Author: Max Tomlin

UBS fined $47.8m and banned from sponsoring IPOs in Hong Kong for one year

Posted on by Max Tomlin

On March 14, the Securities and Futures Commission of Hong Kong (SFC) imposed a one-year embargo on UBS, preventing the firm from sponsoring initial public offerings (IPOs) in the region. It is the first major bank operating within the financial hub to face such action. The Swiss lender was also fined HKD 375m ($47.8m) following its failed sponsorship of three IPOs dating back to 2009.

Along with UBS, the SFC handed out penalties to three other banks: Morgan Stanley will be forced to cough up HKD 224m ($28.5m); Bank of America was hit with a fine of HKD 128m ($16.3m); and Standard Chartered will pay HKD 59.7m ($7.6m). UBS Managing Director Cen Tian has also had his Hong Kong licence suspended for two years after failing to discharge supervisory duties as a principal sponsor.

Investigators have been keen to straighten up Hong Kong’s capital markets of late, after several high-profile company collapses tarnished the territory’s reputation

The SFC named two of the companies related to the IPOs in question. China Forestry raised $216m from a 2009 IPO that was jointly sponsored by UBS and Standard Chartered. However, the stock was suspended after regulators discovered financial irregularities in 2011 – China Forestry is now facing liquidation. Tianhe Chemicals was the second company named by the SFC, which refused to disclose the name of the third business. Shares in Tianhe Chemicals have failed to trade since 2015 after a short seller levelled allegations of fraud against the company.

In a statement issued in response to the SFC’s decision, UBS said: “UBS takes note of the findings of the SFC’s investigations. We are pleased to have resolved these legacy issues relating to our Hong Kong IPO sponsorship licence. We look forward to continuing to service our clients in Hong Kong.”

The SFC modified its rules in 2013 to hold underwriters accountable for the quality of the IPOs they issue, warning that those found in breach would face tougher punishments. Investigators have been keen to straighten up Hong Kong’s capital markets of late, after several high-profile company collapses tarnished the autonomous territory’s reputation as a premier financial hub.

As Hong Kong faces growing pressure to reintegrate with mainland China, businesses have become increasingly concerned that the famed ‘laissez-faire’ principle that previously guided Hong Kong could be under threat. It is yet to be seen how markets will react to today’s decision by the SFC – stricter rules could increase confidence in the finance sector or, conversely, end up deterring businesses that have traditionally enjoyed free rein.

The Brightline Initiative is recognising the need for people-related solutions

Posted on by Max Tomlin

Human behaviour is complex and difficult to shape. As leaders, we like to attack problems that we can control. However, humans act in ways that are hard to predict, and we cannot shift their behaviour by simply flipping a switch.

And yet, people are critical to the process of successfully delivering strategies. Often they are the most important asset within an organisation’s strategy-delivery capability. Despite this, they are frequently overlooked, as more tangible assets can be better understood as levers for change: new technology, for instance, presents disruptions to business, but we know how to tackle that sort of challenge logically.

If individuals fail to shift their mindset following change, organisations will struggle to turn their strategies into reality

Frankly, it is a lot easier to get our heads around how to leverage technology than how to tap into the human potential within our organisation – a potential that is great, yet largely outside our control. We repeatedly create execution plans that are overly simplistic in their consideration of the people required, and our plans often overlook the very complicated and gradual work of aligning and motivating individual behaviour to deliver strategy.

This is difficult work: it requires constant communication, focus, transparency, honesty and feedback. But, fundamentally, it is about people – bringing the best possible people to the task and understanding and maintaining their motivation and engagement. This is something many organisations struggle with and most leaders aren’t versed in.

Beyond the robots
In business, it is easy to become distracted by the next big thing. A surprising challenge of our time is the importance of focusing on our humanity. Remember that machines – whether they are robots or 3D printers – are simply tools. The big question is, how can we best put these new tools to work so they maximise the potential of people?

Similarly, when it comes to strategy execution, the human element is vital: machines and technology may be a critical component of strategy, but it is human beings who leverage these tools for sustained advantage. Execution requires people creating and using technology in new ways, and that depends on shifts in human behaviour. In other words, organisational change requires individual change. But change is deeply personal, and even when it is for the greater good, it is often perceived as a threat. Therefore, people’s reactions to change may not always appear rational at first.

To help individuals in an organisation embrace change, it is critical that leaders create the right incentives. Those may not be extrinsic incentives like rewards, but rather conditions that make new behaviours more desirable. Leaders must understand that resistance to change offers valuable insight into what is needed to make change individually desirable for individuals.

If individuals fail to shift their mindset following an organisational change, companies will struggle to turn their strategies into reality. It doesn’t matter if you have the most brilliant strategy ever developed – if you fail to engage employees, the strategy will fail at the implementation stage.

Leaders must always treat people with respect and seek to understand resistance, but they should be explicit on the consequences of not participating or of reverting to old behaviours. Commit to the goal, but listen to people and leverage their insight. And then if they are not willing to make the change, recognise that not everyone will shift with the company.

Empower people
Most strategic initiatives fail because of flaws in implementation, which comes at a great cost in terms of time and resources. The dynamic interplay between strategy design and delivery starts the moment an organisation defines its strategic goals and investments.

Most leaders appear to understand the importance of implementing a new strategy and acknowledge that they must upgrade their delivery capabilities. At least 59 percent of respondents to a 2017 Economist Intelligence Unit survey acknowledged a gap between their strategy design and implementation, and they recognised its negative impact on organisational effectiveness. However, little has been done to improve this in recent years. In fact, in the EIU survey, 61 percent of respondents admitted to performance-sapping shortfalls in implementation.

We need to rethink how strategies are implemented and understand that they do not simply happen by chance or good fortune. The bridge between design and delivery is made up of solutions created and executed by people – sometimes as teams, and sometimes by working independently.

Care must be taken to deploy the right people and teams to the task at hand and to provide them with the right conditions for working effectively. We must bring people to the centre of the strategy so they are able to execute it and provide necessary insight when the implementation – or even the strategy itself – is flawed.

Start a dialogue
Our aim at the Brightline Initiative is to develop and provide a holistic platform that delivers solutions and insights to successfully bridge the expensive and unproductive gap between strategy design and strategy delivery. We recently launched the People Manifesto. This report was created to highlight the importance of people-related solutions in the delivery of strategy and to force a clear dialogue on critical people issues.

The reason the ‘people gap’ is so persistent is due to its complexity. With the People Manifesto, we seek to acknowledge the complexity of the human element of business, while questioning some of the solutions or mindsets that are limiting the workforce.

At the Brightline Initiative, we have defined four basic tenets or truths that are written in a way that we hope gives readers pause. We want the consideration around people to be as thoughtful as the consideration given to strategy. The People Manifesto is written for leaders, but should speak to people throughout organisations.

Leadership is overemphasised, but the criticality of leadership is well understood. Senior leaders need to reach out and engage with their extended leadership team, convincingly speak with one voice on the change, appropriately influence teams in and outside their direct line of management, and powerfully model the new target behaviours.

Leaders must be prepared to: follow when someone else has greater competency or insight to address the issue at hand; create conditions so that others feel capable and safe to step forward; and recognise that not everyone will want or need to lead a team. Leaders need followers to be successful, and should make ‘follower-ship’ a valued behaviour. Furthermore, rather than always looking for ways to lead, they should recognise when and how to take a backseat. Indeed, being willing to acknowledge and support the essential role of those who follow is also vital.

Collaboration is key, but it is not everything. Strategy requires having the right individuals who can each do their own thing and, when needed, work well together. When the task requires it, teams can break down into silos, add diversity to the creative process, and generate thinking and responsiveness far greater than the sum of the individuals. Care must be taken to craft such teams – whether from internal or external talent pools – with the right mix of capabilities and skill sets, and to explicitly set the conditions that allow people to work collectively. Leaders must recognise that collaboration takes time and coordination, and not all initiatives require team effort: when appropriate, give the right individuals the authority to make decisions and drive execution on their own.

Creating the culture
Culture and strategy are, more than ever, entwined. Not only must culture support strategy, it must move in lockstep with a dynamic, evolving strategy where the behavioural recipe for winning is not fixed or static. While culture cannot be built directly, nor accomplished through a blueprint or a checklist, it cannot be left to chance: it requires understanding the intricacy of culture as a dynamic and living organism made from the collective tension between individuals’ behaviours and responses. Navigating that tension in an increasingly complex and changing environment depends on a shared sense of purpose and legitimate trust among employees. Coupling culture with strategy is a complicated and never-ending endeavour in shepherding influences, assessing outcomes and adjusting focus to build behavioural advantages that deliver winning strategies.

People act in their own self-interest. Change is a human endeavour and, as such, can make delivering strategy a messy and complicated process. People have different interests and motivations that influence behaviours and create potential misalignment and barriers. New strategies always require different ways of working, so leaders must recognise the effort required to shift individual interests, mindsets and behaviours.

Even when people may be convinced that changes are in the collective interest, their individual behaviours may not align if the personal cost of change seems too great. Look for these entrenched behaviours and create the conditions and dialogues to make change individually desirable, and at the same time aligned with the broader interest. Always treat people with respect, but be explicit and resolute on the consequences for not participating in the new behaviours, or reverting to old ways of working. Leaders must accept that not everyone will make the shift.

We hope the People Manifesto gives leaders a breather. We want the consideration around people to be as thoughtful as the consideration given to strategy. But, although the People Manifesto is written for leaders, it should speak to people at any level in an organisation: we believe if people are effectively activated within companies, great things will happen, including a sense of shared vision and understanding across the organisation and a working environment that fosters strong performance and collaboration. And, crucially, people will be excited to be a part of the organisation.

Unlocking the wealth of investment potential in the Turks and Caicos islands

Posted on by Max Tomlin

With swathes of white sand beaches, balmy temperatures all year round and an abundance of stunning coral reefs, it’s no surprise that the Turks and Caicos Islands (TCI) is a highly sought-after holiday destination. The largest island, Providenciales, boasts superlative diving opportunities, the serene Chalk Sound National Park and one of the world’s best beaches, Grace Bay, which stretches for 12 miles along the island’s southern coast.

The favourable financial conditions can benefit not only personal holiday investors, but also institutional investors

TCI has all of the makings of an ultra-secluded, exclusive hideaway, while remaining conveniently located for travellers from the US, Canada, Europe and the Caribbean. It’s a quick 75-minute direct flight from Miami – the closest major airport – but the islands also benefit from up to 150 flights per week to other destinations, as well as a seaport connection to the US.

The islands have remained the Caribbean’s best-kept secret for years, making them a fantastic choice for vacation investors looking to purchase their own slice of paradise. Moreover, the increased tourist interest of late means that a holiday property can also prove to be a lucrative rental investment, with a steady revenue stream guaranteed for much of the year.

A favourable environment
TCI’s open financial system, non-existent income tax and wealth of untapped opportunities make it a natural choice for wise investors. With an S&P sovereign credit rating of BBB+, the island chain has one of the fastest-growing economies in the Caribbean, as its economy continues to expand at around three percent, according to the Economist Intelligence Unit. TCI is a British Overseas Territory, meaning that it has a strong, effective judicial system based on English common law, which guarantees a safe and secure environment for all residents and tourists. Moreover, there is a commitment to maintaining compliance with regulatory standards, including those set by the OECD and IMF. TCI also uses the US dollar as currency, which provides an additional level of convenience for American visitors.

40

Number of islands in the TCI archipelago

75mins

Duration of direct flight from Miami to TCI

150

Number of weekly flights to international locations from TCI

TCI’s strongly pro-business government has recently implemented measures to foster a more inclusive environment for foreign investors, including duty concessions in priority sectors. Exchange controls have been eliminated, along with all direct corporate, personal, capital gains and inheritance taxes. International investors are also welcome to apply for temporary or permanent resident permits if they wish.

For families with young children that are considering investing, TCI benefits from an excellent schooling system, with one student recently awarded the ‘Top in the World’ accolade for AS-level mathematics by Cambridge Assessment International Education. Aside from the educational opportunities, the quality of life on the island archipelago is second to none, with children able to experience enriching sport and cultural activities on a daily basis. After all, there’s no better way to understand the coral reef ecosystem than by exploring it with nothing more than a snorkel, all beneath the brilliant sun.

Once in a lifetime
These favourable financial conditions can benefit not only personal holiday investors, but also institutional investors seeking to capitalise on the rapidly emerging tourist industry – or, better yet, those who have holidayed in TCI for some time and are seeking to take their investment to the next level.

In order for tourism to grow, supportive infrastructure must be in place. Until now, the TCI economy has expanded along with the growth of available finished real estate, including villas, rental apartments and condominiums, which form the backbone of the hospitality industry. In correlation, TCI has also seen a significant increase in the number and quality of restaurants, bars and cafés that are springing up to support the growing number of tourists looking for a unique TCI experience. As a result, the popularity of managed condominiums, villas and large houses continues to flourish, making real estate and tourism development the islands’ most popular industry.

The growth of these industries had previously been limited to the principal islands of Providenciales and Grand Turk. These islands should not be overlooked, as the cruise ships that call at Grand Turk offer commercial opportunities, as does the superb fishing for visiting yachts. The island is also developing a world-class reputation for adventure tourism, attracting kite surfers, sailors and sports fishermen alike. With some of the best dive sites in the world, including a 7,000ft vertical wall a short distance away from shore at Grand Turk, it’s no surprise that visitors are travelling across the globe to experience the thrill of snorkelling and diving in TCI’s
crystal-clear waters.

Untapped gems
The development of burgeoning tourism industries on smaller islands such as South Caicos, Parrot Cay and North Caicos also provides promising opportunities for shrewd investors. As ecotourism rises in popularity, more environmentally conscious visitors are flocking to TCI, thanks to its beautiful, unspoiled landscape. Many of the 40 islands in the TCI archipelago are uninhabited, providing excellent opportunities for tourists to observe nature at work, as well as to view some of the world’s most unique flora and fauna. The islands do not currently have any eco lodges or retreats, but the demand is certainly there. As such, investment in an ecologically conscious, sustainable resort is likely to be extremely successful.

Likewise, some of the world’s finest yachts and sports-fishing vessels visit TCI throughout the year. Providenciales boasts several marinas, while other islands have limited provision for these vessels at present. Many marine travellers also seek hotels and villa lodging close to marinas: a hybrid resort-marina development project would therefore be highly sought-after and would prove a lucrative business model. It’s certainly a worthy consideration for investors.

Finally, with many global citizens now opting to travel for medical procedures, plenty of opportunity for investment in luxury recuperation facilities exist across TCI. With two hospitals that have space for private patients, and opportunities for cosmetic and other surgical procedures by the islands’ best-known clinicians, the medical sector is well accounted for. There are also plenty of options for recovery accommodation.

Economic support
In addition to holiday rentals, the TCI environment is hungry for development funding to support other projects. It imports large quantities of food, furniture and consumable materials which, due to the distances travelled, tend to be expensive. There are significant opportunities for import substitution, covering a wide range of products across the fields of agriculture, fisheries, food processing and light manufacturing.

The many islands of TCI also offer untapped potential with regards to arable land and bountiful oceans. Demand for local farm produce and fish by the thriving tourism industry continues to increase exponentially. Agricultural industries – including hydroponic farming, food processing and fish farming – have been identified as priority sectors by the TCI Government. The Caicos islands in particular offer fertile soil and an ideal climate for agricultural growth. Furthermore, significant amounts of agricultural land exist on North and Middle Caicos that would support new farms producing crops and livestock.

Opportunities in light manufacturing exist for businesses supplying the tourism and hospitality sectors, both in TCI and the surrounding Caribbean islands. We are now in need of training services for existing businesses, as well as the creation of service businesses in finance, tourism support and IT.

Investments such as these are a fantastic way for vacation investors to reinforce the local resident communities and ensure that TCI remains a serene and sustainable destination for future generations. By channelling funds into the economy, this also helps to support financial development of the TCI, creating a mutually lucrative situation for both investors and permanent residents.

There’s even scope for TCI to become a top destination for business gatherings in the future. Due to the islands’ convenient location and easy accessibility from US, Canadian and European cities, they are an excellent choice for conventions and company gatherings. TCI currently has limited standalone hotels, but several investors have expressed their interest in this unexploited opportunity. Whichever person is lucky enough to sign the contract for that deal is sure to secure themselves profit for life.

For investors seeking to take advantage of these opportunities, Invest Turks and Caicos is the only agency you need. It will be by your side through every step of the process, providing free and confidential advice, as well as support in liaising with key government departments to ensure the transaction is entirely stress-free. All that’s left for investors to do is enjoy the beautiful-by-nature destination that they have helped to safeguard for years to come.

MAPFRE continues to fuel evolution in Peru’s insurance market

Posted on by Max Tomlin

Although Peru may not be achieving the same rates of growth as it did during the commodities boom of a few years ago, it remains an attractive proposition for insurers. The country’s central bank still expects the economy to expand by four percent across 2019, and the relatively low levels of insurance penetration mean there is an underserved market that new and existing insurance firms can tap into.

Although Peru’s insurance sector has developed in recent times, challenges remain – particularly in terms of accessibility

At MAPFRE, we understand that the growing appeal of the Peruvian insurance sector will create extra competition for us. This is a challenge that we relish. The company already has a presence across 19 states in Peru, and in both 2017 and 2018 it was named the best life insurance company in the country by World Finance. Nevertheless, now is not the time for complacency: in such a competitive industry, MAPFRE is always looking at ways to improve its services, particularly in terms of its digital solutions. It is the only way to stay on top.

Change is good
The Peruvian market has fundamentally changed in recent years as private insurance has become more important, including auto insurance, health insurance and life insurance. Technology has played an important role in this development. The digitalisation of the market is one of the most significant changes to have occurred in the past decade, and although it is not yet the sole determinant of profitability, it is something that customers are increasingly demanding.

As a result, digitalisation is being implemented on a wider scale. We must bear in mind that in Peru, as in other countries, people get information about insurance through social networks, but they still perform the contracting process offline or assisted through call centres. In the case of MAPFRE, this has already started to change: our digital channels can be used to buy products and generate new sales in certain sectors.

We are also now seeing how our suppliers are interconnected. When a policyholder of ours goes to a clinic, they can automatically access information about the type of coverage or benefits contained within their policy. Our clients have benefitted hugely from digitalisation as they can now access information 24 hours a day, seven days a week. They can also take the initiative to find out about products, receive a quote or contact us directly. Previously, this could only be achieved by approaching a physical office or a personal insurance broker. The opportunities available today have generated great industrial change and brought customers closer to the company.

Improving access
Although Peru’s insurance sector has developed markedly in recent times, challenges remain – particularly in terms of accessibility. We must do more to engage potential customers, going beyond simply the coverage and cost of insurance. Younger generations demand guidance through new solutions that allow them to interact with us quickly and easily, either for validating contracts, taking care of claims or other services. While insurers now have online solutions to help serve these customers, I believe that we still do not have the full capacity to communicate in the ways that Millennials expect. We have digitalised traditional processes so that clients can interact with us online, but we have not evolved far enough.

Recently, private insurance has become more relevant in Peru because the social protection system in the country is very poor. The state has failed to meet citizens’ needs over the past 10 years, during which time the circumstances of the middle class has improved; these citizens are now looking for private insurance to protect their assets. We must bear in mind that 70 percent of the economically active population in Peru is independent. They are already purchasing insurance, but there is another group of dependents with a poor protection system who are looking to acquire insurance.

As insurance has gained prevalence in Peru, improving accessibility has become more important. Insurance companies in the country do not have a tradition of having a physical presence, which means there is a huge shortage of agents throughout the country. The digitalisation of insurance is therefore vitally important – it should not still be the case that people have to go to a bank to buy insurance.

The best driver of continuing digitalisation is the promise of financial reward. If insurance companies can generate extra revenue by embracing new channels of communication with their customers, they will be happy to invest in innovative new developments. At MAPFRE, we are responding positively to changes in the insurance sector, viewing them as opportunities to modernise our services and provide better products for our customers.

SFO Group’s family approach is allowing it to thrive in the Middle East

Posted on by Max Tomlin

Host to a plethora of powerful economies and vast levels of capital, the Middle East region boasts a huge market for family offices. And yet, despite its potential, the market is still emerging: not yet consolidated (nor saturated), few players are positioned to take advantage of the opportunities available.

Among those making a name for themselves is Beirut-based SFO Group, an independent multifamily office focused on direct international real estate investments. Having transitioned from managing the wealth of a single family, SFO is now a fully fledged financial institution, targeting direct global real estate investments and managing assets on behalf of numerous families and investors.

SFO’s business model is centred on sourcing, structuring and managing global real estate investments

With a team of 23 seasoned professionals located in three continents, SFO manages approximately $1bn worth of real estate assets across North America, continental Europe and Africa. Through these operations, the group has earned a reputation for successfully identifying, acquiring and managing high-quality assets that generate superior risk-adjusted returns.

Recognised as the best global real estate investment company by World Finance for 2018, SFO’s business model is centred on sourcing, structuring and managing global real estate investments, which in turn enable investors to achieve a well-balanced geographic diversification.

In addition to real estate investments, SFO advises its ultra-high-net-worth member families on optimal asset allocation strategies and helps to monitor the deployment of their wealth. SFO also assists these member families with developing and implementing family governance and succession planning strategies, which are particularly important as families grow and pass on their wealth from one generation to the next.

Origins of excellence
SFO Group is a member of Saradar Capital Holding, a diversified family conglomerate with a 70-year-old history of building excellence across different sectors and geographies. Saradar Capital Holding (formerly known as Saradar Group) started its journey back in 1948 with a single local bank and grew into a diversified, yet focused, investment holding group with international outreach. It primarily targets disruptive business models while balancing growth with value-accretive investments. Today, Saradar Capital Holding focuses on three main pillars: financial services, real estate and alternative investments, under which each asset is independent and abides by local regulations.

The financial services pillar focuses on long-term strategic investments in operating companies with interests in banking, microfinance and insurance, in addition to SFO’s asset and wealth management services. In terms of governance, Saradar Capital Holding has access to renowned global industry leaders, who offer innovative advice and dynamic perspectives on its capability-driven active strategy. The conglomerate also targets an optimal risk profile by diversifying investments between developed and developing countries, as well as between mature and growing businesses, with a view to optimise its risk-adjusted return on capital.

Programme trio
SFO targets real estate investments falling under three categories, thereby catering to investors with various risk profiles and liquidity requirements. The first is its US housing programme, which seeks to generate current income and achieve long-term capital appreciation, while hedging against inflation and interest rate hikes. This strategy caters primarily to investors seeking to earn a risk-adjusted long-term income stream. The programme targets multifamily assets in markets benefitting from favourable demographics. These include strong employment growth, business-friendly environments and purpose-built student housing located within walking distance of top-performing state universities, which thereby benefit from exceptional enrolment growth in the midst of scarcity in accommodation supply. SFO’s portfolio assets that fall under this programme are located across eight assets in the states of Florida, Texas, Kentucky and Georgia, reaching a total of 2,500 housing units.

Then there is SFO’s ‘value add’ programme, which targets underinvested commercial assets by acquiring them at attractive valuations, below replacement cost and with a clear path to value creation. SFO’s hands-on management approach allows the repositioning of assets in exciting and promising markets.

The strategy also brings in a moderate income stream throughout the holding period, and significant upside through the sale to long-term capital.

What’s more, this programme caters to investors seeking both currency and geographic diversification, as it’s geared towards capturing value in the form of capital appreciation. As part of the programme, SFO has recently set up an international joint venture with Swiss Life Asset Managers. Through this partnership, it has acquired a portfolio comprising 11 office buildings located across nine key cities in Germany, predominantly in North Rhine-Westphalia and the Rhine-Main area.

The ‘opportunistic’ programme, meanwhile, targets developments and the full refurbishment of retail, residential and office assets. SFO’s deep in-house understanding of the different phases of development allows it to partner with local expertise, while still leveraging its global reach. This strategy has a shorter holding period and is directed at investors who are driven by internal rates of return as full realisation of the strategy occurs at the sale. This programme currently includes the development of an award-winning shopping mall in Abidjan, Ivory Coast as well as an exclusive residential development in London.

KIB is leading the fintech revolution in Kuwait

Posted on by Max Tomlin

From its origins in the 1950s and 1960s with the invention of the credit card and the ATM to its role in online data storage in the 1990s, financial technology has been central to banking operations for the past 60 years. Now it is an indispensable tool in all customer-facing processes too, and has been helping banks to build better relationships with their clientele.

KIB has brought in a stack of innovative technologies to deliver a better banking experience for its customers

In Kuwait, the banking industry is in the midst of a revolution, with fintech being a key driver of this much-needed change. The country’s relatively small financial ecosystem, in comparison to other GCC countries, allows essential institutions to be more agile in adopting new technologies. Moreover, the progressive central bank has committed itself to supporting digitalisation, with the organisation’s chief saying in October: “We need to accommodate the new influx of fintech in the country.”

Leading the charge is Kuwait International Bank (KIB), which has recently adopted a stack of innovative technologies to deliver a better banking experience for its customers. World Finance spoke with Raed Jawad Bukhamseen, CEO of KIB, to discuss its strategic transformation.

In what ways has KIB embraced a customer-centric strategy recently?
At the start of 2018, KIB embarked on a new phase of transformation, implementing myriad changes to execute its banking vision. KIB’s new strategy focuses on becoming more customer-centric by offering an integrated customer banking experience, establishing itself as a partner in every aspect of its customers’ lives. With this new strategy, it’s aiming to become a true ‘bank for life’.

A key component of this latest transformation is a comprehensive digital strategy across both online and mobile platforms, which is aimed at enhancing and streamlining KIB’s virtual customer banking experience. By embracing technology and innovation as a core component of its business strategy, the bank seeks to provide the latest digital solutions that are user-friendly and easily accessible at all times.

Our overall strategy is designed to make KIB a more customer-centric business, allowing it to deliver greater value to customers while remaining a valued partner in their everyday lives.

What approaches has KIB implemented to improve the customer experience?
The bank is focusing on putting the customer at the centre of every interaction, across all touchpoints and channels. Its ambitious new approach to customer service sees it transforming the entire customer experience to include a mix of live and digital channels.

KIB has also launched a number of digital banking solutions, such as an interactive voice response (IVR) portal, live chat assistance and more mobile and online services, in a bid to improve the overall customer banking experience.

How do your digital banking solutions help you to deliver a better service to your customers?
One of the most important milestones under the umbrella of this digital revolution has been the inauguration of our first-of-its-kind multichannel contact centre in the Kuwait region. This strategic move seeks to revolutionise the KIB customer experience and improve service quality levels. Operating around the clock, the centre includes an IVR portal and offers centralised monitoring, queuing, routing and reporting solutions.

KIB also launched an innovative visual IVR service in addition to its live chat service, which provides customers with access to most of our services via a visual interface, rather than just a voice-activated self-service interface. This enables us to offer a better self-service call experience.

Strong cybersecurity standards are more essential than ever in the age of digital banking. How does KIB ensure it has robust safeguards in place?
KIB continues to be committed to solving cybersecurity challenges and doing whatever is necessary to safeguard sensitive information in order to gain the trust of its customers. Our information security culture ensures the protection of customers’ data and privacy by making it central to the company’s mission. KIB upholds the highest levels of banking security by implementing the best practices in information security, such as the ISO 27001, which is the most widely recognised, internationally accepted security standard and benchmark developed for information security management systems. Information security is therefore integrated across all of KIB’s core banking operations.

At KIB, information security is considered to be a fundamental pillar of business. In recent years, the bank has invested heavily in techniques and software to combat and deter cybersecurity attacks. As part of the bank’s commitment to ensuring information security resiliency, we have established an information security steering committee chaired by the CEO. This group consistently monitors the state of information security across the bank. It also keeps up to date on the growing number of security breaches in other banks and companies as a strategy to ensure that appropriate security controls are in place to thwart potential attacks.

As a testament to its robust cybersecurity standards, strong leadership in information security and upholding strong security practices, KIB has received multiple prestigious awards in this field.

Could you tell us about KIB’s social responsibility strategy and why it is so important for the bank?
Social awareness is a vital part of KIB’s DNA, both in terms of its position within the industry and its relationship with its customers. As the bank continues to implement its new strategic transformation, which will gradually see it become a partner in its customers’ lives, it is more committed than ever to a policy of social responsibility.

At a corporate level, KIB focuses on addressing a diverse range of social issues facing the local community, underscoring its integral role as a national financial institution. The bank’s social responsibility programme is based on four key pillars: its flagship financial literacy programme; youth empowerment programme; positive social impact; and community development. As part of its social impact and community development pillars, KIB has committed to investing in all kinds of initiatives, including health, sports, environmental, cultural and educational projects, and many more.

Which body is responsible for driving regulatory reform and compliance in the Kuwaiti banking sector?
In Kuwait, the financial and banking market is regulated and supervised prudently by the Central Bank of Kuwait (CBK), which supports financial institutions across the nation. The CBK also continues to promote efficiency in payments systems, particularly electronic payments and settlement systems, as they provide advanced levels of security. As the primary regulator of payments systems, the CBK has adapted to market changes and set up an appropriate legal framework.

How does KIB ensure that it keeps up with the latest corporate governance standards?
KIB is committed to maintaining the highest standards of corporate governance, believing this to be a critical factor in achieving its business goals and objectives, while also generating shareholder value. The bank has a comprehensive corporate governance framework, which is based upon strong relationships with shareholders, cooperation between management and the bank’s board of directors, and transparent reporting.

KIB’s corporate governance board committee is responsible for overseeing and implementing sound corporate governance, internal controls, risk management, and preparing and updating its corporate governance manual. Under the guidance of the CBK, KIB also implemented the adjusted standard of capital adequacy, reaffirming its commitment to good corporate governance.

What is KIB’s opinion on regulatory technology?
‘Regtech’ has become the talk of the town, but it’s nothing new. After the global financial crisis, financial institutions faced a tightening of regulations, and with that the compliance burden increased. To stay abreast of the latest developments, financial institutions must dedicate time and money to tracking and analysing regulatory changes.

How has the rise of start-up fintech firms changed the industry?
Progress has always been achieved as a result of collaboration, not competition. We have already witnessed how fintech has disrupted the financial and banking market, bearing fruits of technological innovation, efficiency, improved service offerings and much more. Rather than engaging in competition, financial institutions and fintech firms now believe that collaboration is the ideal path.

Fintech firms have inspired traditional banks to embrace technology, pushing them to offer more innovative solutions for consumer demand. In turn, traditional banks can provide fintech firms with regulatory support, capital, and data.

What are KIB’s plans for the future?
Going forward, KIB will be focusing on three key pillars: transforming its retail offering by focusing on technological innovation and enhancing its digital services; expanding the corporate banking arm of its business; and building upon its rich history in the real estate sector to become a one-stop real estate financing shop. This will encompass property management and real estate appraisal. The future at KIB continues to be exciting and full of potential.

SNC-Lavalin crisis: Trudeau administration accused of interfering with corruption case

Posted on by Max Tomlin

Canadian Prime Minister Justin Trudeau is facing strong criticism over claims that his administration intervened in the prosecution of engineering firm SNC-Lavalin, which stands accused of fraud.

According to allegations first reported by The Globe and Mail, Trudeau, along with other senior government officials, put undue pressure on former Minister of Justice and Attorney General Jody Wilson-Raybould to secure an out-of-court settlement with SNC-Lavalin.

In a statement on February 27, Wilson-Raybould said she had experienced a “consistent and sustained effort by many people within the government” to push for a deferred prosecution agreement (DPA) with SNC-Lavalin.

Under a DPA, a federal agency files a document charging the individual or company in question, while simultaneously requesting that prosecution is delayed to allow the defendant to demonstrate good behaviour. In exchange, the defendant is typically required to pay a fine, cooperate with the government or hand over any relevant information for the case.

Charges of corruption were first levelled against SNC-Lavalin in 2015, with the engineering giant accused of bribing officials in Libya between 2001 and 2011 to secure government contracts

Wilson-Raybould said that she conversed with the Prime Minister’s Office, the Privy Council Office, and the Office of the Minister of Finance regarding the allegations of fraud levelled against SNC-Lavalin. During those conversations, Wilson-Raybould claims she heard “express statements regarding the necessity for interference… and veiled threats if a DPA was not made available to SNC”.

She added that officials raised concerns SNC-Lavalin would move its headquarters to London or make many Canadians redundant if it was found guilty in an election year. “[They] urged me to take partisan political considerations into account, which was clearly improper,” she said.

When Wilson-Raybould indicated she was unwilling to play ball, she claimed she was shuffled out of her ministerial position in the Department of Justice to the Department of Veterans Affairs. She subsequently resigned from the cabinet altogether on February 12.

President of the Treasury Board Jane Philpott followed Wilson-Raybould in resigning on March 5, stating she had “lost confidence in how the government has dealt with [the SNC-Lavalin] matter”.

Charges of corruption were first levelled against SNC-Lavalin in 2015, with the engineering giant accused of bribing officials in Libya between 2001 and 2011 to secure government contracts during the reign of former Libyan Prime Minister Muammar Gaddafi.

SNC-Lavalin, its international operation and one of its subsidiaries reportedly offered at least CAD 47.7m ($35.7m) in bribes to officials and defrauded the Libyan Government of CAD 130m ($97.2m). The firm has argued that those responsible for the alleged criminality left long ago and has said that prosecution for past actions would severely damage its business. According to The New York Times, SNC-Lavalin has heavily lobbied senior members of Trudeau’s government for an out-of-court settlement.

Trudeau denied any wrongdoing, stating on March 4 that his administration would always stand up for Canadian jobs, but in a way that respected the independence of the rule of law and the judiciary. However, according to a senior government source, the prime minister is now planning his next steps in the scandal, which may include a statement expressing contrition for the way some of his ministers conducted themselves.

Conservative opposition leader Andrew Scheer has called on Trudeau to resign, saying that he “simply cannot continue to govern [Canada] now that Canadians know what he has done”.

Trudeau is facing a federal election in October this year, at which Scheer is hoping to unseat him. As such, the outcome – and the public’s perception of how Trudeau deals with the SNC-Lavalin case – could make or break his political future.

Inspiring a tourism revolution in Morocco

Posted on by Max Tomlin

Tourism has a tremendous impact on economic development, especially for emerging countries such as Morocco. Benefits of tourism include income generation, job creation and positive impacts on the image of the country.

At the beginning of this decade, the world – and the MENA region in particular – went through a period of uncertainty

In the case of Morocco, the tourism industry has long been a crucial economic sector, alongside the automotive industry, phosphates and agriculture. Imad Barrakad, CEO of the Moroccan Agency for Tourism Development (SMIT), spoke to World Finance about how the North African nation plans to continue growing its tourism industry in a sustainable manner.

How important is tourism for Morocco’s wider development, particularly regarding economic diversification?
In 2018, tourism contributed more than eight percent to the country’s GDP, a figure that grows to about 15 percent when tourism’s indirect contributions to transport, food, handicraft and other related sectors are considered. It is also estimated that tourism employs more than 2.5 million people both directly and indirectly, accounting for almost 25 percent of the total Moroccan workforce. Tourism is considered to be a development accelerator, which contributes to reducing income inequalities between regions and provides alternative employment opportunities.

What measures has SMIT put in place to promote Morocco as a tourism destination?
SMIT’s strategic role is to create a business climate that is favourable to tourism investors and operators alike. We assess profitability in advance so we can select the projects that are the most suitable for investment, closely focusing on an investor’s profile. We also facilitate access to funding, whether in terms of equity or debt, particularly for government-backed projects.

15%

The tourism sector’s direct and indirect contribution to Moroccan GDP

2.5m

Approximate number of Moroccans employed by the tourism industry

25%

of the Moroccan workforce is employed by the tourism industry

Moreover, we help identify potential strategic partnerships and play a role in the launch of public-private initiatives. We help investors access government funding, including subsidies for land purchases and offsite infrastructure costs, as well as tax and customs duty exemptions. In addition, SMIT provides advice and assistance to investors and dispenses market intelligence on suitable opportunities.

What innovative approaches are included in Morocco’s national strategy for boosting tourism investment?
The national tourism development strategy has launched eight distinct tourism destinations in order to develop a diversified and high-quality tourism offering that corresponds to both tourists’ needs and investors’ interests. Also, we have begun participating in international events, specialising in tourism and hotel investment. During the past two years, SMIT has focused on diversifying its targets through promotional activities and roadshows in new target areas in Asia and the Americas, which have been increasingly active in project financing.

How is SMIT ensuring that tourism is developed across the entire country?
At the beginning of this decade, the world – and the MENA region in particular – went through a period of uncertainty. Despite this, Morocco remained resilient; over the past five years, direct foreign investment in the tourism and hospitality sector exceeded $1bn annually. Similarly, hotel capacity has continued to grow steadily over the past decade, with an average increase of approximately six percent each year.

In 2017, Morocco’s hotel accommodation consisted of 4,000 lodging units, totalling nearly 260,000 beds. Compared with 2011’s 2,500 units and 190,000 beds, this represents an annual average growth rate of nine percent in terms of lodging units and five percent in terms of bed capacity. Similarly, arrivals grew by more than 10 percent, with final forecasts for 2018 suggesting a similar figure. Occupancy rates have reached peaks of 70 percent in the upmarket and luxury sector, improving revenue per available room. Many international hotel brands are sensitive to these figures and have reinforced their presence in Morocco as a result.

What other strategies are being pursued to encourage investment in the sector?
SMIT has set up a land database application called Atlas Land to help identify premium land for tourism projects across all regions of the kingdom. This provides excellent visibility regarding tourism-dedicated land and makes it easier to identify and reserve real estate properties.

In terms of accessing credit financing, SMIT has helped set up a guarantee fund that aims to partially guarantee medium and long-term bank loans intended for tourism project financing. Last but not least, many of the funds that have been initiated by SMIT have been instrumental in boosting investment flows, and have helped reshape the skylines of destinations such as Saidia, Rabat, Tangier and Casablanca.

What is the outlook for the future of Morocco’s tourism sector?
Many large-scale projects are currently in progress in Morocco’s main tourist destinations, such as Rabat, Taghazout Bay next to Agadir, and Tamuda Bay in North Morocco. We look forward to a great future in terms of tourism development, with the industry expected to continue showing robust growth rates. Impressive plans are in the pipeline and SMIT is committed to strengthening its relationships with investors and tourism operators so we can consolidate tourism projects in Morocco.

BPI-Philam is helping to preserve the favourable economic conditions in the Philippines

Posted on by Max Tomlin

Over the last few years, the economy of the Philippines has been striking a reasonably effective balance: the country’s GDP growth rate has been steady, and inflation has been kept relatively in check. According to recent data released by the World Bank, the country’s poverty rate gradually fell between 2006 and 2015, largely thanks to firm economic fundamentals providing the necessary foundations for more job opportunities outside of agriculture. However, since the beginning of 2018, the tides have turned.

As more people are lifted out of poverty, financially protecting them for the future becomes very important

GDP grew by 6.1 percent in the third quarter of 2018 – an impressive rate by international standards, but still a three-year low for the country. Inflation, meanwhile, accelerated to 6.7 percent by October 2018 – its fastest rate since 2009 and well above the target set by the country’s central bank. Recently, inflation in Manila’s metropolitan area appears to have plateaued at 6.1 percent.

These are all challenges that can be overcome, and the government is taking measures to address them. In 2018, the government signed in a rice tariff bill, lifting the quota on rice imports and reducing inflationary pressures. There is also the benefit of the Philippines’ strong local market and healthy domestic consumption, which is weathering the price hikes on goods and services that have been caused by the ongoing trade war between the US and China. Despite the country’s gross international currency reserves reaching a nine-year low and muted expectations regarding the growth of the important local IT business process market, better days are expected soon.

Changing attitudes
For the average person in the Philippines, these changing economic tides can hit hard. While it can be reasonably straightforward to lift people out of poverty when the economy is good, helping them stay above the poverty line when times are more challenging can be difficult. It requires more expansive measures.

World Finance spoke to Surendra Menon, President and CEO of BPI-Philam, to find out more about the challenges and the opportunities that exist across the country’s life insurance sector.

BPI-Philam is one of the Philippines’ leading bancassurance firms, and has made significant progress in repositioning how life insurance is perceived in the country. The company is working towards helping the Philippines’ ongoing economic development by encouraging vulnerable people to make informed financial decisions to secure themselves against future shocks. Menon explained: “The World Bank released a report on Philippine poverty reduction and recommended measures that the government can employ to continue reducing and eventually eliminate poverty, one of which is managing risks and protecting the vulnerable.”

Menon also said that bancassurance plays an important role in both the Philippine economy and individual people’s lives. As more people are lifted out of poverty, financially protecting them for the future becomes very important. “On an individual level, citizens should take up insurance policies to secure themselves and their families financially,” he said. “Even when the worst happens, their hard-earned money will remain largely intact and accessible, and can be used to rebuild their lives.”

The World Bank’s recent report on poverty in the Philippines encompasses a number of poverty reduction methods, and suggests that government programmes should include effective disaster prevention measures such as early warning systems, improved access to personal banking and social assistance. Insurance is also mentioned as a useful poverty elimination tool, since it can help make sure that financial gains are not lost. “Insurance plays a larger, more long-term role in this area as it stabilises the financial standing of individuals and families,” Menon said.

6.1%

Philippines’ GDP growth in Q3 2018

27,000+

Number of BPI-Philam clients participating in the Philam Vitality programme

Bancassurance, the practice of selling insurance via bank branches, is a particularly powerful tool in the Philippines, he said. “Bancassurance widens the reach of the insurance industry in the country, and we are present in areas where more traditional channels of insurance cannot reach or have no presence.” BPI-Philam is partnered with the Bank of the Philippine Islands, allowing its products to be sold across the bank’s network of more than 900 branches. This has contributed to BPI-Philam’s current position as one of the country’s fastest-growing bancassurance providers.

“Our advocacy of making insurance accessible to all Filipinos is our driving force,” Menon said. “Coupled with the growing network of BPI branches, we are continuously expanding our sales force to match. We have also made it a goal to educate as many people as possible on the need for life insurance.”

This has proven to be a challenging task for BPI-Philam, with life insurance generating a certain amount of cynicism in the Philippines. “There is a stigma against life insurance in the country, particularly due to the way it was previously marketed and sent a ‘you die, we pay’ style of message,” Menon said. This has been the case not only in the Philippines, but in much of Asia. There is also a challenge in that many people, particularly those coming out of poverty, do not fully understand insurance products and what they are capable of. “Filipinos have long been plagued with misinformation on what insurance can do for their households and its importance in securing their future,” he said. “They often shy away, and are under the impression that only the rich can afford to protect themselves.”

However, with falling poverty rates, taking precautionary measures to ensure financial security is becoming more important for the average Filipino. “We are educating the Filipino people first about life insurance, since it leads them into making an informed decision when they decide to insure themselves and their loved ones,” Menon said. “Life and health insurance are crucial components of any complete financial portfolio.”

Alongside this educational role, BPI-Philam is developing world-class life insurance products. “Our products meet the highest regulatory standards. All our products are reviewed, scrutinised and approved by two governing bodies, the central bank and the Insurance Commission,” he said. Bancassurance also helps strengthen a policyholder’s relationship with their bank, helping make further inroads in terms of financial literacy and inclusion.

“Our bancassurance sales executives are empowered to provide customer service to anyone who needs it, whenever and wherever,” Menon said. “This makes it easier and more convenient for customers to manage their money, since there’s no need to go anywhere else when a premium is due. Customers just go to any branch of the Bank of the Philippine Islands or to our online banking portal, and pay their premiums there.” He added that there is a wider array of products for customers to choose from when visiting a bank. Between all of these measures and BPI-Philam’s long history in the sector, the company is working to help thousands of Filipinos navigate the insurance market.

Reaping the rewards
While financial literacy is important, it is by no means the only goal of BPI-Philam. The company is also focusing on communicating and developing the living benefits of its products. This includes dividend payments, policy loans, retirement funds, dismemberment and disablement benefits, hospital income benefits, and even critical and terminal illness benefits. Menon explained: “Our best one is Philam Vitality. We want to help people live healthier, longer, better lives, which is why our Wellness Series products are integrated with Philam Vitality. It is a science-based wellness programme that encourages our policyholders to make real changes for their health.”

The plan has three steps: ‘know your health’, ‘improve your health’ and ‘enjoy the rewards’. For the first step, policyholders are provided with a range of health assessments that determine their ‘vitality age’ – a measure of how healthy they are relative to their actual age. It also helps them understand in much more detail the various aspects of their health and what they can do to improve it. The next step, ‘improve your health’, offers customers discounts on services like gym memberships, workout gear, healthy food and even smoking cessation courses. “The third step is to enjoy the rewards: customers are rewarded for healthy lifestyle activity and choices, and the impact is measured for each individual,” he said. “Rewards range from an additional insurance coverage at no charge to movie tickets and even discounts on hotel accommodations and flights.”

The more active a policyholder is in their journey, the more they are rewarded with points to increase their level. The higher the level, the bigger the discounts. So far, the scheme has been very successful: “To date, we have over 27,000 clients actively participating in the programme, and we are very proud to say that this number is increasing every month.”

Doing it the right way
In addition to this programme, BPI-Philam is also fully committed to complying with its code of corporate governance. Menon said this commitment to the highest standards of corporate governance is rooted in the belief that a culture of integrity and transparency is essential to the consistent achievement of the company’s common goals. “Creating a sustainable culture where trust and accountability are as vital as skill and wisdom steers us towards achieving long-term value for shareholders and clients, and strengthens confidence in the institution.”

He said that, combined, all of these efforts are winning over customers, fostering financial literacy and helping reinforce gains made by poverty reduction. “Aside from our products being vetted by two governing bodies in the country, we have the combined strength of the Bank of the Philippine Islands, with over 160 years’ experience, and Philam Life, with over 70 years of insurance market leadership, behind us,” Menon said. As the Philippines continues its gradual – albeit occasionally uneven – economic ascent, BPI-Philam is working to make sure the benefits are felt for many years to come.

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.