2016 | World Finance

Farewell to Ali al-Naimi, the king of oil

Posted on July 28, 2016July 29, 2016 by Helen

In May, the time finally came for Ali al-Naimi – described by many as both the most influential non-royal in Saudi Arabia and the most powerful man in the oil industry – to step down from his position as the Saudi Arabian Minister of Petroleum and Mineral Resources, a role he had held since 1995.

Not one to make a scene, the former oil minister made way for his successor Khalid al-Falih – Chairman of state-owned firm Saudi Aramco and close advisor to Deputy Crown Prince Mohammed bin Salman Al Saud – without ceremony. Speaking to the Financial Times, Yasser Elguindi, Oil Market Analyst at Medley Global Advisors, said: “These are big shoes to fill.” He added, however, “Khalid al-Falih will be up to the task”.

The Saudi Government shake-up, which affected not just the oil minister but a string of other senior figures also, brought a swift and decisive end to Naimi’s more-than-20-year tenure as taskmaster of the kingdom’s oil policy. His replacement, a graduate of Texas A&M University and long-time Aramco veteran, is known for his part in relieving the public sector’s grip on the oil industry and inviting foreign participation into the country.

Yet despite all of this, Naimi’s departure has been received with a tinge of sadness, and many in the industry will remember his time in office with considerable fondness.

“It’s a brave new world”, Elguindi said of the change. “Ali al-Naimi has been the main steward not just of Saudi oil policy, but of the global oil market in general for the last quarter century. Everyone looked to him for guidance.”

Humble beginnings
In contrast to his high standing in later life, Naimi was by no means born into a rich family and has always enjoyed a reputation as a relatively humble and measured man. Born in 1935 to a poor Shiite Muslim family in Saudi Arabia’s eastern province, Ali bin Ibrahim al-Naimi spent his formative years tending to his father’s flock of sheep. At the age of 12 he worked as an errand boy at Aramco, the company he would later go on to lead.

As much as Naimi was known the world over as one of the most influential figures in oil, his downfall was his inability to part ways with it

It was an American company executive who recommended that Naimi be sponsored for proper schooling, and after graduating from Lehigh University in Bethlehem, Pennsylvania, Naimi went on to study at Stanford University. Following that, he swiftly made his way through the ranks after rejoining Aramco.

His appointment as Minister of Petroleum and Mineral Resources in 1995 signalled something of a sea change in Saudi Arabian politics, with his rather muted style of leadership contrasting sharply with the exuberance of his predecessor, Sheikh Zaki Yamani. Naimi’s appointment was testament to the country’s newfound professionalism and desire to be seen as a leading and stabilising force in the oil business.

Bob McNally, a former White House energy advisor, told the Financial Times: “Minister Naimi has been regarded as a professional, seasoned policymaker and calming influence on his often fractious and frazzled OPEC brethren.” Writing in a publication for the Oxford Energy Forum last year, Pedro Haas was equally affectionate: “Naimi is deeply knowledgeable about the oil industry, from the nuts and bolts of exploration and production to the subtleties of oil policy. He is a thoughtful and polite man, unassuming to a fault, the perfect Sherpa to his king.”

Haas went on to say that – by and large – the degree of professionalism within the Saudi oil industry has deepened with each successive ministerial appointment, and in this regard Naimi has most certainly done a great deal to enhance the legitimacy of the nation’s oil policy. Haas noted: “A very steady pair of hands will be needed to steer the main player in the global oil market.”

Changing of the guard
Now Naimi’s time is done, it appears the kingdom’s oil policy is shifting once again, and the appointment of Falih heralds the beginning of yet another chapter for Saudi Arabian oil.

However, this latest change applies not only to the minister but to the department itself, which has since been renamed the Ministry of Energy, Industry and Mineral Wealth. “The leadership is betting on diversification that previous Saudi leaders have failed to deliver”, Bill Farren-Price, Head of Petroleum Policy Intelligence, said in an interview with the Financial Times. “With Riyadh no longer seeing oil as a growth business, they have decided now is the time to change the focus – the change in ministry name is telling.”

The changing of the guard has less to do with any of Naimi’s policy missteps – which have largely succeeded in keeping the country’s finances stable in times of volatility – and more to do with the scale of the challenges that lie ahead.

Naimi took to the headlines recently for his decision not to lower Saudi production in the prevailing low oil price environment. Furthermore, the decision to maintain output and pile pressure on US shale producers sparked a global contest for market share. This also represented a change of tack from what had come before: OPEC, which produces a third of the world’s oil, has historically kept supply on a short lease to maintain high prices. The latest change, aside from heaping pressure on rival oil nations, did a great deal to boost Naimi’s renown and underline his influence on global oil markets.

Ali al-Naimi in numbers

53rd

On Forbes’ list of the world’s most powerful people 2015

21 The number of years Naimi was Saudi Arabia’s Oil Minister

$1trn

OPEC’s oil revenue in 2014 under Naimi’s governance

$460bn

Saudi Arabia’s oil reserves are projected to dip to this level by 2019

This was far from the first time one of his decisions has dictated the trajectory of oil prices: in 1997, the then-oil-minister went to great lengths to fend off a slump in the wake of the Asian financial crisis; and again, in 2008, when the global financial crisis took hold. In each case, Naimi succeeded in reversing oil’s demise and reminded investors around the globe of its enduring allure. The appointment of a new Saudi oil minister, however, marks the latest in a series of reforms instigated by a government set on diversification and disturbed by the economic fallout low oil prices could bring.

“The changes, especially at the Ministry of Petroleum, were much awaited”, said John Sfakianakis, Director of Economics Research at the Gulf Research Centre, speaking to The National. “The decision to merge ministries and appoint Khalid al-Falih is definitely a plus and a sign of efficiency and technocratic continuity.” Speaking about the reforms, he added: “There is a definite change in the dialectic… There is a different air of reform: more of an emphasis on delivery and greater accountability.”

All this being said, as much as Naimi’s departure hails a change of face, this isn’t to say Saudi Arabia’s OPEC policy direction will change in any significant way. Rather, Naimi’s departure has more to do with a failure over his tenure to free Saudi Arabia from its dependence on oil. As much as Naimi was known the world over as one of the most influential figures in oil, his downfall was his inability to part ways with it.

This optimism for all things oil was on show earlier this year when, in January, he appeared positive about the future of oil prices, despite prices settling below $30 a barrel for the first time in 12 years. “As you know, the oil market has witnessed over its long history periods of instability, severe price fluctuations and petro-economic cycles. This is one of them”, he told the audience at an energy gathering in Riyadh. “Market forces, as well as the cooperation among the producing nations, always lead to the restoration of stability. This, however, takes some time.”

A month later, not long after the price of oil bounced back to around $50 a barrel, Naimi again emphasised that demand for oil was on the up and suggested a measure of stability had returned to the market: “Markets are calm now… demand is growing.” However, the then-minister appeared all too aware of his effect on the oil market when he responded to reporters intent on hearing his comments concerning oil prices: “I don’t like to talk about oil, because we want calmness. Why do you want to bring up the prices issue? Leave the prices alone.”

Oil reform
No matter, the issue of having reporters hang on one’s every word is not one Naimi need contend with, and observers will look to his successor for an indication of where oil markets might be headed. As much as the former minister was influential in dictating the kingdom’s oil policy and averting crisis, his was a position that was always sure to change as Saudi Arabia looked to implement its new reform programme, Vision 2030.

The Aramco oil refinery in Saudi Arabia

In April, Saudi Arabia’s Deputy Crown Prince, Mohammed bin Salman Al Saud, announced a raft of economic and social reforms aimed at freeing the kingdom from its dependence on oil. According to the Vision 2030 announcement, the vision “is built around three themes: a vibrant society, a thriving economy and an ambitious nation”. It is worth noting that this is the same Prince Mohammed who recently curbed Naimi’s influence and replaced not just him, but the nation’s energy, oil, water, transport, commerce, social affairs and health ministers as well.

“Saudi Arabia is in a unique position in its history, in which it has the economic incentive, the financial resources, and the political will to enact true reform”, said Oliver Cornock, Managing Editor of the Oxford Business Group, in an interview with Business Destinations. “Now Saudis increasingly recognise the need to right the fiscal ship, precisely because the oil price is where it is, and many I’ve spoken to are eager for a reinvigorated, dynamic economy which will offer jobs, and better quality ones at that.”

A recent slump in global oil prices also means business confidence in Saudi Arabia has taken a notable hit, while government spending has suffered a major setback, according to Olivier Najar, Country Risk Analyst – MENA at BMI Research. As a result, Saudi Arabia is due to enter a protracted period of subdued growth from this year onwards, racking up annual real GDP growth of 2.3 percent on average between 2016 and 2020, compared to five percent in the period spanning 2011 to 2015.

According to Cornock: “Even with an eventual recovery in oil prices, population growth, internal oil consumption and rising government expenditures, particularly in the form of long-term liabilities such as healthcare and pensions, the kingdom’s economic future is contingent on the development of a non-oil economy and especially an autonomous private sector growth.”

The country, if it so chooses, can mitigate the gathering storm should it follow through with its reform measures. Gone are the days when Saudi Arabia could rely on oil revenue and public spending for prosperity, and the nature of the challenge demands that policymakers do away with the old guard and embrace new blood. Najar told Business Destinations: “The reforms have the potential to stabilise the country’s growth outlook, and budget balance, over the longer term.”

New beginnings
Now Naimi’s time is at an end, there has been no shortage of tributes paid to the oil veteran, each commemorating his contribution not just to the industry but also to Saudi Arabia’s rise on the world stage. In May it was announced the former oil minister would receive this year’s Honorary Lifetime Achievement Award for the Advancement of International Energy Policy and Diplomacy, to be presented by the Abdullah Bin Hamad Al-Attiyah International Foundation for Energy and Sustainable Development.

“There will never be another Ali al-Naimi”, said the former deputy prime minister and minister of energy and industry, Abdullah Bin Hamad al-Attiyah in the announcement. “He oversaw the policies and astonishing growth of the world’s biggest oil company and oil exporter on the planet. No matter if he was working in a small group in a boardroom or facing cameras from all over the world, al-Naimi was always gracious and knowledgeable. His 70-year career saw him literally rise from the desert shop floor to become the world’s most powerful oil executive for almost three decades.”

Now Saudi Arabia is moving into what some are calling a new, post-oil era, the full impact of Naimi’s influence on the oil market will become ever clearer. Only in the coming months will we witness the way in which Saudi Arabia is set to benefit – or suffer, perhaps – as a result of his departure.

Ali al-Naimi – curriculum vitae

Born: 1935, Dhahran, Saudi Arabia
Education: American University of Beirut, Lehigh University, Stanford University

1935
Naimi was born to a relatively poor Shiite Muslim family in Saudi Arabia’s eastern province, where he spent his formative years tending to his father’s flock of sheep and eventually worked as an errand boy at Saudi Aramco.

1957
After graduating from the American University of Beirut, Naimi rejoined Aramco, where he quickly worked his way through the ranks and established a well-earned reputation as possessing a shrewd business mind.

1983
Naimi was named President of Aramco in 1983, becoming the first Saudi to hold the position. Having combined the presidency and chief executive positions, he
went on to fill both of them separately.

1995
His appointment as Saudi Oil Minister signalled a sea change in Saudi Arabian politics. While some commentators were sceptical of his abilities, his actions strengthened the kingdom’s hold on the global oil market.

1997
Arguably Naimi’s biggest challenge came first in 1997, when he had to fend off a slump in the wake of the Asian financial crisis. Further turmoil would come when the global financial crisis hit in 2008.

2016
Naimi was dismissed as part of a wider government shuffle, to make way for Aramco’s Chief Executive. The departure marked the end of Naimi’s reign as perhaps the most powerful figure in the oil business.

How anthropology can benefit customer service in the pension industry

Posted on July 25, 2016May 16, 2017 by World Finance

Knowing your customer is not just a compliance issue; for pension providers it’s about understanding savers’ lives – sometimes even better than they understand themselves. John Glottrup of Danica Pension walks World Finance through its ingenious method of using anthropology and ethnography to provide tailor-made financial products. By focusing on the events that can transform consumers’ lives, he explains, pension providers can craft concepts, service models, and advisory events, that better serve customer needs. And he introduces the simplest consumer interface that Danica has developed, that is helping consumers realise they actually need to take action to secure their financial future.

World Finance: Know your customer. It’s not just a compliance issue: for pension providers it’s about understanding savers’ lives, sometimes even better than they understand themselves. Danica Pension has found an ingenious path to these insights; joining me is executive VP John Glottrup.

John, you’re working with a team of anthropologists to gain insight into the lives of your consumers. So tell me about that collaboration, and what insights it’s brought you.

John Glottrup: We work with a company called Red Associates: very insightful, very skilled. They work with some of the best brands in the world. And what they do is, they leverage a range of techniques such as ethnography and anthropology, which is about more in-depth studies of what really goes on when consumers make decisions.

So, we can ask a consumer what’s most important for them when they pick out an insurance policy, and people will give us the standard answers. It’s the cost, the expected return, the service, that people are friendly, and all of that. And not to say that these factors are not important, but when we pose the second line of questioning – what did you pay in costs last year, what was your return, when was the last time you actually used our service? – people will go blank. They will have no answer.

If you don’t understand, and you can’t remember, these things simply cannot be the reason why you decided to go in one or another direction.

What the anthropologists came back to us and said was actually, what makes sense is to understand what goes on in peoples’ lives.

World Finance: So how have you changed, based on the understanding you’ve gained from these insights?

John Glottrup: So what we’re doing now is basically concentrating our efforts – not to say that segments are not important – but we are more focusing on life events. What is it that’s happening in the lives of our consumers? Because that is where we need to be, at the right points in time, with the right services and the right products.

Let me give you just one example. Around the age of 55, something starts to happen. We see it very clearly in our data: activity picks up. People engage with us, they ask questions, they will ask for quotations on changes to their policies or their services. And we also see a lot of churn.

We had the anthropologists take a closer look, and what they came back with was that at 55, it’s just a symptom of something else going on. Because on average at 55, you become independent from your kids, so to speak. Kids leave the house, or they graduate from college. So you’ve got plenty of time, and potentially some more financial legroom. And you start wondering: so, how am I doing with my pension? Have I been saving enough? Should I be saving more? What’s going to happen for the next years of my life?

That’s the very narrow financial view. But the anthropologists uncovered that actually a lot more is going on. Because people start thinking about, should I buy a new house? Should I go back to college? Should I buy this flat in southern Europe to enjoy life a bit more? And once you understand that, it becomes a lot easier to actually craft a concept, a service model, and then an advisory event, that caters for what really goes on in the mind of the consumer.

World Finance: So how does it change the conversations that you have?

John Glottrup: As opposed to having a very product-centric conversation around the right insurance coverage, the right amount of savings, and the right life insurance, then it became more a conversation around: how am I doing with my finances in general?

So, do I have the financial situation that I want to be in? How would that look 10 years or 15 years out? Should I be saving more, or should I be saving less and spending more? So we’ve done this digital pension check, and we’ve done a completely new consumer interface.

What it is, is a traffic light: red, yellow or green. Very simple. How are you doing? Are you okay against what would be our professional recommendation? And if we put that tool in front of the consumers, what we uncover is that more than half of consumers will receive at least one red light. At least one. Which just tells us, we haven’t done the job. We have by no means met the target of actually making our consumers financially confident, and ensuring that they can use the pension for what it should be used for.

So it becomes a broader conversation which is not just about pensions, but is also about other sums of money, which is about all your financial assets, and your entire life situation.

I hate the word holistic, but in the absence of something better, that is actually the word. It becomes more of a package.

World Finance: The insights you’re getting really seem to have applications across the board, for peoples’ entire financial lives. So, you’re a subsidiary of Danskebank; is this insight informing its whole service?

John Glottrup: Absolutely – and when I say I hate the word holistic, it is just because it is a somewhat overused phrase. I don’t think that many financial institutions can claim that, you know, we’ve actually been able to deliver that kind of service.

What we are doing in collaboration with Danskebank is actually, enriching the picture. So, moving from a product-centric lens that is all about pension; to a broader perspective on your entire financial situation. And we have a vision in the group that actually, what we want to provide is financial confidence. In order to do that, we have to be trusted. And trust is something that you earn.

So, we need to enlighten and inform and help our consumers in managing their financial situations – not just on a pension, but on the entire financial situation. And that’s the only way we can build trust. That we do that in a reliable, and credible way.

World Finance: John, thank you very much.

John Glottrup: Thank you.

Ghana’s drive to modernise its pensions sector

Posted on July 23, 2016July 11, 2016 by Helen

As with many emerging markets, Ghana’s current economic development has led it to modernise and standardise a number of important sectors of its economy in recent years. A key area that has been subject to much change is the country’s pension industry. The introduction of a three-tier pension system in 2008 replaced the quasi-state-owned pensions provider.

Another key area of change has been the increasing involvement of private pension providers in the sector. World Finance spoke to Philip Delali Zumanu, the CEO of Pensions Alliance Trust, about these changes, the reasons they have come about, why they are so important and how they are taking shape. Zumanu also explained his own firm’s strategy within the market, what we can expect from the future of Ghana’s pension industry and the leading role Pensions Alliance Trust will take.

How has risk management in Ghana’s pension sector changed in recent years?
Until 2008, pensions in Ghana were managed by a single, quasi-government organisation called Social Security and National Insurance Trust (SSNIT). They administered both a defined benefit and a defined contribution scheme. There was no independent regulator and it was heavily under the influence of the political authority of the government in power. This structure exposed the monopolistic pensions sector to a lot of risks concerning investments, governance, operations, financial, regulatory and funding.

The introduction of the three-tier pension’s scheme in 2008 via the National Pensions Act, 2008 (Act 766) brought a new perspective to the risk horizon of Ghana’s pension sector. It has introduced changes in the structure, management and control, which has impacted heavily on the risk and returns of pensions funds.

About 80 percent of Ghana’s informal sector workers were excluded from pension schemes, yet they needed them the most, the social protection that pension schemes are designed
to provide

It is worth noting that the independence of the regulator, the removal of the monopoly, the involvement of the privately owned corporate trustees, custodians and fund managers has all created a new paradigm for risk management in the Ghanaian pension sector. The provision of Act 766 ensures good governance, higher returns and reduces the incidence of risk. Unlike in the past, this time around the regulator has guidelines concerning how and in which asset classes pension funds can be invested. This is done so that the funds will be safe and able to return fairly on the amounts invested.

What prompted these changes to take place?
The pensions sector had long operated without an independent regulator to oversee the operations of the companies, or serve as an arbitrator for individuals and organisations when they had a case with the provider of the pension’s service. There were no service standards and regulatory sanctions for the breaches of the law.

When the private sector was excluded from the pension industry, a monopoly was created. As a result, the private sector was crowded out from accessing part of the huge pensions fund for economic development. There is strong evidence of how the economies of other countries have benefited immensely from private participation in pensions fund management, and the possibility of the private sector experiencing a turnaround of its fortunes.

Different groups operated different pension schemes. The security agencies had their own pension scheme, a section of the public sector workers were still enjoying CAP 30, and university lecturers were under a superannuation scheme. The judges and other senior public servants had also special unfunded arrangements for their retirements. These made it difficult for the administration of pensions to be fair, and in addition put a lot of financial burden on the state because many of these schemes were unfunded.

About 80 percent of Ghana’s informal sector workers were excluded from pension schemes, yet they needed them the most, the social protection that pension schemes are designed to provide. Over the years, concerns had been raised and agitations made by public servants over the manner in which the pensions body, SSNIT invested the funds of the scheme at the back of the inadequate retirement benefits. As a result of the low pensions payments, there was a strong call by some sections of organised labour for the government to bring back the then-colonial pensions scheme dubbed CAP 30, which, though unfunded, paid better benefits than the SSNIT scheme that was funded both by the employer and the employee. All of this set the tone for a major reform in the pension sector, to ensure a universal pension scheme for all employees in the country.

Why are more private companies getting involved in managing pension contribution schemes?
Act 766 became the game changer. The act gave legal backing to the sweeping reforms in the pension sector. In the heart of the reform is the management of defined contribution schemes through private participation. Many people have yearned to have a say in the way their pensions are managed. The need for choice that promotes good customer service and drives fees down also accounted for the involvement of the private sector.

The growing involvement of private companies is to ensure, among other things, a healthy competition and better returns on the member contributions. Defined contribution systems depend heavily on the efficient investment of funds that result in higher returns, and the private company that generates adequate returns for its members will continue to enjoy their patronage. The portability option, which the law provides, is also an incentive for these private companies.

It is a strong proposition that, when the private sector is involved, it will get access to some of the pension funds which will help the economy grow. There has been evidence of this as millions of pension funds are invested in the private sector, which has increased the opportunity of the private sector to have access to long-term funds for business activities.

What strategy does Pensions Alliance Trust have in place to minimise these risks?
Risks in governance and operations are very significant, and can create problems for pension schemes. As a result, Pensions Alliance Trust has taken the pain to select and properly train members of the trust board with the requisite knowledge and understanding of the relevant provisions in the law. We also make sure to follow all the investment policies and operational guidelines set by the company and the regulator.

With seasoned investment and fund management professionals, Pensions Alliance Trust is able to minimise these risks through portfolio diversification by asset class and security type. This minimises the overall portfolio risk. Seasoned fund managers are also appointed to advise on the investment and reinvestment of funds. Pensions Alliance Trust also ensures compliance with regulatory set limits, asset classes and securities. Investments are selected to provide a wide range of financial opportunities in different asset classes, to allowing for greater diversification, control over administrative and management costs, provide returns that can be compared to similar investment options, and to maximise returns within calculated levels of risk. We also monitor the performance of the fund managers, and have regular interactions with them.

What further developments can be expected in Ghana’s pension sector in the coming years?
The new pension sector is young, but it is growing at a fast rate. It is expected to grow in volume and structure. We are expecting the regulator to review its investment guidelines and allow the pension funds to venture into more exciting and high-yielding investment instruments. We are also looking forward to a future where trustees can collaborate and fund huge projects that are secured, and will return higher and better on investments.

Policies are expected to evolve to address challenges that occur, strengthening the sector and increasing the confidence of the public. As the funds also grow, the financial and security industry will expand through the start of new financial products, like the issuance of corporate bonds recently.

What does the future hold for Pensions Alliance Trust?
The company is poised to become the leading pension provider in Ghana. We have the right people, strategy and attitude to excite our clients. For us, our clients are the focus of our business and our business model is about them. The future is bright for Pensions Alliance Trust. Our assets under management are growing at a fast rate as a result of our efficient management of the pension funds, and our unique business model. With how promising the future looks, the company will continue to pursue excellence within this increasingly vibrant sector.

Diversification is driving Brunei’s banking sector forwards

Posted on July 23, 2016July 11, 2016 by Helen

Despite its small size, Brunei, a southeast Asian nation on the island of Borneo, is a formidable economic power in the region. A thriving oil sector has ensured a very high standard of living for the population. However, similar to many oil-producing nations in the present climate of plummeting prices and global oversupply, the economy’s reliance on the energy industry has become problematic. In response, the Brunei Government is taking comprehensive steps to reduce the economy’s reliance on oil and gas revenue and instead focus on the growth and development of local businesses.

In 2015, ASEAN – of which Brunei has been a member since 1984 – established the ASEAN Economic Community, achieving a major milestone in regional economic integration. “The integration of ASEAN members can potentially represent a huge opportunity for growth”, said Pierre Imhof, CEO of Baiduri Bank. As such, the possible increase in trade and investment flows, which will result from a single market for goods, services, capital and labour, can open the doors to a far broader customer base for Bruneian banks, while also enabling local SMEs to venture outside of the country.

National interests
With the recent implementation of Darussalam Enterprise (DARe), a statutory body established by the government earlier in the year to monitor and nurture the development of local enterprises in Brunei, diversifying the economy and supporting SMEs has become a major priority for a nation that is heavily dependent on revenue from the oil and gas sector. “We have always had a strong focus on SMEs, which has consistently been one of our major customer groups from the very beginning”, Imhof told World Finance. “With the establishment of DARe and its assistance in the development of SMEs, I hope to see the SME market develop to become even more competitive locally, and to eventually become competitive internationally as well. In line with our commitment to develop local businesses and SMEs, Baiduri provides a wide range of financial products to businesses in order to ease their cash flow management and support their growth.”

Baiduri Bank recently rolled out enhancements to its online banking platforms to coincide with the growing demand for flexibility

The bank also offers Business i-Banking, Baiduri’s internet banking facility catering specifically for businesses. “Our aim is to provide customers with a modern, user-friendly and secure channel for businesses to manage their banking more efficiently”, Imhof said.

In April of last year, Baiduri introduced Business Banking – a new unit as part of its retail banking division – that was designed to target the growing number of SMEs in Brunei. According to Imhof, the unit serves to complement the bank’s corporate banking department by tapping into non-borrowing and small-borrowing accounts. Services provided by Business Banking include card merchant services for local retailers and setting up the Baiduri Internet Gateway System, which allows retailers to accept payment from their online customers. The Business Banking unit also helps SMEs apply for credit facilities.

Moreover, Baiduri Bank is launching a new online payment solution with affordability at its core – again with local SMEs in mind. According to Imhof: “Our latest product, known as MerchantSuite, aims to provide a very accessible and user-friendly method of facilitating online payment without the merchant needing to create their own website. This way, our SMEs are able to conduct business efficiently with minimum difficulty. With over 90 percent of our corporate clients being SMEs, Baiduri Bank clearly recognises their ability to generate revenue in the country and the vital contribution they make to the long-term economic stability of Brunei.”

Race to expansion
Another vital aspect to consider when trying to stay competitive in a rapidly changing society is keeping up with the latest technological innovations. In response to this necessity, Baiduri Bank recently rolled out enhancements to its online banking platforms to coincide with the growing demand for greater flexibility, in order to meet various business needs.

This transition towards the modern digital economy also required the bank to provide a safe and secure digital environment for its customers. According to Imhof: “We continue to invest heavily in our systems to ensure a high level of service delivery along with the highest level of security in the industry.” In fact, Baiduri Bank is at present the first and only bank in Brunei to receive the PCI-DSS certification, a payment card industry standard for the secure processing, transmitting and storing of cardholder data. In line with this trailblazing approach, Baiduri Bank has implemented hi-tech security features for its online banking platforms, such as authentication via mobile or tokens, dual-factor authentication and SMS notification for logins and transactions.

In response to a shifting customer trend towards diversified investment portfolios, Baiduri Bank launched Baiduri Capital, a wholly owned subsidiary that offers a range of global investment products and services. Baiduri Capital was also the first business in the country to launch an online securities trading platform, thereby leveraging technological developments in the global market.

“We feel that this is the right time for the Baiduri Bank Group to go into securities trading, as there is a growing number of Bruneians looking for opportunities to build their wealth by investing in stocks and shares, in addition to deposits”, said Imhof. “Therefore, the establishment of Baiduri Capital is very much in line with the bank’s long-term strategy of playing a leading role in the development of Brunei’s financial sector and in serving the people of Brunei.”

The timing of this strategic move was crucial. “Through our online trading platform, our customers can already trade online in various international stock exchanges, such as those in Malaysia, Singapore, Hong Kong and the US”, said Imhof. As indicated by a statement made by Brunei’s financial regulator, there is more and more talk about a stock exchange being established in Brunei Darussalam in the near future. Baiduri Capital has the capacity to play an important role in educating Bruneians and building their experience of stock trading in light of this potential and significant development.

This commitment to Brunei’s economic development is further indicated by the bank’s acquisition of the retail banking business of United Overseas Bank’s Brunei branch at the end of 2015. “We look at strengthening and developing our retail business in line with our long-term strategy”, Imhof said.

In fact, the retail business is now a pillar of the bank’s business activities. With this acquisition, Baiduri has significantly increased its customer base in a bid to get ahead in Brunei’s challenging economic environment. “The acquisition of United Overseas Bank’s Brunei retail business was made possible thanks to Baiduri’s high level of excess liquidity and strong capital base, as evident from its credit rating of BBB/A-2 with a ‘stable’ outlook from Standard & Poor’s, which we believe reflects the bank’s excellent performance.”

Tackling challenges
Being rooted in the domestic market, Baiduri Bank has the competitive advantage of an in-depth knowledge of its customers and cultural preferences, in addition to having strong brand name recognition. Imhof explained: “Some of the main benefits of being a local bank are that the decision process is done internally. This allows us to tailor our products and services to specifically suit our clients’ needs. From a business banking perspective, it also means that we are able to be more flexible and faster in making decisions to grant facilities or in structuring financing options.”

When asked about the recent arrival of the Bank of China in the Bruneian market, Imhof spoke of the move being demonstrative of the strong interest in Brunei from overseas. “Brunei’s local banks are perfectly equipped to cater to the needs of clients, just as well as, if not better than, other international banks. They can offer those clients a wide, if not wider, range of products and services. In terms of the Bank of China specifically, I believe that its presence will have a positive impact on the image of the country and that, as with any newcomer, there will be a learning curve to understanding Brunei’s unique market culture.”

Amid the current international financial landscape, the global banking industry is operating in an increasingly regulated environment – and Brunei is no exception. “Though it is expected that the business environment will continue to face challenges, the opportunities for businesses and for the Baiduri Bank Group to grow are very promising, throughout the process of Brunei promoting economic diversification and development”, Imhof said. Moreover, the prospect of a stock exchange coming into fruition in the coming years is expected to firmly cement Brunei’s place on the map, which may encourage a surge in both local and foreign investment.

Eurobank Cyprus has experienced dynamic growth in the face of adversity

Posted on July 22, 2016July 11, 2016 by Helen

Within a relatively short period of time, the Cypriot economy has made an astonishing recovery, demonstrated by the mounting number and variety of investment opportunities in the country, as well as its growing fund industry.

The situation is not all positive, however, and as the financial crisis reverberated around Europe, and indeed the world, it soon transpired that no country was safe – not even those with robust economies and strong financial markets. Unfortunately, this was in fact the case for Cyprus, which had suffered a blow to its enviable banking sector, thus instigating a series of wider economic consequences for the entire population.

One bank that stands out for its resilience and continued development both throughout and after the financial crisis is Eurobank Cyprus. Indeed, in spite of a challenging environment in recent years, Eurobank Cyprus has experienced dynamic growth that is demonstrated in its strong capital base, substantial level of liquidity and recurring solid financial results. At this interesting time in the country’s banking history and in particular that of Eurobank Cyprus, World Finance had the chance to speak with Antonis Antoniou, General Manager of Wealth Management at Eurobank Cyprus, about the country’s extraordinary recovery and what’s in store for the future.

What impact did the European debt crisis have on Cyprus?
The debt crisis that emerged across Europe had a considerable impact on Cyprus, and the island’s own crisis was in fact one of the most complex in the eurozone. The Achilles heel for Cyprus turned out to be the confluence of sovereign debt and the banking crisis at the same time; this was partly due to the inherent exposure to neighbouring Greece, which was undergoing its own spiralling economic crisis.

Various events that took place in 2013 had led to this situation, starting with the Cyprus bailout from the European Commission, the European Central Bank and the International Monetary Fund – otherwise known as Troika. As banking deposits were a source of readily available funds at the time, one of the two most prominent banks in Cyprus put forward a resolution that involved unsecured depositors losing their deposits. The other leading bank in Cyprus was then forced to implement a special regime with its own deposit haircuts.

Eurobank Cyprus seeks long-term relationships with customers that are based on professionalism, discreteness and trustworthiness

Subsequently, the country’s two biggest banks merged, which inevitably caused the banking sector to shrink. This situation caused a domino effect of negative consequences, including the imposition of capital controls, the deflation of the financial industry and the shrinking of the economy. Large external debt also ensued, together with an influx of non-performing loans (NPLs) and the burst of Cyprus’ property bubble. The effect on two of the country’s most significant sectors, banking and construction, was substantial, which ultimately led to a rise in unemployment and a sharp decline in wages.

As per the conditions of the economic bailout, strong austerity measures were introduced, including cuts on social benefits, allowances and pensions, as well as increases in taxation. Unsurprisingly, the Cypriot Government’s bond credit rating was also downgraded as a result.

How did the country’s banking industry react to the unexpected haircut?
The brutality of the decision was unprecedented in both its conception and scale. It had a chilling effect on the deposits of thousands of accounts and on the overall credibility of the Cypriot banking system. Naturally, this caused an injection of risk in what were previously considered to be perfectly safe deposits. As such, the haircut addressed the need for recapitalisation and the resolution of the NPLs issue.

How did Eurobank Cyprus specifically respond to the Cypriot financial crisis?
Throughout its years of operations in Cyprus, Eurobank Cyprus has had a strong capital adequacy ratio, with an excess in liquidity that was placed chiefly with prime international banks and debt issuers. The bank also has a low rate of NPLs (seven percent in accordance with the new European Banking Authority rules), which is a sound indicator of its performance that can be attributed to the adequate provisions it has in place for NPLs.

Furthermore, the bank also has a low operational cost, which proved to be extremely helpful during the financial crisis. I’d also like to add that, as a whole, our organisation’s commitment to excellence, accountability and transparency has helped to carry us through and even thrive in such a difficult climate.

Following severe economic damage, Cyprus has made a rapid recovery – what can that be attributed to?
Unfortunately, there is no magic button – however, there are positives that came out of the financial crisis. For example, it led to more prudent and far-sighted governance. Frankly, we dealt with the painful consequences and implemented the structural reforms that were crucial.

We also began the process of selective privatisations, which in turn helped us to increase our efficiency and competitiveness within the market. Fortunately, we then reached the point where we could begin deleveraging the austerity that had hit the country and so we could help to reboot the economy.

Soon enough, the country’s pivotal markets – namely, services, tourism and shipping – buoyed economic growth. Confidence was gradually restored and the trust that had been lost in the economic crisis began to recover. Cypriots are by nature disciplined and optimistic, as also evidenced by the similarly speedy recovery that was observed following the Turkish invasion of 1974.

Following this recovery, how is the investment landscape now looking in Cyprus?
The investment landscape in Cyprus is advantageous due to the island’s well-qualified labour force, its attractive taxation rates, and a transport and telecommunications system that is both reliable and efficient. Moreover, and significantly, Cyprus is a modern, free market and a service-based economy with an effective and transparent regulatory and legal framework in place. This environment offers a great deal of confidence to businesses and international investors to invest, grow and prosper in the country.

In your opinion, why is the fund industry doing particularly well?
At present, Cyprus is modernising its regulatory framework through the country’s regulatory body, the Cyprus Securities and Exchange Commission. In addition, Cyprus offers both EU-regulated undertakings of collective investment in transferable securities and alternative investment funds. Funds and asset management frameworks are actually on par with other international jurisdictions, thus growth in this sector has been driven by the country’s tax treaty network. This is supported further by the country’s large pool of world-class auditors, tax advisors and lawyers.

Furthermore, also present in the country are cost-effective economies of scale, back-office support, administration, and other specialised services, which all offer huge support to the development of the industry. As such, there is a great level of confidence that Cyprus will make significant progress in attracting fund managers in the foreseeable future, which in turn will facilitate its global ambitions.

What strategy does Eurobank Cyprus have in place to continue this level of growth?
Eurobank Cyprus has a wholesale four-pillar strategy in place that is focused on the premium banking income streams in the country. We also have a deep commitment to excellence and customer care, as demonstrated by the fact that we were named Best Banking Group, Cyprus by World Finance this year.

Healthy profitability has been maintained since the bank’s establishment in Cyprus in 2007, and we are already witnessing a similar trend taking place in 2016.

We depend on everyone at Eurobank Cyprus to deliver the highest standard of excellence to all of our customers. We have a team of high-quality professionals with local and international experience that have been recruited on a purely meritocratic basis. This kind of talent is instrumental for the success of any organisation, so we place great value in their expertise and put considerable emphasis on their welfare and training.

As a bank, we place huge importance on fostering strong ethical values and a positive team spirit that rewards commitment and initiative. By committing to excellence, accountability and transparency, we ensure that we can best serve our valued customers efficiently and competitively. To this end, Eurobank Cyprus seeks long-term relationships with customers that are based on professionalism, discreteness and trustworthiness, and we always strive to exceed every customer’s unique expectations.

Sri Lanka’s banking sector is embracing digitalisation

Posted on July 22, 2016July 29, 2016 by Helen

About 400 million people around the world purchased a smartphone last year, with this year’s number expected to be double that. Access to modern technology is now commonplace; it is no longer an advantage for a selected few. In 1995, when technology guru Nicholas Negroponte said “everything that can be digitalised, will be digitalised”, he may not have grasped the cascading impacts digitalisation would have, particularly in the developing and emerging markets. With digitalisation comes connectivity and with connectivity comes engagement, and while Negroponte was way ahead of his time in his thought process, even he could not have foreseen today’s digitally connected world.

For People’s Bank in Sri Lanka, a country with just 20 million people and a consistent GDP growth of about six percent (see Fig. 1), digitalisation is the foundation of its ethos of being ‘The Pulse of the People’. As a bank that has been an integral partner in the country’s post-independence journey, it has become an icon to the people of Sri Lanka, symbolic of strong and stable leadership. The 8,000-strong, highly dynamic and vibrant team spread across the country answer an inherent need for connectivity, working via the biggest branch network in Sri Lanka, which spurred the need for a digital revolution at People’s Bank.

Now that single focus is well embedded into the firm’s strategic priority: for People’s Bank to become the most digitalised bank in the country by 2020. For Chairman Hemasiri Fernando, this heralds an exciting new era in the 55-year history of the bank: “Digitalisation is not a buzzword anymore, but rather the way we live our lives.

“There are no boundaries and no barriers and, the opportunities are immense. With digitalisation, People’s Bank – which has always prided itself on being ‘a bank for the people, by the people’ – will augment this purpose by reaching out and touching far more people than we could have ever imagined. The bricks and mortar infrastructure will gradually ebb, and it will be the push of a button, then voice and finally just thought that will be the key to unlocking the potential that digitalisation infuses.”

Credit where credit is due
People’s Bank has stayed true to its ethos of being the pulse of the people in Sri Lanka. This is seen through the bank being awarded a number of accolades, both locally and internationally, which vouch for its strength and the values it has built since it first opened. Whether being recognised as the Bank of the Year at the European Global Banking and Finance Awards for two years in a row, or winning the Best Banking Group and Most Sustainable Bank in Sri Lanka at the World Finance Awards for two years, to being presented the laurel of the Service Brand of the Year and Banking Service Provider of the Year for 10 years consecutively at the SLIM-NIELSEN People’s Awards, People’s Bank is on a mission to ensure it presents every opportunity to build strong economic foundations to the general public.

It is apparent that each of our stakeholders, whether government, entrepreneur, corporation or individual, is undoubtedly moving into the digital age

The bank has increased its digitalisation process in 2016, having worked on its detailed implementation through a five-year strategic plan, due to be completed in 2020. “The initial process which was in two phases is now completed”, said Fernando. “We first finalised a comprehensive strategy to digitise the entire bank and, secondly, identified and implemented all preparatory work to kick-start the process in 2016. This involved mapping manual processes onto digital platforms, identifying technology requirements, sourcing technology providers, and entering into agreements with technology and services providers.”

With a robust sustainability philosophy that remains ingrained into its very heart and soul, the engagement of People’s Bank’s stakeholders reaches across all demographics; from rural to urban, young to senior citizens, micro and SMEs to large corporations, agriculture to infrastructure, national enterprises to MNCs, and globally across the diaspora that forms an integral collective in contributing towards the country’s economic development strategy.

For Chief Executive Officer and General Manager N Vasantha Kumar, it is this stakeholder participatory approach that has given the bank its continuous competitive edge. “The digitalisation process was actually a very holistic one because we engaged with our stakeholders throughout the year to obtain their feedback on their expectations of People’s Bank”, he said. “From our team, to valued business partners, customers and communities, we also engaged with the regulators and germane national bodies.”

Working closely with stakeholders
The bank has also aligned its strategy with national development, given it is a wholly owned state bank, with the Government of Sri Lanka as one of its stakeholders, and therefore has a responsibility to ensure it contributes proactively to the country’s development. “This is an overall responsibility that remains constantly in our focus and hence the aspirational goals of our people are always worked into the strategic formula”, said Kumar. Through this stakeholder engagement process, which included customer surveys, supplier feedback, community dialogue and discussions with the regulator and national bodies, the bank has also worked on the digitalisation impact on its triple bottom line – from economic, social and environmental perspectives. Fernando said: “While digitalisation will reduce resource consumption on the one hand, we are cognisant that we will need to develop new systems to minimise impacts that could occur through large-scale technology adoption. With that in mind, we have already commenced designing ‘green products’ and we are also making provisions for ‘environmentally friendly construction’ in our future construction activities.”

The most recent launch of People’s Green Pulse – a pioneering initiative aimed at reducing the bank’s carbon footprint – illustrates this marrying of technology with an environmental consciousness. A sustainability framework spans the entirety of the branch network to tangibly demonstrate the bank’s commitment to environmentalism through accurate reporting of its greenhouse gas emissions as part of a comprehensive environmental action plan.

“The underlying findings of our engagement process pointed to the fact that the world will be driven by technology, a phenomenon that will make communities more inclusive and more demanding at the same time”, said Kumar. “But our new-age stakeholder will also be environmentally responsible and will lean towards organisations that have an environmental conscience, while being able to meet their constantly changing demands.

It is apparent that each of our stakeholders, whether government, entrepreneur, corporation or individual, is undoubtedly moving into the digital age. We were also seeing Generation Y and Generation X wanting instant responsiveness, information at their fingertips and banking products that reflect their evolutionary lifestyles.”

Making the leap to digital
Kumar said the digitalisation would change the way the bank does business in the future. “It is not simply about being responsive, speedy and efficient. It is also about working across geographic borders in real-time, offering financial service solutions that are innovative and ahead of their time and exceeding stakeholder expectations continually.”

These stakeholder expectations will surely be the challenge. “We are preparing for interlinked business opportunities, inter-connected products and services and international demands, with growing relationships and bonds. Because that’s where People’s Bank wants to be positioned. Our emerging customer is born into the digital age and it is imperative that we’re armed with innovative technology offering a plethora of technologically driven products and services that will become their preferred choice.”

With a comprehensive communication and branding campaign now being rolled out to reposition People’s Bank as a technology-based financial services provider, building skill and capacity among the team in readiness for this technological revolution has already begun. Over the next five years, all 740 branches of the bank will be digitalised.

There will undoubtedly be a need for organisational restructuring as well as a re-strategising of business processes, which Kumar explains broadly will also mean the restructuring of internal units under the three main business sectors of wholesale banking, enterprise development and retail banking: “We believe this new internal organisational structure presents a more cohesive platform to support our final objectives.” He also mentioned that People’s Bank would soon have a new, more advanced, core banking system, which will form the foundation for developing support systems that will facilitate a diverse portfolio of superior technology-based products.

Having always been a bank that is ingrained in the hearts and minds of the general public, People’s Bank’s digitalisation strategy will surely augment the core of this very emotive facet of banking. A prime example is its latest addition to its product portfolio, Service Plus, which leads a change in the banking industry.

“The relationships we have forged with our stakeholders will always have this emotive feel”, said Kumar. “It is us who will champion the technological change for our stakeholders, articulating that digitalised banking is accessible to everyone. It is us who will pave the pathway for our stakeholders to become a part of that global phenomenon of digitalisation to live and work as global citizens, honing their inherent strengths on this empowering platform and optimising on opportunities they come across, anywhere in the world.”

Mega ICBC is helping to lead Taiwan to great stability

Posted on July 22, 2016July 11, 2016 by Helen

On January 16, it was announced that presidential candidate Tsai Ing-wen had been elected as the 14th President of the Republic of China (Taiwan), making the Democratic Progressive Party the sole party in power. In the history of Taiwan’s constitution, Tsai Ing-wen’s premiership marks only the third rotation of political parties in power. The new government officially took office on May 20, after which time, as expected, multiple organisations across Taiwan’s political and financial arena have experienced a seismic shift in terms of its management.

One of the first major reshuffles was the appointment of a new chairman of the Financial Supervisory Commission (FSC). As a result of Taiwan’s new cabinet, gradual changes are being made in terms of the leadership of finance’s peripheral units and government-owned holding companies, including Taiwan Financial Holdings, First Financial Holdings, Mega Financial Holdings and Hua Nan Financial Holdings. Along with these major changes in personnel, Taiwan’s banking industry is continuing to digitise, propelling domestic players to new heights in both their home market and the wider Asia region.

Domestic expansion
At the end of March, the Chairman of Mega Financial Holdings and Mega ICBC, Yeou Tsair Tsai, submitted his resignation to the board of directors, becoming the first person to leave this government-owned financial institution before the next government takes position. Tsai’s resignation was approved swiftly by the major shareholder of Mega Financial Holdings, the Ministry of Finance, and became effective on April 1. Naturally, the announcement initiated much speculation regarding possible candidates for the position, with potential candidates now being weighed up by the new government.

During Tsai’s 15-year tenure at Mega ICBC, he established new and pioneering policy directions for the institution’s development, avoiding fierce competition within the domestic market and provided services to the Offshore Banking Unit, which enabled Taiwanese companies to go global, as well as leading a strategic expansion into new overseas markets. Jui-Chuang Chuang, Senior Vice President and General Manager of the Planning Department at Mega ICBC said: “Under Tsai’s leadership, Mega ICBC built a global e-banking system in 2003, which links more than 30 overseas branches or subsidiaries in order to provide corporate customers with 24-hour transnational funds management capabilities – more than 67,000 business clients have now signed up to it. He also established a fund management and dispatch centre for customers, which was so successful that competitors in the Taiwanese market quickly emulated the model.”

In keeping with the trend of promoting Asia’s future economic development, Taiwan’s government has spared no effort to support Taiwanese banks becoming regional leaders

During Tsai’s time as president – from 2001 to 2006 – Mega ICBC achieved a record-breaking pre-tax profit of TWD 10bn ($308m) in 2004. This record was again broken a decade later with TWD 20bn ($616m), by which time Tsai had been promoted and was serving as the bank’s Chairman. In the past two years, Mega ICBC has maintained earnings above TWD 30bn ($925m), outperforming all of its domestic peers.

Under Tsai’s leadership, Mega ICBC also became the third largest bank in Taiwan by volume of assets, in addition to attaining a far bigger global network, superior assets and an excellent performance overall, which have all contributed to its reputation for long-term stability and profitability.

The chairman established a distinct management style, which more closely connected the bank’s profits and employee rewards, with great success on both the individual scale and for the institution at large. As a result, the bank’s employee performance bonuses and other compensation schemes have increased considerably to entail a nine-month bonus.

In keeping with the trend of promoting Asia’s future economic development, Taiwan’s government has spared no effort to support Taiwanese banks becoming regional leaders. The FSC continues to make considerable efforts to amend regulations, conduct international financial personnel training and strengthen cooperation with the Asian financial supervisory authority. It has also signed memoranda to assist financial institutions in Taiwan to compete in the Asian Cup.

“The amalgamation of the government-owned Mega Financial Holdings Firm with a top-notch and high-grade rating bank is the most anticipated merger in Taiwan’s financial market”, said Mei Chi Liang, SVP, General Manager and spokesperson at Mega ICBC. Tsai’s resignation ahead of this planned deal has prompted even greater competition among those vying for his former role.

Following the regime change, some of the highest ranking individuals of the financial sector have been appointed to the finance cabinet, while top managers in the government-owned banks will be replaced over the coming six months or so. Liang said: “The future performance of the banking sector under the new leadership will be closely watched, particularly given the momentous changes occurring in the sector as a result of the digitalisation trend that is now taking place in Taiwan and across the world”.

Stepping into digitalisation
The migration of Taiwanese banking onto online platforms is moving ahead at a rapid pace, particularly as a result of ‘Bank 3.0’, the government’s deregulation scheme for online and mobile banking, which is set to accelerate further over the coming year. Wendy Hsu, Senior Vice President and General Manager of the Global Electronic Banking Center told World Finance: “Mega International Commercial Bank prides itself as being at the forefront of this change. As one of the country’s leading banks, with 108 domestic branches and 40 foreign outposts, including a network of wholly-owned subsidiaries in Thailand and Canada, Mega ICBC has long been committed to delivering mega service through mega innovation”.

Whether in online banking, mobile banking or mobile payments, Mega ICBC has consistently striven to deliver cutting-edge solutions for its clients, which offer new ways for them to conduct their everyday financial transactions through virtual pathways, yet without the restrictions of fixed business hours or traffic jams. “That openness, flexibility, and commitment to innovation dovetails with the Financial Supervisory Commission’s Bank 3.0 drive, which is all about change”, said Hsu.

Such examples include when, in 2004, Mega ICBC launched its ‘Order Online, Airport Pickup’ scheme, which makes it far easier for clients to buy foreign currency and travellers cheques. Or when, in 2013, Mega ICBC started to collaborate with mainland China third-party payment service providers, and the building of the ‘Cross-Strait Online Payment Service: Mega Payment for Purchase in Mainland and Taiwan’. It helped to process online transaction payments to and from mainland China. By using this platform, Taiwan’s manufacturers and exporters no longer have to worry about how to collect and process payments, bringing greater convenience and advancing the e-commerce industry.

As part of the Bank 3.0 drive, last year the FSC extended the reach of digital platforms to 12 new types of financial transactions, from applications for standardised, low-risk retail banking products and personal or home loans, to online wealth management and cross-selling. Mega ICBC is leading this new trend, which has already conducted some of the relevant process planning on its Global e-Banking System Funds Management Platform, enabling funds to be transferred and settled online in any foreign currency.

“There are certain scenarios where faxed directives must be used, but as long as security conditions are met, it is no longer necessary to submit the original document”, said Hsu. At Mega ICBC, clients now have the option of directly uploading a photo or a scanned document of a stamped paper directly onto the Global e-Banking System. Once a signature is verified, the associated payment is released for processing through an electronic certificate or dynamic PIN card. “It is a secure, fast and convenient solution.”

Saving time and money
Another significant improvement has been greater access to working capital. Previously, in order to obtain prearranged credit, corporate clients had to fill out a ‘loan guarantee drawdown book’: now, they can access that working capital via the Mega ICBC Global e-Banking System, saving time and making business more efficient.

Further improvements to electronic transaction flows and new e-financial services that will meet client needs better are imminent and will help to drive innovation – especially after a cross-departmental committee was established in preparation for Bank 3.0. In addition to bringing the 12 services approved by Taiwan’s FSC online, the committee’s objective is to refine and enhance various cloud services and explore the potential applications of big data.

“Mega ICBC has long sought to harness new technology in order to develop new types of e-banking services that can help Taiwanese companies expand globally, as well as ensure the bank’s continued success as banking competition intensifies in the digital era”, said Liang. “In the last four years alone, we have invested more than TWD 400m [$1.2m] in new technologies, thus helping to boost Mega ICBC’s average profit per employee by 37 percent year-on-year to just over TWD 4.6m [$141,000] in 2014 on a standalone basis.

“As the era of Bank 3.0 approaches, Mega ICBC will stay at the forefront of Taiwanese banking by providing clients with the best possible services using the latest technology available. Our vision is to become a top-notch Asian bank and embracing the digital age is central to our strategy. By bridging the gap both we, and our clients, can reach the world.”

Increased investment could help Indonesia’s economy flourish

Posted on July 21, 2016July 26, 2016 by Helen

According to the McKinsey report The Archipelago Economy: Unleashing Indonesia’s Potential, the population of middle-class (or consuming-class) people globally will increase by 1.8 billion over the next few years, of which 75 percent will come from Asia. McKinsey defined consuming-class people as individuals with an annual net income above $3,600 (at 2005 PPP). In Indonesia, the number of consuming-class people is increasing exponentially. The report also indicated that approximately 90 million Indonesian people will join the middle classes by 2030 – a major increase from the estimated 40 million already in that group in 2010. This huge number of people has been driving the country’s economic growth over the last few years.

According to the IMF’s World Economic Outlook report, released in April, Indonesia’s 2014 GDP ranked 16th in the world, sitting among more developed countries (see Fig. 1).

Demographic matters
The significant size of Indonesia’s middle-class population offers a huge potential market for business. Added to a relatively stable political situation, it is not surprising that many investors – including foreign investors – are expanding their businesses in Indonesia.

According to the Indonesian Government’s investment services agency – the Investment Coordinating Board – FDI in Indonesia rose to $29.27bn in 2015, from $28.53bn a year earlier. This increase indicates improving investor sentiment in the country since the 2014 election of President Joko Widodo, who has been trying to attract foreign investors. At the same time, domestic investors invested $179.5trn in 2015, up 15 percent from a year earlier.

While the number of middle-class people multiplies, the group’s economic power is also becoming greater, which in turn helps create stronger purchasing power than before. This improved spending power pushes demand for consumer goods such as smartphones, luxuries, cars and even properties.

The significant size of Indonesia’s middle-class population offers a huge potential market for business

In the coming few years, a large number of these middle-class people are expected to move to bigger cities – not just Jakarta and its surrounding area, but also Bandung and Surabaya. Such soaring migration will create a greater need for residential properties, transportation, telecommunications, education and healthcare.

Demographic conditions also help to boost Indonesia’s economy in general: with a population totalling around 250 million, Indonesia is the world’s fourth most populous country.

The country’s age structure also plays an important role in driving the economy, as approximately 66 percent of the total population is between 15 and 64 years old. In other words, about two-thirds of Indonesia’s population is at the active working age. With the unemployment rate at 5.8 percent, the majority of the workforce is generating income and therefore has buying power. Not surprisingly, Indonesia’s GDP is driven more than 50 percent by household consumption.

Opportunity knocks
From an investment point of view, it is not hard to realise the huge opportunity offered by the consumer sector. Because of this, the investment and product teams at Danareksa Investment Management decided to launch Danareksa Mawar Konsumer 10 in February 2011. What makes Danareksa Mawar Konsumer 10 unique as an open-end equity fund is its focus on the consumer sector. As previously stated, our in-depth research shows that more than 50 percent of Indonesia’s economy is driven by domestic consumption alone – thanks to the increasing income of the middle classes, controlled inflation, and a low interest rate environment.

These trends are shaping the country’s economy, making it fundamentally strong and resilient, especially in comparison to the financial uncertainty in other parts of the globe. Based on this conclusion, we delivered Danareksa Mawar Konsumer 10 as a satellite fund, which we believed would become the most relevant fund within our economy. The stock portfolio is selectively targeted at companies with the strongest growth prospects in the consumer sector. We can proudly say that Danareksa Mawar Konsumer 10 has demonstrated superior results against the benchmark since its inception.

However, in spite of how quickly Indonesian society is advancing, the awareness of investing among Indonesians is still low. Despite the huge population, fewer than 500,000 fund accounts are registered. The amount of assets under management in Indonesia’s fund industry stands at $23bn, which is a small fraction given the total national amount of deposits and savings in the banking industry, which stands at more than $300bn across 161 million accounts.

Call of duty
As the first asset management company in Indonesia (founded in 1992), we feel we have a moral obligation to teach the importance of investing to the general public. It is our duty to explain the true meaning of investment, in order to shift the paradigm from a time-deposit mindset to an investing one. We run various educational programmes to teach the value of investment, which involve free seminars, talks, financial events, articles and much more.

Last year, we even incorporated a fashion show into our investment seminar, in order to demonstrate that investing is a simple thing and can be adopted as a lifestyle. We are probably the first and the only fund manager to ever combine such different interests into one night. Furthermore, as we are constantly trying to pass on the key tenet of investing through discipline, we have launched an investment platform called Investasiku Masa Depanku (My Investment My Future), a financial programme to encourage investors to start investing small amounts consistently over time. This has become a key tool to opening up discussions about investing with retail investors.

Tech talk
Since the majority of income earners in Indonesia are young, they tend to be quite tech-savvy. Based on this, we decided to use social media platforms such as Twitter and Facebook as key communication channels. We now constantly post articles, event photos and investment tips. Investors can also share their feedback on our products and services with greater ease, which allows us to respond and take action faster.

Our eagerness to make lasting connections with the populace has also allowed us to become the first manager to offer mutual funds directly online. Through our Reksa Dana Online service, launched in 2008, we offer our retail clients the ability to register and invest in our mutual funds online. Going further, we subsequently developed Reksa Dana Mobile, through which our clients can subscribe to or redeem funds through their mobile phones.

Our research shows the majority of fund investors are concentrated in the capital city of Jakarta, meaning many potential investors in other major cities are untapped and ignored. These online services are a logical way to reach them efficiently.

Infrastructural assistance
Under President Joko Widodo, Indonesia has become very aggressive in building up its infrastructure. The current plan to build infrastructure in 2016 is budgeted at more than $23bn – a slight increase from $22bn last year.

President Joko Widodo admitted that infrastructure in Indonesia has been left behind in the past, especially when compared to Malaysia and Singapore. Therefore, infrastructure development must now be a top priority. The sector covers toll roads, normal roads, airports, seaports and much more. In particular, the government has targeted expansion of toll roads up to 1,000km in five years, as currently they span only 800km.

Underdeveloped infrastructure has led to high costs in the past – largely logistics and transportation costs, which are more than double those in Malaysia or Singapore. This is a major reason the cost of living in Indonesia can be much higher. To support the government’s programmes in infrastructure development, we offer alternative capital-raising mechanisms for businesses in the sector, through the issuance of private equity funds. In Indonesia, private equity funds are vehicles that enable professional investors – through fund managers – to invest in infrastructure. By investing through private equity funds, investors are also supporting the government’s development agenda.

BVI drives forward with financial services diversification programme

Posted on July 21, 2016May 16, 2017 by World Finance

The new rules around beneficial ownership are just the latest in a number of international initiatives around tax and transparency. How are they changing the landscape for offshore financial centres? Lorna Smith, Interim Director of BVI Finance, explains how the British Virgin Islands is engaging with the latest demands for transparency and staying in touch with international industry. She also explains the BVI Forward campaign: designed to strengthen and expand the financial centre’s services, both by engaging with and educating British Virgin Islanders, and developing the islands’ capacity as a data centre and arbitration hub.

World Finance: The new rules around beneficial ownership are just the latest in a number of international initiatives around tax and transparency. How are they changing the landscape for offshore financial centres? Joining me is Lorna Smith, Interim Director of BVI Finance.

Lorna, tell me how these different initiatives might impact international financial centres like the BVI.

Lorna Smith: All international finance centres are evolving, and it is very important that the British Virgin Islands stays in step with the new developments.

The new standards are all about transparency, and the British Virgin Islands therefore is adhering to these very high standards of transparency.

We have been an early adopter for the common reporting standards, we have signed on to the Foreign Accounts Tax Compliance Act. We are a member – one of about 90 members – of the Multilateral Convention on Taxation.

World Finance: As you say, you’re very involved in all these conversations, so how are you engaging with the different stakeholders around these programmes?

Lorna Smith: The OECD Global Forum really gained momentum in 2009, and the British Virgin Islands was at the table at that time.

We have been a member of the steering committee, and that is very important for us. I’ve been attending a Commonwealth Secretariat meeting, because the Commonwealth Secretariat is very concerned about IFCs, and making sure that they are treated fairly. And at the Commonwealth Ministers of Finance meeting that is supposed to take place in October, the subject of IFCs will be on the agenda. So that is a part of our engagement.

World Finance: So that’s part of your outreach, how you’re engaging internationally. But back home, how are you reviewing your legislation to make sure that the BVI is keeping up – and indeed, keeping in front of – the changing international landscape?

Lorna Smith: The British Virgin Islands prides itself on being always ahead of the curve; especially in terms of our legislation, in terms of our regulations.

We stay in touch with the international standards setters, and as a result of that, our legislation is amended as required.

We have recently made it a requirement that the ultimate beneficial ownership of companies be brought onshore. And in terms of the industry there is such a thing as product legislation, to make you competitive, to make you attractive. And we stay in touch with the industry – because as I always say, without an industry, you don’t have financial services.

World Finance: So, part of the way that you’re evolving is through the campaign BVI Forward: tell me about this, what is it trying to achieve?

Lorna Smith: The BVI Forward campaign is central to the evolution that I mentioned when we started out.

The campaign is intended to strengthen our financial services even more, to make them more sustainable. We for instance have begun to engage the population – I mean, very often, people hear about financial services, and it’s a big mystery. So it’s important that they understand how financial services contribute to their livelihood, and how important it is for the continued prosperity of the British Virgin Islands.

We have to build the capability of British Virgin Islanders, and we have therefore established a financial services institute, to make sure that British Virgin Islanders develop the capability for financial services.

One important tenet of it is the diversification of our financial services. We have about 450,000 active companies; we are the third largest in the world. But we would like to add value to the financial services that we offer.

For instance, establishing the BVI as a leading data centre. We have established BVI as an arbitration centre. We will have to improve our infrastructure. We need state of the art telecommunications. So all these things we are working on, to make the British Virgin Islands – as I said before – more sustainable. And that is what the BVI Forward campaign is about.

World Finance: So overall, how is the BVI growing and building on its position as a renowned international financial centre?

Lorna Smith: We’ve done a number of things. I mentioned the arbitration centre. We have one of the most highly respected commercial courts – opened in 2009 as part of the OECS Supreme Court system.

You would imagine that with 450,000 companies, a lot of litigation would be involved. People want swift justice, and that is what they can get in the British Virgin Islands.

We have engaged a firm to carry out a study of the value, or the contribution, that the British Virgin Islands makes to global financial services. That should be finished by the end of this year. Because I go back to the issue of substance, and proving that there is more to the British Virgin Islands and its offerings, than simply incorporations.

That’s just a couple of areas that we are developing.

World Finance: Lorna, thank you very much.

Lorna Smith: My pleasure.

Portugal’s Golden Visa programme is a lure for foreign investors

Posted on July 21, 2016July 8, 2016 by Helen

The Golden Visa programme launched by the Portuguese Authorities in October 2012 is a fast track for investors to obtain a fully valid residency permit in Portugal. Consequently, it allows investors to gain residency and free access to the vast majority of European countries in the Schengen area. The programme is targeted at high-profile non-European Union citizens, allowing direct access to citizenship after only six years.

So far the programme has proven a success. Since October 2012, when the measure was first introduced, a total of 3,165 permits have been issued. Citizens of China have made up the largest proportion of permit recipients, at 2,457 so far. From January 2013 until March this year, according to the country’s Immigration Service, a further 4,841 residence permit authorisations have been issued under rules relating to family reunification.

Property has by far been the most attractive investment prospect to users of the Golden Visa programme. Of the total 3,165 permits issued, 2,991 were on the basis of investment in property, 169 related to the transfer of capital and just five concerned business activity that created 10 or more new jobs. The cumulative total of investment entering the country as a result is €1.92bn, of which €1.73bn is for investment in property. However, outside the many benefits Portuguese citizenship brings, there are also many benefits to investing in Portugal itself.

Real estate investment funds are now finding the opportunity to join one of the most exciting real estate markets in Europe, with prices increasing 10 percent a year and with projections that this growth will continue for at least the next five years, investment funds are now finding the opportunity either to develop, refurbish or do property trading. When choosing to invest in properties that can easily generate high return on investment with rentals, investors have also to benefit from limited exposure to market and capitalise their investments with an entry-exit strategy that pays at least 10 percent in every move. These days it is possible to target returns on investments in real estate of over 30 percent a year.

In Portugal there is currently a low supply and high demand for new construction, creating the perfect conditions for investment in the industry

Real estate boom
In Portugal there is currently low supply and high demand for new construction, creating the perfect conditions for investment in the industry. Since 2013, due to the Investment Benefits scheme launched by the Portuguese Government to non-residents and the exponential growth of tourism in the country, there has been increasing demand for real estate in Portugal.

The Golden Visa programme has been a key-determining factor for the recent boom in real estate in Portugal, together with the Non-Usual Tax Programme directed to European Union citizens alongside a recent boom in the short-term rental industry.

Commercial real estate transactions in Portugal hit an all-time high in 2015 – totalling €1.9bn – and the level of activity is set to continue. Investment has been fuelled by Portugal’s economic recovery and the restoration of investor confidence, in addition to the Golden Visa programme, under which Portugal granted more than 760 visas in 2015 alone. This strong investment demand is expected to continue throughout 2016, possibly reaching another all-time high investment volume.

However, with this level of demand, Portugal has begun to see supply problems. As a result, construction has restarted, alongside growth in renovations. In particular, investors have sought to take advantage of tax benefits for the conversion of old buildings into hotels, with more than 20 new hotels opening in central Lisbon in the last two years. This was in response to the country’s lack of supply amid a tourism boom, in which visitor numbers have increased by 10 percent.

Portuguese real estate is a safe haven for domestic and foreign investment, and none of the data available suggests the existence of a property bubble in Portugal; the real estate sector should be considered a very safe investment. The Portuguese real estate market did not suffer the exaggerated growth seen in other European countries, and there was no excessive construction in Portugal.

In economic terms, over a seven-year period, the country experienced a nominal variation in prices in the order of 18 percent, which is small when compared to other countries, and corresponds to a percentage much lower than recorded inflation. Portuguese real estate average prices are still a quarter of what is practised in Spain, and eight times less than in France.

The boom of short-term rentals is bringing new life to the more historical neighbourhoods, where more and more property owners are refurbishing their old properties to rent to tourists through sites like Airbnb or warmrental.com. Investors who are candidates to programmes like Golden Visa and non-habitual residents normally look for this kind of refurbished apartment since they most probably will not invest to live there. Generally, a property in a historical area, completely refurbished, can generate an income of around eight to 12 percent a year, through a daily rental basis.

All these aspects are bringing property investors in Portugal high yearly capital gains. Due to the country’s low supply and high demand, especially in major places such as Lisbon and the Algarve, the main centres are generating returns on real estate investments of up to 15 percent. At the same time, Portugal also offers a safe harbour for investors. A small real estate investment in Portugal – in an increasingly unstable world – is a sound spot for international investors to use their money safely. Furthermore, the current political stability is a great advantage for overseas investors.

Finding the golden ticket
So far, 97 percent of the candidates for the Golden Visa programme are applying through investment in Portuguese real estate, primarily due to the great returns investors are getting on the properties in Portugal. To apply for a Golden Visa through real estate investment, foreign nationals, either personally or through a company, are required to make an investment that conforms to one of the following conditions: investment in real estate valued at least €500,000; real estate with more than 30 years construction time with a value of at least €350,000; real estate with a value of at least €400,000 in areas with fewer than 100 citizens per square kilometre; and real estate with more than 30 years construction time, in areas with less than 100 citizens per square kilometre, with a value of at least €280,000. Alternatively, Golden Visa applicants can obtain access to the scheme through investment in the non-real estate sector, that includes: completing a capital transfer of €1m to a bank operating in Portugal; committing €500,000 to invest in Portuguese funds; venture capital or leverage capital funds; investment that creates 10 permanent jobs in a new company located in Portugal; or donating €250,000 for culture, heritage or arts to a Portuguese institute.

Aimed at attracting foreign investment to Portugal, the Golden Visa is a very straightforward and flexible programme, with simple and clear legal requirements. If the investment is made, the residency cards are delivered. There are no grey areas in this programme.

With extremely reduced minimum stay requirements, the Golden Visa is one of the most attractive residency programmes for investors in the world. The country allows access to the Schengen Residence Permit immediately, and citizenship after six years. It also has a special regime for non-habitual residents, aimed at attracting foreign investors through very favourable income tax rates, such as the tax exemption programme for foreign senior citizens.

The advantages of the Portuguese Golden Visa programme are unique, when compared to other programmes. By investing in Portugal, non-European Union citizens can travel, work and live in all Schengen Countries. With the residency cards supplied by the Portuguese authorities, investors are able to apply for citizenship and get a Portuguese passport after six years. Many other advantages also arise from holding residency through the Golden Visa programme. Investors interested in opening offices or companies in Europe also have the possibility of opening business in all Schengen countries.

The Golden Visa Programme also allows the investor to extend the application to family members who are dependants, such as children, spouses and parents, with no further investment requirements. Investors’ families interested in relocating are able to enjoy all benefits of Portugal’s social welfare if enrolled in employment, or through a contribution of €150 per month. This includes free access to the public health system, enrolment of children in public schools and access to the country’s retirement pension.

However, if there is no intention of relocation, the programme also has an extremely low minimum stay requirement of only seven days in the first year and 14 days following periods of two years.

Investment is not a price for citizenship, but rather part of a double opportunity, with both citizenship and the chance to invest in Portugal being highly attractive prospects, particularly when it comes to real estate.

For more information visit ptgoldenvisa.com

Banking opens up to female financiers and small business owners

Posted on July 21, 2016July 21, 2016 by Helen

An economic crisis of unprecedented levels – coupled with an ongoing technological revolution – has catalysed a transition in the banking industry worldwide. A rejuvenated approach is particularly evident in Canada, one of the world’s strongest financial markets. Accordingly, comprehensive and more robust regulations, together with greater customer engagement, have propelled forward a system that is more transparent and can meet changing customer needs far more efficiently.

Technology has a pivotal role to play in the latter, through the provision of tools and services that can promptly respond to client requests – any time, anywhere. Consequently, a new era of opportunity has begun for the banking sector, one that sees great optimism for small business owners and female entrepreneurs. At this exciting time, World Finance had the opportunity to speak with Andrew Irvine, Head of Canadian Commercial Banking at BMO Bank of Montreal, to discuss how Canada’s banking industry is shifting, and his own vision in the midst of it.

How have you seen the banking industry in Canada change recently?
Much of the economy is in the middle of a major structural shift. Inevitably, the same thing is happening for the financial industry as well because market and economic forces continue to shape the banking industry in Canada and drive current trends. For instance, today’s banking customer lives in a complex, fast-paced, technology-driven environment. This increasingly knowledgeable, sophisticated and demanding customer expects a banking relationship that delivers convenience, customisation, control, collaboration, convergence and consistency. Therefore, our industry must build strategies that place the customer at the centre of organisational investments, initiatives and day-to-day operations.

A new era of opportunity has begun for the banking sector, one that sees great optimism for small business owners and female entrepreneurs

Trends in innovation and technology dictate that the future industry winners will be those banks that challenge their own business models to be dramatically more efficient, and deliver ever-increasing value to the customer. Driven by customer demands and competition, Canada’s banks continue to invest in technology – not only to enhance existing web and mobile platforms, but to also build the capability to allow customers to carry out a variety of banking transactions through their mobile devices.

Productivity is changing as well. As top-line growth slows, a renewed emphasis on transformational efficiency gains is becoming apparent. Unlike basic cost-cutting, this preoccupation with productivity focuses on both sides of the equation – revenues and costs – to drive both growth and shareholder value. Improving productivity has become a major focus for Canadian banks and productivity gains are now recognised as a key lever to protect and increase profitability.

What challenges are commercial banks in Canada facing at the moment?
At the top of the list is market disruption from non-traditional entrants. Non-traditional and unregulated competitors such as Apple, Google and PayPal – along with smaller and more nimble disruptors – are entering the market at an increasing rate. For us, competing with these firms isn’t about launching apps and adding convenient features, it’s about saying to customers: “We’re ready to meet you where you are, and when it suits you best, with new tools designed to help you manage your financial life on your terms.”

Next, there is regulatory reform that has changed banking on every level, and we think it has changed for the better. With each passing year, regulation related to capital, liquidity, counter-terrorist financing and anti-money laundering compliance rise on the corporate agenda. At BMO, we have a solid level of regulatory engagement that is important for our ability to compete.

Would you say Canada’s economic landscape is giving commercial banks reasons to be optimistic?
According to BMO’s economists, the answer is yes – in a relative sense. Unlike in 2009, Canada is not in a full-blown recession; only the three oil-producing provinces, which account for about one quarter of GDP, are contracting. Meanwhile, British Columbia and Ontario are expanding moderately fast as a result of an upswing in exports and vibrant housing markets. Our major trading partner, the US, continues to grow modestly, while the Canadian dollar, though appreciating this year, remains low. Oil prices have recently increased, raising hopes Alberta, Saskatchewan and Newfoundland and Labrador will start expanding next year.

Interest rates remain very low and the Bank of Canada is not expected to begin tightening policy until well into 2017. Low borrowing costs should encourage decent growth in residential mortgages and business credit – a good reason for optimism. Less positively, lending margins are likely to remain compressed by the low-rate environment for a while, and elevated household debt will continue to constrain consumer loan growth.

Looking at our own customer base, we think the small business sector is alive and well. We are particularly happy to see the growing strength of female entrepreneurs – it’s one of the fastest-growing small business segments – with women now holding ownership stakes in 47 percent of Canada’s SMEs. At BMO, we’ve been focused on being their bank of choice – in fact, in May we sponsored a Carleton University study that provided great insight on how female entrepreneurs make risk decisions, and how they expect to be served by financial institutions.

How is it that BMO’s commercial banking services differ to others in Canada?
BMO’s commercial bank differentiates itself with a sincere focus on enhancing the customer experience. Our vision is to be the bank that defines great customer experience. Across the country, we’ve realigned the structure of our divisions to ensure we are providing the best customer experience possible. Local autonomy, particularly as it relates to commercial banking where relationships are extremely important, is key to maintaining our strong position in the Canadian marketplace.

We continue to use our knowledge strategically, to be more proactive and adaptive, while leveraging our technology and expertise to understand our clients and their businesses better. It’s about making their banking experience more personal, intuitive and, ultimately, growing with them.

How important are strategic partnerships to commercial banks in the current climate?
We know the evolving needs of customers are driving a push for innovation and the development of new technologies. Strategic partnerships will be vital to succeeding in this environment. At BMO we are tapping into partnerships with companies or entities that are using technology in interesting ways that complement our own thinking.

One particularly good example of this is our recently announced partnership with the DMZ at Ryerson University in Toronto – North America’s leading university-based incubator. The programme we’ve developed with them, called ‘BMO Presents: The Next Big Idea in Fintech’, provides six selected fintech start-up companies with a four-month placement at the DMZ, an exclusive opportunity to pilot their technology with BMO, as well as formal introductions to venture capital groups.

Do you have any plans to reinforce your industry specialisation?
BMO already has pockets of industry specialisation: for example, we are very strong in the agriculture and real estate sectors. Additionally, there are numerous opportunities to focus on other industry verticals in a more structured manner, which we are exploring strategically. We have programmes in place to support entrepreneurs and professional service providers like pharmacists, as they require specialised financial solutions – particularly on the lending side – for training, equipment and real estate.

What is the value of customer experience to BMO Bank of Montreal?
Our business is built on relationships. We base our brand promise on the recognition that money is personal, and the investment we’re making in technology is entirely focused on that belief. We’re creating tools that empower our customers, while helping us to understand their preferences and priorities. We’re also blending virtual and face-to-face conversations to ensure we’re delivering value at every touchpoint, providing customers with quick, clear, knowledgeable support, and more.

The company is known for its digital presence. What is its digital strategy?
Excelling in digital technology is about performing well in three key areas, starting with channel leadership. We intend to accelerate our digital channels to lead in digital originations and self-service. We are now making important strides in this area, including the dynamic relaunch of the company’s website, remote deposit capture and the rollout of our integrated retail and wealth tablet application – all while rewiring back-end systems and customer-facing channels to ensure we are more nimble.

Secondly, payments innovations are crucial. We have a great payments business with a strong platform, partnerships and premium products. Going forward, we will focus on continuing to grow our core business, improving fraud management and authentication, as well as developing our digital payments capabilities.

Thirdly, simple, intuitive processes will improve our productivity, in addition to our employee and customer experience. We’ve already started by ‘building the rails’ and process infrastructure for macro changes, while introducing new processes, such as cheque imaging and enablers like the option to bring your own device.

What are your plans for the future?
Across BMO, we are enhancing productivity to driving performance and shareholder value, accelerating the deployment of digital technology to transform our business, leveraging our consolidated North American platform and expanding strategically in select global markets to deliver growth.

To conclude, I want to reiterate the importance of the technological revolution underway in our industry – a revolution that we are fully embracing at BMO. Transformation isn’t something that’s happening to our bank, we’re initiating our own transformation and driving it forward. Where customer experience and efficiency converge, we’re meeting the customer’s changing needs in ways that win their loyalty and reinforce our brand in the digital marketplace.

Nigeria urgently needs to tackle corruption and theft in its oil industry

Posted on July 21, 2016July 19, 2016 by Helen

Nigeria boasts abundant natural resources, yet its failure to crack down on endemic corruption and constant thievery has eroded its status to such an extent that, in May, it lost its title as the continent’s leading oil producer to Angola (see Fig. 1). A reluctance to enact tough-enough reforms or revise the fiscal terms under which the industry operates has cost the country dear. And the threat posed by issues such as theft and civil unrest threatens to destabilise an industry teetering on the brink of a crisis.

Undoubtedly, the nation’s oil wealth has been instrumental in unlocking growth and development in years past, but with Nigeria’s oil losses snowballing and the price of oil spiralling downwards, there’s never been a better time to double down on reforms.

Five-finger discount
Recently, a resurgent militancy in the oil-rich Niger Delta region inflicted untold levels of destruction on key oil sites and put a serious dent in production. Given that the Niger Delta brings in around 90 percent of the country’s foreign exchange earnings and 80 percent of government revenues, any threat to it is a threat to Nigeria’s economy as a whole.

No stranger to controversy, the area has a somewhat chequered past, with confrontations between oil firms and residents all too common. According to government figures, the region was the site of more than 7,000 oil spills between 1970 and 2000, and locals are concerned the state is reaping outsized rewards from the site’s resource wealth, while the region itself has received very little in the way of material benefit.

Theft alone cost the country a reported one million barrels a day – of a 2.5 million maximum daily capacity – under the last government, according to President Muhammadu Buhari, who, in a speech, called the extent of the damage “mind boggling”. The lower figure of 250,000, which Buhari mentioned in the very same speech, is surely closer to the mark – and that’s including losses due to pipeline vandalism. Regardless, the truth of the matter is that nobody really knows with any degree of certainty how much is being stolen, nor do they know exactly how much is being produced.

Given that the Niger Delta brings in around 90 percent of the country’s foreign exchange earnings and 80 percent of government revenues, any threat to it is a threat to Nigeria’s economy as a whole

A Chatham House study entitled Nigeria’s Criminal Crude suggested the problem has reached an “industrial scale”. In the study, the institute wrote: “Officials outside Nigeria are aware that the problem exists, and occasionally show some interest at high policy levels. But Nigeria’s trade and diplomatic partners have taken no real action, and no stakeholder group inside the country has a record of sustained and serious engagement with the issue. The resulting lack of good intelligence means international actors cannot fully assess whether Nigerian oil theft harms their interests… Nigeria’s dynamic, overcrowded political economy drives competition for looted resources. Poor governance has encouraged violent opportunism around oil and opened doors for organised crime.”

According to Stephane Foucaud, Managing Director of Institutional Research at FirstEnergy Capital, “growing security issues in the Delta” mean that production has been plummeting and “as much as 500 million barrels per day are now shut down”. Keen to avoid the accompanying reputational and financial hazards, producers have been quick to distance themselves from the conflict.

As far as the Niger Delta is concerned, Royal Dutch Shell shut its Forcados export terminal earlier this year, its withdrawal costing the country 250,000 barrels a day. A Chevron closure not long after cost another 90,000 barrels following a security breach at one of its facilities. The intention on the part of the aggressors is clear. In a statement, they wrote: “This is what we promised the Nigeria government, since they refuse to listen to us.”

The result, according to OECD data, is a landmark 20-year low in oil production, at a time when the economy is struggling to contend with falling oil prices. The claim of Angola – where disruptions are rare and the political hurdles lower – to the continent’s top spot looks all the more assured. Nigeria, on the other hand, is watching its reputation as a world-beating oil exporter hang in the balance.

Resource curse
Nigeria is still the biggest economy on the continent, thanks in no small part to its oil wealth, though a continuing failure to address the problems facing the oil industry could see previously strong growth fall in line with the wider Sub-Saharan region.

Between 2005 and 2010, Nigeria’s GDP at purchasing power parity more than doubled, yet its human capital and living standards leave much to be desired. As of 2010, the proportion of people living in absolute poverty rose to nearly 60 percent, up from 54.7 percent in 2004, according to the National Bureau of Statistics. And this, alongside World Bank estimates that 80 percent of energy revenues benefit just one percent of the population, has given observers real cause for concern.

Perhaps more than any other African nation, Nigeria has fallen foul of the so-called ‘resource curse’; a situation where an abundance of natural resources can breed corruption, stagnation, and even economic contraction.

“Managing natural resource wealth is fraught with difficulties – some economic, many political – and if not done well, can adversely impact macroeconomic performance in the short and long runs”, according to an IMF report entitled Boom, Bust, or Prosperity? Managing Sub-Saharan Africa’s Natural Resource Wealth. “Data from the sub-region suggests that such a curse has been present to some degree, but has diminished since 2000, although the broad economic and social indicators point to continued weaknesses that could be attributed to poor natural resource management.”

Africa, particularly Sub-Saharan Africa, is an example of how abundant resources can stifle development and distract governments from the central task of ensuring long-term prosperity. Looking at the past 50 years, the continent has made a name for itself as a region rich in natural resources, though also one in which citizens are severely handicapped by a low-growth climate and endemic corruption. With little incentive to raise taxes or focus on other sectors, plentiful resources have been known to cripple once-fruitful economies and shrink government responsibility.

Nigeria’s wealth means there’s potential for those in senior positions to profit personally, and the widespread perception that they are doing just that has bred resentment and mistrust among the population at large.

“The greater the value of the resources, the greater the incentive for corruption, so fossil fuel resources, particularly crude oil, are of course often associated with poor governance”, Chris Beaton, Research and Communications Officer at the International Institute for Sustainable Development, told The New Economy. “But it’s only a question of increased risk; it isn’t guaranteed the two will come hand-in-hand. Some oil-exporting countries, such as Norway, score among the least corrupt in the world.”

Crude reform
It’s no secret that the oil price collapse has been felt keenly across Nigeria, and declining revenues threaten to slow the economy’s momentum and unearth inefficiencies that have, in years past, been allowed to pass unseen and unchallenged. According to energy consultancy Wood Mackenzie, the cost of declining royalties and tax revenues between 2014 and 2018 is projected to amount to around $75bn, and, without swift and decisive action, the country’s finances will stray into the red.

Fears the ruling authorities are not competent enough to contain the situation are far from uncommon, and investors are withdrawing their holdings at quite an alarming rate. President Muhammadu Buhari, nicknamed ‘Baba Go Slow’, has been famously reticent to react to the situation, for fear of upsetting a population in the midst of a major fuel shortage and record budget deficit. More than that, any meaningful attempt at reform will have consequences for Nigerian investors and fundamentally change the relationship between state and big business. The situation for the time being is such that policymakers must expect that any reforms made now will not be without consequence.

The Niger Delta. Military presence is a necessity at many of its oil sites, as theft and attacks are common

“President Buhari was elected on an anti-corruption platform and is doing his best to make institutions more transparent and accountable, which is vital”, said Gail Anderson, Research Director at Wood Mackenzie for Sub-Saharan Africa Upstream Oil and Gas. One reason for Buhari’s recent election success is the perception that his predecessor, Goodluck Jonathan, allowed corruption in the oil industry to run rampant. Another is that Buhari was one of very few Nigerian leaders to crack down on corruption over the course of his military rule (1983-85). Knowing this to be true, the newly elected Buhari can ill afford to stand still on this point, and has made tackling structural issues in the oil industry his first priority, ahead of underlying fiscal concerns.

Last year, Nigeria’s budget deficit grew twofold, while exports were down 40 percent on the previous year. The result, according to PwC estimates, was a loss of approximately $18bn in oil-derived income in 2015. Senior figures at the Nigerian National Petroleum Corporation (NNPC) issued a warning to its venture partners, and cautioned that a failure to make good on arrears worth between $8bn and $10bn “could cripple” the industry, according to a letter seen by the Financial Times.

According to Buhari: “Given the previous levels of waste and corruption, if we spend what we have more wisely and effectively, we can achieve a great deal more.” What’s needed now is not necessarily a change in spending, but a full investigation into the business of oil itself and an anti-corruption drive of epic proportions. By targeting the NNPC, illegal crude theft, and the fiscal terms under which the industry operates, policymakers can at least begin to stem the industry’s decline.

NNPC power
Arguably the biggest bone of contention is the NNPC itself, which has for years stood as a symbol of all that is wrong with the oil sector. Should it, after sustained pressure from senior figures in government, choose not to apply stringent and far-reaching reforms, the oil behemoth could well erode the national economy from the inside out.

The news in March that the NNPC had failed to pay $16bn in suspected fraud payments is characteristic of how the company operates. The audit, carried out by Auditor General Samuel Ukura, appeared to show that officials from the previous administration were engaged in wholesale corruption to the tune of billions of dollars. Worse is that the situation in 2014 was far from the exception; prior to that, the company was found guilty of withholding payments of $1.48bn.

Arguably the biggest bone of contention is the NNPC itself, which has for years stood as a symbol of all that is wrong with the oil sector

“The NNPC’s approach to oil sales suffers from high corruption risks and fails to maximise returns for the nation”, said a study by the Natural Resource Governance Institute. “Over 38 years, the corporation has neither developed its own commercial or operational capacities, nor facilitated the growth of the sector through external investment. Instead, it has spun a legacy of inefficiency and mismanagement. Its faults have been described by a number of scathing reports, many commissioned by government itself. Despite the NNPC’s debilitating consumption of public revenues and performance failures, successive governments have done little to reform the company.”

This – at least theoretically speaking – is where the difference between then and now lies. Buhari has wasted no time in upending the NNPC’s management team. In August 2015, he removed the company’s group managing director and group executive directors. Most important of all, the outgoing MD, Joseph Dawha, was replaced by the former vice chairman of ExxonMobil Africa, Emmanuel Kachikwu, in the hope that a new helmsman might inject a new lease of life into the struggling oil giant.

Aside from the changes to personnel, the government is going above and beyond to dismember the unwieldy beast and inspire change on the scale of a cultural overhaul. In what proved a surprise move, in March the Minister for Petroleum Resources and Group Managing Director of the NNPC unveiled plans to unbundle the company into 30 independent companies, each with their own managing director. “Titles like ‘group executive director’ are going to disappear, and in their place you are going to have CEOs and they are going to take responsibility for their titles”, he said. “At the end of the day, the CEO of an upstream company must deliver an upstream result.”

Anderson said the government’s intentions are “sensible, to create a transparent and accountable NNPC that is commercially focused and profitable”. Listing the changes, Anderson highlighted the replacement of the board and the fact that an outsider with industry experience was appointed to lead it – a first for the NNPC. The restructuring of the organisation into separate business units, each to be run for profit, is also notable, and the fact the company is looking at ways to pay back its join-venture cash call arrears to the IOCs and agree a sustainable funding model in the future is a positive sign.

Port Harcourt, Nigeria is the oil capital of Africa and is home to many multinational oil companies

“All of this is very commendable”, Anderson said. “However, as with everything, it depends on how exactly you implement the changes, and the people in the organisation. There are some major barriers to profitability, such as regulated fuel prices and gas prices, so if the goals are to be achieved, issues such as these will need to be looked at, otherwise you could end up with only one part of your business being profitable (i.e. upstream), while the rest (downstream, refining and gas/power) stagnate.”

Commendable as the reforms are, the majority of them stop short of the promised transformation, and the fact remains that the company’s debts – not to mention its links to corrupt powerbrokers – remain intact. According to Quartz Africa, Matrix Energy was identified as one of several oil traders to have defrauded the government of $11.5m, yet it received a license last year to import refined products. The same applies to Eterna Oil and Gas, despite having cheated the government out of $9m in fuel subsidies. Other questionable names include Shorelink Oil and Gas, Northwest Petroleum and Emo Oil, and an unwillingness to do away with the services of such firms is proof that the cleanup is not as far along as senior government figures claim.

Risky future
Aside from the issue of corruption, Nigeria’s concerns are made all the more problematic by the issue of subnational debt, which, in the wake of spiralling oil prices, is eating away at the balance books. Speaking about the steps taken to uproot corruption, Foucaud said: “So far this has not really dealt with the mounting debt problem and the capability to pay contractors.” The NNPC’s mounting debt, he added, “is crippling the ability of foreign companies to invest in projects”.

Arguably, the issue is more important than militancy or corruption, for the fact that it threatens Nigeria’s future oil output, and lack of funding severely limits the nation’s ability to keep production online. Already, Wood Mackenzie has revised its output forecast for Nigeria, slashing it by more than a fifth to 1.5 million a day for the next decade.

Government promises of an overhaul have done little to slow investment leaving the country, and for as long as the reforms fail to materialise, Nigeria’s economy will suffer. Restoring confidence in Nigeria’s oil industry is most certainly a priority, and the longer these issues are left to fester, the greater the chance the country has of getting caught up in a crisis.

Resource mismanagement has led to a critical water shortage in Asia

Posted on July 21, 2016July 19, 2016 by Helen

In May, India’s Water Resources Minister, Uma Bharti, claimed that transferring water to areas worst affected by drought was – or at least should be – the government’s top priority. Speaking about plans to divert the country’s rivers, she said: “We have got the people’s support and I am determined to do it on the fast track.” Whether the plans amount to anything or not remains to be seen.

In a move not seen since 1947, the proposed $168bn river-linking project will make use of water from surplus rivers and dams and divert it to lesser sites. Once completed, the 30 canals and 3,000 reservoirs will stretch across 15,000km to create 87 million acres of irrigated land and transfer 174 trillion litres of water a year. Yet critics argue the project could displace as many as it will save, and the loss of downstream biodiversity has ecologists up in arms. Experts, meanwhile, are concerned the costs could sap much-needed funding from areas such as health and education, and then there’s the more general criticism that nothing this size has ever been attempted before.

Controversial as the plans may be, the prospect of redrawing India’s landscape and defying its ecology is seen in some circles as the only feasible means of channelling water to the more than 330 million people affected by drought. Unprecedented in scale, the river diversion programme could spell disaster as easily as it could salvation for the millions who struggle daily with acute water shortages. The risks inherent in carrying through this project are proportional to the risks of not doing so.

The subcontinent runs dry
India is facing its worst water crisis on record, and a quarter of its population is suffering from a second successive drought. Spoiled crops and sprawling dustbowls are a common occurrence, and some farmers have gone so far as to steal water from elsewhere for their most basic of requirements, never mind to irrigate their land.

A billion people in Asia could be without access to water by 2050

All in all, 255,000 villages in 254 of India’s 678 districts are suffering a water crisis of some description. Demand has outstripped supply, and with another 450 million people forecast to be added to the country’s population by 2050, the crisis, both in terms of quality and availability, is on course to worsen. Not taking into account the added stress these expanded services will exert on the economy, the expectation that conditions in India will improve gradually over time is not as widespread as it once was.

Millions of farmers, not to mention city residents and companies, are placing huge pressure on water reserves in what is already one of the world’s most water-stressed countries, draining its wells and aquifers at a quite alarming rate. One report by the Water Resources Group predicted the national supply will fall 50 percent below demand by 2030. “The ever-expanding water demand of the world’s growing population and economy, combined with the impacts of climate change”, it said, “are already making water scarcity a reality in many parts of the world – and with it we are witnessing severe damage to livelihoods, human health and ecosystems.”

Government data for the end of March showed 91 of India’s major reservoirs were running at 25 percent capacity, 30 percent lower than at the same point a year before and 25 percent less than average storage for the decade. Reservoirs and wells in some parts of the country are at their lowest in a generation, and commercial ventures are competing against individuals for the use of what little water remains.

The competition between companies, farms and people also means over 54 percent of India’s landmass faces “extremely high” water stress, which, aside from the aforementioned issues, is forcing inhabitants to use otherwise undesirable methods of extraction.

India’s river-linking project

$168bn

Cost

15,000km

Distance that will be covered

30 Canals

87 million

Acres of land will be irrigated

3,000

Reservoirs

174trn

Litres of water transferred annually

Drilling deeper has offered locals a little relief, though doing so ultimately risks making the problem much worse. The repercussions can be seen across the subcontinent.

As many as four reservoirs in Hyderabad have run completely dry this year. In Telangana, as many as 35 million farmers have migrated elsewhere to avoid the financial and social hardships of a second successive drought, and in the capital 10 million people had their access to running water cut for more than 24 hours. According to India’s Ministry of Urban Development, 70 percent of the local population received as little as three hours of running water a day.

Reports of rising suicide rates among farmers are widespread, and in the state of Maharashtra 3,228 farmers are said to have killed themselves last year after the drought hit – the highest in 14 years. A second successive dry season has many worried that thousands more could follow. A report from the Center for Human Rights and Global Justice at New York University Law School said insurmountable debts together with unaccommodating government policies are to blame for the spike. Far from its effect on the economy, water shortages have impacted the lives of millions of individuals, and many more are struggling to make a living.

And the rest
Given agriculture is the principal source of income for around 60 percent of the country’s population and accounts for 15 percent of GDP, the impact of the water crisis in India is understandably severe. All this isn’t to say, however, that the crisis is a distinctly Indian phenomenon: throughout Asia – particularly the southern portion – climate change together with population growth and industrialisation is compromising the ability of entire nations to meet demand.

“It’s not just a climate change issue”, said Adam Schlosser, who recently contributed to a study on Asia’s water shortage. “We simply cannot ignore that economic and population growth in society can have a very strong influence on our demand for resources.”

A recent Greenpeace report found coal power plants around the world consume enough water to sustain a billion people. What’s more, 44 percent of those plants are located in areas suffering from high water stress, with a quarter in red-list areas such as China, Inner Mongolia and, of course, central India. “Water security”, said the report, “is one of the most tangible and fastest-growing social, political and economic challenges faced today.” Without swift and decisive action to curtail consumption, millions in Asia and beyond could feel the effects.

Though home to more than half of the world’s population, Asia has less freshwater than any other continent on Earth, barring Antarctica. To make matters worse, an Asia Society Leadership Group report showed two-thirds of global population growth is set to occur in Asia, with the urban population in particular on course to increase a staggering 60 percent in the 10 years to 2025.

“As population growth and urbanisation rates in Asia rise rapidly, stress on the region’s water resources is intensifying”, said the report. “Experts agree that reduced access to freshwater will lead to a cascading set of consequences, including impaired food production, the loss of livelihood security, large-scale migration within and across borders, and increased economic and geopolitical tensions and instabilities. Over time, these effects will have a profound impact on security throughout the region.” Asia, it seems, is teetering on the brink of a crisis – or is already partway into one.

While it may be true that India has so far shown itself to be the worst hit by the unfolding crisis, nations across south Asia share many of the same issues. Shared waters, transboundary flows and the control of flows from one state to another are issues that compromise the ability of each country to properly manage and distribute what limited resources they have. Each is understandably concerned about the extent to which population growth, industrialisation and urbanisation could handicap its economy, and in this new water-scarce era, relations are strained.

Coal-fired power plant on the banks of Huangpu River near Shanghai

Rivers that straddle international borders are a particular bone of contention, and nowhere is this better encapsulated than in the case of India and Bangladesh. The Farakka dam, the Tipaimukh dam and the diversion of the Ganges, for example, have turned the relationship between the two sour. Should India, Bangladesh and others choose not to cooperate on the issue of water scarcity – which ultimately affects the whole of the region – proposed mitigation strategies will likely amount to nothing. The scale of the issue demands they overcome their differences.

Researchers at the Massachusetts Institute of Technology are of the opinion that, without measures to mitigate the effects of industrialisation and population growth, as many as a billion people in Asia could be without access to water by 2050. In a report, they wrote: “Water needs related to socioeconomic changes, which are currently small, are likely to increase considerably in the future, often overshadowing the effect of climate change on levels of water stress.” The effects will be similar to what we are seeing today, only “more intense, more frequent” and with “more severe effects”.

Water management
The reasons for water shortages vary across the region: in China, for example, they are attributable mostly to industrial processes, while in India and Vietnam personal consumption is the main problem. As wide-ranging as these challenges are, the underlying cause is not adverse conditions.

Shortages in New Delhi, for example, are arguably due more to poor management than either population growth or increased industrial activity. According to Manpreet Juneja, a research assistant at the Indian Council for Research of International Economic Relations, more than half of the city’s running water leaks are born of neglected pipelines. In towns and cities across the country, this poor management is to blame for completely avoidable crises.

Too often, observers are quick to write off India’s water crisis as a result of factors outside the country’s control, whereas in reality poor governance and planning are as much – if not more – to blame. The government’s insistence on subsidies for sugar cane producers in particular has drawn criticism from all angles; such support mechanisms for resource-intensive processes, say critics, are exacerbating the crisis.

Maharasta, in west-central India, is home to 35 percent of the country’s dams, yet only 18 percent of the land is irrigated, as opposed to the 47 percent national average. A more targeted investment strategy would yield more even results and quash mounting concerns that India’s government is catering only to a vocal minority.

Whenever a drought or flood dissipates, so too does the will to change

A free, or otherwise highly subsidised, water supply has done a great deal to perpetuate toxic water policies, and this unsustainable approach to maintaining what is essentially a renewable resource has succeeded in handicapping much of the continent. If India and neighbouring south Asian nations are to address the issue at its root, they must dedicate at least a shade more time and money to making certain the resource is utilised more effectively.

Strong water institutions are a prerequisite for growth, and so too is the political will and necessary funding to make them so. Provided governments do their bit, there must also be an acceptance from the public that tariffs and taxes are a necessity. Leaky pipes and contaminated local sources are one thing, but improvements to agricultural and industrial processes are a must. Agricultural productivity gains, the restoration of watercourses and drought-resistant crops could reduce the need for water, while cooling technologies for power generation and a focus on improved water storage could do the same.

The question, rather than “Is there enough water?” should be “Is there a way of utilising what water we have more efficiently?”, to which the answer is most certainly “Yes”.

A solvable problem
Tackling south Asia’s water crisis has been made all the more complicated for governments by the issue’s seasonal nature, which makes it all too easy for policymakers to palm off responsibility in times of prosperity. Simply put, whenever a drought or flood dissipates, so too does the will to change. Fortunately or not, the escalating scale of the crisis means water’s political value is ever greater, and any administration not engaging with the issue, at least on a superficial level, risks sparking discontent.

The issue of groundwater preservation is perhaps the most complicated of all; unlike surface water, the loss of it is not at all visible to the human eye. If public pressure turns out not to be enough to improve water governance, the realisation that water will in all likelihood become the most contested resource in Asia surely will be. Studies emphasise the seriousness of south Asia’s water crisis and give good reason to be concerned, though the fact that it could be largely solved through effective governance and improved management is encouraging.

The point that water shortages are not just a result of climate change and environmental stress is an important one, and should give policymakers reason to feel the situation is within their power to control. The question for now is whether the powers-that-be are willing to concede short-term gains in exchange for long-term water security. As far as the population is concerned, for as long as the issue of water scarcity remains, they must be willing to reconsider the ways in which they use what precious water there is.

Impressive as schemes such as the India water-linking programme are, the answer lies not in expensive projects, but in changing attitudes to water use. If Asia is to avoid a future in which a billion people will face severe water shortages, it may need to scrap its current growth model altogether and make way for a more water-efficient – albeit less growth-orientated – one.

What does the future hold for Hong Kong’s property market?

Posted on July 21, 2016July 19, 2016 by Helen

Hong Kong is a vibrant city that is home to numerous leading industries in Asia, as well as multiple multinational companies. It is also rated as one of the best places globally to start a business, according to HSBC’s 2015 Expat Explorer study, which surveyed 21,950 expatriates from around the world. As such, there is a vast array of opportunities available in Hong Kong, making investment in residential property there all the more attractive.

Nonetheless, concerns about China’s property market are ample – and this is certainly the case for Hong Kong as well, given its recent plunge in house sales. Moreover, and perhaps more importantly, the city itself has a worldwide reputation for its property booms and busts. This is causing speculation from all corners of the globe that property prices could again nosedive by 70 percent, as they did during the Asian financial crash of the late 1990s.

Cyclical nature
According to the Centaline Property Agency, house prices in Hong Kong have fallen by approximately 13 percent since last September, while sales in the market have been heading towards a 25-year low. Much of the market’s present performance can be attributed to the wider economic landscape that it currently finds itself in.

“The Hong Kong economy has lost momentum in Q1 2016, and there is a risk of that momentum slowing further”, said Joanne Lee, Associate Director of the Research and Advisory Unit for Hong Kong at international property firm Colliers International. “Investment sentiment and domestic demand are [being] overshadowed by a weak global market, the slowing Chinese economy and a volatile stock market. We believe [that] China is likely to undergo a soft economic landing.”

The number of property transactions that took place in April has returned to the levels achieved in August and September of last year, showing that a rebound is already in play

Although there has been much talk about an upcoming crash in the market, there are several arguments against such a forecast, as indicators of a recovery have already begun to appear. As indicated by Hong Kong-based property firm Midland Realty, the number of property transactions that took place in April has returned to the levels achieved in August and September of last year, showing that a rebound is already in play.

“A crash is unlikely as, in our opinion, speculators have largely been squeezed out by the government’s tightening measures”, Lee told World Finance. “In [the] absence of overleverage and any oversupply, the likelihood of tumbling prices is unlikely. Only if China were to experience a political crisis or a dramatic reversal of reforms would prices enter a free fall, which we believe is unlikely to happen.”

Furthermore, with sale volumes slowing down, a drop in house prices is being witnessed, which in turn is enticing more buyers back into the market.

Backing up
In November 2010, the Chinese Government began enforcing a series of property curbs in Hong Kong in a bid to drive out speculators from the market and stabilise house prices. Such measures include a special stamp duty for buyers who sell a property within 36 months of purchase and a duty for non-residents who seek to purchase property in the city. The government also enforced an increase in the deposit required for a mortgage, as well as a stress test to assess the repayment ability of those taking out mortgage loans. While these policies have been successful in discouraging private activity in Hong Kong’s property market, they are now slowing the rate of recovery needed.

What these measures do mean, however, is that, should property prices fall too low, the government can pull back the property curbs it currently has in place, which would ultimately give house sales a boost and reinstate some stability. While this offers a safety net for the market, it may not actually be necessary, as Lee argues that, even with Hong Kong’s property curbs in tact, stabilisation should ensue. “Home prices should deflate gradually over the next three years as interest rates gradually normalise and as supply increases to around 23,000 units per annum in the next three-to-four years.”

Although speculation about Hong Kong’s property market is likely to continue, and could perhaps grow in the coming months if house sales begin to slide once more, there is still much reason for optimism. With an increase already taking place in the transaction volumes of both the primary and secondary residential markets and government easing increasingly likely, market sentiment is certainly warming. This is evidenced more so by a growing interest in the market from Chinese developers from the mainland, together with the rallying of shares in the city’s biggest real estate firms.

As Lee said: “Prices could fall up to 30 percent over the next three years or so – this negative scenario cannot yet be ruled out.” Things are by no means certain for Hong Kong’s property market, yet there is still ample cause for both investors and expats to set their sights on the dazzling spectacle that is Hong Kong.

Top tips for buying in Hong Kong

Every property market has its own features and nuances that must be navigated if buyers want to avoid any disastrous pitfalls. With this in mind, here are some tips to help buyers get started with the process.

1. Know your agents
When employing the services of an estate agent in Hong Kong, it is crucial they are licensed – as this is not always the case. Following this vital first step, when the right property has been found, prospective owners should then ascertain whether the agent acts for the homeowner solely, or if they are operating as a dual agency that also acts on behalf of the vendor. If the latter is the case, this must be declared to all parties, together with the commissions that have been agreed on either side.

2. Stamp duties
When reviewing property and prices, it is essential to remember that, in Hong Kong, foreign investors and expats must pay a buyer’s stamp duty (BSD) equal to 15 percent of the property’s market value. The BSD is due in addition to the ad valorem stamp duty, which is a fee of 1.5 percent for properties valued up to $2m and is applicable to all permanent Hong Kong residents. Moreover, a special stamp duty is also applicable if the property is resold within a 36-month period. Finally, it is worth noting the BSD is exempt for those purchasing properties alongside relatives who have permanent residency in Hong Kong.

3. Access to finance
Hong Kong’s mortgage insurance programme, which is available to both nationals and expats, requires a deposit of just 10 percent in order to purchase a property. Having said that, only expats whose principle income comes from Hong Kong are eligible for the scheme.

4. Vendor rights
As with the estate agent, is it important to ascertain if the vendor has any rights, interests or legal liabilities regarding the property in question. As well as knowing the vendor’s encumbrances, it is also worthwhile to find out in what capacity they are selling the property.

5. The dotted line
When the right property has been found, it is wise to not rush into a contract, as establishing various details can save a lot of trouble in the long term. For flats under Hong Kong’s home ownership scheme, for example, a payment must be made to the Hong Kong Housing Authority before a sale can be completed. As well as ascertaining if there are any existing charges, government orders, mortgages or outstanding litigation cases on the property, a warranty can also be granted from the vendor that guarantees there are no illegal structures or alterations to the property. Obtaining all of these crucial details before signing can help ensure no unexpected payments or fees arise during or after the process has been completed.

Transforming Cyprus’ foremost trade and transportation hub

Posted on July 21, 2016July 19, 2016 by Helen

Limassol Port, which is both Cyprus’ principal port and the most eastern port of the European Union, is favourably located among three continents, enjoying a highly strategic location in the Mediterranean Sea. In 2014, a multimillion-euro project began with the steadfast purpose to transform Limassol Port into the most efficient, competitive, modern and safe port in the southern Mediterranean. The project’s subsequent commercialisation process was envisaged to be transformational for Cyprus, both in terms of realising its EU targets and achieving modernisation within the transport industry (thereby making the island a critical logistics hub in the region).

In order to reach these objectives, the country’s council of ministers, together with a legislative vote by the House of Parliament, assigned the Ministry of Transport, Communications and Works of the Republic of Cyprus the duty of commercialising the port’s activities. A major component of this strategy entailed accomplishing the reform agenda agreed upon for Cyprus’ support mechanism with the Troika.

“The key objectives of the project have always been to maximise value to the government, while at the same time modernising the port’s operations, as well as enhancing the operational efficiency and the services offered”, said Alecos Michaelides, Permanent Secretary of the Ministry of Transport, Communications and Works. “Attracting investment was another key priority of the government – perhaps the most important consideration was that of achieving long-term growth and job creation.”

Working together
After almost two years of intensive work and a competitive, demonstrably transparent and international tender (which attracted the interest of reputable port operators from across the globe), the commercialisation of the activities of Limassol Port was successfully concluded. The completion of this process saw the selection of the port’s operators and the finalisation of its concession agreements. Finally, approval was given by the Cypriot Parliament, which involved a contract-signing ceremony that took place at the Presidential Palace in the presence of both government officials and the press on 25 April this year.

Attracting investment was another key priority of the government – perhaps the most important consideration was that of achieving long-term growth and job creation

Limassol Port is divided into various lots, each with different partners that were brought on board by the Cypriot Government. Eurogate Container Terminal Limassol, P&O Maritime Cyprus and DPWorld Limassol were each awarded a different lot, together with consortia of companies, including EuroGate International, Interorient Navigation Company and East Med Holdings, DP World and G.A.P Vassilopoulos.

“These consortia represent partnerships between strong, acclaimed international operators and local companies that will work together with the Cyprus Port Authority, in its new role as the Independent Regulator, to develop the activities and the assets of the Port. These contracts have essentially dawned a new era of development for Limassol Port”, Michaelides said.

The Transaction and Services Concession was designed by N M Rothschild & Sons in close cooperation with legal advisors Pinsent Masons, together with support from their local partners and co-ordination by the ministry. Moreover, the core advisory team was supported by KPMG, which carried out market research, insurance advisors and virtual data room providers. The total cost of the project, including advisory fees, was approximately €4.4m, in addition to the cost of the ministry’s own resources, namely that of the project team, internal administration and management over the course of two years.

Michaelides told World Finance: “The process from inception to completion included a wide range of activities that required expert technical, financial, legal and commercial input. For example, among others, the comprehensive investigation of global port sector trends and transaction history, a thorough market-sounding exercise, the design of an effective negotiation strategy, due diligence reporting, risk identification and management, investor marketing teasers, as well as the tender documents themselves – the latter of which, as commented upon by external sources, are an excellent reflection on the project and on the government as well. It is on the basis of these documents and the peripheral process and activities that the Ministry of Transport, Communications and Works of the Republic of Cyprus is proud to have been given the Privatisation Deal of the Year 2016 award by World Finance.”

The tendering process
The tender itself was conducted in two stages. It was first published in the EU’s OJEU Notice, the Cypriot e-procurement system and the international press, where it attracted major interest and media coverage. After the evaluation of the expressions of interest, which formed stage one, the pre-qualified parties were invited to tender by issue of the invitation to tender as part of stage two. Pre-qualification was made on the basis of personal, technical and financial criteria. The tender submissions (Volumes A and B) were evaluated on commercial and technical aspects on a pass or fail basis.

The process was concluded by ranking the successful tenderers in decreasing order of their financial offers; the tenderer with the highest offer was announced as the preferred tenderer and assigned one for each lot, while the tenderer with the second highest offer was declared as the reserve bidder. The contracts were then finalised after meetings with the preferred tenderers, during which the concession agreements were customised and their tender submissions were contractualised.

“As per the concession agreements, the state retains ownership of the port, while the operators capitalise on their experience and know-how to ensure its future development through the expansion of commercial activities and the implementation of best operational practice”, Michaelides said. The financial structure of the agreements consisted of an upfront fee, a minimum annual fixed fee and a revenue share.

The estimated economic benefit to the state in proceeds and investments during the tenor of the agreements is approximately €1.9bn, based on the business plans of the Operators. “Although the amount exceeds the initial expectations of the government, the beneficial consequences to the Cypriot economy from the increased activity of the Limassol Port cannot be overstated”, Michaelides said.

Of particular significance is that the project has effectively contributed towards the reform agenda for Cyprus within the timeframes agreed with the Troika, which has resulted in the withdrawal of the country from the support mechanism it was granted during thefinancial crisis.

“We expect the transfer of the port’s activities to the new operators will be completed sometime in January 2017, which also marks the end of the transition period”, said Michaelides. In parallel, the efforts to upgrade the Cyprus Ports Authority’s regulatory framework and transform it into a modern, independent regulatory body continue apace. The concession period for the Container Terminal is 25 years, while it is 15 years and 25 years for the Marine Services and the Multipurpose Terminal respectively.

“The journey towards the successful completion of the project involved an intricate process of asset definition and assignment, in addition to asset and services delineation. Also crucial was the introduction of the law amendments and new regulations, together with extensive public consultation and close cooperation with a wide range of government bodies, EU directorates and stakeholders”, Michaelides said.

“The original timeline that we set out was met, which I think can be attributed to the close monitoring, effective project management, personal dedication and the professional work of the project team. I will also add that strong political will and support was pivotal in achieving the ambitious targets that we set out. In fact, the whole project has been characterised by excellent cooperation among all team members, both on the side of the ministry and of the advisory teams.”

Reimagining Cyprus
The successful commercialisation of the Limassol Port is indicative of the renewed dynamism of the Cypriot economy and the recovery of the country’s investment extroversion. The importance of this project in particular has proven to be invaluable as it contributes significantly in establishing Cyprus as a modern and safe investment destination, in a part of the Mediterranean where investment risk continues to grow. Michaelides said: “The agreements are not only a source of revenue, but they also upgrade Cyprus’ role in the south-eastern Mediterranean by promoting it as an important regional centre of investment and maritime commerce in the area.”

A great deal has been achieved since privatisation of the port was first announced in 2015. Not only has Limassol Port instigated a rise in investment and maritime activities to the country, it has also breathed new life in the area. And more is expected to come, with plans including the creation of an oil and gas offshore supply base and terminal, in conjunction with the terminals already delineated.

This development is envisaged to firmly consolidate the new era of the port as a critical transport and logistics hub in the Mediterranean. As such, the Limassol Port has successfully created a new image for the area and carved out a new spot for Cyprus in the region and as a nucleus for international investment.

Project data

Cost
€4.4m plus own resources (Ministry’s Project Team)

Financial structure
Upfront fee plus minimum annual fixed fee plus revenue share

Start date
January 2017 (following a transition period of approx. nine months)

End date
January 2042 for Lots 1 and 3, and January 2032 for Lot 2

Designers
Advisory Team with N M Rothschild & Sons as Lead Advisors and Pinsent Masons as Legal Advisors

Concession period
25 years for Lot 1 – Container Terminal. 15 years for Lot 2 – Marine Services. 25 years for Lot 3 – Multipurpose Terminal

Project type
Services Concession

Location
Limassol Port in the Republic of Cyprus

Objectives
Maximise value to the government while at the same time modernising the port operations and enhancing the operational efficiency and services offered

Key partners
The Ministry of Transport Communications and Works, the Cyprus Ports Authority and the three concessionaires
(Lot 1 – EuroGate Container Terminal Limassol)
(Lot 2 – P&O Maritime Cyprus)
(Lot 3 – DPWorld Limassol)

Project manager
The Ministry of Transport Communications and Works