Year: 2014

China tackles its air pollution, if a little reluctantly

Posted on by Ashton Wenborn

Look out onto any one of China’s major metropolises and chances are you’ll be faced with a thick cloud of smog and throngs of passersby donning facemasks. This is the country’s ‘airpocalypse’, a phenomenon that has so far caused hundreds and thousands of seedlings to wither, an 80-100 percent year-on-year boom in air purifier sales, and millions-upon-millions of people to die prematurely.

The level of pollution at times resembles a nuclear winter, obscuring the sun’s rays, slowing photosynthesis and costing the country’s food supply dearly. Earlier this year, those in China’s northern provinces were cloaked in visible pollution for upwards of a week and were left with no option but to keep children indoors and reduce exposure to the smog in what ways they could. Pictures of Beijing and Guangzhou circulated the globe, showing a familiar cityscape blanketed in smog, and barely perceptible silhouettes of people squinting into the invisible distance.

In January, the country’s former health minister spoke out against the cloud hanging low over China’s city streets and joined leading members of the scientific community in condemning China’s contribution to climate change. Chen Zhu, a professor of medicine and molecular biologist, concluded, along with colleagues at the World Bank, World Health Organisation and Chinese Academy for Environmental Planning, that between 350,000 and 500,000 people die each year as a result of China’s air pollution. Behind only heart disease, dietary risk and smoking, air pollution is seen as the largest threat to the population, and lung cancer is today the leading cause of death from malignant tumours.

[A]ir pollution is seen as the largest threat to the population, and lung cancer is today the leading cause of death from malignant tumours

Not contained to health hazards, China’s pollution problem has also had a measurable impact on the national economy. The country’s environmental issues cost the economy dearly in 2008 when, according to the World Bank, they reduced gross national income by nine percent; and, with annualised GDP growth at less then eight percent in 2013, the same issue looks to have raised its ugly head once again.

After years spent dismissing the smog as nothing more than a natural consequence of double-digit growth, the matter has finally brought international condemnation and widespread discontent to Chinese shores, leaving the country’s administration with little option but to face the issue head-on.

Let the battle commence
In answer to the pressing social and political hot potato, Li Keqiang finally took to the stage before Chinese delegates in March to denounce the country’s wayward emissions and ineffective stance on climate change. “We will declare war on pollution and fight it with the same determination we battled poverty,” he said at the National People’s Congress. “Smog is affecting larger parts of China and environmental pollution has become a major problem, which is nature’s red-light warning against the model of inefficient and blind development.”

China has long been accused of failing to sufficiently impose itself on matters relating to corruption, labour standards and, above all, pro-environmental policy. But, the country’s leadership appears to be quickly changing tact, in light of growing pressure from those working towards mitigating climate change. “It is currently a major and growing emitter, but it is doing a lot – and increasingly more – to constrain the growth of those emissions and, indirectly, reduce emissions globally,” says Fergus Green, Policy Analyst and Research Advisor to Nicholas Stern, Chair of the Grantham Research Institute.

A woman wears a mask as she makes her way along a street in Beijing
A woman wears a mask as she makes her way along a street in Beijing

The foundations for change were laid in November of last year when China’s leadership set out a raft of ambitious economic and social reforms, namely the relaxation of the one-child policy, improved property rights for farmers, and all-round support for free market-led growth. For the environmentally minded observer, the best was still to come, when a few months later Li unveiled a series of pro-environment reforms.

“China already has a target to reduce emissions per unit of GDP by 40–45 percent between 2005 and 2020, with a target of 17 percent during the 12th five year plan,” says Green. “China’s plans to achieve this reduction in emissions intensity, and to constrain its emissions generally, include: implementing energy efficiency measures to reduce the energy use of firms and households; retiring its least efficient coal and industrial plants and increasing the efficiency of new capacity; capped coal use or imposed coal growth constraints in a number of provinces, in accordance with its air pollution control plan; reducing its share of coal-fired power generation in its energy mix; rapidly expanding its renewable and nuclear generation capacity; and taking a wide range of additional measures to reduce emissions in transport, industry, land-use and beyond.”

Cost to the economy
For months now the country has pushed a number of pro-environmental policies and plans to the fore that look, in principle, to clamp down on dirty industries and lift the clouds hanging over China’s major cities. However, the approach is yet to influence proceedings in a measurable way, as affected industries and growth-hungry local governments appear unwilling to introduce pro-climate policies with quite the same enthusiasm as Li’s administration. The issue in the main is the supposed consequences this could bring for a national economy that has grown accustomed to double-digit growth in past decades.

Many of the administration’s major plans will likely take years to implement, and low-carbon developments will be a long time coming before the economy and environment feel the benefit. Therefore, any reforms introduced to tackle climate change must be made to appear pro-growth as well as pro-environment if local governments are to introduce them willingly, for fear of the backlash that could ensue should China’s growth fall short.

Buildings shrouded in smog in Beijing, China
Buildings shrouded in smog in Beijing, China

Nonetheless, for China to make the shift to a low-carbon economy, the country’s leadership will have to concede that lower growth is a necessary evil in order to achieve sustainable prosperity. For decades China has chased headline GDP growth while blind to the environmental implications of doing so, and the country’s 30 year-long industrialisation drive has polluted the country’s skies and increased global emissions at an unprecedented rate.

One key step taken last year by Chinese authorities was the decision to assess officials on factors apart from economic growth when measuring performance, marking a departure from its ‘economic growth at all costs’ strategy. A document released by the ruling administration in November and seen by Reuters promises to measure resource use, environmental damage and industrial overcapacity, among other things, when assessing officials, which – crucially – could encourage local governments to make the necessary changes.

The systematic overhaul looks to overcome one of the major hurdles to pro-environmental policy, in that officials are no longer incentivised only to boost economic output regardless of the costs to environmental welfare and social wellbeing. And while the changes could likely cause disruptions for dirty industries and sacrifice much-loved GDP points, the change is close to what is needed for the country to end its relentless and – at times – irresponsible pursuit of growth.

Global influence
Irrespective of the environmental dangers that exist for the country’s population, the world’s number two economy and number one emitter also – willingly or not – plays a huge role in informing environmental policy around the world. “Action by China, as the world’s largest emitter, is important in shifting global expectations about whether sufficient climate action/a shift to a low carbon economy will occur,” says Green. “The more steps China takes to cut emissions, the more others – investors, governments, citizens – are likely to expect future global emissions reductions – and green market opportunities – will materialise, and, therefore the more likely they are to follow suit.”

It’s unlikely that a significant emissions reduction will come soon, given that coal consumption is yet to peak and economic growth is still very much reliant on domestic energy production and consumption. This is a country of 1.4 billion people, responsible for upwards of 10 billion tonnes of carbon emissions a year – 10 times greater than the entire African continent – and still dependent in large part on the fossil fuels industry. However, should Chinese policymakers do away with their growth at all costs mentality, we could well see the beginnings of a concerted global movement towards mitigating climate change.

Lagarde investigated over political scandal

Posted on by Ashton Wenborn

The squeaky clean image of IMF Chief Christine Lagarde has taken a hit after she was placed under formal investigation over a scandal that has rumbled on for the past six years. The news came after she was questioned for 15 hours earlier this week by the Cour de Justice de la République.

As World Finance reported in May, the allegations relate to her time as French finance minister, where she worked under Nicolas Sarkozy. In 2008, allegations emerged against controversial businessman Bernard Tapie after he was awarded €408m at an arbitration over a business dispute. It came just a year after he supported Sarkozy’s presidential election campaign.

[Lagarde] claimed that if there had been any wrongdoing on her part, it had been through “inattention”

Lagarde was responsible for the arbitration process that awarded Tapie his payout, although she denies any wrongdoing in the case. He had been involved in a dispute with French bank Crédit Lyonnais over the sale of sports manufacturer Adidas in 1993, arguing that the bank had defrauded him. In 2008, Lagarde stepped in to award Tapie his victory.

Tapie has been steeped in controversy for many years. In the early 1990s he was imprisoned for corruption for match fixing while owner of football team Olympique de Marseille. His support for the right-wing Sarkozy in 1997 was seen as surprising, as he had previously served as a minister in a socialist government. His accusers claim his support came with a price – a favourable decision in the arbitration case in 2008.

Protesting her innocence on Wednesday, Lagarde said she would be appealing against the court’s decision, and claimed that if there had been any wrongdoing on her part, it had been through “inattention”.

“After three years of procedure, the sole surviving allegation is that through inadvertence or inattention I may have failed to intervene to block the arbitration that brought to an end the longstanding Tapie litigation,” she said.

Why everyone’s talking about ‘dark pools’

Posted on by Ashton Wenborn

Many investors could be forgiven for having a knowledge gap when it comes to knowing what ‘dark pools’ are. The June 2014 announcement from New York State Attorney General, Eric Schneiderman, that he was launching a probe into the activities of Barclays Bank, however, at least brought to the public’s attention a hitherto mysterious investment backwater.

In his announcement, Schneiderman said that in the case of Barclays, not only did he have evidence of the bank’s staff falsifying marketing materials, but also evidence of it misleading major institutional clients in a bid to expand its dark pool activities and boost revenues.

In addition, he accused the bank of playing both sides against the middle by giving preferential treatment to brokers and proprietary trading firms employing high-frequency trading strategies, while telling other clients it was protecting them precisely from such tactics. Barclays has since filed a motion contesting the claims, arguing Schneiderman’s office used misleading information in its suit.

If Schneiderman’s initiative marks a more aggressive stance being taken by the US authorities it merely follows steps already taken by Australia and Canada in limiting the trading volumes of dark pools.

Dark pools are dark for a reason: buyers and sellers expect confidentiality of their trading information

An existing force
First and foremost, dark pools are not a new phenomenon and can trace their origins back to the late 1980s when technology was less advanced and larger scale trades had a proportionately greater impact on market pricing. In essence, dark pools emerged when some institutional investors decided they needed to get together and trade in an environment where they could avoid the prying eyes of public exchanges or brokers and be able to buy or sell large quantities of stocks without affecting the market, thereby getting better execution prices.

In 2005, dark pools accounted for just three to five percent of total market trading activity. By 2012 this had almost tripled to 12 percent, according to estimates from the TABB Group. Much of this due to the advent of electronic trading and a SEC rule that came into effect in 2007, aimed at generating greater competition and reducing transaction costs. Meanwhile, overall non-exchange trading accounted for roughly 40 percent of all US stock trades by 2014.

At its simplest level the objective of a dark pool is so-called ‘price improvement’. In other words, if the bid price for a stock on a recognised exchange is $30 and the first asking price is $30.30, the dark pool will typically set the price at the midpoint of $30.15.

However, participants in a dark pool won’t know who the other participants are and similarly won’t, in theory, know if there is interest in stock they may wish to offload, hence the availability of information is self evidently paramount. To address this issue some brokers may do ‘payment for order flow’ deals and agree to send orders to a particular dark pool.

Alternatively, ‘indications of interest’ from dark pools may come into play. In this case information such as the particular stock, its price and how much of the stock is available may be revealed. Worth noting is that not all dark pools are the same. While some will passively match buyers and sellers at exchange prices, such as the midpoint of the exchange bid and offer price, others will execute orders by their price and time priority, according to Haoxiang Zhu of the MIT Sloan School of Management in his paper, Do Dark Pools Harm Price Discovery?

A measure of success when it comes to trading privacy and the quest for best execution prices can be seen in the more than 40 alternative trading systems currently in operation in the US – many of them dark pools – these in addition to the public exchanges. It isn’t difficult to see why when one examines the mechanics of what was going on prior to non-exchange trading.

Past alternatives
Before the advent of dark pools, an institutional investor with a very large parcel of stocks needing to be offloaded had a number of options available. These included working the sale through a floor trader, which could often take a day or so; breaking the order up into much smaller units and hoping for a reasonable weighted price average or finally, selling off the parcel in small amounts over a number of days until the entire block was offloaded.

While the vendor was always going to be open to pricing downside, irrespective of the path taken, because identities of buyers and sellers could not be kept secret, the option of trying to offload stock over a period of time until the sale was completed as a whole, was viewed as an even riskier bet than the negative market impact of a large one-off sale.

For purchasers of stock in a dark pool, on the other hand, the one obvious downside is potentially sitting on overpriced stock should news of that sale/purchase leak into the public domain and cause the stock’s price to slump.

The investment landscape began change in 2007 when the SEC in the US passed new regulations that would become known as Reg NMS (Regulation National Market System). Its aim was to generate competition when it came to both individual orders and individual markets, ostensibly to promote efficient and fair price formation across securities markets.

This was in stark contrast to the market architecture of the early 1970s when there was no national market system and the overall market for securities was a fragmented one. From a practical standpoint the same stock could, in theory, be traded at different prices at different trading venues. Indeed, the NYSE ticker tape did not report trades in NYSE-listed stocks that were traded on regional exchanges or on the OTC markets. By the mid-1970s the US Congress finally authorised the SEC to facilitate a national market system.

Reg NMS built on rules formulated in 2005, that included the Order Protection (or Trade Through) Rule, providing intermarket price priority for quotations that are immediately and automatically accessible. The problem was, Reg NMS opened up a can of worms, given it required traders to deal on a trading venue at the lowest price, rather than a venue offering the quickest execution or the most reliability.

While critics have viewed all this as unnecessary government interference the rule’s defenders counter that all it does is simply require brokers to do what they should be doing anyway, i.e. acting in their customers’ best interests.

Given Reg NMS increased competition for the exchanges by removing rules that protected manual quotations by exchanges, investors were now being given the opportunity to trade elsewhere if they could find a better price more quickly.

Securities and Exchange Commission’s Division of Enforcement Director, Robert Khuzami
Securities and Exchange Commission’s Division of Enforcement Director, Robert Khuzami

Making a splash
Enter dark pools, where not only like-minded institutional investors could get together to buy and sell stock without affecting the market, but also find even better prices. However, against the backdrop of an increase in automated trading as technology continued its inexorable advance, broker-dealers saw this as an opportunity to set up their own dark pools.

Unsurprisingly, they began to attract clients with big trades and looking to save on dealing costs. The question of whether Reg NMS has achieved its stated aim of protecting investors, or whether it has produced unintended consequences, remains open to debate. In a December 2013 speech before the Consumer Federation of America’s annual conference, Luis Aguilar, a Democratic member of the SEC, opined that the commission should immediately revisit Reg NMS.

As some critics have noted, competition has acted as a driver for rapid-fire high-frequency trading, which in theory puts the ordinary retail investor at a disadvantage.

High-speed firms have been able to reap profits by being more agile than their competitors by moving quickly between different trading venues. Competitors have fought back by developing their own trading algorithms so they too can compete.

After taking a relatively passive stance initially – ostensibly on the grounds it was unclear whether high frequency trading helped or hindered markets overall – the SEC, following on from Barclays, has since launched probes into the activities of Deutsche Bank and UBS to determine whether broker run exchanges have given an unfair advantage to high-frequency traders. The two banks have been named in class action suits alleging both violated US securities laws by allowing high-speed traders to make a profit at the expense of institutional investors, such as pension funds and insurance companies.

While UBS confirmed in its quarter two earnings report it was responding to inquiries from the US authorities over the operation of its ‘dark pool’, Deutsche Bank merely confirmed it had received requests for information from certain regulatory authorities related to high frequency trading, without giving additional details.

In the case of Barclays meanwhile, the impact – post-probe announcement – was near immediate with the number of shares traded on its Barclays LX alternative system slumping 79 percent in the space of 10 days, to 66 million shares (from 197 million), according to a report from Wall Street’s self funded regulator the Financial Industry Regulatory Authority (FINRA).

Meanwhile, Deutsche Bank, Credit Suisse and Royal Bank of Canada, among others, stopped routing orders to Barclays’ dark pool after the securities fraud lawsuit was filed. While Barclays, Deutsche Bank and UBS are the first (and certainly won’t be the last) institutions to fall afoul of US regulators, history records how the US authorities have altered their stance in recent years – eBX LLC being a case in point.

Cracking down
In October 2012 the SEC charged Boston-based dark pool operator eBX LLC with failing to protect the confidential trading information of its subscribers and not disclosing to all subscribers that it allowed an outside firm to use their confidential trading information. If eBX, in effect, misled investors by having insufficient safeguards and procedures in place to protect them, it eventually paid for it with an $800,000 fine to settle the charges.

Yet as Robert Khuzami, Director of the SEC’s Division of Enforcement noted at the time: “Dark pools are dark for a reason: buyers and sellers expect confidentiality of their trading information.

“Many eBX subscribers didn’t get the benefit of that bargain – they were unaware that another order routing system was given exclusive access to trading information that it used for its own benefit.” In other words the implication was that dark pools were acceptable – even if the imparting of confidential customer information – evidently wasn’t. Prior to the Barclays announcement the SEC had already announced plans requiring more oversight by traders of their algorithms relating to the buying and selling of shares. SEC Chairwoman Mary Jo White publicly stated she was wary of setting speed limits on traders, although the regulator would consider options that would minimise the speed advantage some industry players have.

When the dust begins to settle and the ongoing probes have been concluded, the likely public fallout may mean White having a battle on her hands from the politicians. Watch this space.

Testing times for European banks

Posted on by Ashton Wenborn

Europe’s banking industry has hardened most banks after years of crisis, and taught them a thing or two about dealing with adversity and regulation. Now, the ultimate test still lies ahead for Europe’s banks, in the form of unnerving balance sheet evaluations performed by the European Central Bank (ECB). In an unprecedented effort, the ECB will unleash thousands of auditors and regulators to examine the books of 128 banks in the eurozone before early November when the it will assume oversight of the region’s largest financial institutions.

The so-called stress tests will take a detailed look at the quality of the banks’ balance sheets and their resilience to potentially adverse market conditions. Not surprisingly, this could result in the ECB requiring some financial institutions to make improvements – but more importantly, the regulator may go as far as to recommend that some banks be liquidated. This would be an unprecedented move signalling harsher regulation than we’ve ever seen and disturbingly, could seriously unsettle Europe’s financial sector.

The hope is that despite this, the experiment will sound the all clear for the eurozone, which has limped out of the financial crisis and poured billions of state-funded euros into the sector. To this end, the ECB is still providing emergency credit to some banks. However, the potential for elimination of these institutions could restore some much-needed confidence in the European economy, especially if the rest are granted a certificate of financial health.

The so-called stress tests will take a detailed look at the quality of the banks’ balance sheets and their resilience to potentially adverse market conditions

Destabilising effect
Yet the project is clearly a risky one. Should the ECB prove too strict, it could destabilise a European banking sector that has only just begun to show the first signs of recovery. But if it isn’t strict enough, the ECB’s credibility could be called into question. As such, the stress tests will provide the first indication as to whether the ECB can live up to the task of monitoring Europe’s banks.

Just three years ago, Europe’s first financial watchdog – the European Banking Authority – launched a broad stress test, only to see it fail miserably. The 50-person team in London proved to be completely overwhelmed and ironically, the agency’s credibility quickly vanished when some banks that had passed the test almost immediately ran into difficulties.

This is why Danièle Nouy, Head of the ECB’s supervisory arm, is making sure that the regulator comes off strong and as such, she won’t be holding back when it comes to weak banks. “We have to accept that some banks have no future,” she told the FT recently. “We have to let some banks disappear in an orderly fashion”.

Rumours have circulated that the ECB intends to fail around 30 banks in order to establish credibility and that German banks will be particularly hard hit, due to the sheer amount of banks there compared to countries like Italy and Spain. A particular issue for German banks is the billions of loans tied to the shipping industry that are set to default soon – a serious concern for banks like Commerzbank, which has a €14bn shipping portfolio and Deutsche Bank, which is tied to a large number of complex securities.

This is grim news for an economy that pretty much keeps the eurozone afloat. What’s more, estimates from the OECD and economic analysts suggest that European financial institutions could be worse off than we assume, billions short of a sufficient capital buffer, and that this could result in a far higher number of failures than expected.

Problematically, the ECB auditors have been unnervingly quiet about the stress test process and specifications have not yet been finalised, despite the deadline for the tests being not far away. It’s grossly concerning that banks affected have had little time to prepare and the majority haven’t received a schedule for the test or any associated documentation. Time spent on the evaluations is also limited, with the ECB committed to completing the balance sheet checks soon and with the second phase of determining how much capital each bank will need to withstand specific crisis scenarios, which was due to begin in May.

Further complicating the effort is the fact that while the first phase may already have begun, Nouy is still establishing her team. Of the 1,000 employees set to work at the ECB’s regulatory arm, only a few hundred have started work, and many of those are only on loan from national watchdogs. This means that the ECB has left much of the evaluation to external auditors who have only recently begun their work. This all raises the question whether the ECB is applying the necessary time and resources to actually conduct proper stress tests and whether these will have any credibility afterwards.

Too much transparency?
Finally, there are concerns about the amount of transparency associated with the tests and how this will affect the overall economy in Europe. Concerned industry voices have said that any results coming out of these banks post-test will be impossible to keep under wraps and that the examination of eurozone banks could actually unleash renewed turbulence instead of calming the markets. The ECB has said that test results may be made transparent and publically accessible, and this has raised concerns that speculators could target weak banks and make their problems even worse.

As such, it’s hard to gauge the outcome of the ECB stress tests, despite the anguish this is currently causing in the European banking sector. It’s clear that the process itself is somewhat lacking, without enough employees to conduct the stress tests and banks receiving very little information on what is necessary and needed in order for the tests to be conducted. What’s more, it is concerning that there is very little clarity on how much information will be available to the public on specific banks, and what criteria will be set up for whether a bank should be shut or not. This all creates growing uncertainty in the eurozone, which should otherwise be on the cusp of economic recovery and stability. Sadly, it seems that while the ECB was hoping to steady the region’s finances, it is more apparently, stressing Europe’s economy like never before.

Banco Nacional de Crédito: one of Venezuela’s most treasured institutions

Posted on by Ashton Wenborn

The Venezuelan economy is not without its fair share of problems, although the country is still home to a number of budding economic opportunities and enterprising business names. Widespread economic reforms look to offer the country the stimulus it needs and certain sectors are performing ahead of expectations, not least financial services, which has emerged as a major economic constituent and an example in how best to promote growth.

Despite being only 10 years since its establishment, Banco Nacional de Crédito (BNC) has become one of the country’s most stable and successful institutions, and in many ways represents a much broader progression in Venezuelan financial services. On its foundation in 2003 the bank had only three offices in Caracas, San Cristóbal and Valencia. However, skip forward to the present and at the end of 2013 the bank is the seventh largest of Venezuela’s commercial and universal private banks, as defined by the Venezuela banking regulator, SUDEBAN.

Offering a comprehensive range of products and services to its clients through a broad network of 162 branches and over 400 automated teller machines in over 50 cities and in 21 states, the bank is testament to the strength of Venezuela’s financial services sector. The success attained in the last decade and in a highly competitive market, is due to the bank’s extensive expertise, combined with a pursuit of constant innovation, attention to modern risk management guidelines, excellent service, and institutional policies aimed at generating growth.

What’s more, as a socially responsible institution, the bank fulfils an important social function by offering its support to the most vulnerable sectors of the social structure. BNC contributes to projects aimed at strengthening education, values, religion and family, improving the quality of life of children, adolescents and senior citizens, as well as serving as a fund raising vehicle through its branch network, to address serious health concerns.

Experienced management team
The bank’s senior management is renowned for its successful track record in the banking industry, and is represented by a strong and experienced board of directors and a cohesive group of shareholders. These foundations have contributed to the building of a successful business model based on close proximity with clients and the promotion of a commitment to the highest quality in delivering banking services. This is a commitment that can be seen in the results of 2014’s first quarter, which was one of the banks’ brightest in terms of growth and expansion. During the first quarter, BNC’s assets grew 17.54 percent, far beating the performance of Venezuela’s banking system at 11.21 percent and propelled by the expansion of the Gross Credit Portfolio, which increased 17.14 percent compared to the end of 2013 – higher than the 9.45 percent growth recorded by the national system. Client deposits also increased 19 percent; almost double that of the system’s 11.01 percent.

The combination of BNC’s financial solidity and responsible philosophy should be seen as an example for others in the industry in how best to achieve explosive growth in a market still experiencing growing pains (see Fig. 1). The bank’s growth during the first quarter of 2014 has been one of the most significant, healthy and reliable of any in the sector, and the bank’s non-performing loan index stood at 0.06 percent as of the end of March 2014,the lowest such index in the Venezuelan banking system. In addition, the ratio of non-performing loans in its portfolio has allowed BNC to attain the highest coverage of non-accrual loans in the country, at 2,724.97 percent.

Since its establishment, BNC has pursued a strategic goal to become a modern bank with nationwide coverage, and, in a bid to fulfil this goal, the bank has implemented an aggressive expansion plan. Its growing physical presence throughout the national territory has allowed it to increase its assets under management and enhance its participation in the market through its banking relationship officers, taking timely decisions to directly service its clients, and reach a market share of three percent as of March.

Source: BNC. Notes: 2014 figures
Source: BNC. Notes: 2014 figures

However, the institution’s progress is far from limited to traditional banking channels, and growth has also been achieved by way of unusual, modern channels of service: electronic banking and web platforms, along with the design of new products and automated services. The bank is the country’s seventh largest in terms of operating automated teller machines and has a number of commercial points of sale, a call centre renowned for its speed and excellent service, and an easy-to-use web platform with the highest security standards.

The bank has also experienced significant development on the international front in a country with strict foreign exchange controls and one that is highly dependent on imports. Its Curaçao branch, for example, has allowed BNC to participate in international business when supporting its clients in their foreign trade transactions, performing hard currency processes in accordance with current legislation, and in directing payments through the Regional Settlements System (“Sistema de Compensación Regional” – SUCRE) and ALADI agreements. For these purposes, the bank relies on a significant number of alliances and correspondent banks located in a number of major economic and financial centres worldwide.

Pushing the boundaries
After a decade of successful expansion, BNC has identified technological innovation as the route to solidifying its position in the market, optimising processes and raising awareness among the general public along the way. In addition to developing its own software, the bank has incurred significant expenses in technology and systems in order to bolster protection and security, as well as transactions, data and processing. In the Venezuelan market, technology has emerged as a crucial differentiator for those in the financial services industry, in particular among those looking to extend their reach into new markets.

For the custody of data related to clients and transactions, greater capacity and flexibility in data processing – and to assure the continuity of operations under crisis – BNC has built an information storage and processing site to replicate the bank’s Data Processing Center. These facilities adhere to the strictest anti-seismic standard, and data centres best practices according to the Telecommunications Industry Association (TIA) and provide redundant backup of transactions and protection from natural disasters, failures in the main systems and/or other potential challenges.

Throughout the course of the bank’s modernisation process and the development of alternative service channels, BNC has added several other options to its website, allowing the bank to broaden its range of available products and services, such as self-managed real time loan applications and traditional banking products and services. The website has also been optimised for use with tablets and smartphones, therein placing products and services within reach of customers regardless of their location, while maintaining tight controls throughout.

Taking into account the transformation of recent years, technological or otherwise, and the increasingly prevalent role of web applications and social networks in the lives of consumers, BNC has sought to make its presence known in this community. By maintaining an active presence on social media, BNC hopes to foster closer ties with clients through tools that might not necessarily constitute a key part of the traditional banking business, but are relevant, nonetheless, in current social dynamics.

By joining Twitter with the account @bnc_corporativo, the bank has been able to form close ties with the public and reinforce its ambition to offer personalised, efficient and timely services. The platform also allows BNC to not only promote its products and services, but announce the opening of new branches, special business hours, events and relevant information, security measures to avoid theft and fraud, as well as interacting directly with its clients and users addressing concerns or complaints.

Elsewhere, with the recent launch of its YouTube BNC Corporativo, the bank is promoting an information channel that includes tutorials to address frequently asked questions from clients relating to banking processes and transactions, as well as advertisements.

After a decade of pulsating growth, BNC is betting on technological innovation and expansion to consolidate its reputation in the market and bring more customers on board. Entering into its 11th year now, BNC’s goal moving forwards is to optimise its existing operations and accommodate for an ever-changing financial marketplace by building solid, safe and trustworthy relationships throughout.

Will copying the Dutch pension system help the UK?

Posted on by Ashton Wenborn

Dutch Space is a corporation that manufactures advanced products that, among other things, helped put the Vega rocket into the upper atmosphere. In May, the Netherlands-based company, a division of the giant EADS Astrium aerospace group, sent its own rocket into the Dutch pension industry by announcing the merger of its company-wide €115m pension fund with a much bigger fund known as PME. An industry-wide retirement plan, PME has €34bn of AUM.

The strategy deployed by Dutch Space illustrates the latest step in a brutal process of consolidation among the country’s pension firms which has, in the last 22 years, seen the number of funds implode from over 1,000 to around 380 today. De Nederlandsche Bank, the Dutch central bank, predicts there will be just 300 firms left to manage all retirement investments within a few years. If so, that would leave the pensions of workers under the control of too few superfunds. Currently, the remaining 380 funds already manage €950bn of pension assets, or an average €2.5bn each.

However, some industry leaders are forecasting an even more severe contraction in a sector whose ‘collective pensions’ have served Dutch retirees well for 70 years. Just over two years ago, Ruud Degenhardt, Chairman of PGB – one of the bigger pension funds with €14.5bn of AUM – predicted there may eventually be just 50 to 100 pension funds remaining in the Netherlands.

Assuming they have a similar ratio as today in AUM, that would average out at €100bn to €200bn of assets for every surviving firm.

A collective approach
Now British firms fear a similarly Darwinian process could happen in the UK in the wake of imminent reforms that seek to create Dutch-style collective pensions. With €1.9trn in AUM, an industry-wide consolidation would inevitably lead to job cuts among actuaries, investment consultants, administrators and fund managers. The Conservative-Liberal Democrat coalition unveiled the sweeping reforms – the biggest in decades – in May on the basis that Britain’s pensioners have long had a raw deal. That’s because of the UK’s immensely complicated and constricting pension laws, and because of the fees charged by asset managers that steadily whittle away at retirement pots.

With €1.9trn in AUM, an industry-wide consolidation would inevitably lead to job cuts among actuaries, investment consultants, administrators and fund managers

“A huge proportion of our pensions disappears in fees, with charges swallowing up to 40 percent of the value,” argues RSA, the multinational insurance giant, in a report that took two years to research. “If a typical Dutch and a typical British person save the same amount for [their] pension, the former can expect a 50 percent higher income in retirement.” It’s not just about fees though. Company-wide pensions, which are by definition much smaller than pooled ones, are more vulnerable to variations in the stock market. Thus, an employee may lose heavily – or gain significantly – if he retires in a particular year.

“It’s not rocket science why collective pensions are better”, argues the report, “as anyone who has taken an introductory finance course knows, the way to address the problem of risk is to diversify. So we buy a portfolio of many securities if we want to limit our risk. Similarly we can diversify our liabilities; for example, when we buy insurance. So each of us gives some money to the insurance company, and by pooling those contributions there is enough to compensate us should our house burn down.”

Written by David Pitt-Watson, Chairman of Hermes Focus Asset Management that has £26.9bn of AUM, the report argues that Dutch-style collective – or industry-wide – pensions not only provide economies of scale that lead to lower costs, but also deliver higher returns over the long life of the pension because they allow asset managers to spread the investment risks. “The benefits of collective, defined contribution [as distinct from defined benefit] schemes are huge,” the report notes.

These views match that of the UK government, which estimates that collective schemes should give pensioners up to 39 percent more money to retire on. The Dutch schemes are “some of the best in the world”, enthuses the coalition’s Pensions Minister Steve Webb, the main flag-bearer for collective pensions. RSA Insurance Group’s research backs up the government: according to the report, Britain’s pensioners would pocket extra retirement income that is almost equivalent to the entire economic contribution of the North Sea oil field.

The Wild Western Europe
The UK reforms are a response to a long-festering crisis about underfunding that has threatened to overwhelm company-wide schemes. Many small and medium-sized companies have reportedly fallen into administration because of holes in the old system. Successive governments have also bungled earlier reforms. As a disgruntled letter-writer pointed out in The Daily Telegraph in May: “One of Gordon Brown’s first decisions as [Labour] chancellor was to scrap tax relief on pension-fund dividends, costing savers an astonishing £118bn since 1997.”

Another issue has been the legal requirement to convert most of a pension pay-out into an annuity. By some estimates this has chopped £1bn off retirement incomes because pensioners have not always had the necessary expertise to sign up to the most suitable schemes. Indeed, many critics say the annuities system has functioned like a giant financial cartel to the detriment of the consumer. By common consensus, something had to be done. “The UK private pensions system is not fit for purpose,” says Pitt-Watson. “Regulations in the UK should be changed to enable the establishment by trustworthy providers of low-cost collective pensions similar to those enjoyed in Holland and Denmark.”

Sensing opportunities, pension funds from the Netherlands and Denmark have already thrown their proposals down. They have told UK companies they are ready to provide low-cost pensions in what promises to add extra pressure on the British industry as it comes to terms with the reforms. Meanwhile, further consolidation is seen as inevitable in the Netherlands. Indeed, even the Dutch central bank, which regulates the industry, believes this is the case. In April, the institution took the ominous and unorthodox step of writing to 60 small and medium-sized funds in what amounted to a warning that they may not be around for much longer. The regulators invited these precariously poised funds to analyse their ‘long-term viability’.

In an extremely competitive and volatile environment, consolidation is gathering pace. “It’s already going pretty fast and it could go faster,” PME’s Transition Manager Koos Haakma told Financial News. Dutch Space’s action was just the latest in a long series of company-wide funds being rolled into industry-specific ones. As early as 2005, electronics giant Philips sold the management of its pension scheme to two separate firms and others such as Germany’s Siemens and Stork, the construction materials giant, have since followed suit.

Brit/Dutch incompatibility
Insiders say much of the problem is down to the regulators themselves who were galvanised into action in the wake of the financial crisis. “The dynamics in pension funds have changed greatly”, explains Degenhart, citing much tighter supervision and monitoring of the funds. The result is that costs are rising steadily. “More costs mean of course higher premiums and lower benefits”, he told shareholders. “Scale size will be increasingly important in the coming years.” Like PGB, competing funds are looking for economies of scale and are moving into other industries related to their core one, or they are swallowing up branch and remaining company funds. But they are at least doing so while attempting to preserve the identity of the original fund by, for instance, a communications policy that focuses on individual members.

Even in a superfund all members are treated equally, whatever the nature of the original scheme. As Degenhart explains, “the conditions are symmetrical, meaning that for the participating groups entering or leaving branches or corporations, no significant benefits or disadvantages may occur.” Although Dutch schemes put more money in retirees’ pockets than do Britain’s funds, it’s still not enough for the government. According to the Dutch Labour administration’s Jetta Klijnsma, the collective schemes aren’t trying hard enough. “A higher expected yield can only be achieved by accepting more risk,” she wrote recently in a confidential document. Having said this, the government will force funds to keep pace with price indexation, which means that pensions must grow annually in step with inflation so pensioners don’t lost purchasing power.

In the meantime the British insurance industry remains divided about the viability of the reforms, and especially about the introduction of Dutch-style schemes. For Alan Higham, Head of Retirement Insight at Fidelity Worldwide Investment, it comes down to generational funding. Collective schemes, he argues, “allow one generation of member to receive more pension in the hope that future investment returns will ultimately justify the decision. Younger people may bear the cost in reduced future pensions should these judgments proved flawed and/or pensioners may see their income fall, or in the extremis see income clawed back.”

In the same light, Neil Lovatt, Marketing Director at Scottish Friendly, fears the reforms will lead to “a huge Ponzi scheme”, whereby retirees are paid out of the premiums of new members of the fund. Others fear the British market is just too different from the Dutch one for the reforms to work. David Smith, Financial Planner at Bestinvest, told Scotland’s Sunday Herald that “for collective pension schemes to work effectively you need economies of scale. However, the UK pension market is already extraordinarily fragmented and it’s highly unlikely that such schemes will establish sufficient critical mass to work as well as they theoretically could.” However, it looks very much as though the reforms are here to stay.

Africa’s appetite for growth is huge, says deVere Group

Posted on by Ashton Wenborn

“The market for international financial consultancy is growing tremendously around the world. I think this is because more and more people are leaving Europe to go places where there is development and potential tax havens for the earnings as well,” Nigel Green, Chief Executive Officer at deVere Group, tells World Finance from the company’s South Africa offices. “Five of the fastest growing economies in the world are in Africa, so that is exciting. There is so much expansion and optimism that you can feel the vibe. People want to get on and do something and there is tremendous appetite for development.”

Green’s enthusiasm for the African continent and the business opportunities it offers is not only contagious, but tremendously insightful. Over the last few years, countries like Nigeria and South Africa have experienced tremendous growth, fostered in part by long-overdue investment in infrastructure. According to the Harvard Business Review, between 2001 and 2011 the African continent grew on average 4.7 percent a year– over twice its growth rate in the 1980s and 1990s.

“Africa has lots of natural resources,” explains Green. “If Africa was a lift, then it was in the basement – it has plenty of room to grow and it is definitely moving up very quickly. Lots of people keen to learn, and a large willing workforce proves that Africa is trying to change the way it is run. Infrastructure needs to be improved, but again, that attracts many international companies to those countries.”

Joining the boom
As African countries develop and grow economically, international companies swoop in to provide the services that every emerging market requires. Africa has potential because there is so much room for improvement and investment. deVere Group operates in that very niche; expatriates who immigrate to frontier markets looking for better business opportunities. “British people go to Dubai, for instance, because it’s tax-free, but there are many opportunities arising in Africa, so many ex-patriots are choosing to settle there,” says Green. “Johannesburg certainly feels like it’s booming with expats – British, Germans, Americans – there is a growing international market in many different countries, and it just shows that emerging markets are doing what they should do: emerge and grow, creating a demand for expatriates.”

As African countries develop and grow economically, international companies swoop in to provide the services that every emerging market requires

With over 80,000 clients worldwide, the group has learned to navigate the intricacies of the international trade and taxation, and to help enterprising foreigners find their feet – and their profits – in unknown territories. deVere Group is the world’s most prominent independent international financial consultancy and over the years has helped to create, grow and safeguard its clients’ assets in 100 different countries all over the world. “Originally we only dealt with British expats living abroad. We are British, we understand the British mentality and tax system and, at the time, could offer relevant advice,” says the CEO.

“But we quickly realised that there are German expats, and American expats, and that if we could deal with one nationality we could learn how to deal with others. Today the majority of our business remains catering to the needs of expats, but we also deal with the top end of the local community in some countries as well who seek out international advice because they may be international business people or may even have lived internationally themselves.”

That is certainly the case in Africa, where fast economic growth has lifted millions into the middle classes. The African Development Bank estimates that the middle-class in the continent has increased from 115 million in 1980 to 326 million today – an incredible growth and golden business opportunity. “There is massive growth in Africa at the moment, so deVere Group will be opening more offices in the region,” says Green with conviction. “Africa has a huge emerging middle-class, and we want to deal with them as well as with the inbound expat community. This is one of the continents where deVere Group looks to offer good financial advise that is not necessarily available locally for the burgeoning middle-classes. There is an emerging niche of people who are looking for international investment other than products that might be limited to their home-markets only.”

The group, however, was founded in order to cater for the financial needs of Europeans, primarily living abroad, and that remains its chief business today. “A friend of mine who went to work aboard persuaded me into the international markets – I was an IFA in the UK at the time,” recounts Green. “Today deVere Group has a strong international presence and we have come full-circle by opening an office in the UK, which we never previously had. We can now cater for returning expats who need advice as well.” Tax is one of the reasons for the growth we are seeing in the international financial consultancy market, but also low bank interest rates in Europe. The situation where banks will give you one percent in an account – if you are lucky – so people are looking elsewhere for higher returns.”

The typical client is probably between 35 and 50 – someone who has moved abroad for better opportunities and is looking to earn good money but wants to build security for themselves and their family. While 10 years ago the oil and gas industry made up the majority of those looking for international financial consulting, today every company across industries wants an international presence, which has diversified deVere Group’s client base.

Helping to overcome challenges
“Things are difficult in every country for foreigners, and in Africa it is no different. Each country has its own peculiarities and adjusting to local laws that don’t always sound sensible to someone from a different place can be challenging” says Green. “It is all about adjusting to someone else’s rules and regulations and understanding the local culture, wherever you are in the world. From talking to people about their personal situations deVere Group can assist with this type of transition and explain all the rules from an investment point of view. It is also vital to explain what taxation expats are liable for in the country that they are in, in regards to their home country, their domicile, and you can even consider a third country, which is where they intend to retire in. So if you were speaking to a Briton in South Africa, for example, who wants to retire in Spain, they would require a tax efficiency plan that accounted for each one of those different countries. And of course that is not always possible.”

With over $10bn of funds under stewardship in over 100 countries, deVere Group certainly understands what it takes to not only settle, but to succeed in a new an unknown territory. Over the course of its existence, the company has not only supported the business success of its clients, but also grown exponentially themselves. “Most of our development has been client driven. As our clients moved from one place to another we ended up with lots of clients in new locations, requiring that we open an office there to service them,” says Green.

“Our own people who have wanted to develop the business have driven some of our growth by moving further afield and opening offices based on their research and drive. I cannot say that our growth has always been scientific – a lot of it is based on a gut feeling because there are not that many statistics on how many expatriates are based in any given country, as not everybody registered. This gut feeling usually comes from monitoring where different international companies are moving, and where existing clients might be moving.”

It is exactly this type of instinctive nose for business that has propelled deVere Group forward in a competitive and oversubscribed market. Over the years the group, under Green’s expert guidance, has developed into more than a financial advisory group and into a vital service provider, which can cater for the needs of its clients globally.

Social media shoppers: how women are tweeting to the check-out

Posted on by Ashton Wenborn

We have all seen the images: the shopping-crazed woman buying her eighth pair of shoes, while an exasperated male companion sits in a corner looking dejected. Stereotypes such as this one permeate the dialogue and influence how we think of ourselves as consumers, as well as how brands market their products. Women are often portrayed as the more reckless spenders, and men as more shopping-averse. As this image is repeated it is perpetrated as a self-fulfilling prophecy.

“Over the next decade, women will control two thirds of consumer wealth in the United States and be the beneficiaries of the largest transference of wealth in our country’s history,” Clare Behar, Senior Partner and Director of a new business development at Fleishman-Hillard told She-conomy. “Estimates range from $12trn to $40trn.” Women are by far the biggest luxury goods consumers and account for up to 85 percent of all consumer purchases in developed markets like the US and Europe, according to market research compiled by Mindshare and Ogilvy & Mather.

Window shopping
What is perhaps most interesting about female shopping habits, is that they are ever-evolving. Though the clear stereotype is that women buy personal and luxury items at exhaustion, data actually reveals that women are responsible for the vast majority of consumer electronic, vehicle, healthcare, holiday and food purchases; in fact, women far outstrip men in shopping in almost every category of consumer goods and services.

Female vs male
US adults interacting with brands on social media:

54% vs 44%

show support

53% vs 36%

access offers

39% vs 33%

to stay up-to-date

28% vs 25%

comment

US adults using top social media sites:

76% vs 66%

Facebook

20% vs 15%

Instagram

54% vs 46%

Tumblr

18% vs 17%

Twitter

33% vs 8%

Pinterest

19% vs 24%

LinkedIn

According to She-conomy, a male guide to marketing to women, in 1998, 69 percent of women aged 18 to 24 were involved in the purchase of home electronic products. By 2008, that figure had risen to 91 percent as personal electronics such as mobile phones and computers became vital personal items to own. During that same period, the number of single women in that age bracket living alone increased from eight percent to 38 percent – giving rise to an important consumer segment, in possession of disposable income and a predisposition to want to spend it.

Though the psychology of gender-specific consumer habits is questionable at best, the figures speak for themselves; women shop, and increasingly, the way women shop is changing. The same Ogilvy & Mather research reveals that up to 22 percent of American women shop online at least once a day and up to 92 percent of online shopper’s pass on information about deals to their friends or social media connections.

“Women tend to be more loyal to brands and because they maintain a great deal of the buying power, brands are foolish not to speak directly to them,” Emily Carroll, Manager for Strategic Planning and Consumer Insights at Leapfrog Interactive told Pontflex’s Social Media Marketing to Women report. “Social media and email represent the best way to get a brand in front of women consumers. You have to be where they are to talk and give advice.”

Changing habits
A decade ago Facebook, Twitter and Youtube were barely even ideas in the heads of Silicon Valley developers. Today the social media industry is worth around $1bn in advertising and sales annually. Though virtually every single western adult has a social media account of one type or another – be it a YouTube playlist or a LinkedIn profile – in reality it has taken a long time for these platforms to find viable business models in which to operate.

Advertising and sales was the clear path for profit for social media brands, which traditionally have a lot of access to their users’ information, location and personal habits. Social media has not only changed they way we communicate with one another; it has also changed the way we consume information and goods. And all of the data generated by these exchanges is helping companies to reassess how goods are marketed and consumed.

“We have to make sure we’re using the channels that allow us to find the right people wherever they are online,” Deb Swinder, Director for e-Marketing for ASPCA, told the same Pontiflex report. “We have to constantly be reaching out into new sites, new audiences, new demographics to expand our reach.”

Women have emerged as the real power in the social media industry. According to data compiled by Alex Hillsberg for NMK, from reputable sources such as the Pew Research Centre and Burst Media, women are vastly more likely to interact with brands on social media then men. Up to 54 percent of women consumers show support to their favourite brands online, 53 percent access offers and 28 percent comment, compared with 44 percent, 36 percent and 25 percent of men respectively. This information may not appear that significant independently, however, when taken into consideration with other statistics relating to the consumer patterns of women, then suddenly a significant pattern arises.

Appy customers
Women dominate all the major social media platforms in the US, apart from LinkedIn, which is still a largely male-dominated environment. But more importantly than that, women vastly outstrip men in volume of users and time spent online for Facebook and Pinterest – the two social media platforms with the most sales potential.

Women also lead the way in the use of mobile apps for social media in both smartphone and tablet categories, meaning that marketers and brands have more access to women consumers online than they do men. On Facebook alone, women are up to 55 percent more engaged with brands than men are, according to a survey by Women’s Marketing and SheSpeaks. That same survey suggests that women are 55 percent more likely than men to purchase goods and services from brands they interact with online.

Women online:

2000

the year women first surpassed men in internet usage

171

average number of contacts in a woman’s email/ mobile list

85%

of consumer purchases are by women

22%

of American women shop online every day

71%

of female users like or follow brands for deals

92%

of online shoppers pass on deals to their friends

55%

are more engaged with brands on Facebook than men

91%

of women feel misunderstood by advertisers

The wealth of data that is generated by our collective social media use is perhaps the most valuable tool a brand has today, because it is a direct blueprint of its customers lifestyle and shopping habits. But not all brands have mastered how to convert this information into useable clicks and increased sales. For instance, according to the 2014 Mobile Behaviour Report by ExactTarget, 71 percent of female social media users like or follow brands on social media for deals, compared to only 18 percent of men. However, women are far more likely to ignore paid digital adverts on social media and mobile ads than their male counterparts. This means that women want to interact with brands in a creative and rewarding way, rather than just be bombarded with ads.

“First you have to know your customer and whom you want to reach,” explains Bonnie Kintzer, CEO of Women’s Marketing Inc in an American Express Open Forum article. “Who is she and how does she buy? What media does she see and what channels does she shop in all day long? Once you know that, you know where to focus.” The issue is that many brands are still struggling to answer even these simple questions. Data from the Marketing to Women Conference, suggests that 91 percent of women still feel misunderstood by advertisers. As many as 59 percent of women feel let down by food marketers and 66 percent feel misunderstood by healthcare marketers – two of the biggest markets for female consumers.

Understanding the consumer
It is clear that having an effective and consistent social media presence is vital for any brand, especially those hoping to tap into the female demographic. However, many companies are still falling short of the levels of success they seek. The way companies approach digital strategy today “is no different from what companies have done on other media,” Mikolaj Piskorski, author of A Social Strategy: how we profit from social media, told Forbes. “They simply took this approach and put it on social media platforms. The problem is that this approach does not work well. Most firms can’t generate the requisite engagement, and those that do often fail to convert it into sales. This is because people use social platforms to interact with their friends, and firms are seen as intruders who interrupt the experience.”

Kintzer agrees: “Women use social media to integrate disparate roles – family, work and personal online. They use it to connect to family friends and brands.” This means that a traditional approach of targeted ads is unlikely to reach women shoppers online. It is a surprise that more brands are not making the understanding and targeting of women shoppers their number one priority when it comes to social media.

Additionally, this is not a new trend; women surpassed men in terms of internet usage as early as 2000, and yet, many brands still struggle to reach women online. “To reach women, know who she is and what media she consumes all day long,” suggests Kintzer. “Plan an integrated campaign, because all the channels feed off each other. If a potential customer hears or sees your message in more than one context or venue, she will remember it, and it is far more effective.”

There is a wealth of data on social media marketing and consumption available, and yet many brands are still struggling to understand exactly what it is their consumers are looking for in their social media experience. It is abundantly clear that female social media users are a powerful demographic when it comes to online shopping and they are generally looking for a personalised interaction with their favourite brands. By putting in the extra effort brands will be rewarded with loyalty and enthusiasm – women are far more likely than men to share their shopping experiences and the deals they find online with their friends and connections.

With the social media industry worth $1bn annually, no brand can afford to miss out on any slice of that pie – especially as research shows that people want to consume online, and are more than happy to engage. While women continue to dominate the lion’s share of this market, they should be afforded the royal treatment by every brand online, without condescension or cheap stereotyping.

India’s train problems are derailing its economy

Posted on by Ashton Wenborn

India is to open up its dilapidated railway network to foreign investors in a government move that will hopefully boost economic growth and strengthen infrastructure across the country.

Recently elected Prime Minister Narendra Modi is working hard to fulfil his promises of an improved Indian economy, and key to this is an upgrade of the country’s vast railway network to the tune of $93bn over the next five years. Whether the government will be able to improve existing tracks, strengthen bridges, and modernise signalling and communications to meet the demands of the modern Indian economy is questionable: the upgrade will be largely dependent on foreign direct investment. What’s more, a century-old monopoly threatens to make the upgrade a drawn-out affair.

Indian Railways, the world’s third-largest train system, carries about 23 million passengers and 2.65 million tonnes of freight on 19,000 daily trains. It is a popular and much-needed means of transportation for the millions of Indians travelling to the country’s urban hubs. According to PwC, more than a quarter of India’s railways are being used over capacity and 50 percent of the network is nearing the same height of overload. The state-run network, which employs 1.3 million people, has struggled to keep pace with rising passenger numbers, freight demands and economic aspirations.

About 94 percent of the system’s revenues are spent on operating costs and social obligations, leaving little to modernise its creaking infrastructure. Out of India’s 130,000 railway bridges, about 25 percent are more than a century old. This alone presents massive security issues and causes severe delays regularly, yet is only a small part of the problem. There is a desperate need for better railway technology, such as signalling and an expansion of the network itself through more tracks and trains.

This is why Modi’s government wants to create a number of bullet-train rail links between large cities, starting with the long-discussed line between Mumbai and Ahmedabad, 500km away. Each of these links would cost about $10bn, but would greatly boost the 161-year old network. In early July, the country’s first high-speed train was sent on a test run to Agra, the home of the Taj Mahal, on which it reached a top speed of 160 km/h – a serious improvement from current travel times. Already the link is being called the ‘Bullet Raja’ or Bullet King. Nevertheless, the new high-speed train, set to launch officially in November on the New Delhi-Agra route, travels at just half the speed of the superfast trains Modi wants to build (in addition to planned new freight corridors and coaches).

Indian railways by numbers

23 million

passengers

2.65 million

tonnes of freight

19,000

trains per day

1.3 million

people employed

15,000

train-related deaths

160kmh

top speed of first high-speed train

Large-scale problems
This a crucial project to focus on, says PwC, as India’s ailing railways have hurt the economy greatly: itsfaltering logistics could otherwise service its manufacturing industry. What’s more, high freight rates – about twice the rates in China – have prompted many companies to ship cargo by truck instead. Today, trains carry just 30 percent of India’s freight, down from nearly 80 percent 30 years ago.

“The railways have been losing freight for years,” says Manish Agarwal, PwC India’s Leader on Capital Projects and Infrastructure. “This mostly comes down to the inability to ensure a time frame for freight travel, because of the lack of sufficient technology and the size of the network. Passenger and freight lines are shared, and, when there is a delay, passenger trains are always prioritised. This makes it impossible to ensure deliveries within a set time.”

The delays on the railway system are largely caused by a lack of new and efficient technology, such as proper signalling, track changes and trains with more comfortable capacity. In a country where temperatures easily run to 40 degrees celsius, the lack of air-conditioning on a rammed commuter train is no laughing matter. This adds to the growing security issues related to the railways.

Decrepit tracks and bridges aside, the trains are grossly overloaded on a daily basis. People can often be killed falling off overcrowded trains or crossing the tracks. Others are charred to death by high-voltage electrical wires while perched on coach roofs. The network has a dreadful safety record, with a government report in 2012 putting the number of deaths each year at nearly 15,000.

The urgent need to upgrade the system is not just one of economics; it comes down to life or death. But the upgrade is largely dependent on a grossly monolithic and bureaucratic government system that so far has impeded modern railway maintenance for the past 10 to 20 years. And that is no easy hurdle to overcome, says Agarwal.

“The Indian railways have lacked investment. There’s been an inability to raise passenger fares because it’s a political ideology that public transport in India needs to be accessible for everyone. It also has to do with execution. The railway is a monopoly behemoth and as is often the case when policymaking is bundled with execution, efficiency has gone down. A lot of previously announced projects have not been completed. But I think it’s a good sign that the new government has promised to finish these projects in addition to taking on new ones.”

Foreign investment
The majority of the new projects related to the railway will have to be funded by public-private partnerships, according to DV Sadananda Gowda, the Indian Railway Minister. He said the government is relying on foreign investment to fund station upgrades and new bullet trains. The cabinet will approve FDI in railway infrastructure, which has previously not been allowed.

The move comes in acknowledgement of the fact that India’s current fiscal issues present a significant problem to major investments such as this. As Gowda remarked: “Internal resources are insufficient to meet the requirement”.

Given the magnitude of the railway upgrade, it is no question that the investment needed will be of the long-term type, with realistic estimates suggesting it will take a minimum of 10 years for the network to reach modern standards. In order to not be overwhelmed and repeat the mistakes of past governments, Gowda has taken a pragmatic approach that divides the upgrade into several smaller projects that will be tackled one at a time. These will include the establishment of the high-speed rail network and increasing speed on the current structure – the two projects considered top priorities so far.

The PPP models need to be spelt out to attract FDI, so investors can see which projects are aligned to their risk appetite

This division of projects is crucial, says Agarwal, pointing to how previous PPPs have failed to attract sufficient investment.

“The PPP models need to be spelt out to attract FDI, so investors can see which projects are aligned to their risk appetite,” says Agarwal. “That said, we need to get the PPP model closer to what the world understands as a PPP model, ensuring that it has the right clearances and approvals before it’s put out to bid. Also, performance-based revenue models are more aligned to foreign investor appetite than traffic and real-estate-based models”.

Concerns about risk are a particular hurdle for India in its attempts to attract FDI, but Agarwal maintains investors must keep their eye on the risk-return equation instead. Another issue pertains to the lack of long-term financing in India for projects such as these, as well as the governments tradition of bundling infrastructure projects in with real estate. It is crucial that the upgrade doesn’t depend on such multi-projects, as the risk appetite of infrastructure investors does not match up to that of real estate and could prevent the inflow of FDI. The government and the Reserve Bank of India will also have to work hard at reforming banks lending practices – and this, again, could prove a long-term affair.

Control system
While infrastructure experts have welcomed the overall drive for private and foreign participation, they have also said institutional reforms, such as creating an independent rail regulator, will be required to de-politicise the railway sector. In 2013 alone, India spent 10 percent of GDP on its logistics sector. Considering the state of the railway system and that other countries average an investment of seven to eight percent, it is clear the network could be a lot more efficient.

“An independent railway regulator is necessary to deal with economic side of the railways and de-politicise issues such as tariffs and prioritisation of projects,” says Agarwal. “It’s taken 10 years for the government to do a 14 percent rate increase, so government involvement needs to be reduced. The regulator should be able to gauge investments and tariffs based on demand and costs, and then the government could subsidise projects or passenger classes in a more targeted manner.”

To this end, the Indian Transport Minister has proposed establishing automatic revisions to the subsidised passenger fares in order to reduce political skirmishing over increases needed to cover rising costs. For decades, successive Indian governments have held passenger fares far below their costs to keep trains universally affordable, while charging steep freight rates in order to cover the losses. This has hurt commercial train freight in India, but is not by any means the only issue keeping companies on the roads and away from the tracks.

The Indian Transport Minister has proposed establishing automatic revisions to the subsidised passenger fares in order to reduce political skirmishing

“Reducing rates alone will not impact logistics in the country,” says Agarwal. “Committed service levels are equally important to attract more freight movement to railways. For example, a level playing field amongst private container freight licensees could bring competition in service levels, while in the monopoly segments service levels could be locked in through long-term PPP contracts. Breaking the monopoly and letting others operate container freight on the railway would be a significant advantage to cost and time.”

It’s clear that the biggest hurdle to overcome for India’s railway dreams is institutional. Major changes are needed in order to bypass the century-old monopolies and separate policymaking from the actual running of the railways. The unbundling of the sector and creation of benchmark competition will undoubtedly be a challenging one. But Modi and his government must focus on it in order to realise the upgrade within the necessary timeframe.

Unfortunately, India’s railways cannot wait if the country’s economy is to sustain growth and create the 100 million jobs that its population needs. This project demands efficiency and innovative technology, which can only be achieved through a serious inflow of cash – one that will be stunted by a bureaucratic railway system. Modi’s government is seemingly taking the necessary steps to open up the sector. The question is just how far they will actually go, and whether this will be enough to lure in those much-needed foreign investors.

Mozilla releases $33 smartphone for India

Posted on by Ashton Wenborn

With a recommended retail price of only $33, Mozilla’s first low-cost smartphone enters an Indian mobile market ripe for growth. The Intex Cloud FX is the first handset to run Firefox’s operating system and is priced to cash in on what is widely regarded as the world’s fastest-growing smartphone market.

“The launch of Intex Cloud FX marks the beginning of a new era of the Indian smartphone market and Intex is proud to be the first Indian company to understand and deliver on market needs,” said Keshav Bansal, Director, Marketing, Intex Technologies. “With the launch of Intex Cloud FX, we aim to enable the masses to get smartphone experience at the cost of a feature phone.”

Mozilla hopes to bridge the connectivity gap that exists for many in the country

Although the company originally targeted a retail price of $25, the finished product has come in at a slightly more expensive $33 – or 1,999 rupees – and is designed to capitalise on a lucrative opportunity. “With support from Intex, Firefox OS smartphones in the ultra-low-cost category will redefine the entry-level smartphone and create strong momentum in Asia,” said Dr Li Gong, President of Mozilla.

By offering a smartphone at a price only slightly above that of the lesser feature alternative, Mozilla hopes to bridge the connectivity gap that exists for many in the country, and, in doing so, claim a sizeable share of the market ahead of its larger mobile rivals. Deloitte’s TMT Prediction 2014 claims the number of smartphone users in India will surpass 104 million before the end of the year – a significant increase on last year’s 51 million.

The price point of the Intex Cloud FX compares favourably with smartphones available already on the market, with Apple’s iPhone 4 selling for $245 and Google hoping to release $100 and $200 ‘low-cost’ Android phones in India soon. Mozilla’s price point may be a threat to competitors, but the app range leaves a lot to be desired. Mozilla’s phone will offer around 1,000 apps, whereas Android phones offer close to 1.3 million. Mozilla will be hoping sales of its entry-level phone will enable the company to expand its operating system to compete with larger rivals.

HP to sue Deloitte over Autonomy deal

Posted on by Ashton Wenborn

The ongoing dispute over HP’s colossal 2011 deal to buy British tech firm Autonomy for $11bn is set to rumble on, with news that the former company will sue the UK arm of accounting giant Deloitte.

The news comes after two years of public disputes over the deal, which saw HP buy the UK firm for what was seen as a vastly inflated price. In 2012, HP announced it would be writing off almost half of the $11bn spent on Autonomy, as well as axing the British chief of the company Mike Lynch.

HP accused the management of Autonomy of overstating the company’s value

HP accused the management of Autonomy of overstating the company’s value. As a result of the dispute, HP shareholders also sued the firm for mismanagement of the deal.

Now HP is targeting Deloitte UK, the accountancy firm that audited Autonomy at the time. HP said in a statement: ‘We will continue to work to have the derivative actions settled or dismissed and to hold the former executives of Autonomy as well as Autonomy’s auditor, Deloitte UK, responsible for the wrongdoing that occurred.’

However, both Deloitte UK and Autonomy’s former leaders deny allegations of malpractice. The accountancy firm responded: ‘Deloitte was not engaged by HP, or by Autonomy, to provide any due diligence in relation to the acquisition of Autonomy. Deloitte UK was auditor to Autonomy at the time of its acquisition by HP. Deloitte UK conducted its audit work in full compliance with regulation and professional standards.’

The case is set to continue, with investigations by the US Securities and Exchange Commission, the FBI and the UK’s Serious Fraud Office, to decide whether Autonomy’s board inflated the price of the deal.

With further investment, Ghana could become global powerhouse, says GIPC

Posted on by Ashton Wenborn

In 2009, when Barack Obama was preparing his first official trip to Sub-Saharan Africa as President of the United States, he could not leave out Ghana from his tight schedule of official visits. It was the final bit of recognition the country needed to show the rest of the world that it had arrived: Ghana is now an African powerhouse.

Nestled between Togo, Burkina Faso and Cote D’Ivoire, Ghana has consolidated itself as a beacon of democracy in a turbulent region. Since obtaining independence from Britain in 1957, Ghana transitioned from tumultuous military rule and uprisings to eventually settle down as a stable and prosperous country in the 1980s.

It has certainly not been easy, but over the past three decades, Ghana has established itself as an African leader, despite its small size. It is one of the fastest-growing economies in the region, and is one of only a handful of countries expected to meet the Millennium Development Goal of halving poverty rates by 2015.

At a recent national economic forum Ghana’s Minister of Finance, Seth Terkper, stated that the rebasing of GDP in 2010 and onset of oil production in 2011 boosted growth and was the final push Ghana needed to transition to low- and middle-income country status, from its previous classing as low income country (see Fig. 1).

Source: International Monetary Fund. Notes: Post-2010 figures are IMF estimates
Source: International Monetary Fund. Notes: Post-2010 figures are IMF estimates

This in turn has led to the reclassification of the country by donors, as well as multilateral institutions, which has implications for official development assistance. Terkper also mentioned that Ghana has made significant progress towards the achievement of the Millennium Development Goals in the areas of poverty reduction, improving access to education, reducing gender disparities in primary education and providing access to improved water sources.

Prospects for growth
In terms of growth potential, Terkper believes that many projects are on the agenda to support Ghana’s growth objectives, including the increase of crude oil production from existing and new oil fields, gas production to improve the supply of energy, investments in port infrastructure through the Tema and Takoradi Port Development Project, the rehabilitation and modernisation of existing railway lines that will further contribute to improved transport infrastructure, investments in key sectors (see Fig. 2) that will reduce the infrastructure deficit and boost Ghana’s long-term growth potential, and further expansion of the services sector. The finance minister fully expects Ghana to become a hub for financial and transportation services in the very near future.

Ghana has also been working hard on the image it presents to the rest of the world. The country is keen to draw a line between itself and its more troubled neighbours, and emphasise the traditional hospitability and friendliness Ghanaians are famous for. The appreciation of the role Ghana plays in the African continent can probably be best described by the fact that Ghana is the first and only African country that has welcomed Queen Elizabeth, and three consecutive American presidents, on state visits.

It is all part of a concerted effort by President John Dramani Mahama’s government to boost investment into the country. Ghana’s burgeoning oil industry is full of promise, but will still need some injection of capital before it can live up to its potential.

“Ghana’s wealth of resources, democratic political system and dynamic economy make it undoubtedly one of Africa’s leading lights. Gaining the world’s confidence with a peaceful political transition and a grounded and firm commitment to democracy has helped in expediting Ghana’s growth in foreign direct investment (FDI) in recent years,” said Mahama. “Building on significant natural resources, our dear nation is committed to improving its physical infrastructure.”

According to Mawuena Trebarh, CEO of the Ghana Investment Promotion Centre (GIPC), the country is under no illusion as to what investors’ main criteria are for choosing investment destinations; namely, an investment climate where they can run a profitable business. Trebarh believes that Ghana fulfils many of the requirements foreign investors look for, such as favourable labour conditions, strategic global positions, and a welcoming finance and funding environment. “We regard investors in Ghana as prosperity partners and as such we have structured our service delivery to ensure a seamless induction into Ghana for investors to quickly and efficiently achieve the prosperity that they are looking for,” she said.

Foreign interest
Recent research by the United Nations Development Organisation (UNIDO) presented in Accra last year corroborates Trebarh’s analysis. It concluded that FDI had increased in Ghana by three percent in 2012, a rise worth $3.3bn. The report also suggested that this increase defied the general trend for declining FDI in the region. During the same period, Nigeria saw its FDI revenues drop by 21 percent. According to Frank Van Rompaey, UNIDO’s Accra representative, foreign investors surveyed for the report ranked Ghana’s political and economic stability, transparency of regulation, and local market conditions as the key factors influencing their decision to invest.

Source: Ghana Investment Promotion Centre
Source: Ghana Investment Promotion Centre

“Ghana has attracted the attention of well-known international businesses, investing in all sectors of our economy. All these investors have come to Ghana because they know we have a wonderful… social, political and economic environment in which they can invest, grow and be successful,” explains the president. “Ghana has recently embarked on an ambitious but achievable reform programme to improve the investment climate for both local and international investors. These efforts have paid off tremendously, with Ghana being recognised by the World Bank Doing Business Report 2014 as the Best Place for Doing Business in the ECOWAS [Economic Community of West African States] Region. Also, during the difficult times last year, when most countries did not show good growth levels due to the global economic downturn, Ghana had an economic growth rate of 7.4 percent, provisionally.”

Mahama is certainly backing up his words. His government, which aims to ramp up investment, has approved a number of laws and incentives, including a bill passed by parliament in 2013 to encourage joint ventures in the retail sector, allowing foreign partners to contribute capital of up to £1m, increased from $300,000. The government has also backed initiatives like the GIPC, which regulates and promotes FDI.

If the current and future governments manage to continue attracting this level of interest from foreign and domestic investors, there is little doubt that in no time at all Ghana will not only be a regional powerhouse but a global one. It certainly has the resources for it; all it needs now is the investment and initiative to explore them.

Diamond Bank’s retail engagement strategy serves Nigeria’s masses

Posted on by Ashton Wenborn

Diamond Bank, with its head office in Lagos, has emerged as one of the leading banks in Nigeria, having grown significantly in size and assets since its incorporation in 1991. By focusing on new technologies and targeting specific customer groups with innovative products, the bank has quickly risen as a major player in the industry, threatening the stronghold of Nigeria’s traditional top-tier banks.

With a growing footprint in west Africa, Diamond Bank is keen to continue its expansion by betting on Africa’s booming economy and by investing in the unbanked. “Diamond Bank is strategically positioned to deploy cutting-edge technology, in the growth of the retail segment of its business. This in turn, will provide a wide range of unrivalled convenience in our retail products and services,” explained the Bank’s Group Managing Director and CEO, Dr Alex Otti in an interview with World Finance.

For Otti and Diamond Bank, retail banking means supporting the individual as well as the small business, as both segments are at the heart of its new retail strategy. The bank’s ideology lies in its understanding of the future for retail banking with a huge focus on a wide range of customer segmentations, which provide various products and propositions to serve each segment; youth and school banking, mass market, affluent, privilege and MSME (micro, small and medium scale enterprises). Consequently, its medium-term retail strategy initiated in 2008 has delivered significant results evidenced by a phenomenal 125 percent growth in retail deposits between December 2010 and December 2013.

The bank currently has over 240 branches in Nigeria in addition to subsidiaries in Benin, Senegal, Côte d’Ivoire, Togo and the UK. Diamond Bank was first listed on the Nigerian Stock Exchange in 2005 and in January 2008, its global depositary receipt was listed on the Professional Securities Market of the London Stock Exchange. Diamond Bank was the first bank in Africa to record that feat.

125%

Growth in retail deposits at Diamond Bank from 2010-13

Chasing retail
Although the bank’s business focus consists of corporate, retail and public sector businesses, retail remains the largest part of the bank’s business and by leveraging the SMEs’ footprints, the bank hopes to capitalise on the impending economic boom to further drive its retail portfolio.

“Our deep understanding of the retail sector has availed us valuable insights into the challenges of the market. This has driven our innovations in e-banking, which has become the core of our business strategy in promoting a seamless transition to a cashless economy. We have continuously invested in top-of-the-range technology deployed via robust platforms to provide safer, faster and more convenient services to the banking public,” said Otti.

In this respect, the bank is making its mark on the Nigerian financial industry, which is experiencing growing competition in the area of technological innovations designed to make everyday banking more convenient for customers. With a large part of the population based in rural areas, it can be quite cumbersome trying to reach the entire retail segment through branch network alone. As such, Diamond Bank has launched a series of alternate banking channels including the Diamond Mobile App, Diamond Pay, Diamond Online and Diamond Mobile, which all allow customers to transfer funds, pay bills and conduct a host of banking transactions from computers or mobile devices (see Fig.1).

Financial inclusion
All of these innovations are instituted in order to further the financial inclusion drive in Nigeria, where over 70-80 million potential customers still remain unbanked. This has resulted in a robust retail engagement strategy to serve the unbanked and underserved segment across the country.

Source: Diamond Bank
Source: Diamond Bank

“As part of our retail innovation, we have integrated agency banking into our core business model. For example, our Beta Savings Proposition was designed to offer a simple savings account driven by mobile technology and a nationwide network of agents, who act as touch points to reach the financially excluded from petty traders to artisans. Furthermore, in partnership with MTN, we developed the Diamond Yello Account, which offers our customers a safe means of opening and operating a full bank account on their mobile phones, thus eliminating the need for documentation and the discomfort of locating a branch,” said Otti.

Particularly interesting is the alternative customer channel agent banking offering, which provide customers access to financial services at convenient locations such as supermarkets, schools, cinemas, markets and restaurants. The phenomenon is increasingly popular with Nigerian banks and seems to be gaining traction with customers who are flowing into banks such as Diamond Bank. Since 2012, the bank has gone from being Nigeria’s 10th largest bank by assets, to its seventh largest by the end of 2013, largely because of its NGN1.5trn in assets (see Fig.2) – the majority deriving from its growing retail business.

The bank has also embarked on the continuous development of women-friendly propositions and services aimed at empowering women economically. This includes the launch of the Diamond Woman Proposition, a fully fledged business support initiative designed to empower its female customers by building their capacity in managing their finances, family life, career and businesses through platforms such as seminars, conferences, networking events, and an active online community.

“Our ultimate goal is to provide suitable solutions for all types of customers, keeping each satisfied at every touch point and continuously stimulating an enabling business climate that would encourage real development in every financial centre that we operate in,” said Otti on the need to offer a vast collection of services that can accommodate the varied and growing wealth of the Nigerian population.

Catering to MSMEs
To this end, Diamond Bank has made it a key point to embrace small businesses in its search for strong business growth. The bank has an elaborate MSME offering which provides the resources entrepreneurs need to grow their businesses, in addition to tools that facilitate-commerce and market visibility.

Balance sheet trends 2013
Source: Diamond Bank

Customers are provided with a unique website address, transaction services and investment accounts/instruments, lending, cash management, and trade and financial advisory services, through its nationwide branches. What’s more, a team of experienced business bankers with industry specific expertise give MSME customers invaluable insight into their target market and the opportunities that exist for that particular business. The aim is to help customers promote their business to a broader audience, buy and sell a wide range of products online and find potential business partners, suppliers etc. For Diamond Bank, this venture is set to be the key driver of profit growth in the coming years – despite the volatility associated with SMEs.

“We pride ourselves as being the entrepreneur’s bank of choice in the country, playing in sectors and industries where [the] competition is sceptical to venture into. We believe that the Nigerian economy cannot grow in real terms without investment in the MSME sector; hence we are supportive of entrepreneurship that can create jobs for millions of Nigerians especially at the grassroots,” said Otti. “The success we have achieved in this segment since 2009, has led to numerous invitations for strategic partnerships by multilateral international agencies including the IFC, USAID, Women’s World of Banking, Shore Cap Exchange and DFID. These are clear testaments of our commitment to stimulate economic development in our operating environment.”

The bank’s commitment to give back to the community and foster economic development in Nigeria comes at a crucial time for the African economy. Nigeria is currently considered the largest economy in Africa and has an immense growth potential due to its vast resources and trade markets. Its financial services industry is well developed and has in last two years identified high-growth potential among the teeming unbanked individuals. To this end, technological initiatives, agency banking and the promotion of MSME businesses, is a crucial way to bank and increase the wealth of the Nigerian population, which is at the cusp of an economic boom and will need all these financial services for years to come.

PASHA Bank provides investors with a gateway to Azerbaijan

Posted on by Ashton Wenborn

For many countries that were formerly part of the Soviet Union, it has been hard to establish themselves as independent, modern economies with such a dominant and overbearing former ruler. While some struggle to forge their own way towards economic prosperity, there are others that have been blessed by a wealth of natural resources.

One such country is Azerbaijan, which benefits from a large amount of oil and natural gas (see Fig.1) that has helped to transform the country over the last two decades. However, the country is well aware of the risks that stem from being overly reliant on a finite natural resource. The government has been actively trying to diversify its economy in recent years away from an overreliance on energy and towards more of an even balance with manufacturing and agriculture.

World Finance spoke to Farid Akhundov, Chairman of PASHA Bank, one of the country’s leading financial institutions and a company that is spearheading the drive towards opening Azerbaijan up to the wider international investment community.

While Azerbaijan has come to be known for its rich levels of natural resources – it produces around one billion cubic metres of gas a year and 800,000 barrels of oil a day – there is a clear need, recognised by the government, to diversify into other areas, says Akhundov.

“Azerbaijan is an energy country. It has lots of oil and now lots of natural gas. But oil is not a sustainable resource and this is why it is widely acknowledge by the government that there are risks associated with being only a natural resources exporter. The crisis of between 2007 and 2009 affected Azerbaijan slightly after affecting the world market. The realisation of the need to diversify away from a reliance on the oil and energy sector became clear. The government at the time had a regional development strategy and it has actively been pursuing the aim of diversifying the economy into other things.”

Akhundov says that Azerbaijan’s manufacturing sector has a strong history that should be tapped into once again

A need for diversification
Akhundov says that Azerbaijan’s manufacturing sector has a strong history that should be tapped into once again. “Azerbaijan already has traditionally a lot of heavy industry, and especially oil machinery. I remember a Soviet statistic that the country had a concentration of oil machinery factories as high as in the US.”

Agriculture also plays a major role in the country’s economy, although more needs to be done to turn production into profits. “Azerbaijan is traditionally an agricultural country, with currently as much as 40 percent of the population working in agriculture. But agriculture only yields five percent contribution towards total GDP. This is a huge disparity and so there is a need to diversify away from energy. This all resulted in the government actively promoting regional investment, and there have been various processes to encourage that. Agriculture, for example, is totally exempt from tax.”

Another area that the government has been focusing on is the country’s lacklustre infrastructure network. After years of underinvestment, it is now dedicating a lot of its resources towards transforming the infrastructure network of the country. “We see now that oil and gas are being pumped to the global market, but there is a great need to create infrastructure inside the country. The government has started to invest money into the infrastructure, which after the Soviet Union was not in a good state. Now the government has almost completed gas distribution to villages in the mountain regions, so that everyone has gas,” says Akhundov.

He adds, “Road construction is carrying on across the country, and roads are a major contributor to the regional development. We have airports built in different cities across the country, and there are more being built. The government is also negotiating with international experts about a new, modern railway system throughout the country. This has been a government-driven investment, and less so from the private sector. Up to 75 percent of investment in the country is done by the government.”

Although the government has played a central role in building Azerbaijan’s economy, the private sector is starting to play its part too, especially in the banking sector. State-run firms providing financial solutions to businesses have largely dominated Azerbaijan’s nascent banking industry. However, a gap in the market emerged for a firm that could offer high quality, corporate banking services to larger clients. That is where PASHA Bank came in, says Akhundov. “The company itself is new and the sector is relatively new. Everything that’s happening in Azerbaijan we would not have seen 25 years ago. What we realised when we were setting up the bank was that there are opportunities for a commercial bank to start offering services to corporate entities. Before there was just a big state owned bank, but the assets of that bank were declining in share terms of the banking sector. That was mainly through smaller banks only being capable of handling the needs of smaller retail clients rather than corporate clients.

“We realised that there was an opportunity to work with corporate clients, and to start offering investment banking services. Some companies were larger than the banks, and so they demanded new and modern products, wanted to access capital markets, and to raise bonds to finance their operations.” The group have also looked at how banks can aid each other in financing, as Azerbaijan lacked a proper interbank market. “Since the inception of the company we have also moved into wholesale banking. We realised that there was not an adequate interbank market in Azerbaijan and to liven it up was an opportunity for a new bank like ours. It allowed us to help set the rules of the interbank market in the country with others. That helped to develop the institutional banking part of the business.”

Ticking all the boxes
While Azerbaijanis have welcomed the new range of banking facilities on offer to them from the likes of PASHA Bank, there has also been a considerable amount of interest from overseas to invest in the country. “When we started offering investment banking products, such as underwriting bonds for our clients in local and foreign currencies, then we realised that investors were not only in Azerbaijan, there were also foreign investors that were looking at the country as a potential prospect. The country had oil, good solid macroeconomics and the level of debt to GDP was very low. There were lots of attractions in terms of the macroeconomics of the country. There has always been a lot of potential for investors in the country for good returns,” says Akhundov.

Source: US EIA Agency. Notes: 2012 figures
Source: US EIA Agency. Notes: 2012 figures

“That gave us an opportunity to start positioning ourselves as a gateway to Azerbaijan and as a partner to local companies, foreign businesses, and also as a bank that is capable of understanding the needs of foreign investment houses and financial institutions. In around 2009 and 2010 we started building up our trade finance portfolio, and we also started working with export agencies for various countries, including France, Germany, Italy and Chinese. That gave us a lot of exposure.”

PASHA Bank has also been helped by the global knowledge that its senior management has spent time working abroad. “The management team has a lot of international experience. This brought us to believe that we could do be successful during our first three-year strategy. Now we are entering into the last year of our second three-year strategy. We believe that we have become the definitive destination for enquiries about the country and for Azerbaijani risk and corporate risk”, says Akhundov.

Providing a gateway to the country is obviously an area that PASHA Bank is keen to develop, but it is also looking at broadening its services to other countries. Akhundov believes that instead of merely being an Azerbaijani bank, PASHA Bank sees itself more as a “regional” player. “We have positioned ourselves as understanding corporate entities and bringing Azerbaijani corporate risk to the capital market. This is initially in Azerbaijan, but we believe we can do it in capital markets outside of the country. We view ourselves now as a regional bank, and not just as an Azerbaijani bank. We have been operating in Georgia for three years and we have identified a bank in Turkey that we would like to own. We have applied for the corporate investment banking license with the Turkish regulator, and we’re now waiting for approval.

“This will allow us to underwrite the risks of a corporate entity, do trade finance and participate in the capital markets in Turkey. We believe that we’ll be well positioned to handle this business. There’s a lot of trade between these countries.” PASHA Bank expects to continue developing its five core areas of operation, namely small business banking, medium sized commercial banking, corporate banking for large companies, investment banking, and wealth management services. “The growth is right in the company, and we believe this trend will continue in the coming years. There will be more and more need for banking services for businesses in the future,” Akhundov says.

With such ambition, both at home and abroad, PASHA Bank can be expected play a leading role in the region’s future prospects. “Our ambitions are to grow in these five directions, spread our operations into new countries, as with Georgia and Turkey, and to make sure we capture a big chunk of trade opportunities both internationally and regionally.”

Baiduri Bank takes charge in the Brunei banking sector

Posted on by Ashton Wenborn

Brunei’s banking sector has historically been strong. This is due, in large part, to the relatively affluent population who can afford to bank with more than one bank as a safety net. At the beginning of 2014, there were eight commercial banks in the country, including an Islamic bank providing full banking services. One foreign bank withdrew from the market in March, leaving seven players to serve a population of just slightly over 400,000. But industry experts in the Brunei banking industry say it is still a very crowded place.

Soon after the establishment of the Autoriti Monetari Brunei Darussalam (AMBD) as the regulatory authority for the banking industry in 2011, the industry saw a series of new measures imposed by AMBD governing personal loan and credit card business, aimed to protect borrowers from over-indebtedness and to promote a savings culture. A 2013 directive set a maximum lending rate and minimum savings and deposit rates among banks. This reduced the net interest margins for most banks, putting pressure on them to reconsider the size and breadth of their operations, resulting in a number of foreign banks right-sizing their operations and one withdrawing from the market altogether. Many bankers saw the departure as a new opportunity to expand and have upped the ante on hauling in those lucrative customers. And to keep with the changing business environment, banks have been leveraging technological innovations and putting new emphasis on customer service in the hope of retaining their customers.

One such bank is Baiduri Bank, which in recent years has made great strides to cater to all segments of society and become one of the leading banks in Brunei. Established in 1994, Baiduri Bank is part of the Baiduri Bank Group, one of the largest providers of financial products and services in the sultanate. Its shareholders include major players such as Baiduri Holdings, Royal Brunei Airlines, Royal Brunei Technical Services and the French banking giant BNP Paribas. With this strong backing, the bank has worked hard to invest and commit to local projects, interests and clients, in addition to offering global expertise, earning themselves a reputation for financial innovation and pioneering that would benefit the local economy.

90%

of businesses in Brunei are SMEs

413,000

Population of Brunei

“We are committed to providing innovative and comprehensive financial products and services to the Brunei community,” said CEO Pierre Imhof in an interview with World Finance. “We are committed to help Bruneians achieve the best in their worlds – be it business, personal finance or family, at different stages in their life.”

Tech-savvy consumers
The bank aims to be a financially inclusive organisation through its three main core businesses – retail banking, corporate banking and consumer financing; catering to institutions and corporations, students, working professionals and high-net-worth customers in Brunei. In its efforts to serve all segments of society, Baiduri Bank hold franchise to four different card payment operators: American Express, Visa, MasterCard and UnionPay. Other banks typically only franchise two card brands, which has helped Baiduri achieve the largest card member base, as well as merchant base, in the country. By offering a range of services including online banking, mobile banking, electronic payment services and a marketing app, which features a branch and ATM locator, promotions, product programmes, foreign exchange rates and e-coupons, the bank hopes to meet the on-going demand for innovative and hassle-free banking.

“Bruneians, especially the younger generation, are generally very tech-savvy and can easily learn to use new gadgets. Carrying out banking via the internet or over the mobile phone is already a common thing here. More and more people are turning to electronic banking because of its convenience and mobility. You see fewer and fewer people at branch counters. Usage of cards for payment of products and services is also increasing rapidly and most major banks have introduced electronic branches where customers serve themselves. Mobile banking service is also gaining popularity and I can only see this trend moving forward,” said Imhof, who also implied that the bank has several other technological projects in the making, but didn’t elaborate further on the details. In this respect, developing technological initiatives has been a way for the bank to maintain and increase its customer base, particularly when looking to attract younger clients.

SMEs in focus
Another key customer group is SMEs, which is a particularly profitable focus for Baiduri. With more than 90 percent of all businesses in Brunei made up of SMEs, developing a relationship with this sector is key when striving for growth. As such, SMEs have been a priority for Baiduri Bank, which offers products and services designed specifically to serve SMEs. These include advice on financing plans with preferential terms, as well as a free of charge payroll processing service, bulk deposit service, an interest bearing checking account and business internet banking to assist companies in managing their banking more efficiently. The aim is to give entrepreneurs and those alike, more time to focus on building their businesses.

“Baiduri Bank has continuously played an active role in the development of SMEs, which the bank views also as our social obligation to the country to nurture and develop local businesses. For the past 10 years, Baiduri Bank has partnered with a leading local company, Asia Inc Forum on an SME partnership programme aimed at nurturing and grooming Brunei’s SME’s through business awards, networking gathering, business forums and workshops,” said Imhof.

Under the Enterprise Facilitation Scheme and the Micro-Credit Scheme, both in collaboration with the Ministry of Industry and Primary Resources, Baiduri Bank has been providing assistance to local entrepreneurs to give them a head start in their business. Also, an online payment gateway enables businesses to collect payment online from their customers via a wide range of credit, debit and prepaid cards through their website and by conjoining a series of merchant services, SMEs are able to conduct business with minimum hassle and financial expenses.

Source: Baiduri Bank
Source: Baiduri Bank

Commitment to the cause
This form of SME support is part of the firm’s strong investment in local society, and its broad corporate social responsibility policy. Community projects include raising funds for local charities; a local business development programme that seeks to develop Brunei’s SMEs; active promotion of financial literacy among the Bruneians through public seminars and road shows, as well as sponsorships of local groups, competitions and NGOs in order to foster talent among youths.

Particularly interesting is the bank’s partnership in the Junior Achievement programme, which seeks to instil the spirit of entrepreneurship among students through an after school programme. Besides providing financial support, Baiduri’s staff members volunteer at schools to develop financial literacy, work-readiness and entrepreneurship among students.

To this end, Baiduri Bank Group hopes to foster further growth in coming years, particularly within the SME industry. This comes on the back of a recent rating from Standard & Poor’s, which recognised the strong financial performances of Baiduri Bank, as well as steady growth year after year. While many banks saw profitability slide in recent years, Baiduri Bank saw a 12.2 percent increase over 2013 and recorded an operating income of BND98.2m ($78.6m) – an impressive achievement in the current environment (see Fig. 1). These positive developments have opened new doors for the bank, according to the CEO.

“Baiduri Bank’s recent achievement of a credit rating of BBB+ for long term and A-2 for short term, with a stable outlook from Standard & Poor’s, opens up new opportunities for the bank to look beyond Brunei. BBB+ is an investment grade, which means that Baiduri Bank may go to international market to offer its bond, which will be fully recognised by international investors. The rating is just a notch behind some of the major global and regional banks in the region and it is the first time that a bank in Brunei obtained such a rating,” said Imhof, highlighting some of his ambitions for the bank.

Conclusively, with financial strength, international recognition and innovative projects underway, there’s no doubt that 2014 will be another record year for the bank.