into airlines and airline manufacturers for 100 years with terrible results.”
US airlines saw record revenue in 2015, when fuel costs were low, but this year’s rebound in oil prices has been a blow to profits
In a regulatory filing, Berkshire Hathaway disclosed that from September 30, it acquired new stakes in three US airline companies. The largest new stake was in American Airlines, worth $797m, with smaller shares of $249.3m in Delta and $249.3m in United Continental. Buffett has also confirmed a further stake in Southwest Airlines, according to CNBC, which was reportedly acquired later than the others and so was not included in the regulatory filing.
The announcement prompted a rise in the airlines’ share values in after-hours trading. American Airlines’ shares were up by more than three percent, Delta Airlines and Southwest Airlines saw increases of more than two percent, and United Airlines witnessed a 1.7 percent increase in share value.
While Buffett has not explained what caused his change of heart, US airline stocks have recently gained ground with investors. This is likely because several carriers have suggested that a prolonged spell of low fares is likely to ease soon, which should make way for profits in the near future.
The sector’s sensitivity to fuel prices has also been a central factor in determining profits over recent years. US airlines saw record revenue in 2015, when fuel costs were low, but this year’s rebound in oil prices has been a blow to profits. This setback, however, has in turn made share prices cheaper.
Furthermore, the airline sector is in a better position after having largely avoided price wars and excessive capacity growth since emerging from the 2008 economic crisis.
It is possible fund managers Todd Combs and Ted Weschler at Berkshire Hathaway have been behind the unprecedented decision; the pair share investment responsibilities for Berkshire Hathaway and this would not be the first time they have widened the group’s range of investments. In March this year, the group invested a $1bn stake in Apple, moving into the tech sector after Buffett had reportedly eschewed it in the past.
As the financial sector races to respond to Donald Trump’s presidential victory, Goldman Sachs economists Sven Jari Stehn and Alec Phillips have presented damning predictions for the future of the US should the president-elect follow through with his economic plans. The report presents a prognosis of immediate gain followed by future pain.
Trump’s economic team has proposed a huge fiscal stimulus package of infrastructure spending and tax cuts, presenting a likely short-term boost in GDP alongside potential long-term supply side benefits. His proposals also include protectionist policies and a squeeze of the immigrant labour force, which could result in both inflation and dampened economic growth.
Modelling the potential adverse effects of Trump’s policies opens up the huge question of how literally his campaign promises should be interpreted
The Goldman Sachs economists look into how an ‘adverse scenario’ could play out. This is a prediction based on what could occur if Trump fully implements his proposed plans of financial stimulus and trade and immigration restrictions, and if the Fed responds hawkishly as expected.
The prediction goes as follows: growth would see a short-term boost as real GDP reacts to the expansionary fiscal policies, which would result in the economy seeing growth higher than the baseline rate. Growth and unemployment would then falter in 2018 and 2019, without a corresponding drop in inflation. At this point, the Fed would use tight monetary policy to tackle inflation, which further dampens growth and unemployment. The result will be that the US will face the simultaneous blow of unemployment and inflation.
Modelling the potential adverse effects of Trump’s policies opens up the huge question of how literally his campaign promises should be interpreted.
The Goldman Sachs economists also model a ‘benign’ scenario whereby Trump only follows through on his fiscal proposals. In this case, the boost of a fiscal stimulus is felt briefly before dying down. This scenario largely avoids the adverse effects to future unemployment and growth due to restrictions on trade and immigration.
While protectionism and immigration restrictions formed much of Trump’s campaign rhetoric, many voices – including the Goldman Sachs analysis – are predicting Trump will hold back on some of these promises. According to the Financial Times, Ryoji Musha, President of Musha Research, commented: “Surely now that the election is over he will do away with the rhetoric he used to attract voters and move to formulate a consistent and realisable system of policies.”
First introduced in the 1970s, the concept of microfinance was created as a way of helping individuals to lift themselves out of poverty. For many living in poor communities in developing countries, access to capital can deliver a much-needed boost to their standard of living, an opportunity to provide an education for their children, or act as the impetus necessary to start a new business.
Microfinance Institutions (MFIs) lend money to those who are not able to take out loans from traditional banks. At the time when of its introduction, the concept was celebrated as the desperately needed key to solving poverty in countries around the world, and was quickly thrust into the international spotlight.
Microfinance all started with the Bangladeshi economist Dr Muhammad Yunus, who became the first and biggest name in the novel but rapidly growing industry. One day in 1976, during a visit to the village of Jobra, Yunus met a stool maker who needed just 22 cents to bypass her usurious lenders. Yunus took it upon himself to give her his first micro-loan for the amount of $27. He went back to Jobra the very next day to hand out more micro-loans, thus forming the roots of this alternative lending model.
For many living in poor communities in developing countries, access to capital can deliver a much-needed boost to their standard of living
Microfinance became an official concept in 1983 when Yunus founded Grameen Bank as a vehicle to provide micro-loans. The organisation’s expansion was rapid; by 2005 Grameen Bank had 2,422 branches with 7.06 million customers in over 78,000 villages, 97 percent of which were women. In 2006, both Yunus and Grameen Bank were awarded the Nobel Peace Prize for their work in developing microfinance as an innovative financial system.
In the years since, however, criticism from various outlets has built up. Indeed, many now doubt the effectiveness of microfinance in aiding poverty reduction, while some even go so far as to say the opposite is true for the very poorest members of a community.
Many people living in developing nations are trapped in an endless cycle of poverty; living on very little each day and deprived of regular work and access to vital services. In the absence of financial history, collateral, steady employment or indeed any form of repayment assurance, banks are generally unwilling to provide would-be customers with capital. Yet without access to financial services, there is little hope of escaping. Microfinance aims to bridge this gap.
“I’ve been at the coalface of microfinance for 45 years, my whole working life. I have seen the transformative impact it has on many people’s lives”, said Rupert Scofield, Founder and CEO of Finca, an MFI that was established in 1985.
Nowadays, MFIs operate across the globe, positively impacting the economies of dozens of countries (see Fig 1). “Some larger organisations work closely with the World Bank, while other smaller groups operate in different nations. Most were formed with the simple goal of improving lives with funding from donations, grants and other forms of generosity”, Scofield explained.
Aside from standard loans that usually start at $1,000 and can reach up to around $20,000, group loans are also available for those people at the very bottom of the pyramid. Known as ‘village banks’, each participant within a group acts as a guarantor for one another’s loans.
“A lot of people like the group guarantee model, as they don’t have to go through a big process of registering and collateral and so forth”, Scofield told World Finance. “And it’s particularly helpful for low income individuals – it’s a very popular vehicle for them to get credit.
“Many people use the money to start up their first businesses, often mentored by experienced entrepreneurs in their local communities. Or they use the money to expand their current businesses, adding new products, opening new stores, or launching new enterprises in other sectors. This grassroots economic development not only generates income for the business owners, it creates additional jobs for other members of the community as well.”
Getting a bad rap
Despite various aspects pointing towards the good that can be achieved from the product, the reality of microfinance is incredibly complex. In fact, many argue there is a distinct lack of evidence to show microfinance actually does help to reduce poverty. Over the years, a series of controversial events have given microfinance a reputation for unscrupulousness.
The backlash began in 2007 when Mexican microfinance bank Banco Compartamos transformed itself from being a non-profit organisation into a profit-making finance institution. After raising over $400,000 in its initial public offering (IPO), just like any other public company, Banco Compartamos became ultimately answerable to its shareholders and the bottom line.
Yunus was one of the first to speak out against Banco Compartamos’s IPO, arguing that turning the company into a for-profit organisation went against the core objective of microfinance – namely, to reduce poverty. Compartamos, on the other hand, contended that, by becoming profitable, it could further extend its reach to poor communities in Mexico.
The reputation of microfinance was further damaged by the exploits of SKS Microfinance (since renamed Bharat Financial Inclusion): India’s biggest MFI had expanded rapidly under the leadership of its founder and former McKinsey consultant, Vikram Akula, reaching some 5.8 million customers and taking in billions of dollars in revenue (see Fig 2). In 2010, it became the first institution in the country to offer its shares through an IPO. The fact it raised over $350m was praised by some as an indication of the system’s self-sufficiency – others, however, reacted with outrage, noting how millions had gone directly into Akula’s pocket. Incensed at the idea of taking from the poor to give to the rich, local entities and politicians began convincing SKS’ clients to stop paying back their loans.
A new trend thus emerged in the world of microfinance, which saw groups using the platform not just to help others, but to also turn a profit. The likes of Barclays, CitiGroup and General Electric initiated microfinance projects that gained from lending small amounts of capital to so-called ‘unbankables’.
“Back in 1985, when my partner and I started Finca, microfinance and loaning money to low-income people was a novelty. Now it seems like everyone is getting into microfinance”, said Scofield. “Not only commercial banks, but also large consumer lenders, retail stores, telecoms, utilities – anyone, in short, who has large numbers of low-income customers.”
Even Yunus himself, the father of microfinance, has not been shielded from criticism. At the tail end of 2010, the Bangladeshi Government launched a high-level investigation into Grameen Bank. In addition to accusing Yunus of evading taxes, Sheikh Hasina, the Bangladeshi prime minister at the time, condemned MFIs for “sucking blood from the poor in the name of poverty alleviation”.
Stories also began to proliferate about the aggressive techniques used to pressure borrowers into making repayments. The worst case reported at the time came from the Andhra Pradesh state of India: according to local media reports and the Associated Press, in late 2010 over 200 over-indebted residents had committed suicide. Also emerging was evidence of SKS verbally and physically harassing customers, which included various forms of public humiliation.
Blaming MFIs for the upsurge in suicide rates, the state implemented stringent new microfinance laws, which included compulsory lender registration, weekly repayments for borrowers and limiting the sum of interest payments so they could no longer exceed the loan itself.
Granting financial access
In the early days of microfinance, the industry’s focus rested primarily on micro lending – which was a large part of the problem. However, the system has since evolved.
“Microfinance is more than micro lending, and in fact other financial services are probably more important than the lending part. Asset building, micro insurance, savings – those are becoming more prominent now, and I think that’s a welcome change”, said Bhagwan Chowdhry, Professor of Finance at UCLA. “The whole cycle of borrowing comes much later. First you need to build financial history; you need to show continuity of spending patterns, earning patterns, and then the micro lending comes in.”
In terms of significantly reducing poverty, as its critics have long argued, microfinance is not actually the answer – or the sole answer, at least. “We tend to get carried away; we are always looking for silver bullets for the answer to poverty. There is no one answer to poverty, but I think these [microfinance products] are steps”, Chowdhry told World Finance. Without access to financial services, it is far more difficult to escape poverty – much more is required in terms of opportunities, jobs and skills. “So microfinance – or in general, I like to think about it as financial services – are steps to facilitate that”, he added.
In 2007, Kenya’s biggest mobile operator, Safaricom, introduced M-PESA, a new platform for making payments and transfers via mobile phones. At no extra cost or monthly fee, users could transfer balances and deposit money through their mobiles, marking a dramatic improvement to the access and delivery of microfinance services to customers, even in the country’s most remote areas. This was a significant departure from the work of telecoms firms that charged inordinate fees to customers who wished to move or deposit money via their mobile phone – a norm for many countries in the developing world. As testament to the impact M-PESA has had in Kenya, after just three years, the number of users rose to a whopping 10 million.
Technology now plays a pivotal role in developing microfinance as a tool for providing financial access to those living below the poverty line. Through the use of smartphones, MFIs can reach far more people, which is of particular importance when the potential clients are located in hard-to-reach areas.
Prior to recent technological developments, large sections of a population were grouped together in the over-simplified category of ‘unbankable’. Chowdhry said: “Now that we are able to collect data on people, because they are using mobile phones or other electronic technology, in some sense they become more visible to us – suddenly these people become ‘bankable’.” Technology has also reduced the cost of transactions, which in turn may allow more competition in the field, and so better offerings for customers. “I am very optimistic that those developments will actually make microfinance more of a success in the coming years than it has been in the past”, said Chowdhry.
Active investors in the microfinance sector in 2014
Growth of the Indian microfinance sector in Q1 2016
Fighting the naysayers
Another famous point of contention is the often-high interest rates MFIs charge. For example, shortly after its IPO, Banco Compartamos came under fire for its shocking APR of 75 to 100 percent. In a 2007 interview with Bloomberg, Yunus said of the company: “Microcredit was created to fight the money lender, not to become the money lender.”
To many, charging such a high rate of interest to those already contending with extreme poverty would seem nonsensical. Even borrowers with steady incomes would be hard pressed to make such repayments, let alone the type of clientele MFIs generally deal with. Naturally, lenders have fought back against this objection, arguing high administration costs – particularly as most customers are based in remote area – justify such high rates.
When asked about this point in particular, Scofield said: “The financial cost globally for us is about 10 percent of the cost of our money, and that’s a blended rate of savings and external debt. Our administrative costs could be as much as another 20 to 25 percent, because our loans are small and they are also dealing with remote groups, and it’s expensive to get out and service them.
“Interest rate caps always happen inevitably, then the MFIs can’t afford to make the small loans in the remote areas so they just withdraw from the markets where they are most needed.”
Chowdhry too sees a problem with interest caps, saying they “impede the development of the competitive market – it gets very messy once you reach that stage”.
The other frequent criticism facing microfinance refers to the severe improbability of there being a Bill Gates or Mark Zuckerberg in every village in which MFIs operate. Unsurprisingly, very few customers are able to take a small amount of capital and turn it into a thriving business, while even fewer can also create new jobs within a community in the process.
In truth, most people living in severe poverty rely on so-called entrepreneurship to earn a wage. Numerous people in low-income communities cannot hold regular jobs for various reasons – one obvious example being that of child rearing – and so, when only intermittent hours are available for working, flexibility is essential.
“I hesitate to use the word ‘entrepreneurship’, because it’s romanticised and we talk about it as if it’s also a silver bullet. At the very poor level, entrepreneurship is a necessity, rather than an answer”, said Chowdhry. “I think a very poor person would rather have the security of a job and security of income.”
For a large section of a population that works in the unorganised sector – meaning those who do not have consistent, long-term jobs – entrepreneurship is just one way to fill the gap. “If you can do something on the side – start a food stall, or make something and sell it – that’s where you need capital, and that’s where I think microfinance can help”, Chowdhry added.
Very few customers are able to take such a small amount of capital and turn it into a thriving business
As with so many ventures that started out with good intentions, over time the core objective of microfinance has been warped by the reality of life. The notion of microfinance is wonderful; it represents a tool that can enable economic empowerment. It represents the missing link that could help the millions of people around the world who are living in dire poverty.
Unfortunately, despite high hopes, the results of microfinance have been somewhat disappointing, particularly in light of organisations using it to extort money from the poor under a mask of philanthropy. There is also a note of corporate irresponsibility hovering over reports of over-indebted individuals who reached such desperation regarding their financial woes they felt they had no choice but to take their own lives.
But despite such a chequered history, there is still something to say for microfinance. Every person on this planet is entitled to basic goods and services, and as a prerequisite to those things, they are entitled to financial inclusion as well. That many banks will not and cannot help the poorest segments of society is no excuse to deny financial inclusion to millions. As Scofield said: “There are still many places around the world that are starved of capital.” MFIs can surely step in to fill this crucial role.
“It simply makes sense that once these communities are provided with the resources they need to expand their businesses at an affordable level, they will do so”, Scofield continued. And to some extent, he’s right. However, microfinance should not be considered an absolute solution to alleviating poverty – it is simply one integer in a highly complex equation.
Moreover, microfinance must not solely focus on micro lending. If it is to truly help improve living standards, it must offer other vital products, such as insurance and savings. Namely, it must provide vital financial access to those that cannot obtain it otherwise.
The international community and individual governments are unremittingly charged with the responsibility of reducing poverty, but such a feat can only be achieved through sound, sustainable polices. Job creation, education, healthcare form the thrust of this vital mission; microfinance is simply one stepping stone of many. But at least it exists, supporting communities until the rest of the path is formed.
The world of insurance is closely linked to the condition of the economy, technological advances and the environment. In recent years, we have lived in a world with slower growth, with low interest rates, lower productivity within the labour force, increased volatility in capital markets, and unprecedented technological development. Some economies have recovered slightly, but it is unlikely we will return to the growth prospects of previous years, especially if we take into account the lower growth rate for China, which, at 7.7 percent, is at its weakest in over two decades.
The picture is no different in Peru, and recent years have also seen a reduction in GDP growth rate. A slight recovery is expected, but again, we do not foresee reaching levels of six percent growth. As insurance is connected with economic growth, this situation has a direct impact on our industry. Greater investment flows generate a greater demand for labour, which leads to an increase in wages and strengthens the expansion of the middle class, creating new opportunities for business.
The change of government in Peru has injected new optimism and confidence among investors. By reactivating infrastructure and mining projects, generating appropriate investments in the fields of health and education, and implementing the state’s strategic plan to address fiscal imbalances in the face of natural disasters (earthquakes, the El Niño phenomenon, rain and flooding), Peru presents a fresh context and opens up new opportunities in the realm of business insurance.
One of the major concerns of insurers is climate change, which leads to a higher frequency of natural disasters
Projects being reactivated include: the Southern Gas Pipeline, Metro Line Two in Lima, water works and sanitation programmes, the expansion of Jorge Chávez Airport, the construction of Chincheros Airport in Cusco, the missing sections of the Sierra highway, and the contract award for the Metro Line Three. These are important for the revival of growth in the insurance market.
This scenario presents a very important challenge for Rimac Seguros as insurance market leaders in Peru. Throughout our 120 years of business, we have been committed to Peru, our clients, and our employees. We have also been immersed in a programme of continuous transformation, in order to address the changes that are occurring in the country and will continue to occur in the insurance market. This flexibility enables Rimac to maintain its leadership in a profitable manner.
Advances in technology create a very significant challenge for the insurance industry across the value chain, with more informed customers seeking simplicity, accessibility and more sophisticated products to meet their needs. As such, investment in process improvement, technology and innovation is key.
Rimac has continually invested in these fields, focusing on new trends and forces that generate the most important developments in the insurance industry. One such example is the use of big data and data analytics to find patterns in structured and unstructured data applied to prospecting processes, sales, risk assessment and fraud detection processes. We are also present on social networks, in order to obtain information on the behaviour of consumers and set up product models for related groups. We make great use of the web, smartphones and apps that allow us to better reach our customers in all stages of prospecting, sales, care, use and relationships.
An example of these changes can be seen in the development of the first engineering management app for risk inspection: Risk Inspect. This is a software programme that interacts online and in real time with the company. The software evaluates various risks, such as fire, theft, mechanical breakdown and natural disasters, through detailed questionnaires. This tool allows us to offer finer and more appropriate underwriting to meet our customers’ needs, since the data we obtain automatically includes GPS coordinates, building materials, and details of the protections used by companies against fire, among other risks.
This initiative began at the end of 2013, when Rimac and IBM signed a strategic alliance for the digital transformation of our company, with the aim of maintaining leadership in the Peruvian insurance market. During 2014, Apple and IBM announced a global strategic alliance to develop mobile business applications, and approached us to introduce this tool. The interesting thing is we managed to identify the specific needs of Peru’s insurance market, and thus Risk Inspect was born – the first mobile business application in Latin America’s insurance industry that is provided by two global partners.
This application positions Rimac as the leader in innovation and technology in the general insurance market. In this vein, it is also important to highlight Rimac’s annual inspection programme, which has the largest coverage in the country, comprising more than 1,200 business customers nationwide. In addition to this, last year we incorporated a prevention property risks website, which addresses issues of interest to our customers and offers a variety of services, ranging from online courses to train staff and customers, to fire control systems tests in accordance with NFPA 25. This platform has allowed us to strengthen our leadership in prevention. Such developments demonstrate we are true pioneers in technological advancement and innovation within Peru’s insurance industry.
One of the major concerns of insurers is climate change, which leads to a higher frequency of natural disasters. As we have seen across the globe, these are recurring in shorter timeframes and, in many cases, more severely. In the case of Peru, seismic risk has to be considered, due to the country’s location in the Pacific Ring of Fire, and considering there has been no seismic activity for many years.
In the case of Peru, seismic risk has to be considered, due to the country’s location in the Pacific Ring of Fire
This obliges us to follow more sophisticated processes of risk assessment and reinsurance purchasing and, above all, to implement prevention and loss mitigation programmes together with our customers, so as to reduce their vulnerability to natural events.
Being market leaders enables us to make best use of both structured and unstructured information, including flood zone maps and topographic maps, either of the country or of places where important events (such as landslides due to rain or landfalls caused by earthquakes) have occurred. We also utilise innovative models that are developed for coastal flood-prone areas in the event of a tsunami or tidal waves, as well as other types of information. This use of vital data is coupled with our leading expertise in the field.
All these factors combined allow us to create analysis models that differentiate us significantly in the market in terms of quality of risk assessment. We therefore remain competitive by maintaining adequate prices, while also offering a clearly compartmentalised offer according to the quality of risk in each individual case.
Reputation and renown
This year, Rimac celebrates 120 years of working in Peru. With around 4,000 employees, it is now recognised as one of the most trusted companies in the country. Throughout the years, Rimac has maintained its position as a key player, having thrived even through the various changes that have shaped the country, including social, economic and political reforms.
The company has achieved several milestones over the years: it was the first company to be listed on the Lima Stock Exchange in 1898; the first to underwrite car insurance in 1919; the first to have a call centre to handle emergencies in 1996; and the first to launch digital applications for services and inquiries in 2014, just to mention a few. In recent times, Rimac has made significant investments in technology to modernise its infrastructure and make the leap towards becoming a customer-centred company.
Its solidity and financial support are recognised by two of the most important international rating agencies: Moody’s Investors Service and Fitch Ratings, which awarded the company the best risk rating in Peru, making it the only insurer in the country that operates with such qualifications in the areas of general risk and life insurance. It has also been awarded A+ rating by the two most important risk rating agencies in Peru: Equilibrium and Apoyo & Asociados.
Its business development, financial strength, highly specialised team, and search for continuous innovation have made Rimac a leader in the insurance market throughout the past 12 years. It is the insurer that offers protection to two-thirds of large investment projects in the country.
Being recognised as the most reputable insurance company in Peru, Rimac’s leadership in sustainability is considered of great importance. It is also the first insurance company in the country to present sustainability reports under the parameters of GRI4. Furthermore, Rimac has received several awards for its performance as a good employer and for being a socially responsible company. This is reflected by the fact that every year, the Lima Stock Exchange recognises the company for having the best corporate governance practices in Peru.
Rimac is committed to remaining at the forefront of change, which will ensure its sustainability in the face of new tests and challenges in a constantly changing market. Cohesion and team capabilities, commitment to customers and business partners, and the introduction of technological changes are key factors for continuing to lead Peru’s insurance market.
In a turn of events that defied the predictions of opinion polls and widespread media expectations, Donald Trump has taken victory over his democratic rival, Hillary Clinton. After a particularly fierce campaign, global markets now have begun the process of figuring out what exactly Trump’s policies will mean for both the US and international economies.
Trump led a freewheeling and aggressive campaign full of contradictory statements, which led to fears of an uncertain future. These concerns initially rattled markets as the election results trickled in. On Tuesday night, as Trump’s victory became clear, futures trading of US stocks immediately crashed – however, markets began to turn around following his victory speech, which struck a far more conciliatory tone than his previous campaign efforts.
Immediately following Trump’s victory, the peso suffered its largest drop in nearly 20 years
In the days following, investors have continued to push the stock markets in sectors that are expected to benefit from Trump’s policies. As reported by Reuters, the healthcare and financial sectors posted gains of three percent each on Wednesday, with Trump’s ambition to repeal the Affordable Care Act and free up banking regulations seen as a chance for growth. The US manufacturing sector also saw a boost, with a rise of one percent across the Dow Jones industrial average. Returning manufacturing to the US was a lynchpin of Trump’s campaign, and overall Wall Street has welcomed Trump’s broadly pro-business sentiment, Bloomberg reports.
One sector of the US economy facing increased uncertainty is Silicon Valley. While Obama was particularly supportive of the technology industry during his presidency, Trump has expressed hostility towards companies including Apple and Amazon. As reported by TechCrunch, Trump could stall attempts solidify net neutrality and weaken encryption standards to allow law enforcement agencies greater access to data. He is also opposed to overseas manufacturing and shifting profits offshore, particularly at Apple.
Other industries that have seen a fall in confidence are those that rely on open trade, with transport firms and manufacturers in Asia hit particularly hard. Trump’s protectionist policies, which are designed to reinvigorate US manufacturing, may result in a drop of Asian imports, Reuters reported.
In the lead up to the vote, the value of the Mexican peso had been matching Clinton’s support polls. Immediately following Trump’s victory, the peso suffered its largest drop in nearly 20 years, reported TheNew York Times. More uncertainty is expected in the future.
Markets will undoubtedly continue to carefully scrutinise all of Trump’s statements leading up to January next year, when he officially takes office.
Amid fears Brexit could pull the rug out from under the UK technology sector, a major development – which Hackney Council plans will dominate the north-east corner of Old Street roundabout – could come as much-needed good news for East London’s tech cluster.
The development could help attract more entrepreneurs and digital businesses to Silicon Roundabout
The scheme, which could provide as much as one million square feet of mixed use property, running the length of Old Street from Silicon Roundabout – so named for its proliferation of tech start-ups – to Pitfield Street in the east, could mark a change of fortunes in the area.
Plans are due to be made public in early 2017, but sources close to the council expect a select group of leading architects, thought to include Allford Hall Monaghan Morris, Buckley Gray Yeoman, Squire and Partners and Gensler, will be invited to submit concepts for various phases of the development.
Hackney Council already owns much of the property in the development space, but has begun acquiring strategic sites that fall outside its ownership including the William Sutton Estate fronting the roundabout and the former Nelson’s Retreat pub, which was subject to a compulsory purchase order. It is also believed the council is in negotiations with the Greater London Authority over the site occupied by Shoreditch Fire Station.
The development could help attract more entrepreneurs and digital businesses to the area, which is already the third-largest technology start-up cluster in the world, after San Francisco and New York City. National and local governments have long supported the growth of the area, and that will be of paramount importance as the country tries to manage uncertainty about the effect Britain’s exit from the EU will have on London’s status as a global technology hub.
Despite its growth in recent years, underinsurance remains an ongoing problem for Kenya. Its lack of penetration largely comes down to a negative view of the industry, which has led many to save through credit cooperatives instead. The scene, however, is finally starting to change, as the country’s expanding middle class increasingly opts for insurance products. Capturing the potential of this growing market is no small feat, particularly given the level of competition in the game. To do so, Britam Life Assurance places talent as the crux of its success.
Britam is a leading diversified financial services group, listed on the Nairobi Securities Exchange. The group has interests across the eastern and southern Africa regions, with operations in Kenya, Uganda, Tanzania, Rwanda, South Sudan, Mozambique and Malawi. Offering a wide range of financial products and services in insurance, asset management, banking and property, Britam’s range includes life, health and general insurance, and pensions. The company is also involved in unit trusts, investment planning, wealth management, offshore investments, retirement planning, discretionary portfolio management, property development and private equity.
At this decisive time, World Finance spoke with Ambrose Njuba Dabani, Britam’s CEO and Principal Officer, about the evolution of the market and how he aims to push the company further forward.
A major challenge to growth in the industry is a widely held perception that insurance agents and companies are unscrupulous fraudsters
Can you give us a brief overview of the insurance industry in Kenya?
Kenya’s insurance industry is one of the most developed and well regulated in Africa. Over the years, insurance penetration in the country has been improving steadily, supported by the growth of the middle class and increased disposable incomes.
Recently, the country’s Insurance Regulatory Authority introduced a risk-based capitalisation supervised model to protect policyholders; it requires insurance companies to hold capital commensurate with their size and risk profile. As well as boosting confidence for policyholders, this development also encourages mergers and acquisitions of smaller, mainly family-owned businesses, so they can meet the new requirements.
In 2015, insurance market penetration stood at 2.9 percent of Kenya’s GDP, of which 1.06 percent was life insurance, while non-life was at 1.87 percent. Life insurance claims in the industry increased to KES 33.1bn ($327.3m) in 2015 from KES 2.3bn ($22.7m) in 2014, with numbers expected to continue rising over the next few years.
What are some of the challenges and opportunities in Kenya’s insurance sector?
Although it continues to grow, Kenya’s insurance sector faces a number of challenges that slow down the rate of penetration. The industry is extremely competitive, and is defined by extreme price undercutting, fraud and consumer apathy. There is also the problem of having too many players in a small market.
A major challenge to growth in the industry is a widely held perception that insurance agents and companies are unscrupulous fraudsters – that they are out to steal their clients’ money. As a result, a majority of Kenyans are wary and prefer to save and invest through savings and credit cooperatives. Furthermore, insurance is also seen as a luxury expense for the majority of citizens, and so is considered a preserve of the rich.
Despite such challenges, there are numerous opportunities within the sector. Alongside the aforementioned rise of the Kenyan middle class, the country is also undertaking giant infrastructure projects, such as the construction of a standard gauge railway and the Lamu Transport Corridor, both of which provide new potential for the market. New industries, especially in the oil and gas sectors, have also provided potential new demand for the sector.
Finally, the introduction of the government’s devolution system has led to a surge in insurance penetration in previously marginalised and mainly rural areas. This will lead to greater awareness about the industry in previously untapped markets. As a result, underwriters and brokers have had to move from the traditional urban markets in big cities such as Nairobi, Mombasa and Kisumu, among others, in order to venture into previously uninsured rural regions.
How does Britam go about recruiting managing agents?
At Britam, our unit managers are charged with the responsibility of recruiting agents, which they do through a meticulous process. They start by advertising the positions in print media, on the Britam website, and on social media platforms. We also advertise in public places, such as shopping malls.
We get numerous referrals by our agents, customers and other stakeholders as well, while our unit managers are trained to judge the suitability of each individual. Once in a while, the unit managers use their instinct and skills to spot an individual who they think could be a good insurance salesperson. As this can happen anywhere, at any time, unit managers are always on the lookout for people with potential.
Why is training managing agents important?
Insurance is a business with a high employee turnover. Our focus is to retain the most successful financial advisors and nurture those with potential. All our agents are trained in leadership, and non-graduates are trained in personal development to ensure they develop the right attitude and philosophy when working.
Our agents are trained and inspired to create their own goals without contractual burdens by the company. This means agents are self-driven to excel and surpass set objectives; in return, when they excel the company handsomely rewards them.
Kenyan life insurance claims 2015
2.9% of GDP
Kenyan insurance market penetration
As we encourage our agents to specialise in specific products, we offer them high-level training that can meet all the needs of a forward-looking career in insurance. The training ensures individual agents set their own personal targets, which in turn makes it easier for the company to attain overall targets. It also equips agents with the skills that will keep them at the top of their game.
How does Britam make sure managing agents meet compliance standards?
All Britam agents sign up to a code of conduct when they join the company, in addition to their individual contracts. Once this stage is complete, the company gives financial advisors a platform to run their own show. There is seamless team dynamic among the advisors, unit managers and branch managers. All the while, our appraisal system keeps evaluating progress and encouraging better performance.
All agents must adhere to the laws set by regulators, which include obtaining the licenses required to operate. They must also pass various professional examinations that are required by law. In addition, Britam has a zero-tolerance policy on corruption. Non-compliance by agents leads to the termination of their contract. Moreover, agents who do not perform are terminated, while those that need nurturing and encouragement are mentored. We give them the tools they need to become the best.
How does Britam go about maintaining the productivity standards of its managing agents?
All those in leadership positions at Britam have a role to play in mentoring agents. The financial advisors look up to the unit managers, who in turn have the branch managers as their role models. The secret to this is simple; to succeed as a salesperson, you must have a compelling vision and you must remain focused on the goal.
In 2015, Britam was named Company of the Year by the Association of Kenya Insurers (AKI), which is the ninth time Britam’s agents have received this award. As further proof of the company’s dominance in the industry, 156 out of 280 agents recognised with awards by the AKI were from Britam.
To receive such recognition, the AKI demands an agent writes business worth KES 2.4m ($23,720) annualised premium income, with a minimum of 50 policies. The efforts of our agents saw Britam realise over KES 2bn ($19.7m) of annualised premium from individual life insurance business in 2015. The AKI also requires 85 percent of the clients netted in the year are under review, while 80 percent from the previous two years must be active in paying premiums.
At Britam, we appreciate our financial advisors and the role they play in maintaining the company’s position as a market leader. Dr Benson I Wairegi, Britam Holding’s Group Managing Director, recently said: “Our financial advisors are the lifeblood of Britam, they are our foot soldiers and ambassadors. They have done more to promote the Britam brand in Kenya than any advertising campaign can ever do, and we are truly proud of them.”
What is in store for Britam’s future?
Britam aims to have between one and two million clients in the next five years – up from the current 100,000. This projection corresponds with the continued growth of the insurance industry, as more and more Kenyans embrace and appreciate the art of saving for the future.
The company also continues to invest in technology and innovative products that will further boost the customer experience going forward.
Indonesia remains a highly attractive market despite the country’s recent economic slowdown. The Emerging Trends in Real Estate Asia Pacific 2016 survey, conducted in November 2015 by the Urban Land Institute and PricewaterhouseCoopers, ranked Jakarta sixth globally in terms of its prospects and property development potential in the Asia-Pacific region.
Similarly to agriculture, industry, trade and services, the property/real estate sector holds an important and strategic role in building the economy of Indonesia (see Fig 1). Real estate is positioned as the locomotive of the national economy, as property – particularly housing development and construction – has a strong multiplier effect. This sector has the ability to attract and encourage the development of other economic sectors. There are at least 175 subsectors related to the property/real estate market, such as steel, aluminium, pipe, cement, tile, stone, roof tile, glass, paint, furniture, wood, household appliances, electrical tools, home appliances and gypsum.
Moving forward, greater clarity on the political front should lead to stronger demand for investment and a more optimistic outlook for the property/real estate sector, especially for residential property. The Indonesian Central Statistics Agency has shown the country has a good demographic profile, with 50 percent of the population aged under 30 years. The country’s large housing backlog, currently standing at around 13.5 million units, opens more opportunities for property development as well.
The property/real estate sector holds an important and strategic role in building the economy of Indonesia
The most popular cities in Indonesia for property investors (other than Jakarta itself) are in the Greater Jakarta area – chiefly Serpong in Tangerang. Each city has its own unique strengths for development: because of the high value of land, Jakarta is usually targeted for the vertical development of upper middle-class to upper-class properties, while Serpong in Tangerang is targeted for ‘landed house’ developments, or single housing units, for the middle-classes.
In Serpong, house prices have been rising for the last five years, driven by a rapid increase in land prices. Land prices in commercial and business areas reach around IDR 20-27m ($1,500-$2,050) per square metre. Besides being close to the capital, the ease of access via new toll roads has boosted the growth of the property industry in the region.
Despite significant land appreciation in both south and central Jakarta, Serpong is witnessing rapid growth of land prices year on year. The availability of land, and the increasing need for housing because of population growth, continues to increase, while more and more corporations are choosing to relocate their head offices from Jakarta to the Tangerang area due to heavy traffic and overcrowding in the city. This will create even more demand for housing. Serpong, therefore, is an area with bright prospects. An ever-growing number of investors can be expected to target the area, with a property boom forecast soon as well.
Just 16 years ago, few would have thought Serpong would reach the prosperity it now enjoys; at that time, the area was an overlay of unproductive land and rubber plantations. With the emergence of large property projects, its status has changed dramatically: a number of firms have since been undertaken by large developers, including a township project by Paramount Land, the property arm of PT Paramount Enterprise International (Paramount Enterprise), namely the Gading Serpong township. This firm is one of the leading private property and lifestyle companies in Indonesia, and has revolutionised the face of Serpong.
Gading Serpong is Paramount Land’s flagship project – one of the most ambitious urban planning schemes in Indonesia, which combines housing, business and commercial properties. The company has cemented its place among the leading developers in the region, offering unique concepts and the utmost quality in residential, leisure and commercial developments. It is committed to delivering the highest quality for its customers, encompassing every element from the design and materials to the location, as well as ensuring the customer journey – from prospecting to the handover of keys – is worth their time and investment.
Over the years, the company has thrived in its business operations, remaining strong as it launched new projects and site developments, while consistently receiving support and confidence from the market. Gading Serpong, which is situated 30km from the central business district of Jakarta, enjoys a strategic location, with its close proximity to Soekarno-Hatta International Airport and accessibility via two toll roads – the Jakarta-Merak and the Jakarta Outer Ringroad. This has made Gading Serpong a new economic hub at the centre of several other property and township developments that are being undertaken by various renowned Indonesian firms.
The development of the 1,200-hectare township has been so successful that Gading Serpong has become one of the busiest trade and business centres in Tangerang, as well as one of the most desirable locations in which to live and invest. The population in the Gading Serpong township currently stands at more than 53,000 people, not counting those who commute to Gading Serpong to work or visit.
Hotels, hospitals, schools, universities, commercial areas, restaurants, supermarkets, hypermarkets, fresh produce markets, shophouse complexes and offices are now found across Gading Serpong. In addition, essential cultural structures have been built, such as places of worship, sport and recreation facilities, community complexes and green public spaces. Travel within the township has also been made convenient via pedestrian walkways, bicycle lanes and various forms of public transportation.
“We have found that property in the township is attractive both to residents and investors alike due to Gading Serpong’s fast return on investment”, Ervan Adi Nugroho, President Director of Paramount Enterprise, told World Finance. “In order to continue growth amid tight competition in Indonesia’s property industry, Paramount Land prioritises constant innovation. For the last couple of years, we have provided our customers with products that are not only acceptable or affordable, but meet their needs as well. We provide a wide variety of designs, layouts, façades, colours and prices.
“We are committed to providing excellence, especially in terms of service, product quality and on-time delivery. To achieve this, we continue to improve our services to our customers during the construction period, handover and after handover.” Furthermore, Nugroho added, it is important to note “we are not only building homes, but also a community”. The firm’s motto – “building homes and people with heart” – underlines this ideal.
In total, during 2015, Paramount Land handed over eight clusters to its customers, consisting of more than 1,800 units. During the first semester of 2016 alone, the company has handed over seven clusters, or 1,500 units, to consumers.
Further up the hill
Paramount Enterprise’s scope, however, extends further than just Gading Serpong. Nugroho explained that, besides the plans it has to develop other townships in the future, Paramount Land plans to build several real estate developments, which are smaller in size than townships. These are developed in many major cities in Indonesia to help provide much-needed housing.
In 2015, Paramount Land launched the development of two real estate projects outside Gading Serpong, namely Paramount Village (nine hectares) in Semarang, Central Java, and Paramount Hills (20 hectares) in Manado, North Sulawesi. Nugroho said: “The company’s footprint now extends to other cities in Indonesia, to deliver a unique living experience.”
Paramount Land is also an award-winning company, having received an array of awards in 2016 alone, including: a top 10 developer award from BCI Asia; top 25 most creative companies in Indonesia from Swa magazine; one of Indonesia’s most admired companies by Warta Ekonomi magazine; and Developer with Unique Investment Products in Gading Serpong from Property & Bank magazine. Paramount Land has even received acknowledgement from the Indonesian World Records Museum for the largest number of design alternatives (1,296 alternatives) for custom homes at Malibu Village in Gading Serpong.
Paramount Enterprise also develops hotels and hospitals. At present, it owns and manages six hotels that are located within various business hubs, with four hotels in Gading Serpong: Atria Hotel (four-star), Atria Residences (four-star), Ara Hotel (three-star) and Fame Hotel (two-star). In addition, the company owns a four-star hotel in Central Java and another four-star hotel in East Java. Its hotel management company, Parador Hotels & Resorts, Paramount Enterprise, also manages hotels owned by third parties.
In the healthcare sector, Paramount Enterprise owns Bethsaida Hospital. The site is the first general hospital in Gading Serpong and provides quality and affordable healthcare, not only for residents, but also for the people living in West Jakarta, Tangerang and the surrounding areas. The centre includes aesthetic, orthopaedic, dental, hyperbaric and cardiac care.
In terms of retail, Paramount Enterprise operates various fashion stores, convenience shops, mini-markets and cafés that serve the varying needs of a rapidly growing suburban population. The existence of business units is one of the strategies in place to increase and optimise the company’s recurring income.
Paramount Enterprise has developed its property and lifestyle business in response to the demographic shift currently taking place in Indonesia, which includes a growing middle class. “We are ready to meet the customer’s needs by providing products and services they desire”, Nugroho said. “We look forward to effective government investment in infrastructure and are hoping to see continuation throughout the coming years to boost growth.”
Chile’s insurance market is one of the most competitive in the region. However, Consorcio Seguros, with a century of history behind it, has pulled ahead of the pack. Like any market immersed in the global economy, Chile’s economic outlook has encountered its share of adversities over the past year. Maintaining leadership in any industry in this country entails a set of challenges for companies involved. With an economy with a GDP per capita that has surpassed $23,000 – historically among the highest in Latin America – Chile’s insurance industry is highly developed and continues to offer ample growth potential.
In Latin America, Chile is ranked first in terms of the number of insurance policies taken out per capita – a clear sign of the sustained economic development seen in recent years, as well as rising income levels. In the life insurance industry alone, Chile is home to 36 companies, with 28 insurance companies in the general insurance industry. Among these, major multinational companies are present in the Chilean insurance market, including MetLife, Principal, Liberty, AIG, Mapfre, RSA and HDI (part of Grupo Talanx).
In Chile, between 1985 and 2015, insurance penetration rose from 1.98 percent to 4.71 percent of GDP in total premiums, and from 1.03 percent to 3.23 percent in the life insurance market alone. As such, according to figures from 2015, there are an estimated 60 million insurance policies in Chile, with an average of 3.36 insurance policies per person and a direct premium per capita of $582.
Chile’s insurance industry is highly developed and continues to offer ample growth potential
Although these figures point to significant growth over the past decade, there is still a serious gap between Chile and developed countries, where average insurance penetration is 8.7 percent of GDP. With this in mind, the insurance sector is on track to continue growing in Chile at a faster rate than GDP, essentially due to one very logical reason: if we compare insurance consumption in Chile with that of developed countries, the gap is still wide and there is much space to grow.
Healthy competition, increasingly informed customers and access to a broader range of products, as well as new regulations related to oversight and capital requirements, are all factors contributing to the creation of fresh challenges for stakeholders involved in the insurance market. We in the insurance industry must strive to stay up to speed with regulatory changes, constantly improve corporate governance and, of course, develop better strategies, products and services to meet customer needs.
In the medium term, insurance companies in the Chilean market will have to adjust to the new ‘risk-based capital’ requirement, currently being debated in Congress and a path already taken by various other countries around the world. In this sense, the objective of Consorcio Seguros is to be the company with the most robust balance sheet in the insurance industry, and to be ready to respond smoothly to changing regulations, continuing our focus on growth and relationships with customers and brokers.
Chile’s Congress is also discussing the creation of a Securities and Insurance Commission, which would open the door to a new set of challenges that may have an impact on profits, by enhancing current oversight practices and granting stronger guarantees to all stakeholders, to the benefit of consumers. According to industry forecasts, the insurance sector will grow at a rate of around five percent this year. For life insurance specifically, growth will be led by savings insurance, health insurance and life annuities, while general insurance will be led by guarantee policies.
In these circumstances, and in light of the fact that Chile continues to be a market with broad growth potential, the region undoubtedly enjoys conditions that will favour international growth for those involved in the market. This will also require addressing development with a new approach. Essentially, we stand before a competitive and challenging scenario, in which Consorcio Seguros has managed to solidify its position on the occasion of its 100th anniversary of success and leadership.
Chile is privileged to have a mature, developed and varied insurance industry, able to provide diverse coverage alternatives at competitive prices, with high levels of commitment and solvency. The industry plays a very important role in society and, throughout the past 100 years of our history, Consorcio Seguros has reaffirmed its leadership position, becoming top-ranked in equity, total assets and premium income. Moreover, we achieved a milestone for insurance groups, exceeding $1bn in premium income in 2015, through the three insurance companies that comprise Consorcio Financiero: Consorcio Seguros Vida, CN Life Seguros Vida and Consorcio Seguros Generales.
The parent company, Consorcio Financiero, has secured its position as a leading financial services provision group, with interests in a wide range of businesses related to insurance, social security, savings and banking. Through its affiliates, it manages a total asset volume of over $13bn. In the insurance business, Consorcio Financiero conducts activities in Chile through three companies: Consorcio Seguros Vida, CN Life Seguros Vida and Consorcio Seguros Generales, and is also active in Peru through the insurance company La Positiva Vida.
Looking to the future, Consorcio Financiero is expecting to further consolidate its leadership. To this end, the International Finance Corporation (IFC), a member of the World Bank Group, has signed a capital increase for the amount of $140m, representing an 8.3 percent stake in the ownership of Consorcio Financiero. With these funds, the company will be able to bolster its development plans and strengthen its banking and life insurance business lines.
4.71% of GDP
Chile insurance penetration
Consorcio Financiero total asset volume
Consorcio Financiero equity
Alongside this, the IFC’s role will be to help reinforce the company’s corporate governance. In this realm, it is worthwhile to note that responsible management with an eye to the future is the way we do business, working proactively to advocate for the best interests of our customers, associates and shareholders. Thanks to a robust structure, we are constantly working to ensure the development of our various businesses, as well as compliance with both internal and external rules and regulations, based on the best global practices.
One of the major accomplishments of the past 12 months was when Consorcio Seguros joined the life insurance market in Peru with the acquisition of 40.1 percent of insurance company La Positiva Vida. It is the fourth largest insurer in Peru, with a 10.8 percent market share, almost one million policyholders, and assets and equity equivalent to $900m and $94m respectively.
Consorcio’s entry into the Peruvian insurance market was a strategic decision and marks a great opportunity to help take the company global, while also boosting our knowledge and experience in one of the most dynamic markets in the region, with major growth potential for the insurance industry.
Besides the inroads made in Peru, the company has reached other major milestones in the local market, including the launch of a new life insurance policy with savings. It is the most flexible on the local market in terms of capital, coverage and savings methods, aiming to tailor insurance policies to our customers pursuant to their evolving needs over time.
In the life insurance industry, once again, Consorcio is a market leader, with premium income accounting for 13.8 percent share of total industry income, thanks to our successful strategy, effective risk management and administration of operations. The life annuities business was the most dynamic, with record growth for the industry of 55.2 percent in 2015 for Consorcio’s life insurance companies.
These achievements have turned us into a renowned brand in the industry, backed by a history of resiliency, experience and the firm support of our customers. Today, in an increasingly complex economic scenario, Consorcio Seguros remains firmly committed to its customer-centric approach, which gives us an edge as we tackle the uncertainties of a rapidly evolving market.
Key to the progress made and the accomplishments of the past year was the development and implementation of concrete initiatives to strengthen corporate governance and the launch of a comprehensive risk management system. Our company management is grounded in a clear, customer-orientated strategy, with a motivated and committed team, as well as prudent risk management. All of these are essential to the activities in which we engage. Also of note, for the third year in a row, Consorcio was awarded ‘Top Employer’ certification, in recognition of our excellent working conditions. We are the first Chilean company to receive this honour.
In the current context, the biggest challenge before us will be to preserve our growth and leadership in a market that is in full swing. Reaching our 100-year anniversary in such a competitive market as the life insurance industry fills us with pride and energy for the future, as one of the top-ranked companies in terms of market share. Our goal, looking ahead, is to consolidate our presence and strengthen our brand positioning, continuing to earn the trust of our customers and partners.