Year: 2018

The unstoppable rise of neobanks

Posted on by Max Tomlin

The 2008 global financial crisis resulted in the loss of millions of jobs and trillions of dollars’ worth of financial capital. For many, the blame resided squarely with the banking sector and the individuals that got rich from laissez-faire regulations and speculative investments.

A new kind of digital-only financial institution known as a ‘neobank’ has emerged to capitalise on the resentment felt towards the industry’s incumbents

The wave of anger that the crisis unleashed continues to be felt to this day. The results of a YouGov survey last year tell the story of an industry that has failed to repair the damage caused a decade ago: in Italy, just 37 percent of the individuals surveyed stated that they trust their bank (see Fig 1). In France, a mere 27 percent of people believe that banks are a force for good; in Japan, the same amount think that banks act in the best interests of their customers.

With confidence in the banking sector at historically low levels, a group of upstarts have glimpsed a remarkable opportunity – one that may not present itself again for decades. A new kind of digital-only financial institution known as a ‘neobank’ – sometimes referred to as a ‘challenger bank’ – has emerged to capitalise on the resentment felt towards the industry’s incumbents.

To unsettle the leading players, these neobanks will need to do more than simply capitalise on the negative perception of long-established financial institutions. They will need to offer a positive alternative of their own that is more convenient, more secure and cheaper than what is currently available. Even if they achieve this, regulatory hurdles and a lack of market penetration could still prove to be their undoing.

Opening the floodgates
The banking industry has traditionally been one of the most impenetrable. Many of the market leaders, including the likes of JPMorgan Chase and HSBC, have roots going back more than 150 years and market capitalisations measured in hundreds of billions of dollars. For an entrepreneur or start-up, there are certainly easier markets to disrupt.

In recent years, however, the EU’s progressive approach to financial regulation has opened the sector up to greater competition. The original Payment Services Directive, which became law in November 2009, increased industry transparency and provided easier access for market entrants. Its successor, PSD2, went further still, mandating third-party access to banks’ application programming interfaces.

YouGov survey results (2017)

37%

of individuals in Italy trust their bank

27%

of individuals in France believe banks are a force for good

27%

of people in Japan think banks act in the best interests of their customers

This more open landscape has meant new fintech firms have been able to securely access customer account data that was previously the sole preserve of traditional banks. This has allowed neobanks to thrive. These are institutions without physical branches, where customers organise their finances entirely via digital channels. Their lower overheads mean they frequently out-compete traditional banks regarding the fees they charge customers and in terms of their agility.

Sukhjot Basi, Co-Founder and CEO of Bank Yogi, told World Finance there were several advantages that were facilitating the rise of neobanks: “Neobanks have a lower barrier to entry, [which] means they can accept many more individuals who don’t qualify for a traditional bank account because they lack credit history or stable employment.”
Basi continued: “There are a large number of adults and households that are underbanked. According to the Federal Deposit Insurance Corporation, seven percent of households in the US are underbanked. Neobanks are also a great way for youngsters to learn [about] money management while their parents control an underlying bank account.”

Germany’s N26, a neobank that promises its customers a paperless sign-up process that takes no more than eight minutes, has already acquired more than one million customers since it launched in 2013. Competitors like the UK’s Revolut and Australia’s Xinja are also gaining traction. Collectively, Europe’s neobanks attracted $495.5m in funding across the first five months of 2018 alone.

A helping hand
The EU’s common standards have also proved to be a major help for neobanks: they allow a neobank to quickly expand its customer base, safe in the knowledge it is complying with regulatory standards. N26, for example, has already expanded into 17 different markets since it was founded five years ago. Another disruptor, Fidor Bank, offers its services to customers in more than 40.

In some ways, the rise of the neobank has been enabled by their long-established forebears. Traditional brick-and-mortar banks introduced customers to digital channels without really pressing home their advantages. Although mobile banking has been available for the best part of a decade, the apps offered by high street banks have been hampered by poor functionality and security concerns.

Late last year, researchers from the UK’s University of Birmingham found that a number of banking apps possessed security issues related to certificate pinning – a security mechanism that protects websites from impersonation by hackers – including software offered by NatWest, HSBC and Bank of America. More recently, in April this year, TSB customers found their mobile applications were displaying account details belonging to other users.

If the financial crisis damaged customer confidence in traditional banks, then subsequent security breaches have ensured that it has not been able to recover. Unburdened by decades of legacy architecture, neobanks have made the most of the opportunities presented by this breakdown in trust. For too long banks have taken customer loyalty for granted. Their modern-day challengers are beginning to show them what a mistake that was.

Beginner’s luck
When neologisms first appear, particularly in the business and finance worlds, it is tempting to think of them as describing homogenous concepts. On the contrary, each neobank is unique and offers customers a range of different services. What’s more, not every neobank has taken the same route to arrive where they are today.

Not every neobank wants to rip up the rulebook: some of them have used relatively traditional methods to build their user base

For a start, not every neobank wants to rip up the rulebook: some of them, including the likes of Atom Bank, Tandem Bank and Starling Bank, have used relatively traditional methods to build their user base. While all three are mobile-only services, they also focused on acquiring a full banking charter prior to launch. This enabled them to offer customers a wide range of services, but it also increased their time to market. Being awarded a banking charter from the relevant financial authority can easily take between 18 months and two years.

Alternatively, neobanks can partner with financial firms that already possess regulatory approval in order to launch their products. This approach is not only quicker, it also grants them access to market and customer data that can be used to attract new clients. N26, for example, initially partnered with another German bank, Wirecard, while it was waiting to receive a banking charter of its own. Upon receiving its own licence in 2016, however, N26 began transferring customer information onto its own banking infrastructure. Apart from allowing N26 to offer a broader spectrum of services, receiving a full banking licence also meant the neobank could reduce its costs, as it no longer had to give a cut of its proceeds to its partners. For neobanks, lowering their outgoings is absolutely essential.

One of the ways neobanks have been able to attract customers is through the promise of lower fees. Because they do not have to pay the costs of running physical branches, they are able to offer services for free that more established institutions charge for, such as withdrawing money in a foreign currency. However, while neobanks are low-cost, they are also low-earning.

“Profitability is an issue, because these banks are offering their services below cost to attract new members,” explained Basi. “This is especially true if they are doing no-fee and no-mark-up international money transfers. Currency fluctuations that may occur every minute can further increase their operating costs unless the money changes hands only in the destination or originating countries. Their costs may also be increased by the fact that they have to share their revenue with the underlying banks that are supporting their accounts and transactions.”

The profit problem is perhaps best exemplified by the fact that earlier this year, Revolut claimed the distinction of being the first challenger bank to break even on a monthly basis. Most of the others are being sustained by investor funds and the belief that they will become profitable in the future. For the sake of comparison, Santander UK’s retail banking division made a pre-tax profit of £1.7bn ($2.16bn) in 2017.

Currently, it is not clear whether neobanks simply need to reach a critical mass of users before becoming profitable or if they are based on a flawed business model. Some of them make their money by charging for premium accounts and services, while others earn commission by cross-selling related products, such as insurance. Whether any of these approaches can provide the required long-term revenue streams remains to be seen.

Another problem facing neobanks is that customers can increase costs more than they increase revenue. In its annual report for the 12 months leading up to February 2018, UK-based neobank Monzo revealed that it had increased its user base to 750,000 customers, but across the same period its losses more than quadrupled from £7.9m ($10.05m) to £33.1m ($42.1m). Many of these new customers are happy to give neobanks a try, but are not ready to use them as their main account, meaning they are a financial burden instead of an asset. On average, for example, Monzo customers have less than £150 ($190.80) in their accounts.

Despite their rapid growth, neobanks are in a difficult position. While some are switching from a ‘freemium’ approach to a subscription model in the hope of improving their bottom line, this could result in customers returning to their tried-and-tested high street banks. The challenge, then, is to keep pushing for efficiencies that ensure profit increases in the same way customer numbers do.

The backlash
More worrying than their long-term issues is the threat that neobanks’ recent successes could be undone. Customer acquisition remains difficult, with many consumers still finding it difficult to leave a centuries-old bank in favour of a new fintech start-up. Even with trust in traditional institutions at such low levels, old habits die hard. Neobanks are also operating in an increasingly competitive market.

“Customer acquisition is hard for all consumer businesses,” explained Will Beeson, Head of New Propositions at CivilisedBank. “Rapid development and deployment of scalable technology means there are lots of companies targeting the same finite pool of customers. Human nature dictates that a small portion of the population will be early adopters of new technologies and that the mass market will lag. Plus, it takes time to build trust, which is vital in financial services.”

Traditional brick-and-mortar banks introduced customers to digital channels without really pressing home their advantages

As well as battling it out among themselves, neobanks will need to hold firm against a renewed challenge from brick-and-mortar banks. Last October, JPMorgan Chase launched its own mobile-only banking offshoot called Finn. Other long-established banks are likely to follow suit. Far from destroying their predecessors, neobanks may inadvertently set them on the path to a new wave of growth.

There are also mounting concerns that neobanks are more susceptible to criminal activity than industry leaders are. Earlier this year, Revolut announced that it had discovered incidents of money laundering across its digital payment systems, something critics of neobanks and their automated compliance checks quickly leapt upon.

Although Beeson believes achieving compliance is “not a question of whether the technology is trustworthy, but a question of company culture”, balancing rapid growth and robust security is undoubtedly a challenge. In spite of the great strides made by many neobanks, there remains a perception that larger establishments can simply commit more personnel and money to compliance.

Becoming the norm
If neobanks can prove their security and regulatory credentials in the short term, then they might just buy themselves the time they need for public perceptions to shift further in their favour. As customers become more comfortable with digital banking, any aversion to using N26 instead of NatWest will fade. However, neobanks still need to do more to boost awareness among the general public. According to research conducted by Mastercard last year, just 11 percent of UK consumers currently use a neobank or said that they were “very likely” to use one in the next three years.

To ensure neobanks boost their uptake beyond digitally savvy Millennials, they will need to commit more of their income to marketing. This will, however, be a difficult battle to win, particularly as traditional banks can invest far more heavily in this area. A more fruitful approach could see neobanks adopting niche selling points, as opposed to competing on all fronts with the major established banks. There is already evidence of this taking place, with neobanks like Monese targeting “nomads, expats and migrants” and others, like Soldo, focusing on parents.

Consolidation is also likely to take place. The number of neobanks worldwide has grown substantially in recent years, and company takeovers are likely to prove the only way for some of them to achieve longevity. This, of course, is the case with any new market, and it would be wrong to dismiss these innovative new players simply because they haven’t toppled HSBC in the space of five years. However, it is clear that the recent success of neobanks is fragile. A greater focus on profitability must emerge quickly if these new kids on the block are to stick around for the long haul.

Cyprus has emerged as Europe’s new investment fund hotspot

Posted on by Max Tomlin

Cyprus is rapidly emerging as one of Europe’s key jurisdictions for investment funds and fund managers. As such, there has been a significant increase in the volume of funds and the value of managed assets in the market, with assets under management (AUM) tripling since 2008. The Cyprus Securities and Exchange Commission (CySEC) currently has 140 approved funds registered in the country, while total assets exceed €4.5bn ($5.3bn), thus illustrating that asset managers and international investors are especially keen to take advantage of the key competitive characteristics of the funds industry in Cyprus.

Cyprus’ funds industry will continue to expand due to the stable legal environment and strong network of financial and professional service providers

The country is also seeing a growing interest from those seeking new EU-regulated jurisdictions. Accordingly, Cyprus offers regimes for both EU-regulated undertakings of collective investment in transferable securities (UCITS) and alternative investment funds (AIFs).

Market players are confident that Cyprus’ funds industry will continue to expand and develop further, due to the country’s stable legal environment and strong network of financial and professional service providers. With a competitive legislative and regulatory regime – the most recent development being the new AIF bill, which introduces a flexible framework for funds – Cyprus is set to take the fund industry by storm. World Finance spoke with Konstantinos Xanthis, Head of Wealth Management Operations at Eurobank Cyprus, to find out more about the market’s growing prominence.

Why is Cyprus so popular among international investors?
Cyprus is a member of both the European Union and the eurozone. It has a small, open, service-based economy, which over the years has been characterised by remarkable resilience. Further, the strategic location of the island has played an important role in establishing Cyprus as a business hub. The combination of talented individuals, robust business infrastructure and a competitive regulatory and legal framework has long made the island an ideal environment for doing business.

In addition, the market boasts a solid banking sector, which is regulated by the Central Bank of Cyprus and the EU’s Single Supervisory Mechanism. It also offers an investor-friendly and exceptionally advantageous tax regime, with a large number of double tax treaties and a pool of world-class and highly skilled service providers. At the same time, Cyprus offers a great climate and a very pleasant and safe environment for professionals wishing to relocate, thereby providing a brilliant balance of work and leisure.

Why are AIFs in particular on the rise?
Ever since Cyprus transposed the Alternative Investment Fund Managers Directive into national law in 2013 and passed the AIF law in 2014, the number of AIFs operating in the market has shown consistent growth in both AUM and the number of funds receiving considerable interest from all over the world, especially from Asia, the Middle East and Europe. Currently, there are a number of applications for AIFs with a sizeable value of target assets, some of which are still pending authorisation from CySEC.

The latest achievement of this successful effort is the newly introduced bill for AIFs, which was passed into law in July 2018 and puts the industry’s regulatory and legal framework on a par with other renowned jurisdictions, such as Luxembourg and Ireland.

The new law introduces the Registered Alternative Investment Fund (RAIF) – a flexible regulatory framework for establishing a regulated fund. RAIFs do not require a licence from the regulator since their supervision is done through an asset manager, which has to be a regulated entity, such as an AIF manager, UCITS or a Cypriot investment firm. Additionally, the establishment of the limited partnership form of a fund offers greater flexibility and effectiveness in the hands of asset managers and international investors. With the introduction of some key additional features, including the mini manager concept that is due in the near future, the Cyprus funds industry will offer all the necessary tools that asset managers and international investors require to set up and operate their collective investment schemes – all in accordance with the world’s best practices.

What about UCITS – how are they performing at the moment?
Cyprus transferred the UCITS V Directive into national law in 2016, thereby offering EU-standard trustworthiness, flexibility and reliability, in what appears to still be a niche market in Cyprus for the distribution, establishment and operation of such funds. There are currently nine local UCITS entities operating in Cyprus alongside a good number of international asset managers, which have registered their funds with CySEC for distribution in the local market.

Why are custody and depositary services beneficial for the Cyprus market?
Over the past few years, local banks have developed their custody and depositary services to accommodate the demands of the growing funds industry, as well as the demands of increasing regulation. Significant investments have been made into vital resources, including people, technology and processes. The main custody providers are local banks that fulfil their custody and depositary obligations according to best market practices and know-how.

Banks are therefore called upon to facilitate the needs and services required by asset managers and funds, while accommodating the settlements of transactions and portfolio maintenance over a range of more than 50 international markets and active investments in a wide range of financial products. Strategic relationships with a selective range of top-rated global custodians and international prime brokers have been set up by the main providers in order to best facilitate their service offering with reliability and prudence.

Furthermore, local banks have developed processes and best practices to independently and effectively perform their oversight depositary obligations on alternative assets (assets other than bonds, equities and mutual funds) that are held by the funds, including real estate, vessels and private equity.

Funds operating in Cyprus will continue to require comprehensive banking, custody and depositary services, while the main local providers will continue to invest and further improve their global custody and depositary business offering, as this is a profitable business for them.

What sets Eurobank Cyprus apart from other players in the space?
Eurobank Cyprus has been operating in the market since 2007. Focusing on the wholesale side of the business, the company’s operating model is distinct from the rest of the banking industry in Cyprus, specifically in the areas of: corporate and investment banking; wealth management; fund depositary and global custody services for institutional investors; international business banking; global capital markets; shipping; and banking for high-net-worth individuals. Its strong capital base, substantial liquidity and solid financial results allow Eurobank Cyprus to continue its dynamic growth and its ongoing support of the Cypriot economy.

The cornerstone of our success is our commitment to relationship management, which we achieve by offering high-quality services, outstanding solutions and innovative products within a culture of professionalism, proactivity, trustworthiness and discretion. We are committed to the continuous improvement of the quality of our service offering, following international market trends, and the best practices that are reflected in our awards from industry professionals. Eurobank Cyprus has been awarded numerous accolades by various reputable international organisations, including being named best banking group in Cyprus in 2016, 2017 and 2018 by World Finance. The company has also been named best global custodian in the latest World Finance Wealth Management Awards

What does Eurobank Cyprus offer in terms of global custody and fund depository services?
We have extensive expertise in global custody services, which is delivered by a highly dedicated team of experts and the continuous improvement of the systems and processes we employ. We service the needs and investments of both local and international clients. Our clientele includes a growing number of prominent local institutional investors, such as pension fund managers, large corporations, brokerage firms, asset management companies, insurance companies and investment funds, as well as high-net-worth individuals.

Our total assets under custody and depository for year-end 2017 were in excess of €3bn ($3.5bn), including alternative assets. This value has been continuously growing in 2018, and is expected to increase significantly further as a result of commitments to UCITS and AIFs, which are scheduled to be launched in the Cyprus market within the year.

We work directly with a selective network of counterparties via well-established relationships with leading industry players to serve and protect the interests of our clients’ investments in the best way possible. We cover a wide range of financial products, supporting clients’ portfolio investments in more than 50 international markets – such as equities, ETFs, sovereign and corporate bonds, mutual funds, hedge funds, precious metals and derivative instruments.

Eurobank Cyprus is distinguished for its leading position in the local fund industry. It offers depositary services with the required regulatory diligence, as well as the world’s best practices, to a growing number of fund clients, including UCITS, investment funds and AIFs with complex fund structures. Our depositary services cover the oversight and control of investment funds in terms of their set up, transaction activity, financial and non-financial assets, and net asset value.

Ethiopia continues its economic ascent

Posted on by Max Tomlin

Ever since horrifying images of famished children hit our screens back in the 1980s, there has been a stigma attached to Ethiopia – one of a deeply impoverished nation, strangled by starvation. And, for some time, it was. But what may not be as widely known today is the utterly remarkable progress Ethiopia’s economy has made over the past decade. The country has in fact achieved double-digit GDP growth on average for the last 10 years (see Fig 1). Yes, Ethiopia has come a long way in a relatively short period of time, and yet, it’s still just at the start of its extraordinary story.

Perhaps what had been missing from the tale until now was a charismatic protagonist. Enter Abiy Ahmed, as of April 2, Ethiopia’s 15th prime minister. Abiy has taken the country by storm, and in just a few months has achieved what most leaders could only hope for during an entire tenure: establishing peace with neighbouring Eritrea; rousing a disenchanted population; pushing forward with key infrastructure development; opening up the economy to further financial investment; and winning support from the Ethiopian diaspora.

A unifying force
Heading up the Oromo People’s Democratic Organisation – one of four parties comprising the Ethiopian People’s Revolutionary Democratic Front coalition – Abiy is Ethiopia’s first prime minister from Oromia, the country’s biggest ethnically based state.

Abiy is a breath of fresh air. He has made moves to modernise the economy and loosen the monopoly of key sectors

“That really seems to matter to some of the tension of Ethiopian politics,” said Christopher Cramer, Professor of the Political Economy of Development at SOAS University of London. Though they comprise around one third of Ethiopia’s 100-million-strong population, the Oromo people have been marginalised for decades. Increasing violence, anti-government rallies and deadly clashes have dominated Ethiopian politics for the past three years in particular.

Since Abiy came to the fore, however, significant progress has been made to quell the dissent. Of note, a new amnesty law was introduced, releasing political prisoners and reversing the overzealous security measures that have long inflicted the country. In freeing prominent journalists and opposition leaders, Abiy has successfully begun the difficult task of rebuilding trust in a faction that had long been discontented with the government. In August, Abiy signed a new peace agreement with the Oromo Liberation Front, consolidating this new phase in the country’s stability.

Abiy’s background plays a significant role in his widespread support. Highly educated, he has a master’s degree in transformational leadership from the University of Greenwich and a PhD in peace and security studies from Addis Ababa University. Though he rose to the rank of lieutenant colonel during military service, Abiy also served as a UN peacekeeper in Rwanda in 1995. Abiy then gained prominence when he founded the Information Network and Security Agency in 2007, and continued to work as director of the organisation responsible for Ethiopia’s cybersecurity. In 2016, he was appointed as the Minister for Science and Technology.

At 42, he’s the youngest leader on the African continent. His youth is reflected in his style of leadership, his stirring rhetoric and the speed with which he is taking action – in short, Abiy is a breath of fresh air. Since coming to power, he has made moves to modernise the economy and loosen the monopoly of key sectors. This news is a boon to the aviation industry in particular, given Ethiopian Airlines’ status as Africa’s largest and fastest-growing airline. Competition for a 30 to 40 percent stake in state-run Ethio Telecom is also heating up.

$4.7bn

Expected cost of the Grand Renaissance Dam

6,450MW

Expected power generated by the Grand Renaissance Dam

$11bn

Amount spent on Ethiopia’s roads over the last 20 years

Regionally, Abiy has already made his mark. In June, he visited Egyptian premier Abdel Fattah al-Sisi to break a deadlock hindering the construction of the star in Ethiopia’s infrastructure development plans – the Grand Renaissance Dam (GERD). Fearing a reduction in Egypt’s water supply, Sisi had expressed “grave concern” about the mammoth hydroelectric project. A pledge in person from Abiy, however, saw the pair reach an agreement on Ethiopia’s work on the Blue Nile.

Then, of course, came Abiy’s monumental announcement (also in June) that Ethiopia would accept the 2000 Algiers Agreement, signalling long-awaited peace with Eritrea. The news marked the resumption of trade between the countries; interstate flights have commenced, while phone lines have also been re-established. With Ethiopia once being Eritrea’s largest trading partner, the potential gains are a game-changer for both countries.

Unsurprisingly, with such triumphs in tow, Abiy has enraptured the Ethiopian diaspora – an important vehicle for foreign investment. “There’s just so much positive energy around the new prime minister,” according to Vijaya Ramachandran, Senior Fellow at the Centre for Global Development. “I think there’s an enormous amount of hope that he can bring stability to the region, that he can mobilise investment, and certainly I think the diaspora is enthusiastic – everybody wants to help him succeed.”

A decade of growth
Naturally, a number of the successes sparking international admiration were already underway before Abiy came onto the scene. Indeed, last June, the World Bank labelled Ethiopia the world’s fastest-growing economy. According to a new report by the organisation, its GDP growth for the 2017 fiscal year reached an enviable 10.9 percent, while growth for the period from July 2017 to June 2018 is forecast at 9.6 percent.

10x

Increase in Ethiopia’s GDP since 2000

20%

Decrease in extreme poverty in Ethiopia between 2000 and 2011

“It’s very important to stress that it is not only a sustained period of very rapid growth, it was actually achieved in a country that is not resource-rich,” Cramer told World Finance. “It’s not a matter of being driven by oil, diamonds and so on. So it is quite an unusual record and very important in the context of sub-Saharan Africa.” Despite this lack of resources and the fact that it is landlocked, Ethiopia has managed to increase its GDP tenfold since 2000. Extreme poverty, meanwhile, dropped by over 20 percent between 2000 and 2011.

Ethiopia’s shift from recurrent to capital expenditure has formed the foundation of the country’s socioeconomic transformation, its focus on infrastructure development in particular being instrumental.

“Many orthodox economists tend to criticise high government spending in lower income countries, [but] what you notice is that, to some extent grudgingly, many people have come to accept that it has actually been really important in Ethiopia – not without its difficulties of course, but it has,” Cramer explained. “So you’ll see World Bank economists, for example, acknowledging that a set of heterodox policies, combining around a programme of large-scale public spending, has been at the basis of this period of growth.”

Filling the transport void
Despite its rapid GDP growth, Ethiopia’s woeful transportation infrastructure has acted as a stranglehold on the economy for decades. In 1990, the country – which is around twice the size of Texas – had just 19,000km of roads. Transforming this situation has been crucial. Thanks to the government’s refocused spending ($11bn has been spent on roads over the past two decades) together with a growing inflow of foreign investment (FDI has increased fivefold from $814.6m to $4.17bn between FY 2007/08 and FY 2016/17), by 2015 Ethiopia’s roads stretched 100,000km around the country. Showing no signs of abating, today foreign investment continues to bolster the network, while 20 percent of the government’s infrastructure spending is dedicated to road building, equating to $1.7bn annually.

Railway construction is another symbol of the government’s determined strategy. In September 2015, a new 32km light rail system opened in the country’s capital, the first of its kind in sub-Saharan Africa. The Chinese-funded project has enabled some 60,000 citizens from the city’s suburbs to travel into the centre for work – and affordably, too. Further plans are in the pipeline to connect the electrified network with the national train system by 2025, earmarking the government’s plans to become a transportation hub for neighbouring countries.

The 750km-long electric railway connecting Addis Ababa to the Red Sea via the Port of Djibouti best encapsulates this aim. Inaugurated in October 2016 and beginning commercial operations in January 2018, the line reduces transit time from two-to-three days to around 10 hours. With faster and cheaper access to the sea through Djibouti, the railway is a boon to the country’s burgeoning manufacturing sector.

Behind such assertive plans is a coherent approach to leadership, which Cramer believes to be pivotal in the economy’s transformation. “They thrash out arguments, come to a consensus view and then drive ahead,” he explained. “There was a coherent, determined leadership and it was organised around delivering development, and increasingly around accelerating structural transformation.”

Ethiopia’s woeful transportation infrastructure has acted as a stranglehold on the economy for decades

Cramer also attributes Ethiopia’s recent economic success to pragmatic – rather than ideological – leadership: “They are very willing to learn from a range of other countries’ experiences and to talk to all manner of people – from western investors, the IMF and the World Bank to the Chinese Communist Party. They study the past record of industrial paths in Vietnam… Mauritius and elsewhere before making their own strategic choices. That pragmatism goes with a willingness sometimes to learn from mistakes and to kind of adjust direction and move forward.”

An enticing investment
Such infrastructure development has obvious effects on the economy, but there is another reason pushing momentum forward so rapidly: Ethiopia’s vision to become a manufacturing hub. In recent years, the nation has boasted formidable success in using its very competitive rates to persuade foreign manufacturers to set up shop in the country.

One of the first such manufacturers was Huajian Group, a Chinese shoe manufacturer that employs around 4,000 people in an industrial park outside the Ethiopian capital. Big-name clothing brands have since followed suit, including the US’ Gap, Germany’s Tchibo and Sweden’s H&M. In 2017, the industry received another windfall when not one but three fashion giants set up factories in the country: PVH, of Calvin Klein and Tommy Hilfiger fame; Velocity Apparelz Companies, which boasts the likes of Zara and Levi’s; and Jiangsu Sunshine Group, the manufacturer for Hugo Boss and Giorgio Armani. According to Ethiopia’s investment commission at the time, a further 150 companies from China and India would soon begin sourcing production from Ethiopia.

Ramachandran, who co-authored the 2017 paper Can Africa Be a Manufacturing Destination? Labour Costs in Comparative Perspective, shed light on the shift: “Manufacturing, particularly light manufacturing, is… driven by the cost of labour. That’s a very critical component in the overall cost, and Ethiopia’s manufacturing sector is competitive globally.” Indeed, Ethiopia’s low labour costs put it in direct competition with market leaders like Bangladesh.

“The government itself is very focused on industrialising and is… serious about developing Ethiopia as a manufacturing destination, and so the new industrial zones in Hawassa and Bole Lemi are good examples of very significant government interest and investments,” said Ramachandran. “I think this is a significant factor as well because it conveys a positive signal to investors.”

Its goal, former prime minister Hailemariam Desalegn told reporters when Hawassa became fully operational in July 2017, is to create “millions of new jobs in labour-intensive and export-oriented light manufacturing”. He added: “The Hawassa industrial park is the most evident and concrete example yet towards achieving our national vision, and marks a milestone in our quest for industrialisation.”

Being one of the country’s greatest assets, Ethiopia’s enormous population is at the core of this mission. Importantly, the people are ready and willing. “There is a large supply of young people who are interested to move from the informal or the semi-formal sector into the formal sector,” Ramachandran told World Finance. “That pool is very advantageous for the process of industrialisation.” Talking about workers in the Bole Lemi zone, who were interviewed for the study, Ramachandran continued: “Many of them said that the concept of working in factories is good for the country – there is that sense of patriotism and wanting the country to succeed.”

Quenching the power thirst
Though Ethiopia is the rising star of light manufacturing, challenges remain, ranging from those of bureaucracy to issues with cotton quality. However, most pressing is the issue of energy stability.

For too long, energy apartheid has stifled countries in sub-Saharan Africa – Ethiopia being no exception. “Power outages have for a long time been a major constraint. And the [greater] the demand for energy power – as with more investment and manufacturing and in high-value agriculture commodities – the bigger that constraint becomes,” said Cramer.

In recent years, ethiopia has boasted formidable success in attracting foreign manufacturers to set up shop in the country

While many investors are hopeful that the country’s new industrial zones will result in large-scale garment assembly and manufacturing, the unreliable supply of electricity is a concern. “Without [reliable electricity], it’ll be very hard to expand. I think the government is very aware of this and is making the necessary infrastructure investments in various types of energy,” said Ramachandran. “I think it’ll be important for them to stay on this track and stay focused on this goal.”

As Ramachandran notes, the government is indeed aware of the importance of overcoming this particular challenge. Fortunately, it is taking advantage of the country’s hydroelectric potential and has built a number of dams in recent years, that which has grabbed the most attention being the aforementioned GERD. And for good reason: its potential is tremendous. With an expected generation capacity of 6,450MW, the GERD project is set to become the biggest dam in Africa, and according to The Ethiopian Messenger will “triplicate Ethiopia’s consumed energy”.

Cramer told World Finance: “These kinds of projects have the potential to start to overcome the [power] shortage. And that’s both in terms of the scope – the electrification of rural areas, for people to be able to study adult education in the evenings, or for public safety on roads at night etc – but it’s also what underpins industrialisation and change.”

Significantly, the GERD will also act as a driving force for exporting electricity to neighbouring nations, which in turn will prove crucial to generating foreign exchange. Indeed, the dam has become a powerful symbol for the country. Costing a whopping $4.7bn, the GERD has been funded and constructed almost solely by Ethiopians, marking a monumental step in the state’s ability to stand on its own two feet and demonstrating its status as a regional power.

The best is yet to come
From the dire straits publicised around the western world in the not-too-distant past, Ethiopia is now on the cusp of a complete transformation. Its remarkable economic growth makes it a beacon of inspiration for the entire region; indeed, it holds a number of lessons from which other developing nations can draw. First, it highlights the importance of government spending – even in low-income countries – particularly in areas that are stifling the economy. In Ethiopia, the government has maintained a determined focus on improving transportation and energy infrastructure, and it has done so through a commendable combination of local financing, the facilitation of foreign investment, securing loans from international entities and the
help of the diaspora.

As explained by Cramer, Ethiopia has also demonstrated the value of learning from others – speaking to various organisations and experts, studying the development of other economies and learning from their pitfalls. In the case of Ethiopia, having a strong, coherent leadership in place, which is steadfastly focused on a long-term strategy, has been crucial in this approach.

Now with Abiy at the helm, the economy has received yet another boost, thanks in large part to his quick work and charisma. Today, the country is more stable than it has been for years – foreign investors are further motivated, while the population is amply inspired. The time is ripe for the country to firmly push itself into the next phase of its development: becoming a hub for sub-Saharan Africa in terms of manufacturing, transportation, energy and economic leadership. With more reliable energy soon to follow, the country’s grand ambitions are actually within reach. Ethiopia’s economic story is truly extraordinary – and the best part is, it’s not over yet.

Stefnir Asset Management is overcoming market difficulties to deliver for its clients

Posted on by Max Tomlin

Over the past year, the fixed-income market in Iceland has faced some tribulations. Foreign investors still face restrictions on fixed-income investing – restrictions that have nearly wiped out demand from foreign investors since their introduction in June 2016. Domestic pension funds, meanwhile, have been focused on issuing loans to pension fund members and diversifying risk by investing internationally. Consequently, turnover in the market has decreased by around 16 percent from the end of 2016 through 2017.

Abolishing the current restrictions on foreign investment in domestic fixed income could be a major game-changer in the market

Market players are hoping that current restrictions on foreign fixed-income investment will be levitated (probably in steps), increasing demand in the coming months. Anna Kristjánsdóttir, Head of Fixed Income at Stefnir Asset Management, Iceland’s largest fund management company, spoke to World Finance about the current state of the market and the opportunities it presents.

What opportunities currently exist in Iceland’s fixed-income market?    
Abolishing the current restrictions on foreign investment in domestic fixed income could be a major game-changer in the market for foreign and domestic companies alike, the latter of which have seen credit spread rise due to a shortage of funding in Icelandic debt markets. With increased interest from a wider audience, debt terms for domestic companies should benefit from a more favourable yield.

How important is innovation in the market, and how does Stefnir continue to innovate?
A shifting investment environment requires Stefnir’s experts to be ready to respond to investors’ varying focuses by offering new investment options. That’s why we set up a new investment fund, the Stefnir Savings Fund, in 2017. Investing in deposits, commercial papers and shorter duration bonds, the new fund has gathered considerable client interest, attracting a total investment of ISK 6.7bn ($62.7m).

The demand for doing business online and through digital channels is also accelerating. During the past year, Arion Bank, Stefnir’s main distributor of funds, has made it easier for customers to trade with Stefnir funds. Meanwhile, a new feature on the Arion online banking platform enables unit holders to keep track of investment returns and transactions – all of which can be performed very easily. The Arion app, voted the best banking app in Iceland, also provides a complete overview of securities portfolios. Continued development and innovation in this area will be a priority in the near future.

Why is transparency an important issue in the Icelandic investment market?
After the public in Iceland experienced a total loss of faith in the financial system, it was a challenge rebuilding trust. Stefnir identified that transparency and detailed information on fund investments and data was key to regaining trust and building future relationships. As such, Stefnir has placed great importance on offering its clients competitive and responsible investment options in virtually all asset classes. Essentially, it is vital that the company is able to pass on information accurately and simply to investors. The company’s website performs an important role in this respect by displaying detailed information on all the Stefnir funds that are available to the public.

Likewise, Stefnir is an advocate of transparency and good corporate governance, publicly participating in debates and sponsoring conferences to increase awareness of the responsibility present at all levels of the financial system. The company also publishes a corporate governance statement on its website every year, describing its activities and its focuses for the near term.

What new challenges does the industry face?
Stefnir has experienced significant long-term growth in assets under management, which is vital to achieving economies of scale and operational efficiencies. However, margin squeezes, technological developments and legal requirements pose challenges to the industry, and Stefnir is not exempt from these challenges. Changing customer behaviour – namely growing demands for digital channels and access to information on investments and funds – will continue to disrupt the market.

What role will investment funds play in the market moving forward?
Investment funds and asset managers will continue to play a vital role in generating returns on investment, and our involvement in niche areas that are difficult for smaller investors or the public to approach will increase as part of our product development and supply of new investment options. That said, demand for passive investment vehicles continues; fortunately, Stefnir has the capability to supply the building blocks for a diversified portfolio of investments that adhere to the different risk appetites of its customers. Stefnir is constantly seeking opportunities to present to investors, whether they are institutional or private. Several projects are well underway within the fixed-income team that tie together our expertise and access to debt for restructuring, which suits our investors well. These products provide a high level of service, and achieve results by utilising our economies of scale to the benefit of our customers.

New York authorities put Trump’s clandestine tax dealings under the microscope

Posted on by Max Tomlin

New York state tax officials have opened an inquiry into the Trump family’s business dealings, prompted by the results of an extensive investigation by the New York Times, released on October 2.

The centrepiece of the material comprised tax returns from the president’s father, which substantiate claims that Trump avoided tax through a variety of deceptive practices

The investigation challenges Trump’s claim that he is a ‘self-made billionaire’ by revealing that he received at least $413m in today’s currency from his father’s property empire, much of it as a result of fraudulent tax dealings in the 1990s.

The paper trail
Journalists at the New York Times studied over 100,000 documents that detailed the machinations of Trump’s father’s business empire. These included documents from public sources such as mortgages and deeds of properties owned by the family, as well as confidential files including bank statements and invoices.

The centrepiece of the material comprised over 200 tax returns from Fred Trump, the president’s father, which substantiate claims that Trump avoided tax through a variety of deceptive practices.

The investigation highlights ‘dubious tax schemes’ as well as ‘instances of outright fraud’ that the family engaged in. These include the establishment of a sham corporation by the president and his siblings to conceal millions of dollars of gifts, as well as the filing of incorrect property valuations to reduce tax bills.

Over the course of their lifetime, Mary and Fred Trump transferred over $1bn in wealth to their various children, which under the 55 percent tax rate imposed on gifts and inheritances at that time, should have incurred a tax bill of over $550m. However, Donald and his siblings paid a total of $52.2m, only around 5 percent, according to tax records seen by the publication.

A firm rebuke
Charles J. Harder, a lawyer representing the president, provided the following statement on October 1: “The New York Times’ allegations of fraud are 100 percent false and highly defamatory. There was no fraud or tax evasion by anyone. The facts upon which the New York Times bases its false allegations are extremely inaccurate.”

This statement would suggest that the president is employing his typical ‘fake news’ rhetoric to pour scorn on these allegations. The President’s dislike for liberal media outlets such as the New York Times is well-documented and he has been known to accuse the paper of falsifying reports on various occasions in the past.

Many others, however, are not willing to set aside these allegations so lightly. One of those parties includes the New York State Department of Taxation and Finance. It told World Finance: “The Tax Department is reviewing the allegations in the New York Times article and is vigorously pursuing all appropriate avenues of investigation.”

The US tax system is filled with loopholes, and enterprising tax lawyers cautiously walk the line between legal tax avoidance and illegal tax evasion to get the best deal for wealthy clients. The investigation indicates, however, that the Trump family may have trespassed into illegal territory on multiple occasions.

It remains to be seen whether there will be any penalties for Trump as a result of this investigation. Professor Alex Raskolnikov, a specialist professor in international tax law at Columbia University, explains: “The internal revenue code does have a statute of limitations for civil offenses and for criminal ones as well.  Both statutes have run for returns discussed in the New York Times article.”

He added: “However, civil fraud is not subject to the statute of limitations. Moreover, even when a tax return is audited and ‘closed’ by the IRS, if the IRS later discovers fraud it can reopen the tax year. If it does and finds fraud (civil), the penalty is 75 percent of the underpayment. That penalty, plus interest for many years, can amount to a large sum.”

There are also other ways in which Trump could be investigated for these claims. Alistair Bambridge, Director of Bambridge Accountants, told World Finance: “It is well-documented that one of the main things that Trump relies upon financially is a series of losses and credit from carryovers. No-one knows when these carryovers started, due to the fact that Trump has not released his tax returns to the public, so they could date back to 20 or 30 years ago. Therefore, although the statute of limitations has run out on the original losses, if they were carried over into any of the past three years, the IRS could still investigate. The same goes for any of the allegations relating to Fred Trump – although the IRS cannot posthumously investigate his tax record, if Donald Trump or any of his siblings have received benefits from Fred’s assets or trusts in the past three years, that would be grounds for an enquiry.”

Bambridge added: “The question is whether the IRS has the appetite to pursue the President of the United States – they may opt to go after periphery figures instead.”

The self-made fantasy
The investigation also calls into question much of Trump’s rhetoric surrounding his status as a self-made man. It also brings to light the inaccuracy of his well-rehearsed story that he accepted a $1m loan from his father and transformed it into a $10bn empire.

The New York Times states in its report: “what emerges from this body of evidence is a financial biography of the 45thpresident fundamentally at odds with the story Mr Trump has sold in his books, his TV shows and his political life.”

Much of Trump’s presidential campaign rested on his supposed responsibility for his own success. He has previously claimed that he received very little financial help from his father. However, the documents examined by the report highlight that the president was earning $200,000 annually by the time he was three years old, and was a millionaire by the age of eight. The financial aid that he received from his father continued to grow year on year until his death in 1999.

Change of fortune
The release of the New York Times investigation findings also coincided with a Forbes report stating that Trump has fallen 138 spots on the publication’s list of the richest people in the US.

Forbes’ valuation of the president’s net worth is also at odds with Trump’s own declaration. In a break with decades of precedent set by past presidential nominees, Trump refused to release his income tax when he ran for office, instead electing to disclose his net worth, which he claimed to be “$10bn”.

However, according to the Forbes 400 list, Trump was only worth $4.5bn in 2015 when he ran for office, and since becoming president, that number has fallen to $3.1bn.

Measuring the aftershock
This is not the first time that Trump’s credibility with regards to the financial transparency of his business dealings has been challenged. An investigation by the Palm Beach Post found that Trump and his lawyers had omitted details from a written agreement with Palm Beach officials to ensure that he would get a $5.7m tax break on his Mar-A-Lago property back in 1993. This tax break deduction previously appeared on the IRS’ list of “Dirty Dozen Tax Scams.”

The New York Times’ investigation, though, is the first significant assembly of documents of this sort and represents a huge investment of time and manpower by the paper. It is also the first time that a sitting president has been accused of a personal financial scandal of this scale.

Responsibility to decide on the appropriate legal proceedings now lies with the New York tax department. But decisions on the larger moral implications of this investigation lie with the American people. Tax evasion is not usually a partisan political issue, but in the US’ current, highly polarised political climate, it may become one.

Personal implications of this allegation for Trump himself could be two-fold. Concerning the legal aspect, this could force the president into being more transparent about his own business dealings. With regards to his reputation, the impact of these revelations on voter confidence will be borne out in his approval ratings, as well as in the run-up to the 2020 election. In the meantime, while the White House brushes off the claim in a vain attempt to move on to the next news cycle, many others will not be so dismissive.

Vietnam’s burgeoning stock market continues its resilient comeback

Posted on by Max Tomlin

Having been crowned Asia’s best-performing stock exchange and named among the world’s top 10 highest-gaining exchanges in 2017, the Vietnamese stock market is regarded as investment-worthy to say the least. In early April, the benchmark Vietnam Stock Index (VN-Index) hit a new record of 1,200 points, surpassing its March 2007 peak of 1179.32 points. Indeed, the index saw an impressive 80 percent growth throughout 2017 and the first three months of 2018. In June 2018, market capitalisation reached $160bn. There are two million accounts on the Vietnam stock market, in which there are 30,000 accounts of foreign investors. Non-Vietnamese investors own $36bn worth of equity and bonds. This position was supported by recent state initiatives; in August 2017, the government kick-started the derivatives market in a bid to further improve the Vietnamese securities market structure, while also enhancing the quality and diversification of its products in accordance with international best practices.

In mid-April, however, stocks plunged amid uncertainties surrounding global equities markets. Every major stock index in Vietnam suffered a steep drop in the second quarter of the year, with the VN-Index falling by more than 25 percent from its peak in early April. But as of mid-July, Vietnam’s stock market meltdown appears to be subsiding; there are mounting signs that the market is recovering, with good stocks resurfacing at decent prices. Indeed, with yearly earnings growth expected to range between 20 and 25 percent in the second half of 2018, Vietnam’s equities are becoming more and more attractive, particularly against the backdrop of the country’s sustained economic stability.

In light of these recent developments, World Finance spoke to Tran Hai Ha, CEO of MB Securities (MBS), about the stock market in Vietnam, minimising risk and the group’s forward-thinking strategy.

How does MBS manage to maintain a top-five position in terms of market share in the Hanoi Stock Exchange (HNX) and the Ho Chi Minh City Stock Exchange (HSX)?
For over 18 years, we have always focused on the core value offered to our customers. I think it’s a key factor behind our leading market position in both the HNX and HSX. Since its establishment, MBS has been consistent in its long-term vision and strategy, which correlates with our goal of providing the best possible securities services. Honestly, this clear vision keeps MBS heading in the right direction; we know what we have to do in each period to adapt to changing market conditions and achieve our overarching goal. We are proud to have one of the strongest research teams in the country, which uses in-depth market and industry insights to provide a critical understanding of our macro-market reports and equity analyses.

In the age of digital and information technology, our online trading platform is an imperative factor in driving our brokerage house towards success. Over the last three years, we have been investing heavily in our in-house IT and have launched our Contact24, Stock24, M.Stock24 and Home24 platforms. These programs provide online derivatives trading, online securities trading and online securities services, allowing our clients to securely conduct transactions anytime and anywhere. In addition, our consultancy support centre is available to assist clients in investment matters 24/7.

How does MBS minimise the risks inherent within securities trading?
The risks associated with the stock market cannot be entirely removed, but they can be controlled. Since day one, we have paid strong attention to developing robust risk management procedures and risk management strategies. Through these we take a structured and coherent approach to identifying, managing and minimising risks in relation to market, credit, operational, legal and liquidity risks.

We conduct internal risk management policies that are based on our practical risk management and experiences, as well as our corporate governance structures and national regulation frameworks. Essentially, we carry out four steps: identification of possible risks, evaluation and measurement, reaction and governance, and, finally, a review process that ensures no further control measures are needed. We also set limits for each kind of investment in regards to the level of risk that suits our risk appetite.

The limit may change from time to time depending on our performance and the asset management investment for each period. In addition, we also conduct portfolio performance reviews quarterly and have internal codes of ethics in place.

In your opinion, how has Vietnam’s improving political backdrop helped attract higher levels of FDI into the country?
FDI plays an important role in Vietnam’s economic growth. Accounting for around eight percent of GDP – which reached $221bn in 2017 – FDI increased by almost 10.8 percent to $17.5bn in this period. This positive trend continued through the first quarter of 2018. These results are the fruits of Vietnam’s commitment to establishing a business-friendly environment and providing profit-based incentives for foreign investment inflows. Such incentives include short-term corporate income tax (CIT) exemptions (which range from four to five years), a long-term special CIT rate of five to 15 percent, personal income tax exemptions for those working in a specialised business or area, free land leasing and so on.

What’s more, the country continues to relax its stance on foreign ownership in many listed companies; it has lifted foreign investment capital by up to 100 percent in various sectors including banking, securities, pharmaceuticals and medical equipment. This policy amendment has been recognised as a ‘game-changer’ that could further spur investment inflows and reduce market volatility.

What are the main factors driving the new wave of mergers and acquisitions (M&A) that are gathering pace in Vietnam?
The total transaction value reached $10.2bn in 2017 compared with 4bn in 2013, and there was CAGR of 31%. In the first eight months of 2018, there were 3,331 cases of capital contribution and state purchases from foreign investors with a total value of $4.8bn.

I believe Vietnam will continue to witness a boom in M&A activity over the coming years, especially given the country’s positive macroeconomic growth, rising GDP (see Fig 1), steady political climate, commitment to the development of the economy and stable currency. The marketability of the national economy is also an important factor, as is Vietnam’s open regulatory framework.

M&A investors are drawn to Vietnam as the population is approaching 100 million and has a great connection with 600 million people in the region. Recently, foreign investors from Singapore, Thailand, Korea and Japan have been involved in M&A activities across all sectors, but particularly in retail, FMCG, real estate, finance and agriculture. They have played an important role in M&A activity, creating a dynamic M&A market in Vietnam.

It is predicted that the explosion in both the number and scale of M&A transactions in key economic sectors will reach a total value of some $50bn between 2018 and 2020. Naturally, the actual market value will depend on many factors, such as local and international market conditions.

How has investment banking become one of MBS’ competitive strengths?
Being very aware of the role investment banking services play in a securities firm’s development, we pay close attention to, and invest in, services that will enable us to reach international standards. In the last three years, MBS has been listed among the country’s top five securities firms in terms of revenue from investment banking services. By the end of 2018, we aim to be in the top three. Our strengths are a perfect blend of talent, experience, market knowledge and partnerships. With 18 years of experience providing integrated investment banking services to hundreds of clients across various industries, we have not only built up a large network of corporations and financial institutions, but our staff has also gained on-the-ground knowledge of the Vietnamese business environment.

We always carry out independent assessments of every transaction to evaluate a client’s proficiencies. We then create a tailored structure to ensure the success of the deal, satisfying the client’s requirements, as well as attracting investors. Furthermore, our investment banking services receive support from our brokerage (with more than 70,000 accounts), trading, stock research and analyst departments in order to offer value chains to our clients. As a subsidiary of Military Bank, we can also take advantage of the group’s financial capacity and client network.

Finally, MBS is actively involved in M&A activities, with financial and M&A advisory services available to clients. Operating as a proactive local securities firm in the market, we fully understand corporate culture and have strong relationships with local corporations, as well as on-the-ground knowledge of market and legal systems to offer the best solutions to enterprises and ensure the success of their deals. I strongly believe that local securities firms have a strong competitive advantage in M&A advisory services in Vietnam, including cross-border deals.

What developments does MBS have planned for the future?
Well, our strategy has been developing in relation to the development of Vietnam’s stock market. It is predicted that the economy will be upgraded from a frontier market to an emerging market in 2020 by MSCI. This will boost the confidence of both domestic and foreign investors, while attracting capital inflows to the local market.
We always strive to improve the quality of our services and reach international standards in order to enhance our client and institutional network. Moreover, we continue to focus on our core business, on maintaining sustainable growth in brokerage and investment banking, and on achieving our goal of being listed in the top three securities firms in terms of both market share and revenue.

China’s ZTE Corp placed under extended probation after breaching Iran sanctions

Posted on by Max Tomlin

China’s second largest telecommunications equipment manufacturer, ZTE Corp, has been placed under extended probation by a US judge for continuing to violate Iran sanctions.

This most recent edict forms part of a long-running dispute between the US and ZTE Corp over non-compliance with US sanctions

The company was already under probation dating back to March 2017. It has been found guilty of conspiring to evade US sanctions by illegally shipping US-made products to Iran.

Dallas District Judge Ed Kinkeade issued an order on October 3 stating that he would be extending the terms of the probation to 2022. It was previously scheduled to end in 2020.

ZTE relies on access to US components in order to manufacture its smart phones and networking equipment.

This most recent edict forms part of a long-running dispute between the US and ZTE Corp over non-compliance with US sanctions. In March 2017, ZTE was fined $1.19bn, the largest ever US fine for export control violations, for illegally exporting US hardware to Iran and North Korea. At that time, the company was allowed to continue working with US firms provided that it identified and reprimanded all employees involved in the violation.

In April this year, the US Department of Commerce found that ZTE had breached the terms of the agreement by providing bonuses to 35 employees who had been involved in violating sanctions. It responded by placing a ban on US companies selling goods to ZTE. The company was forced to halt operations entirely until a settlement was reached in July. Under the terms of that agreement, ZTE was ordered to install a new board and senior management.

This latest violation coincides with an October 3 ruling from the International Court of Justice (ICJ), the highest court of the UN, stating that the US must repeal its sanctions on Iran. During the trial, Iranian lawyers argued that the restrictive measures on trade, food and medicine had strangled the country’s economy and were affecting the daily lives of its citizens. The court subsequently found in favour of Iran.

However, the ICJ has no power to enforce its directive. US secretary of state Mike Pompeo made it clear that the country has no intention of respecting the “meritless” ruling, stating: “I am disappointed the court failed to recognise its lack of jurisdiction.”

These two rulings by the ICJ and Judge Kinkeade are the latest escalation in a global trade war that threatens to topple the world’s two most powerful economies. The April ban imposed on ZTE sparked significant backlash from the Chinese government; six months later, the trade partnership between China and the US is even more strained. This latest ruling on ZTE may lead to a further deterioration of relations.

Malaysia checks China’s infrastructure ambitions by pausing major projects

Posted on by Max Tomlin

Malaysia’s election result back in May of this year was, in spite of the country’s recent political troubles, something of a shock. The Barisan Nasional (BN) coalition of parties that had ruled the country since its independence in 1957 was ousted, and then-92-year-old former prime minister Mahathir Mohamad was back in charge.

As well as the projects’ inflated price tags, many of the contracts contain a number of red flags that indicate due diligence was not carried out

Mahathir had previously served as leader of the BN himself, but joined the opposition, Pakatan Harapan, in 2016 following allegations of corruption levelled at his former party. Even though BN’s popularity had been on the wane, incumbent prime minister Najib Razak was still expected to win another term. His defeat is not just a political surprise – it also represents the chance for an economic overhaul.

One of Mahathir’s earliest actions has been to cast doubt over billions of dollars’ worth of China-backed infrastructure projects. The proposals, which include rail connections with Kuala Lumpur and gas pipelines in Borneo, have been criticised as overpriced and weighted in Beijing’s favour. The new prime minister’s actions may appear impulsive, but they just might be in Malaysia’s best long-term interests.

Proceed with caution
To understand Mahathir’s decision, one needs to understand the political mess that has been allowed to fester under his predecessor. During Najib’s stint in power, he established the 1Malaysia Development Berhad (1MDB) state investment fund that has since found itself at the centre of corruption allegations. Najib himself was recently charged with three counts of money laundering in connection with a former 1MDB subsidiary, though he has denied any wrongdoing.

$110m

The cost per kilometre of the East Coast Rail Link

$10m

The cost per kilometre of the Padma Rail Link

13%

The proportion of completed gas pipelines in Borneo

90%

of the cost for the pipelines has already been paid to the China Petroleum Pipeline Bureau

According to James Chin, Director of the Asia Institute at the University of Tasmania, Mahathir’s re-evaluation of the investments that were negotiated by Najib allows him to draw a line between his government and the last. “The reasons for the Malaysian Government halting some of its infrastructure projects are twofold,” he said. “Firstly, it was political, intended to show voters that it was going to do something different from previous regimes. In addition, many of the mega-projects were overpriced for the benefit of cronies connected to previous regimes.”

It is difficult to say by exactly how much the various projects have been overvalued – Chin suggests that the high-speed rail link with Singapore may have been “overpriced by about 100 percent” – but they are certainly costly. In total, projects worth up to $23bn could ultimately be suspended, including the East Coast Rail Link (ECRL), one of the most expensive railways in the world.

The 88km-long ECRL is set to cost CNY 66bn ($9.6bn), averaging out at just under $110m per kilometre. This compares unfavourably with other recently proposed long-distance rail projects: Bangladesh’s Padma Rail Link, which is also being constructed by Chinese contractors, is set to cost around $10m per kilometre. Although the price paid for rail projects in different parts of the world can vary for a multitude of reasons, the prices quoted in Malaysia do seem exorbitant.

Perhaps more worrying is the one-sided nature of the deals struck between China and the previous Malaysian Government. In an unusual move, the payment plans for the oil and gas pipelines to be built across Borneo were agreed on a temporal basis rather than being determined by the construction’s progress. This has meant that while only 13 percent of the pipelines have been completed, approximately 90 percent of the estimated cost has already been paid to the China Petroleum Pipeline Bureau.

There are also increasing murmurings that the questionable infrastructure projects could be connected with the 1MDB scandal that first rocked the country in 2015: Malaysia’s finance minister, Lim Guan Eng, said in a press conference in early June that he was “strongly suspicious” that some of the negotiated pipeline projects were part of the scam.

As well as the projects’ inflated price tags and snail-like progress, many of the contracts contain a number of red flags that indicate due diligence was not carried out. Several connections between the government bodies set up to oversee the projects and the now-disgraced 1MDB fund only serve to add to the murkiness.

A blessing in disguise
Infrastructure projects are usually a sign of a country’s economic wellbeing. They signify that travel is about to get more efficient, previously disconnected regions are to become integrated into the national economy, and a country is worth investing in. They should not be pursued, however, simply for the sake of it. In Malaysia’s case, it seems that the China proposals may not really have been necessary.

In a report published in May, Alex Holmes, Asia economist for Capital Economics, suggested that the decision to review, and possibly cancel, the planned mega-projects could be for the best. “Malaysia already has good infrastructure, equivalent to what you’d expect in a developed economy, and much better than countries at a similar income level,” Holmes wrote. “In particular, we suspect that all the investment in port infrastructure currently planned would lead to major overcapacity. Given that neighbouring Singapore and Indonesia are also adding to capacity, there is unlikely to be enough demand to make all the projects profitable.”

Growth in Malaysia is already meeting expectations, putting the country at risk of overheating if the infrastructure projects do go ahead. The economy expanded by 5.4 percent in the first three months of 2018, and although this figure represents a second successive quarter of deceleration, the country still boasts a favourable trajectory.

In addition, shedding the infrastructure proposals could help Malaysia reduce its growing debt burden. Lim recently revealed that public debt could be as high as 65 percent of GDP (see Fig 1), making it one of the biggest in the region. Cancelling unnecessary construction would free up some much-needed government funds. Even if Prime Minister Mahathir only withdraws from a few of the costliest projects, this would still help to balance the books. The ECRL and the high-speed rail line to Singapore alone are projected to cost roughly $16bn, equivalent to eight percent of Malaysian GDP.

While the sudden decision to cancel a host of infrastructure projects would normally be a sign that something is drastically wrong with a country’s economy, for Malaysia, this is not the case. When construction works are of dubious economic value, they only really benefit the people signing the contracts and pocketing funds. In Chin’s view, although the decision to reset these initiatives could hurt investment and growth in the short term, “in the long term, it will be positive”.

The fallout
Although it is conceivable that other countries could follow Malaysia’s lead and push back against China’s infrastructural ambitions, this appears unlikely. With its good credit rating, large capital reserves and growing domestic economy, Malaysia was relatively well placed to reject China’s proposals. Not many other developing nations are in a similar position.

Chin noted: “Many in Malaysia were worried about China being the biggest creditor for the infrastructure projects and whether that would grant [it] undue influence”. Their concerns were not without merit: late last year, Sri Lanka had little choice but to hand over its Hambantota Port to China after failing to meet its debt repayments. Furthermore, there is a suspicion that the development projects that form part of China’s Belt and Road Initiative are not entirely altruistic.

“Sri Lanka’s experience serves as a warning,” explains Holmes. “The Hambantota Port in the south of Sri Lanka that formed an important part of China’s Belt and Road Initiative has turned into a huge white elephant. A lack of traffic meant that Sri Lanka incurred heavy losses, and it was unable to repay the debts owed to the various Chinese state-backed companies [that] helped to finance the project. Last year, Sri Lanka was forced to hand over control of the port to China on a 99-year lease.”

Pressing pause on China-backed proposals may risk souring relations with Beijing, but other regional powers may also be dismayed. Although Malaysia’s Singapore rail project is likely to go ahead, the fact that Mahathir initially vowed to cancel it will not have done much good for relations between the two countries. Breaking international agreements is sure to create tension.

Although the fate of many proposals remains undecided, Chin believes that China will reduce the value of the projects as it is “playing a long-term game”. This would be preferable to seeing them aborted completely, allowing Mahathir to keep some of the proposals in place without losing face among his supporters.

During Mahathir’s previous spell in charge of the country between 1981 and 2003, his economic policies were known for bringing great benefits to the Malay community, but often to the detriment of the country’s Indian and Chinese minorities. If he does receive more economic freedom as a result of renegotiating Malaysia’s infrastructure projects, he will need to use it to ensure that everyone benefits. That is the only way that his country will be able to thrive in South-East Asia, one of the world’s most competitive regions.

Lombard International Assurance continues to make a compelling case for impact investing

Posted on by Max Tomlin

For many wealthy individuals, their fortunes come with a great sense of personal responsibility – to the society in which they live, to the wider global financial ecosystem and to the legacy they wish to leave behind. Their investment decisions increasingly reflect a desire to deliver not only financial returns but also social benefits. As a result, there has been a growing interest in impact investing. At BNP Paribas Wealth Management, for instance, client assets allocated to these types of investments have grown tenfold in the past six years to reach €10bn ($12.3bn), according to an article published earlier this year in Professional Wealth Management.

In a highly globalised world, there is a greater common awareness of major societal and environmental issues

The case for impact investing is clear. First of all, investors live in the societies shaped by their investments, meaning environmentally and socially positive investing is inherently in their own interests. Second, over the long term, economies can only thrive if the wider society does well.

In a highly globalised world, there is a greater common awareness of major societal and environmental issues, such as income inequality and climate change. Clear objectives have been set to address these issues, but substantial investments are needed. For instance, the UN estimates that the cost required to meet its Sustainable Development Goals will be somewhere between $50trn and $70trn, while the cost to meet the goals set out by the 2016 Paris climate accord will require more than $12trn over 25 years.

A developing trend
Shifting demographics among the world’s high-net-worth individuals, families and institutions are cause for optimism that these global social and environmental goals can be met. According to surveys carried out last year by UBS and OppenheimerFunds in association with Campden Wealth, approximately 70 percent of ultra-high-net-worth (UHNW) Millennials, 88 percent of UHNW women and 40 percent of family offices want to make investment decisions that align with their social values.

$50trn-70trn

Estimated cost of the UN’s Sustainable Development Goals

$12trn

Estimated cost of the 2016 Paris climate accord’s goals

$40trn

Estimated transfer of wealth to women and Millennials by 2050

With $40trn in wealth expected to be transferred over the next 30 years to women and Millennials in the US alone, according to a 2018 trends report by the Centre for Financial Inclusion, we are likely to continue to see an increase in the private capital allocated to impact investments.

While sustainability and alternative investments had previously just been niche strategies within a broader portfolio, they now represent a much larger and increasing portion of many investment strategies. In fact, some investment management firms concentrate exclusively on sustainable investments, such as London-headquartered Generation Investment Management, which promotes ‘sustainable capitalism’. Launched 14 years ago, the firm now has over $18.5bn of assets under management and runs one of the top performing global equity funds in the world across all indices – not just those focused on sustainability.

Growing demand for impact investment opportunities has also led to the launch of a number of initiatives among the leading players in the global financial services community. UBS is working with partners outside the industry – such as the Word Bank and the World Economic Forum – to develop an open architecture platform to facilitate sustainable investments. Last year, Credit Suisse launched an impact advisory and finance department to drive its sustainability agenda. Industry leaders such as KKR, Bain and Goldman Sachs are among those in a rapidly expanding group of financial institutions raising capital for impact investments that meet environmental, social and governance (ESG) criteria.

The holistic approach
These initiatives are being echoed and encouraged by the work of regulators and activists around the world. The European Commission has set its intention to clarify institutional investors’ and asset managers’ “legal obligation to factor sustainability risks into capital allocation decisions”. Brazilian regulators, meanwhile, are reviewing a resolution that governs investment practices and disclosures by closed pension schemes to reinforce ESG integration needs. Furthermore, in Australia last summer, shareholders brought a lawsuit against the Commonwealth Bank of Australia over the nondisclosure of climate risks, forcing the bank to begin climate disclosure practices.

For corporations and investors alike, taking a holistic view of activities brings benefits. A 2015 review of more than 2,000 studies found that integrating sustainability measures improves, rather than impairs, operating performance. Although impact investing varies a great deal, research by the Global Impact Investing Network and consultancies, such as McKinsey, suggests that investors believe they are achieving annual returns of between five and 15 percent.

While pursuing stable returns in the current volatile environment, impact investing can provide the opportunity to further diversify investment portfolios and improve yields over the longer term, while bringing positive social and economic benefits to the wider society. Indeed, in their search for improved performance to support wealth and succession planning – taking into account international family circumstances, geographical footprint and lifestyles – investors will continue to take a greater interest in them.

Thomson Reuters closes $20bn deal with Blackstone Capital

Posted on by Max Tomlin

Thomson Reuters has sold a majority stake in its Financial and Risk (F&R) division to the US-based private equity firm Blackstone Capital.

The deal, which closed on October 1, values the F&R unit at $20bn. The unit provides data and news to financial services professionals across the globe.

This represents a significant investment for Blackstone Capital, as it is the largest sum that the firm has paid out in a deal since the 2008 financial crisis

Thomson Reuters has sold a 55 percent stake of the business to Blackstone, retaining a 45 percent minority share. The division has been renamed Refinitiv, a term which combines the 160-year-old Reuters brand with the new business’ objective to enable ‘definitive action in financial markets’.

Refinitiv will be led by David Craig, who was the chief executive of the F&R division under Thomson Reuters.

Thomson Reuters was created in April 2008, when the Thomson Corporation, which had previously owned the Times and the Sunday Times newspapers, bought business broadcaster Reuters Corp. The company is the world’s leading provider of news and information, with a particular focus on financial, regulatory and legal data.

Thomson Reuters received $17bn in gross proceeds when the deal with Blackstone closed. It plans to return $10bn to shareholders under a buyback scheme launched in August this year. It will use the remaining capital to redeem $4bn of debt, while keeping $2bn on its balance sheet for future acquisitions and spending $1bn on expenses relating to the transaction.

Under the terms of the deal, Thomson Reuters Corp will maintain ownership of its Reuters News division. New company Refinitiv will pay an annual fee of $325m for the next 30 years to retain access to Reuters’ newswire service.

This acquisition represents a significant investment for Blackstone Capital, as it is the largest sum that the private equity firm has paid out in a deal since the 2008 financial crisis.

The deal will also serve to create a direct competitor for Bloomberg News in the US, which is run by former New York City mayor Michael Bloomberg. Bloomberg is currently the market-leading site for news, data and analytics for traders, bankers and investors, and until now, has had no direct viable competitor on US soil. Refinitiv is now set to fill that void.

Top 5 tips for doing business in Vietnam

Posted on by Max Tomlin

After decades of war, hunger and economic sanctions, Vietnam reached a turning point in 1986. The general secretary of the ruling communist party and former leader of the Việt Cộng, Nguyễn Văn Linh, implemented the policy of Đổi Mới, or ‘renovation’. Like Gorbachev’s Perestroika initiative in the former USSR, the aim was to create a socialist-orientated free market economy. In 1994, Bill Clinton lifted the 19-year post-war US trade embargo, and Vietnam entered the global marketplace.

The Vietnamese are incredibly open and optimistic about foreign investment and the opportunities brought by increasing integration in international markets

As a result, Vietnam’s 94 million people have experienced huge economic change within the last generation. The national GDP is now around $180bn – a stratospheric leap from just $6bn in 1990. As of 2017, 24 of the 28 EU nations have invested in around 2,000 projects in the country, with total registered capital reaching $21.5bn. Industry, construction, and services were the major sectors that attracted the majority of EU capital.

Real GDP in Vietnam is projected to expand by 6.8 percent this year (up from 6.5 percent in the previous forecast), before moderating to 6.6 percent in 2019 and 6.5 percent in 2020. In addition, a PwC report published in 2017 suggested that Vietnam would be among the world’s 32 most powerful economies in 2030, ranked ahead of the Netherlands and South Africa.

The Vietnamese are incredibly open and optimistic about foreign investment and the opportunities brought by increasing integration in international markets. They are also usually very keen to share their proud culture, tradition and history with foreigners in order to protect their local customs and heritage in a rapidly developing and outward-looking society. Therefore, even the slightest acknowledgement of Vietnamese culture can earn foreigners a lot of esteem. With all this in mind, we share the top five tips for doing business in Vietnam.

1 – Greetings
The Vietnamese language has an interesting set of pronouns. There is no direct translation for ‘I’, ‘you’, ‘he’ or ‘she’ in Vietnamese, because the words used to address people are decided by generation as well as gender. For instance, someone younger than you will be addressed as ‘em’, while a friend the same age is ‘ban’, yet a male your grandfather’s age is ‘ong’. Dozens of pronouns are necessary to help fully articulate the strict generational hierarchy of Vietnam.

The elder generations’ struggles and sacrifices on the road to freedom and independence are highly respected by Millennials. Most teenagers would agree that their parents know what’s best when it comes to big decisions about their future.

Experience, wisdom and pragmatism take precedence over youthful idealism. Therefore, it’s always best to offer a two-handed handshake to the oldest people in the room first, and the youngest last.

When pitching an idea, try to have an experienced colleague focus on the practical real-world solutions you’ve already established, rather than losing your audience in speculative, ideological or conceptual discussions.

2 – Eating
Generation also plays a key role when eating. Usually, meals are a family occasion, so paying individually is a baffling practice for most Vietnamese. If you invite a group of people to eat with you, it’s your responsibility to settle the bill, with the oldest male traditionally reaching for his wallet.

Vietnamese people love to eat and are very proud of their traditional cuisine. They will be overjoyed to hear foreigners hum while eating and saying the word ‘delicious’. Rice products, noodles, fresh vegetables and hotpots form the backbone of the Vietnamese diet, along with every kind of meat imaginable. Tropical fruits like guava or green mango, served with salt, are a common snack during meetings,

It’s also worth bearing in mind that lunch is a meal reserved for family. Between 11:30am and 2pm, schools close and workers go home so that families can enjoy lunch together. As Vietnamese working hours can stretch from 7am-9pm in tropical weather, Vietnamese people also like to take a nap around midday. It’s not wise to suggest a call or meeting that might disturb this institution, so a business dinner is a much better idea than a working lunch.

3 – Making conversation
When sitting down to eat, you might be surprised by some of the questions you are asked. It is uncommon for people to ask “How are you?” as there is no direct translation in Vietnamese (the closest being: “Do you have strength?”)

Vietnamese people may ask “How old are you?” – usually considered a faux-pas. But don’t be offended – this is just to gauge how they should address you as part of the generational hierarchy. In fact, trimming years off your true age may prove detrimental.

More common opening questions in Vietnamese include “Where are you from?”, “How many people in your family?” and “Are you married yet?” The family unit is still very strong in Vietnam, and sharing pictures of loved ones enjoying free time together will be very endearing, portraying a person of wholesome character.

Image is important in Vietnam, especially when doing business. You must be professional, but it also helps to illustrate that you are a charitable person and dedicated family member.

4 – Being honest
When sharing photos, try not to be taken aback by common Vietnamese compliments like “Your daughter is so beautiful” or “Your family are so rich”. Due to their mother tongue’s simple grammar and logical vocabulary, people in Vietnam generally call things as they see them and prefer to communicate in a very clear and simple manner. This can lead Vietnamese people to sometimes come across to Westerners as quite abrupt, especially if they ask frank questions like “How much do you earn?”

However, some in business might find this refreshing, as cutting to the chase and displaying results can be much more effective than drowning people in euphemisms and jargon.

5 – Negotiating
Don’t be afraid to articulate your position clearly, because you’re going to be negotiating. Like most Asian countries, Vietnamese businesses tend to favour tailored, flexible deals over standardised, fixed arrangements.

The figure you’re quoted first is usually just your trading partner’s target; their ideal result of the negotiations. Your response should then be your minimum amount, which then sets the range in which negotiations can take place.

Vietnam’s exponential growth has created an optimistic economy, but one that is also increasingly competitive. Businesses are eager for foreign investment to gain the advantage. It is therefore important to understand the context in which you are negotiating and offer the right sweeteners to any deal. For example, long-term sustainable partnerships with flexible terms are seen as favourable to rigid contracts with short-term gains.

Image is also paramount, and doing business with large organisations in developed countries is a big indicator of success and prestige to Vietnamese consumers. Any deal involving publicity, marketing and media opportunities boasting international relationships would be very desirable.

It’s also crucial to remember that Vietnam only joined the global marketplace three months before Jeff Bezos founded Amazon. Free markets are still somewhat of a new phenomenon. Vietnamese businesses are keen to learn the secrets of successful, sustainable growth from large multinational firms. Offering cutting-edge software, online technology or simply secrets to international success in your industry will likely sweeten any deal.

For more detailed advice about doing business in Vietnam, visit the Asian Absolute website

Canada agrees a trade deal with the US

Posted on by Max Tomlin

Canada and the US have reached a deal alongside Mexico to replace the North America Free Trade Agreement (NAFTA), ending 13 months of uncertainty.

President Trump has long sought to revamp the 1994 trade agreement with the wider goal of bringing down US trade deficits

The US and Canada released a joint statement late on Sunday, September 30, that confirmed a deal to rework NAFTA, which governs $1.2trn in trade.

“Today, Canada and the United States reached an agreement, alongside Mexico, on a new, modernised trade agreement for the 21st Century: the United States-Mexico-Canada Agreement (USMCA)”, US Trade Representative Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland said.

According to the statement, the USMCA will “result in freer markets, fairer trade and robust economic growth in our region”, and create jobs and new opportunities across North America.

President Donald Trump has long sought to revamp the 1994 trade agreement with the wider goal of bringing down US trade deficits.

Despite threats to tear up the pact, the US reached a deal with Mexico in August. On Sunday, negotiators on both sides were said to make concessions as they rushed to meet a midnight deadline.

Prime Minister Justin Trudeau told reporters: “It’s a good day for Canada.” Mexico’s Foreign Secretary Luis Videgaray echoed this sentiment, proclaiming: “It’s a good night for Mexico, and for North America.”

But while the agreement ended more than a year of uncertainty, it came at a cost. Canada agreed to provide US dairy farmers access to about 3.5 percent of its nearly $16bn annual domestic market, Reuters reported, citing sources. The deal also reportedly failed to settle the dispute over US tariffs on Canada’s steel and aluminium exports.

Financial markets reacted positively, however, as the agreement marked a modicum of certainty for traders. Following the announcement, Canada’s dollar rose to its highest since May against the US dollar, and the Mexican peso soared to its highest since August.

Although Trump continues to wage a trade war on multiple fronts, the agreement with Mexico and Canada brings relief and could lead to a growing trust in the US economy, which has been plagued by uncertainty since Trump took office.

How Coronation Merchant Bank is contributing to Nigeria’s investment banking renaissance

Posted on by Max Tomlin

The Nigerian banking sector has emerged from its recession with new characteristics. First, let us look at commercial banks specifically: their business models are traditional and require a lot of capital. There is also a split between commercial banks with plenty of capital, those with moderate capital and those with barely enough. If you have a number of commercial banks that are focused on their capital problems, rather than looking to expand their loan books, then the growth outlook for commercial lending is patchy – some banks can grow, while others cannot. On the other hand, demand for credit is quite weak because companies need an even lower cost of debt in order to compete.

Regulatory compliance remains a moving target, with the latest technologies and trends introducing new risks to the business world

But what does this mean? At present, it has forced Nigerian companies to look for alternative means of capital. Consequently, other sources of financing are taking off, such as commercial papers, corporate bonds, leasing and equity issuance, among other capital market transactions. The wonderful thing is that there is an enormous pool of institutional liquidity to be tapped into. If you look at the various capital markets, this is where the evolution of Nigerian banking is taking place. It’s very exciting and, here at Coronation Merchant Bank, we’re thrilled to play our part in the process.

Times are changing
The investment banking sub-sector in Nigeria has witnessed significant developments in recent years. These changes cut across ownership, entity structure and the industry’s biggest players. Without a doubt, the number of firms registered to conduct investment-banking-related business has increased considerably of late. This can be attributed to relatively low capital requirements and the ease with which entities in Nigeria can obtain operating licences.

In addition, there are noticeable changes in the industry with respect to ownership structures. Previously, investment banks had sole proprietorships and partnerships with dominant individuals. Today, this is fast changing, as non-traditional banking firms are deliberately institutionalising in response to regulatory and market changes. Likewise, some industry players are now able to support transactions with their balance sheets. What’s more, there is a greater investor capacity to absorb well-structured products, enhancing both the momentum and depth of the sector.

Our investment banking business has been structured to provide solutions to project and structured finance, mergers and acquisitions, and capital markets. Through our projects and structured finance desk, we provide bespoke services to corporate organisations in the infrastructure, construction, oil and gas, international trade and commerce sectors. We are constantly helping clients utilise our solid network of relationships to deliver value in their various ecosystems. Through benefits like this, we have carved a niche in the market for quality service delivery and consistent value alignment. As such, our clients are confident in our capacity to help them position strategically to harness capital flows and deliver timely competitive advantages.

As key capital mobilisation agents, we have assisted various entities, accruing around $1bn in capital flows from the local capital market in Nigeria over a period of three years. We expect to significantly increase this number over a shorter period of time in the near future.

Digital ubiquity
We cannot deny the impact that technology has had on the Nigerian banking landscape; from payment systems to customer management, innovations in technology continue to remodel the entire spectrum of service delivery and customer engagement in the financial services industry. These advancements have shaped the way we work and engage with our customers. As a bank, we understand that a key part of staying relevant in the industry depends on our ability to leverage these technologies and deliver a seamless banking service to our customers, whether they are making a payment, buying into an investment option or utilising our advisory services.

Today, we are talking about incorporating digital innovations – such as chatbots, machine learning and data science – to make financial services simpler, faster and more engaging for our customers. For instance, we have pioneered several digital solutions to improve transaction-processing times, handle existing and projected transaction volumes, and enhance data management and security across the group.

Recently, we launched the Coronation e-trader, an online trading platform that allows users to buy and sell equities through the Nigerian Stock Exchange from anywhere in the world. The platform guarantees convenience by enabling investors to open virtual stockbroking accounts. Furthermore, the platform gives real-time notifications on trade executions and allows the investor to take full control of their investments at all times. It also provides users with market data and information on all quoted companies, which is accompanied by top-quality research reports that help our customers make safer investment decisions.

Good for all
As a high-finance organisation, we have always supported various state entities, private companies and public firms in raising funds to finance infrastructure projects in Nigeria. We remain committed to developing products and playing a deeper role in structuring infrastructure projects that help the economy thrive.

In June, we launched our inaugural commercial paper, which recorded very strong performance in the market. From an initial target of NGN 15bn ($41m), we received commitments of around NGN 30bn ($82m) from various investors. Essentially, we have contributed immensely to the development of the capital market – both on the equity side and in terms of debt capital. We have distinguished ourselves as a formidable player in the capital market, raising in excess of NGN 300bn ($820m) for various companies in multiple sectors of the economy.

For us, helping to develop the economy and promote sustainability is not just a stated commitment: it’s something that applies to every facet of our organisation. Far from simply ticking boxes, we seek to deliver positive development to society, while protecting the communities and environments in which we operate. We achieve this by assessing and mitigating the direct and indirect impacts that arise from our business operations. We also respect human rights in all of our activities by implementing robust and transparent environmental and social governance practices. What’s more, we promote women’s economic empowerment through a gender-inclusive workplace culture, encouraging diversity of thought and actively nurturing a collaborative workforce. We believe that such an approach towards sustainable banking is consistent with our business objectives, and can stimulate further growth and opportunity, as well as enhance innovation and competitiveness.

Against this backdrop, regulatory compliance remains a moving target, with the latest technologies and trends introducing new risks to the business world. Financial institutions have faced a host of challenges when trying to stay abreast of these changes, as well as when implementing an effective and dynamic risk-based compliance framework. We recognise that any potential weaknesses in our compliance management systems pose serious risks to our reputation. Therefore, we strive to ensure systems are in place to guarantee the conformity of our processes with international best practices and standards.

Market insights
Every day we make decisions that rely on our knowledge of companies, markets, interest rates, naira and US dollar liquidity, industry sector strength, and the macroeconomy. Traditionally, the research department in our investment bank was an offshoot of the securities division, but we have since changed this structure. We have put our research department right in the middle of the bank, with a mandate to serve every key department. Furthermore, market knowledge is not confined to the research department; we have weekly meetings for the entire bank at which a different department presents a company in analytical detail. The forum is then opened up to questions from other departments.

The most effective way to ensure that our research department is the best at what it does is to have it face outwards – towards the clients – where competition is tough. So, a significant part of the research department’s mandate is to function as a traditional team, writing and publishing reports on companies, interest rates and macroeconomics, as well as meeting institutional investors. We have also raised our research standards to global levels, taking on all the processes of international frameworks such as MiFID II. The research team’s objective is to create independent, long-term views based on in-depth knowledge that institutional and individual clients can trust when they turn to us to manage their liquidity.

The future
Coronation Merchant Bank currently generates over 80 percent of its revenue from its corporate banking and global markets business. Over the past three years, however, we have seen a significant uptick in contributions from our subsidiary businesses. Since December 2017, our asset management business recorded over 230 percent growth in profits before tax (PBT), while our securities business recorded a PBT growth of 206 percent. Overall, revenue contributions from our non-core banking businesses have increased from about four percent in 2015 to approximately 12 percent in 2017. We expect this to reach around 20 percent in the next five years.

Although the bank is still very young, we believe we are on a journey towards becoming Africa’s leading investment bank. Personally, I believe we have made considerable strides in this direction, especially when you consider where we are now compared with where we were a few years ago. We remain committed to this vision and we are confident that we have the requisite people and resources to convert this vision into a reality. In the meantime, we will focus on the Nigerian market and leverage our robust distribution network and strategic alliances to provide high-quality services across West Africa and beyond. The sub-Saharan region retains significant potential for growth, as well as favourable long-term macroeconomic and demographic factors.