Author: Max Tomlin

Charting the rise of the disaster economy

Posted on by Max Tomlin

Earthquakes, flooding and wildfires: these tragic events seem to have become ever-present on our screens. This is partly the result of better coverage – disasters taking place thousands of miles away are now shared across the globe. Evidence that conclusively proves these events are becoming more frequent is difficult to pin down, but the data certainly suggests that the biggest and most damaging disasters are occurring more often.

Across 2019, the US experienced 14 weather and climate events that resulted in damages worth over $1bn; the annual average between 1980 and 2019 was just 6.5. Some estimates predict that by 2030, the funding required to support those suffering from climate-related disasters could reach $20bn a year.

The response to cataclysmic events such as those mentioned above – whether naturally occurring or man-made – focuses on the human costs, and rightly so. Damaged property can be repaired, but the loss of a loved one is not so easily healed. Nevertheless, the economic costs of natural disasters must be reckoned with eventually.

While the insurance industry may need to reassess how it operates in a world becoming increasingly prone to disasters, other sectors are being presented with opportunities

Increasingly, with the public sector struggling to cope, private businesses are stepping in to fill the void. The global incident and emergency management industry is predicted to experience a compound annual growth rate of 6.8 percent until 2024, surpassing $140bn in value. Such a rise promises more devastation and more suffering – but that has never precluded businesses from making a profit.

Under the weather
Figures relating to the ‘disaster economy’ are staggeringly large. In 2019 alone, Typhoon Hagibis in Japan and monsoon flooding in China each caused $15bn in damage. According to a report by global professional services firm Aon, across 2019, the top 10 economic loss events resulted in total damages of $232bn.

“Following two costly back-to-back years for natural disasters in 2017 and 2018, there were several moderately large catastrophes [in 2019], but strong capitalisation has allowed the insurance industry to comfortably manage recent losses,” Andy Marcell, CEO of Aon’s reinsurance solutions business, explained in the report. “However, as socioeconomic patterns further combine with scientific factors such as climate change or extreme weather variability, the potential financial costs at play are only going to increase, so building resilience is key.”

While the insurance industry may need to reassess how it operates in a world that is becoming increasingly prone to disasters, other sectors are being presented with opportunities. National governments often drive these opportunities by investing in more effective disaster recovery and response initiatives. In Japan, for example, the national government formed the Reconstruction Agency in February 2012 in order to manage the aftermath of the To¯hoku earthquake and tsunami that resulted in nearly 16,000 deaths and ultimately caused the Fukushima nuclear disaster. At the end of 2019, it was confirmed that the agency’s life would be extended by a further 10 years in order to continue providing affected municipalities with financial support.

Elsewhere, governments have shown an eagerness to undertake careful analysis in the aftermath of accidents and disasters, ensuring that lessons are learned for the future. The US’ National Transportation Safety Board has issued around 15,000 safety recommendations, with more than 80 percent “favourably acted upon”.

Still, there remains a tendency for the public sector to be reactive, rather than proactive, even as disasters become more commonplace. A community-driven response to disaster policy can help in this regard, providing greater focus compared with centralised initiatives that may suffer from a lack of attention on key issues and an inability to see what is needed on the ground.

Good in a crisis
To fill the gap in the public sector response, privately financed start-ups are coming up with the innovative solutions required to create a more resilient world. Often they employ cutting-edge technologies, such as artificial intelligence (AI) and drones, to help mitigate and improve disaster response.

“Governments and international aid organisations are relying more and more on the private sector to support those affected by natural disasters,” Konstantinos Apostolatos, a partner at global management consultancy Kearney, told Consultancy.uk. “Companies using AI and other emerging technologies are generating new relief products and services, and the attention on and investment in these products will spur on additional technological advances.”

Orora Technologies is one start-up that is looking to use technology to deliver faster, more efficient responses when disaster strikes. The company, founded in Munich, uses nanosatellites to help with the early detection of forest fires. The firm’s patented CubeSat architecture combines a multispectral thermal infrared camera that is equipped to detect high-temperature events with a real-time communication link, ensuring that fires are recognised at the earliest opportunity.

Similarly, London-based Tractable uses AI to deliver a holistic view of the damage caused by natural disasters, combining satellite, drone and smartphone imagery. The technology provides a detailed appraisal that can be integrated with an insurer’s own systems. The process should make repairs easier to assess financially. Earlier this year, the firm secured $25m in Series C investment, enabling it to expand into new markets.

Across a multitude of worst-case scenarios, start-ups are finding that there is money to be made. For example, water scarcity has been recognised as a significant global risk for years now, but not necessarily because of a lack of water: countries can struggle with drought and flooding in quick succession. Often, problems are logistical – how to get water from areas where supply is high to those where it is not. Kearney’s Year-Ahead Predictions 2020 report highlights two firms, San Francisco’s Orb and Sweden’s Altered, that are working on ways to reduce water waste. Many others are looking at disaster areas where global problems can be turned into profit.

Going for broke
But before businesses and governments get too excited about the prospect of another hurricane or earthquake, it should be remembered that destruction is never a net gain for an economy. In his influential 1946 book, Economics in One Lesson, Henry Hazlitt devoted an entire chapter to the parable of the broken window.

The broken window fallacy was first explained by French economist Claude-Frédéric Bastiat in 1850. He described a boy who had broken a shopkeeper’s window. “This little act of vandalism will, in the first instance, mean more business for some glazier,” Hazlitt wrote. “The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend [on] a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury)… The glazier’s gain of business, in short, is merely the tailor’s loss of business.”

Proponents of the broken window fallacy often point to the economic growth that accompanies wartime as evidence of the good that can come from destruction. Countries like Japan and South Korea have seemingly used war as a springboard to join the ranks of the world’s most powerful economies. However, this is an overly simplistic view: although Japan did post GDP per capita growth in excess of seven percent in the years between 1945 and 1956 (see Fig 1), this relied heavily on economic aid from the US. In addition, such growth was, to some degree, the continuation of the national economy playing catch-up with the West after years of relative isolation.

What’s more, any post-war recovery must take into account the lower economic base created by wartime devastation. By 1946, for example, Japanese industrial production had fallen to just 27.6 percent of its pre-war level. Although some individuals and businesses did benefit from the Second World War, many more did not. A simple look at the number of flattened factories and bombed-out buildings demonstrates that.

River flooding in China

Silver linings
Aside from start-ups looking to monetise their response to disasters, there is some evidence, albeit mixed, of firms experiencing ‘creative destruction’, which describes how the dismantling of established processes makes way for new means of progress. A 2009 study by Andrea Leiter, Harald Oberhofer and Paul Raschky found that – in the short term, at least – European firms based in regions that suffered flooding displayed a higher growth of total assets and employment than businesses unaffected by flooding. Another study, this time by Matthew Cole, Robert Elliott, Toshihiro Okubo and Eric Strobl, also showed some evidence of creative destruction in the aftermath of Japan’s 1995 Kobe earthquake.

There are several reasons why entire sectors might flourish in the wake of a disaster. In the event of war, it is plausible that an external threat could cause citizens to pull together, boosting productivity. More broadly, disasters could push the most inefficient firms into obsolescence, improving market efficiency and corporate productivity.

“Aside from… survived firms, there is another potentially important channel through which natural disasters may affect the corporate sector: the selection, or exit, of firms due to the disasters,” Arito Ono, Senior Economist at the Mizuho Research Institute, told the World Economic Forum. “If natural disasters expel inefficient firms, or if natural selection is at work, then the average corporate productivity will increase. However, to the extent that efficient firms are also forced to exit, or an unnatural selection is at work, then the overall impact is unclear.”

Unsurprisingly, for every piece of evidence that suggests destruction helps businesses, there are further indications that it simply causes – well, destruction. Economic metrics are not always accurate methods of measuring the impact of disasters, particularly where economic damage is slow to appear. It may be possible to quantify the damage caused to existing businesses when events like the Chernobyl nuclear disaster or Syria’s civil war take place, but assessing the businesses that never launched and the economic benefits that were never accrued – the opportunity cost – is much more difficult.

It seems fairly obvious that every dollar spent repairing flood damage or rebuilding flattened businesses is one that will not be spent on education, healthcare or any number of other essential services. In that sense, destruction is always a net loss to an economy.

Money on the mind
With no immediate end to the world’s climate crisis in sight, we are entering a period where natural disasters are likely to become more regular and increasingly severe. Some argue that talk of a disaster economy is crass when lives are being lost. They do have a point. But capitalism has never been afraid to monetise human suffering. Companies like Uber have been accused of exploiting workers by failing to give them the benefits that would normally be afforded to full-time members of staff, under the pretence that they are enjoying the flexibility of the gig economy. Fashion brands burn huge quantities of unsold stock just to protect their image – valuing long-term profits over the health of the planet.

Even today, when there is so much talk of the ethical consumer, many companies stand accused of saying one thing and doing another. Corporate social responsibility agendas and sustainability initiatives can be found on most firms’ websites, but there is often a darker, hidden side to the business, whether it’s underpaid contractors in some faraway part of the supply chain or using big data to erode consumer privacy.

Across a multitude of worst-case scenarios, start-ups are finding that there is money to be made

When it comes to natural disasters, of course, the ethics are different. Early detection systems for earthquakes, improved flood defences or any number of other solutions to potential crises are not cheap to develop – their creators deserve some reward for their endeavours. And while the social good these efforts will deliver may be enough for some, in reality, profit is a huge motivating force for innovation. As such, governments have a role to play in ensuring the technologies that are likely to prove so vital to the modern disaster economy are made available to the people who need them most. Public-private partnerships offer one way of melding private sector innovation with public sector oversight.

In Japan, private gas firms make use of public sector 3D geographic information system maps in order to manage pipelines and improve communication during emergencies. Similarly, in New Zealand, a risk management framework is employed to ensure local authorities, emergency services and critical infrastructure providers can cooperate effectively. In 1999, the country’s government launched the New Zealand Lifelines Council to formalise these partnerships.

When tragedy strikes, money seems like the last thing that should be on our minds. Unfortunately, the economic impact of natural disasters, rather than the human one, often determines the next course of action in terms of risk assessment, mitigation and recovery. The disaster economy is here to stay and is set to be a growth industry. For private businesses, this provides a two-fold opportunity: to boost revenues while simultaneously helping those most in need. Governments around the world must give them the supporting framework to do both.

The next global frontier: Millennial investors are driving growth in emerging markets

Posted on by Max Tomlin

Emerging markets are bearing the brunt of the US’ trade protectionism, which has seen tariffs imposed on several states. Trade tensions between the world’s two largest economies, the US and China, have been labelled “the biggest trade war in economic history” by The New York Times and have significantly impacted global growth, reducing it to its lowest level since the 2008 financial crisis.

The question is now whether emerging economies will be able to heal from the wounds inflicted by the US-China trade war and if these markets are still attractive to investors. The IMF’s October 2019 World Economic Outlook report went some way to answering this question. The report stated that emerging markets are expected to remain the growth engine of the global economy over the next decade as the power shift from West to East continues in the years to come.

Their economies already account for almost two thirds of the world’s GDP growth and more than half of new consumption over the past 15 years. The IMF projects that India will overtake the US in terms of contribution to global growth by 2024, claiming the number two spot with 15.5 percent of world GDP growth. Indonesia will rise to fourth place with a contribution of 3.7 percent.

To gain financial freedom, Millennials are turning away from traditional investments such as bond and stock markets

However, progress has stalled in recent years as economies have matured and become more exposed to external cyclical factors. Macroeconomic developments such as the slowdown in advanced markets, trade uncertainty and financial volatility have all captured the headlines, though structural challenges – including stagnating productivity – are surfacing too.

New kids on the block
The term ‘emerging markets’ was coined in 1981 by economist Antoine van Agtmael to denote progress, uplift and dynamism in countries that were classified as ‘third world’. With an increasing amount of data on these markets being collected and used, the case was made for the creation of a vast new asset class. This included the Korea Fund, which was one of the first of more than 150 country funds launched in the late 1980s. The first half of the 1990s then saw wider economic liberalisation and privatisation in numerous emerging markets, which substantially enlarged the number of tradable securities available to foreign investors.

The proliferation of private portfolio investment helped those developing nations move towards becoming free markets. That journey was characterised by these economies often having a lower income per capita than developed countries, but experiencing rapid growth and liquidity in equity markets. This involved establishing regulatory bodies, although they usually had immature capital markets that posed a higher risk to investors. Many emerging markets are also troubled by geopolitical instability and volatility, exacerbated by price shocks from natural disasters.

In general, developed markets are considered ‘safer’ than emerging markets, although this rule cannot be applied unequivocally. For example, Greece and Italy are categorised as developed, while Singapore and South Korea are labelled as emerging by most investors. We must question what ‘safer’ means in this context. It is probably wiser to refer to the market’s governance, as this encompasses numerous areas such as government stability, ease of doing business, regulation and competitiveness. Here, the difference is more obvious as insubstantial governance and lower incomes are more commonly associated with emerging markets, and therefore investors require a risk premium.

Trading up
Globalisation has offered investors, hedge fund managers, asset managers and retail traders greater access to high-yielding risky assets when volatility is low in developed markets. With the US Federal Reserve planning to keep interest rates unchanged until at least mid-2020, a weaker dollar could boost profit opportunities for investments in emerging markets. Low volatility in the G10 currency space will also divert more investment in this direction. For many years, forex trading in emerging markets has outgrown that of developed markets. The average daily turnover of emerging markets’ currencies rose by almost 60 percent between April 2016 and April 2019, reaching $1.6trn. With reputable financial institutions such as the IMF highlighting that emerging markets are fast becoming drivers of global growth, these countries can be expected to offer greater liquidity and tighter regulations as they continue to evolve.

Digging a little deeper, we must look at what is driving the growth of emerging market economies. It is estimated that Millennials, who have now reached their prime spending years, will make up 35 percent of the global workforce by 2020. They are the principal consumer generation and will shape the world’s economy in the years ahead. Most of these future economy shapers live in developing countries, with nearly nine out of 10 Millennials residing in emerging economies. Chinese Millennials alone outnumber the entire population of the US: out of the world’s two billion Millennials, 400 million live in China. It is estimated that India’s 410 million Millennials will spend $330bn annually by 2020.

Adapting to the market
Millennials are also the most educated generation in history, although this privilege has left them with heftier educational loan baggage than their parents. To gain financial freedom, this generation is turning away from traditional investments, such as bond and stock markets, which would take a long time to yield profit. Instead, they are opting for alternative investments; short-term options, such as forex trading and cryptocurrencies, could provide them with higher and quicker returns.

Inevitably, there are risks involved with these short-term investments. As an international online forex broker, FXTM offers contracts for difference on spot metals, shares, commodity futures and indices. These leveraged products come with a high level of risk, with 81 percent of retail investors losing money when trading. FXTM strongly believes that a successful trader is an educated one. That’s why we strive to provide our clients with free educational courses and outstanding customer support whenever they need it.

In the context of technology, it is obvious that any business must be continuously working on more creative and innovative products

We are also committed to meeting our customers’ demands through cutting-edge digital products. Millennials are the most digitally savvy generation, demanding higher levels of customer satisfaction, easy to manage user experience tools and swift access to services through mobile apps. This can mean they are less loyal to specific brands and are quick to switch to competitors boasting more efficient services. As well as great digital engagement, Millennials also require an element of personalisation whenever possible. Many leading brokers have created their own mobile trading apps in response to this demand, but these have become relatively similar in both design and function, and are therefore less competitive.

The next big area of differentiation is likely to stem from artificial intelligence (AI). The use of AI in the finance industry has become widespread in recent years, and the technology is going some way to improving personalisation in terms of the customer journey and education. Since the arrival of 5G in April 2019, the number of global 5G subscriptions hit 13 million, with China accounting for three million of these. Prominent smartphone brands are keen to keep up with the technology by providing new generations of 5G phones.

In the context of technology, it is obvious that any business must be continuously working on more creative and innovative products and services. Taking this into consideration, FXTM adopted a mobile-first approach in 2019, when we optimised the design of our FXTM Invest pages. We have also engaged with our clients and invited real users to take part in usability testing and provide feedback on their experience. Since then, we have seen an increase in the number of participants in the FXTM Invest programme.

FXTM’s success has not gone unrecognised. The company won Best Trading Experience in the 2019 World Finance Forex Awards, which only motivated us to provide our traders with an even more exceptional user experience. Whether our clients are interested in emerging or developed markets, we are ready to offer them all the support they need.

Nigerian banking remains unshaken despite a financially turbulent year

Posted on by Max Tomlin

The global economy had a bumpy ride in 2019. As tensions mounted between the US, China and the EU, trade was left sputtering. According to the World Bank, global growth ultimately closed at 2.4 percent, down from 2.5 percent in 2018. This tepid growth had significant implications for frontier markets, including Nigeria, and specifically for the financial services industry.

The impact on frontier markets was made more severe by the US Federal Reserve’s mid-cycle alterations to its monetary policy. The uncertainty this created around rate rises in the US triggered fund outflows from emerging economies. As a result, the Nigerian stock market had a difficult year, closing at a loss of 14.6 percent at the end of 2019. Similarly, these policy adjustments increased pressure on the country’s foreign exchange reserves, which dipped to $38.6bn in January 2020, down from $44.9bn in July (see Fig 1).

World Finance spoke with UK Eke, Group Managing Director of FBN Holdings, about how Nigeria is moving on from this financially turbulent year and what this means for its banking sector.

How is Nigeria’s economy faring at the moment? What are its main strengths?
Within Nigeria, there have been concerted efforts – both in terms of fiscal and monetary policy – to get the economy back on a healthy growth path. As far as monetary policy is concerned, the Central Bank of Nigeria continues to make efforts to meet its targets of price stability, reduced unemployment and a stable exchange rate. To this end, it has rolled out a number of policies, such as the recent increase in the minimum loan-to-deposit ratio for commercial banks – up from 60 percent to 65. Additionally, the new Global Standing Instruction aims to combat the predatory impact of serial borrowers in the banking system, thereby driving down non-performing loans.

The fundamentals of the Nigerian financial services sector remain strong and attractive, despite recent headwinds

In terms of fiscal policy, the Nigerian Government has pushed on with plans to return the country to a January-to-December budget cycle by passing the 2020 Appropriation Bill. It also signed a new finance act and recently amended the Deep Offshore and Inland Basin Production Sharing Contract Act to improve Nigeria’s business environment.

Thanks to these policies, Nigeria climbed 15 places on the World Bank’s Doing Business 2020 ranking: the country now ranks 131st, jumping from 146th place last year and up 39 places since 2016, when the current administration established the Presidential Enabling Business Environment Council. Based on this positive track record, the country is well on its way to achieving its goal of reaching 70th position by 2023.

What is the outlook for Nigeria’s financial services sector in the short to medium term?
The fundamentals of the Nigerian financial services sector remain strong and attractive, despite recent headwinds. Given that the economy is expected to grow in the medium to long term, it is expected that there will be a corresponding growth in the Nigerian financial services industry.

The banking sector accounts for 80 percent of this industry. Despite Moody’s recent decision to downgrade its outlook for the sector – owing largely to regulatory challenges – international investors have shown a growing interest in Nigeria’s banks. This is thanks to the size of the economy, the country’s young population and the depth of the market. In the short term, we expect there will be greater consolidation in the industry, as both the insurance and banking sectors strive to enhance their capacity in response to pressure from the market and the banking regulator.

How will FBN maintain its dominance in the financial services industry in sub-Saharan Africa?
Our strategy to dominate the financial services industry in sub-Saharan Africa has three key points of focus. The first is increasing our appeal to existing and potential markets through our world-class services. The second is strengthening our grip on alternative delivery channels through electronic banking and agency banking networks. Finally, we plan to expand our market footprint across the region in pursuit of growth and trade flows.

How has FBN embraced new technologies in the banking sector?
Innovation is central to our strategy and critical to our value proposition. Two years ago, we opened the FBN Digital Lab, an incubation centre for nurturing novel products and services from the conceptualisation stage to market launch. This centre allows us to partner with the growing fintech community in Nigeria to develop products that address the constantly evolving needs of our customers.

Similarly, we have continued to outpace the sector in terms of IT investment; for example, we recently embarked on an IT transformation project in partnership with cloud infrastructure company Oracle. It is by far the largest project of its kind in sub-Saharan Africa. This is all part of our quest to leverage technology in driving critical processes such as risk management, procurement and data analytics.

What customer trends are you noticing at the moment?
The global financial services landscape is evolving and, as part of this, the banking industry is boosting digital transformation in an effort to meet customers’ new needs. Banks that offer a compelling digital customer experience are winning big, regardless of whether they’re established institutions or new entrants.

We have also seen that customers have a growing preference for product bundling, whereby different products are tied together to bring greater value. This adds to the case for all-in-one digital offerings that are tailored to the everyday needs of our customers.

How important is environmental sustainability for FBN?
Preserving our environment for future generations is a core strategic aspect of FBN’s corporate responsibility and sustainability initiatives. We recognise that our success is hugely dependent on the sustainability of the environment and communities we operate in. For this reason, we have adopted a number of initiatives focused on minimising our direct and indirect impact on the environment. We achieve this through our environmental, social and governance management frameworks. We also focus on responsible lending, meaning we hold our customers to a high sustainability standard.

Our responsible approach to protecting the environment has seen us partner with the Nigerian Conservation Foundation (NCF), a non-governmental organisation dedicated to nature conservation and sustainable development in the country. Through its ongoing partnership with the NCF, FirstBank (a subsidiary of the FBN) supports activities promoting the conservation of wildlife and biodiversity.

What other corporate responsibility programmes has FBN launched?
Our key corporate responsibility programmes include the Future First programme, Infrastructure Development programme, Start Performing Acts of Random Kindness (SPARK), and the Employee Giving and Volunteering programme. SPARK, a values-based initiative, was introduced in our first corporate responsibility and sustainability (CR&S) week in 2017. The initiative is designed to promote kindness to others and encourage employees to reconnect with their values in the workplace. Its underlying principle is that we should go beyond just meeting the needs of our immediate family and focus on showing compassion, empathy and affection towards people in every aspect of life.

Our focus has always been to lead the market in addressing the care deficits in our society. In 2019, more than 25 schools benefitted from our CR&S week, with 6,000 secondary school students participating in its launch. Through our 2019 Ripples of Kindness programme, we have worked with more than 50 charities and foundations, including the Global Down Syndrome Foundation, the Sickle Cell Society, the Nigeria Association of the Blind, the Nigeria Red Cross Society, the International Women’s Society and the UN Global Compact. Because of these partnerships, we have helped to improve the lives of more than 20,000 people across eight countries.

How important is it to provide financial services to the previously unbanked?
The unbanked population of Nigeria remains one of the largest in sub-Saharan Africa. This segment continues to attract interest from banks and the banking regulator for different reasons. For the Central Bank of Nigeria, bringing this unbanked population into the formal sector enhances the effectiveness of its monetary policies. For commercial banks, this large pool of Nigerians represents a huge business opportunity.

Today, FirstBank has made significant investments in capturing this unbanked population through traditional and alternative channels. FirstBank has 40,000 agents represented in 770 local governments – just four local governments remain unrepresented. This is by far the largest coverage of any bank in Nigeria. Similarly, through our *894# Quick Banking service, we make it easy for our customers to open an account with us and transfer funds. These efforts have helped to shrink this unbanked population over the last few years, from about 41.6 percent in 2016 to 36.8 percent today.

What does the future hold for FBN?
Our vision is to become the foremost financial services group in sub-Saharan Africa. This entails dominating every market we serve, both in terms of customer count and service delivery through innovation. Ultimately, we see a future where this dominance translates into unrivalled value for all our stakeholders – our shareholders, staff, customers and local communities.

Creating a sustainable sand industry requires greater regulation – here’s why

Posted on by Max Tomlin

Sand seems like a material we have in absolute abundance, but it’s actually one of the most used natural resources on the planet. Globally, we extract over 40 billion tonnes of sand every year, dredging it from beaches and riverbeds and hauling it out of overturned forests. “Find some random river in Asia and zoom in on Google and you realise that there’s mining going on pretty much everywhere,” said Mette Bendixen, a research fellow at the Institute of Arctic and Alpine Research at the University of Colorado Boulder.

Sand is a key ingredient in concrete, glass and computer chips. As such, demand for the material has skyrocketed ever since urbanisation accelerated at an unprecedented rate all over the world. China used more concrete between 2011 and 2013 than the US did in the entire 20th century. Our appetite for sand is so insatiable that we could soon be facing a shortage. A 2019 UN report titled Sand and Sustainability argued that extraction is now far outstripping the rate at which sand is replenished. Considering that this is the material upon which civilisation is built, there is an urgent need for more transparency around its extraction and trade.

Shaky foundations
When we imagine the Sahara’s sweeping dunes, the prospect of a sand shortage seems ludicrous. But not just any old sand can be used in construction. “The thing about desert sand is it’s too rounded,” Bendixen told World Finance. “So it’s like building with marbles. That doesn’t work. You want more angularity and you want a bigger variety of grain sizes so that you get this really good material for construction.”

As riverbanks disappear, the foundations of the infrastructure surrounding them will collapse

The best sand for construction can be found on beaches, riverbanks and seafloors. Because these places are so easily accessible, sand falls victim to the ‘tragedy of the commons’ principle. “Sand is very easy to extract,” said Aurora Torres, a postdoctoral researcher at the Université catholique de Louvain. “If you give a man a shovel and a bucket and a donkey to transport it, he can extract sand. So it’s very difficult to regulate.”

This lack of regulation spurs unsustainable practices, with major consequences not just for the environment but also for local populations. As riverbanks disappear, the foundations of the infrastructure surrounding them will collapse. At the same time, sand mining destroys ecosystems, ravaging communities that depend on them for their livelihoods.

Rock the boat
One of the areas where these consequences are most visible is Vietnam’s Mekong Delta. Providing half of the country’s food, this network of rivers and swamps is known as the rice bowl of Vietnam. Now, its riverbanks are being stripped away. Government officials estimate that roughly 500,000 people will have to move out of the area to escape the major coastal collapse caused by sand mining.

Even where sand extraction is regulated, there is so little enforcement that it leaves the door open to illegal sand mining, which is particularly prevalent in countries such as India, Kenya and Cambodia. In India – the second-most rapidly urbanising country in the world – this illicit activity generates $2.3bn a year. Here, sand is so precious that dozens have died in disputes with the gangs mining it or while reporting on the illegal trade.

Historically, extracted sand has been used locally – for obvious reasons. “Because it’s a bulk material, there is a huge cost in the transportation of sand, so ideally you should bring it to the consumer as soon as possible,” said Torres. However, with sand resources running low in some countries, many are looking further afield. “We’re seeing an increasing tendency towards a global trade of sand,” said Bendixen. “So countries are willing to import sand from rather long distances.”

Dubai, for example, is famous for its ambitious construction projects. In 2004, when work began on the Burj Khalifa tower, which is now the world’s tallest building, the country was forced to import sand from Australia because it had already exhausted its marine resources creating the extravagant artificial islands of the Palm Jumeirah, which required 186.5 million cubic metres of sand to build.

Growing pains
Sand is also used in territory expansion. Singapore has grown its landmass by more than 20 percent since the mid-20th century by importing sand from its neighbours. But for the country to grow this much, others have had to shrink. “In Indonesia, we’ve seen islands vanish; they’ve disappeared because they’ve been snuck away,” said Bendixen.

Several countries, recognising that they are destroying their own rivers and forests for the territorial expansion of their wealthier neighbour, have decided that enough is enough. In July 2019, Malaysia banned all sea sand exports, despite being Singapore’s biggest source of it. This could cause problems for major development projects in Singapore, including the Tuas mega port, which is expected to be the biggest container terminal in the world upon completion.

The lack of a price index on sand makes it difficult to gauge how Malaysia’s ban could financially impact Singapore. However, a similar incident in 2007 provides some clues. When Indonesia banned sand exports to Singapore, the price of sand in Singapore leapt from SGD 25 ($13.80) to SGD 60 ($33.12) per cubic metre and construction activity in the city-state was brought to a near standstill. Singapore has since learned its lesson and begun stockpiling sand. This may have created a buffer, but these supplies won’t last forever.

Singapore’s lack of natural resources forces it to venture overseas for sand, but other countries may go abroad in search of higher-quality materials. State-owned Chinese companies are obtaining permits in Mozambique to extract minerals such as zirconium, ilmenite and titanium from heavy sands. “These more expensive heavy minerals are used in computer chips and all sorts of electronics,” said Bendixen.

The latest of these companies is Dingsheng Minerals, which estimates it will process 100,000 tonnes of sand a day once it’s up and running. This activity has serious consequences for the environment and communities in the region. A 2018 report by Amnesty International concluded that the activities of Chinese mining company Haiyu likely contributed to a flash flood in Mozambique in 2015 that left 290 people homeless.

Murky waters
Because of the damage the Mekong River incurred as a result of sand extraction, Vietnam and Cambodia prohibited exports from the area in 2009 and 2017, respectively. However, it’s unclear whether the two nations actually followed through on the ban: both countries were among the 15 biggest sand exporters in 2018, Mekong River sand is still advertised online, and Singapore continues to record imports of sand from Cambodia. Murky statistics like this are commonplace in the industry. Although Singapore claimed to have imported only three million tonnes of sand from Malaysia in 2008, the actual figure was more like 133 million tonnes, according to Malaysia’s own statistics, most of which was smuggled.

The absence of any real monitoring system contributes significantly to sand mining’s unsustainability

The absence of any real monitoring system contributes significantly to sand mining’s unsustainability. “There are some global statistics that say, ‘This is the import, this is the export from different countries’, but it’s not exhaustive at all,” said Bendixen. “We say that we use between 32 and 50 billion tonnes of sand per year… but [there’s] quite a big difference between those two numbers. And since a lot of this mining is also illegal, it’s not being recorded in the public domain. So we really don’t possess that overview.”

If the information around the origin and trade of sand were more transparent, construction companies would be better placed to make informed decisions about the resources they use. Arguably, the need to do so is greater now than ever before. With the rise of environmental ratings, companies are increasingly motivated to incorporate sustainability into their decisions.

But surveillance alone may not be enough: the industry urgently needs more alternatives to sand. Recycling concrete is one solution, but this is unworkable in developing countries where there’s less of the material in the first place. “There might be another alternative to the extraction of sand from rivers and marine ecosystems, which is crushed rock,” Torres told World Finance. However, she points out, this is more expensive and not all areas have suitable types of rock.

The scientific community could yet engineer a promising alternative. At Imperial College London, a team of researchers has created a product called Finite, a material that is as strong as concrete but has half the carbon footprint and uses that previously unsuitable material: desert sand. However, the product is still in its early stages and has yet to be manufactured on a large scale.

With the urban population rising by 1.63 percent annually, our sand consumption shows no sign of slowing. The UN’s Sand and Sustainability report suggests that the international community is beginning to recognise the scale of the problem. However, the sand crisis is still seen by many as a niche ecological problem rather than a global issue with wide-reaching consequences for the construction, glassmaking and technology industries. Until its trade is more closely monitored and regulated, sand will continue to be exploited, threatening the very building blocks of modern society.

Iberdrola: collaboration is key to decarbonising the economy and solving the climate crisis

Posted on by Max Tomlin

The world has woken up to climate change. Although scepticism endures in some quarters, the overwhelming consensus is that action – both in the scientific and policymaking spheres – is needed to tackle emissions and save our planet. From nations publishing ambitious net-zero targets to citizen-led movements like the school strike for climate, there is a clear acknowledgement that we need to take action now.

This realisation has been years in the making – arguably since the roots of the environmental movement in the 1960s – but we have considerably less time today to agree on what the answer is and how to implement it. One thing is clear: it will take the efforts of businesses, governments and citizens to have a meaningful impact on the climate. It’s no surprise, then, that the UN has labelled the 2020s ‘the decade of action’.

Although the Paris Agreement and the UN’s Sustainable Development Goals were drafted in 2015, the commitment shown by national governments so far has been largely disappointing. These proposals can play a vital role in reshaping how we use the planet’s finite resources, but they will only work if fully embraced.

It will take the efforts of businesses, governments and citizens to have an impact on the climate

The role of businesses is crucial, and many organisations are already taking action: Iberdrola, for example, was one of the first major energy companies to build its investment strategy around renewable power. Now, 20 years on, it is one of the world’s biggest renewable energy companies, operating across four continents. The fact that so many others are now following suit – recognising and responding to the climate emergency – is a welcome development.

Investing in the future
Every day seems to bring a new announcement, from pension funds divesting away from fossil fuels to companies incorporating environmental, social and governance (ESG) issues into their annual reports. But any measures must be meaningful and executed in the right way if we are to truly make a difference – words can no longer be a substitute for action.

First and foremost, we must make a clear distinction between meaningful corporate activity and greenwashing. A good example of meaningful activity is green finance and the use of green bonds. Unlike with other credit instruments, the funds obtained from green bonds are destined for projects that are sustainable and socially responsible. This could cover areas such as renewable energy, energy efficiency, clean transport and responsible waste management, among others.

When used properly, green bonds can be highly effective. Raising money for investment in this way – provided such bonds are rigorously assessed – supports the development of green industries and cuts carbon emissions. The popularity of green bonds is growing rapidly, with European issuers leading the way globally (see Fig 1).

In 2014, Iberdrola became the first Spanish company to issue a green bond and, two years later, took out the world’s first green loan to be issued to a utility company. Today, it is the leading private group in green finance, with a total €11bn ($11.9bn) issued via capital markets since April 2014. The funds obtained are used to finance or refinance projects that fulfil the environmental and sustainable development criteria set by both Iberdrola and Vigeo Eiris, an independent entity. Iberdrola is not unique in this enterprise: in October 2019, BloombergNEF reported that sustainable debt in global markets had surpassed $1trn.

A question of scale
Beyond financing the fight against climate change, we must strike the right balance between investing in new technology and getting drawn into clean energy dead ends. MarketsandMarkets expects the green technology and sustainability sector to be worth $28.9bn by 2024, up from $8.7bn in 2019. But while the Internet of Things, artificial intelligence and analytics, digital twins, cloud computing, blockchain, and weather-monitoring systems present huge opportunities, they also bring challenges. Put simply, not every new piece of technology will be a worthy investment – indeed, this can just as easily be the case with established technology as it is with new products.

We cannot overlook the key role electric solutions derived from renewable generation will play in decarbonising our society, especially if the current electrification of the economy continues apace. Beyond direct electrification, which is currently regarded as the most effective and efficient way of decarbonising the economy, many view hydrogen as a potential solution. The reality, though, is that it is only cost-effective for niche solutions that constitute around 15 percent of our energy system.

Although it will prove vital in some markets – such as maritime transport and high-temperature industry – hydrogen fuel is simply too expensive and inefficient to play a central role in the quest for a net-zero economy. If we view decarbonisation as a journey, hydrogen is the last mile, but there are still 99 miles ahead of it we can’t ignore. The limitations of this technology and others, such as carbon capture and storage, were highlighted in a recent report by think tank UK Fires, which noted that decision-makers should not assume they will be running at scale by 2050.

This is not to say there isn’t room for optimism. After all, the idea of harnessing the Sun’s energy to create electricity may have seemed more suited to science fiction once upon a time. Yet, according to BloombergNEF, solar prices have fallen by 85 percent since 2010, making it cost-effective and, therefore, a vital part of the green energy mix. Iberdrola has recognised the potential of this technology – despite being the world’s leading wind-power company, it has increasingly focused on solar energy, making it a major part of its 2018-22 investment strategy. In Spain alone, we plan to install 3GW worth of new solar and wind projects by 2022, rising to 10GW by 2030.

The power of hope
We must continue to seek out new technology that will have a significant impact – both in the ways we generate power and in the ways we distribute and use it. To achieve this, Iberdrola has established the PERSEO International Start-up programme, which is designed to fund the technologies of the future and support entrepreneurs within the electricity sector. So far, the company has invested over €60m ($64.9m) in start-ups around the world and now boasts eight companies in its portfolio. Through these investments, Iberdrola can identify technologies with the potential to transform the energy landscape and foster their growth by supplying expertise in renewables and global infrastructure.

Finally, we must continue to hold both businesses and global leaders to account when it comes to tackling global warming. This will mean applying a sceptical lens to certain activities and making sure that we are asking the hard questions: for example, are ESG initiatives resulting in meaningful changes to how businesses operate? What are the key enabling conditions for investing in emissions-cutting technology? And are senior executives being correctly incentivised to ensure their businesses play a part in achieving global climate goals?

All hope is not lost. The reality is that we have technologies at our disposal that will allow us to achieve a climate-neutral economy cost-effectively, providing a wide range of opportunities to create value and prosperity for society. With onshore wind fully mature and solar costs continuing to fall, emerging technologies are the final piece of the puzzle when it comes to replacing fossil fuels.

We must channel our efforts into ensuring that businesses play an active and productive role in the journey towards a net-zero economy, holding one another to account and supporting the start-ups that can take us closer to our emissions targets. As in the example of PERSEO, established industries must be prepared to work with the companies of tomorrow – without collaboration, we risk stifling progress.

The walking dead: how the rise of zombie firms is affecting the global economy

Posted on by Max Tomlin

Few people were surprised when the US retailer Sears Holdings filed for bankruptcy in October 2018. For many years, the Chicago-based company had been stumbling from one crisis to the next, amassing outstanding debt of around $5.6bn. When the firm was unable to pay a $134m tranche, its leadership decided to accept the inevitable and sought Chapter 11 protection, putting the jobs of 89,000 employees at risk.

Founded in 1893, Sears had been a pioneer of innovative retail practices, such as the issuing of merchandise catalogues and setting up department stores targeted at male customers. At its apogee in the 1980s, the company was the US’ biggest retailer – a position it ceded to Walmart in 1990. Hit by shifting consumer habits and the rise of online retailers, the company’s sales began declining, and in 2011, it ceased to be profitable.

Its chairman, the hedge fund manager Eddie Lampert, tried to prop up the company through share buybacks – an unorthodox tactic in the retail sector. Mark Cohen, Director of Retail Studies at Columbia Business School and former chair of Sears Canada, told World Finance: “Sears under Lampert’s control was never run as a legitimate enterprise. His modus operandi was and always has been to load the company up with as much debt as necessary to keep it solvent while he systematically stripped its assets for cash, largely for his own benefit.” This view was shared by Sears, which accused Lampert of looting the retailer’s prize assets in 2019. Lampert’s hedge fund, ESL Investments, has vigorously disputed these claims, calling them “fanciful”.

As in Europe and the US, the Chinese banking system has contributed to zombification

According to Ray Wimer, a professor of retail practice at Syracuse University, the firm’s soaring debt was an unbearable burden that contributed to its demise: “They were known for their appliances and hardware, things like automotive tools, refrigerators and batteries, and they started selling these brands off to raise capital to pay down the debt. That was the time when everyone in retail was heavily investing in launching their own brands, and [Sears was] getting out of it.”

Run into the ground
Sears is an extreme but characteristic example of what economists aptly call a ‘zombie’ company – an organisation that is unable to finance its debt with profits for an extended period. In an influential 2018 paper published by the Bank for International Settlements, economists Ryan Banerjee and Boris Hofmann examined data from 14 advanced economies. They found that the number of companies with zombie-like traits had been growing since the late 1980s, reaching on average 12 percent of all listed non-financial firms by 2016.

The term was coined in 2006 in a much-quoted paper examining the role the Japanese banking system played in the country’s ‘lost decade’ in the 1990s. Although Japanese policymakers have managed to tackle the problem since then, the term has come back in vogue due to the increasing number of highly indebted firms in Europe and North America – a trend that spiked after the global financial crisis in 2008. Definitions for what constitutes a zombie firm vary, but a widely accepted measure is an interest coverage ratio that has been below one for three consecutive years, notably for companies that have been operating for more than a decade. Many of them receive directly or indirectly subsidised credit, as in the case of many companies in East Asia and Southern Europe.

Some sectors are more vulnerable to zombification than others. Retail powerhouses such as Sears and Toys R Us – another US retailer that filed for bankruptcy in 2017 – struggle to adjust to the challenges facing the sector. The only reason they stay afloat is a combination of favourable financial conditions and sheer size, as suppliers are reluctant to pull the plug on them. As Cohen explained to World Finance: “Decades of excessive expansion of square footage have finally caught the industry in a deepening productivity crisis. There are too many undifferentiated stores (and malls), and creeping expense inflation concurrent with deflationary pressure on retail prices [has] created a deadly margin squeeze.”

Changes in consumer behaviour have also played a role, as e-commerce powerhouses such as Amazon and Alibaba have gradually killed brick-and-mortar stores. Cohen believes adjusting to the needs of the digital era comes at a cost: “E-commerce development comes with a whole host of challenging expense and margin issues because e-commerce sales are typically [made] at very… low prices, customer acquisition and fulfilment is increasingly expensive, and e-commerce returns are extraordinarily higher than returns from brick-and-mortar stores, further eroding margins.”

Many retailers resort to arcane financial tactics to survive until better days come. Sears is a case in point. “Lampert had his own hedge fund, and because Sears had his backing, they were allowed to take more debt,” a source familiar with the company’s demise told World Finance. “But are you going to trust the financial wizard who has that kind of reputation to save you?”

In many cases, what keeps zombie economies alive is political pressure. Arthur Guarino, an associate professor of professional practice at Rutgers Business School, told World Finance: “If left to free-market economic principles and ideas, many of these companies – perhaps 50 percent or more – would fail, resulting in high amounts of unemployed people.” For retailers, though, bailouts are out of the question. As Cohen explained: “Unless you are a farmer receiving billions of dollars [from US President Donald Trump’s] tariff-driven disruption payments, workers losing their jobs are out of luck.”

Low interest, high debt
Most experts agree that the monetary policies seen over the past decade have exacerbated the problem. Historically low interest rates coupled with quantitative easing (QE) may have helped developed economies avoid collapse during the 2008 financial crisis, but they have also created a credit bubble that is difficult to sustain.

Emre Tiftik, Director of Sustainability Research at the Institute of International Finance (IIF), a global association of financial institutions, told World Finance: “The low-interest-rate environment has been one of the main drivers of [the] rise [in zombie firms]. Easy access to cheap credit with longer maturities continues to support many firms that otherwise would hardly survive.”

Loose monetary policy also pushes investors to seek riskier opportunities, such as bonds issued by heavily indebted firms. “Low interest rates provided a foundation for more aggressive financial policies and ‘riskier’ behaviour on the part of issuers, as well as higher tolerance for these as a way to quench the thirst for yield on the part of investors,” Sudeep Kesh, Head of Credit Markets Research at S&P Global Ratings, told World Finance.

As in Europe and the US, the Chinese banking system has contributed to zombification

The result is a vicious cycle of soaring debt – low interest rates are necessary to sustain growth, leading to increasing numbers of zombie companies in Europe and the US. According to Cohen, many retailers have benefitted from this trend: “There is no question that low interest rates and QE [have] created an environment in which enormous sums of money have been easily and inexpensively deployed by private equity firms to acquire and load up retailers’ balance sheets with debt.”

To make things worse, the proliferation of zombie companies has caused what economists call ‘congestion effects’. By draining resources such as capital and workers, zombie firms make it more difficult for profitable companies to grow. Most economists agree that they distort competition, reduce productivity and hamper growth, although some question whether more productive companies would emerge if zombie firms in less dynamic economies, such as those of Southern Europe, were forced to shut down.

The rise of zombie firms partly explains the increasing rates of corporate debt globally (see Fig 1). According to the US Federal Reserve, US corporate debt reached $6.5trn last year, while non-financial corporate debt, loans and debt securities hit 74.45 percent of GDP in 2018, surpassing the figures recorded in the wake of the global financial crisis (see Fig 2). “The riskiest firms with low earnings have accounted for the bulk of debt build-up in recent years,” Tiftik said.

“While large US firms’ balance sheets look much stronger than they were before the 2008-9 crisis, the SME segment has become more fragile and remains largely exposed to sudden shifts in risk sentiment.” According to the latest IIF data, the picture is similar in the eurozone, where non-financial corporate debt stood at 107.9 percent of GDP in Q3 2019, close to the peak of 112 percent witnessed in 2015.

Many point to the banking sector as the main culprit, as banks with fragile balance sheets are reluctant to write off debt that would affect their liquidity and solvency ratios and bring them closer to regulatory scrutiny. “The problem is that unless banks are highly regulated by a central bank in how loans may be granted, they will continue to make high-risk loans,” Guarino explained to World Finance, pointing to the subprime mortgage crisis – during which high-risk borrowers were allowed to buy homes without sufficient scrutiny – as an example.

Currently, most investors expect central banks to intervene in cases of tighter financial conditions. However, Guarino doubts whether they will have enough leeway to avert a crisis: “When an economic recession or slowdown occurs, central banks have little recourse, such as further lowering interest rates. Rates will be so low that going down further either means hitting zero rates or perhaps going into negative territory.”

China syndrome
In China, zombie companies are partly responsible for the country’s soaring debt, which rose above 300 percent of GDP for the first time in 2019 (see Fig 3). According to Fitch Ratings, a record number of Chinese private companies defaulted last year – and the trend is expected to persist in 2020.

When the Chinese economy kicked off its export-driven boom in the early 1990s, many state-owned enterprises (SOEs) were closed or privatised. By the end of the 2000s, when the country had started to become competitive in world markets by building cost-efficient economies of scale, such pressure had already slackened. The tipping point came in the wake of the global financial crisis, when China launched a $600bn stimulus programme to avert the lack of demand that afflicted the US and Europe. The country’s banks were forced to pump the economic system with corporate loans, many of which were made to loss-making SOEs.

The result was a credit bubble, with corporate debt reaching 160 percent of GDP in 2018 – double its size from 2008. In 2009, Deutsche Welle, a German international broadcaster, estimated that more than 10,000 zombie companies were operating in China, around 20 percent of which received funding from the central government.

According to Dinny McMahon, a journalist and author of the book China’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans and the End of the Chinese Miracle, a key difference between western and Chinese zombie companies is the way the latter stay afloat: “Chinese zombies are kept alive by local governments, [which] provide subsidies and lean on banks to provide sufficient credit to ensure they remain viable. Local governments in China are driven to keep zombies alive because they are still capable of generating tax revenue, even if they’re operating at a loss.”

The Chinese Government is dealing with the problem through a series of measures, including forced mergers. According to McMahon, its supply-side structural reform programme has helped ease the problem by reducing industrial overcapacity. He told World Finance: “The government doesn’t want to see large SOEs collapse and it will do whatever is necessary to ensure they continue to function. However, the central government wants to do it as cheaply as possible.”

Last October, Chinese authorities announced they had cleared up more than 95 percent of zombie companies, intending to phase out the rest by the end of 2020. A reform plan launched in 2019 forbade central government agencies and local governments from providing financial support to zombie firms. However, some cracks have already started to appear in the system: in 2016, Guangxi Non-ferrous Metals Group, a state-owned metal producer, became the country’s first major interbank bond issuer to go through involuntary liquidation, with debts totalling CNY 14.5bn ($2.09bn).

Raising the dead
As in Europe and the US, the Chinese banking system has contributed to zombification. “China’s banks have been essential in allowing China’s zombie firms to continue operating,” McMahon told World Finance. “If banks weren’t willing to exercise forbearance on delinquent loans, or weren’t willing to capitalise unpaid interest when rolling over a loan, zombies would be forced into bankruptcy.”

Over the past few years, Chinese banks have increased disposals of non-performing loans, helping zombie firms to gradually reduce their debt burden. Although most banks have been able to recapitalise, a crisis might be looming, given the lack of transparency. “The official non-performing-loan ratio is still only about 1.86 percent,” McMahon said. “That grossly understates the extent of the problem. However, it means that the banks can clean up their bad loans gradually, without having to recapitalise in a hurry. The magic of the clean-up process that China is going through is this: it’s happening in slow motion.”

Several Chinese banks have been bailed out over the past four years. The People’s Bank of China took Baoshang Bank into receivership last year, while Hengfeng Bank was effectively nationalised through a subsidiary of the country’s sovereign wealth fund. Although most of these institutions are small, fears over the resilience of China’s banking system have not abated. According to Guarino, the government goes to great lengths to hide the problem for good reason: “China is said to have numerous zombie banks, but disclosure of such information would probably cause a panic that could ultimately result in the global bond and stock markets [witnessing] a serious decline in a relatively short time.”

In 2016, Beijing launched a deleveraging campaign to crack down on controversial practices that could put the country’s financial system in danger. For McMahon, though, this was “something of a misnomer”, given the programme’s inherent contradictions. He told World Finance: “China can’t afford to deleverage. The economic model means that a certain level of growth is only possible if the level of debt expands faster than the pace of economic expansion.”

Broader macroeconomic trends may also play a role. Last year, China recorded a growth rate of 6.1 percent, its lowest for nearly 30 years. As the country’s economy slows further – due, in part, to ongoing economic reforms and the COVID-19 crisis – debt is expected to increase. However, McMahon believes China’s banks have been raising new capital in preparation for writing off more bad loans: “We have no way of knowing whether the pace [at] which banks are disposing of their bad loans is greater than the pace at which new bad loans are being created. If the pace of new bad loan creation is faster, then the banks are only delaying the reckoning – 2020 will offer something of a litmus test.”

A meltdown of zombie firms will have a spillover effect on healthier parts of the economy

Apocalypse now
It is uncertain how the zombification of the world’s biggest economies will evolve. Some experts believe growing inflation will gradually kill most of these companies, but a more abrupt ending is also likely. Slowing growth in China, the global effects of COVID-19 or any geopolitical crisis may force central banks in the US and Europe to raise interest rates. The impact may be dramatic for heavily indebted companies. As Guarino explained to World Finance: “Many American corporations took full advantage of low interest rates in the last economic crisis… and loaded up on so much debt that a recession, perhaps even a mild one, could ruin their income statements and especially their cash flow statements.”

A meltdown of zombie firms will have a spillover effect on healthier parts of the economy, as low-quality borrowers that are more sensitive to economic shocks may find it impossible to refinance debt or raise new capital. Some think that we are still far away from the brink of a crisis similar to the one that gripped the global economy in 2008. As Kesh told World Finance: “Maturities are largely manageable in the near term, as monetary easing by central banks will continue to support favourable funding conditions. Further, 77 percent of the debt due through 2024 is investment-grade.”

However, for those who are less optimistic, such as Guarino, the worst may still be ahead of us: “The next recession could possibly reach the scale of the financial crisis of 2008-9, since the American economy will see the corporate debt bubble pop in a manner we have not seen for a while.”

How Kamakura Corporation’s robust simulation models are helping firms manage risk

Posted on by Max Tomlin

“Central bankers will fight the next recession with their backs against the wall. Will the weapons of the last crisis work in the next one?” asked a 2018 article from The Economist. It’s a difficult question to answer. Monetary policy works by increasing borrowing and spending, but for it to be successful, there must be creditworthy borrowers. With corporate debt at near-record highs and banks unwilling to lend during a downturn, investors may shrink their balance sheets rather than expand them when the next market decline comes.

The current low-interest-rate environment has made it easy for companies to meet their debt service coverage requirements, and they can easily roll over debt to increase working capital. But with such high levels of debt needing to be refinanced, just one key default or failure to refinance could spook markets.

With high levels of debt needing to be refinanced, just one key default or failure to refinance could spook markets

If monetary policy fails, will governments turn to fiscal stimulus, even in the face of growing deficits? We have no way of knowing. This creates something of a dilemma for risk managers. To determine what they should do, they must understand how the dynamics of risk management have changed in recent times.

At Kamakura Corporation, we employ risk managers with a broad spectrum of knowledge. We are also keen to make use of the latest technology in order to supply our clients with the most accurate, research-driven advice possible. While this doesn’t mean we know what the future holds, it equips us with a full appreciation of the facts so we can advise our clients of where risks are likely to emerge.

Market evolution
The field of risk management has undergone enormous change in the last 50 years, with the pace of transformation accelerating in the aftermath of the financial crisis. However, many practitioners came into the business after the worst of the credit crisis had passed and may not recall those lessons, especially trading desk staffers and lenders at banks and investment funds.

At Kamakura, we define risk management as the forecasting and management of the relative risks and returns of different strategies, both at the portfolio level (from the perspective of the CEO) and at the transaction level (from the perspective of the trader, portfolio strategist or lending officer). The best-practice definition of risk management has been summarised by Donald R van Deventer, Kenji Imai and Mark Mesler in their book Advanced Financial Risk Management.

They explain: “Risk management is the discipline that clearly shows management the risks and returns of every major strategic decision at both the institutional level and the transaction level. Moreover, the risk management discipline shows how to change strategy in order to bring the risk-return trade-off into line with the best long and short-term interests of the institution’s shareholders (in the case of public firms) or taxpayers (in the case of government-related entities).”

Given today’s economic climate and our position in the credit cycle, companies should consider how well equipped they are to deal with risk

At Kamakura, we believe that risk management is not limited by organisational or political boundaries. It encompasses all the traditional siloes of credit risk, market risk, liquidity risk, capital allocation, performance measurement, transfer pricing and regulatory compliance. It is equally applicable to banks, insurers, pension funds, governmental treasuries and any other entities that experience counterparty risk.

Reality check
One of the most significant risks the economy faces today is that, after a long period of complacency, a single event could trigger a flash crash, signalling a huge market shift. It is difficult to identify potential trigger events in advance, though many experts take credit for seeing them after the fact. The best defence against the risks posed by uncertainty is sound underwriting and portfolio management. This means using best-practice quantitative tools and working with companies that perform well, have liquidity that is driven by financial performance, and do not have excess leverage or significant refinancing risk.

In exuberant markets, it is easy for speculative businesses to achieve enthusiastic multiples without appearing to have significant refinancing risk. But to ground ourselves in reality, all we need to do is remember the case of WeWork, where even the best and brightest on Wall Street mistook a real estate firm for a technology unicorn. Quantitative analysis helps risk managers arrive at appropriate valuations in cases where emotions heavily influence investors’ thinking. Because it is objective, it avoids introducing the biases and irrational enthusiasm that lead to economic bubbles and crowd mania.

Negative rates pose risks on many fronts. For one thing, studies have shown that they fail to increase lending. In addition, many risk models cannot accurately account for negative rates. But they can have powerful effects, including possibly ending retail bank franchises or destroying the valuation of pension funds, which in many countries are already insufficient to deliver promised benefits. Negative rates encourage investors to stretch for yield, but if they overextend themselves on a massive scale, it could lead to sovereign default risk.

Risk managers often confuse compliance with sound capital management, but they cannot rely on regulators to ‘pull the punchbowl’ at the right moment. Instead, risk managers must be objective and quantitative. They must employ robust predictive tools utilising multi-factor models and Monte Carlo simulations to understand the risks to their portfolios and firms. Given today’s computational power, there is no excuse not to model as many simulations as possible to understand their implications in advance.

The tools for success
In the last year, we have seen a sharp increase in short-term default risks, while cumulative 10-year default expectations remain higher than they were prior to the recession (see Fig 1). Given today’s economic climate and our position in the credit cycle, companies should consider how well equipped they are to deal with risk.

Understanding the factors that drive movement in this relatively risk-free point in the cycle is an important start. The tools companies select will depend on the country. The yield curve for Japanese Government bonds, for example, can be analysed using a 10-factor Heath, Jarrow and Morton model. Kamakura has undertaken equivalent analyses for Australia, Canada, Germany, Singapore, Spain, Sweden, the UK and the US. In modelling interest rates, companies cannot be floored at zero, nor should they compromise by using workarounds for existing models, which can lead to misunderstandings and inaccuracy.

For default risk, the most useful measure is the Jarrow-Turnbill reduced-form model, which offers unrivalled accuracy. Incorporating years of research, it is one of the largest and most accurate default databases in the industry, combining financial, market and macroeconomic factors to generate a full-term structure of defaults.

From a simulation standpoint, businesses need a calculation engine that is fully integrated and allows an unlimited number of risk factors. A fully integrated solution supports business decisions, internal and external reporting, and regulatory reporting for credit risk, market risk, liquidity risk, interest risk, asset and liability management, performance measurement, portfolio risk, transfer pricing and risk-adjusted return on capital. Unlike black-box testing, an integrated solution allows for common assumptions across the firm and provides maximum transparency and flexibility. In the fund management and pension fund business, most portfolio managers are judged by comparing their risk-adjusted return with a predefined benchmark.

Equity markets tend to ignore bankruptcy risk when calculating indices, but the holder of a stock that defaults or is dropped from an index suffers a large loss. Therefore, even if you are not running a credit investment portfolio, you should have best-practice tools to manage credit risk.

Even the most astute risk managers don’t know what the future holds. To provide the guidance our clients need and expect, we must employ best-practice tools to evaluate risks and returns at both the portfolio and transaction level, and understand how to either hedge or avoid them. Using robust simulation models and having the discipline to avoid the large number of biases that traditional measures introduce are essential steps that today’s risk managers must take to succeed.

Sweet nothings: what West Africa’s COPEC plan means for cocoa farmers

Posted on by Max Tomlin

The Aztecs were one of the first civilisations to cultivate cocoa, drinking it as a thick, bitter liquid. They believed the beans had medicinal properties and were a gift from Quetzalcoatl, the god of wisdom. Although it’s lost much of its spiritual significance since then, cocoa remains a coveted foodstuff. Unfortunately, the indulgent image the commodity evokes in modern consumers is a far cry from the bleak reality of West Africa’s cocoa farms.

The global cocoa supply chain is one of vast inequality. Roughly two thirds of the world’s cocoa comes from just two countries (see Fig 1) – Ghana and Côte d’Ivoire – but cocoa-producing nations have traditionally captured just 12 to 13 percent of the industry’s $100bn-plus value chain. This disparity hits West Africa’s two million farmers the hardest: for their backbreaking labour, the average African farmer makes just $0.78 a day from cocoa, according to the Cocoa Barometer 2018. A recent Fairtrade Foundation report found female cocoa farmers are paid even less, taking home as little as $0.23 per day.

To bring cocoa farmers out of poverty and give them a more equitable share of the profits, Ghana and Côte d’Ivoire announced in June 2019 that they would be hiking up the price of their cocoa. “We will not continue to be victims or pawns of the global cocoa industry that is dependent on the work of our farmers,” Ghanaian President Nana Akufo-Addo said after the proposal was announced.

From October 2020 onwards, every tonne of cocoa from Ghana and Côte d’Ivoire will come with a $400 living-income premium. Whether farmers will benefit from the move remains to be seen.

A bitter taste
International chocolate companies have little choice but to accept the premium. “Because of the size of these two countries and the scale of their production, it is pretty much impossible for people to avoid,” Jonathan Parkman, Joint Head of Agriculture at Marex Financial, explained to World Finance. “You can’t substitute two thirds of the world’s cocoa for something else. Certainly not in the short term.”

Publicly, chocolate brands have backed the move. Barry Callebaut and Nestlé confirmed they would pay the premium, with the latter commending the decision in a statement. It read: “The [living-income differential] will help improve farmers’ living income and complement all our efforts to improving the lives of farmers.” But behind closed doors, they may have been shaking their fists. For confectioners that rely on West African cocoa, the new premium means a spike in production costs. Martin Hug, CFO at Lindt & Sprüngli, warned in January that the whole industry faced higher input costs as a result of it.

“To put it into perspective, [from] where the market was at the time that [the premium] was announced, that’s something like a 20 percent rise,” Parkman said. “The total extra cost for the cocoa supply chain is about $2bn. Those are costs that the industry will have to meet. Now, that will, I imagine, eventually find its way down to the consumer.”

As Parkman explained to World Finance, the $400 premium makes Ghanaian and Ivorian cocoa a riskier investment. Chocolate manufacturers, processors and traders use the cocoa futures market to hedge their bets, but these companies can’t hedge the new premium and, consequently, can’t mitigate its risk.

The long maturation period of the cocoa bean means that families can experience long stretches with little to no income

“Previously, if you’d been transacting with Côte d’Ivoire or Ghana, the premium above the futures price that you’ve been asked to pay would be relatively small, and consequently manageable,” Parkman explained. “This is escalating that risk dramatically.” As a result, Ghana and Côte d’Ivoire’s premium could call into question how effective the use of the futures market is in mitigating risk within the industry.

Chocolate’s dark side
To understand whether or not the premium could meaningfully improve farmers’ profits, it’s important to first understand why poverty is so endemic to the West African cocoa industry. According to the International Cocoa Initiative, the majority of farmers in Ghana and Côte d’Ivoire are self-employed, operating farms of two to five hectares. These small-scale farms have relatively low yields, providing an average of 0.42 tonnes of cocoa per hectare. Lower yields mean slimmer profits for farmers.

At the same time, the long maturation period of the cocoa bean means that families can experience long stretches with little to no income. Unable to afford to pay adult workers, many farmers resort to using child labour. The Bureau of International Labour Affairs, an operating unit of the US Department of Labour, estimates that two million West African children engage in hazardous work on cocoa farms, including slicing bean pods open with machetes and carrying heavy sacks of cocoa.

One 2019 study cited by The Washington Post found that raising the amount paid to farmers by 12 percent could eliminate the worst forms of child labour in Ghana, but farmer advocacy groups aren’t convinced the new premium will yield such results. Sako Warren, Secretary-General of the World Cocoa Farmers Organisation, told Lumina Intelligence in 2019: “We don’t think having a fixed ceiling is the answer… We are more concerned about how farmers will get that money.”

Moreover, even if the premium can increase farmers’ wages, it is only a short-term solution to a systemic problem. “This doesn’t address the basic issue that exists within the cocoa chain, which is that most cocoa that’s produced in the world is produced from smallholders and the yield is relatively low,” Parkman explained to World Finance. “So this isn’t doing anything to prevent the relatively poor use of land to produce a product. What we really need to see is expanding yields, so we’re not using more virgin forest or rainforests or anything like that.”

No more sugar-coating
At a recent cocoa industry gathering, Ghanaian Vice President Mahamudu Bawumia said he was excited to create what he called ‘COPEC’ – an intergovernmental cocoa organisation inspired by the global oil cartel OPEC. With only two members, COPEC is certainly smaller than OPEC, which has 14 members, but it is a commodity cartel nonetheless.

Unfortunately for Ghana and Côte d’Ivoire, the success of such groups has been limited at best. In the 20th century, several cartels tried – and failed – to control the global price of certain products, including the International Tin Council (ITC) and the International Coffee Agreement. OPEC is considered to be more or less the only success story.

Mark LeClair, a professor of economics at Fairfield University and author of International Commodity Markets and the Role of Cartels, told World Finance that a group must fulfil several criteria to be considered a cartel. First, it should have only a handful of producers to facilitate negotiations. “Coffee, with 50 producing nations, failed this condition,” LeClair pointed out.

A cartel should also have significant barriers to entry, while the commodity itself should be non-perishable, without any close substitutes. “[Otherwise,] if I raise the price of cane sugar, as the sugar cartel did, I end up stimulating the production of a substitute, beet sugar,” LeClair explained. Lastly, the product needs to be homogenous, with only a few different ‘grades’. “Note that cocoa is homogenous, there are a very limited number of major producers, climatic requirements act as a barrier to entry, there are no good substitutes, and it is non-perishable in the near to medium term,” LeClair said. “Hence, cocoa is a good candidate for a cartel.”

But it could still fall victim to the issues that toppled previous such bodies. The ITC was established in the mid-1950s to regulate the price of tin. Member states bought inventory when prices rose and sold it when prices fell. However, a sustained period of high prices enabled Brazil, a non-member, to boost production and flood the market. The ITC ultimately went bankrupt in 1985.

Analysts warn the same could happen to COPEC. “If you get a big increase in farmer income, you’re going to get a correspondingly big increase in production,” Parkman told World Finance. “Introducing an arbitrary premium for [Ghanaian and Ivorian] cocoa is going to incentivise people to use other cocoas as well, for which they’ll pay more money. That’s going to create an incentive globally to produce more cocoa. And so down the road – maybe [in] two to three years’ time – we’re probably looking at significant oversupply. And that could cause a bust scenario.”

In the short term, the premium could positively impact farmers’ wages, but it’s unlikely to tackle the industry’s root problems. What’s more, it could create new issues. On the one hand, the rise in prices could overstimulate production and flood the market, leading to a global price crash and spurring deforestation. On the other, a long-term gap between the floor price and the prices in competing countries could see Latin America – which accounts for almost 20 percent of the world’s cocoa – swoop in and increase its market share.

Another important factor to bear in mind is the political motivation behind this decision, with both Ghana and Côte d’Ivoire holding general elections later this year. As farmers represent a large proportion of the countries’ respective voter bases, the premium may be first and foremost an electoral bid, one that won’t necessarily bring meaningful change to the lives of those it promises to help.

How to adopt the best corporate governance practices in a privately held company

Posted on by Max Tomlin

Corporate governance has become increasingly important to all businesses, regardless of their industry. Although ethical concerns in the financial services sector have sometimes been undermined by a focus on profit, the corporate governance debate has grown louder as the societal impact of corporations has grown, touching on issues such as the purpose of business, the role of board members and shareholder rights.

In 2018, Canadian payment services provider Interac completed a corporate reorganisation process that brought its product development and research arm, Acxsys, and its non-profit entity dealing with transactions, Interac Association, under a single for-profit brand. The restructuring promises significant changes to the firm’s governance structure. World Finance spoke to the company’s corporate governance team about what the amalgamation means for the future.

Interac’s board members bring their industry insights, business experience and individual perspectives to bear while acting together in the best interests of shareholders

How has Interac’s reorganisation affected its governance structure and approach to corporate governance?
As a result of the amalgamation, Interac now has a hybrid board of directors that consists of four independent directors, eight nominee directors and our president and CEO. Our board members bring their industry insights, business experience and individual perspectives to bear while acting together in the best interests of our shareholders, forging a new path that reinforces the position of Interac as an agile, forward-thinking leader in the evolving payments ecosystem. To maximise the efficiency and effectiveness of our board operations, five board committees and a board-level advisory committee were established in 2018.

While our approach to corporate governance continues to embody the principles of transparency, integrity and accountability, the 2018 reorganisation allows us to create more strategic value for our investors – and the broader community – with a more flexible and well-rounded governance framework that follows the best industry practices.

What is the mandate of the corporate governance team and what kind of role does it play in elevating the organisation?
The corporate governance team’s mandate is to establish the frameworks that promote good governance. As part of this, we implement effective policies, programmes and mechanisms, work in collaboration with the board and management to ensure the company operates ethically and responsibly, and maintain open lines of communication.

Further, we provide comprehensive reporting to clients and shareholders, buttressing all of the above with corporate programmes and initiatives that elevate the corporate profile.

How does Interac instil shareholder confidence and generate shareholder value in the absence of a stock price?
Interac’s history as a cooperative venture among major financial institutions is core to the organisation’s robust corporate governance model. Shareholder value is generated and sustained by way of ensuring open lines of communication and sharing information through various channels, including annual general meetings, corporate governance reports and a digital portal for comprehensive and timely reporting.

Interac’s corporate programmes and contributions to the community at large drive shareholder value and enhance brand reputation

The organisation’s corporate programmes and contributions to the community at large also drive shareholder value and enhance brand reputation. These channels operate in parallel with board-level advisory committees, which allow management to skilfully balance the diverse perspectives of shareholders when seeking out high-value opportunities, including complementary and strategic acquisitions.

The corporate secretariat oversees effective and transparent communication between the board, management and shareholders, and, in cooperation with various other departments across the organisation, works to ensure our institutional investors – and others who might be interested in the company’s viability and financial stability – remain informed.

As a privately held company, how does Interac exhibit best corporate governance practices?
We strive to put ourselves on par with publicly traded companies’ corporate governance practices by providing comprehensive reporting that is reliable, consistent and transparent. As such, we adopt an integrated approach to corporate governance with clearly defined protocols, mechanisms and published policies to ensure a strong, viable culture of transparency, integrity and accountability at every level of the organisation.

At the board level, for example, we have a governance committee that oversees the organisation’s corporate governance matters, business conduct and ethics. At the corporate level, we have five divisions under the corporate governance umbrella (investor relations, board operations, ombudsman, enterprise compliance, and diversity and inclusion) that form the operational foundation of our activities. Relevant policies and practices are reviewed annually – at the very least – to enhance our governance structure and practices in the evolving corporate governance environment.

In what way does Interac ensure and protect the rights of minority shareholders?
By encouraging effective communication between Interac’s board, management and shareholders, our corporate governance team aims to increase transparency and foster positive development that aligns with our shareholders’ interests. While we have implemented a variety of tools to enhance all of our shareholders’ experiences, we have also put certain governance practices in place to ensure the views of our diverse shareholder body are heard.

By encouraging effective communication between Interac’s board, management and shareholders, our corporate governance team aims to increase transparency

One way we’ve done this is through the establishment of our board advisory committee, which comprises 10 of Interac’s smaller clients. This committee meets twice a year and is a forum dedicated to soliciting the views of our minority shareholders on a variety of topics, including product development and strategic infrastructure activities. In turn, views expressed at this committee are reported to our board of directors, ensuring that the views expressed by our smaller shareholders are heard at the highest level of our management.

What were Interac’s key corporate governance accomplishments in 2019?
In 2019, we established two additional service-level advisory committees to boost our organisation’s expansive client engagement service and enhanced our enterprise compliance function through a mandatory enterprise-wide training programme, which was customised to address specific business needs. Moreover, we introduced annual business unit self-assessments, respondent interviews and executive attestations, as well as a successful annual compliance assessment for the organisation.

The formalisation of our investor relations function through the launch of new information channels, including a virtual data room, detailed shareholder reporting and an annual meeting, should also improve transparency. Meanwhile, the establishment of the ombudsman’s office, which successfully works with cross-functional teams both internally and externally, served as a vital resource in conflict management in 2019, coordinating resolutions for several issues raised by the public while fielding inquiries from members of parliament and other government bodies.

The corporate governance team at Interac comprises Kikelomo Lawal, Chief Legal Officer, Ombudsman and Corporate Secretary; Victoria Seth, Senior Legal Counsel and Assistant Corporate Secretary; Isabel Lee, Head of Enterprise Compliance; Saleha Ali, Legal Counsel and Senior Governance Advisor; Isabelle Hon-Lee, Corporate Governance Lead; Genna Vonasek, Corporate Governance Senior Specialist; and Aziza Ibrahim, Executive Assistant, Corporate Secretariat.

Harnessing the power of new technologies – why banks must take advantage of open banking

Posted on by Max Tomlin

It’s easy to forget just how rapidly technology has progressed in the space of a single decade. Today, virtual assistants can schedule appointments, while smartwatches monitor our sleep patterns and voice command technology turns off our house lights. The lives of consumers have changed in small but extraordinary ways as investments in disruptive technologies have grown exponentially.

Banking isn’t immune to these changes. Advancements in technology have increased demand for accessible and convenient solutions that meet consumers’ banking needs. The industry is aware of a new disruption that is brewing – one that will once again transform the industry over the coming years.

Across the globe, we are seeing a growing appetite for open banking models. In 2016, the EU passed the Second Payment Services Directive (PSD2), which requires banks to supply customer data to third-party providers to increase competition in the payments industry and open it up to non-banking entities. The Monetary Authority of Singapore has also developed a playbook for operating application programming interfaces (APIs), which third-party developers use to build open platforms. In the Middle East, the Central Bank of Bahrain has licensed Tarabut Gateway, the region’s first open banking platform, which allows customers to connect their account to any bank in Bahrain and provides a consolidated view of their financial information.

Open banking promises an improved customer experience, new revenue streams and a sustainable service model for underserved markets

A new approach
For those in the industry, the benefits of open banking are obvious. It promises an improved customer experience, new revenue streams and a sustainable service model for underserved markets. According to PricewaterhouseCoopers, API-based architecture can enhance integration with third parties, making it easier for banks to support a portfolio of product options – even those provided by partners. Banks can use their platforms to make customer data available to non-bank third parties, such as retail stores. This gives them an incredible opportunity to expand their ecosystems to cater to the retail industry.

Banks such as Standard Chartered have capitalised on this increase in consumer demand by introducing more than 100 APIs and publishing a comprehensive standards catalogue that is aligned with international API regulations. The bank is also building on its API investments to further its sustainable banking and financial inclusion goals. Standard Chartered has partnered with Ant Financial to offer a new digital cross-border wallet remittance service. Through mobile payment platforms such as AlipayHK in Hong Kong and GCash in the Philippines, the service enables 180,000 Filipino workers in Hong Kong to send money to their families in real time, securely and at a low cost.

Standard Chartered has developed its own open banking platform, aXess, which drives connectivity between developers, businesses and fintech firms. It was created to service an open community and facilitate the development of cutting-edge technologies. The interface promotes the co-creation of ideas by supporting new business models and sharing best practices, capabilities and tools. By opening up our sandbox, we are encouraging developers to refine their services and innovate for clients in our test environment. APIs on our platform include services targeted at corporate banking and retail banking, such as forex, retail products and custody services.

Protecting the customer
While banks have expressed their support for open banking, the general consensus is that there should be a level playing field with regards to data sharing. If fintech players are able to access data from banks, then banks should have access to the data that fintech players obtain.

One concern regarding the adoption of open banking is cybersecurity. Fintech firms that use APIs and do not require human authorisation at a transactional level would be able to access proprietary data from banks, thereby significantly increasing the risk to the institution. Regulators must recognise this challenge and insist on robust authentication mechanisms that ensure customers have consented to their data being used.

Awareness of data security can vary between consumers, meaning customer protection should be prioritised to ensure the long-term sustainability of this initiative. Because many fintech firms are not regulated and could have short lifespans, there must be clear guidelines on permission, use, perpetual storage and destruction of data to ensure the security of institutions and consumers.

Government authorities are beginning to apply these considerations to their legislative agendas and have proposed new measures pertaining to data restriction. This is particularly true in the EU, where there has been much discussion around data regulation. The European Commission has expressed its support of legislative action that pushes companies to share and pool their data. With the aim of limiting the formation of tech monopolies, these revisions will likely result in a more balanced data landscape for players of all sizes.

Trust the system
Consumers are already showing an interest in open banking. A 2017 Deloitte report on the topic found that 58 percent of consumers with a mobile banking app could be persuaded to switch to a mobile-only bank. The report also found that consumers are open to the idea of accessing their banking services through a third-party interface: 49 percent would trust a digital payments provider with this, while 43 percent would trust a traditional retailer.

By harnessing the power of new technology, open banking can serve as an accurate instrument in the undertaking of banking activities. In turn, the difficult task of digitalising a bank’s operations can be facilitated through the use of an API-based infrastructure, similar to the one implemented by Standard Chartered. The bank has launched a series of digital-only banks across eight markets in Africa, the latest of which was successfully implemented in Nigeria. In under a year, Standard Chartered has seen the number of accounts opened via its digital bank grow by over 150,000.

Given the demand from consumers, the rise of subscription services and the need to digitalise, the bank has enabled clients to onboard in under 15 minutes by using API technologies to provide services such as QR codes, peer-to-peer payments, loan and overdraft facilities, instant fixed deposits, and wealth management solutions for the African market.

 The greatest benefit of open banking is having the power to enhance the development of service platforms

While there is no one-size-fits-all approach to open banking, we do know that it will create new ways of doing business. Thanks to this medium, retailers from car dealers to fashion brands will be able to showcase their products to bank customers through a digital marketplace, easily accessible via the bank’s mobile application.

However, the greatest benefit of open banking is having the power to enhance the development of service platforms. It also serves as a way to foster collaboration between fintech firms and banks, as no single entity is able to provide a comprehensive catalogue of the broad offerings customers have shown a demand for, such as retail, mobility and delivery services.

As such, Standard Chartered has pioneered the implementation of disruptive banking technologies across its global operations. The bank has introduced various retail banking products that aim to satisfy the demand from Africa’s digitally savvy population. A great example of this is SC Keyboard, a tool that allows customers to access a variety of financial services from any social or messaging platform.

As technology solutions continue to impact the finance industry, open banking will further evolve. Additionally, as industry disruptors fight the lingering trust issues around data and privacy, banks that have established their services as trustworthy and reliable over the years will be in a strong position to innovate and meet consumer expectations.

Digital banks and physical branches will begin to look like retail outlets powered by the latest technologies and driven by consumer convenience. While other technology companies, retailers and social media outlets are looking to capitalise on the growing demand for convenience, banks – through their conventional business streams – will have the upper hand, having already won the trust of consumers. However, as technological innovation reshapes the industry, the future success of banks will depend on their ability to champion openness in their business models.

FBNInsurance: digital innovation can help build trust in the Nigerian insurance industry

Posted on by Max Tomlin

With a young population and a rapidly growing middle class, Africa presents huge opportunities to insurers. But so far, this potential has been relatively untapped. In 2016, the whole continent of Africa represented only 1.5 percent of the global insurance market.

The insurance penetration rate is particularly low in Nigeria. There are a number of reasons for this, but perhaps one of the most significant is a lack of trust in insurance providers. Many people in Nigeria still struggle to believe that their claims will be paid quickly, fairly and accurately.

FBNInsurance believes the way to warm Nigerians to the concept of insurance is to build trust and enhance transparency through digital innovation. World Finance spoke with Val Ojumah, Managing Director and CEO of FBNInsurance, about how the company plans to make this a top priority over the coming years.

This year marks FBNInsurance’s 10th anniversary. How will the company celebrate? How has the life insurance space changed in this time?
In the last decade, the Nigerian insurance landscape has seen a significant shift away from the oversaturated world of corporate insurance and towards the retail space, where there are enormous opportunities for insurance providers.

The distribution strategy has also changed from a completely broker-dependent market to a multichannel system, where insurance products are distributed through various merchant representatives. Finally, we are finding that more products released to the market truly resonate with Nigerians. We are also seeing an increase in consumer awareness of insurance and its benefits.

To commemorate 10 years in the insurance industry, this year we are planning a host of celebratory activities with our numerous stakeholders who have contributed to our success story over the decade.

The Nigerian insurance landscape has seen a significant shift away from the oversaturated world of corporate insurance and towards the retail space

In 2019, FBNInsurance became the most profitable life insurance company in Nigeria. How did it achieve this?
The company achieved this by designing and marketing products that add value to the lives of Nigerians and by managing our costs very efficiently. At the same time, we maintained robust investment in our insurance funds. We were aware of the huge opportunities in the Nigerian insurance landscape and chose areas that were both high volume and low cost.

What innovations has FBNInsurance introduced recently and how have they improved the company’s services?
Last year, we rolled out our internal financial advisor app to two thirds of our 3,000-strong agency workforce. We positioned this platform to be more than just another sales tool – rather, we wanted it to act as a professional aide to our financial advisors. This ensures that when they are out in the field, they can give the best advice to customers and recommend products that actually fit their individual needs.

We have built artificial intelligence into our financial advisor app so that it has the capacity to recommend cross-selling opportunities based on data we already have on the customer. The app also provides a sales tracker feature for the advisor and their manager, as well as an appointment tracker and other messaging features. Meanwhile, customers can benefit from instant payment notifications and multiple processing options.

The app has great potential to transform our processes for the better. It reduces bureaucratic inefficiency by eliminating paperwork that can easily get lost in transit. Now, the underwriter can instantly receive a proposal, meaning there is a faster turnaround for policy conversion. The app will also allow us to operate with greater transparency.

Are there any digital technologies that will continue to disrupt and evolve the insurance market in the coming years?
The biggest challenge we have to overcome in the industry is the lack of transparency between insurance providers and customers. It’s crucial that we enhance transparency across all aspects of our business model, from product features and terms and conditions to payment arrangements and policy statuses.

Digital technology is helping us achieve this. Through our online platforms, we can show customers that we will fulfil our promises to them by insuring their most valued assets and safeguarding their future. In this way, customers don’t have to simply take our word for it – they can verify our performance for themselves. This can be done anywhere, at any time and by any digital means, from quick codes and WhatsApp to other web and mobile apps. Even calling one of our customer service centres has become a completely new experience: thanks to technological advances, we know exactly who the caller is before they say a word.

Through data collection and artificial intelligence, these platforms allow us to better understand our customers and their preferences. This helps us personalise our interactions with clients and ensure that our products are relevant to them. In this way, we fulfil our ambition to secure the future of Nigerians and their families. At FBNInsurance, we truly understand that the future is digital, so we have made it our mission to embrace the latest technological innovations to drive success.

To what extent are environmental risks a consideration for your employees?
Environmental risks and the impact they could have on our employees are a major concern to our organisation. Because of this, we’ve included action plans for dealing with environmental exposure in our enterprise risk management framework.

What is the current state of Nigeria’s insurance sector? How do you expect it to achieve further growth?
In Nigeria, insurance penetration has remained at less than 0.5 percent for over two decades. This positions the Nigerian industry among the least-penetrated insurance sectors in Africa (see Fig 1). While this is an indication of the current weak performance of the country’s insurance industry, it also highlights Nigeria’s potential, particularly for companies that are willing to exploit opportunities in the retail segment.

Awareness of the value of insurance is still relatively low in Nigeria. This inevitably limits the demand for products and services offered by insurance companies. Furthermore, Nigeria’s National Insurance Commission has identified that some cultural and religious beliefs act as a hindrance to the uptake of insurance. In fact, some consider them to be critical factors in the underdevelopment of the insurance sector.

In the past 10 years, FBNInsurance has emerged as a leading life insurance company in Nigeria, becoming one of the top three life insurers based on market share

Consequently, an aggressive consumer education campaign is a strategic priority for the insurance sector. From a regulatory perspective, new recapitalisation plans are expected to result in the emergence of stronger insurance companies that would be capable of underwriting bigger risks.

Can you talk us through FBNInsurance’s strategic outlook for 2020-23?
In the past 10 years, FBNInsurance has emerged as a leading life insurance company in Nigeria, becoming one of the top three life insurers based on market share. Our strategy is based on the fundamental premise that insurance penetration in Nigeria, which still stands at less than one percent, must be improved.

Because of the low penetration rate, the opportunities for first-time buyers of life insurance are huge, and the retail market is open to all players that possess the capabilities and stamina for it. Therefore, between 2020 and 2023, we will strengthen our capabilities in this regard, with a view to reinforce our foothold in the retail segment.

Specifically, our focus will be on the following strategic initiatives: sustaining agency expansion and enhancing productivity; establishing bancassurance partnerships with key banks; and leveraging digital technology to enhance our operational efficiency and service delivery.

Could you explain some of the key differences between your corporate and retail products?
Given that FBNInsurance is a retail-focused insurer, meaning most of its offering is developed for the retail market. These products are designed to address the particular needs of various types of retail customers while taking into consideration the specific customer’s income level. From time to time, we conduct research on the evolving needs of Nigerians, with a view to develop groundbreaking products based on what they tell us.

The primary corporate product of FBNInsurance is group life insurance. This is a mandatory life insurance product that companies with five or more employees are required to purchase on behalf of their workforce.

How important is corporate social responsibility at FBNInsurance?
Our corporate responsibility and sustainability strategies reflect our vision of becoming Nigeria’s first choice in wealth creation and financial security. This is an undertaking that can only be achieved by nurturing strong long-term relationships. This is a core value of the company and something that influences the way we go about our work. It means not just engaging with our stakeholders and striving to meet our customers’ needs, but also cherishing our workforce and the communities in which we operate.

The business of insurance revolves around trust. As a leading insurance company, it is imperative that we inspire trust and confidence in everything we do. It is with this in mind that we move into a bright new decade in Nigeria’s insurance industry.

Elizabeth Jack-Rich leads Elin Group’s philanthropic efforts in Nigeria

Posted on by Max Tomlin

Few people go from being a bus attendant to running a multimillion-dollar company – but then again, Dr Elizabeth Jack-Rich isn’t like most people. As founder and CEO of Elin Group, Jack-Rich has helped her organisation establish a robust presence across a diverse range of sectors while never forgetting its singular purpose: to establish value for its customers, clients and shareholders.

Admirably, Jack-Rich has not forgotten her roots: even though her success has made her one of the most highly regarded business leaders in her native Nigeria and beyond, she remains passionate about giving back to others so they can benefit from the same opportunities she has enjoyed.

The Elizabeth Jack-Rich Aid Foundation (EJ-Aid), a non-profit entity that supports numerous worthwhile causes, manages Elin Group’s charitable undertakings. These philanthropic endeavours have grown as the group has made several exciting moves in the corporate world. Whether it’s in real estate, power generation, agriculture or aviation, Elin Group is committed to innovation that yields dividends for investors and Nigerian society.

Humble beginnings
As Nigeria continues to establish itself on the global stage, a young entrepreneur with a dream and the tenacity to bring it to fruition is working to empower the nation’s women and youth. Jack-Rich, the embodiment of Nigeria’s next generation of leadership, is on a mission to bring shared prosperity to her fellow citizens. Hailing from a humble background and shaped deeply by her faith, Jack-Rich has embraced entrepreneurship and charity as the core tenets of her life, creating an award-winning charity that supports numerous initiatives focused on reducing poverty and inequality.

Elin Group is committed to innovation that yields dividends for investors and Nigerian society

Born in 1993, Jack-Rich entered the world at a time of great transformation in Nigeria. At the start of the decade, rising oil prices had provided a much-needed economic boost to the country and, in 1999, Nigeria finally transitioned to democratic rule after decades of military dictatorships. Democracy brought with it further economic benefits, with the country’s GDP per capita rising rapidly between 1999 and 2008 (see Fig 1). While such significant change can prove daunting to some, it also creates opportunities for those who take risks and show a willingness to make a difference. It was in this climate that Jack-Rich began to make her mark.

After graduating from the University of Applied Science and Management, Porto-Novo, Jack-Rich embarked on an entrepreneurial journey with Elin Group. Under her stewardship, the privately held conglomerate has grown its presence in numerous sectors, including energy, real estate, agriculture and aviation, among others. With footprints across West Africa and the US, Elin Group’s investment portfolio touches several facets of Nigerian society, drawing on its core operating values of integrity, mutual respect, customer service, innovation and safety.

According to Princess Dato’Seri Maria Amor, founder of We Care for Humanity and creator of the Global Order of Dignitaries and Philanthropists awards, these values are embodied by the group’s founder and guiding light: “Jack-Rich has a ferocious drive in helping the people of Nigeria, uplifting the African continent while doing so. The enthusiasm she has for the sake of people is contagious and powerful.”

Safety first
Despite only being formed in 2018, Elin Group has already had a significant impact on Nigeria. In terms of health, safety and the environment (HSE), all of the group’s projects are guided by the highest regulatory standards, creating the safest possible workplace for employees, contractors and visitors.

To create an environment in which everyone feels safe, Elin Group has adopted a proactive approach to risk management. By identifying potential problems ahead of time, the organisation can ensure the long-term wellbeing of all its stakeholders. Effective risk management doesn’t only keep employees safe, either: assessing, managing and preventing risk gives Elin Group better access to data regarding its work processes, improves communication channels and enhances resource allocation. Moreover, risk management can help with an organisation’s bottom line and prevent any nasty surprises from surfacing.

To achieve its HSE targets, Elin Group has formal procedures in place to identify potential workplace hazards, such as situations and substances that might prove harmful to its staff. Consequently, all relevant personnel receive training in emergency preparedness, accident prevention, accident response and the use of protective equipment.

“By virtue of the nature of the businesses we operate in – be it aviation or oil and gas – the health and safety of our staff, clients and all other stakeholders cannot be compromised,” Jack-Rich told World Finance. “We understand that a lapse in judgment or one careless moment can lead to a fatality. This is why we ensure that we stay compliant with every health and safety policy, as well as all government and statutory regulations. Safety is a core value for us – we have maintained an accident-free workplace since inception and recorded zero downtime due to accidents.”

Protecting employees is part of a broader ethos that Jack-Rich has adopted throughout her career. Although she would not be a successful entrepreneur without a clear understanding of business, finance and hard data, she is careful to remember the importance of maintaining a human touch.

Reaching for the sky
In a monumental step, Elin Group recently announced a deal with Canadian aircraft manufacturer De Havilland Canada, signing a firm purchase agreement to acquire three rebranded Dash 8-400s. The Dash 8-400 promises a significant productivity advantage over other aircraft, as it can hold more personnel than competing 76-seat turboprop carriers and boasts better fuel economy than larger aircraft. According to the De Havilland website, the Dash 8-400 offers over $8m in additional value per aircraft.

Commenting on the deal, De Havilland’s chief operating officer, Todd Young, touched upon the importance of the African market for his firm: “We are delighted to welcome Elin Group to our family of customers and to announce this order – the second booked since the relaunch of De Havilland Canada in June [2019].

“Propelled by the excitement generated by the transition of the Dash 8 aircraft programme to De Havilland Canada, our sales and marketing teams are focusing their attention on building a pipeline of orders to further increase our backlog and reconfirm the Dash 8-400 aircraft’s position as the world’s most advanced and most productive turboprop. Africa continues to be a showcase market for the Dash 8-400, where the aircraft’s speed, hot and high performance, and higher payload capabilities bring significant advantages to new markets within the continent.”

From Elin Group’s point of view, the purchase agreement is a savvy move by Jack-Rich that supports the organisation’s work across numerous industry sectors. Put simply, the ability to transport employees across Nigeria in a fast, reliable and cost-effective manner will prove hugely important to future business developments.

“As a dynamic entrepreneur and a leader with a vision, I am profoundly pleased that De Havilland Canada and Elin Group Nigeria have come together to form a formidable business relationship that will enable Elin Group to deliver [a] cutting-edge service to customers in the aviation sector,” Jack-Rich said at the time of the purchase. “It has always been my vision to collaborate with a company of high technical and innovative repute to see the actualisation of my vision to broaden services in different economic facets. I am particularly proud today about this alliance with De Havilland Canada – the acquisition of the Dash 8-400 aircraft for operations in Nigeria is a step in the right direction and it couldn’t have come at a better time.”

Investing in aviation equipment could bring significant benefits for Elin Group. First, it enables the organisation to enter the private charter space and provide a valuable transportation service. Perhaps more pertinently, though, the purchase of three Dash 8-400 aircraft will permit the company to improve the reliability and efficiency of its oil and gas projects.

The empowerment of women is key to creating a healthy nation – as well as holding women back, gender inequality prevents whole countries from realising their full potential

Green credentials
In addition to its aviation capabilities, Elin Group is a standout leader in Nigeria’s exciting hydrocarbon sector. Elin Oil Services is a cutting-edge oil and gas exploration, development, production and marketing company that serves as a one-stop shop for engineering procurement, construction, oil prospecting and well-drilling solutions. Specialising in the exploration of oil and gas assets, onshore and offshore services, marketing, and the distribution of petroleum products, the subsidiary primarily focuses on the provision of solution-orientated, cost-effective and responsive services in the areas of oil mining and offshore services.

Besides the deal with De Havilland Canada, Elin Oil Services is in the process of acquiring a mobile offshore drilling unit and three multipurpose vessels – all of which are scheduled for delivery this year. These will add to a broad portfolio of existing assets that provides support throughout the entire oil and gas value chain. Jack-Rich knows now is not the time for complacency, though: over the next few years, her company will continue to invest in the acquisition of strategic assets and other ancillary services, such as the storage and distribution of petroleum products. A diversified asset portfolio guarantees the company’s economic sustainability.

Although some may see Elin Group’s work in the oil and gas sector as being antithetical to the environmental values espoused by its CEO, this is not necessarily the case, as Elin Oil Services employs cutting-edge technology to reduce environmental disturbance. The global petrochemical sector has also been exploring ways in which it can continue to provide universal energy access while cutting its carbon emissions. In Nigeria, Elin Group leads the way in this regard.

EJ-Aid helps society’s most vulnerable and marginalised individuals attend high-quality educational institutions and create a better future for themselves

“Detailed assessments of potential environmental, social and health risks are carried out during the planning stage of all new projects,” Jack-Rich explained to World Finance. “The reports from these analyses allow the company to manage and reduce negative risks to the community and environment. Also, environmental impact is a major deciding factor in asset acquisitions at Elin Group. This influenced our decision to purchase three brand new Dash 8-400 aircraft as opposed to cheaper, older, more polluting alternatives.”

Nigeria is blessed with a multitude of natural wonders, from the Yankari National Park, which has one of the largest elephant populations in West Africa, to the magical Idanre Hill, with its mysterious, yet-to-be-deciphered inscriptions. Jack-Rich understands the value of this beauty, making environmental best practice a top priority across all divisions of Elin Group.

Giving back
As well as being a successful businessperson, Jack-Rich has received widespread acclaim for her philanthropy. This drive to add value to humanity led to the creation of EJ-Aid and allowed Jack-Rich to follow in the footsteps of her husband, Tein T S Jack-Rich, who established the Belema Aid Foundation to support much-needed projects throughout Nigeria.

Elizabeth Jack-Rich has continually demonstrated her passion for helping others, supporting families and young people through the issuance of grants, delivery of medical support, facilitation of skills development and provision of many other tools that empower individuals economically. EJ-Aid scholarships, for example, allow less privileged students to continue their studies – both within and outside of Nigeria – and improve their financial prospects. Jack-Rich’s staunch commitment to changing lives for the better is rooted in an expression both her and her husband live by: “God has blessed me to impact my generation.”

More recently, Jack-Rich launched a special interest foundation to support the women living outside of Nigeria’s urban centres: the Opportunity for Rural Women Development Initiatives (ORWODI). ORWODI equips rural women with the basic tools they require to engender positive social and economic change in their communities, further promoting the sustainable development of Nigeria in the process. Having been born into difficult economic circumstances herself, Jack-Rich understands how vital this work can be.

But her charitable outlook and goals do not end there: since being formally established in December 2017, EJ-Aid has dedicated its resources to improving Nigerian lives through empowerment and education. The foundation has awarded more than 50 scholarships to underprivileged children and focuses on giving hope to young, elderly and ex-service personnel across Nigeria, Africa and the wider world. In other words, EJ-Aid helps society’s most vulnerable and marginalised individuals attend high-quality educational institutions and create a better future for themselves. These scholarships have often covered the cost of primary, secondary and tertiary education for orphans, children of widows and disabled individuals.

With regards to economic empowerment, EJ-Aid places a particular emphasis on skills development and business management training. Once courses are completed, seed capital is offered to support and encourage the development of SMEs. According to PricewaterhouseCoopers, SMEs currently contribute approximately 48 percent of Nigeria’s GDP – a significant sum, but one that remains behind other markets. Across the EU, for example, SMEs contribute 56 percent of GDP on average, while in South Africa – Africa’s second-largest economy behind Nigeria – the figure stands at 52 percent.

The work being undertaken by EJ-Aid should stimulate Nigerian SME performance, but that is not its only remit: hunger eradication is a key aim of the organisation, one that is met by improving the availability of food for all citizens, regardless of their economic difficulties. In a country that has the most people living in extreme poverty globally (see Fig 2), such a cause couldn’t be more important.

Honour roll
Jack-Rich has received several accolades in recognition of her work, including an honorary doctorate in leadership and community development from ISFOP Benin University and the Global Woman Humanitarian for Poverty Alleviation Award from the Global Order of Dignitaries and Philanthropists. She also holds certifications from the University of Cambridge’s Rising Women Leaders Programme and Harvard University’s Entrepreneurship Essentials course.

More recently, the National Youth Council of Nigeria bestowed Jack-Rich with the newly formed title Matriarch of Nigeria Youths for her efforts to empower the country’s women. The award drew particular attention to EJ-Aid’s presentation of NGN 110m ($231,820) in start-up capital to 1,100 women. To date, the foundation has empowered more than two million women, contributing over NGN 350m ($737,609) in partnership with the Belema Aid Foundation.

“My focus on women is not for gender bias,” Jack-Rich explained upon receiving the award. “As enablers of growth, it is commonly said: ‘When you empower a woman, you empower a nation.’ No woman should be on the street. My greatest desire is to see the day when no single woman is roaming the streets of Nigeria, but are rather all gainfully engaged in legitimate enterprises, contributing to the uplifting of their families and society at large.”

Such awards are fitting given the great effort Jack-Rich has put into lifting her fellow Nigerians out of poverty. In Abuja and Port Harcourt, for example, she created a two-week skills acquisition programme for women in association with the Small and Medium Enterprise Development Agency of Nigeria. Of the 1,100 beneficiaries, 500 were selected from the Federal Capital Territory and Northern Nigeria, while a further 600 hailed from the Rivers State region and Niger Delta. The participants received schooling in a variety of vocations, including catering, IT, fish farming, poultry management, cosmetology, baking, handicrafts and event planning. At the end of the training, students received start-up funding to begin their journey towards economic prosperity.

The empowerment of women is key to creating a healthy nation – as well as holding women back, gender inequality prevents whole countries from realising their full potential. In fact, according to a 2015 report by McKinsey Global Institute, Nigeria’s GDP could expand some 23 percent by 2025 if women participated in the economy to the same degree as men.

Growing together
Jack-Rich’s purposeful leadership is a hallmark of her business journey and should inspire any budding entrepreneur. When previously asked about what drives her success, Jack-Rich was quick to point to her long-term vision: “I would like to assure you that Elin Group is in this for the long haul and looks forward to expanding other business horizons for our collective organisational wellbeing and the betterment of the entire nation.”

True to the values exemplified by its founder, Elin Group’s leadership team believes it has a duty to act in the best interests of the environment and society as a whole. Since its establishment, Elin Group has committed to empowering the communities it serves with initiatives targeted at reducing poverty and improving the quality of life for local citizens.

Jack-Rich told World Finance that this is the same wherever the company operates: “We believe this is not only about sustaining our business, but about sustaining our core values and who we are. Hence, we ensure our project operations incorporate environmentally friendly practices and socioeconomic benefits into the local community. We have clear responsibilities, duties and standards in our management, boards, stakeholders and operating units. These include our sustainable dealings with stakeholders, effective risk management and audit regulation, and transparent accountability and reporting.”

It is Jack-Rich’s focus on doing the right thing that drives the company’s growth and exceptional performance. She has noted repeatedly that she believes Elin Group should deliver services that not only meet statutory quality demands, but also exceed such expectations. To achieve this, the group has created, maintained and developed leadership guidelines that ensure processes of production and delivery are consistent across the board. Elin Group remains steadfastly committed to ensuring its procedures and engineering practices protect the people and environment of Nigeria.

With the Nigerian economy going from strength to strength, further triumphs are surely just around the corner for Elin Group

A prosperous future
Despite the difficulties inherent to being a young entrepreneur, Jack-Rich remains hopeful and excited about her company’s role in growing the Nigerian economy. Over the next few years, she believes both Elin Group and EJ-Aid can do much to improve financial inclusion in Nigeria, providing further gains to the country’s women and young people. Although access to financial services in Nigeria has improved of late, the proportion of adults with a bank account in the country still sits at a meagre 29 percent, according to Kantar.

“Higher levels of financial inclusion provide a number of benefits,” Jack-Rich explained. “First, it promotes a savings culture. It provides a safe place for savings to be built up, thereby providing a source of funds for emergencies and other existential needs. Second, financial inclusion facilitates access to loans and credit. It provides a platform for broader transactions, helping to grow small and medium-scale businesses. Finally, by increasing the earning potential of women and youth, financial inclusion can lead to poverty alleviation.”

With regards to the business, Jack-Rich is intent on keeping innovation at the heart of Elin Group’s objectives, finding easier, more efficient and cost-effective ways to create value. “Innovation is at the core of who we are,” Jack-Rich told World Finance. “By staying focused on our vision, continuously identifying the gaps, providing the needed intervention and ensuring that a culture of continuous learning is promoted, we will remain successful.”

It is this attitude of never being satisfied, never standing still and always seeking improvement that has stood Jack-Rich and Elin Group in such good stead. In just two years of operation, Elin Group has achieved great success; with the Nigerian economy going from strength to strength, further triumphs are surely just around the corner. What’s clear is that Jack-Rich will ensure these successes continue to benefit all Nigerian citizens.

A home truth: public-private partnerships are key to solving Africa’s housing crisis

Posted on by Max Tomlin

Unprecedented urbanisation has led to a serious shortage of affordable housing in cities around the world. In 2014, McKinsey & Company predicted that, if trends continued, as many as 1.6 billion people would live in substandard housing by 2025. African countries are among those currently grappling with this crisis – the continent’s housing deficit has not only been fuelled by urbanisation, but also by the growth of its vast population of young people.

Despite the problems facing the housing market, there is cause for optimism. Over the past decade, numerous developments have better equipped us to tackle this shortage: the rise of the sharing economy, for example, offers new solutions to the lack of affordable housing, while social media has empowered young people to voice their discontentment at being priced out of the market.

Governments have been slow to enact innovative housing policies unless forced to by crisis or dramatic change

Global warming, meanwhile, is driving the adoption of eco-friendly construction methods. Developments like this are set to have a significant impact on the industry and may even come to define the next decade of housing in Africa. For that to happen, though, the continent’s policymakers will have to be bolder and much more dynamic.

Shaky foundations
Housing policies in Africa are a hangover from the post-colonial era. Many of the major initiatives carried out on the continent were instigated by newly independent African nations and focused on mass housing – particularly for civil servants, who were usually the greatest contributors to the labour force and, therefore, the largest pool of voters. These policies reflected the conventional wisdom of the time, which suggested governments alone could stimulate demand and generate enough supply for housing.

Today, there is a constant battle between public sector intervention and private sector capacity. The right approach, as with most things, lies somewhere in the middle: public-private partnerships. The private sector neither has the will nor the incentive to take on affordable housing alone, and this is where the government must intervene. Governments, on the other hand, often lack the technical capacity or the systems to deliver affordable housing – areas in which the private sector excels.

Fortunately, there are signs that government policy in Africa is starting to catch up with this reality. The Big Four Action Plan – Kenya’s guiding social and economic development policy – has launched an ambitious affordable housing programme, bringing together both the private and public sectors. Equally, Morocco’s social housing programme has reported tremendous success, making it a key reference point for future study, while newly enacted tenant protection laws in Nigeria seem to be making good progress.

Unfortunately, governments have been slow to enact innovative policies unless forced to by crisis or dramatic change. Consequently, the push for more affordable housing will most likely have to come from elsewhere.

A global problem
This policy gap cannot and should not be construed as a problem unique to the Global South. The 2008 financial crisis was triggered by the mismanagement of the housing market and the exorbitant price of US homes. Alarmingly, the same trends that caused the crisis are still prevalent today: according to The Economist, real house prices have risen by 15 percent globally since their post-recession low, taking them well past their pre-crisis peak. As a result, there is mounting resentment among Millennials who are unable to get on the property ladder as easily as their parents did.

While a lack of affordable housing is a global problem, the challenge is especially pressing in Africa. The continent’s booming population is expected to almost double by 2030, surpassing 2.5 billion, according to the Brookings Institution. By 2050, the Mo Ibrahim Foundation expects more than half of the population to be under the age of 25.

Consequently, megacities such as Lagos, Cairo and Kinshasa – each of which already has a population of more than 10 million people – will continue to expand rapidly while other cities, such as Luanda and Johannesburg, will soon join their ranks. This population boom and rapid urbanisation is creating huge housing deficits: according to El-hadj M Bah, Issa Faye and Zekebweliwai F Geh’s open access book, Housing Market Dynamics in Africa, the continent’s housing backlog stood at roughly 51 million units in 2018. This is an urgent problem that African governments will soon be pressed to address. Over the next decade, numerous challenges could hasten government action.

Africa’s housing deficit has been fuelled by urbanisation and the growth of its vast population of young people

Estate of mind
Housing has always been deeply political, but with the rise of technology – and its ability to coalesce people around a single idea – we can expect to see more social movements emerge in the coming years. It has already had a significant impact in the UK, with The Economist reporting that those who lived in areas with stagnant housing prices were more likely to vote ‘leave’ in the 2016 EU membership referendum.

The same was true of those who voted for the far-right National Rally party (then the National Front) in France in 2017. Housing prices have also added economic impetus to the protests in Hong Kong. Given the resentment of young people struggling to access real estate around the world, it is likely a global social movement or protests on housing will demand attention and action – Africa will not be exempt from this. Perhaps we are not so far away from a global #housing4all movement, after all.

Another trend starting to impact the housing sector is the emergence of the sharing economy. Platforms like Uber and Airbnb have demonstrated how technology can help us commoditise unused assets. There has been much talk of employing the rental model in Africa, and there is some merit to this idea: given the continent’s steep mortgage prices, it is more than likely that rental housing will remain a feature of the market. However, we may soon see some advancement in flexible living arrangements. In fact, shared spaces in which tenancy and ownership are not necessarily fixed-term are already beginning to take shape. The next decade will reveal just how sustainable this model is.

Already, the impact of human activity on our environment is becoming difficult to ignore – we’re seeing more heatwaves, flooding and uncontainable wildfires than ever before. These severe weather conditions have a direct impact on housing and how we develop infrastructure. While the housing industry has often toyed with the idea of using alternative building materials, the effect of climate change may force it – and government bodies – to accelerate the adoption of green innovations into building strategies.

It’s not just global warming we need to factor into our construction methods, though. The Ebola crisis that ravaged West Africa between 2013 and 2016 – and continues to rage through the Democratic Republic of the Congo – can also be viewed as a failure of housing policy. One of the reasons the contagion spread as quickly as it did is because of the density of housing in informal settlements. In the age of global epidemics, we will be compelled to consider how construction interplays with the environment beyond just the materials we use.

As safe as houses
Over the next decade, policymakers’ main challenge will be crafting a policy that not only addresses the aforementioned concerns, but also passes easily across African states. There have already been some positive steps in this direction. For example, the African Union Specialised Technical Committee on Public Service, Local Government, Urban Development and Decentralisation is pushing for a model law – an overarching legal and policy framework that all countries can adapt their national strategies to. This is informed by the recent conceptualisation of affordable housing as a human right.

Advocacy in the next decade is expected to be highly influential in pushing affordable housing to the top of the agenda. However, external forces – such as global warming, youth dissatisfaction, global crises and epidemics – may ultimately force African governments to reprioritise housing.

Technology could also play a pivotal role in alleviating the pressures that the housing sector faces. Africa has always tried to harness technology to leapfrog certain stages of economic development, and blockchain may help to transform the housing industry over the next decade, removing the need for intermediary players and streamlining the registration of property documents and other real estate processes. Smart contracts will be established entirely between the buyer and the seller (or, in this case, the renter and landlord) without requiring any human interaction.

The next 10 years will transform affordable housing in Africa. Admittedly, there is still much uncertainty – many things need to happen in order to drive change. Nonetheless, there are actions we can take today: investors, for instance, would do well to finance projects that benefit Africa’s youth, be it the construction of student housing, multipurpose buildings or rental homes. After all, Africa’s youth is its greatest resource – the best way to ensure a positive future is to invest in it.