Can Investors Bet on a Broad Emerging Markets Recovery?

Can Investors Bet on a Broad Emerging Markets Recovery

  • Following the 2008 financial crisis, emerging economies rebounded. But since 2011 things have changed.
  • Emerging economies are now richer than ever. And while these countries still have an opportunity to grow in the future, their growth rates are likely to be slower than in the past. 
  • As advanced economies recover and their monetary policies return to more conventional policies, further weakness in emerging markets’ equities and bond markets is expected.

During the global financial crisis the world economy stabilized thanks to vibrant emerging markets. Now, emerging economies are weakened by slower growth, rising financial vulnerabilities, and outflow of capital attracted by higher interest rates in the U.S.

What happened after the financial crisis?
Following the 2008 financial crisis, emerging economies rebounded. But since 2011 things have changed. In 2013 growth was 4.5 percent, compared with 6.5 percent two years earlier. Except for Arica, all emerging market regions were marked by some form of economic slowdown. These were the growth rates of the following areas in 2013 : Russia (1.5%), developing Asia (6.5%), Latin America (2.6%), MENA (2.4%), and Central and Eastern Europe (2.5%).
Emerging economies are now richer than ever. And while these countries still have an opportunity to grow in the future, their growth rates are likely to be slower than in the past. This is normal when a country’s catching-up process succeeds in raising its per capita income and its economy approaches a steady state. For example, Chinese GDP per capita tripled in a decade. At 7.5% in 2013 and 7.3% in 2014, China’s growth is lower than during the past decade, but it remains strong for a country where the GDP per capita is about to reach $10,000 this year.
The problem is that Chinese growth is unbalanced. China’s economy continues to rely on high investment and too much credit. In contrast, consumption is weak; it only represents 35% of the GDP. This low level of consumption reflects the macroeconomic challenges faced by the world’s second largest economy—as it redistributes income in a way that enables sustainable growth—and a larger middle class that benefits the economy by enabling more people to be consumers.
In other emerging and developing countries the problem is reversed. Consumption is too dynamic compared to production capacities, and growth is blocked by supply constraints and a lack of investment. Thus, in places like India, Brazil, Turkey, Indonesia, and South Africa current account deficits have widened to alarming levels .
These external imbalances in emerging countries indicate a contradiction between the aspirations of a growing and educated middle class—looking for more consumption—and production whose development is impeded by the lack of investment and inefficiency of the administration. Lately, these contradictions have resulted in growing political tensions (in Brazil, Turkey, and Ukraine) and increased financial fragility.
Countries with high external deficits are usually vulnerable to unexpected monetary shocks, leading to capital outflows. When the U.S. Federal Reserve hinted at its intention to put an end to its accommodative monetary policy last summer, many emerging markets—particularly those with weak fundamentals—experienced strong reversals of capital inflows as investors reacted to the expected “tempering” by reducing their investments in riskier assets (including the assets of emerging markets).
What to expect?
Renewed troubles and retrenchments of capital flows have certainly not led to a new financial crisis, and none of the emerging countries have defaulted on their debt or called for the IMF’s support (which was often the case in the 1990s).
Whereas this is a strong sign that emerging economies have become stronger, the cost of external financing for these countries increased, their currencies depreciated, and their monetary authorities had to raise interest rates (to contain inflationary pressures). All the same, equities and bond markets dropped.
Fighting inflation and preventing a currency from depreciating require tighter monetary policies. But this hampers domestic demand and weakens growth. Moreover, currency depreciations aggravate public deficits and create the sentiment that emerging countries are less able to service their debts denominated in foreign currencies.
As advanced economies recover and their monetary policies return to more conventional policies, further weakness in emerging markets’ equities and bond markets is expected. Emerging markets will face challenging headwinds this year.

The article is written by Dr. Charbel Cordahi for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

The Dutch Disease that plagues Rentier Iraq

The Dutch Disease that plagues Rentier Iraq

 

  • Some of the symptoms of Dutch disease are that it creates very rich countries but poor citizens, and high financial revenues with few job opportunities.
  • Oil export increase raises the value of the local currency but it makes the national industry less competitive with goods of other countries.
  • To worsen the situation, the government of oil-producing country is not linked to citizens as it does not need them, because it receives its vast resources from oil industry. 
  • Getting rid of the resource curse that has hit the economy of Iraq and infected its political system requires several solutions including the diversification of the country’s exports to be free of the single-source economy, which depends on oil. 

Iraq seems to be hit by many curses. Among those, the most serious is the resource curse, or what is so called (Dutch Disease).

This word was first used as a term in 1977 and can be defined as a set of negative effects that badly influence the establishment of proper economy. Some of the symptoms of Dutch disease are that it creates very rich countries but poor citizens.

It also provides greater financial revenues with few job opportunities. That’s applied in Iraq. This disease has previously struck other countries in addition to Netherlands, such as Spain, Australia and Nigeria.

Oil export increase raises the value of the local currency but it makes the national industry less competitive with goods of other countries. On the other hand, the oil market is unstable with volatile prices. Also this industry is one of those, which doesn’t absorb unemployment, requires intensive and immense capital and labor at professional level of skills.

Perhaps the most serious symptoms of Dutch disease are those related to the side effects of the disease, as the crisis transit from the field of economics to the field of political practice. Rentier states and those countries, whose economy depends entirely on oil, suffer from some governments that give all their efforts to the perpetuation of the existing political regime at the expense of the fundamental goals of the state.

In addition to this, the government of oil-producing country is not linked to citizens as it does not need him, because it receives its vast resources from oil industry. When citizens do not pay taxes, they have that feeling of separation along with their government, especially when the state/ Government turned into a shop that sells oil.

The government, then, is not afraid of citizen accountability, because citizen does not supply the country’s economy. Thereof, it is reflected in the political performance of the governments of such Rentier states. That actually leads to a political climate in which the authoritarian tendencies and dictatorial aspects are vivid in addition to mating between wealth and power.

So Dutch disease contributes to the creation of a more centralized state, through which the government spending is doubled. Moreover, it makes the citizen’s capability of formulation of public policies shrinks and that generates an atmosphere of discontent among those who are marginalized- the people, and helps the government to enhance its repressive means to keep the situation unchanged. This situation has plagued Iraq since several decades when oil was discovered. Current and previous governments of Iraq have abused the oil fortunes to create regimes and to ensure their stay in power as long as possible. These governments are used to distributing donations to those who are close and loyal to them neglecting the vast majority who is getting crumbs in their rich country.

Although the new political system in Iraq, after the fall of the former regime, is based on a democratic basis and a constitution, which guarantees the independence of the three powers (Legislative, Executive and Judiciary) and allow those powers to derive their legitimacy from the people as the source for all authorities, influential political blocs are formed. Those blocs collected fortunes through their political status, and acquired huge privileges concerning oil, as well as the exploitation of public money in the purchase of consciences especially in the election season to get the votes of the electorates, in addition to widespread administrative and financial corruption.

Getting rid of the resource curse that has hit the economy of Iraq and infected its political system requires several solutions including the diversification of the country’s exports to be free of the single-source economy, which depends on oil. It also requires a policy of decentralization in the organization of the oil industry and the applying the principle of transparency in handling this industry, in addition to the establishment of an oil fund that ensures a fair distribution of oil profits to the citizens along with developing a tax system in order to re- link the citizens to their government.

The article is written by Falah Mousa for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

UAE – Innovating to Grow & Diversify

UAE – Innovating to Grow & Diversify

  • The UAE has been able to quickly and successfully transform itself from an oil-based economy into an innovative, knowledge-based economy; actively promoting innovation through policies and initiatives aimed at developing the three pillars of the innovation ecosystem – human, financial and technological capital
  • Being the first-ever World Expo to be held in the MENA region and themed as ‘Connecting Minds, Creating the Future’, Dubai Expo 2020 is expected to strengthen the innovation ecosystem in the region.
  • UAE’s private sector will need to play an increasingly important role in supporting the government’s agenda and promoting the national innovation ecosystem to ensure that the UAE is able to maintain and strengthen its position as a hub for innovation, not just in the Middle East, but across the world.

The United Arab Emirates (UAE), which used to be known as an oil-based economy, has been able to quickly and successfully transform itself into an innovative, knowledge-based economy over the past decade. In fact, knowledge-based revenues now constitute a greater proportion of the nation’s GDP than oil revenues, having grown from 32.1% in 2001 to 37.5% in 2012. In its move towards becoming a knowledge-based economy, the UAE has diversified its economy, becoming a key player in the real estate and renewable energy sectors, in addition to becoming a global hub for trade, financial services and tourism. This vision to become a knowledge economy is evident in the UAE’s Vision 2021, which aims to build a nation where ‘knowledgeable and innovative Emiratis will confidently build a competitive and resilient economy’.

The nation has been actively promoting innovation through policies and initiatives aimed at developing the three pillars of the innovation ecosystem – human, financial and technological capital. 

Let’s talk about the human capital first as it is the most critical and fundamental pillar for all innovative changes. UAE has advanced its human capital on numerous fronts. Thanks to consistent investments across all education levels, UAE boasts one of the most advanced education systems in the MENA region. Moreover, advancing women’s education and economic participation has led to women taking up leadership roles throughout the country.

The UAE government’s budget allocation to education makes up more than 20% of the overall budget amount — this is way above than the benchmark average of 13%. Besides overhauling primary, secondary, and higher education systems, the nation is facilitating expansion of higher education institutes by establishing world-class local universities, attracting foreign universities to open branches in the nation, and entering into international partnerships. For instance, the Masdar Institute was established in 2007 in close cooperation with the Massachusetts Institute of Technology (MIT). All these efforts have paid off, with the UAE’s rank on the Education sub-pillar of the Global Innovation Index going up from 65th in 2011 to 15th in 2013.

Second key element of knowledge economy is the financial capital because even the highly skilled human capital can fail to perform to its full potential without sufficient funds. Several sources of funding are available in the nation, including government funds, equity investing and crowd funding. Government funds typically provide early-stage funding and include the Khalifa Fund, the Expo 2020 fund, among others. In terms of equity investment, venture capital is the most accessible, despite the low risk tolerance of VC funds. The number of regional VC funds actively investing in the region is going up. Also, the number of VC deals has increased by 50% between 2010 and 2012, with 47% of the investment focused on technology.

Along with human capital and financial capital, technology accounts for another critical element for facilitating ground-zero innovation.  Although the UAE’s R&D expenditure as a percentage of its GDP (0.47% in 2011) is still below international benchmarks (global average of 2.08% and the OECD average of 2.32%), it is launching several targeted initiatives to develop its R&D efforts. Besides driving R&D in universities, the UAE government is keen to establish scientific hubs, for example, TechnoPark was set-up as a science and technology park managed by the Dubai Institute of Technology (DIT). Also, the Masdar Institute is developing a technology for desalinating sea water using renewable energy sources, and building the London Array, the world’s largest offshore wind farm.

The UAE’s innovation ecosystem has been encouraging many residents to become entrepreneurs. UAE-based technology start-up launches are expected to increase at a faster rate than the MENA average. By 2015, the UAE is expected to witness 185 new technology-based start-ups. Furthermore, the UAE government has reviewed its intellectual property and copyright laws with an aim to align them with international standards.

Exhibit 1: Snapshot of Some UAE Start-ups

UAE – Innovating to Grow & Diversify 1

Source: The Global Innovation Index 2014: The Human Factor in Innovation, Cornell University, INSEAD, and the World Intellectual Property Organization (WIPO)

The UAE topped the World Bank’s Knowledge Economy Index (KEI) among Arab countries, ranking 42nd globally with a score of 6.94. On all the four pillars of the knowledge economy—the economic and institutional regime, education, innovation, and information and communication technologies (ICTs), UAE was ranked among the top four Arab nations.

While the UAE leads the Middle East with a global ranking of 46 in overall innovation performance, Dubai is the first city in the region to establish first knowledge centers, including Dubai Internet City, Dubai Media City and Knowledge Village.

Further, the Dubai Expo 2020 is expected to benefit several sectors of the economy such as hospitality, tourism, trade, shipping logistics and real estate; nearly $7 billion (Dh25.7 billion) has been allocated for development and infrastructure projects in Dubai so far. Being the first-ever World Expo to be held in the MENA region, the Expo will also add more than Dh140 billion to Dubai’s GDP, create nearly 277,000 new jobs and draw over 25 million visitors.  The theme of Dubai Expo 2020, Connecting Minds, Creating the Future emphasizes the importance of partnerships and innovation for building a sustainable world today and in the future­. Especially Dubai Expo’s new 100-million-euro Expo Live initiative will help drive innovation by uniting research institutes, companies, citizens and entrepreneurs across the globe in finding solutions to global challenges.

Exhibit 2: World Bank’s Knowledge Economy Index (KEI) Ranking of Arab Nations

UAE – Innovating to Grow & Diversify 2

Source: IMF, MRD/Orient Planet

Overall, if we look at the UAE’s innovation ecosystem, it seems that the pieces of the puzzle are falling into the correct places. The nation now boasts a number of unique advantages, such as strong education system, a diverse talent pool, a growing innovation culture, and a number of targeted R&D initiatives. While the UAE government has been capitalizing on these strengths and issuing relevant policies that address the issues of talent, funding and stakeholder cooperation, the private sector will need to play an increasingly important role in supporting the government’s agenda and promoting the national innovation ecosystem to ensure that the UAE is able to maintain and strengthen its position as a hub for innovation, not just in the Middle East, but across the world.

The article was originally published at: Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

We Can Do It as Arabs

We Can Do It as Arabs

  • Lack of successful entrepreneurs, especially in the technology space has been challenge faced by our region for a long time, despite abundance of human as well as financial resources
  • The main reason for this lack of self-belief in Arab Entrepreneurs in their ability to innovate or emulate the success of Western counterparts.
  • Another reason is that most Arab investors do not like to act as Venture Capitalists, but “play it safe”, which makes it difficult for entrepreneurs to get access to capital for growth.
  • If these problems can be addressed innovation and entrepreneurial success for Arabs should be easily achievable.

One thing that has always intrigued me whilst I was abroad, during the first half of my life, was why we as Arabs seemed not to be able to produce any measurable, perceivable success in the various facets of technology.

At the time (exactly 30 years ago) I was just embarking upon a prospective surge in my carrier, as a post-doctorate researcher at the former McDonnell Douglas Aircraft Company and part-time Assistant Professor at California State University, Long Beach, U.S.A.; I decided to return to my home country, Egypt, to try to do find out why we, as Arabs, were lagging behind and to try to do something that would make us stand out!

Over the years, I discovered a few problems that are holding us back from making positive steps forward in the advancement of technology; the most prominent problem is the inherent lack of the ability that we are able to achieve any progress, because of the lack of resources, such as money, human competency, amongst other ‘excuses’. However, I soon found out that the Arab nations possess a plethora from both these resources, which seemed to me to be very strange.

Upon further analysis, I discovered that the real reason was that we lacked the self-confidence to achieve success, as entrepreneurs; one very dear friend, with great honesty, once confessed that we have the “Khawaja’s (foreigner’s) hat embedded inside our hearts”! As such, we are incapable of achieving success to the level of the Western countries. This is where I strongly disagree with this falsity.

As a challenge, I decided to travel the road of entrepreneurship in order to experience it for myself and discover the realities. To do this, I changed my career to Arabic Computational Linguistics, as I believed it was fervently needed for our Arab nations; thirty years ago, I was labelled as mad, as the field was not known then. What made it worse was that I had the dream of developing an Arabic search engine that would someday be the “Google” of the Arab nation!

Here is when I started to meet the real problems that entrepreneurs suffered in the Arab world; in addition to the lack of aforementioned lack of self confidence amongst entrepreneurs, I also faced the lack of confidence, on the part of investors, in the capabilities of entrepreneurs. I believe that this is one of the main hindrances that is holding back the formation of the entrepreneurial ecosystem in the Arab nations. I spoke about this particular problem when I was invited as a panellist at the annual meeting of the World Bank Group in 2011.

Arab investors are “playing it safe” and are treating the financing of entrepreneurs as a bank which should guarantee a return on investment, only with a much higher rate than a bank. This redefines the term “venture capital” to “extremely safe capital”, which, in my opinion, defies the objective of the entrepreneurial exercise. I wish to mention something that a well-respected marketer once told me: The Chinese word for “Threat” is composed of the two words “Danger” and “Opportunity”.

This “Take the Safe Side” attitude, I believe, will never allow the Googles or Microsoft’s to emerge in the Arab world; what we really need is to produce real technology and not just a whole lot of applications, of which there are already a dime a dozen. What we really need are daring real risk takers who are willing to finance regional projects (“regional” meaning for the whole MENA region), that are capable of catapulting the Arab nation to the realm of real technology.

I also wish to stress that technology cannot be imported, but is created in its own environment; this is why I have embarked upon linguistic technologies for the Arabic language, as it is unique to the Arab world. Its applications are innumerable, as we have recently discovered in the areas of sentiment analysis, trending and various analytics, let alone search results that return meaningful and useful search results for the Arab user.

I believe that if we overcome the problems highlighted in this article, we can do it as Arabs!

Source: http://www.infodev.org/highlights/out-valley-death-meeting-challenges-financing-innovation

The article is written by Hossam Mahgoub for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

Al Etihad Credit Bureau: Making the UAE Creditworthy!

Al Etihad Credit Bureau

  • The absence of a formal consumer credit rating system in the UAE resulted in consumers having easy access to loans without any check on the repayment capacity. However, the launch of the Al Etihad Credit Bureau is expected to change the scenario by providing banks access to consumers’ credit history, thereby curbing excess lending and raising the quality of retail lending in the country.

Al Etihad Credit Bureau (AECB) will start providing consumer credit reports to financial institutions from September 2014, and this is expected to have widespread implications for consumers, banks, and the UAE’s economy. However, in order to assess the impact that the Al Etihad Credit Bureau (AECB) is expected to have, it’s important to understand the history of credit check activities in the UAE.

The first step in the credit check history of the UAE was the creation of the Emirates Credit Information Company (Emcredit) in January 2006. Emcredit, the first private credit company in the UAE, was expected to be compliant with international standards of data protection and security. It provided industry information to a federal technical advisory committee working for creating a regulatory framework to share credit information across UAE. Between 2006 and 2008, Emcredit established a database of 5.6 million consumer identification records, and also gathered payment behaviour information on consumer and commercial borrowers, and held 35 per cent of mortgage data in the UAE.

However, the global financial crisis in 2008 impacted the UAE as well, most notably the real estate sector in the country. As the real estate bubble burst, the regional economic boom in UAE came to an end, and banks suffered the most with large scale debt default. This forced the banks to revisit their existing portfolio and take a strategic decision on their future lending activities.

Among other things, it made the government and lenders (banks and other lending institutions) realize the importance and urgency of strengthening the process of gathering and sharing credit information on consumers. In March 2009, the Credit Information Law was approved by the Cabinet, allowing the establishment of a Federal credit information company that would provide comprehensive services and solutions related to credit information. In July 2010, a law was passed making it mandatory for all the lending institutions, utilities and telecoms companies, to share client information within the UAE with Emcredit.

Timeline of Credit Check Activities in the UAE

Al Etihad Credit Bureau-1

Source: TheNational, Arab Business Review Research

With increasing need for a centralized consumer credit information system, bylaws were prepared for establishment of a federal bureau and Al Etihad Credit Bureau (AECB) was established in 2012. The ministry of finance established the AECB with a paid-up capital of Dh200 million. It started compilation work in 2013 and is expected to start providing consumer credit reports to financial institutions from September 2014. In addition, the bureau is also expected to come up with regulations to curb excess lending and rising consumer debt.

AECB is aiming to achieve its goals in a multi-phase process. The first phase will be launched in September 2014 allowing the banks and financial institutions to access existing and potential customers’ credit reports electronically. This information can be purchased as credit reports on submission of required documents. The lending institution will, however, need a written consent from the borrower to obtain the report. The customers can also access their credit reports by paying a fee through customer service centres. The report will include name, current address, and employment, credit repayment history for last 24 months, credit and loan histories, and overdues and default records for past 24 months.

To start with, the reports will be based on UAE data only, however, in future there is a plan to work closely with international credit bureaus like Experian, Equifax, CIBIL, SIMAH etc. to provide a more complete report. As of now, the credit report issued by the bureau will have no relevance overseas as the bureau will not get access to credit history of the banking consumers outside UAE.  By 2015, the AECB is expected to provide credit coverage on companies as well.

The retail lending environment in the UAE is expected to undergo a radical change, as the bureau becomes operational and start issuing credit reports.

For banks, the credit reports from bureau will provide much needed inputs in the lending process and therefore improve the quality of credit. The reports will highlight unclosed bank accounts, non-cancelled or unused credit cards, outstanding payment and loans on several credit cards and overdraft facilities. Therefore, it will enable the banks in decision making and reject requests for loans and credit cards to individuals having a poor repayment history even if they have the capacity to pay. It will also help the banks to charge high or low interest rates depending on the risks associated with each consumer. As banks will have more clarity on consumer’s payment history and current loans status, they can ensure that they do not over-lend, and therefore have a relatively high-quality loan portfolio.

It is also likely to lead to a growth in the personal loans for debt settlement with consumers consolidating their debt positions. As a result, products such as Abu Dhabi Islamic Bank’s Al Khair Liabilities Settlement are set to benefit from the AECB’s consumer data reports.

For consumers, these reports will act as bitter pills as they will stop individuals from applying for multiple loans beyond their repayment capacity, and ensure that they do not fall into a debt trap. Individuals with better credit profiles will be rewarded as banks will be keen to lend to individuals with a good credit profile. Further, with the UAE Central Bank setting limits on the share of government-related enterprises (GRE) lending in banks’ loan portfolio, banks will seek to increase their lending to private companies, SMEs and individuals – once again, companies and individual with a strong credit history will stand to benefit.

The short-term impact will include slower credit growth, which could have its spill-over impact on the overall economy; however, in the long-run, the bureau will help improve the credit environment for consumers and lenders, alike.

As the UAE transitions from its current lending environment to a new one, credit growth is likely to be impacted as over-indebted customers may not be able to get new loans. This will impact banks like Abu Dhabi Islamic Bank and Dubai Islamic Bank that have retail loans as a major contributor to their loan book. For consumers, access to credit will no longer be as easy it was in the past, and growth in credit for existing borrowers will be much slower. A tightened lending regime will likely reduce liquidity and thus spending, and might pose a short-term challenge to UAE’s economy, that has recently shown signs of recovering from the 2008 financial crisis.

However, on the positive side, growth in new customers without any credit history will be rapid. Also, credit reports will make UAE nationals more aware of financial management and ensure that they maintain a good repayment profile to improve their future credit prospects. In the long-run, the system is expected to lower the default rates, improve customer pricings and improve the risk charged on personal loans.

In a nut-shell, if executed well, the AECB’s roll-out will put an end to free-for-all lending and support the economy via a more sustainable credit cycle.

The article was originally published at: Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

A Banker’s Primer to Saudi Arabian Family Offices

A Banker’s Primer

 

  • Major global banks have established a presence in the Kingdom, only a few years ago, though with an almost exclusive focus on corporate and private banking.
  • The predominant banking business model involves a partnership between a local bank with an International partner, where critical areas such as risk and asset management are under the purview of International partner.
  • At the apex of the wealthy client pyramid are Family Offices, vehicles established to formally manage the day-to-day investment affairs of the richest families.
  • There are several type of family offices in Saudi Arabia, and they are constantly evolving due to the influence of the Western world.

The Kingdom of Saudi Arabia was never a banking hub for the GCC in the tradition of Bahrain, and later Dubai. That is, foreign banks were never historically established in Riyadh, Jeddah and Dammam with active mandates in servicing the local economy or with the intent to be utilized as a springboard for access to other nations in the GCC. Instead, the commercial linkages between the seat of Islam’s holiest sites and the rest of the world were first based on the general trade in goods, and later—the defining moment in the nation’s history—the discovery of crude oil occurred in the early twentieth century. In the wake of oil’s discovery was the founding of the energy behemoth Saudi Aramco (the Saudi Arabian Oil Company), having begun operations in 1933 as the California-Arabian Standard Oil Company.  With the technological advances and labor-intensive expertise required to extract and manage the world’s most precious tradable commodity came legions of skilled workers from the United States and other nations, critical in establishing what was once considered the consummate American outpost in the Middle East.

The Aramco camps in Eastern province were akin to transplanted Midwestern US cities.  Based on this model in the utilization of crude oil and the reliance on its financial dividends for economic development and later growth, no absolute national consensus was ever formulated on the internationalization and broad-based opening of the Kingdom’s market to foreign banks with the aim of establishing bricks-and-mortar presence.  It is only in the last several years that a few of major global banks established a presence in the Kingdom, with an almost exclusive focus on corporate and private banking.

Historically, the predominant banking business model in Saudi Arabia has been for local banks to include a non-Saudi partner institution, typically with a stake of 40 percent. Critical areas of bank management, including, heads of finance, risk management, asset management—just to name a few—were within the purview of the banking partner by contract. Over time, wealthy Saudi clients have become accustomed to dealing with their local banks for corporate loans and regional brokerage and investment services. When it comes to sophisticated investments, packaged as funds for example, the reliance continues to be on US and European private banks—many of which have been reliant on the “briefcase banker” approach. This entails flying bankers to the Kingdom for a few days of marathon one-on-one client meetings to introduce a product and collect a tidy sum of money—with the hope that the fees generated from client investments will ultimately cover the banker’s costs.

At the apex of the wealthy client pyramid are Family Offices, vehicles established to formally manage the day-to-day investment affairs of the richest families. In Saudi Arabia there are several types of these entities and it is worth our while to outline them.

The Mega Family Office:

The minute a foreign banker lands at an airport in the Kingdom, these family offices are the first few stops to make as they represent the wealthiest fifty families in the Kingdom. By their very nature, they were established decades ago and have highly sophisticated departmental structures, for example splitting managerial investment functions among Equity, Fixed Income and Private Equity teams. There is a formal investment committee process in which new proposals are discussed on voted on and IT expenditure to support detailed reports and investment analysis are standard. In a few cases, these billionaire families have offices in Dubai, Europe (primarily London and Geneva) and the US to complement their Saudi presence. The logic behind this is approach is to remain closer to their investments abroad while vetting ideas from the source. But also from a practical standpoint, many senior investment staff members are precluded from leaving their families due to personal obligations in their home countries.

Multi-Generational Office:

This structure supports various owners from many branches of the family. In the Kingdom Due to the participants in this office structure, the internal challenge is to accommodate various points of view regarding investments (type, time horizon and risk). These types of offices at times allow other families, generally maternal relatives, to participate while functioning as a multi-family office to increase the purchasing power of the owning family group. In effect, multi-generational offices reflect the current state of Saudi Arabian family businesses with young sons and daughters, typically freshly minted university graduates, being brought into the family business in the hope of an inter-generational succession proceeding smoothly one day.

The Corporate Group:

This type of entity supports the shareholders of operating business. The primary role is to maintain business control through effective wealth transfer, providing strategies for internal stock transactions among shareholders or leverage as needed to generate liquidity for owners. The office also supports owners’ financial needs for income, diversification of assets, and risk management.   A head of finance for these groups will typically handle both the company’s day-to-day affairs as well as individual investment management for the Chairman and associated family members.

The Single Provider Office:

In the last few years, some families have decided to stop granting bankers calling for an appointment to hold sales meetings, as a matter of policy. Instead, they have relied on an internal staff member to vet various product providers and settle on a single institution to manage the office’s affairs. It then becomes the mandate of the bank advisory professional handling the relationship to suggest investments from third party banks or investment houses. This “gatekeeper” approach has a major benefit for the families involved as there is a simplification of the process and reporting is handled by the hired bank, an ostensible cost savings.

Philanthropy/Foundation Office:

The Kingdom has an immense number of philanthropic institutions that families have established apart for their corporate alms-giving that is compulsory in Islam. Many of these offices are distinct from the family’s investment arm and, as would be expected, their investment universe is typically more limited. When it comes to the plethora of foundations which dot the Arabian landscape, the majority that bankers deal with are affiliated with religious or university funds. Bankers visiting Saudi Arabia are frequently surprised by the risk-return profile of these investors, with many delving into products that are far more esoteric than one would expect. Of course Sharia-compliance remains of paramount importance.

The Royal Family Office:

The trend today within these offices is launching new businesses and offering value-added projects for the benefit of Saudi society. Most of the initiatives undertaken by these investors will target a particular rate of return on a project or a feeder fund to a project, instead of seeking an income-generating fund investment—for example. The due diligence on the banker at the beginning of an introductory meeting is critical and being asked for a return visit is not assured. Knowledge of local market deal flow is key in these relationships.

The evolution of the family office unit, much like business itself, relies on constant change. There are trends in Europe and the US that are having an impact both on the vision and operational aspects of establishing, managing and growing a family office. Despite the influence of corporate practices and financial institutions on the most sophisticated investors in the Kingdom, most of them continue to hold sacred one slogan: “Made in Saudi Arabia.”

 

[1] (Source:  https://www.familyoffice.com/understanding-family-office/types-family-offices)

 

The article is written by Ragheed Moghrabi for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

Overview of Banking System in Iraq

Overview of Banking System in Iraq

 

  • With 80% of population without a bank account, Iraq has one of the least developed banking sector in the MENA region.
  • The banking sector reform, which started in 2006, has provided solutions, in terms of new capital, but the implementation has been very slow.
  • Increasing the dialogue between the Iraqi authorities and the banking system, associated with the restructuring process, in terms of human resources, audit framework, accounting and performance is vital for the sustainability and solidity of this sector.
 

The reform of the Iraq banking system is a challenge, in the light of political and security environment issues, but the evidence from recent years has shown that the results are consistent and many of the solutions have already been implemented.

The banking sector of Iraq is the most underdeveloped banking system in the Middle East North Africa. According to the statistics, more than 80% of the population does not have a bank account (Sansar Capital, 2013).

Accounting for 75% of the financial system, in terms of assets and 77% of GDP, the Iraqi banking system is dominated by the state-owned banks (7) (IMF, 2013). The main issues of this segment are related to low capitalization, especially in the case of Rafidain Bank and Rasheed Bank. The banking sector reform, which started in 2006, has provided solutions, in terms of new capital, but the implementation has been very slow. The private banks (50) are small and their activities are short-term orientated to retail trade and wholesale. The professionalism of private banks is questioned by the Central Bank of Iraq officials, in regard to their real potential in supporting economic growth.

The regulation related to capital requirements, which must be met by the private banks favours public banks to monopolize the banking sector. The decision has the role to protect private banks funds but in the same time will slow down the activity. Also, forcing large banks to lend more and small banks to merge with other financial institutions is an attempt to implement central planning.

Additionally, the effectiveness of banking supervision is questioned and the audit standards are lax. The general mistrust of the banking system is driven by the lack of deposit insurance, the bankruptcy case of Warka bank and the losses registered by the two main banks in the system. There is a real need for transparency and reliable financial media.

 Other internal issues experienced by the Iraqi banking systems can be stated as follows:

  • Gaps in data collection on banking transactions in the northern region (Iraqi Kurdistan)
  • Party transactions role and actions – the majority shareholder family are using bank funds for projects of their own
  • Low financial infrastructure associated with shortages of skills and technology (The World Bank, 2012).

According to the Iraq Banking Reform Strategy – Action Plan (2008-2012), the actions designed to improve the overall situation are orientated to organizational structure, IT infrastructure, risk management and banking supervision. Increasing the dialogue between the Iraqi authorities and the banking system, associated with the restructuring process, in terms of human resources, audit framework, accounting and performance is vital for the sustainability and solidity of this sector.

We consider that the reform towards a modern banking system has to change the mentalities as well. The traditional way of holding cash at home becomes a real challenge for the banking development. The restrictions imposed on government agencies, state-owned companies and employees, to deal with private banking represent a drawback of growth.

However, we truly believe that the restructuring of the banking system of Iraq has determined positive results not only in terms of numbers, but also in the general perception over the role and potential of the banking activity on the economic growth. Many steps in overcoming the actual problems have been made. …Because adaptation to the internal and external conditions is crucial for the future.

 

The article is written by Falah Mousa for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

Telling Business Tales from the ‘Wolf of Wall Street’

Telling Business Tales from the ‘Wolf of Wall Street’

 

  • In the recent Hollywood flick, beneath Jordan Belfort’s corruption, there are a number of key lessons that leaders need to learn from his success.
  • Leaders need to attract, engage and tantalize the imaginations of their team members, to get the best out of them.
  • They need to give their team members a compelling reason to take consistent action, through incentives and performance management techniques
  • Big dreams with a strong base of ethics is the right mix for being a strong and successful leader.
Martin Scorseses’ most recent Hollywood blockbuster has the business world talking and a few financial guys on Wall Street ducking for cover. The film unveils a brash lifestyle that claims to depict the real life escapades of Jordan Belfort and along with members of his company selling financial services and wealth management products.
 
Of course, for those who may not have read the book or seen the movie, expect a few spoilers in this article as it would make no sense at all otherwise.
 
Here are the 3 things that Jordan Belfort (The Wolf of Wall Street) did right as a leader:

1. Getting your team engaged in a powerful compelling vision: 

Leaders who are able to attract, engage and tantalize the imaginations of their fellow team members will build a fire of enthusiasm that will power their individual producers forward and spur others using the momentum.

Jordan set examples, led his team, was fearless in engaging in personal performance himself. He effectively got his team to buy into his dream of the future and these team members could begin to paint a picture of their new future with Belfort’s company in return.
 
This daily ritual of getting his team pumped and motivated could be emulated by leaders today provided that they engage in activities of an ethical nature that will provide win-win experiences for both the customer and the business.
 
 2. Creating amazing rewards for team members:
 
Giving them a compelling reason to take consistent action!
 
Telling Business Tales from the ‘Wolf of Wall Street’ 1
 
Leaders today who understand that success is a mix of both inspiration and perspiration can quickly take a page out of Jordan’s book. His leadership style, brazen and wild as depicted in the film, used incentives and performance management techniques that infected some of his team members with incredible drive.
 
As a result, and as preposterous and outlandish as it seemed, he rallied his team performance by creating an eco-system of rewards and incentives within his team that impacted his bottom line. (Pun unintended).
 
3. Dare to Dream Big:
 
The Wolf was not shy about dreaming big, in fact, few people of his age and background could have had the audacity to dream so big. Of course, if you consider that big dreams are not always ethical while considering the late Ronny Biggs of the Great Train Robbery, or Jordan Belfort’s tactics.
 
Telling Business Tales from the ‘Wolf of Wall Street’ 2
Ethical leaders who dare to dream big are contagious and will gather energy and enthusiasm just as a tornado gathers dust, becoming even more powerful at each new collection of souls who buy into the dream. Imagine Martin Luther King without a Big Dream, or Gandhi saying he was ready to give up, Mandela, or Steve Jobs, along with hundreds of other noteworthy examples in human history.
 
In the building of his company, Jordan used three leadership techniques and deployed them perfectly. The only problem was that he had forgotten where the line of ethical practices started and ended.
 
His short-lived rule of being the master of the universe could have been easily predicted by anyone who understands that success can never be measured in the short term trick, but the trick is to enjoy long term success ethically.
 
It is the mantle of the leader’s character that will sustain their attractiveness to others with their real inner enthusiasm, purpose, passion and integrity.
 
To know without question that your boss is honest, would support you, will always strive to do the right thing, to know that your boss does not engage or tolerate in unethical practices or behaviours helps team members sleep much better at night.
 

The article is written by Michael J. Tolan for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

 

MENA Economy, Investments and the Specter of the Arab Spring

MENA Economy, Investments and the Specter of the Arab Spring

  • The obstinate political instability has weakened the macroeconomic fundamentals of the MENA region.
  • Investor confidence has been severely impacted resulting in a decline in the FDI received by the MENA region.
  • There is an urgent need for structural business and regulatory reforms, infrastructure development, and improvement of the education system, for the region to recover from the Arab Spring and regain its position as an attractive investment destination.

In this article we try and assess the repercussions of the Arab Spring on the MENA region’s macroeconomic and investment climate. In the first half, we discuss the trend of declining GDP growth (5.6% in 2012 to 2.8% in 2013) – a trend which is more pronounced in developing oil exporting countries – and the challenges faced by the region to recover to its historic average growth rate of 4%. We then focus on the falling FDI received by the region in wake of dented investor confidence, and how non-oil manufacturing and services sectors have been impacted more than their resource-rich counterparts, thereby creating a case for structural reforms if the region has to regain its position an attractive investment destination.

  • The unrest created by the Arab Spring is not limited to the political and social spheres only; rather, the persistent political instability has weakened the macroeconomic fundamentals of the MENA region.  An October 2013 report by the World Bank – “MENA: Investing in Turbulent Times” – tracks the on-going political turmoil, and its effect on the economy and the attractiveness of the region as an investment destination.  As per the report, despite the recovery in global macroeconomic conditions, MENA region’s GDP growth is expected to come down from 5.6 percent in 2012 to 2.8 percent in 2013.  The effect of unfavorable political and social conditions is starker in case of the developing oil exporting countries (like Libya, Iran, Syria) experience greater turbulence; as a result, their GDP growth will decline from 9 percent in 2012 to -0.4 percent in 2013.  GCC oil exporters’ efforts to increase oil production will help them outperform the region’s growth in 2013, but their growth will also be lower on y/y basis, as oil production is currently at capacity in both Kuwait and the United Arab Emirates, and Qatar’s growth continues to decline due to the winding-up of its natural gas program and the fall in crude oil prices.

MENA Economy, Investments 1

                                                                        Source: World Bank 

  • Per the report, MENA may revert to its average growth rate (of the past four decades) of 4 percent in 2014, in the event of greater political stability and improved policy measures.  However, we believe that achieving the 4 percent mark will be challenging, especially in the wake of lower credit ratings, rising inflation, weaker currencies, falling exports, inflated current account deficits, and declining tourism receipts in the region.
  • The spill-over effects of the instability also include dented foreign investor confidence, which has resulted in a decline in the FDI received by the region.  It is well known that political stability and favourable policy are among the key drivers of FDI into emerging markets. Therefore, it is not surprising that the onset of the Arab Spring coincides with a decline in FDI inflows into the MENA region.  A comparison of FDI inflows (see chart below) shows that while other developing countries were able to maintain FDI inflows post the financial crisis, MENA countries – developed as well as developing – experienced a huge drop in FDI inflows starting 2011-2012. This period coincides with the phase of extreme political and social turmoil in the region, where governments were overthrown in Egypt, Tunisia, Libya, and Yemen; civil wars erupted in Libya and Syria; and major protests were staged in Bahrain, Jordan, and Lebanon.

MENA Economy, Investments 2

                                                                        Source: World Bank

  • Finally, while FDI inflow into resource rich sectors remains unaffected by the political situation, FDI into non-oil manufacturing and services sectors declined to the political-instability and unfavourable policies. As per FDI Markets data cited by the report, resources & oil manufacturing and non-tradable sectors were recipients of Greenfield FDI worth USD 540 billion from 2003-12, which is ~50 percent higher than the amount received by non-oil manufacturing and commercial services sectors in the same time frame. One of the key reasons for this difference is the lack of democratic accountability, government instability, unstable business environment, and conflicts in the region, which matter more to foreign investors looking at the non-resource tradable and services sectors. Therefore, it is not surprising that while FDI investments focused on resource-rich sectors remained largely unaffected by the political situation, and the already low FDI to manufacturing and services sectors declined further due to the crisis, thereby depriving the region of efficiency seeking investments, which are necessary for job creation, technology enhancement, and sustainable growth of the region.

We believe that the facts above clearly highlight that finding solutions to the political situation should be a priority for MENA leaders.  However, we also believe that the need for structural business and regulatory reforms, law enforcement, infrastructure development, and improvement of the education system is higher than ever now, for the region to recover from the Arab Spring and regain its position as an attractive investment destination.

The article is written by Faisal Hasan for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

 

Bitcoin in MENA Market

Bitcoin in MENA Market

  • Financial Institutions in the MENA region remain skeptical about bitcoins, despite a slow but steady growth in bitcoin adoption.
  • Small groups and Entrepreneurs are developing platforms to promote the digital currency, which can address the long-standing problem of financial inclusion in the region.
  • Low credit card penetration and difficulty to acquire a credit card or a bank account in the MENA region will drive the demand for the Bitcoins in the region. However, cultural and technological challenges exist.

Bitcoin was created in 2009 by an unknown person, or group of people, using pseudonym Satoshi Nakamoto. It is a decentralized (digital) currency, without any authority, company, website or symbol.

Bitcoins are created by a slow and highly iterative computing process called ‘bitcoin mining’, enabling individuals or companies engage in this activity in exchange for transaction fees and newly created bitcoins. Besides mining, bitcoins can be obtained in exchange for fiat money, products, and services, and users can send and receive bitcoins electronically for an optional transaction fee using wallet software on a personal computer, mobile device, or a web application. Bitcoins can also be bought from bitcoin exchanges by paying through other payment methods including cash.

Currently, 50 bitcoins are generated every 10 minutes; however, the mining process will get slower and complex with time. However, this payment method is getting increasingly popular, especially in the developed world. According to Coindesk.com, as of 26 June, one Bitcoin is worth about USD 570 and on average, 80,000 Bitcoin transactions worth over USD 100 million occur daily. In Dec 2013, daily value of Bitcoin transactions crossed Western Union transactions.

Global Bitcoin Transactions

Bitcoin 1

Source: seconmarket.com

Large number of financial remittances, low level of financial inclusion, and high mobile penetration rates in the Middle East creates a good market for the Bitcoins.

MENA region is home to large number of expats who send significant amounts of salaries back home. The region accounts for nearly 15% of global remittances and the bitcoin being a low cost money transfer option (compared to average 8% transfer fee for other money transfer modes), help save significant amounts of remittance fee.

The low levels of financial inclusion in the MENA region has led to limited access to any sort of financial services. According to Findex, MENA has the lowest percentages of adults with a formal bank account (18%) and of poor people with formal access to financial services (9%). The recent success of mobile banking is an example of how alternative payment methods can make their place in the market.

The mobile and internet penetration is high when compared to the global average. As per the Global Media Intelligence Report by eMarketer, at 525.8 mn, the Middle East and Africa had the second largest mobile phone population in 2013. Also the internet penetration is 37%, which is above the global average. These two channels can facilitate the use of Bitcoin and can help the region address the issue of poor financial inclusion.

Some groups are continually working on new platforms for Bitcoins in the region to make them popular and easy to use. In June 2014, BITBOX launched the Middle East’s first bitcoin ATM in Tel Aviv (Israel). The vending machine allows both purchase and sale of Bitcoins. Although Bitcoin is witnessing significant growth trend in Israel, however, at present all the transactions have to be through a bank, involving lot of bureaucracy. With the launch of the Bitcoin ATM, it will help the users to transact without being hassled by the bureaucracy of the banks. This will encourage the users to exchange Bitcoins for local currency and also create a wallet to store Bitcoins. This platform will enable sending Bitcoins via email and phone and redeeming them at any of the similar ATMs. The ATMs are priced at about $15,000 and includes biometric features which may be activated depending on the local requirements.

Iranians got a Bitcoin Marketplace, CoinAva, which allows people to buy and sell Bitcoin. Bitcoin Exchange is similar to a traditional exchange except that it is entirely online.

Lack of innovation, knowledge and skepticism are the main hindrances for the Bitcoin growth in the region. Although with lot of potential for growth of Bitcoins available in MENA, it is one of the toughest regions to operate and acquire Bitcoins. Some of the reasons that may be pulling down the potential are:

  • Absence of incentives to use bitcoin
  • Lack of innovation as the environment is still more reactive than proactive
  • Lack of confidence in the security and trustworthiness of the currency
  • Broader community in Middle East is still in the early learning phase about bitcoin
  • It was difficult to find options to exchange other forms of local digital money with Bitcoins till Bitcoin Nordic recently introduced CashU as a payment option

The central banks in the region have issued warnings against the usage of the Bitcoins making it tougher for the people to trust this digital currency. 

  • According to the Central bank of Jordan, the virtual currencies are not legal tender and there is no obligation on any central bank in the world or any government to exchange its value for real money issued by them.
  • According to the Lebanese Central Bank, due to its relatively small user base, the value of Bitcoins is subject to intense volatility and as the money is not backed by any central bank, the value of Bitcoin is not stable, and the price can drop to zero.

However, people in favor of Bitcoin argue that the technology is desirable as there is no issuing authority making it a borderless currency on Internet. Anyone having access to the Internet or a phone can access Bitcoin and leverage the financial services around it.

Combined efforts by governments and businesses is needed to drive the growth in the region. There is a lack of trust in online payments in the region leading to low credit card usage and growing but comparatively small e-commerce sector. It has to be tackled by educating people about bitcoin and related terms like wallets and exchanges and addressing issues with the conventional online payments.  Bitcoin entrepreneurs in the region are focusing on education and outreach which will include:

  • Showcasing at events like ArabDigital;
  • Building contacts at other tech start-ups; and
  • Reaching out to the region’s merchants and consumers.

Another challenge is incentivizing the use of the digital currency. However, it is a catch 22 situation because there is a need for more users to incentivize businesses to use it, and more businesses to incentivize users to use it. The region needs more innovators and risk takers, more ideas and solutions as the market is more reactive than proactive.

Bitcoin appears to be destined to grow big in MENA, however, it remains to be seen how long the cultural barriers and lack of technological integration stopping it from penetrating deeper in the region.

Cases of acceptability of Bitcoins in the Region and Warnings issued by Regional Banks

Despite being a favourable market, Bitcoin has a very low presence in MENA region with only two merchants accepting Bitcoin in the entire region: a restaurant in Dubai and a coffee shop in Jordan.

  • UAE homegrown F&B brand “The Pizza Guys” became the first restaurant in the wider region to accept Bitcoin. According to these pizza guys, they are able to accept the volatility in the price of Bitcoin because of their small transaction size
  • According to the owner of the coffee shop in Jordan, accepting Bitcoin payments, there is very low risk of losing money given the small size of the transactions

 

The article was originally published at: Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review