Year: 2019

Russia’s banking sector continues to stabilise amid clean-up operation

Posted on by Max Tomlin

Starting in 2013, the Russian central bank has been vigorously pursuing a clean-up process in a bid to stabilise the national banking sector. For every year since, an average of 10 percent of Russia’s banks have lost their licences; in total, the number of lenders has been slashed from more than 900 to around 500. Nonetheless, the Russian regulator still has a long way to go before its banking sector stabilisation efforts are complete.

The Russian regulator still has a long way to go before its banking sector stabilisation efforts are complete

Each year, more failing banks are discovered. If we observe the situation from the sidelines, it would seem that the accompanying challenges have swollen: for instance, in 2017 the cost of bailing out Otkritie, Promsvyazbank and B&N Bank topped a whopping RUB 1trn ($15.2bn).

These facts and figures cast doubt on the future viability and growth prospects of Russia’s banking sector. Russian rating agency ACRA expects that the national banking sector will see stagnation for the coming three to five years, and that the challenges faced by national banks will eventually have to be resolved by the government. ACRA’s June 2018 report regarding the national banking sector stabilisation progress stated: “Since, in the nearest-term average, Russian banks will not be able to salvage themselves, which requires a ‘push from outside’ as investors [become] less interested in the banking industry, the major part of financing will have to come from the government.”

The untouchables
What will the successful completion of this clean-up process look like? The system will finally be stabilised when non-liquid inflated book assets shrink to an insignificant amount at best, or become lower than the capital figures at the least. In this sense, 2017 may be seen as a U-turn year. First, because the Russian central bank has made it clear that there will be no ‘untouchables’, banks that have a long history of keeping their problems unresolved will not be permitted to expand their assets. And second, for the first time since the new national banking industry emerged, we can be confident that the net inflated book assets have decreased, meaning that more non-performing assets were resolved than created.

Yet, high-level analysis like this prevents us from understanding an array of internal processes that are crucial to the development of Russian banks. The country’s banking sector is very much like an inhomogeneous mosaic: it is made up of banks of various types and levels, and their assets and liabilities are structured in significantly different ways. Their business strategies and development plans differ greatly, too. In addition, given the current economic and regulatory environment, their viability levels and odds for robust growth are also very dissimilar. Among them are a significant number of Russian lenders, which we believe are able to progress sustainably and generate capital.

Healthy competition
A number of highly efficient private Russian banks are rated among the industry’s top performers in terms of business effectiveness. According to The Banker, six out of 10 Russian banks that were perceived as having the strongest return on capital were local private banks. However, they lack visibility within the sector, whereas many inefficient banks are more publicly recognisable and so negatively affect the general population’s opinion of the sector.

But what makes a good bank? The answer is very simple: a good bank can generate profits for its investors and stakeholders steadily and sustainably in any economic environment. The value of such a bank’s assets grows faster than that of its liabilities. Naturally, there are lots of aspects here that need to be understood, and the main one is the quality of a bank’s assets. A bona fide bank’s assets always offer good liquidity. They can be evaluated quite accurately and, if they have to be sold, this can be done within a short period of time at a price no lower than their par value. Efficient private banks are able to operate in the open market and deal with competition.

Unfortunately, unhealthy competition with non-bona-fide banks that gobble up customers’ money using inflated rates curbs market development and prevents effective bankers and lenders from growing their business. Meanwhile, the reputation of private banks becomes even more undermined. Therefore, with each stabilisation effort, true and healthy market competition between business teams and business models becomes more of a reality. Such competition will be the driver for the Russian market and will inevitably boost Russian banks’ appeal for investors.

Prima AFP is highlighting the growing importance of responsible investment

Posted on by Max Tomlin

In September 2018, more than 1,200 representatives of nearly 600 organisations from 37 different countries gathered in San Francisco to participate in the 2018 PRI in Person forum, the largest ever gathering of professionals in the responsible investment space. Formed by a group of institutional investors following a United Nations initiative in 2005, the Principles for Responsible Investment (PRI) network is the main promoter of responsible investment in the world.

If everyone on Earth lived as American citizens do, we would need three planets to sustain our consumption

Responsible investing is a relatively new concept that refers to the integration of environmental, social and corporate governance (ESG) factors in decision-making and investment processes. ESG factors cover a broad spectrum of topics that have not been traditionally considered in financial analyses, such as how corporations respond to climate change, water shortages and corruption risks. They also consider how firms ensure their supply chains are not only sustainable and avoid excess costs, but also do not promote child labour or modern slavery. Investors are finally beginning to recognise that ESG issues are financially relevant, as well as being morally significant.

A conscious economy
The PRI’s main objective is to assist its signatories in incorporating its guidelines into their decision-making processes and fiduciary duties. The PRI has more than 2,000 signatories, including some of the largest institutional investors in the world, with a total of more than $100trn in assets under management.

Attendance at the PRI in Person forum

1,200

representatives

600

organisations

37

countries

Given the conference’s focus on ESG factors, it was unsurprising that the food served during the three-day event was exclusively vegetarian. Thanks to a new technology, we could enjoy a hamburger with the texture and flavour of meat that was entirely plant-based. Importantly, compared with a normal hamburger, this vegetarian burger produces eight times fewer greenhouse gas emissions, uses four times less water and 20 times less land.

Meal options aside, Paul Polman, the former CEO of Unilever, gave one of the most inspiring presentations of the conference. Polman began his speech by saying that, while he is dedicated to being the CEO of Unilever in his spare time, his full-time job is working towards a sustainable future. This emotive message demonstrated Polman’s commitment and passion for creating a more conscious economy that works to produce solutions for the environmental and social
challenges we face.

Serving the 99 percent
Another key moment came later in Polman’s speech, when he mentioned the huge challenge of moving from a linear to a circular economy. The world consumes 1.5 times more resources than are available on Earth, and if everyone on the planet lived as American citizens do, we would need three planets to sustain our consumption. It is increasingly important that we preserve our resources for as long as possible.

A particularly relevant topic Polman discussed was the growing inequality afflicting the world. We live in a world where 87 percent of the wealth created in 2017 belonged to the top one percent of the population, and just eight people accumulated the same wealth as the 3.5 billion poorest people. Polman stressed the urgent need to seek more equitable forms of growth.

In 2015, representatives of 197 countries met at the United Nations to work on the Sustainable Development Goals, 17 global goals that act as a road map to a sustainable future. But instead of thinking about corporate social responsibility as one aspect of a company’s operations, Polman said businesses must change their entire vision and business management approach to become socially responsible corporations.

A new reality
Former US Vice President Al Gore also spoke at the event. The sustainable revolution, Gore said, has the magnitude of the industrial revolution and the speed of the digital revolution. Crucially, we are reaching a turning point: institutional investors are waking up not only to the risks of what climate change means for their portfolios, but also to the extraordinary opportunities it presents. Gore described climate change as the greatest investment opportunity in the history of humanity.

In his closing remarks, Gore summarised the issue of responsible investment: “If you do not integrate ESG factors in investment processes, you are violating fiduciary responsibility,” he said. “This is the new reality in the market.”

The alarming decline in foreign direct investment

Posted on by Max Tomlin

In the first half of 2018, foreign direct investment (FDI) around the world fell by 41 percent compared with the previous year. In fact, the $470bn invested across borders between January and June last year represented the lowest figure since 2005. Often such sharp declines are the result of an economic downturn: for example, between 2007 and 2009, as the global economy faced its worst recession in decades, annual FDI flows fell from $2.15trn to $1.1trn. Last year’s fall had a different cause.

For all the talk of geopolitical tensions, it is the expectation of financial gain that really determines where investors place their money

Primarily, the decline in FDI resulted from changes to US economic policy, namely the tax cuts President Donald Trump finally managed to pass in December 2017. But the decline has longer-term roots as well: FDI flows have been on the wane since 2015, with lower returns making investors less willing to part with their cash.

The cause of FDI decline may be less important than its impacts, however. FDI plays a crucial role in the world economy, especially with globalisation having strengthened international ties in recent years. If this contraction continues, it could have a damaging impact on growth in many parts of the world, particularly in developing economies.

America first
When the US Government passed the Tax Cuts and Jobs Act (TCJA) towards the end of 2017, much of the criticism levelled at the bill focused on how it could further entrench economic inequality and widen public deficits. Opponents came from across the political spectrum and included notable business leaders such as Warren Buffett and Michael Bloomberg.

Average FDI Returns

8.1%

2012

6.7%

2017

While debate rumbles on regarding the legislation’s long-term economic benefits for Americans, the effect it has had on FDI is clear: in the first quarter of 2018, outward investment from the US plummeted to minus $145bn. It was the first time the country had recorded a negative FDI flow since the fourth quarter of 2015.

The TCJA saw US corporation tax fall from 35 percent to just 21 percent, and ensured multinationals would only face a one-time 15.5 percent tax when repatriating overseas earnings. Together, these measures have encouraged US companies to bring money back to their home country rather than send it abroad.

For Richard Bolwijn, Head of Investment Research at the United Nations Conference on Trade and Development, this has had a telling effect on FDI: “The decline witnessed in the first half of 2018 [was] driven mostly by the tax reforms in the US made in December of the previous year. As a result of that, US multinationals are pulling back a lot of accumulated foreign earnings, and that leads to negative FDI outflows [in] the US. This negatively affects FDI inflows [elsewhere].”

Chasing isolationism
Undeniably, developments in the US have a major impact on FDI figures globally. The US is normally the biggest outward investor in the world, as well as the recipient of a great deal of investment from other nations. But while Trump’s tax cuts may eventually make the US a more attractive destination for overseas wealth, his diplomacy-by-Twitter approach to international relationships could quickly outweigh any benefits.

The Tax Cuts and Jobs Act may have exaggerated the figures seen in the first half of 2018, but they were in keeping with longer-term trends

“In this era of globalisation, countries have increasingly embraced the market economy model, having seen the great potential it can bring,” explained Dr Johnny Hon, a Chinese angel investor and venture capitalist based in Hong Kong. “Should this global trend of increasingly liberal financial markets begin to recede, and if a generally more insular, nationalistic and protectionist culture were to develop and take hold, we may begin to see negative effects on host countries.

“This could accelerate the symptoms of financial instability, including increased unemployment, weaker infrastructure and, ultimately, a poorer quality of life. This also opens up the opportunity for local investors to capitalise on any uncertainty and monopolise domestic markets, making the entire country less competitive both internally and on the global stage.”

Currently, the money divested by US companies will likely take the form of overseas cash holdings. As such, it is unlikely to prove especially damaging to the host countries that stored it previously. There may be some short-term benefits for US citizens, too: Apple has announced plans to repatriate a significant portion of the $252.3bn it currently holds overseas, some of which will be invested in building new US data centres and creating more jobs. Other huge US firms – including Microsoft and Alphabet – have also indicated that they will bring some of their profits back home.

The long-term impacts of Trump’s tax cuts are more difficult to assess. Certainly, the incentive to repatriate money made abroad is much greater today. However, while FDI flows are heavily influenced by decisions made in the White House, the global picture is dependent on much more than the actions of the current US president.

Turning off the tap
FDI is of huge importance to economic development around the world. Capital inflows help with job creation, boosting output and reducing budgetary deficits. What’s more, investment is often accompanied by knowledge sharing and technological collaboration, which can also help recipient countries.

-$145bn

US outward investment in Q1 2018

For Hon, the benefits of FDI are numerous: “FDI is considered one of the main drivers behind a country’s economic growth. It expands the base of investment in the country, not only because it is a source of hard currency, but [because] it also increases available physical capital – this is especially important for developing countries. This injection of money and assets can create a positive snowball effect on the economy.”

Fortunately, many of the developing countries that rely so heavily on FDI were not significantly affected by the decline. Wealthy nations were hit the hardest, with falls in emerging markets measuring a relatively subdued four percent when compared with the same period in 2017. Nevertheless, certain regions have struggled.

West Africa, for example, experienced a 17 percent decline in FDI in the first six months of 2018, while Latin America and the Caribbean suffered a six percent fall. In these regions, economic volatility and political uncertainty made investors reluctant to put their hands in their pockets. There are, however, ways that developing countries can attract FDI on a more consistent basis.

“The primary way to encourage more FDI flows is by improving the business and investment climate,” Bolwijn explained. “In the current climate – with declining overall flows and a shift towards intangible forms of international production – developing countries will have to work hard to develop their technological assets and workforce skills base.

“Clearly, the investment determinants that were valid until recently are gradually shifting, and now it is much more important to have a skilled workforce, an adequate intellectual property framework and digital infrastructure to attract investors.” If countries can improve their attractiveness to investors, there will be plenty of advantages, but there are reasons to believe that – in the medium term, at least – lower levels of FDI are here to stay.

Following the money
It’s important that FDI figures are analysed carefully before any conclusions are drawn. As Bolwijn said, they contain “a lot of noise”. This is because they can include intra-firm loans, mergers and acquisitions, and one-off payments that substantially skew the figures. These types of financial flows make a huge difference to balance sheets, but have little impact on the real world. It’s greenfield investments – FDI that sees a company start a new project in a foreign country from scratch – that make a real difference to developing economies. In contrast to the declining overall figures, there was a 42 percent increase in the value of greenfield projects in the first six months of 2018. Even so, a worrying trend is emerging.

While the average return for FDI was 8.1 percent in 2012, it has declined consistently since. In 2017, it was just 6.7 percent. For all the talk of geopolitical tensions, it is the expectation of financial gain that really determines where investors place their money. If returns are lower, it stands to reason that investment will be too.

“One of the reasons for the lower returns we have seen over the last few years is sharply lower commodity prices that have proved challenging for extractive industry sectors, which account for a large chunk of traditional FDI,” Bolwijn said. “If we look at the more efficiency-driven investments, there is a possibility that there is a decline in arbitrage opportunities in international production… [This could come] as a result of the convergence in labour costs around the world and because of measures to reduce international tax avoidance.”

It’s certainly true that investors have to work harder now to find the right opportunities overseas. Many foreign affiliates established in China, for example, are looking to divert to other regions as labour costs rise. Similarly, efforts to crack down on profit shifting mean that tax arbitrage is becoming more difficult. For policymakers in emerging markets, where investment is needed to achieve sustainable development, the fall in FDI returns should be a major concern.

While there are reasons for optimism – not least of all the fact that greenfield investments continue to grow – many national governments and businesses will be hoping the decline in FDI is reversed soon. The US tax reform of December 2017 may have exaggerated the figures seen in the first half of 2018, but they were in keeping with longer-term trends. Lower FDI levels are also consistent with a growing trend of distrust towards further globalisation – in certain parts of the world, at least.

Ultimately, such protectionist measures are likely to only be temporary. If the US wants to permanently step aside as the leading nation in terms of FDI, then China will be more than happy to take its place. Beijing’s Belt and Road Initiative is evidence of that. FDI may be in the doldrums right now, but lucrative opportunities continue to exist in both the developed and developing world. As long as that is the case, investment will continue to flow.

Bohai Leasing is shifting its focus to stay ahead of the game

Posted on by Max Tomlin

In 2011, Bohai Leasing officially listed on the Shenzhen Stock Exchange. At that time, the firm became the only leasing company to be listed with A-shares. Just five years later, the company renamed itself Bohai Capital, announcing it would embrace a new multi-financial development model.

Bohai hopes to become a global leader In the aircraft leasing industry

Under this model, Bohai diversified into banking, insurance, securities and internet finance. Participation in these markets mostly consisted of financial investment, however, as leasing remained Bohai’s core business, representing more than 98 percent of the firm’s total income. But on October 24, 2018, Bohai announced that, due to the strengthening of supervision in the financial industry and its recent divestment in some non-core businesses, the firm would revert to its original name, Bohai Leasing.

Bohai will no longer expand into diversified financial services and will gradually divest from activities outside the core business. So far, analysts have welcomed Bohai’s divestments, which they say will enable the company to obtain returns and focus on the leasing business. In the aircraft leasing industry in particular, Bohai hopes to become a global leader.

Ready for takeoff
China’s domestic market liquidity significantly tightened under recent regulatory stabilisation and risk control policies. This caused many bond issuances of companies listed in China’s A-share market to fail, with many companies’ credit ratings being downgraded as a result. The cost of capital reached new highs, sending the domestic leasing industry into decline after many years of triumph.

Bohai, an international business with solid liquidity management, continues to stand firm amid the tides in capital markets. In 2018, Bohai issued four three-year unsecured bonds for a combined value of CNY 3.68bn ($530m). United Rating judged the bonds to be worthy of AAA ratings, with an extremely low non-payment risk and a stable outlook. The rating report mentioned the fact that Bohai has overseen rapid growth in business and asset scale, as well as an increase in operating income and profit.

Today, aircraft leasing is Bohai’s largest core business. Revenue from this segment alone accounts for more than 78 percent of the company’s total sales. As of June 2018, the total number of aircraft owned, managed and ordered by the company reached 925. Its fleet value remained the third largest in the world, serving 156 airlines and customers.

Supported by its main aircraft business, Bohai became one of the few Chinese leasing companies to maintain steady growth during the year, while the firm’s profitability and liquidity management dispelled concerns about its corporate liquidity.

Flying high
Leasing is a capital and technology-intensive industry. In China, leasing companies with a banking background always benefit from the low cost of funding. However, those without such a background lack core competency. In order to surpass these challenges and diversify its income sources, Bohai entered the international leasing market in 2012 by acquiring leading overseas aircraft and container lessors.

After the acquisition of Avolon and C2 (CIT’s aircraft leasing business), Bohai established its position not only as the third-largest aircraft lessor globally, but also as an affiliate of one of the largest airline groups in the world, which means we have a unique relationship with original equipment manufacturers. When combined with HNA Group, we are already one of Airbus’ and Boeing’s top customers worldwide. This position allows us to negotiate attractive aircraft pricing – a core input into the economic performance of an aircraft lessor. For instance, the 75 Boeing aircrafts recently purchased by Avolon are a significant money-saving feature for both the company and its customers.

Since its public listing, Bohai’s total assets have increased 16-fold, reaching CNY 292bn ($42bn) in 2018. The compound growth rate of Bohai’s total assets has reached 64 percent since 2014, while the compound annual growth rate of total revenue has reached 73 percent and the compound annual growth rate of net profit attributable to shareholders of the parent company has reached 42 percent.

In the mature international leasing market, the core competitiveness of a leasing company is down to its asset management capabilities. Teams with rich industry experience manage leading global aircraft lessors, such as AerCap, Aircastle and Bohai’s aircraft leasing arm Avolon. They rely on specialised operations and scale effects to reduce dependence on capital leverage. Wang Jingran, secretary of Bohai’s board, has said the company will further strengthen the integration and upgrading of existing assets. He is also keen to introduce the experience of overseas subsidiaries in the domestic business.

Bohai’s subsidiaries have also begun to explore the innovative ‘light asset management’ mode of operation in aircraft leasing. The average age of Bohai’s fleet is 5.2 years, the lowest among the world’s top three aircraft lessors.

Analysts believe that, in a context of strong financial supervision in a debt-driven industry, Bohai Leasing’s asset management model can effectively avoid the pressure of devaluation caused by the rapid updates in aircraft technology, and reduce the asset liability ratio, while also achieving stable income and maintenance costs in the long term.

Standard Insurance is thriving in challenging times in the Philippines

Posted on by Max Tomlin

Located within the Pacific Ocean’s tectonic Ring of Fire, the Philippines is prone to major earthquakes and catastrophic volcanic eruptions, experiencing approximately 12 minor earthquakes on a daily basis. What’s more, its position within the region’s typhoon belt exposes it to persistent tropical storms, with around 20 typhoons of varying severity registered every year. To make matters worse, its geographical location and unique topography also renders the nation susceptible to tsunamis, flash flooding and landslides, placing considerable strain on the Philippines’ underdeveloped infrastructure.

The Philippine insurance industry continues to thrive despite the challenge of natural risks

These seemingly overwhelming risks, which threaten the insurance industry year in and year out, hang over the nation’s head like the proverbial sword of Damocles. Nonetheless, these tribulations have pushed the industry to continually enhance its capabilities and overall insurance structure, and to be better protected and prepared for any eventualities that may arise. Meanwhile, enhanced technology and digitalisation in recent years combined with heightened competition among industry players has driven the quality and affordability of products, as well as the manner of distribution and claims handling. Equally important, the Filipino heart and mind, as well the Filipino culture and traditions, are the factors that spell resilience amid all these calamities.

70

Philippine non-life insurance companies operating in 2013

54

Philippine non-life insurance companies operating in 2018

As such, the Philippine insurance industry continues to thrive despite the challenge of natural risks, posting steady growth in the past few years. The country’s robust economy, with GDP at 6.7 percent, has allowed the industry’s key drivers to prosper, and 2017 was an exceptionally good year for the Philippine insurance industry as a whole. Insurance net premiums rose 12.1 percent to PHP 259.8bn ($4.95bn), and are expected to continue growing in years to come. The non-life insurance sector has experienced particularly strong growth, bolstered by a rapid uptake in motor insurance policies and expanding fire and allied perils coverage.

The non-life insurance industry posted an impressive growth rate of 10.1 percent for 2017, with insurers bringing in approximately PHP 83.2bn ($1.58bn) in gross premiums and PHP 48.6bn ($927m) in net premiums. But despite this exceptional market performance, changes to the Filipino tax landscape are now proving challenging to both established and fledgling non-life insurers. With significant tax reforms coming into effect this year, insurers must implement innovative business strategies if they wish to remain profitable in this challenging climate.

Challenges ahead
The Philippine automotive industry has posted particularly impressive results in recent years, becoming one of the nation’s key drivers of economic growth. Domestic car production has ramped up, fuelled by increased demand for vehicles among the Filipino population. The flourishing industry grew by 18.4 percent in 2017, with a record number of sales totalling 425,673. This remarkable uptake in car sales is good news for the non-life insurance industry, as motor insurance accounts for over 50 percent of the non-life market. This upward spiral of motor sales coupled with aggressive car sales promotions and the proliferation of transactions with built-in insurance packages has, in turn, driven significant growth in motor car insurance policies.

However, this flurry in activity can be largely attributed to the looming implementation of new excise tax laws, which came into effect in the Philippines in January of last year. The government’s substantial reform package, Tax Reform for Acceleration and Inclusion (TRAIN), has established new taxes on both vehicles and fuel, leading to an increase in car prices. While the newly imposed TRAIN law lowered tax rates on SUVs and luxury vehicles, it increased taxes on low-to-mid-priced vehicles, driving up the cost of motorcar purchases among the general public.

Many Filipinos sought to avoid these hefty excise taxes by fast-tracking their motor purchases in the last quarter of 2017 (see Fig 1), which accounts for the sudden increase in car sales in the latter half of the year. It is too early to say now whether these new excise taxes will affect the long-term car buying habits of Filipinos, but mid-year reports suggest that the automotive industry can expect to experience a significant slowdown in annual sales.

After eight consecutive years of growth, this decline is certainly disappointing for both the automotive industry and the non-life insurance market. These developments, exacerbated by economic headwinds such as the weakening Philippine peso and increasing inflation, are projected to result in slower car sales for 2018 overall. Carmakers and insurers are anticipating a drastic change in consumers’ spending priorities, as buyers will be forced to reconsider their budgets when looking to purchase a vehicle, whether it is their first or second investment.

Despite this expected drop in car sales, vehicle manufacturers and insurers are hoping the declining sales trend will eventually plateau and post some positive growth by the end of 2018. In order to combat this sales slump, leading brands and carmakers have launched a number of compelling promotional schemes: these initiatives include flexible financing packages such as ‘buy now, pay later’ schemes, in addition to a host of other unique customer incentives. If these ambitious initiatives prove successful, insurers can expect to see an uptake in motor insurance policies.

Overcoming hurdles
As one of the largest non-life insurance providers currently operating in the Philippines, Standard Insurance understands how to handle industry challenges. With close to 2,000 associates, we have insured one in five of the nation’s four million four-wheeled motor vehicles at some point in our history. Over the course of our 60 years spent serving the Filipino population, we have seen the non-life insurance industry become increasingly competitive, with bancassurance capturing a growing segment of the insurance market.

Furthermore, the mandated capital increase has led to a flurry of mergers in the insurance industry, with the number of non-life insurance players dropping from 70 in 2013 to just 54 in 2018. Although the number of non-life insurers has declined, competition has heightened as traditional insurance players are forced to compete with powerful banks and financial conglomerates.

Amid this fierce competition, it is increasingly important that non-life insurers adopt innovative solutions in order to stand out from the crowd. At Standard Insurance, we aim to deliver strong, customer-focused services that meet the needs of the public, while adhering to our mission of providing stakeholders with a platform to achieve their respective life goals.

We continue to focus on proper underwriting and intelligent pricing across all lines, in addition to ensuring fast and accurate claims turn-around for our loyal customers. As we look to the future, we are committed to expanding our current partnerships and building new relationships with intermediaries, including car dealers, banks and insurance brokers across the nation.

In order to adapt to our customers’ evolving needs, we have created a range of innovative products and solutions. Our cutting-edge IT system, iNSURE, is designed to meet the existing and future requirements of our policyholders, advancing our ambition to become an all-digital business. An agile in-house service, iNSURE has improved efficiency at every level of our operations, enabling Standard Insurance to cater to the shifting demands of the Filipino public.

People first
Along with offering our clients innovative digital solutions and a range of flexible products, at Standard Insurance we are also committed to providing quality customer service. Our loyal customers are at the heart of everything we do, and we are dedicated to treating each and every client with the care and attention they deserve. At all of our 42 branches, our attentive associates are always on hand to offer crucial advice and match customers with a policy that suits them. With a comprehensive understanding of non-life insurance products, Standard Insurance advisors are well positioned to explain complex concepts and highlight the importance of policies to existing and potential clients.

Furthermore, customers are able to quickly and efficiently file claims at any of our nationwide branches, regardless of where the policy was issued, saving our clients valuable time in what could be an emergency. In addition to assisting existing customers, our knowledgeable in-branch associates are more than happy to speak with potential customers, advising them on what kind of policy might suit their current and future requirements.

What’s more, our internally developed web-based claims system iCATS enables associates to remotely access policy records, register claims, upload claim documents, request vehicle inspections and approve claims from any of our branches, making the claims process as efficient and hassle-free as possible. Our commitment to providing fast and convenient service led us to develop our ‘responsive appraiser of photo identification data’ solution – a tablet-based, point-and-click program that generates near-instant repair estimates.

Since implementing this innovative technology, we have been able to process claims in as little as two hours, rendering the process far more time-efficient for both customers and associates. As a result, complaints have fallen and customer satisfaction is at an all-time high, reflecting the effort we have put into our customer care. From customer service to insurance products, at Standard Insurance we are dedicated to finding innovative solutions at every level of our business. Moving forward, we will continue to invest in diversity with regards to skills, perspectives and approaches. We are confident that this will allow Standard Insurance to remain profitable and relevant for many years to come.

Money’s killer application

Posted on by Max Tomlin

Money must rank as one of humanity’s greatest inventions, right up there with other handy things like the wheel, or beer (or writing and mathematics, for that matter), all of which were first created in ancient Mesopotamia. Money was developed in peace but, as with many other powerful technologies, it first really came into its own in times of war. This changes the way we see it.

The main motivation for the spread of coin money appears to have had less to do with the needs of the market, and more to do with those of the military

Money’s roots go back to religious temples in the ancient state of Sumer (part of modern-day Iraq). These temples employed thousands of priests and bureaucrats, along with agricultural and manufacturing workers. To help with things like food rations, they developed a system based on clay tokens, which would represent specific goods. Over time, these tokens were replaced by markings – the first writing – on clay tablets that are today known as ‘cuneiforms’. And instead of drawing multiple copies of the same item, the Sumerians introduced numbers – the first use of mathematics.

At first, these cuneiforms contained specific instructions, such as how many beers certain workers should receive as pay (the first squandering of a pay cheque on beer). But over time the temple accountants – being accountants – realised it would be more convenient to have a common unit of account, rather than having to specify set amounts of beer, barley and so on.

So in around 3000 BC, they settled on the ‘shekel’, which was a weight of silver (around 8.3 grams) that was chosen to be worth a bushel of barley. Clay tablets, which denoted a set amount in shekels, represented a debt for that amount and could be used to pay state employees, or exchanged for other things.

Money was therefore a useful kind of computational device for accountants and bureaucrats, and helped run the first city-states (the Sumerians invented those too) as they grew in complexity. But money only really took off when it found its ‘killer app’ in the form of coins.

Definition of statehood
The first coins date to the 17th century BC in the nearby kingdom of Lydia. The idea quickly spread, first to the Greek cities of coastal Asia Minor and from there to the mainland and surrounding islands. By 600 BC, most Greek city-states were producing their own coins as a sign of their independence. Since then, power over the money supply and the right to dictate what is legal tender have been defining attributes of statehood. The ancient Romans, for instance, projected power over distant colonies through the images of emperors that adorned their coins.

Indeed, the main motivation for the spread of coin money appears to have had less to do with the needs of the market – which historian Michael Crawford called an “accidental consequence of the coinage” – and more to do with those of the military. Money had found its killer app, and it was war: coinage was introduced at a time when by far the largest expense of Greek rulers was the mobilisation of huge armies. Coins served as a device for payment, but also as a tool to both motivate the troops and control the general public.

Soldiers and mercenaries were paid using metal that was mined or plundered. They spent the money on things like food and supplies, and the state then demanded some of the coins back as taxes. The fact that the general public had to get their hands on money in order to pay taxes – for example, by feeding or housing soldiers – solved the logistical problem of how to maintain the army.

The system was perfected by Alexander the Great. During his conquest of the Persian Empire, salaries for his army of more than 100,000 soldiers amounted to about half a ton of silver per day. The silver was obtained largely from Persian mines, with the labour supplied by war captives, and was formed into Alexander’s own coins. These had an image of the supreme god Zeus on one side, and Hercules (whose superhuman powers he may have identified with) on the other. Alexander would go on to invade the Babylonian Empire in Mesopotamia, where he wiped out the existing credit system and insisted that taxes be paid in his own coins.

Crowbar of power
So, what does money’s history tell us about the unique power that it holds over society? One thing is that we are looking at it the wrong way.

In economics, money is usually presented in textbooks not as a designed system, but as something that emerged naturally as a substitute for bartering. The monetary economy can therefore be treated as a kind of advanced form of barter. As Paul Samuelson put it in his 1948 book Economics, which served as a standard text for the second half of the 20th century: “If we strip exchange down to its barest essentials and peel off the obscuring layer of money, we find that trade between individuals and nations largely boils down to barter.”

In this picture, money is just an inert intermediary with no special properties of its own. One result of this understanding is that macroeconomic models usually don’t bother to include money, debt or private banks – even after these models failed to predict the financial crisis (which involved money, debt and banks). As Vítor Constâncio, former vice president of the European Central Bank, said in 2017: “In the prevalent macro models, the financial sector was absent, considered to have a remote effect on the real economic activity.”

However, while the barter story has remained remarkably constant over the centuries, the reality – as anthropologists like David Graeber point out – is that economies based purely on barter (as opposed to gifts or communal arrangements) don’t appear to have ever existed. Instead, the money system was a designed social technology that – even if it had many applications other than war – was imposed at the sharp end of a sword, and in many respects was an expression of power. It is no coincidence that today the world’s largest reserve currency is also backed by the largest military, or that in Iraq, the cradle of western civilization, the oil business runs on dollars. Or, indeed, that (as economist Michael Hudson has pointed out) “the financial sector has the same objective as military conquest: to gain control of land and basic infrastructure, and collect tribute”.

As Nietzsche wrote: “Money is the crowbar of power.” To model the economy, we need to take that power into account, starting with a better understanding of how money is created and controlled.

Top 5 countries with the highest trade tariffs

Posted on by Ashton Wenborn

When Donald Trump took his seat in the White House, he promised to shake up global trade as part of his ‘America First’ policy. The US president certainly upheld that promise, initiating trade attacks on China, the EU and neighbouring partners such as Canada and Mexico. The trade war with China, in particular, has upset global markets, which have risen and fallen at each new development.

In an era where developed nations swear by low tariffs and free trade, the US has firmly stuck a spanner in the works. With the prospect of increased tariffs looming, World Finance lists the countries that impose the highest charges on imported goods.

 

1 – The Bahamas (18.56%)
The Caribbean’s wealthiest country also imposes the world’s highest tariffs on imported items. Despite relying on imports – the country has a trade deficit of $7.781bn – the Bahamian Government raises 60 percent of its total revenue from import taxes. While the basic tariff rate is levied at 35 percent, a growing list of tax-free items has reduced the average tax rate to 18.56 percent.

Despite relying on imports – the country has a trade deficit of $7.781bn – the Bahamian Government raises 60 percent of its total revenue from import taxes

It’s a stark contrast to the Bahamas’ tax rates; the country imposes no income tax, corporate tax, capital gains tax or wealth tax. Along with the tariffs, the island, which is located just off the coast of Miami, relies on tourism, mainly from the US, to drive its economy.

 

2 – Gabon (16.93%)
Located on Africa’s west coast, this Francophone country is one of the continent’s medium-sized economies. While its crude oil reserves and abundance of timber have resulted in a healthy trade surplus of $2.79bn and steady GDP growth since the start of the millennium, unemployment remains high, along with poverty rates. In addition, the country’s failure to diversify its economy has resulted in a slowdown in recent years.

Gabon is part of the Central African Economic and Monetary Community (CEMAC), an alliance between seven Central African nations, where no tariffs are imposed on its partners – though trade between them is rare. However, elsewhere around the global the CEMAC community imposes high charges on imported goods such as food and raw materials.

 

3 – Chad (16.36%)
The landlocked Central African nation is another CEMAC member, again following the imposition of high tariffs on imports from outside the alliance. Trade makes up 68 percent of Chad’s GDP, though unlike Gabon, the nation has run up a trade deficit in recent years, at $630m. However, much of Chad’s trade is informal – 80 percent of residents rely on agriculture and the exchange of cattle – and has never been recorded. Therefore trade estimates should be treated with caution.

Oil and agriculture make up the majority of Chad’s exports, with over half heading to the US. Imported rice and flour are subject to the lowest tariffs at just five percent, which increases to 30 percent for tinned foods and electronics.

 

4 – Bermuda (15.39%)
The isolated British overseas territory has one of the world’s highest GDP per capita, as a result of its offshore financial services. Considered a tax haven with loose regulations, an estimated 18,000 foreign companies operate on the island. Bermuda is scarce in resources suitable for exports and has a non-existent manufacturing base. Therefore, most of its products are imported, mainly from the UK.

The high tariffs imposed on goods account for a large proportion of government revenue and generally reflect expensive retail prices. The majority of products are subject to a charge of 22.25 percent, though this is lower for food, and tariffs on essential medical items are removed altogether.

 

5 – Central African Republic (14.51%)
The third CEMAC country to make this list, the Central African Republic (CAR), is one of the world’s poorest countries. The nation is trapped in a civil war, which decimated its GDP in 2013 and has resulted in substantial foreign aid being needed to support the government and its citizens. CAR is rich in natural resources and possesses a range of minerals such as diamonds, gold and uranium. However, smuggling is rife in the country and a large percent of goods end up in the hands of illicit traders.

Crops such as coffee, cotton and tobacco are also exported, however, despite its supplies, the country imports nearly double the amount it exports. In a similar vein to its fellow CEMAC members, CAR’s imports mainly consist of food, as well as machinery to aid the country’s mining sector.

Afschrift continues to showcase the value of its tax optimisation expertise

Posted on by Max Tomlin

Everybody must respect the law. This also applies to tax lawyers – perhaps even more so than for other citizens. Likewise, states must respect the law as well – for instance, by admitting that taxes are only due when the law stipulates that they are.

As such, tax lawyers have a double mission: on the one hand, to help their clients respect the law, especially as legislation is exceedingly complex. On the other, tax lawyers must also find law-compliant solutions in order to enable their clients to pay fewer taxes, but without breaking the law. Even when limited to just one country, systems of taxation are complicated and difficult to navigate. When multiple countries and the spread of misinformation are factored in, it can be truly overwhelming.

Therefore, it is hardly surprising that businesses and individuals often turn to professional tax advisors to make sense of the complex systems they are faced with.

Staying on the right side of the law is essential, which is why choosing the right tax advisor or legal representative is so important

The media’s reaction to the release of the Paradise Papers in November 2017 demonstrated that taxation is clearly an emotive issue, but not one that is always properly understood. There are, for instance, various methods of reducing tax bills that are completely legal, whether they concern offshore businesses or not. Tax optimisation is not something that should be condemned – it is simply one aspect of prudent fiscal management, no different from an individual making the most of their tax-deductible expenses when completing a personal tax return.

Unfortunately, some governments appear to be committed to destroying tax competition, despite the fact that this is not to their advantage. Indeed, this is a disturbing trend that is becoming particularly apparent in the EU, where the power of key member states threatens to undermine our civil liberties.

Of course, staying on the right side of the law is essential, which is why choosing the right tax advisor or legal representative is so important. Providing valuable advice to its clients for more than 20 years and possessing an acute understanding of the internationalisation of customers’ activities (both private and professional), Afschrift Law Firm fits the bill perfectly.

Spirit of competition
At present, EU member states are in constant need of capital and, as a result, they try to collect the maximum amount of tax revenue. One of the methods that EU member states are using, under the pressure of more powerful members such as Germany and France, is to limit tax competition. As a result, measures are being collectively implemented in order to restrict tax optimisation.

This said, tax competition will never really disappear, and has even started to develop on regional or federal levels in countries such as Spain or Belgium. Even if governments attempt to prevent tax optimisation, opportunities will always exist. With states continually introducing new tax niches, which can create ways for companies to reduce their tax burden, it could be argued that tax optimisation is even encouraged by the state itself, albeit within a specific context. In any case, the more they are subject to heavy taxation, the more companies and individuals will resort to tax optimisation. The role of tax lawyers is to help them achieve their optimisation targets – all, of course, within the limits of the law.

Given that tax is defined as a compulsory contribution without consideration, it is understandable that taxpayers try to reduce this financial burden. Government efforts to prevent tax optimisation only result in the creation of new rules and, in turn, greater complexity. In order to deal with the application of these rules, companies and individuals are in even greater need of tax lawyers so as to avoid suffering the consequences of the state’s tax policy. This is especially true as tax competition will never really disappear, and has even started to develop on regional and federal levels.

Legislative shackles
In recent times, directives have been implemented to limit certain types of tax optimisation, such as the deduction of interest or royalties in relation to intellectual property rights. The implementation of these directives is the result of the joint and concerted action of several large EU members in order to make it less advantageous for companies to establish themselves in smaller EU countries, many of which use tax incentive policies to attract foreign investment. Indeed, it has become characteristic of the European Commission to use this tactic against its smaller members, including Luxembourg, the Netherlands, Belgium, Ireland and third countries like Switzerland.

Because of the size of these countries, they need to attract foreign companies by adopting tax-friendly policies. Without these advantageous tax policies, large companies would always base their operations in bigger countries. Having said that, it is important for national tax incentive schemes to be chosen very carefully so they are not classified as selective state aids, which are strictly prohibited in the EU.

For clients, trusting their tax specialist is hugely important. A client cannot entrust their lawyer with the intricate details of their finances if they are not certain that these details will remain confidential. This trust is the only way to make sure that clients disclose all relevant information, which is vital if lawyers are to provide their clients with judicious advice while always remaining respectful of the law. Essentially, the absolute protection of the client-attorney privilege should be upheld at all times.

Ensuring optimisation
If one wishes to avoid the creation of a virtual cartel of EU states, fiscal competition between countries – and even between territorial subdivisions and federal regions – is necessary. Such a cartel would always act against the interests of the taxpayer, as its actions will likely result in an increase in taxation. While the role of individual states has swollen in recent years, their efficiency has unfortunately not grown in correlation. Without fiscal competition, nothing would compel states to reduce tax, nor prevent them from making increases.

As history shows, politicians will always be tempted to increase their power and present their roles as essential. Meanwhile, voters prefer to see personal gain, rather than see taxes reduced for everybody. As a result, it is always more advantageous for politicians to propose plans that benefit their supporters as individuals, rather than reduce taxation in a uniform manner. Fiscal competition is therefore necessary in order to restrain the current trend that is seeing our societies become more and more controlled by the state. By their nature, taxes are set up by those in power; without competition, this power may become arbitrary. As such, in the event that tax pressure becomes too much, all citizens must have the right to vote with their feet by establishing elsewhere.

Nevertheless, fiscal competition does not seem to entirely disappear, even when faced with the pressure from the EU and the Organisation for Economic Cooperation and Development, which generally act in the interests of the most powerful states. Furthermore, even if unification could be achieved, this would not prevent the development of fiscal competition based on tax rates, the harmonisation of which is not being discussed at present.

It is also worth keeping in mind that tax optimisation is not solely the preserve of large multinational companies: individuals and small companies can stand to benefit as well. First, there are certain procedures implemented by the tax administration that are provided by law or by administrative practice. Moreover, the utilisation of the advance tax ruling procedure, through which a taxpayer may receive prior approval from the tax administration on any given future operation, is not reserved for big companies – smaller companies and individuals may also benefit from it.

Finally, tax optimisation does not always require an individual or organisation to have a great deal of influence or capital at their disposal. Lawyers and other advisors are perfectly positioned to recommend tax optimisation methods to smaller companies, which are developed specifically for them and adapted to their needs, by taking into consideration their distinct legal or accounting situation. It is in such a role that Afschrift Law Firm offers its services, providing a bespoke experience, no matter the size of a company, nor the status of the individual.

Ageas is looking to promote a shift in Portugal’s savings culture

Posted on by Max Tomlin

How much a population saves plays a crucial role in a country’s economic growth – too little, and it can act as a stranglehold with far-reaching, long-term effects. Portugal, sadly, falls into this category. The Portuguese population saves considerably less in comparison to other European nations, most notably Luxembourg, Sweden and Germany. This difference can be attributed to the few savings incentives offered to families in Portugal, while low interest rates on term deposits and a tax on savings applications – the highest in the eurozone – further exacerbate the issue.

The population of Portugal saves considerably less in comparison to other European nations

Furthermore, like other nations in Southern Europe, there is a tendency among the Portuguese to limit the diversification of their savings instruments. In contrast to Northern European populations, which tend to use the capital market for savings, the Portuguese continue to prefer term deposits and fixed assets, often investing in real estate instead.

As a result, household savings levels have declined steadily over the past 20 years, falling from a rate of 12.9 percent of available income in 1995 to just 5.4 percent in 2017. There were two exceptions to this trend in 2008 and 2012, which came as a result of Portugal’s financial rescue programme. According to data released from ECO Economia Online, at the end of FY 2018 the household savings rate was one of the lowest ever recorded in Portugal, at 4.4 percent.

Market impact
Over the last few decades, changing habits in Portugal have resulted in a bigger growth in consumption than we have witnessed for savings. This is partly due to an increase in consumer confidence, which has also led to a rise in the use of credit. In fact, during the first half of 2018, Portugal’s household debt burden grew from 70.8 percent to 73 percent.

12.9%

Portuguese household savings as a percentage of available income in 1995

5.4%

Portuguese household savings as a percentage of available income in 2017

4.4%

Portuguese household savings as a percentage of available income in Q2 2018

By restricting individuals’ ability to finance investment, the task of promoting the sustained return of economic growth becomes all the more difficult. In a vicious cycle, this is further exacerbated by the bad saving habits of younger generations. The state’s commitment to foster greater financial literacy and household savings is therefore vital for a healthier economy. It will also help to create a more informed society that is better aware of its rights and duties.

Being the largest bancassurance operator in Portugal and the number one life insurance company in terms of assets under management, we at Ageas feel a responsibility to help the much-needed development of the country’s savings culture. To this end, we are working on various projects at present. Our goal is to work closely with young people and to be part of the evolution of practical learning for financial literacy. Furthermore, we would also like to help the older generation, by creating decumulation solutions that prepare them for retirement. This is how Ageas wants to make a difference: by laying the foundations that help the Portuguese understand how to deal with these issues so they can make informed decisions when it comes to their money and investments.

We are also investing in cutting-edge platforms to clearly present our solutions to customers. In simplifying the communication process, we can help them understand all the necessary information, avoid pitfalls and overcome the fear of making mistakes, thereby helping them to move forward. This also has the added benefit of reinforcing their trust in us.

Financial literacy
Among the 30 countries analysed by OECD in October 2016, Portugal ranked 10th for knowledge, attitudes and behaviour with regards to money management. The OECD also revealed that the Portuguese are passive in the management of their savings: saving is an active choice for less than 40 percent of respondents. The OECD average, meanwhile, is 60 percent, while Norway’s is an impressive 80 percent. Along with the fact that few incentives related to savings exist, a lack of knowledge in this area is still very common.

Financial literacy is therefore a determining factor in our daily lives, especially as it is becoming more and more complex. The learning process should start at a young age. Fortunately, this evolution has already begun, with Ageas Portugal playing an important role: the challenge of promoting financial literacy has been incorporated into our global CSR strategy.

Financial literacy also plays an extremely important role in creating a new culture for saving, which means we need to be more aware of the practical relevance of financial literacy in its various aspects. Being a market leader in the life and pensions sector in Portugal reinforces our active role in developing the education of citizens towards saving. It is also important to reinforce civic education in schools as a way of affirming the importance of saving from an early age. At Ageas Portugal, we truly believe that the development of skills in this area and the creation of savings habits should start early, in order to develop a greater awareness of the need for good long-term financial management.

Retirement approach
Portugal is ageing. Today we live longer, with fewer children being born too. By 2050, only one in eight people will be considered young – that is, they will be younger than 15 years old. Despite the fact that there is some time to go before we encounter this scenario, Portugal is already the sixth-oldest country in the world. As such, it is simultaneously confronted with both the benefits and challenges of increasing longevity.

Given the international recommendations for living longer, it is curious to see that Portugal’s recent evolution points to an increased focus on the practices of active ageing, despite the lack of mobilisation in older people. As such, it is essential to determine the policies we must adopt in order to ensure the future of this new demographic age. In January 2018, we learned that the average age where people will be granted access to pensions will increase by one month in 2019, to 66 years and five months. Is this enough to ensure the viability of dignified ageing? We don’t think so.

The retirement pension is now recognised among the main causes for household indebtedness. This, combined with a high unemployment rate and the deterioration of working conditions, is very concerning for Portugal’s ageing population. Indeed, if the level of savings does not increase, the retirees of the future are likely to receive considerably less than current pensioners.

We have tried to alert older people to the risks of having a carefree plan for the future. We also need to focus on savings instruments that will safeguard them during their retirement years. Fortunately, our wide range of offers responds to the various needs that can arise during this phase. In a bid to create greater awareness, we have teamed up with a major media player to launch a cycle of conferences. The first of these conferences was exactly about this subject: ageing well.

Taking the initiative
We have many other initiatives in place too. For instance, Ageas has partnered with a group of like-minded companies to create SingularityU Portugal Summit Cascais, an event that brings the world’s leading experts on accelerating technologies together with Portugal’s brightest minds. As a founding partner, Ageas helps to connect great companies, entrepreneurs and future innovators with a view to creating new opportunities and training leaders to solve society’s biggest challenges through technology.

Go Far is another great example. It’s a joint venture between Ageas and the Portuguese National Association of Pharmacies, which has launched an innovative integrated health services network spanning more than 2,500 associated pharmacies. Services range from the administration of injectables to a wide range of analytical processes. As we know, pharmacies are highly valued by local communities, particularly among elderly people, who view them as a secure, trusted service when it comes to their health.

In a completely different area, we have created a new service designed for expats. The joint venture – this time a result of a collaboration with a real estate consultant – helps support clients in essential tasks such as looking for a house, opening a bank account or obtaining insurance.

At Ageas, we want our activities to be far-reaching. The insurance industry has changed completely: today, we need to go beyond insurance by enlarging our ecosystem with new partnerships, as the closed insurance world simply does not work anymore. We need to be in the front line for anticipating needs and tendencies, while also focusing on our customers’ satisfaction and requirements. In doing so, we will continue to play a relevant role in society while remaining a sustainable organisation that employs approximately 1,300 people.

Our role is not to merely provide the services requested by our customers: our role is to think ahead, innovate and act as a guide in terms of prevention, protection, preparation and assistance. Our mission is to support our main stakeholders – namely our customers, as well as partners, employees and society. We do this by offering solutions that not only insure against risk, but also anticipate it by listening to our customers and developing simple and innovative solutions that meet their ever-changing needs.

Cyprus is proving to be an attractive destination for investment funds

Posted on by Max Tomlin

As Cyprus continues to enhance its fund legislation, it has positioned itself as a flexible and cost-effective jurisdiction for funds and fund managers within the European Union. The island nation offers unique advantages that provide operational flexibility while also achieving a fine balance between the freedom of operation for asset managers and investor protection.

Cyprus offers unique advantages that provide a fine balance between the freedom of operation for asset managers and investor protection

The island’s recently created Registered Alternative Investment Fund (RAIF) reflects its commitment to continue enhancing its competitiveness in this respect. The local market works towards this goal through regular upgrades of both products and services. It has also positioned itself as a regional fund centre and a cost-effective investment platform into the EU, drawing on its strength of being a common law jurisdiction with a comprehensive tax treaty network spanning 60 countries.

Current considerations
At the time of World Finance going to print, the terms of the UK’s withdrawal from the EU are still being negotiated and are highly likely to change. However, asset managers (both inside and outside the EU) will still need to address the succeeding challenges. They will also need to identify the potential long-term opportunities that will arise in a European fund management environment that has already been significantly reshaped since the introduction of the Alternative Investment Fund Managers Directive (AIFMD).

The potential impact on investment funds domiciled in the remaining 27 member states of the EU (EU 27) varies from fund to fund, depending on the structure of the fund and its distribution strategy. It also depends on the fund’s level of engagement with UK service providers – particularly with regards to the manager and, in the AIFMD context, the alternative investment fund manager (AIFM), as well as the alternative investment fund (AIF) itself. Against this backdrop, Cyprus can offer long-term solutions for a variety of managers and funds planning for a post-Brexit Europe, including both managers in the UK and those located in countries outside the EU 27.

For UK asset and fund managers looking to benefit from European passporting and needing to maintain access to the wider European market and cross-border investors, it seems likely that a more substantial part of their business will have to be created and managed in the EU 27 in the years to come. Cyprus offers UK managers (and, more broadly, managers outside the EU 27) the ability to domicile funds and establish new management companies in order to ensure continued, unfettered European market access.

Post-Brexit, a UK AIFM managing an EU 27 AIF will no longer be able to do so as an authorised EU AIFM. Depending on the final deal, it should be able to continue to manage an EU 27 AIF as a third-country manager, similar to the arrangements already in place for US investment managers. Authorised EU AIFMs are currently permitted to delegate portfolio management to non-EU investment managers, subject to certain conditions. When the UK officially leaves the EU – again, depending on the final deal – it may well be necessary to have the UK entity approved by national competent authorities (NCA) of individual EU member states as a non-EU investment manager.

ESMA view
In the case of undertakings for collective investment in transferable securities (UCITS), the fund must be domiciled in the EU while also being managed by an EU-based management company. In the absence of a renegotiation of the status of UCITS management companies, a UCITS with a UK management company would need to appoint a management company in a EU jurisdiction, become self-managed if possible (although that is a more onerous option these days), or re-domicile the existing UK management company to another EU jurisdiction.

Fund distribution is an important consideration, especially given the dynamics of AIFMD. Under AIFMD, a marketing passport is not granted to the fund product itself, but rather to the AIFM. As only authorised EU AIFMs can currently access the marketing passport, EU 27 AIFs managed by UK AIFMs will be significantly impacted.

With respect to the concept of delegation, on May 31, 2017, the European Securities and Markets Authority (ESMA) published an opinion piece that set out the general principles on supervisory approaches in relation to relocations of entities from the UK to EU 27. Within it, ESMA published its opinion based on the scenario that the UK will become a third country after its full withdrawal from the EU, while also setting out nine general principles for NCAs on the avoidance of supervisory arbitrage risks. One of the nine principles requires NCAs to ensure that substance requirements are met – specifically, this implies that certain key activities and functions should be present in the EU 27 that cannot be outsourced or delegated outside the EU.

These important activities include internal control functions, IT control infrastructure, risk assessment, compliance functions, key management functions and sector-specific functions. The ESMA statement also said that special attention should be granted to mitigate the use of letterbox entities in the EU 27. As such, NCAs should reject any relocation requests where the main intention is to benefit from a EU passport, with all substantial activities or functions being performed through third-country branches. Furthermore, ESMA advised that outsourcing and delegation to third countries is only possible under strict conditions, subject to outsourcing or delegation arrangements between the EU NCAs and a third-country authority.

The Cypriot option
A Cyprus RAIF is available for subscription from an unlimited number of professional or well-informed investors. It is required to be externally managed by an authorised AIFM that has its office in an EU member state and is fully compliant with AIFMD. Setting up an AIFM is not a prerequisite and third-party AIFMs (independent management companies, or ManCos) are available, which can potentially offer a turnkey solution instead of setting up a proprietary AIFM. Given ESMA’s view on substance requirements for AIFMs, independent ManCos offer the ability to effectively meet substance requirements on the risk management side through more extensive human and technical resources in the event that the portfolio management function is delegated to a third-party investment manager.

In addition to the AIFM, the appointment of a depositary, a fund administrator and an auditor are mandatory requirements for the RAIF. Through the Cyprus RAIF, setting up a fund on the island is now significantly expedited (in principle, within one month). Cyprus RAIFs are also not subject to licensing or authorisation processes by the regulator, the Cyprus Securities and Exchange Commission (CySEC). CySEC only needs to be notified of the RAIF with a mandatory suite of documents; it maintains a special register for RAIFs that includes approved Cyprus RAIFs.
More importantly, given that the Cyprus RAIF must be managed by an authorised AIFM, it also benefits from all passporting advantages for distribution by way of the marketing passport. As a result, marketing Cyprus RAIFs across Europe is significantly rationalised when compared with non-EU jurisdictions, as the AIFM may rely on cross-border passporting arrangements to access all 31 European Economic Area jurisdictions without relying on private placement regimes.

There is no minimum share capital requirement for a Cyprus RAIF, and there is also legal form flexibility in terms of structuring, including the option to be open-ended or closed-ended. For many investors, including but not limited to unregulated investor groups such as family offices, the Cyprus RAIF represents an attractive investment vehicle from a legal, regulatory and tax perspective. It also allows an expedited, cost-effective fund solution to be brought to market. In addition, the Cyprus RAIF provides investor protection through the requirement to appoint an authorised and regulated AIFM that is responsible for ensuring AIFMD compliance (in practical terms, the regulator oversees the RAIF through oversight of the AIFM). It further benefits from a licensed depositary that is required to act independently and in the best interests of investors by performing oversight, cash-flow monitoring and safekeeping of assets duties.

Looking ahead
Against the backdrop of a pending Brexit deal, ESMA has focused on ensuring that minimum substance requirements are created for new fund management entities established in the EU 27. This is necessary in order to mitigate a creation of letterbox entities – a likely outcome without certain rules in place. As such, ESMA now requires a minimum of three full-time employees for an entity within any of the EU member states.

Specifically, these employees are required to work in the areas of portfolio management, risk management and the monitoring of delegates. ESMA has also clearly stated that relocating entities have to transfer the majority of their portfolio management and risk management functions into a new entity within the EU 27. As an emerging fund and fund management jurisdiction, Cyprus has the ability to offer fund managers and promoters cost-effective and compliant substance solutions to meet the increasingly demanding, complex and evolving legal and regulatory dynamics of the European fund industry. The country also serves as a practical long-term platform for fund managers and service providers to develop their fund business – all from one convenient hub.

AAIB is helping to drive the banking industry’s push towards sustainability

Posted on by Max Tomlin

In 2018, the United Nations Environment Programme – Finance Initiative (UNEP FI), which was created in 1992 to promote sustainable finance, brought together 28 banks representing $16trn in assets from five continents. These banks were tasked with creating a set of standards that would lay out how the sector could align itself with the Paris climate agreement and the UN’s Sustainable Development Goals.

AAIB is making a meaningful contribution towards the global banking sector’s work on sustainable finance

The Principles for Responsible Banking (PRB), which will be voluntary for banks, will define and affirm the banking industry’s roles and responsibilities in shaping and funding a future that is in dire need of sustainable finance. These overarching principles aim to bring banks together and regain the world’s trust in financial institutions by urging lenders to respond to social challenges and achieve sustainable development.

Pursuing its mandate to advance sustainable finance on a global scale, Arab African International Bank (AAIB) is assuming a leading role in the development of the PRB. According to Sherif Elwy, CEO of AAIB: “Sustainable finance could unleash the potential of a new economic era. By addressing financial inclusion and clean energy funding, we could significantly unlock the fortunes of the MENA region.” In context, Dr. Dalia Abdel Kader, Director of Sustainability and Marketing Communications at AAIB, stated that AAIB is proud to be part of driving the transformation of the banking industry through the Principles for Responsible Banking that advances the bank’s sustainability journey that started in 2003.

Active leadership
Sustainable finance is an integral part of AAIB’s brand. The bank’s sustainable finance journey started back when it was seriously contemplating how to pursue an aggressive growth strategy. We recognised that growth has both a material and nonmaterial dimension, and our focus went beyond the single bottom line to the triple bottom line. This is an idea that a company can take social and environmental performance into account in the same way that it does financial performance.

In 2003, AAIB became a forerunner in sustainable finance, setting up the foundations that have since become the cornerstone for an industry-wide change not just in Egypt, but in the wider region as well. Having been one of the first banks to develop a corporate social responsibility platform, AAIB’s sustainability agenda has not only grown in scope, it has also transformed AAIB from a philanthropic trendsetter to a bank committed to advancing sustainable finance in the region.

AAIB realised early on that it was important to join international frameworks in order to advance sustainable finance in a purposeful manner. In addition to joining the UNEP FI in 2018, AAIB became a member of global initiatives such as the UN Global Compact in 2005, the London Benchmarking Group in 2007 and the Equator Principles in 2009.

Parallel to its effort to integrate sustainability principles into policies and practices, AAIB took its mandate to the next level in 2014 when it kick-started an industry movement through MOSTADAM, the first platform to promote sustainable finance in Egypt and the MENA region.

MOSTADAM was launched to introduce state-of-the-art training programmes in sustainable finance, advocate policies and encourage sustainable banking products and services. It has progressed impressively, with more than 60 percent of Egyptian banks taking part in its train­ing module. In this regard, UNEP FI invited Dr Kader to present the success of MOSTADAM integrating an industry movement in Egypt during the Global Roundtable and Climate Finance day in Paris during November 2018.

Triple bottom line
The PRB is the first international framework to combine a bank’s profit-making with a forward-looking approach towards the environment. By developing these principles, the founding banks have set a clear path for the banking industry, investors, policymakers, regulators and stakeholders to compare the impact of banks based on their contribution to national and international social, environmental and economic targets. These principles will be a commitment that will push the banking industry upwards.

UNEP FI announced the banking principles at a global roundtable in Paris on November 26, 2018. The principles will be part of a global public consultation phase until September 2019. In the meantime, banks will be able to become endorsers and to start preparing for the implementation of the principles.

AAIB was assigned to co-lead the PRB’s implementation guidance sub-group with Greece’s Piraeus Bank, as well as to co-lead the principles and review sub-group with Piraeus Bank and China’s ICBC Standard Bank. The UNEP FI appointed Dr Kader to lead the MENA region in the engagement sub-group, which is responsible for promoting the principles within the region. As such, AAIB is committed to playing a vital and active role in the advancement of the PRB’s principles.

Nordea is making a case for the myriad benefits of sustainable financing

Posted on by Max Tomlin

Climate change is the biggest challenge facing our planet today. Many world-leading academics and national leaders have suggested ways of tackling the issue, but a consensus has yet to be reached. In a recent opinion piece for the Financial Times, however, Zoe Knight, Managing Director of HSBC’s Centre of Sustainable Finance, was clear about what needs to be done.

We are at a point where the world economy has become very large in relation to the resources the planet has to offer

“Financing growth in a way that is transparent on addressing sustainability challenges is a must for future prosperity,” Knight wrote. “There is no time to lose: sustainable finance is the answer.” This newfound acceptance is well deserved, with the sustainable finance market estimated to be worth more than $380bn in 2016 (see Fig 1) – a figure that is surely set to grow. This financial heft helped make renewables the fastest-growing segment of the energy market last year.

Nevertheless, it is important not to get ahead of ourselves. If mankind is serious about ushering in a low-carbon economy by 2050 (as the Paris Agreement requires), then a significant financial cost will need to be accepted. Shifting the energy sector alone onto a sustainable footing comes with an annual price tag of $3.5trn. By that reckoning, meeting the planet’s sustainability goals will be a hugely difficult task.

There is no doubt that everyone wants to live in a world that is socially, environmentally and economically sustainable. Despite this, poverty and hunger still exist, access to clean water is not available to all, and humanity’s consumption of resources remains at dangerously high levels. In addition, our failure to limit greenhouse gas emissions to the necessary levels means that catastrophic natural disasters are likely to become more common and increasingly severe.

A fragile world
We firmly believe that sustainable finance is the answer to decarbonising the economy. However, for that to be achieved, the financial sector requires a radically different kind of leadership – one that is bolder, more transparent and more outward-looking than the one we have at present.

As the leading bank in the Nordic region, Nordea is able to play a key role in encouraging a more sustainable future. In 2017, we had 160 meetings with companies that we invest in, with approximately 65 percent of these related to environmental, social and governance (ESG) issues.

We are not just focusing internally, either. Our sustainable finance newsletter and our first-hand reports from glaciers, coral reefs and other vulnerable environments continue to shine a spotlight on environmental issues around the world. By conducting a transparent dialogue with our stakeholders, we ensure that our own expectations regarding ESG issues are made clear at all times.

Still, more work needs to be done. The world of finance must shift from the presumption that the climate is unchanging, that the resources of this planet are infinite, and that growth can be realised indefinitely. We are at a point where the world economy has become very large in relation to the resources the planet has to offer – we are continuously pushing the limits. In order to truly enable the transition to a low-carbon economy, the entire system needs to change so that it does not undermine the activities being pursued to mitigate climate change.
Our current economic model has served us well over the past 250 years, but today it is under pressure. Throughout history, mankind has been able to tackle great challenges, including devastating epidemics, world wars and severe recessions. Climate change could very well be the most difficult challenge yet.

Speaking out
We need a collective response and should start by changing the flow of capital. The finance sector – a global toolbox with huge investment and lending power – is greatly underestimated in its capacity to achieve sustainable development. No other sector in the world is as far-reaching as the financial sector: with its interconnected markets, money can flow all over the world in mere fractions of a second. Everything about the financial sector, from corporate lending to IPOs, is, by its very nature, global.

15%

of total global energy is renewable

1%

of US car sales are electric

39%

of total greenhouse gas emissions are caused by the construction industry

Everyone involved in the financial sphere, from investors to consumers, is aware of how international cash flows can promote or hinder sustainability efforts. Although no one has yet been able to change the system in order to help with the planet’s decarbonisation, recent developments in sustainable finance
promise a brighter future.

Money, as everyone knows, makes the world go round. It is logical, therefore, to ask serious questions of today’s moneymen: first and foremost, how did we get to this point? And, just as importantly, how are we going to get out of it? What strategies do they have for employing the capital under their control, for instance? What importance are they attributing to climate concerns?

Our skewed economy speaks for them. Today, renewable fuels still only comprise 15 percent of the global energy mix, and in transport, only one percent of US car sales are electric. For construction, the carbon footprint of buildings is stuck at a stubborn 39 percent of total greenhouse gas emissions.

It is impossible for the energy-intensive sectors of yesteryear to maintain their dominance without acquiring the right financing. Unfortunately, the sustainable finance sector is complicit in providing access to this financing. Not directly, perhaps, but the financial sector as a whole – to which sustainable finance firms inextricably belong – has helped to keep the lights on in these fossil-fuel-burning industries.

As sustainable financiers, we need to be bolder in addressing the blatant contradictions within our own industry. For too long, the financial sector has been helping the climate with one hand while damaging it with the other. This counterproductive use of capital won’t stop until those within the industry speak up.

To do so will incur a backlash – of that, there is no doubt. Speaking truth to power is never easy. Yet, standing by in silence is no longer an option. We talk their language, we understand their world and many of us even share the same offices. At Nordea, we know that now is the time to make our voices heard.

Opening up
Globally, only a limited amount of total assets under management integrate ESG criteria in their investment decision-making processes. The uptake of these assets must accelerate faster to accommodate an effective transition to a sustainable future. If investors do not reevaluate the current capital flows to companies unwilling or unable to diversify their business models in line with a low-carbon economy, then these investors are expecting returns on assets that must eventually be written off in order for the planet to be safe. Increasing monetary flow to sustainable business models is imperative, from both an environmental and economic perspective.

Secondly, we need to become more transparent. Sustainable finance might be a small slice of the overall finance market, but its trailblazing ways are a beacon for everyone else. According to Knight’s Financial Times article, governments, businesses and mainstream investors look at the flow of low-carbon capital and “make decisions accordingly”.

If only this were the case. In reality, the investment trajectories of the sustainable finance market are more of a black hole than a bright beacon. For all but the most earnest analysts, spotting trends or identifying meaningful patterns is nearly impossible.

Opacity is hardwired into the culture of professional investors, but normalising a bad practice does not excuse it. If we are to genuinely act as a signpost for others, then we need to break ranks and demonstrate far greater levels of individual and collective transparency. As an absolute minimum, businesses must agree on a common system for disclosing climate finance flows and – just as importantly – for the action financed by these flows.

Finally, the sustainable finance sector is crying out for a more outward-looking model of leadership. Kick-starting and consolidating the sector has required huge internal focus and cooperation. Now, with the sector reaching maturity, we need to take those same attributes and direct them beyond our own inner circle.

Engaging the non-sustainable elements of our industry is just the start. We also have to be out there engaging with those who frame and fuel our modern economy – policymakers, legislators and company leaders alike. And not just in sub-committees with a sustainable finance label, but at the top tables of public debate.

The future of finance has to be sustainable. If not, it will have no future. We must step up and make that point loud and clear: if sustainable finance really is to be the answer to decarbonising our economy, then the hour has come for us to adopt a new form of leadership. On that score, there really is no time to lose.

Vertex is showing the benefit of a strategic approach to tax function modernisation

Posted on by Max Tomlin

The World Economic Forum Annual Meeting’s theme for 2018, ‘creating a shared future in a fractured world’, should continue to resonate strongly with tax executives in global companies. It certainly reverberates within senior leadership teams and boards, which have growing expectations regarding the value that tax functions delivered to their organisations.

More tax functions are now undergoing major changes in order to help organisations adjust to technology-driven disruption

Like most other organisational functions, more tax functions are now undergoing major changes in order to help organisations adjust to technology-driven disruption. A highly dynamic and challenging regulatory environment is also driving the need for this transformation. The sector is currently being characterised by sweeping US tax reform, the European Commission’s proposal for a historic overhaul of value-added tax rules, and a rising number of country-specific rules on real-time tax reporting.

Despite a growing need to evolve, new KPMG research indicates that tax functions are still “lagging at transformation”. According to its 2018 study Chief Tax Officer Outlook, 68 percent of the 300 CTOs and senior tax executives surveyed expect their tax functions to remain relatively unchanged three years from now, despite the growing need for transformation.

33%

of tax functions use data analysis to make informed decisions

For an organisation to close this gap, tax leaders, senior executives and the board of directors need to settle on a shared vision of what a transformed tax function looks like. To enable this shared vision, an organisation needs – aside from tax knowledge – skills in leadership, talent management, tax technology and a complete understanding of the tax function’s collaborations with crucial stakeholders. Aligning all aspects of an enterprise on a tax function’s future can kick-start stalled tax transformation efforts. A sound way to begin this process is by understanding how global tax policy disparities and a splintered enterprise technology environment are driving the need for major upgrades.

More, sooner
The most formidable challenges that tax departments currently confront boil down to two demands: the need for more, and the demand to have things sooner. Changes in tax policy and compliance requirements are giving rise to new risks, while also ratcheting up pressure on tax functions to collect, organise and report far more compliance data, all in real time.

These challenges are also commanding the attention of executive leadership teams and boards of directors. Both recognise that the successful management of tax risk now hinges on tax functions having proper access to data, and the right tools at their disposal to manage, analyse and report on that data. All of this supports an organisation’s ability to mount a strong defence of its tax reporting to regulators and enforcement agencies when necessary. CFOs need the tax function’s data management capabilities to be sophisticated enough to effectively manage a company’s tax risks to avoid unexpected impacts. These could include unforeseen changes to a company’s effective tax rate, or the need for an indirect tax reserve. For their part, audit committees understand that tax authorities maintain a zero-tolerance mindset concerning the data management errors that their increasingly rigorous audits pinpoint.

Successfully transforming tax processes and putting the right technology in place can be difficult in organisations with technology standardisation gaps or a tangle of finance and tax software platforms. These conditions exist in many global companies, and they explain why more finance and tax executives are introducing requirements for their companies to standardise and integrate enterprise resource planning (ERP) and major tax management systems across subsidiaries, business units and geographic locations.

The standardisation and integration of finance and tax technology marks an important, yet relatively early step on the tax function’s transformational journey. More progress related to tax technology management, as well as several other areas, is needed. The small but growing number of tax functions that are on track to achieve more dramatic upgrades within the next few years tend to focus on making improvements in several areas.

Bringing it all together
To thrive in the near future, tax leaders will need to continue doing everything they do today while also enhancing both their planning and their approach to technology and talent. Tax leaders must continue to keep a company’s effective tax in line with industry competitors, collaborate effectively with their CFOs and audit committees, manage their staff, and address budget and tax risks, all while delivering strategic value through tax planning. Tax executives will need to become much more technologically adept while also recruiting, retaining and developing a far greater number of tech-savvy professionals than they have in the past.

Infusing the tax function with more technology expertise requires tax leadership to understand the qualities that ‘tax technologists’ possess, as well as what it takes to attract and retain them. Hiring for technology skills does not necessarily mean finding tax experts who are fluent in Java, Python or C++. Instead, skilled tax technologists typically have experience with large ERP systems, including the latest releases of SAP and Oracle. Experience with systems implementation is also important, as is the ability to write simple queries and handle basic coding, while expertise with the offerings of a leading tax technology vendor is also highly beneficial.

As competition for tax technologists becomes fierce, tax leaders should keep in mind that this talent segment prefers not to join tax functions that require them to work with outdated, inadequate legacy applications. Instead, they prefer to join departments already equipped with advanced technology. Given the high cost of acquiring veteran tax technologists, most tax functions choose to develop existing tax staff through experience, training and education programmes.

KPMG’s research indicates that only 33 percent of tax functions currently use data analysis to make informed decisions. This gap is startling, especially given that high-performing tax functions are advancing their analytics capabilities while also assessing the benefits and use of advanced technology. This technology includes robotic process automation and the use of a centralised tax data repository.

Elevating tax functions’ technology management requires a clearly defined strategy. A documented tax technology plan should present a clear vision covering at least three years, a detailed list of the tax department’s IT needs, and a budget for meeting these needs. It should also include an analysis of frequent implementation and execution challenges likely to be encountered. This document should also detail all information systems that feed into the tax data repository. This type of ‘tax technology playbook’ can help tax leaders secure adequate technology funding from their colleagues in corporate finance and accounting.

Strong relationships with at least three internal groups will also be crucial for tax leaders to manage and continually improve. These groups include internal audit (IA), IT and accounting departments. IA departments can help make a compelling and impartial business case for investments in more advanced tax data management technology. As the IA department’s reports go to the audit committee, its recommendations are generally acted upon, especially when a recommendation reduces the risk of a material weakness or points out a significant deficiency.

Tools in place
Tax executives should recognise that leading IT functions now expect internal customers to access the information they need to conduct their own analyses from the organisational data supply. This approach requires more areas of the business to take greater control of their technology tools. For tax functions, this means possessing the systems and technology expertise necessary to access, stage and analyse tax data, both current and historic.

This shift notwithstanding, IT leaders and their teams remain crucial tax function collaborators. IT’s guidance helps ensure that tax technology investments adhere to the company’s IT strategy and the finance function’s IT plan. The IT department is also able to advise on specific technology selection, purchase, implementation, integration and maintenance, as well as vendor management policies and protocols. Effective tax-IT partnerships also help safeguard against cybersecurity lapses.

While a strong relationship between tax functions and finance departments has always been important, it has grown more crucial as both functions undergo significant changes. These transformations and the supporting technology changes they trigger must be aligned, as effective tax management heavily depends on access to data that resides in billing applications, ERP systems and other finance, budgeting and planning technologies. Leading tax functions currently participate in ERP implementations, upgrades and standardisation initiatives. To achieve full integration, tax leaders of the future will call on their close relationships with finance and accounting executives to ensure that tax technology requests feature prominently in budget decision-making.

As global tax leaders strive to advance major changes within their domains, they should keep in mind that the expectations bearing down on their functions will continue to escalate. For instance, tax professionals can expect to take on a more active role in strategy-setting and scenario-planning activities. These growing expectations and expanding workloads make a shared vision for a future tax function even more critical to the success of businesses around the world.

MASLOC continues to make a compelling case for MFIs in Ghana

Posted on by Max Tomlin

Ghana is one of the most abundant nations in the world in terms of natural and human resources. The country’s varied landscape consists of four main segments: forest, semi-forest, savannah and semi-savannah. Moreover, five out of its 10 regions have a coastal belt. Each of these segments and regions offers a wide range of natural resources, including different types of fruits, precious minerals and wood. They also boast salt, oil, gold, diamond, manganese, bauxite, iron, granites and marble, as well as cash crops such as cocoa, coffee and cotton.

The SME industry in Ghana is underperforming due to the difficulty in both accessing funds and leveraging integrated IT

With a population of just under 30 million, the country is home to great engineering talent, together with numerous medical and academic doctors, agriculturalists, artisans, financial managers and economists. And yet, despite its vast resources and highly skilled labour pool, Ghana continues to underperform. Thanks to a huge trade deficit, the depreciation of its currency persists, while its unemployment rate has also increased in recent years.

The equity gap
Our market is the defensive type. At present, there is a huge equity gap between micro, small and medium-sized enterprises (SMEs) – which form around 85 percent of the market – and large companies. It is clear, therefore, that after the industrialisation of the market, one of the best strategic policy options we have at this point is to make use of microfinance institutions (MFIs) – organisations that offer financial services to low-income populations. Indeed, the SME industry in Ghana is woefully underperforming due to the difficulty in both accessing funds and leveraging integrated IT to improve operations. Furthermore, most SME actors lack the requisite abilities or skills, as there is no formal training offered by most governments in Africa, including Ghana. The MFIs that do exist in the country often become bankrupt and collapse, thereby making it difficult for market players to access the support they need to succeed.

320

Approximate number of licensed MFIs in Ghana

90%

Percentage of Ghanaian population served by SMEs

Aside from the difficulty in accessing funds, a lack of automated systems, inconsistent power supply and the high cost of funds also add to the challenge; default rates, meanwhile, remain high. Sadly, the industry does not get the necessary attention it deserves from local authorities. This has created a huge gap between local markets and macroeconomic performance, resulting in a low standard of living across the country. Low-income earners are the group in need of most assistance, but unfortunately, they form the majority. Agriculture is the backbone of our economy and, unsurprisingly, its players are low-income earners.

Agricultural support
The banks in Ghana rarely lend to farmers or other agricultural actors. Many of the country’s MFIs only support those farming vegetables, and so offer few enterprises long-term loans. Instead of boosting our economy, this results in a great deal of our SMEs underachieving. The result is that economic growth currently only benefits the few, instead of the many. In fact, this is one of the most cited reasons why African countries do not attain long-term economic growth and stability.

When managing its discretionary budget, the government rarely considers MFIs. As such, according to the Bank of Ghana, the number of licensed MFIs in Ghana is only around 320. However, SMEs in Ghana serve approximately 90 percent of the population, demonstrating that the number of MFIs is woefully inadequate given the market size. This has contributed enormously to a low standard of living, a situation believed to be prevalent in most of Africa’s developing economies. However, the expansion of MFIs in all developing countries is essential.

At present, the most challenging factor is that women and young people, who are the chief actors in Ghana’s MFI industry, lack the necessary know-how and capacity-building skills. Consequently, the population’s value is extremely difficult to realise. A large number of our young people are not in business, although there are many potential entrepreneurs among them. The inadequate number of MFIs has also created an imbalance between supply and demand, thereby contributing to the high cost of borrowing for SMEs.

Africa’s MFI industry, together with reducing its reliance on leading economics, is a global concern. Africa, and Ghana in particular, must be able to organically develop a sustainable economy with very little support from other parts of the world, which can be achieved by identifying and maximising our core strengths. It is absolutely crucial for us to attain our ultimate goal of leveraging MFIs in order to develop the Ghanaian economy.