Author: Emily

Shaping tax policies to meet the requirements of the digital age

Posted on by Emily

In recent years, executives of multinational companies have grown all too accustomed to warnings of disruption, their organisations scrambling to adapt to the numerous threats and opportunities presented by breakthroughs in digital technology. These challenges have dominated business in the digital era, and yet such challenges could soon be lessened by corresponding changes in policy. If the digital economy taxation proposals put forward by the European Commission (EC) and the Organisation for Economic Cooperation and Development (OECD) come to pass, businesses will have to work hard to comply with the new regulations.

Policymakers need to be aware that tax authorities are aggressively pursuing new ways of capturing revenue in the digital era

Most analysis of these potential tax policy changes inevitably focuses on how the disruption will affect the practices – and bottom lines – of a handful of large, US-based technology companies. It is important to keep in mind, however, that these changes will affect more and more companies as they undergo digital transformations and derive even greater value from their data assets and digital transactions.

According to a recent PwC bulletin: “Digitalisation is resulting in significant changes to economies – and tax bases. The influence has spread far beyond the digital economy; the digital economy increasingly is the economy, and it cannot be ringfenced. Any changes will, therefore, impact all businesses, however narrowly policymakers try to draw them.”

It’s important, then, to recognise the risks and ripple effects that may be coming down the pike, especially at a time when global companies are striving to understand, prepare for and respond to other major changes in traditional tax law. These changes include the EU’s proposed overhaul of its value-added tax rules, the US Tax Cuts and Jobs Act, and the US Supreme Court’s decision regarding the implementation of a digital sales tax in South Dakota vs Wayfair which, at the time of writing, has yet to reach a verdict.

The risks of ringfencing
It was a busy spring for tax policymakers. In mid-March, the OECD released its Tax Challenges Arising from Digitalisation – Interim Report 2018 as part of an ongoing effort to prepare businesses for impending tax changes via its base erosion and profit shifting (BEPS) action plan. The report offers insights on “certain highly digitalised business models and [focuses on] value creation in the digitalised age”, examining the shortcomings of the existing international tax framework and the complex issues we face in moving towards a long-term solution. The report also discusses some unilateral interim digital taxation measures put forward by individual countries. On this matter, however, the report notes: “There [has been] no consensus on the need for, or merits of, interim measures, with a number of countries opposed to such measures on the basis that they will give rise to risks and adverse consequences.”

Shortly after the release of the Interim Report, the EC proposed two new rules to ensure that digital activities were “taxed in a fair and growth-friendly way in the EU”. The first legislative proposal, which the EC describes as its “preferred long-term solution”, calls for profits to be registered and taxed where businesses have significant interaction with users through digital channels, in accordance with new digital presence criteria. The second proposal, meanwhile, calls for an interim tax that “covers the main digital activities that currently escape tax altogether in the EU”. This would be primarily achieved by taxing the sale of online advertising space, digital intermediary activities and the sale of data generated from user-provided information.

Policymakers must also be wary of the wholesale changes major revisions in tax policy are likely to give rise to

The EC’s proposals could have a major impact on a relatively small group of large US technology companies. In one particularly strident response to the EC’s proposals, the editorial board at The Wall Street Journal wrote: “For ‘large tech firms’ you should read ‘American companies’, since the rules are tailored to apply to the likes of Amazon, Apple, Google and Facebook. The tax proposal ensnares companies that sell digital advertising or provide a platform for online trade between third parties.”

The Silicon Valley Tax Directors Group (SVTDG) has also been quick to point out that, despite the OECD’s assertion in its original BEPS report that the digital economy could not be ringfenced, the taxation options it has recently requested comments on achieve just that.

Policing policy
While the digital economy taxation proposals put forward by the OECD and the EC would clearly affect US tech giants, the impact of these measures would extend well beyond this small group of companies if adopted. For this reason, the business and tax leaders of multinational companies should already be planning for both the immediate and long-term future with these potential changes in mind.

First of all, policymakers need to be aware that tax authorities – not just the OECD and the EC – are aggressively pursuing new ways of capturing revenue in the digital era. To make matters even more complicated, some countries and economic blocs prefer not – or appear unwilling – to wait for a multilateral solution. This is why the EC emphasised the need to “urgently bring… tax rules into the 21st century” when it announced its own digital taxation proposals.

Without a multilateral solution in place, organisations will be keen to avoid double taxation or, even more detrimentally, multiple taxation. While many leaders of multinational companies recognise that tax authorities will subject the digital economy to some type of formulary apportionment, they should have serious concerns regarding the extent to which new rules will upend existing business models and processes. Many executives have previously raised concerns that the information contained in the BEPS country-by-country reports their companies file could be used to establish this formulary apportionment, instead of the transfer pricing practices normally used to determine the portion of profit each country receives. If business leaders fail to put adequate plans in place to effectively account for these changes, their companies could face the very real possibility of multiple taxation.

Policymakers must also be wary of the wholesale changes major revisions in tax policy are likely to give rise to. For decades, companies have invested heavily in their systems so as to comply with the current regime’s tax rules, setting up structures for selling products, such as limited risk distribution subsidiaries, and storing data in ways that align with sourcing regulations. If enacted, many of the proposed changes would spark disruptions and upend these long-standing business models.

Task at hand
According to a comment letter from the SVTDG to the OECD’s Task Force on the Digital Economy, a number of the measures the OECD is considering could have potentially massive – and detrimental – effects on companies, as well as on many OECD countries. When the OECD’s task force meets this summer, it will consider other sweeping changes, such as taxing databases according to the country of residence of the citizen whose data has been entered into said database. This type of policy shift would represent a sea change in how intangible assets are treated from a taxation perspective. If such a scenario comes to pass, a growing digital company that has yet to turn a profit could face a major tax burden and be forced to rethink its operating model.

Regardless of how the digital economy taxation proposals progress, it seems likely that global tax authorities will increase their focus on transaction taxes as a key revenue lever

As such, the management of tax data will become more important than ever. Strategies, processes and supporting technologies within tax functions will need to be re-evaluated and updated to accommodate new taxes on digital transactions and/or digital assets. The importance of tax data will rise in tandem with the emergence of each new tax remittance and reporting obligation, requiring tax functions to exert as much control over their own data as possible in order to ensure accuracy and limit the risk of noncompliance.

The OECD’s Interim Report emphasises that three areas of importance for multinational companies and their tax departments have yet to be addressed by the task force. These are: business tax functions; people and systems required to use financial data; and the impact of technology on tax administrations, including the improvement of taxpayer services and the reduction of compliance burdens. The OECD does, however, recognise that these areas require more attention. Automated technology can greatly improve data management and transparency, while also accelerating efficiency and accuracy. The improved governance control and risk management that technology can provide will benefit organisations globally.

Regardless of how the digital economy taxation proposals from the OECD and EC progress, it seems likely that global tax authorities will increase their focus on transaction taxes as a key revenue lever. As governments look to meet revenue needs in the near future, it’s safe to assume transaction taxes will be in their crosshairs. How much additional disruption this will cause to existing business models, however, remains to be seen.

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The fire still burns for the coal industry

Posted on by Emily

Late last year, a Dutch energy provider announced plans to create an artificial island in the North Sea that would supply several countries in Northern Europe with clean wind energy. Meanwhile, over in the US, renewables’ proportion of the country’s energy mix has increased from nine percent to 18 percent over the past 10 years. During 2017, global investment in solar power was greater than that in all fossil fuel sources combined. But not everyone is committing to going green – not yet, anyway.

When it comes to heating homes, powering industry and keeping the lights on, coal is still seen as the safe choice in many parts of the world

In March this year, Swiss mining firm Glencore purchased the Hail Creek coal mine in Queensland, North-East Australia, for $1.7bn. The move represents a significant fossil fuel commitment at a time when many other businesses – even those in the petrochemical industry – are exploring alternative sources of energy. It also comes off the back of the firm’s $1.1bn investment in another Australian mine, Hunter Valley, last year. Glencore is not expanding its coal operation as part of some fondness for carbon emissions and pollution; it is doing so because it makes economic sense.

Despite the rightly lauded gains that have been made in the renewable energy market, coal continues to contribute a significant proportion of the world’s global energy consumption. While many political actors based in developed countries have called for the fuel to be dropped entirely, in other markets – particularly Asia – coal use is on the rise. Collectively, the abundance, cost and diversity of coal deposits have helped to ensure the fuel’s resilience. Whether or not coal can continue to stave off competition from rival power sources will depend on its ability to grow in developing markets, but it certainly seems as though this particular fossil fuel isn’t going away anytime soon.

Back from the dead
The environmental damage caused by the coal industry has been known for decades. Since the 1970s, efforts to reduce the harmful pollutants produced by burning coal – notably nitrogen oxides and sulphur dioxide – have gained traction the world over. At the same time, technological developments in solar, wind and other green energy sources have caused their share of the global energy composition to increase. And yet, coal appears to be sticking around. In fact, Carlos Fernández Alvarez, Senior Coal Analyst at the International Energy Agency (IEA), explained in an interview with World Finance that the industry has a “long-term outlook” stretching to 2040 and beyond.

“There is a mixture of causes for the resilience of the coal market,” Alvarez added. “Abundance is a very important reason and helps to explain why China, India and even the US continue to rely on coal to produce electricity. The cost is important, of course, as is logistics. Coal is relatively straightforward to store, which is another advantage it has compared with rival energy sources.”

Alvarez’s optimism is justified given that the coal sector experienced a buoyant 2017, with global demand increasing by one percent. When this is coupled with the fact that coal still accounts for 40 percent of the world’s electricity generation and supplies around a third of its total energy, it points to an industry that is not simply hanging on; it is actually enjoying something of a revival.

Part of the reason why coal appears to be on the comeback trail is that other energy sources are not yet ready to handle the weight of the world’s energy needs. Renewables like wind, solar and hydroelectric power are intermittent and depend on meteorological factors that are outside of human control. In contrast, coal is the most abundant energy resource on the planet, with more than 892 billion tonnes of proven reserves worldwide. The fact that many of the world’s coal deposits reside in politically stable countries like the US provides another boost to its reliability. Additionally, unlike gas and oil, coal does not require costly pipelines or other infrastructural developments that can create supply bottlenecks.

Although it is also tempting to attribute coal’s improved fortunes to Donald Trump’s blasé attitude to climate change, the impact of the president’s rhetoric has been minor. Growing energy demand in emerging markets is a much more likely reason for coal’s recent uptick: in developing countries, electricity demand is growing so fast the reliability of coal is preferred, even if its polluting by-products are not.

Keeping the lights on
Despite demand for coal rising slightly – or remaining stable at the very least – the world’s major coal suppliers, apart from Indonesia, Russia and the US, were unable to increase production in 2017. This has precipitated a global increase in the price of thermal coal – something that caused Minergy CEO Andre Bojé to claim back in April that there has “never been a better time to invest in coal”. If that is true, it’s almost entirely a result of rapidly expanding economies in Asia.

Economic growth in China and India pushed up global energy demand by over two percent in 2017, much of which was met by fossil fuels. Coal still accounts for 40 percent of all energy consumption in emerging markets, with China the world’s largest consumer and India one of the few major economies committed to increasing its consumption. According to Alvarez, it’s almost possible to draw a line east of Germany between the countries that are moving away from coal and those that are not yet able to.

“Emerging markets are absolutely vital to the coal industry,” Alvarez explained. “To give you a simple figure that illustrates this: in 2000, one quarter of the coal in the world was used in Europe, another quarter in North America and half was used in Asia. In 2015, the figures were one quarter being used in Europe and North America combined, and three quarters in Asia. This shift is going to continue. In Western Europe, most countries have committed to phasing out coal for power generation by 2030 at the latest.”

Last year, energy companies from every EU nation besides Germany and Poland pledged that no new coal-fired power plants would be built after 2020. The decommissioning of existing plants is also underway across the bloc. In Asian markets, however, it’s a different story. In China, 692GW of coal-fired capacity was commissioned between 2006 and 2017 – more than twice the amount authorised in the rest of the world combined. India, a distant second, added 152GW over the same period. Even Japan, one of the world’s most developed economies, has plans to open 36 new coal plants over the next decade – although this is partly a backlash against nuclear power following the 2011 Fukushima disaster.

Coal’s strong showing in Asia is largely attributable to the continent’s sustained economic growth. Although Chinese investment in green energy sources is beginning to eat into coal’s market share somewhat, in India power derived from coal is expected to grow until 2022. This is being driven by GDP growth of almost eight percent a year and a need to deliver power to the 240 million Indians who remain without a reliable supply of electricity. When it comes to heating homes, powering industry and keeping the lights on, coal is still seen as the safe choice in many parts of the world.

A bit rich
If Asia does continue to rely on coal for its energy needs, it will have to accept disapproving sound bites from the West. Of course, international pressure from developed economies is well meaning: the Clean Air Task Force estimates that 13,000 people die every year from coal pollution in the US alone. Smog is already a major issue in many of Asia’s biggest cities, and the much-publicised impact of carbon emissions on global temperatures also needs to be confronted.

And yet, lecturing developing economies on their coal usage can come across as hypocritical, particularly when carbon emissions per capita are often higher in western nations than they are in the likes of China and India. Considering that emerging economies are simply treading the same development path that post-industrial nations took many decades ago, it is hardly surprising that some nations put environmental ambitions to one side in favour of their economic ones.

It is, in Alvarez’s words, “a very sensitive issue” that must be assessed on a country-by-country basis. “In the short to medium term, it is not realistic to think that coal is going to end as a means of electricity generation. Although you cannot oppose initiatives to reduce CO2 emissions, in China, India and elsewhere, coal is still very much needed.”

One possible way for developing countries to embrace greener energy principles without jeopardising growth is to invest in clean coal technologies. One of the most promising is carbon capture and storage (CCS), where carbon dioxide emissions from fossil fuels are prevented from entering the atmosphere, but the technology has gained little traction in spite of government incentives encouraging its use.

“If you go back a few decades, coal power plants produced a lot of emissions,” Alvarez said. “Now, many plants have the equipment to clean local pollutants. In Japan and China, for example, there are coal power plants whose emissions are lower than gas plants. Unfortunately, there are not many plants around the world that are using CCS solutions.”

In the end, simple economics may drive the debate between renewable advocates and coal proponents into irrelevancy. As the demand for coal outstrips its supply, costs are likely to increase, pushing markets to explore renewable offerings instead. Electricity costs from large-scale solar projects have fallen by 73 percent since 2010, while wind, hydropower and geothermal energy are following a similar path. By 2020, all renewable sources currently in commercial use are predicted to fall to the same cost range as fossil fuels.

Of course, predictions are not always accurate. Worldwide, the IEA expects coal’s share of the energy mix to shrink only marginally, from 27 percent last year to 26 percent by 2022. Similarly, in 2013, the US Energy Information Administration claimed that global demand for coal would increase 39 percent by 2040. It has since revised its figure to just one percent. So while coal’s resurgence could be part of a longer trend that sees it remain a staple of the energy landscape for decades to come, it could equally experience a faster-than-expected decline.

For the planet’s sake, many will be hoping that the latter is closer to the truth. For this to be the case, governments in rapidly developing countries should look to funnel some of their GDP growth into renewable subsidies that support new green developments. A long-term approach must be prioritised – one that not only compares energy sources along price lines, but considers environmental and health implications too. If countries around the world can achieve this without hampering growth, then last year’s bullish coal market could represent the death throes of a fuel finally on its way out, rather than a sustained revival.

African Free Trade Area agreement poised to revolutionise the continent’s trade

Posted on by Emily

The African continent is one of huge untapped potential. Despite its rich supply of natural resources and its large, youthful population, it continues to lag behind most of the world in terms of economic development. The combined GDP of Africa’s 50-plus countries, based on purchasing power parity, is equal to roughly a third of the US’.

The causes of Africa’s struggles are deep-rooted, varied and not easily solved

Recently, however, one particular challenge has received increased attention: trade. Back in March, at an African Union summit held in Rwanda, a major breakthrough was made that could revolutionise the continent’s economy. During the session, 44 countries signed up to a continent-wide free trade agreement that, if ratified, will create the largest single market in the world.

The African Continental Free Trade Area (CFTA) hopes to modernise a trading landscape that remains hampered by high tariffs, outdated (or non-existent) infrastructure and regional fragmentation. If it is successful, it will become the largest free trade zone in the world and could play a leading role in lifting millions out of poverty. Progress, however, will be hard-won. The first challenge is convincing the 11 national governments that refused to sign the CFTA to change their minds – including two of Africa’s largest economies: Nigeria and South Africa.

Sharing is caring
Africa’s need for greater intracontinental trade is well documented. Existing trading networks range from the relatively liberal to the stubbornly protectionist. In the worst examples, exporters are forced to wait at border crossings for weeks and businesses choose to transport goods to neighbouring countries via EU middlemen to avoid bureaucratic hurdles. Such inefficiencies cause delays and create an unfavourable business climate. If investors choose to put their money into markets elsewhere, few could blame them. The CFTA hopes to solve some of these issues by creating a single continental market for goods and services. Free movement is one of the project’s main aims, along with reducing tariffs on 90 percent of goods. Plans to create a customs union in the not-too-distant future will also help support and promote regional value chains.

Michael Kottoh, Chief Strategist of the AfroChampions Initiative, a pan-African platform aimed at boosting economic integration on the continent, believes that the CFTA will deliver a number of benefits to the region. “African businesses are now confronted with an average tariff of 6.1 percent,” Kottoh told World Finance. “These tariffs are often higher for intra-African exports than they are for exports outside the continent. By eliminating tariffs on intra-African trade, it will become easier for businesses to trade within the continent, and leverage opportunities from neighbouring or more distant African countries.”

The CFTA should also foster closer collaboration between African countries, creating a more inclusive business environment. The free movement of goods, people and services will naturally lead to a spread of new ideas as well. By sharing data across borders, African entrepreneurs will have access to more detailed business intelligence, enabling them to scale up their own projects and accelerate the spread of technology across the continent.

Economic coordination will also create its own advantages. “The design of economic plans by African nations in isolation from one another has led to a complete lack of synergies between countries,” Kottoh said. “This has led to a climate of unnecessary and sometimes harmful competition between neighbouring countries in their bid to attract foreign investment.” The CFTA will look to replace the existing spirit of economic rivalry with one of regional cooperation.

Despite its growing number of detractors in the West, free trade has been a significant driver of economic growth and – globally, at least – has reduced inequality on a huge scale. The UN’s Economic Commission on Africa predicts that the CFTA will increase intra-African trade by 52.3 percent, with this figure set to double upon the further removal of non-tariff barriers. A more liberal trading system would not only support existing businesses, it would drive investment and benefit people spread across the continent.

Existing trading networks range from the relatively liberal to the stubbornly protectionist

Same old, same old
If the CFTA is to have its desired impact, it will need to do more than simply replicate the meagre gains currently being provided by Africa’s existing intracontinental trade agreements. Presently, Africa is home to eight regional economic communities (RECs), many of which overlap and each of which possesses its own rules and objectives.

Two of the more successful trading areas – the Economic Community of West African States and the Common Market for Eastern and Southern Africa – have proved somewhat successful in their efforts to promote trade with markets further afield, but intra-African trade remains low. When compared with trading blocs in Europe, Asia and elsewhere, intra-African trade is modest at best. As of 2016, intra-EU trade represented 65 percent of the region’s total, while in Africa the respective figure stood at just 18 percent.

“The issue is, for any REC to succeed, there needs to be a multidimensional approach to economic integration,” Kottoh explained. “There has been too much of a focus on trade alone in the past without acknowledging the importance of trade enablers. Effective trade requires coordination on economic and monetary policies, financial alignment and some interoperability of various national instruments and legislation.”

The overlapping and competing interests of the various RECs do not help simplify trade in a part of the world that is already rife with complexity. Currently, 31 African countries are members of two RECs and nine are members of three. The fragmentary nature of Africa’s trading network discourages legitimate economic activity and is partly responsible for the growth of informal cross-border trade – estimated to be worth 43 percent of Africa’s GDP.

The CFTA will undoubtedly streamline Africa’s trading landscape, but creating a rules-based business environment is one thing; adhering to it is another. The East African Community, another of the continent’s RECs, has had some success in creating a common market, but even so, it’s not unheard of for Tanzanian border officials to seize Kenyan imports seemingly without reason. If a civilised trading system cannot be maintained in a six-country bloc, then what hope is there for a continent-wide agreement?

Supplanting the RECs with the CFTA is not a panacea. Infrastructural development and investment facilitation, both of which are in drastic need of reform in many African nations, must be improved. The lack of a developed manufacturing industry in many states will also limit the benefits available.

However, Kottoh believes that these issues “depend more on the policies of individual states than RECs”. The CFTA will need to build on the work of RECs by pushing countries to engage in closer economic and regulatory alignment. National governments cannot simply rely on the CFTA and the African Union to clear all their trading hurdles for them. Promoting intracontinental trade will require a concerted effort on the part of politicians, NGOs and entrepreneurs alike.

A model to follow
March’s CFTA summit saw 44 signatories commit to introducing the free trade area within 18 months. In order for this to occur, at least 22 countries must formally ratify the agreement through their national parliaments. Kenya became the first to do so in early May, but it is already apparent that some nations will take more persuading than others.

During the aforementioned African Union meeting, Nigeria and South Africa were the most noteworthy states to reject the CFTA outright. With their combined GDP figures equalling almost a third of the entire continent’s, encouraging these two countries to sign on the dotted line would provide a huge boost for free trade in Africa.

South African trade minister Rob Davies has expressed reservations about the agreement, and has asked for some of its more vague areas to be fleshed out. Even so, the national government in Cape Town has shown every intention of joining the CFTA. However, President of Nigeria Muhammadu Buhari provided less cause for optimism when he used his official Twitter account to rail against anything that would “lead to Nigeria becoming a dumping ground for finished goods.”

The Nigerian Government is perhaps concerned that its export strength, outside of its robust petroleum industry, remains too underdeveloped to open its borders up to further competition. More generally, the huge economic disparity across Africa could deter the continent’s stronger economies from joining. Still, it is Kottoh’s view that “convincing reluctant countries is largely about giving them more time to evaluate the details of the agreement”.

Even if the African economies that have so far abstained from the pact do change their minds, challenges will remain for the CFTA. Fortunately, there already exists a free trade area that could serve as a model for Africa’s own. The EU has demonstrated the many benefits that single markets can deliver and, just as Europeans have benefitted from cross-border innovation for decades now, it is hoped that the CFTA will give individuals from Cairo to Kinshasa the opportunity to enjoy the same advantages.

“The overlapping and competing interests of the various RECs do not help simplify trade in a part of the world that is already rife with complexity”

Part of the reason why the EU provides such a good example for the CFTA to follow is because of its well-established frameworks, systems and institutions. Through regulatory alignment, it provides rules for businesses to follow and sanctions for those that fail to do so. Through the European Commission and the European Court of Justice, the EU has created a rules-based trading system that is just as important for the bloc’s economic wellbeing as the single market or customs union.

“The EU judicial system has been instrumental in facilitating the mutual recognition of goods and services and defining rules of origins,” Kottoh explained. “So, creating a strong incentive for compliance within the CFTA is something we will have to think about. What we can learn from the EU and other free trade areas is that you need to consider all dimensions of economic integration if you really want it to succeed.”

The EU, of course, is not perfect. Wage depression resulting from free movement could be negatively replicated in Africa, and national economies may bristle at having to shape their domestic policies to fit within supranational frameworks. But the EU is also not static: it is constantly evolving and adapting to the needs of its member states. There is no reason that the CFTA could not do the same.

If Nigeria is worried that a lack of strong controls around the CFTA’s outer border will allow unscrupulous companies to flood its market with cheap imports, then it is the job of the African Union to convince it otherwise. Rules need to be discussed and properly enforced at the local level if, as Kottoh believes, the CFTA is to be viewed “as a good and fair deal for all countries”. Only then can Africa’s potential be unlocked, without free trade descending into a free-for-all.

Wema Bank is shaping the future with launch of pioneering ALAT

Posted on by Emily

Crowded banking halls, long queues at ATMs and a daunting amount of paperwork: these have long been the hallmarks of banking in Nigeria. For even the most resilient person, a trip to the bank is an overwhelmingly stressful experience. It is also something that people go through often, with many regular banking tasks still requiring a physical visit to a branch. While advances in digital technology have opened up new channels and mean there are fewer reasons to visit, their functionality is limited. For everything beyond the most simple transactions, enduring a visit is still a necessity.

As the convergence unfolds at Wema Bank, a far-reaching strategy for transforming the entirety of the Nigerian banking experience is slowly crystallising

This status quo is mirrored on the back end of banking operations as well. Behind-the-scenes processes are typically sluggish, which leads to very long wait times. This all adds up to create a seemingly unending list of frustrations for the average customer.

Quantity isn’t quality
While many Nigerian banks have committed a significant amount of resources to making banking more convenient for their customers, they have primarily approached it by expanding the footprint of their branches. By building more physical locations, they hope to better accommodate the daily flood of people visiting to complete transactions, open accounts and resolve any other issues that may arise. But the drawbacks of physical expansion far outweigh the benefits. An increase in the number of branches may help a bank manage the number of customers it has to deal with every day and increase its brand presence, but ever-growing building and maintenance costs diminish any potential gains. Add in the necessary investment in human resources needed to support additional branches, and any physical expansion becomes a risk on the bottom line of a bank.

As well as adding branches, several banks in Nigeria have made varying degrees of commitment to furthering some sort of digital banking strategy. Mostly, their efforts involve deploying a combination of internet banking services, mobile apps for smartphones and creating an Unstructured Supplementary Service Data (USSD) portal for GSM mobile phone users. Unfortunately, the success of these digital channels has been limited; their high cost combined with the limited penetration of internet connectivity in Nigeria has hampered their success. The channels themselves have also proved to be inconsistent and unreliable at times. Consequently, more uptake has been seen in the use of USSD than all other internet-dependent channels combined.

But USSD is not without its limitations and, while its usage is increasing, it has not been able to stem the tide of customers making their way to the banking halls. The Nigerian banking experience is ripe for disruption, and innovation has recently appeared from what many would have considered the most unlikely source.

The digital pivot
Wema Bank, the oldest indigenous bank in Nigeria, faced a conundrum for many years: while it desperately needed to achieve profitability by acquiring more customers, it could not afford the massive expense that would be required to expand its network of branches. To make the bank’s situation even more dire, the Wema brand is not what it used to be. Over the years it has been overtaken by more youthful financial brands, and for a while now has been considered unattractive by a majority of Nigeria’s Millennial population. With these people representing the future of the bank, a change was necessary to ensure the bank’s survival.

Pressed for time and struggling to stay afloat, Wema Bank took a bold step that caught the rest of Nigeria’s banking industry sleeping. In May 2017, Wema Bank offered a fresh and exciting perspective on the Nigerian banking experience with the launch of ALAT, the first entirely digital bank – not just in the country, but one of the first in Africa as well.

Built from the ground up to be a branchless, paperless bank, ALAT completely removes the need for commencing or completing transactions at a physical location. Signing up begins with downloading the bank’s app, available on both Android and iOS, or visiting its web application. Registration is completed by uploading a selfie and a photo of one’s signature, as well as other identification documents. With an average sign-up time of only five minutes, ALAT has revolutionised the process of opening a bank account in Nigeria. The hour-long, paperwork-filled account opening process at traditional banks is now a thing of the past.

The bank’s innovation also extends to securing a debit card, another process that is typically tedious. Unprecedented in Nigeria, ALAT offers in-app card requests and activation, as well as free card delivery in as little as three working days to any Nigerian address.

Like other Nigerian banks, ALAT offers a standard savings account, but that is where similarities end. The bank provides multiple personal savings options, including savings goals and group savings options. Nearly all of these account formats come with up to 10 percent interest; three times the regular bank rate in Nigeria. To keep its Millennial audience within the ALAT ecosystem, the bank also offers loans and deals or discounts on food, entertainment and travel, and a virtual dollar card for online shopping. This is an innovative use of digital systems and is proving to be extremely successful.

While adoption is increasing among Millennials, the general response to ALAT has also exceeded expectations: during its first year, the bank has acquired more than 250,000 customers responsible for well over NGN 1.6bn ($4.48m) in general deposits. Now ALAT is closing in on the NGN 1bn ($2.78m) mark in terms of deposits into savings accounts. With assets growing steadily, ALAT is also seeing a consistent increase in the number of monthly active users.

Despite its success, ALAT is not exempt from the growing pains that digital-only ventures typically experience. It has also been unable to completely escape the internet connectivity issues and regulatory impediments that would otherwise make its adoption easier. Yet, the bank has shown more than enough promise for it to be a linchpin in the next phase of Wema Bank’s digital transformation journey; the convergence of its banking services into one versatile, omnichannel platform.

Bringing it all together
Driven by the success of ALAT, as well as a desire to simplify banking for everyday Nigerians, Wema Bank has begun the process of streamlining its banking services, harmonising duplicates and consequently cutting operational costs. Wema Bank’s convergence journey kicked off recently with the gradual closing of its old Wema Mobile app. Users of the old app will be seamlessly migrated into ALAT, which has proven to be a more than adequate replacement. Once this process has been completed, ALAT will become Wema Bank’s primary online banking platform, supported by its highly successful USSD channel and a small, but frequently visited, network of branches.

[A]n omnichannel approach that allows for the co-existence of digital and traditional platforms

As this convergence unfolds at Wema Bank, a far-reaching strategy for transforming the entirety of the Nigerian banking experience is slowly crystallising. This will begin with our own customers, but we hope it will also bring significant change to Nigerian banking more generally. The unique nature of the Nigerian market has shown that the digitalisation of front-end services may not catch on as quickly as businesses would like.

Consumers are often resistant to change in all sectors of the economy, not just in banking. Instead, what is more workable is an omnichannel approach that allows for the co-existence of digital and traditional platforms, with the former slowly absorbing the latter as the quality and proliferation of digital infrastructure grows. With digital services always improving, we believe that while it may take time, there will ultimately be a successful transition to a digital-first experience.

However, in terms of back-end services, we have much more freedom as to how we work to create a digital revolution. This is urgent, given the state that much of the Nigerian banking industry operates in. Wema Bank has already staked a claim at the forefront of this development, promoting digital change by implementing the globally touted, agile method of software development. Agile is an exciting form of development that will allow us to adapt to customers as their needs evolve. By developing and rolling out new features and tools frequently, we can bring a much-needed increase in speed to the Nigerian banking industry.

As more customers come on board, having an agile development team in place will become a necessity to meet their expectations. We have recruited some of the best homegrown technical talent and are investing liberally in research and development. With our expert team, we will lead the way when it comes to Nigeria’s digital banking revolution.

The evolution of Wema Bank from simply the oldest indigenous bank in Nigeria into a nimble financial institution with its own fintech spinoff is well underway, and it is quite a sight to behold. We believe that our work now will come to shape the future of the entire Nigerian banking industry. The world should sit up and pay attention: Wema Bank is a bank to watch and a bank to beat.

Masaref enhances its reputation in Egyptian banking circles

Posted on by Emily

Much of the buzz currently being felt in the Egyptian banking community is directed towards Masaref, a young, dynamic company that provides business solutions and consultancy services to a variety of clients. The company has faced a series of large and undeniably challenging core banking implementation projects over its lifespan, and has enjoyed multiple success stories in the process.

Masaref is founded on a comprehensive set of business ethics that are fundamental to achieving its goals

World Finance had the opportunity to speak with three members of the company’s board of directors: Dr Mohamed Goneid, Chairman of Masaref; Ahmed Abdel Aziz, the CEO and founder of the firm; and Tarek Hamoud, COO of Masaref and one of the youngest project managers in Egypt.

Can you tell us a little about Masaref’s mission?
At its heart, Masaref is an independent services company specialising in the implementation of the Temenos T24 Core Banking system. We are an official business partner of Temenos. To achieve integration, our consultants may design and develop necessary interfaces – we may also add other systems in order to guarantee complete functionality.

We are also official partners of NetGuardians, a Swiss company that specialises in providing anti-fraud systems for banks, and HID Global, which is one of the leading names in the field of online authentication services for digital banking.

What makes Masaref unique among other implementation services companies?
Our business is a people-orientated business, which means we do our best to avoid communication problems among project participants, whether as a result of cross-culture differences or linguistic misunderstandings. Masaref’s mission is to provide Temenos customers with high-quality implementation services and support. Our vision is to become the best and largest implementation services provider for Temenos products in the Middle East. Our goal is to maintain high customer satisfaction and excellent business relationships based upon a profound understanding of customers’ business requirements.

Another factor that we believe makes Masaref unique is the fact that the company is founded on a comprehensive set of business ethics, which are fundamental to achieving our goal. Masaref stays true to its word: we never walk out of a difficult situation, and we understand and love our customers. They are our real advocates.

Why do banks choose Masaref when they are in need of implementation services?
Masaref’s top management, as well as our key resources, have worked for Temenos for more than 10 years. During business discussions with the customer, Masaref will provide the bank with Arabic-speaking project management and business consultants, which we have found to dramatically reduce miscommunication issues. We use agile software development methodology to cut the time frame of projects short. We have also developed and implemented what we call the Egyptian Model Bank to meet the specific requirements of the Egyptian banking business, allowing banks to deploy these products in conjunction with T24 features and best practices.

Is it difficult to recruit and retain consultants in a challenging business such as yours?
Masaref has one of the most efficient incubators in our line of business. Our policy is to form a team with an elite line-up of seasoned business services professionals, supported by young consultants who are almost limitless in their capacity to deliver. Our work is extremely interesting; our consultants learn about in-depth modern software solutions, as well as banking business techniques. At Masaref, we all form one big family and we really enjoy what we do, in spite of difficulties and long working hours. Banks in Egypt are turning towards outsourcing; this trend allows us to grow and to retain our consultants. Our mission is to serve banks efficiently at very competitive costs.

Do you have plans for the future of the business?
As a company, we are extremely busy at present and we will stay very busy for the next three years at least. Our pipeline is rich and, with new business coming in almost every day, we believe we made the right bet on Temenos T24 and have been rewarded accordingly.

Notably, Goneid spent a chunk of his career in South-East Asia and is passionate about doing business there. We have a sister company operating in the Asia-Pacific region, and together we will create a common entity very soon. This will drastically increase Masaref’s footprint on this planet. We will definitely play an important role in implementing the future of digital banking and microfinance in the Middle East.

ProInversión continues to drive private funding of Peruvian infrastructure

Posted on by Emily

Over the past decade or so, the Peruvian economy has provided plenty of reasons to be optimistic. Driven by huge revenues from the mining industry, the country quickly became one of the fastest-growing in Latin America. Now, under new President Martín Vizcarra, there is an expectation that further business-friendly reforms are on the way.

Peru’s investment climate is already well established, with opportunities in sectors such as energy, mining, water and sanitation, transport infrastructure, ports, roads, railways and irrigation projects. ProInversión, the country’s private investment promotion agency, has played a key role in making Peru an attractive place for investment.

Although its main office is located in Lima, ProInversión has a presence nationwide and possesses a detailed understanding of international investment issues. By encouraging private support for public infrastructure and state activities, the efficiency of government investments can be increased and execution risks can be shared. It’s for these reasons that public-private partnerships (PPP) are gaining popularity all over the world.

In addition to the wide-ranging and diversified investment portfolio offered by ProInversión, Peru offers private investors a solid macroeconomic framework that has been tested and proven to work in recent years, along with a regulatory framework aimed at fostering private investment.

Under the Peruvian constitution, foreign and local investors receive equal treatment. Peru also guarantees the free flow of capital. This openness to foreign trade has created a truly globalised economy, with preferential access to the largest markets in the world. World Finance spoke to Alberto Ñecco Tello, Executive Director at ProInversión, about the reasons why partnerships between the public and private sectors are so important, as well as some of the exciting projects that his company is working on.

A project leader
As a public agency operating under the authority of the Ministry of Economy and Finance, ProInversión is engaged in promoting a portfolio of 50 projects worth in excess of $10.8bn between now and 2020. What’s more, this figure is set to increase significantly over the following months with additional mandates in transport, energy, water and sanitation. By offering information and guidance to investors, both domestic and international, the agency ensures that public sector works have access to the funds they need. Infrastructural projects in particular are a key focus for the organisation.

With such a broad spectrum of projects currently being designed for the Peruvian market, investors are sure to find one that suits their expertise and funding level

“The most significant infrastructure projects in ProInversión’s portfolio are linked to the improvement of water and sanitation services,” Ñecco explained. “These include a $600m development to build and operate major parts of Lima’s potable waterworks, a $304m wastewater treatment system in the Lake Titicaca basin, and a $90m wastewater treatment plant in central Peru. At present, the Titicaca project is expected to be awarded at the end of 2018.”

Among its many energy projects, ProInversión is also promoting an expansion plan for the use of natural gas in the south and centre of the country – something that will require an investment of $350m. Furthermore, the agency is supporting six electricity transmission projects that will benefit northern and eastern Peru.

In the telecommunications sector, there are broadband projects in Ancash, Arequipa, Huánuco, La Libertad, Pasco and San Martín totalling $359m. In addition, the Colca and Jalaoca mining projects are already attracting the attention of world-class mining operators.

Another potential development is the iconic 1,000km Longitudinal de la Sierra highway that stretches along the Andes mountain range, which will come at an estimated cost of $464m. Further, three specialised hospitals will be built in Lima, Piura and Chimbote.

One of the most important projects to be awarded recently is the Michiquillay copper deposit project that was granted to the Southern Perú Copper Corporation in February this year. To win this project, the Southern Perú Copper Corporation did not simply bid the most – it also included a number of vital sustainability clauses in its tender. Where possible, local employees will be recruited and community projects will be supported.

“With such a broad spectrum of projects currently being designed for the Peruvian market, investors are sure to find one that suits their expertise and funding level,” Ñecco said. “What’s more, the government-backed proposals that we highlight at ProInversión promise benefits not only for funders, but also for the broader Peruvian society.”

Putting on a show
ProInversión has started a busy 2018 by designing a robust international campaign to promote the most attractive investment opportunities in Peru. All this kicked off with a bilateral meetings agenda in Mexico and a road show in Asia, which took place in May.

In recognition of the size of European markets and the role they play at the international investment level, a ProInversión delegation travelled to Zurich, Paris and London in June to hold meetings with local equity and debt investors. This included conferences to update local counterparts on the latest opportunities in energy, telecoms, sanitation and infrastructure, among other sectors in Peru.

This road show was an excellent opportunity to announce facts and figures relating to the Peruvian economy, which is one of the most stable in Latin America. Informing audiences of Peru’s robust legal frameworks, especially with regard to PPP deals, was also on the agenda.

Previous events hosted by ProInversión have proven successful: the conclusion of the agency’s Roadshow Asia 2017 in Tokyo attracted the interest of more than 80 individuals representing the continent’s most important companies. It led to bilateral meetings with important private investors. The roadshow also included stops in Seoul and Beijing.

With the long-term infrastructure gap in Peru estimated at around $160bn, the need for external investment is as pressing as ever. By meeting face to face with investors from around the world at its road show events, ProInversión can build relationships and extol the virtues of the Peruvian investment climate.

“In addition to the diversified investment portfolio offered by ProInversión, Peru offers private investors a solid macroeconomic framework”

Promoting private investment
As a developing country, Peru promises enticing returns for investors – particularly with GDP growth averaging more than five percent between 2000 and 2016. Despite this rapid growth, however, Peru remains developed enough to offer stability to investors. The principles of transparency, good governance and sustainability are well entrenched in the country. Still, even with such a favourable economic climate, prospective investors from overseas are likely to benefit from local knowledge.

At ProInversión, the management team is willing to provide advice to clients whenever necessary. To maintain the highest possible standards of support, the agency has identified four strategic pillars that are extremely important for its long and short-term work. The first of these aims to turn ProInversión into an institution renowned for its high-quality operations.

“We must strive to become a hub of excellence so we can advise the government on the structuring and preparation of PPP projects,” Ñecco explained. “To achieve this aim, it is critical that we have the best advisors in the market, as well as standard contracts that provide the market with a degree of predictability.”

The organisation’s second major focus is social and environmental management. ProInversión has identified that a key factor of efficient social and environmental management is working on sustainable projects that are beneficial to society as a whole, while remaining profitable for investors.

The third point concerns commercial strategy. By applying a structured, organised methodology to identify, attract and sort potential investors, ProInversión ensures that it only engages with private funders that have long-term, reputable aims. By continuing to participate in local and international road shows and other promotional events, the company is able to keep attracting first-rate investors who are highly committed to the Peruvian economy.

Lastly, ProInversión continues to work at the organisational level to offer high-quality working conditions and attract the best human capital to its organisation. By ensuring that it only recruits the highest-quality candidates, ProInversión is not only able to deliver on its promises to investors, it is also able to maintain high standards of social responsibility.

If the company’s ambition is to be recognised by investors and the wider population as an effective strategic ally for the development of investment in Peru, then its mission is to promote sustainable private investment with efficiency, quality and transparency. “We invite investors to take a chance on Peru,” Ñecco said. “At ProInversión, we will do everything within its power to make sure the experience of investing in PPP projects and asset-based projects is a highly positive one. Seize the opportunity now and invest in a reliable country: invest in Peru.”