Year: 2014

Jordan Islamic Bank spurs growth in the kingdom

Posted on by Ashton Wenborn

Though the Islamic finance market has shot to prominence in the past few years, Jordan Islamic Bank (JIB) has been committed to the betterment of the industry for many decades. HE Musa Shihadeh, Vice Chairman, CEO and General Manager of the bank, has been a leading figure not only within the industry, but also in the development of socioeconomic conditions for the people of Jordan.

He spoke to World Finance about how JIB has evolved over the years and become a powerhouse in developing new, innovative and profitable Islamic banking products.

In what key ways have you seen Islamic finance change in recent years?
Islamic finance is improving and the number of institutions using it is increasing annually. As the industry develops, the Islamic banking system will continue to offer financial services in compliance with sharia regulations. This is a principle and commitment, and all Islamic banks are committed to applying this system, which is based on financing trade and forbids usage of the conventional banking system, which is based on accruing interest.

Islamic banking is popular in Islamic countries, but industrialised countries are very interested in the system as well. All over Europe, a lot of countries are introducing the system and have started banking using Islamic methods.

In terms of complexity and market share, how does Islamic banking rank alongside conventional banking in Jordan?
In Jordan we have four Islamic banks, 13 conventional banks and nine foreign conventional banks. We are sure that the Islamic banking marketplace share is increasing because the people in Jordan are becoming more accepting of the methods of Islamic banking.

Jordan-Islamic-Bank's-balance-of-financial-transactions
Source: Jordan Islamic Bank

Before 1978, the conventional banks were alone in Jordan, but JIB was established to offer Jordanians Islamic banking services. As we keep moving forward in line with innovation and being the pioneers of Islamic banking in Jordan, we are committed to applying the latest products and technology. We keep upgrading our systems and working network, as well as developing new products and services in compliance with sharia principles. JIB is proud to have achieved a yearly sharia quality rating of AA SQR.

What new products and services does JIB offer to the Jordanian market?
JIB is committed to introducing new banking services and products to satisfy the customers. We are currently working on a number of innovations, from new banking programmes to loan products. We are completing the implementation of a new banking programme in order to satisfy our clients and fulfil their needs, offering quick, accurate services. Over the past few months we expanded our branch and ATM network to reach 83 branches and offices, plus 140 ATMs, located all over the country.

After studying market demands, we developed new products, two of which have been launched this year with competitive profit rates and flexible terms targeting the student segment – all Jordanians. The first is Labbayk, an Omra and Haj financing solution to assist with every Muslim’s wish to visit Mecca to carry out the holy rituals of Haj and Omra. This product solves their financial needs with the view to completing these holy rituals.

Secondly, we have a new financing programme for students – Iqra. Learning is essential for everyone and JIB introduced this service to help the process of learning. Iqra is a new financing solution for university and school fees.

JIB’s call centre was developed to support our clients and all the people in the kingdom. Current clients with existing accounts and other services can contact our call centre to make inquiries about their accounts and we provide all the help they need 24/7. Currently we have 30 employees working in our call centre, and the plan is to increase the number to 60 employees to offer better and faster services to all of our current clients and/or anyone in the kingdom.

We have also recently added to our I-Banking system, implementing free-of-charge money transfers between customer accounts within our bank, as well as allowing for the settlement of telephone bills for free. These innovations are designed to support growth and empower our customers both financially and spiritually, as well as increasing our marketing and online presence.

How have new market entrants introduced new challenges?
As the competition in the Islamic finance sector increases, JIB has continued to focus on its own priorities. Client satisfaction is our number-one goal. We also remain committed to introducing new and innovative products, through which we can maintain the trust of our clients.

Jordan-Islamic-Bank-market-share
Source: Jordan Islamic Bank

Our products and services differ from those of our competitors because we are a pioneer in Islamic banking services; as such, our products are committed to offer Islamic banking in compliance to the principles of Islamic sharia. We monitor our clients’ satisfaction levels via our Sharia Supervisory Board.

But what really sets us apart from the competition is that we offer the best and fastest services. JIB is committed to introducing new services and products each year, which satisfy the needs of our customers in addition to our geographical coverage throughout the entire Hashemite Kingdom of Jordan. And finally, JIB has the most highly qualified staff and employees, who all have vast experience in offering Islamic banking services.

What do you believe to be the reasons for JIB’s success in recent years?
JIB has been offering unique and diverse Islamic banking in Jordan since 1978, with great success. Since establishment, our balance sheet has grown exponentially as new and innovative products have continued to attract clients (see Fig. 1).

How does JIB’s influence extend to international markets?
JIB deals with local and international banks, but our main priority is to ensure that our international partners operate within and accept our commitment to sharia law. Therefore, no interest is involved in any transactions between JIB and these banks, and is forbidden in any banking deals. We do not make any deals on derivatives.

JIB has arrangements with about 300 international banks outside Jordan and all of these international banks are happy and satisfied with our dealings with them. We mostly collaborate with the opening letters of credit for importing commodities to Jordan on behalf of our customers; investing client deposits via Islamic methods. We are also actively looking to increase our dealings with foreign banks, and have been committed to disseminate education on Islamic finance to our international partners by conducting training sessions with the staff of new Islamic banks.

What role has Islamic finance played in instigating social change in Jordan?
JIB has long since been committed to offering the best possible banking services to the people of Jordan, promoting social welfare and services along the way.

Last year, JIB issued a report covering our social responsibilities in which we detailed the activities of our two social responsibility committees – one including board members, and one including management. The first committee implement policy plans, while the second will ensure those plans are being followed.

JIB is committed to empowering the citizens of Jordan by helping them avoid dependence on philanthropic activities. Our plan is to finance the citizens’ small projects, which will, in turn, help to solve poverty and unemployment problems. JIB is also committed to supporting the activities of the Ministry of Environment by helping to support health, safety and environmental pollution projects.

The bank will also support a number of smaller scale, but no less important, social programmes, from employees donating blood to arranging lectures for our employees regarding safety from civil defence. Last year, JIB began a new programme to achieve the ISO 26000 certification for social responsibility. JIB has begun implementing a new project to use solar power to generate electricity to cut costs and help protect the environment, and is always ready to finance local companies who wish to implement the solar energy system.

JIB established the Social Services/Joint Insurance Fund in 1994 and supported it by paying $705,000 as a donation. The idea of this fund is that participants will jointly indemnify part of any damage incurred on them according to takaful principles (‘takaful’ is an Arabic word which means helping each other), meaning that participants are helping themselves without additional obligations or risk.

In the future, JIB plans to continue to diversify, develop and improve the quality of its banking services; to expand the issuance of Mugarada bonds; strengthen and develop its application to meet the Basel 2 requirements (as well as making preparations for Basel 3); expand programmes for financing professionals, craftsmen and small- and medium-size enterprises; and to attract new customers from both the public and private sectors.

Religion ‘of critical importance’ in business, says Islamic finance expert | Video

Posted on by Ashton Wenborn

Islamic finance is one of the fastest growing sectors in the world. But does it have anything better to offer than traditional western finance? World Finance interviews Harris Irfan, author of Heaven’s Bankers: Inside the Hidden World of Islamic Finance and Managing Director of European Islamic Investment Bank, to find out if ethics and religion have a place in modern day business, whether Islamic finance is misunderstood, and how prominent he thinks it will be in the west in years to come.

World Finance: Well Harris, let’s start with the name of your book: Inside the Hidden World of Islamic Finance. Now this makes it sound very mysterious, secretive even; surely this is contrary to what people want from their financial services?

Harris Irfan: A lot of friends and family asked me about Islamic finance. Many of them say, “Look, I looked at Islamic finance, and it didn’t look very different from conventional finance to me. So really what is it that you guys do that is different?”

And I have a lot of sympathy with that argument, and I wanted to demystify that argument, and explain to people how this world actually works.

World Finance: Well does ethics – and religion for that matter – really have a place in modern day business?

Harris Irfan: In my opinion it’s of critical importance! And there’s no better demonstration than the last few years, when we’ve seen the short-termism in the conventional banking industry has caused an implosion. And actually if investors and financiers and all the various stakeholders in the commercial market took account of this societal, and environmental, and other impacts of the business that they do, then actually we might have better business all round.

If banks really wanted to change the way they did business, they wouldn’t stick with the status quo

World Finance: So ethics and religion – it doesn’t affect profits?

Harris Irfan: Well if you look at some of the performance, particularly in recent years, of what they call socially responsible investment funds (and included within those are the Islamic funds), you’ll find many of them will have outperformed the conventional investment funds.

So typically for example, if you look at Islamic finance, it will have excluded a lot of the institutions that were exposed to toxic assets during the financial crisis, and as a result they’ll have strongly outperformed.

World Finance: Well how developed is Islamic finance compared to traditional western finance?

Harris Irfan: It has a long way to go. Many of the investors, the institutions, may be newer and perhaps less sophisticated than their conventional counterparts. So you could say that it has a fair way to go.

I think one of the dangers is that it might stagnate as a result of the attempt to replicate the conventional banking industry. And actually I think it needs to forge its own path, and demonstrate to a wider investment base, a wider community, that actually there’s something good, and proper, and right, here. And it can forge a new path, and it needn’t be like the conventional industries.

World Finance: Islamic finance was largely seen to be immune to the financial crisis, but the Malaysia-based Islamic Financial Services Board has recently questioned financial ratios of Islamic financial institutions. So could Islamic finance be headed for its own crisis?

Harris Irfan: It’s unlikely, because although the ISFC are quite correct in identifying that certain institutions have a larger exposure to certain types of assets – like real estate in the Middle East, for example – and therefore is perhaps overly exposed to one area.

On the other hand, those same institutions have not been exposed to some of the toxic assets that we’ve seen in the conventional banking industry. You know, the sort of intangiable derivative contracts that brought down Lehman Brothers and Northern Rock and so on.

So I think there’s a balancing argument. I wouldn’t say that Islamic institutions are completely immune to financial crisis: they do after all operate in a global economy. But at the same time there are some checks and balances in place to ensure that they smooth out those bumps.

World Finance: From my understanding, Islamic finance operates under Sharia law. But that’s not recognised here in the UK, or in fact in most western countries. So how can these financial institutions carry any weight?

Harris Irfan: Actually I think it’s a popular misconception that the two are incompatible. So typically in a Sharia-compliant financial transaction, the contracts are governed by – let’s say – English law. That’s quite common.

But the basis on which this commercial deal has been constructed would be according to a set of ethical parameters, which are the parameters of Sharia law.

[W]hat we’ve learned from Islamic finance can be applied to western
finance generally

So those parameters might be fairness, justice, transparency, not unjust enrichment of one party over another. These are all good principles, and they are definitely not incompatible with English law, for example.

And I think that actually, if one looks very very closely, one will see that there are aspects of English law which have borrowed very heavily from the work of 11th and 12th century jurists from the Islamic world, who developed concepts like trust law and agency law, and so on. Some of the commercial devices that we use today.

World Finance: Well Muslims account for 22 percent of the world’s population, and that number keeps on growing. So how prominent do you see Islamic finance in the coming years for the western world?

Harris Irfan: It will be I think not just important for Muslims, but it’ll also be important for non-Muslims: broad-minded individuals who are looking for a fairer society, a society in which there is a much more even distribution of wealth, where the gap between rich and poor is much less.

You know, what we’ve learned from Islamic finance can be applied to western finance generally. And we’ve certainly seen there’s been a failure of the system in the west over the last few years. Why is that? Why is there a growing inequality between rich and poor? Is there a way to redistribute wealth?

In a sense there’s an argument to go back to basics, and understand what is it that we do when we enter into a trade? How can we make that trade fairer? How can we think about things more holistically? How can we think about our customers, and our shareholders, and our employees, and the environment, and labour practices, and so on and so on.

Because I think once we start thinking about those things, we’re only a small step away from considering Islamic finance as an ethical alternative source of finance. We don’t even have to call it Islamic! It’s just an ethical form of finance, and actually I think it’s relevant for everybody in the world, not just for people from one particular religious group.

World Finance: Well banks are embracing ethical finance more – you’ve got more corporate social responsibility – so isn’t this the same thing?

Harris Irfan: No, I think that that’s very much a sort of PR puff. I’ve been a part of these institutions for 20 years, and I’ve seen CSR come and go, and I’ve seen PR within these organisations. And it’s very much about making sure something gets seen in the annual report, rather than something actually grass-roots taking place.

If banks really wanted to change the way they did business, they wouldn’t stick with the status quo. I actually think that banks are not the leading light as far as ethics are concerned. I think that we ought to be looking beyond those types of financial institutions. And we ought to be involving people outside the traditional debate.

Why aren’t we talking to the people involved in the Occupy Wall Street protests? Why aren’t we talking to the anthropologists? Why aren’t we talking to the social scientists? We seem to be very fixated on only talking to the central bank governors and the politicians, and really the man and woman on the street is not having his or her voice heard.

World Finance: You have a wealth of experience in traditional banks, so how seriously do you think they take Islamic finance?

Harris Irfan: They see it seriously when the money’s good; they see it as a fad when the money’s not there. That’s why I think those who are in it for the long term, those who sincerely believe the ideology of Islamic finance, those institutions that are Sharia-compliant by their nature and therefore are in it for the longterm – those are the ones I think that will carry that flag.

World Finance: Harris, thank you.

Harris Irfan: Thank you.

Bank of America faces $12bn fine for role in financial crisis

Posted on by Ashton Wenborn

Bank of America is currently negotiating to pay at least $12bn in order to settle several federal and state civil probes into its role in the 2008 financial crisis.

Bank executives, as well as officials from the Justice Department, have been actively meeting to discuss the fine with negotiations still in an ‘early’ phase, according to a report by the Wall Street Journal.

[R]eports say that Bank of America is likely to accept the $12bn fine, despite the fine seriously injuring the finances of the bank

The massive pay-out, combined with the $6bn BofA has already agreed to pay the Federal Housing Finance Agency for its handling of toxic mortgages, would exceed the record $13bn JPMorgan Chase paid last year to resolve similar charges.

The deal could be setting a precedent for the Justice Department to press other financial firms for huge fines, as compensation for the costs of the crisis and ensuing economic recession. BofA is one of several major banks currently looking to settle federal and civic probes and investigations, as regulators are pushing for harder and tougher punishments. Only last week, WSJ reported that French banking giant BNP Paribas is currently looking at potential criminal charges, which could send future fines through the roof and see the bank banned from doing business on Wall Street. In this respect, many firms are hoping to avoid such consequences by settling before criminal investigations into banks take precedent.

According to WSJ, a minimum $5bn of Bank of America’s fine will be used to help homeowners reduce the amounts they owe on their mortgages or assisting struggling neighbourhoods that were hit hard by the housing downturn. In this respect, Bank of America, JPMorgan and several other major firms are accused of selling sub-standard home loans to unqualified consumers, packaging those mortgages into securities and selling them to investors around the world.

Consequently, banks have spent tens of billions in legal fees to fend off federal and state probes, whereas no senior executives have faced the possibility of jail time. In order to avoid that, reports say that Bank of America is likely to accept the $12bn fine, despite the fine seriously injuring the finances of the bank, which earned about $11bn last year.

Bahrain Bourse: the stock exchange with a fighting spirit

Posted on by Ashton Wenborn

When it comes to stock exchanges, innovation is often key. And since 2010, the Bahrain Bourse (BHB) has been challenging the odds to emerge as the best and most competitive stock exchange in the region. It follows on with the long and fortuitous tradition of Bahraini stock exchanges, but combines it with cutting edge technology, state of the art equipment, and premium services.

The BHB was founded in 2010 as a replacement for the existing Bahrain Stock Exchange, which had been struggling to keep up with modern trading technology. It assumed many of the duties its predecessor passed one, but brought the level of services up to new standards. It continues as a self-regulated organisation, though the Central Bank of Bahrain licenses it.

Since its inception the BHB has drastically increased the number of companies, funds and bonds listed in the exchange, and today close to 50 regional and international companies are listed in the BHB, as well as 26 mutual funds and nine bonds and Sukuk. There are many advantages to listing with at the bourse, such as the low cost transaction, that is based on its recent incentive programme which capped the broker commission to provide incentive to investors encouraging them to be more active traders.

Bahrain has emerged as an attractive investment destination in and of itself in recent years, and the BHB has been working tirelessly to convert this investor interest into business opportunities. “Looking into Bahrain Bourse’s financial performance, the financial results in 2011 showed an increase in revenues from $9.3m in 2010 to $11.1m in 2011,” explains Yousouf Abdula Humood, BHB’s Chairman. “Recording an increase of 20 percent due to the grant received from the government during this year. Shareholders’ equity also increased from $11.6m, as of December 31, 2010, to $14.8m. BHB reported net profits amounted to $2.92m in 2011 compared to $164,000 in 2010.”

Geographically and economically, the BHB is ideally located to emerge as the leading stock exchange in the GCC region

These are phenomenal results for a company founded in the throes of the worst financial crisis since the Great Depression. Though, if anything, emerging in such a challenging environment has given the BHB a fighting spirit and robustness that will carry it on for generations. Upon its inception in 2010, BHB adopted a comprehensive strategy that aims at developing all aspects of its work. The strategy adopted included different initiatives and programmes. One of the initiatives taken includes programmes currently developed to increase liquidity at the bourse.

Solid foundations
Liquidity is vitally important for the bourse, but the company is taking other innovative steps in order to promote healthy and robust trading. All brokers who are licensed by alternative juristic bodies in other countries will be able to apply for membership at BHB to trade remotely without having a physical presence in Bahrain, and appoint a clearing agent to settle their trades. This step will open the gateway for all brokerage firms in GCC markets to serve their clients at BHB.

“In spite of all the consequences of the global financial crisis and the recent developments in the region that continued to affect the trading activity in most Arab stock exchanges and financial markets, there were various achievements for BHB during 2011 regarding legislative, administrative, and technical aspects which contributed to setting the bases of BHB’s future policies for the coming years, along with defining the nature and size of roles that BHB undertakes to contribute more effectively to the development of the Bahraini economy,” says Humood.

The bourse also spent a lot of time and resources developing a series of programmes and initiatives that provide incentives to attract and encourage new local and regional companies to seek listing at BHB. Locally, the exchange is seeking collaborative work with related entities that will not only provide the improved legal structure but also aid in other elements required to engage in capital market instruments and services.

BHB is also continuing to improve the legal and technical infrastructure in order to meet the growing needs and demands of issuers and investors which include improved online services and easy to process and cost effective operations. The strategy also aims to implement a marketing plan and an awareness programme to highlight the opportunities the strategy provides for all related parties in the short, medium and long term.

There has also been a concerted effort to attract foreign investors to Bahrain. Taking advantage of the favourable tax environment in the kingdom, the BHB has developed an innovative package to encourage foreign ownership. It allows foreigners a 100 percent ownership completely exempt from capital gains tax. The availability of international custodians operating in BHB such as HSBC, CITI and Standard Chartered Bank, and other regional institutions is another advantage for listed companies operating in the kingdom.

And the results are promising. According to the Bahrain All Shares Index, as of the end of November 2013, the bourse gained 13.41 percent compared to the same month in 2012. This increase was associated with a noticeable increase in the value of shares traded by 99.42 percent, the volume by 195.62 percent and the number of trades also increased by 40 percent in comparison to the corresponding period in 2012. The market capitalisation of the BHB stands over $17.7bn. In addition the main financial indicators shows that Bourse’s price-earnings ratio is less than eight times, the dividend yield is around five percent and the price to book value is less than one, based on 2012 results.

Expanding strategically
Having laid solid foundations for development, the BHB is now looking to the future. From this year onwards, it will begin implementing a comprehensive marketing strategy both locally and regionally. While results have been positive, the key now is to attract more listings in order to be able to compete with the leading exchanges in these regions. Geographically and economically, the BHB is ideally located to emerge as the leading stock exchange in the GCC region.

“The BHB have also taken several initiatives to support the development of the workplace environment in a way to enhance staff loyalty to the bourse, maintain all experienced, competent and well-qualified employees, and strengthen internal control systems of BHB’s financial, administrative and technical operations,” says Humood, about the bourse’s commitment to emerging as the leading trader in the region.

With regards to spreading awareness among investors and other concerned parties, the bourse signed a memorandum of understanding with JPMorgan to conduct an annual programme that aims at promoting the stock exchange’s investor relations concept among listed companies locally and regionally. This programme will be held in 2015 for the fourth consecutive year, and attended by participants from Bahrain and other countries in the region. In addition, the BHB signed another memorandum with CFA Bahrain to jointly cooperate in conducting courses and workshops directed to listed companies, brokerage firms, investors and other related parties.

This commitment to education is a defining characteristic of the BHB. Last year, the company launched a programme entitled ‘TradeQuest’ for universities. The programme aims at increasing the investment awareness among university students and familiarising them with the basics of stock market operations and investment techniques by allowing them to virtually trade at BHB and NYSE. There is a similar version of the programme, which has been conducted by the bourse for the past 17 years and targets high school students.

Every step of the BHB’s rise has been carefully calculated in order to ensure its rise is successful and sustainable. And as the world economy recovers more IPOs will begin springing up, at which point the bourse will be ideally positioned to service this burgeoning industry. With its slew of innovative measures designed specifically to attract and support listed companies and investors, it is likely that the BHB will emerge as a leading market creator in the coming years. By encouraging local businesses to grow and diversify, the BHB is not only fostering a better market for itself, but is supporting the growth and development of the whole of Bahrain.

Kuwait International Bank triumphs despite Arab conflict

Posted on by Ashton Wenborn

The Arab world of recent years is perhaps best characterised by crisis. However, quite apart from the issues that have befallen a number of nations, including Syria and Egypt, the area is home to some of the most impressive advances in the banking industry to date.

Islamic finance in particular is exhibiting impressive gains and looks on course to reach a $2trn milestone by year’s end, with 78 percent of that sum accounted for by Islamic banking. What is most extraordinary, however, is that the industry has been unaffected by the conflict and is actually on the upturn, and nowhere else can this better be seen than in Kuwait.

“This type of turmoil is giving the bank a level of appetite to go for certain risks they were not in the past taking,” says Mourad Mekhail, Board Advisor, Kuwait International Bank (KIB), which has negotiated on-going problems with an overriding focus on the client in these areas. “We created some innovative structures that mean we can accommodate the business of our clients, even in these countries that have this turmoil.

Islamic finance in particular is exhibiting impressive gains and looks on course to reach a $2trn milestone by year’s end

“We have the investment banking department, where international banking professionals are doing their utmost to accommodate the business of the clients by creating innovative structures to mitigate and eliminate such political – and also commercial – risk, related to doing business in these countries.” By-and-large, turmoil in the surrounding area has had little to no effect on Kuwait’s banking industry, owing to the sector’s core constituents, who have together shepherded the industry from strength-to-strength.

Expanding in a niche market
KIB, a stalwart of Kuwait’s Islamic banking sector since 2007, is highly representative of the capacity of those in the Islamic banking sector to bring about positive social and economic change, regardless of inopportune market conditions. “We are focusing on our niche,” says Mekhail. “We are establishing that, and building it based on our client needs.

“We listen to our clients, we know the market very well, and we are always maximising the penetration of the market. We are partnering globally, bringing the expertise, the know-how. We are bringing new products and new ideas and new business solutions to our clients.”

While the reasons for KIB’s success are many and various, the common thread here is client centricity, and it is only with a strong commitment in this space that sharia-compliant banks can reach a level of success on par or even close to that of KIB. “We know our clients very well – we listen exactly to what they need. We are prepared to offer all types of services that can be required in the markets in terms of international banking, using the services of our treasury, and in terms of using our retail banking network.”

An all-encompassing view
This focus on the individual is far from exclusive to the client, however, and also extends to employees and individuals in the communities in which the institution plays a part. “It’s very important here to say that really we rely on the teamwork and the spirit and cooperation of every employee in our bank,” says Mekhail.

In essence, the success of KIB and those in the Islamic banking industry is owed to a focus on the individual, which in itself constitutes a core component of sharia-compliant banking and represents a mentality that those in conventional banking should seek to emulate.

It remains to be seen to what extent client centricity will feature in the near future when put alongside Kuwait’s growing capital markets, increasingly stringent regulation and $130bn national development plan, however, institutions such as KIB look to remain essentially unchanged in this regard.

“The year has started very positively. This is confirming what we have as a major target, is being a market player and a market maker. Of course we will be continuing doing our homework and concentrating and focussing our market niche, concentrating and focussing on our client needs, and increasing the return on equity of our stakeholders.”

Tesco sales figures worst recorded in nearly 20 years

Posted on by Ashton Wenborn

Three consecutive quarters of falling sales has led to Tesco, the UK’s largest retailer, to suffer its worst trading figures for nearly 20 years. The supermarket giant believes that an increase in competition from both the high-end and budget markets had hit its sales figures.

The figures for the last three months showed that Tesco’s sales had dropped 3.8 percent, which included a slump in annual profits of six percent during April. The supermarket has been badly hit by a price war from lower-end rivals like Aldi and Lidl, while seeing premium retailer Waitrose rapidly expand its market share.

Clarke maintains that the firm is actively seeking to modernise its stores across the country in an effort to claw back customers

Responding to the news, Tesco CEO Philip Clarke accepted that the sales figures were the worst he had seen in the 40 years he had been at the company. “I have never seen a quarter’s like-for-like sales like this before, that I can remember. I have never seen a period of such intense transformation either for the industry.”

According to research released this week by analysts Kantar Worldpanel, Tesco’s market share in the UK had fallen to 29 percent during this quarter, from 30.5 percent for the same period last year.

Clarke maintains that the firm is actively seeking to modernise its stores across the country in an effort to claw back customers. 650 stores will be upgraded over the next year, and Clarke believes this move will reverse the company’s fortunes. “Our accelerated plans are making a real difference for customers and we are more competitive than we have been for many years.”

However, he warned that the cost of upgrading these stores would mean that in the near-term, Tesco’s sales figures would likely remain low. “We are pleased by the early response to our accelerated efforts to deliver the most compelling offers to customers. We expect this acceleration to impact our headline performance throughout the coming quarters and for trading conditions to remain challenging for the UK grocery market as a whole.”

Islamic finance ‘complementary’ to western equivalent, says Cass Business School expert | Video

Posted on by Ashton Wenborn

With global assets reaching over $1.3trn, it would be hard not to recognise the success of Islamic finance. Indeed, as the repercussions of the global financial crisis rumble on, many in the western world are taking note of what sharia-compliant products and practices have been beneficial. World Finance speaks to Meziane Lasfer, Professor of Finance at Cass Business School to explore what the western world can learn from sharia-compliant finance.

World Finance: Well Meziane, it’s said that Islamic finance is free from the products and loans that triggered the financial crisis, but it hasn’t been immune. So how exposed is it to the same risks as traditional western finance?

Meziane Lasfer: Islamic finance prohibits debt, and given that the financial crisis was created by mainly debt financing, Islamic finance normally shouldn’t have any say in that.

So Islamic finance says that any investment that you are going to do, do not expect any fixed interest. It is more participation in the investment that the company is doing. So if we look at venture capitalists: venture capitalist funding is pure Islamic finance, because they give you money, they give you equity, they participate in your company, and then when your company makes profit, they get their return.

But if the company doesn’t make profit, then they take the loss. They have engaged the capital, so they’re taking the risk with you. Rather than debt, where the risk is transferred only to the company.

We need to be very careful as to how those financial products that are more conventional – in particular debt – can
be turned

World Finance: Well critics do argue that Islamic finance is just traditional western finance dressed up to look more moralistic, because at the end of the day profits end up in the same place. What’s your take on this?

Meziane Lasfer: We need to be very careful as to how those financial products that are more conventional – in particular debt – can be turned just by twisting it into an Islamic finance product.

So far example, we need to look closely at the design of sukuks. Sukuks, they say they are Islamic debt financing, but we need to really look closely at how they are structured to see if they are consistent with Islamic finance principles.

World Finance: Well the sukuk really isn’t without its controversy, because very conventional, very traditional scholars, actually don’t recognise it. So why is this?

Meziane Lasfer: Yes, we are facing a very difficult situation. In theory we have Islamic finance that tells us that we shouldn’t have financing that is based on debt. In practice it will be too constraining for companies to really make them finance-only with equity.

So you still need some debt financing, but in order to please the scholars, you need really to go probably to the extreme, to say: no interest at all. So probably issue what we might call a zero coupon bond, ie, you don’t pay interest during the life of that bond, but at the end of the bond you will pay the interest as well as repaying the principal of the bond.

But then the problem is, how do we calculate the excess that you will give on that bond? So suppose that I issue you a bond for £1,000, and then I tell you in five years time I’m going to give you £1,200. But how am I going to compute those £200 that I’m going to give you extra?

The big problem is that Islamic finance is
relatively new

Is it really interest? Is it participation? Is it the time value of money? Is it inflation? And so on.

So all those factors that contribute to this excess money that I’m going to give you are not straight forward. They are controversial. So in other words, I can understand the sharia scholars’ point. It’s just a matter of explaining to them where this money is coming from. As long as it is not fixed, as long as it is not a form of interest – a kind of ‘shadow interest’, if we can put it between quotes, then it should be fine.

World Finance: Surely Islamic finance isn’t always consistent, because it’s open to the interpretation of sharia boards?

Meziane Lasfer: The big problem is that Islamic finance is relatively new. Even in conventional finance, it’s not clear as to how should companies finance themselves, or how should banks behave, or how should derivatives be traded. So from Islamic finance that was created only recently, you would expect really lots of controversies!

And in fact as you mentioned earlier, the fact that we had this big increase in Islamic finance products, means that this development has already lots of problems were taken out from it.

World Finance: How much would you say Islamic finance is replacing traditional western finance?

Meziane Lasfer: Islamic finance is not a substitute; it is complementary.

More importantly, it offers liquidity. Liquidity is very critical in financial markets, if you don’t have enough financial securities that are trading, like equity, debt, convertibles and so on, there will be some excess in the prices, because there will be lots of demand, yet the products that you’re offering are small.

Islamic finance is not a substitute; it
is complementary

World Finance: The UK will issue a £200m sukuk, so how prominent do you see Islamic finance in the future?

Meziane Lasfer: If you have got all this money that is coming up from the government in the form of Islamic finance, I think that will be an advert for the London market, and also for the investors to say, oh yes, if the government is issuing all these sukuks, it is a product that we really need to take seriously. That we need to invest in, because it has already got the backing of the government in the UK.

World Finance: Meziane, thank you.

Meziane Lasfer: My pleasure.

Burgan Bank paves the way for economic prosperity in Kuwait

Posted on by Ashton Wenborn

Kuwait’s banking industry has emerged from the economic and political troubles outside of its borders relatively unscathed in the recent years. Despite the political turmoil in nearby Syria and Egypt, Kuwait’s banking sector has enjoyed steady growth over the last couple of years, bucking the trend of many affected markets. Although the country’s economy has continued to be dominated by the large amounts of crude oil on its borders, the government has been actively trying to diversify things in recent years.

With the industry in Kuwait enjoying a series of opportunities that have sprung from the government’s colossal $130bn national development plan, financial institutions like Burgan Bank Group are well positioned to help the country transform its economy. At the same time, the wider GCC region has been resilient to outside pressures due to its high liquidity and the sensible financial measures taken by many governments. 2013 saw solid performances from a number of institutions, but leading firm Burgan, which enjoyed a particularly strong year, outshone all.

Burgan Bank revenue

$581m

2010

$900m

2013

Founded in 1977, the bank is the youngest commercial bank and third-largest in terms of assets in Kuwait. Its main focus has been on serving corporate clients and financial institutions, while it has also been growing its retail and private banking customer base. The group has five majority owned subsidiaries that are spread across the region. These are the Gulf Bank Algeria, the Bank of Baghdad, Jordan Kuwait Bank, the Tunis International Bank, and the fully owned Turkish subsidiary known as Burgan Bank. It is also looking to expand into new markets, provided they meet the strict criteria that the board has set out.

Speaking to World Finance, Bashir Jaber, Burgan Bank Group’s Head of Corporate Communications, said that a good deal of the bank’s success has been down to its implementation of what it calls its ‘4×4 strategy’. Jaber says that this strategy has pushed it into new markets, as well as solidifying the bank’s position as a trusted financial powerhouse in the region.

How has Burgan Bank Group’s strategy changed in recent years, in light of the difficult economic climate?
Having accepted the current challenging financial climate in the region and the volatility of the markets, we built our long-term corporate strategy around one core idea – to smartly grow in all areas. After steering the brand, group corporate communications and investor relations activities for the past three years, I can proudly say that the bank has grown into a regional commercial banking powerhouse, which has managed to continue to grow faster than the market, achieving solid year-on-year growth. Considered one of the largest regional networks and leading financial brands, Burgan Bank Group offers a superlative range of corporate and private banking services, in addition to a growing retail banking franchise across more than 231 branches in eight countries. We are therefore well positioned for smart growth on both the domestic and international fronts.

Between 2010 and 2013, Burgan Bank has undertaken a successful turnaround in the group’s profitability. We have launched innovative and unique products, advocated best practices and excellence in many areas and, most importantly, delivered a total shareholder return that is higher than the industry average. With a resilient and prudent regional strategy – combined with focused execution – each of our subsidiaries continues to perform well and deliver even in non-expansionary cycles. This is being done despite the tough operating environment, which is characterised by volatility, low investment and low job creation.

In what ways has the company’s strategy remained strong?
Throughout its growth journey, the group proved the strength of its operating model and the resilience of its formula. Through the period 2010-13, we delivered a strong financial and operating performance supported by solid balance sheet growth. This can be seen by the fact that revenues grew from $581m in 2010 to $900m at a compound annual growth rate (CAGR) of 15.4 percent, while underlying net income grew from $16m in 2010 to $258m in 2013. Loans and advances also grew from $7.6bn in 2010 to $14bn in 2013, at a CAGR of 22.6 percent, while total assets grew from $14.8bn to $25bn. Deposits increased from $9.1bn in 2010 to $16.4bn in 2013 at a CAGR of 21.6 percent and total liabilities grew from $12.8bn in 2010 to $23.2bn in 2013 at a CAGR of 21.7 percent.

[T]he bank has grown into a regional commercial banking powerhouse, which has managed to continue to grow faster than the market

In addition to solid financial and operating performance, the company’s risk position has been significantly improved – non-performing assets (NPA) to gross credit facilities has dropped from 7.3 percent in 2010 to 3.4 percent in 2013, while the coverage ratio was at 123 percent at the end of 2013. NPAs, net of collateral to gross facilities, stands at 1.6 percent, and coverage net of collateral at 256 percent.

In 2013, international operations contributed 54 percent of Burgan Bank’s revenue, reaping the benefits of a successful diversification strategy into faster growth markets. In recognition of its achievements and consistent performance, Burgan Bank was awarded the Best Banking Group in Kuwait, 2013 award by World Finance. The group has also won a number of other prestigious awards that recognise the way in which it has grown in recent years, as well as the service it is offering clients across Kuwait and through its international subsidiaries. Many of these awards have recognised its role in the MENA region, and the way it has helped to shape and modernise the industry.

Burgan Bank has also seen its strategic brand management propel it up the chart of another highly regarded index. Our approach has delivered a strong brand position in the top 500 league of banking brands worldwide in the Brand Finance Report published in the FTs’ The Banker magazine. Burgan Bank’s brand rating has been re-affirmed as AA for the second consecutive year with a positive outlook, making it the highest rated banking brand in Kuwait. Our brand value has also increased to $234m, in comparison to 2012’s value of $175m, representing a CAGR of 15 percent. This also saw the group jump 43 positions in the rankings of the top 500 banking brands across the world. What’s more, the Burgan Bank brand was recognised in 2012 when it won the Best Banking Brand in the Middle East award from The Banker’s Middle East division.

Which areas have produced the best performance, and in what ways is Burgan Bank Group looking to expand?
Despite the challenging operating environment, we have managed to grow locally and acquire market share with profitability thanks to a number of various initiatives. Firstly, our teams have worked to introduce new products and support the current product range through varied sales and marketing campaigns. That successful mix, along with a growing sales-force, managed to grow our loans and deposits books.

Over the years, Burgan Bank’s Kuwait business has grown to become a leading corporate banking service provider, achieving various accolades by offering a wide range of specialised products and services that provide cost-effective end-to-end banking solutions.

Moreover, our retail banking operations delivered fruitful results; 2013 was the year our retail operations returned to profitability. The retail bank contributed 17.5 percent to the revenue line in 2013, reflecting a growth of 52 percent year-on-year. The total number of accounts in 2013 stood at 154,436: a 21 percent growth year-on-year. The bank’s retail operations have also seen it awarded the Best Domestic Retail Bank of the Year, 2013, by the annual ‘Service Hero’ customer survey, which also shortlisted the bank as a top retail-banking brand in Kuwait.

How does the company’s strategy differ to its competitors?
We like to describe ourselves as a luxurious yet powerful 4×4, because we stick to our resilient formula on rough bumps as well as smooth roads. It is a formula that has proven resilient, and has resulted in a solid financial and operating performance together with effective risk management and internal controls, which is enabling us to strike the right risk-return balance.

The last three years have served as a successful platform for us and so we will continue on the same path of smartly growing the business. Our objective remains to plough ahead in uncertain times through innovation and flexibility.

‘Everything is going haywire’: top economist Dr Eamonn Butler on why we should worry about the UK economy | Video

Posted on by Ashton Wenborn

Risky bankers and excessive lending: these were largely seen as the villains behind the global financial crisis. But to what extent were governments to blame? World Finance speaks to Dr Eamonn Butler, economist and author of The Economics of Success: 12 Things Politicians Don’t Want You to Know, to discuss who should take responsibility for the economic downturn, why he thinks Britain should get out of the EU, and whether the Bank of England’s financial predictions for the UK economy are a good sign.

World Finance: Well Dr Butler, maybe we can start with what you think caused the global financial crisis?

Eamonn Butler: Governments and bad regulation! The crisis was caused because we had an enormous boom which was created by cheap interest rates and loose money for a very long and protracted period.

Added to which, you had the government in America, and here in Britain, subsidising housing, encouraging people to take out house loans. So what did you get? You got a huge boom, you got a massive increase in house values and so on. You got an unsustainable spiral. Eventually that all collapsed, and now we are reaping the rewards of that. It’s as if we had a huge party, and this is the hangover. And I’m afraid we just have to go through it.

We’re trying to have another drink in order to get through the pain

World Finance: So government profligacy, this is what you said caused the financial crisis. So do you think the coalition government has made matters worse?

Eamonn Butler: We’re still borrowing hugely. I mean the government borrows one pound for every five pounds it raises in taxation. The national debt is still rising. Public expenditure has hardly declined at all. Households are still borrowing at massive, almost record levels. So I think that… I said it was like a party and you have a hangover; I think we’re actually trying a hair of the dog. We’re trying to have another drink in order to get through the pain. And that actually just makes the whole thing worse.

World Finance: So do you support then a more laissez-faire attitude of governments towards financial regulations?

Eamonn Butler: The regulators really caused this crisis in the first place, certainly in America, because for very good reasons, the American government wanted poorer people to have access to their housing market, and therefore it used the regulatory authorities in order to force banks to lend to people that they didn’t really want to lend to. And so the banks knew that they were lending some very bad business. They diced it and sliced it, and sold it back to us here in London, where it polluted our banks as well.

So the regulators generated this problem in the first place, and then when the crisis actually hit as it inevitably had to do, what do the regulators do? Well they were all standing on each others’ feet! They hadn’t got the faintest idea what to do.

World Finance: Well one of the statistics you quote in your writing is £375bn of virtual money has been created through quantitative easing. So where do you think this is headed? 

Eamonn Butler: At the moment all of that money basically is being used to shore up the government, because it’s going into the bond market. And that’s where it’s stuck.

Eventually it’s got to get out of there and go into the real world somehow. When things pick up, then that is the time that that money will reappear. You can argue that it wasn’t a bad strategy: there was a collapse in the money supply when the banks started calling in loans and so on, and therefore you have to replace that.

But you’ve got to be willing to get that money back out again when things start picking up. And that’s the trouble with central bankers, you know? They love a boom, and they’re very bad – as the former Fed chairman said – at taking away the punchbowl once the party gets a bit riotous. And you have to take away the punchbowl, I’m afraid.

So I fear that there is an inflationary pressure there, baked into the system, and that when business starts to revive, if business starts to revive, then that’s when we’ll see that inflation coming through. And that’s not good either.

I think that Britain can easily manage on its own

World Finance: You suggest that the Bank of England should stop cheap credit, and this should be done before the elections. But realistically, wouldn’t this be political suicide? 

Eamonn Butler: It should be done right now. Obviously the nearer you get to an election, the more difficult it is for the bank to act. The bank has to act, because we are clearly creating another false boom. And that is being created, as before, on housing subsidies and on cheap credit. The bank has already complained about housing subsidies – the government isn’t going to do anything about that – so we’ve got to look at the cheap credit.

And the longer you postpone it, the bigger you have to make the rise. And that will cause real pain for people, because when interest rates are very low, even a small increase is a big bill.

World Finance: Well staying with politics for a moment now. David Cameron recently said the EU is too big and too bossy. So do you think we should step away from Europe?

Eamonn Butler: I think that Britain can easily manage on its own. I think that we would have a free trade agreement with the world, basically. At the moment we are locked into a free trade agreement with Europe, and that means we actually have to impose quite heavy tariff barriers on other countries that we would dearly love to do business with.

And I think also the costs of the regulation have really made the whole thing a negative now.

World Finance: So back to the UK now. If not quantitative easing, what would you say should be the solution?

Eamonn Butler: What you have to do is to let the market do its job. The reason that we have a recession is because we had a fake boom created by cheap credit. People have invested in things that were unsustainable in the long run. Assets and personnel are in the wrong places, doing the wrong things. We have to reassign them to do the right things for the real world, post-apocalypse economy.

The way to do that is really to get out of the way. It is to reduce taxes on business, it is to reduce regulation on business. To get rid of things like minimum wage regulation and other things that stop human and financial and physical resources getting to the right places.

[Taking away the minimum wage] would be entirely beneficial

So: clear the field. Let the market do its job. And then you will come out of the recession very much quicker than you would ever possibly imagine.

World Finance: So taking away regulations, especially the minimum wage. How would this affect people at the grass-roots level?

Eamonn Butler: I think it would be entirely beneficial. We’ve got nearly a million young people in the UK, for example, who can’t get a job. Because they have no skills, they’ve just come out of school or college, they’re not trusted employees, they don’t have references, and no employer will take them, because they’re not worth the minimum wage!

So what you want is people to create starter jobs so that young people in particular can take a job, and then show themselves that they can actually hold down a job and do it properly. And then they’ll get a better job. That is a much better system than the present tax on jobs which just keeps them out of work entirely.

World Finance: Now the Bank of England has predicted that the UK economy will rise 3.8 percent this year. So, should we start celebrating now?

Eamonn Butler: We should start worrying! That is well above trend, I mean how could you ever believe that is going to happen? Okay, we’re starting from a low base, but that is much too fast! That is a sign to me that everything is going haywire, it’s going out of control.

World Finance: So a fake boom, and a worse crash. These are the words you used in your writing. So this isn’t really want we want to hear; where are we headed?

Eamonn Butler: Hopefully people will realise that this is crazy. This is where we were in 2004, 2005, 2006, and that we’d better not do that again. And that hopefully governments will tighten their belts a bit.

I hope that the regulators don’t just keep imposing more and more regulation, particularly on the banks, which is the most regulated industry in discovered space already. And if we can do that, if we can just keep out of it, and let the market sort these things out, then there’s the possibility that we will survive this.

World Finance: Dr Butler, thank you.

Eamonn Butler: You’re welcome.

IBA: legal world responds to economic austerity measures

Posted on by Ashton Wenborn

As the ramifications and effects of the global financial crisis continue to expand and act as catalysts of further instability – particularly in the financial markets almost eight years later – the gathering of more than 5,000 legal practitioners, business leaders, regulators and government and non–government officials at The International Bar Association’s (IBA) Annual Conference in Tokyo, Japan in October of this year, provides a unique platform to assess how, and if any, legal and regulatory reform can provide remedies to these dynamic issues.

The IBA was established in 1947, and is a leading organisation of international legal practitioners, bar associations, law firms and law societies. It has influenced the development of international law reform, shaping the future of the legal profession globally, and has a membership of more than 50,000 individual lawyers, 205 bar associations and law societies spanning 170 countries, with considerable expertise in assisting the global legal community.

Grouped into two divisions – Legal Practice and Public and Professional Interest – the IBA covers all practice areas and professional interests, giving members access to leading experts, up-to-date information and unparalleled global networking opportunities. Through the committees of the divisions, IBA members interchange information and views on laws, practices and professional responsibilities relating to the practice of law globally.

IBA covers all practice areas and professional interests, giving members access to leading experts, up-to-date information and unparalleled global networking opportunities

Corporate governance and responsibility, labour and employment law, pro bono activities, the empowerment of women and vulnerable groups with the rule of law are not the mainstays of an activist agenda. Rather, they are part of what is expected every day, of business lawyers and the daily aspirations of the law for everyone.

Professor Joseph Stiglitz, the Nobel Prize-winning Economist, former Chairman of the Economic Advisors under President Bill Clinton and Former Chief Economist at the World Bank, spoke at length at the 2012 IBA Annual Conference in Dublin on the macro issues related to the GFC, informing those present: “It’s five years since the beginning of the recession, six years since the breaking of the bubble. The downturn continues with no recovery really imminent. In many of the countries – of Europe particularly – GDP is still less than it was before the crisis. The question, obviously, is asked, how long will it last?”

Stiglitz went on to suggest that the only relevant precedent was the Great Depression. “The Great Depression is usually dated as beginning in 1929…looking at this from a perspective of the US, in 1937 we hadn’t recovered and we went back into a double-dip recession. The reason? President Roosevelt was persuaded to try a dose of austerity because of fear of deficits.”

Following the wrong treatment
Assessing the situation from both a US and European perspective, Stiglitz concluded that one of the chief underlying causes of the continuing, dynamic instability – particularly in Europe – is that “the diagnosis in Europe of what went wrong was wrong and, as a result, the prescription was wrong. What one hears commonly is that the problem is excessive debt; but Europe’s debt-to-GDP ratio was actually better than the US. If Europe changed its economic framework, it could have access to credit, funds – at the same negative real interest rates that the US could. Because they misdiagnosed the problem as over-spending, the prescription has been, quite naturally, to cut back on spending: austerity.

“But one should remember austerity has almost never worked. This is an idea that’s been tried over and over again; back in 1929 Herbert Hoover tried it… The IMF has tried this experiment; in East Asia I saw it in the years that I was at the World Bank; they tried it in Latin America; each time it succeeded in converting downturns into recessions, recessions into depressions.”

The second core issue, similar but subtly different on both sides of the Atlantic – and inherent in the misdiagnosis – Stiglitz argued, is one of politics versus economics. “The fundamental problem with Europe is very simple: it’s a flawed currency arrangement. Europe, the eurozone, was not based on economics, it was based on politics. The economics was very clear. My colleague at Columbia, Robert Mundell, got a Nobel Prize for his work on what were the conditions under which a group of countries could share a common currency. And European countries did not satisfy those conditions. And I think that the European leaders knew that at the time, but the hope was that somehow, in the ensuing years, there would be a change that would make the system work.”

While Stiglitz revealed he saw “a little basis for optimism” among the emerging markets, in particular China’s focus “on quality of growth, not quantity and the belief that a slightly slower growth would lead to a higher quality of growth”, his final message was still from a position of concern. “Even in the years before the crisis, in most countries, there was growing inequality. But the economic downturn has exacerbated these problems greatly… Economic inequality leads to political inequality and for those of you in the legal profession it presents, I think, a particular challenge. There’s a risk that the promise of justice for all will become justice for those who can afford it.”

Another way?
Muhammad Yunus was awarded the Nobel Peace Prize in 2006 having successfully developed microfinance to address poverty in Bangladesh. Starting with just $27 more than 30 years ago, his Grameen Bank has grown to become a multibillion enterprise lending almost exclusively to women. Also speaking at the IBA Annual Conference in Dublin in 2012, Yunus touched on similar themes to Stigltz, concurring in a sense, that many of the core issues affecting the global economy, and in turn many national economies, are so far reaching because they are inherent and systemic issues within the institutions attempting to resolve the ‘crisis’. Yunus went on to suggest that a completely different paradigm is both possible, exists already in fact, and is replicable.

“[Grameen Bank is an] unusual bank in the sense that it focuses on delivering financial services to poor women and this is a bank which is owned by poor people, poor women. So in that way it’s unique in the whole world. And it gives loans for income generating activity. The basic principle of the bank is that people should not go to the bank; the bank should go to the people. So we are not an office-based bank. Our office is not our place of work; our place of work is the doorstep of the borrowers. Grameen Bank means village bank, we work in the villages. Today we have 2,600 branches over 80,000 villages in Bangladesh so we have covered every single village in Bangladesh. And it has changed their lives, improving their income with their own power of creativity in business.

“Another feature would be it [the bank] doesn’t take any money from the government and it doesn’t take any money from international sources or anything. It generates the money inside the bank by taking deposits and then lending the money to the poor people in the area.” Asked what fundamental changes he would make to the existing institutions and frameworks, Yunus responded: “…make the institutions work for the poor to get them out of the situation they are in.

“Also, create a new legal structure, because you think, all right the bank is there, why can’t you create a bank to do that? But the law creates the bank for the rich. It’s a different kind of animal you create with those laws, it’s a bank for the rich, so you need a different kind of legal framework to create a bank for the poor. People say a bank is a bank. It’s not true: a bank is not a bank, because conventional banks – even after 35 years of micro credit all over the world – still could not open their doors to the poor because their system doesn’t allow them to open the door. So why can’t we create a separate banking system, or a separate breed of bank, which is a bank for the poor as we have done in Bangladesh. So this is why we need a separate structure for that… redesign the whole thing.”

The law, finance and human rights
A powerful report by Action Aid looked at how multinational corporations in developing countries are avoiding paying tax. The report was inspired by the IBAs Human Rights Institute setting up its own taskforce to look at the impact of tax abuses on human rights.

A second landmark report was written by the IBAs Presidential Task Force on the global financial crisis, entitled Poverty, Justice and the Rule of Law that directed its attention to the negative impacts of the financial crisis on those persons least able to manage or counteract them, and the wider social and legal issues that have resulted from, or been highlighted by, the GFC.

“Both reports look at what the global legal community can achieve beyond the perceived core purpose of ‘business and corporate law’,” says the IBAs Head of Marketing and Membership, Neil Smith. “They are about mobilising the legal profession as a whole to look at poverty issues.”

The detailed reports were published in late 2013 and are packed with ideas and solutions. They include contributions from four Nobel laureates, as well as an insight into how Argentinian lawyers fought their way back to democracy after years of dictatorship, and then weathered their own economic struggles in the early 1990s. Both reports share the aim of urging lawyers, legislators and corporate and NGO lobbyists to face the fundamental responsibility of campaigning for laws that go beyond a client’s individual interests.

By 2015 – the deadline for the world to meet the UNs millennium development goals (MDGs), which include the challenge to reduce poverty by half – the global community needs to be ready to take the next step. These reports provide the suggestions of a global tax on greenhouse gas emissions and arms imports to developing countries; an end to secret bank accounts in tax havens; and rewarding innovation in medicine by paying for the actual health impact rather than high prices up front. These are just three proposals from Professor Thomas Pogge, Director of Yale University’s global justice programme and Chair of the IBAHRI Taskforce, which compiled the report on tax abuses.

“The world has the resources but still over one billion people survive on less than $1 a day [compared to a daily $2 agricultural subsidy for every cow in the EU],” says Peter Maynard, joint editor of Poverty, Justice and the Rule of Law, and Chair of the IBA Poverty, Empowerment and the Rule of Law Working Group.

Magellan sees container investments grow rapidly

Posted on by Ashton Wenborn

The traditional savings book is ridiculed for its low interest rate in good times, and lauded as the only safe way of keeping hold of your money in bad times. And the savings book has lost some of its solidity as financial holes in state coffers persist. Nobody who is anybody wants to be caught without investments on the stock markets in good times, but you’d heave a sigh of relief if you don’t have shares when times are more bearish. So are we in good or bad times? It’s difficult to tell these days.

It’s the same story with business investments and participations – they’re in demand for their potential in good times, but only a few are viewed as safe assets in times that are not so rosy. Their security was questioned for years due to the lack of state regulation, but almost all asset classes have since proven to be potential loss-makers regardless of whether they’re listed on the stock exchange or state certified; whether the loss is caused by market factors or mismanagement. The financial crisis of 2008, or rather since 2008, has shed a completely different light on the security aspect in general, and on opportunities and risk assessments – who’s qualified to give investment advice? And more to the point, who can say what’s really happening on the markets as a whole?

Magellan ploughed some $82m into containers – all of which were quickly snapped up by
leasing customers

There are four main considerations that play a role for those willing to invest: market, object of investment, concept, and counterparty. As any builder will tell you, it’s all about property and construction prices, the property itself, financing, and construction companies. It can hardly be any different for other forms of investment, can it?

Contained investment
Looking at the market first, the statistics show an increasing trend in container traffic that goes back years despite the global crisis; a trend mainly based on the ever-increasing volume of trade due to growing globalisation. This has not only increased the number of container ships, but also the size – and container-holding capacity – per vessel. The enormous investments in container ships as an asset have encouraged liner shipping companies to take on containers that they do not necessarily own, with container vessel and container markets diverging just in the last marine shipping crisis of 2008. Containers are built on demand, depending on orders from liner shipping companies; supply and demand react far more rapidly; and the market dynamic clears the container market far more effectively than it does for ships and shipbuilding project financing.

Containers have come to symbolise globalisation; hardly anything else represents the global networked economy to the same degree. Different types of container have emerged, and increasing numbers and volumes of goods are containerised in packaging for shipping – and the increasing containerisation ratio is still rising. The clock can’t be turned back on globalisation: the flow of goods will continue, and container shipping will continue to develop with it. The share of long-term-lease containers has been increasing in comparison to master-lease containers in liner shipping companies for years, whereas short-term leasing saw a significant drop in leasing payments during the crisis. Master-lease containers were no longer used by liner shipping companies, and increased off-hire container inventory at container leasing companies increased until the world economy came back to life. Long-term leases were mostly honoured. Predictions see an increase in global container inventory from 33 to 38 million TEU (20-foot equivalent unit) over the next four to five years, mainly 20ft standard and 40ft high-cube containers – predictions that are a reasonably safe bet since annual replacement and ships yet to be delivered offer a solid prediction basis. So we will be seeing a need for containers in the coming years.

Investments in this market now have to be placed on a sound financial and legal footing with a proper concept. Two types of investment have emerged on the capital market – funds and direct investments. A fund is an investment in a company that uses borrowed capital to invest in a portfolio of containers belonging to a container leasing company. If possible, the leasing company should be a major player on the market, leasing the containers to a variety of liner shipping companies with good credit ratings for different periods and leasing rates – a scattering effect that secures the investment. Investment funds in niche markets – swap bodies, chassis, tank containers – or in portfolios of dubious provenance or of small scale pose greater risks to investors outside the industry, and should be left to active market players. Container leasing companies ensure optimised container management, paying excess leasing payments to the investor and selling at the best terms at the end of the period, thus ensuring the success of the investment for investors.

Unlike funds, direct investments involve purchasing the containers, taking ownership of a specified number of containers identified by container serial numbers. Investors do not co-own the investment company, but act as the sole agreement counterparty to a container management company that leases containers to liner shipping companies itself or through a leasing company in fixed long-term leasing agreements; the existence of an actual long-term lease agreement secures this investment, but only where reputable lessees with good credit ratings are involved. Whether through funds or direct investments, working with competent and creditworthy counterparties plays a major role in container investment success.

Knowing the right people
Container investments only used to fail when the investor did not take sufficient care in reviewing the four aspects – market, object, concept, and counterparty. Again and again, investors inexperienced in the market seek to invest in niche markets in special equipment with dubious counterparties, and still expect their investment to be successful. It only takes failure in one aspect for the whole investment to fail, however solid the concept.

Investment offers from initiators new to the market often have difficulties in establishing themselves permanently due to insufficient experience and lack of good contacts, and if the investment fails, investors are often left standing with their containers as the counterparty lacks sufficient contacts. Successful investments in functioning markets with standard containers that have been in demand for years and selection of top market players as counterparties have been possible for more than 30 years, and returns of four to seven percent (IRR after tax) can be reached after a standard term of three to six years; however, only experienced market players will offer this kind of investment.

How does a company in the maritime industry manage to remain successful, even during a crisis period? Magellan Maritime Services is continuously gaining new investors despite the tough economic times, and according to the company’s own information, ranks among the world’s top 20 container leasing organisations.

In a period when banks are giving the shipping and transportation sectors as wide a berth as possible, the sea container leasing specialist Magellan is continuing to forge its own path – and this despite the fact that reports of weaknesses in the ship chartering sector and a dramatic decline in container shippers’ cargo business on many shipping routes aren’t exactly inspiring confidence.

The Magellan team derives tremendous benefit from its expertise and the commitment of its staff, as well as the company’s personal contacts and ability to build relationships of trust with shipping lines, container manufacturers and a host of companies in the industrial, financial and business sectors. The figures speak for themselves: Magellan has leased 246,000 TEUs to date, of which 120,000 TEUs comprise containers that are an average of two years old and are currently under long-term lease. Magellan only leases new containers for periods of five years or longer.

Shipping demand
Among other things, Magellan is involved in the container financing sector, with the aim of enlarging its container fleet and meeting shipping companies’ growing demand for leased containers. The surge in container ship construction between 2003 and 2008 induced a major upswing in the container leasing sector, until the onset of the financial crisis in 2008, which brought about a major decline in container leasing and a shakeout in the leasing industry.

“Magellan’s position in terms of direct-investment activities is taking on ever growing importance,” says Magellan Sales Director Axel Roselius. “We’re seeing confirmation of this in the growing number of new investors that we’re attracting and the current 60 percent reinvestment rate on the part of our steady customers; and this is trending upwards.”

For the most part, Magellan steers clear of bank financing; nor does the company have any plans to avail itself of underwriters. In keeping with its motto, ‘keep it simple’, Magellan is a company with a robust one-two punch: it offers investment opportunities in the container sector and, at the same time, acts as a container management and leasing company. The size of the container fleet that Magellan leases to shipping companies has grown steadily over the years, and between January and December 2013 alone, Magellan ploughed some $82m into containers – all of which were quickly snapped up by leasing customers.

Magellan provides its customers solely with direct-investment opportunities, provided that promising offerings of this type are available under the prevailing market conditions. No investment portfolio will be offered during times of market uncertainty or poor market performance. One of the main drivers of the company’s success has been its investment customers, and it does everything in its power to keep them happy by offering them attractive investment opportunities. The company only offers its customers the opportunity to make direct investments in sea containers that are made in China and that are leased from there for five years or more to the world’s top 25 shipping companies.

For further information email info@magham.de

Economists blame weather as US economy contracts in Q1

Posted on by Ashton Wenborn

Revised Department of Commerce figures show that the US economy shrunk in the first quarter of 2014, marking the country’s first instance of economic contraction in three years. On an annualised basis, the economy contracted by one percent, little under the original estimate of 0.1 percent and far short of the 2.6 percent rise the quarter previous.

“Overall the first quarter was subject to a number of notable influences, including historically severe winter weather, which temporarily lowered growth,” read a statement released by the White House. “The President will do everything he can either by acting through executive action or by working with Congress to push for steps that would raise growth and accelerate job creation, including fully paid-for investments in infrastructure, education and research, a reinstatement of extended unemployment insurance benefits, and an increase in the minimum wage.”

Economists believe the weather conditions alone were responsible for a loss of 1.5 percentage points

The economy’s reversal is believed to have come in large part due to harsh winter conditions and a lack of business investment throughout the first three months of the year. Economists believe the weather conditions alone were responsible for a loss of 1.5 percentage points, whereas falling exports combined with strong imports slashed the US trade deficit by 0.95 percent. However, emboldened economic indicators since have given many analysts cause for optimism.

For one, figures released by the Labour Department showed that the number of jobless claims in the week ending May 24 had fallen 27,000 to 300,000 and employment rose close to 300,000 in April. All things considered, most expect second quarter growth to come in at around 3.5 percent, and for the economy to regain the pace it showed towards the latter stages of last year.

Economists have been quick to emphasise that the contraction is not as bad as it looks, and cite improved labour market conditions as a major contributor to the country’s growth in the months ahead. “I wouldn’t worry about the contraction at all,” said Paul Dales, Senior US Economist for Capital Economics. “There are strong signs that the health of the labour market has improved in the second quarter, which is pretty crucial.”

Michael Levi on China’s resource extraction boom | Video

Posted on by Ashton Wenborn

Chinese resource extraction has been growing at an increasingly intense pace. But has feeding the dragon come at the expense of resource-rich countries? World Finance interviews Michael Levi, co-author of By All Means Necessary, and Senior Fellow at the Council on Foreign Relations to find out about the boom and what it could mean globally, and what course the Chinese economy is likely to take over the next few years.

World Finance: Michael, what is wrong with China’s ambitions overseas?

Michael Levi: There isn’t necessarily anything wrong. Every rising power with a growing economy ultimately needs to turn outward for resources to fuel its economy.

You can generate most of the sources of national power from within, but you’re stuck with the resources that you have. So at some point, every country – the United States, Japan, now China – turns outward to secure resources.

Every rising power with a growing economy ultimately needs to turn outward for resources to fuel its economy

World Finance: Now let’s talk about China in terms of its domestic policy. You know you mentioned in the book that they’re moving towards a more services and technology driven economy. What sort of implications is that going to have for foreign trade with China?

Michael Levi: That’s the central question, because the course that the Chinese economy takes at home is going to have an enormous influence on how it performs abroad.

So China looks at several different forks in the road, in some sense. One is between continuing along its investment heavy, export heavy path, or shifting towards to a more services based economy that’s less energy intensive, less resource intensive. That’s something they’ve been trying to do for many years – largely unsuccessfully – but they hope to turn the corner now.

Then you have this division between no matter what you do, using more efficient technology or less efficient technology. And again, it’s challenging in a less market-based economy, to steer producers and consumers to more efficient technology. But again, depending on the path that China takes there, you’ll see different demand for various resources around the world.

World Finance: This is a country that’s been trying to make this shift for at least five years now, struggling at various periods. So do you think it’s likely that we’re going to see a dramatic change in the next five years?

Michael Levi: Well I don’t think you’ll ever see a dramatic change, but the question is, can they start to turn the corner? And for that you want to focus on the structure of domestic China’s economy, and domestic Chinese politics. Because this is really a political challenge.

This is something that economists generally agree would be good for China, and good for the rest of the world. But just because something is good at the highest levels, doesn’t mean that there aren’t big winners and losers.

And it also doesn’t mean that the structural deficiencies in the Chinese system can naturally be overcome. It turns out that it’s easier for the Chinese government, the Chinese political system, to steer money into big infrastructure projects, big state-owned companies, rather than the more diffuse economy that would be needed to chart this different course.

World Finance: Now in terms of oil reserves, I really like the way that you’re able to debunk the myth that China is at fault for raising oil prices. Can you explain in your own words why you think it’s not necessarily China, but more these market-driven factors?

Michael Levi: Well we should be clear, over the last decade oil prices have gone up enormously. And that would not have happened without very strong Chinese demand. But it also wouldn’t have happened without decisions by a host of countries around the world to not produce more. To actually hold back their output in order to drive prices higher in the face of Chinese demand.

[The rise in oil prices] would not have happened without very strong Chinese demand

There were countries – particularly in the Middle East – that were able to make more money by producing less. And that’s why we’ve seen what we have.

What we argue in the book though is that when you step out of this past 10 years and look out at the next 10, it’s unlikely to see a repeat performance. So we went from $20 to $100 for a barrel of oil. We’re not going to have another five-fold increase from $100 to $500, even as China grows. The world economy has started to respond, it’s producing more, technology has advanced, and we’re not consuming less, but we’re consuming less than we otherwise would have, because we’re becoming more efficient in our use.

And when I say we, I mean most countries around the world: including China.

World Finance: As China has a stake in foreign oil reserves, what sort of implication is that going to have as they continue to build and build their portfolio of control? Are we going to see them in any way be able to monopolise and therefore increase or decrease prices at their discretion?

Michael Levi: Well for the most part, China wants to see lower prices. So for most countries around the world – unless they’re oil exporters – that’s a good outcome. And this Chinese money that’s going into overseas oil production, it’s often a bad deal for China! They’re often losing money, they’re making bad bets. But by adding oil to the market, they’re benefiting economies around the world.

And so I think that is generally a positive outcome, one that we should welcome.

As far as monopoly goes, China’s still a relatively small player compared to the big producing countries and the big international investors. And so it’s diversifying the global pool. You see China buying oil overseas, investing in it? But typically selling that oil on to the global market.

World Finance: Now having a resource-hungry country such as China propping up regimes in Africa that are fighting terrorism could potentially exacerbate the situation locally, don’t you think?

So when China invests in Africa, you have a host of different impacts. Certainly when China invests, or when it buys resources that others produce, it can boost the overall economy in these countries. It can help the broader population.

But we know that if resource extraction is handled poorly; if it’s not transparent, if it’s not done in a way that properly shares wealth – and often China’s companies can abet that sort of trend – it can undermine governance. And that can help any of many kinds of bad things to happen in a country, whether it’s on the security side, or on the labour side, or on the environmental side.

World Finance: Ensuring southeast Asian sea lane security is a real issue for China, isn’t it?

Michael Levi: So you’re hitting on an important piece. We assume that international trade and resources, and other things, is a frictionless thing. That it happens without any kind of military, security, involvement. That it’s a pure economic process. But the reality is, there’s a security regime that underpins all that. These resources move around the world at pretty low cost, because security is provided for those sea lanes that they travel over.

But if you’re sitting in China, and you look out at the world and you see the US is guaranteeing the security of these sea lanes. The US is an adversary, or at least a potential adversary, and you start to ask, ‘What can I do at a reasonable cost to provide more of my own security for that trade? So I don’t need to rely on others?’

And I think you see manifestations of that in the South China Sea in particular. You see conflict in recent weeks between China and Vietnam, ostensibly over small bits of land, and maybe oil and gas resources nearby. But I think really, in substantial part, about the sea lanes that run near those small pieces of rock. Because if you control the land, you have a stronger claim to the sea.

China often tacks back and forth. But right now they seem to be feeling confident

World Finance: So do you think this current regime is more or less willing to diffuse tensions in those regions where they have trade deals?

Michael Levi: I don’t think we’re seeing a move toward a more conciliatory Chinese approach. I think if you look at the pattern in recent months you’re seeing a more aggressive approach. Particularly when it comes to the common areas that move global commerce, including commerce and resources.

You saw the unilateral declaration of an air defence identification zone late last year. You’ve seen the situation with Vietnam. You’ve seen conflicts with Philippines. You’ve seen more tension with Japan. And so it seems that the trend is towards greater assertiveness, towards greater deference to the military, rather than a more conciliatory approach.

We’ll see! China often tacks back and forth. But right now they seem to be feeling confident.

World Finance: Do you think fears of China’s resource extraction, the pace that it’s happening at – do you think it’s unwarranted?

Michael Levi: I think a lot of it is unwarranted. In the sense that… not in the sense that it isn’t a challenge, but in the sense that we have appropriate responses. I think we need to make sure that we become more efficient in our use of resources. That we make it possible to produce resources. That we develop alternatives so that supply isn’t overly strained, and prices don’t become too challengingly high.

We also need to make sure that we invest in that global regime of open trade and secure trade that we’ve benefitted from so much over the last decades.

I think we’ve actually been pretty successful in bringing China along. Not always, but a lot of the time. But as we see what’s happening in the South China Sea, as we see Chinese diplomacy with Russia, I think we should be reminded that this isn’t necessarily a natural state of affairs. It requires our attention.

World Finance: Michael Levi, thank you so much for joining us today.

Michael Levi: Thank you.

Chalhoub Group drives growth for Middle East luxury brands

Posted on by Ashton Wenborn

Recent years have seen Western and Eastern cultures unite, notably in the Middle East where globalisation alongside impressive economic growth has beckoned on in an emerging consumer class and a whole host of international-quality brands. One area in particular where there has been a great deal of expansion is the luxury sector, where certain organisations, among them being the Chalhab Group, have orchestrated extraordinary change.

Countries in the Middle East represent a market of promising and largely untapped opportunities for luxury brands. However, in order to succeed in this space, these luxury brands must have the know-how, expertise, and knowledge of constantly changing specificities, as well as a deep understanding of the region, which is a vital prerequisite of success.

[T]he Chalhoub Group has been able to build brands in the region and has acted as a bridge-to-market

The region benefits from a young population, with 50 percent under 30 years of age, and this in turn offers tremendous potential for the luxury market, not only in terms of numbers but also in the opportunity for brands to overcome their uncertainty about young consumers and build loyalty early. In order to succeed in this space, it is essential that companies know these consumers and understand their various needs and behaviours.

In this respect young consumers are driven by conflicting aspirations. On one hand they are searching for individual expression and personal style, and on the other these consumers are bound to strong social codes and traditions. The region’s young consumers have changing behaviours and are always looking for the latest in terms of collections, for a unique experience and an unparalleled service.

Building a brand on knowledge
The key to succeeding in the region is to know these consumers; to understand and answer their needs. For example, luxury Gulf consumers are following their own journey, rooted in a particular lifestyle and the societal codes; they are passionate about luxury yet demanding and assertive.

Through the years, the Chalhoub Group has been able to build brands in the region and has acted as a bridge-to-market while making sure to bring value to those in its portfolio. Today, it is aiming to continue its work in that direction, while also supporting brands to build its activities within the Middle East. However, the aim is not simply to bring new brands to the region, but to focus on its existing partners and help them grow within the Middle East.

In fact, the GCC offers great opportunities for international brands to achieve levels of recognition and respect. Some brands have already achieved this, not simply by following the obvious path but rather by working with local partners to create and expand opportunities. Making long-term strategic commitments and leveraging insights into the region’s nuances have proven to be effective in minimising the risk and opening the door to the greatest possible return on investment.

The group’s role is to help its partner brands to know consumers better. Any brand entering the market needs to connect, both rationally and emotionally, with its consumers, tapping into their sensibilities, speaking their language and offering an outstanding level of service.

For almost 60 years the Chalhoub Group has been building brands in the region based on delivering excellence in service. It is the leading partner for luxury across the Middle East and an expert in the fashion, beauty and gift sectors. Through the years, it has been supporting international brands and building its businesses in the region by providing the necessary tools to develop, grow and adapt strategies for the market and consumer’s needs.

It has been able to accompany each brand in its growth and development. Through research conducted within its Strategy and Innovation Unit and the experiences gained through the years in the market in the domains of retail, distribution and marketing services, the group has a firm understanding of market dynamics and consumer behaviours and expectations.

The main focus for the coming year is to continue building partner brands in the region, adapting mind sets to changing consumer needs and continue developing human resources, especially in the Gulf nationals. For the group, achieving these goals – especially in the current economic climate – is possible through applying three key leadership skills. It is very important to always take new initiatives, while keeping an entrepreneurial spirit, encouraging the leaders to constantly push the boundaries of their expertise, their know-how and their customer understanding. Inspiration is key in aiding the leaders to pull and develop their teams as well as prepare for the next step.

Reaching out for wider coverage
Supporting local designers and brands has helped their development by providing the right tools and advice to be able to grow locally and internationally. This is done though an initiative undertaken by the group in partnership with the Khalifa Fund, an independent body of the Abu Dhabi Government which caters to local entrepreneurs by providing them with a holistic approach to entrepreneurship through funding, training and development, and equip them with the necessary tools for a successful business.

Through this agreement, the Chalhoub Group intends to share its expertise in the retail business with the Khalifa Fund by developing vocational training courses and offering local entrepreneurs with voluntary opportunities such as shadowing and mentoring in the retail sector. Another area the group would like to focus on in the coming year is the development of human resources, especially among Gulf nationals.

The group has had an impact on building brands in the region, and believes that it has a responsibility to positively impact the communities in which it lives and operates. Therefore, it is committed to providing career opportunities for talented nationals in the countries they operate in, to grow within the group and progress their professional career. The Chalhoub Group Graduate Development Program has been designed to help create the future leaders and offers a professional development opportunity in an exciting luxurious industry.

On a market level, the GCC is taking a far more prominent role on the world stage. With geopolitical, socio-economic, educational and cultural projects, the Gulf States are securing their place in the world by attracting the economic attention. These resilient dynamics will bring a new centrality for luxury. Regional cities want to emerge as hotspots for fashion shows and designer events, and are working towards levels on par with Milan, Paris, London and New York. The Middle East will not only be a rich territory for luxury consumption but for luxury creation.

The group is very positive about the year ahead. The region’s economic growth is picking up and a lot of new projects are in the making. Consumers are becoming increasingly assertive, and this pushes it to be constantly innovate, which is very healthy for an organisation. With the luxury market facing disturbances globally, growth has slowed down in the second half of 2013 but 2014 has begun very well. This volatility is a key challenge – agility and the ability to adjust operations quickly will be critical in 2014.

Falcon Private Bank: emerging markets ripe with opportunity

Posted on by Ashton Wenborn

The financial media has perpetuated the idea of the ‘crisis’ in emerging markets; whether it is political turmoil in Ukraine, Thailand, Turkey, Venezuela or inflation in Brazil, all of these situations have frightened investors away. Each situation is different, but they also present many similarities. There is an Arabian proverb which reminds one that in every crisis there is an opportunity: “Four things come not back: the spoken word, the sped arrow, the past life, the neglected opportunity.” Before delving into an assessment of the right approach for global investment, it is important to take a general look at the emerging market hypothesis, which can be divided into the following elements:

  • Higher than average GDP growth; young populations; urban migration. In effect the ‘demographic dividend’;
  • Modernisation of infrastructure;
  • Manufacturing excellence/efficiency driven by plant modernisation and lower labour costs;
  • Wealth growth, which in turn leads to emerging consumer plays;
  • Abundant natural resources.

These factors alone are not sufficient cause for investing. One must pay an attractive price for growth, and top-line growth on its own is not a guarantee of profit or positive investor returns.

Understanding the market
Today, an investment strategy towards emerging market (EM) equities should not be premised on the simplified thesis that all EM’s are in a synchronised expansion, where one can then make an allocation towards the BRIC countries (Brazil Russia, India, China) markets through an exchange-traded fund (ETF). The term ‘BRIC’ was first coined 13 years ago, and that label brought global investor attention. Financial product innovators immediately created BRIC asset allocation products and soon Western capital flooded into these markets, propelling them up at rates five to 10 times higher than the US equity markets from 2002-08. The Emerging Asia index went up by five times in that period; the Emerging Eastern Europe index by eight times; and the Emerging Latin America index was up 10 times. Over the same period, the S&P 500 rose by 85 percent. Since the meltdown in 2008, these markets fell twice that of the S&P 500 and since then the US market has bounced back to its old 2008 highs, whereas each one of these broader BRIC EM indices are still materially below their pre-crash high.

Unlike in the past, when almost all emerging markets were on a synchronised expansion, things are much
different today

Unlike in the past, when almost all emerging markets were on a synchronised expansion, things are much different today. Many emerging economies are now running trade account deficits, have overleveraged banking systems, declining profit margins, currency devaluations, inflation pressures and social unrest. Other countries, like the UAE, are on the rise economically and their stock market performance reflects this acceleration. This phenomenon emphasises the notion that country or regional selection (and stock selection) is likely to be much more important to success than the old approach of selecting an EM basket in one’s portfolio.

Emerging markets clearly contain more volatility than their developed market counterparts. Previous crises in EMs led to long-standing problems, while impacts on developed equity markets were much more temporary.

There are fundamental reasons why it takes some time for these markets to become attractive buys. There are two distinct but interrelated metrics to understand. One is the trade dependency of a country, and second is its capital market dependency with the rest of the world. What brings these two factors together is a country’s trade deficit, or surplus. Countries with a trade deficit basically need to finance that deficit; in short they are capital importers. If a country’s imports are valued greater than its exports, a trade deficit develops. If the deficit persists, the currency eventually ‘devalues’ as a mechanism to slow the imports and accelerate exports. Countries with dependence on imported food and or fuel for example are particularly vulnerable. As their local currency depreciates it costs more to import food and fuel and this leads to inflationary pressure and then social unrest. Basic sustenance becomes very expensive for the local population.

Furthermore, the inability of a country to pay for government services like police and fire protection creates additional local political risk. This is exactly what happened in Ukraine, Thailand and Turkey. Economic stress highlights political mismanagement and inefficiency leading to a populist request for new leadership or reforms. Policymakers in these countries have many agendas, but most want to maintain their control. They attempt to fight currency depreciation and local inflation by raising interest rates or placing restrictions on the exodus of local capital. This becomes another contributor to social unrest (rising costs of mortgages) and then, coupled with inflation, social unrest leads to a period of poor relative and absolute returns for local equity markets. These issues are ones that take many months to rebalance. Early re-entry to these markets based on comparisons to historic valuations can be value traps.

Crisis spillover
Because many of these economies compete with one another for capital and for exporting power, countries that are similarly situated with trade deficits usually have capital markets that are correlated. When there is a ‘crisis’ in one, it usually leads to some systematic risk across other similarly situated country’s currencies and equity and fixed income markets.

For some time now, there has been growing concern about five emerging markets in particular: Turkey, Brazil, South Africa, India and Indonesia, referred to as the ‘fragile five’. The argument goes that these markets exhibit current account and fiscal deficits and are particularly vulnerable to US Federal Reserve tapering and investor confidence. Earlier this year, global markets sold off on this systematic anxiety. Similar to Greece or Ireland, these economies represent less than five percent of world GDP, and only about 0.5 percent of world equity market capitalisation. In our opinion, the ‘fragile five crisis’ is likely to only be a tempest in the teapot, and is not likely to affect in a material way the rest of the world’s economies.

China, on the other hand, is a significant player in the world economy; it’s not the tempest in the teapot, it is the teapot. Deceleration risk in China is likely to have a material effect on the second tier emerging market economies that are suppliers to China, whether it is raw materials or energy. In order to appreciate this risk, it is important to revisit what has happened in the Chinese economy over the last 20 years.

The Chinese economy grew enormously from natural forces like urban migration and its position as a global manufacturing centre. Recently, GDP growth has had (like most economies) top down stimulus added from the state. This has mostly been through mandated infrastructure builds and bank lending to state-owned enterprises, and real estate projects. China continues to be in a delicate transition from a huge goods exporter to a new model that is struggling to sustain the same growth rate of the last decade. Instead of excess capacity being rationalised, it was expanded further with leverage. When there’s excess manufacturing capacity that is leveraged, it means that the owners of that capacity need to sell more goods to keep plant and labour capacity deployed. This means that goods are sold at even lower prices rather than not sold at all, which leads to profit margin pressure on companies. This is the primary reason why many local Chinese equities have had a difficulty in gaining upward price momentum over the last few years.

Growth and decline
During the 1980s, Japan was the envy of the rest of the world. Numerous academic studies were published about the efficiency of the Japanese manufacturing and export industry. The economy grew from $1trn in 1980 to $3trn by 1989. During the same time period, Japan’s stock market grew 11.72 percent per year. At the end of 1989, the Japanese stock market began its 20-year bear market and faced significant challenges of deflation, an aging population, excess capacity, an over leveraged real estate market and high loan losses in its banking system. A culture of pride, which had been reinforced by a decade of global admiration, made the recognition of these post bubble realities difficult to acknowledge and contributed to a protraction of needed policy reforms and economic restructuring.

China today is similar. Some of Japan’s challenges in the 1980s and 90s became China’s opportunities in the 20 years after 1989. Japan’s deflation era became China’s prominence era from 1989-08. One might argue that the onset of China as a competitor contributed to the deflationary forces that took hold in Japan. The important thing to take away is that Japan’s deceleration and stock market bubble bursting in 1989 did not spill over and have a long-term adverse effect on the US economy or stock market. One could argue that the deflationary pressures in Japan, and the rising alternative supplier of goods (from China) from 1989 onward, contributed to the growth in profits of US-based companies. Similarly, the deflationary pressures of excess capacity now in China could also have a positive impact on US profitability and GDP growth.

There are a number of conclusions we can draw from the above. The ‘fragile five’ are an insignificant part of global GDP and global stock market capitalisation. Instability in these countries is not likely to have a negative spillover effect on US markets. The potential deceleration of the Chinese economy is also not likely to have an adverse material effect on the US economy or stock market, but will continue to affect emerging market raw material suppliers. But in the shorter-term, global markets are affected by sentiment, and any contagion of a ‘China deceleration’ will certainly affect confidence, and hence valuations.

Countries like the UAE are running on a desynchronised expansion based on lower cost energy production and are now diversifying into tourism and other industries. Other frontier markets have also desynchronised and positive fundamentals can be attractive long-term allocations today, just as broader EM allocations were 20 years ago.

Valuation matters
There is no homogenous emerging market growth hypothesis built solely on demographics and GDP growth. Attractive pricing of that growth is imperative and no one should invest in GDP growth alone. Valuation matters. Country, regional and industry allocations are becoming more important determinants of long-term prudent portfolio construction. All investors should recognise the inherently higher volatility of emerging markets and be prepared to modulate portfolio volatility through international diversification. Finally, asset class diversification reduces portfolio volatility, giving an investor greater confidence and less emotional interference in asset allocation. Staying the course, but also recognising the big picture trends, is the key to long-term wealth building.