Author: Max Tomlin

Egypt’s sustainable finance trailblazer

Posted on by Max Tomlin

Over the last several years, regulators and consumers alike have increasingly focused on the role that finance plays in the wider world. While not directly responsible for forces like climate change and pollution, banks and other lenders are often the deciding factor as to whether certain unsustainable projects are brought to fruition or not. As environmental awareness grows, alongside issues related to sustainability, the types of projects a financial institution chooses to support are now coming under mounting scrutiny.

AAIB has succeeded in becoming a forerunner in promoting sustainable finance on a regional level, while also achieving remarkable financial growth

As such, many banks are now being forced to adapt to this changing landscape. However, those few that have pre-empted this shift now have a significant advantage. Speaking to World Finance, CEO of Arab African International Bank (AAIB), Hassan Abdalla, explained how his organisation successfully implemented sustainable practices far earlier than many industry peers. The bank’s forward-thinking approach has since seen it become a leader in the region, encouraging other financial institutions to make sustainability a focus.

What were the driving forces behind AAIB’s early focus on sustainable finance?
Since the term ‘sustainable development’ was first coined by the UN Brundtland Commission in 1987, there has been a growing realisation that finance is the most powerful tool for promoting the concept of sustainability and enhancing the creation of sustainable economies. This is because financial institutions bankroll all other sectors and industries, whose operations and production have been more responsible for environmental damage.

Since then, it has been an integral part of our growth strategy. As early as 2004, when AAIB started to pursue more aggressive growth, we began seeking business that targets long-term value rather than mere profit. Sustainability is also the theme of Egypt’s Vision 2030 sustainable development strategy, putting us ahead of the curve, since regulators are now focusing on sustainable finance and financial inclusion.

Egypt is heavily promoting financial inclusion in other ways, ratifying a microfinance law in 2015 and mandating that all Egyptian banks provide a minimum of 20 percent of their total lending portfolio to small and medium-sized enterprises by 2020. The Egyptian stock market was also the first in Africa and the MENA region to join the Sustainable Stock Exchanges initiative. The Egyptian financial sector is overall quite resilient and dynamic, having coped with a very active socio-economic and environmental landscape.

AAIB was the first bank to join the Equator Principles in 2009 and introduce social and environmental risks. How did you manage the change given the bank’s corporate legacy?
It is not easy to change established systems. Declining a credit-worthy corporate client because they are not environmentally and socially compliant is hard for everyone involved. But over time, the business case for integrating economic, social and governance aspects into our corporate business surfaced as we saw an increasing number of businesses collapse because of these risks.

On top of that, the bank is sourcing new revenue streams from environmentally friendly projects. We are leading new frontiers in clean energy funding and energy efficiency. Recently, AAIB led the Egyptian market in granting credit to participants in the largest solar photovoltaic generation park in Egypt, the Benban solar development complex. With a total capacity of up to 1.86GW, it will be one of the largest solar generation facilities in the world once completed.

In parallel, we are strengthening a fully fledged specialised SMEs department inside our bank. We recently concluded several deals with multilateral development banks that granted facilities to scale up our lending operations to SMEs. This has allowed us to build our sustainable energy finance portfolio, including a $100m loan from the International Finance Corporation and a $30m loan from the European Bank for Reconstruction and Development.

We were the first bank to join the international frameworks in the field of sustainability; including the UN Global Compact in 2005, the London Benchmarking Group in 2007 and the Equator Principles in 2009. We have also been leaders in introducing sustainability reporting into our reviews.

What is AAIB’s outlook for sustainable finance?
We are in the midst of revising our internal policies and procedures; developing a new stream of sustainable products and services. Indeed, AAIB is very much committed to promoting an industry-wide movement, by sharing our experience to create a peer-to-peer dynamism that is bound to create significant breakthroughs. Consequently, in 2014 we established the MOSTADAM platform – the Arabic word for ‘sustainable’.

MOSTADAM is the first platform advancing sustainable finance in Egypt and the MENA region. It has been a joint endeavour between AAIB, the United Nations Development Programme and the Egyptian Corporate Responsibility Centre. Its objectives are focused on capacity building, advocacy and advancing sustainable products and services. It has been progressing impressively. Around 70 percent of Egyptian banks have participated in the training modules and been certified in disciplines including clean energy funding and SME funding.

What else contributes to AAIB’s competitive edge among banks in the region?
Our edge lies in the powerful synergies that are inherent in the bank’s lines of business, both locally and regionally. AAIB is practically the only bank in Egypt that provides tailor-made solutions for commercial and investment banking. Our corporate portfolio services include advising on equity placements, mergers and acquisitions, feasibility studies, valuations, escrow arrangements, agency services, and raising finance through the syndicated loan market. We also lead the local debt capital market in terms of issuing corporate and securitisation bonds.

Moreover, the Gulf region provides a solid geographical base for expanding in investment services. In the 1970s, AAIB became the first private sector bank to establish a presence in the Gulf region. Branches are now located in Dubai, Abu Dhabi and Beirut, as well as a strong client base in Saudi Arabia, Kuwait, Bahrain, Oman and Qatar.

We are continually striving to expand our operations. We are establishing an investment axis by linking investors from the US, Europe and Asia with Egypt, the Gulf region and Africa, as well as channelling investments from the Gulf to Egypt and Africa. Notably, the UAE is second only to China in terms of investing in African countries.

How successful has AAIB and its partner companies been in the last year?
AAIB has achieved well-rounded growth, spurred on by the expertise of our entire workforce. We have simultaneously succeeded in becoming a forerunner in promoting sustainable finance on a regional level and achieving remarkable financial growth. Despite operating within a challenging landscape, 2016 saw AAIB achieve its highest ever increase in net profit. The synergy of comprehensive banking solutions, a fully fledged financial group and a strong regional presence continue to drive our ongoing growth.

AAIB offers both commercial and investment banking activities, along with retail services. We also offer a plethora of other services through subsidiaries including asset management, brokerage, mortgage finance and leasing. These organisations within the AAIB financial group have been steadily growing. Arab African Investment Management ranks fifth in Egypt among the top 25 equity mutual funds, and was the only company to launch new funds in 2016. Arab African International Mortgage Finance is the first mortgage finance company to be launched by a bank in Egypt and has successfully increased its market share from 20 percent in 2015 to 24 percent in 2016. Despite only having launched in 2014, Arab African International Leasing also showed unprecedented performance in 2016. It was able to increase its market share to 7.6 percent, up 4.7 percent from the previous year.

What does the future have in store for AAIB?
In 2005, we announced that our vision was to be the leading financial group providing innovative services with a strong regional presence, and to be the gateway for international business into the region. Since then, more than a decade of hard work has taken us closer to fully realising our vision.

AAIB is now out to start another round of high-pace growth through an agile three-year strategy, and to keep leveraging the huge synergies inherent in our business formula. It builds on AAIB’s distinguished corporate footprint in the region and seeks to conquer new growth frontiers in Africa and the Gulf. AAIB is strongly positioned to provide well-rounded investment services to meet the rising demand from international investors of China, Europe and the US, who seek partners backed by a comprehensive financial platform.

We also intend to serve new segments by funding entrepreneurs and expanding our funding of SMEs, while also focusing on acquiring the whole supply chain of the existing corporate clients through tapping broader sectors. We shall expand on financial inclusion through Sandah, our standalone microfinance company founded in partnership with the SANAD fund.

Moving on to our continuous improvement efforts, we are also eyeing the next disruption in the industry: digitalisation. Currently, we are in the process of making changes to the core banking system and replacing legacy systems. We believe digital transformation is currently at an inflection point, and banks have just a few years to adapt.

Amid all the dynamism and business growth, AAIB has two constant factors: the human resource calibre that distinguishes us, and the resilience of a solid institution with more than 50 years of banking tradition. These credentials will continue to sustain AAIB’s balanced growth going forward.

Ceylinco Life is catalysing growth in Sri Lanka’s insurance market

Posted on by Max Tomlin

Since emerging from a long and bitter civil war in 2009, the island nation of Sri Lanka has embarked on a programme of accelerated economic development. Shifting away from the predominately agriculture-based economy of its past, the country has experienced rapid urbanisation and modernisation over the past eight years. According to the World Bank, the nation’s economy has grown at an average of 6.2 percent since the end of the civil war, with manufacturing and services helping to drive this upward trend.

Sri Lanka’s life insurance market is one of the nation’s most innovative, and as the country experiences GDP growth and rapid urbanisation, the demand for it grows

While most of the world has struggled in the years following the global financial crisis, Sri Lanka has enjoyed steady economic growth and now boasts the highest per capita GDP in the South Asia region. Similarly, Sri Lanka is one of only two South Asian countries currently rated as ‘high’ on the Human Development Index and is on target to transition to upper-middle income status by 2018.

Amid this rapid socioeconomic development, one sector is showing particularly impressive results. Despite being a relatively young industry, Sri Lanka’s life insurance market is one of the nation’s most innovative and competitive. Assets belonging to Sri Lankan life insurance companies amounted to $3bn as of 2012, a figure that has continued to climb in the years since. As the country experiences impressive GDP growth and rapid urbanisation, the demand for life insurance products grows, and opportunities for companies improve.

Steady growth
The Sri Lankan life insurance market has historically been modest, accounting for just a small percentage of the nation’s wider industry. In 1988, the state-owned insurance sector was liberalised, allowing private sector insurers to re-enter the market. Nonetheless, despite the sudden influx of new players, life insurance uptake in Sri Lanka has remained low. Just 13.7 percent of the Sri Lankan population is covered by life insurance as it stands – a relatively low level of penetration.

R Renganathan, Managing Director and CEO of Ceylinco Life Insurance, said: “There is undoubtedly potential for selling medium-to-long-term life insurance in the country.” He continued: “The challenge is to capture that segment of the market by increasing life insurance penetration in the country in the future. This is not just a priority for Ceylinco Life, but for every life insurance provider in the country.”

However, these low levels of life insurance penetration may soon be set to change thanks to the significant demographic shifts currently taking place in the island nation. Like many countries around the world, Sri Lanka now has a rapidly ageing population: in 1971, just 6.3 percent of the nation’s population was aged 60 years and above, but by 2012, this figure had almost doubled to 12.2 percent. As life expectancy continues to rise, as much as 16.7 percent of the Sri Lankan population could be aged 60 or over by the year 2021.

Renganathan explained: “It is evident that the country’s population is ageing rapidly. Demographists predict that by 2041, one quarter of our population will be elderly. We view this as an opportunity for life insurance providers to reach out to the senior citizens in the market to create tailored life insurance policies, as well as retirement planning products.”

Indeed, with its inhabitants now living longer, Sri Lanka is expected to see a bigger demand for life insurance products such as pensions and endowment policies, while retirement planning is becoming increasingly essential. Furthermore, the nation’s rapid urbanisation is also contributing to greater life insurance penetration among its citizens. Urban populations are expected to grow by 3.3 percent annually over the next 15 years, as vast numbers of citizens relocate to the nation’s sprawling city centres. While rural families can often rely on village support and other means of localised security, urban families tend to depend on a single breadwinner, leaving them vulnerable to financial difficulties in the event of family tragedy. Urbanisation can thus have a positive effect on life insurance demand, as families look for financial security in their new city lives.

What’s more, along with rapid urbanisation and rising life expectancy, Sri Lanka is also experiencing impressive GDP growth. In 2015, the nation achieved its Millennium Development Goal of halving extreme poverty, and the country is now expected to achieve upper-middle income status as soon as next year. With its citizens now enjoying greater financial security, Sri Lanka may well see an increased demand for life insurance over the coming years.

A relationship for life
As interest in life insurance policies grows among Sri Lankans, the nation’s leading life insurance companies are now looking for new ways to engage with a wider customer base. In addition to appealing to the country’s ageing population, life insurance companies must also be able to connect with younger clients if they wish to stay ahead of the competition. Representing one million lives with active policies, Ceylinco Life’s commitment to innovation and outreach has cemented the company as Sri Lanka’s most successful life insurance firm, winning loyal clients across various generations.

Renganathan explained: “Ceylinco Life’s current objective is to focus on different policy solutions, devise effective retirement plans for Sri Lanka’s ageing population and roll out long-term insurance policies for the younger urban markets.” He added: “We are developing an extensive and original portfolio of products that cater to the different life stages of potential policy holders.”

These products range from basic protection-based products to investment-orientated life insurance policies. For younger clients, Ceylinco Life offers a range of medical plans and retirement planning, and has created an array of education-related products specifically targeted at parents. One such product is the recently launched Ceylinco Life Degree Saver, which helps families put money aside for their child’s further education, while still providing valuable financial protection. This diverse collection of policies reflects the company’s belief that life insurance is a relationship for life, with different products available for every stage in a client’s lifespan.

In addition to this wide range of products for clients of different ages, Ceylinco Life is also committed to modernising the life insurance market by prioritising customer convenience. Thanks to a recent collaboration with the Sri Lankan postal service, Ceylinco Life customers can now pay their insurance premiums at any post office in the country. By offering time-saving services, Ceylinco Life is effectively creating a new style of life insurance that is compatible with the busy pace of urban life. Furthermore, in addition to serving its existing client base, the company is also passionate about highlighting the importance of life insurance among the wider community.

“We conduct two annual islandwide campaigns to address the lack of awareness of life insurance and retirement planning,” said Renganathan. “Conducted primarily through door-to-door visits and social media, our Life Insurance Week and Retirement Planning Month have both contributed significantly to increasing life insurance penetration in Sri Lanka.”

A modern market
In recent years, technology has drastically transformed the world’s financial services industries, as mobile banking and instant-pay products have fast become the norm. While the banking sector has undergone something of a digital revolution, the life insurance industry has been slow to modernise its services. However, this trend may be set to change in Sri Lanka, as Ceylinco Life has made digitalisation a key priority in its future development plan.

Indeed, the transformation to an all-digital environment is already well underway, with more than 1,000 Ceylinco Life sales agents currently equipped with tablets and smartphones. The company also boasts its own app, which allows its agents to deliver a comprehensive and digitalised service to customers. Along with improving services for existing customers, Ceylinco Life hopes that this digital drive will help the company engage with the elusive Millennial client base.

“Selling life insurance to Millennials and Generation Z is tough,” said Renganathan. “They prefer instant gratification and demand returns in a much shorter period of time.”
Many young people fail to prioritise future financial protection and retirement planning, as later life simply feels too far away to worry about. While it can be tempting for young people to purely focus on their current finances, future planning is an unavoidable necessity. Neglecting future plans at a young age can prove extremely detrimental when approaching retirement, leaving the person in question with little financial security in the later years of their life.
Renganathan explained: “The challenge is to tap into this Millennial market by making them aware of the need for a longer-term commitment and by providing innovative insurance solutions that appeal to their needs.”

With the company now beginning to make in-roads into this Millennial market, the future certainly looks promising for Ceylinco Life. Through community engagements and product innovation, it continues to successfully raise awareness of life insurance and show that it is a practical investment for all modern Sri Lankans.

Ocidental extolling the virtues of saving

Posted on by Max Tomlin

The three decades of prosperity and strong demographic growth following the Second World War are now a distant memory in Europe. Since the first oil crisis in the early 1970s, Europeans have faced rising unemployment and increasing economic uncertainties, especially in southern countries.

The hallmark of a developed and prosperous country is when the majority of its population has a savings plan of some kind

In addition, Europe’s ageing population is becoming a real problem. According to recent studies, the European population will reach a peak in approximately 2040, and will then begin to decline. A combination of these two factors – economic uncertainties and an ageing population –  leads us to a troubling question: who will pay for the pensions of those who are children today?

Planning for retirement

Some young Europeans, especially in the Nordic countries, are already putting money aside in an attempt to achieve their desired quality of life when they retire. But wide variations exist between countries, which is most likely a reflection in different living standards, together with cultural factors.

Most experts believe that in 50 years from now, 30 percent of Europeans will be aged 65 or over, compared with 17 percent today. Nowadays, older people are an attractive target market for financial services providers, and that phenomenon will only grow as time goes by.

Though it may indicate that people are genuinely worried about the future, ultimately, putting money aside to prepare for retirement shows prudence and foresight. Indeed, the hallmark of a developed and prosperous country is when the majority of its population has a savings plan of some kind.

European businesses should therefore adapt their marketing strategies in order to convey the importance of savings to the population. For groups to whom this is particularly pertinent, price might be the most important factor to emphasise when planning product marketing. It would also be beneficial for financial companies to broaden their range of savings products that are dedicated to retirement planning.

The Portuguese case 

A 2016 study by Nielsen revealed that only four percent of Portuguese citizens put money aside every month. This is a colossal change from the 30 percent that attested to monthly savings just two or three years ago. What’s more, more than half (58 percent) of those quizzed confessed to having difficulties paying bills by the end of every month. The conclusion was that older people (defined as those between 55 and 65) have the greatest difficulties. It is believed that this downward trend began with Portugal’s entry into the euro and was only interrupted in the years of crisis.

According to most surveys, the richest save the most in Portugal, while those with lower incomes have low or even non-existent savings levels. This reality indicates that saving can be seen as a luxury good for the Portuguese population.

After the start of the 2008 financial crisis, Portuguese savings rates increased. This was mainly due to the postponement of consumption decisions and the concerns that led families to save during an environment of uncertainty. This uncertainty was borne from the precariousness of employment at that time, alongside the expectation of smaller governmental reforms in the future.

Fortunately, household consumption has increased in nominal terms since 2010, when the country was in the process of a bailout programme. In the second quarter of 2011, there was a slight increase in the household savings rate at around 0.5 percent GDP, which brought it closer to the historic average of 7.6 percent GDP.

At the beginning of 2015, the economy’s financing capacity improved, but the capacity of households declined. Although disposable income improved over the last quarter of 2014, the increase in consumption was slightly higher, which lowered the level of savings in households from the previous quarter. Essentially, families reduced their levels of caution due to recovering confidence levels.

Then, in 2015, an increase was generated in household investment thanks to the evolution of the labour market. Confidence indicators made families more optimistic about their financial situation and the country’s economic stability in the long term.

By the end of 2015, savings had dropped to some of the lowest levels ever. Families were spending around 96 percent of their income and consumption via bank credit was on the rise. Interest rate levels impacted savings, consumption and the investment decisions of households and firms alike. Low interest rates, which were induced by the European Central Bank’s monetary policy action, acted as a disincentive to save by encouraging short-term consumption. According to data observed during this period, the savings rate represented 4.5 percent of disposable income for the average household – close to the rate of 4.3 percent in 2008.

Contrary to what was happening at a household level, the Portuguese national statistics institute showed that the economy as a whole had improved its capacity in financial markets. Therefore, it was the slight increase in savings in 2016 and 2017 that allowed an improvement at the national level, since the growth of disposable income was marginally higher than that of consumption expenditure, which had also benefitted from an increase in Portugal’s GDP.

Ocidental’s culture plan 

At present, Ocidental is developing a type of practice called ‘capitalisation insurance’, which focuses on customers providing savings for the future in a mid-to-long-term plan. They work by delivering a certain amount to the insurer (delivery can be periodic or all at once), after which we provide an immediate investment. At the end of the contract, the customer will receive an extra income, together with the initial amount they entrusted us with. Due to the supervision of these products, a constant follow-up on all phases of the investment process is offered. Without a doubt, these offerings leave the client with little chance of losing the money that was initially invested; it’s a safe and low-risk way to plan for retirement.

The changes in the Portuguese social security system, as well as the importance of maintaining a good standard of living following retirement, have reinforced the need for private retirement savings products. Unlike other financial products, retirement savings plans have been a privileged vehicle for private savings in the medium and long term since their inception, and they play a relevant role in the complementary contribution to social protection.

At Ocidental, we provide retirement savings plans, which are incorporated in an insurance contract linked to investment funds and are qualified as a structured savings collection facility. Each complex financial product consists of four investment funds: an aggressive strategy with a maximum of 55 percent in shares; a moderate strategy with a maximum of 30 percent in shares; and a protection strategy and a preservation fund strategy, with a maximum of 10 percent shares for each.  Each investment strategy is associated with an autonomous fund based on deposits, bonds or equities, which are chosen in accordance with the defined investment policy.

These are retirement savings plans directed at people who intend to invest with a medium and long-term risk-tolerant vision.

Together with this, Ocidental’s Increased Savings Insurance (Seguro Poupança Crescente) is a medium to long-term capitalisation insurance product with total guaranteed capital invested. Deliveries deducted from the applicable subscription fee are invested in an autonomous fund at the end of each financial year, while the rate of return is obtained by the fund after the deduction of the financial management fee.

Is all of this enough to ensure a culture of savings in a majority of the Portuguese population? Probably not, but it is certainly a big step towards trying to achieve this. As an organisation, we are dedicated to improving savings, and it is our aim to continue developing new and innovative retirement and savings plans. The key is that people are aware of all of the plans on offer; that comes down to how good a job we do.

In Portugal, it was commonly said that times of economic and financial crisis required entrepreneurs and business people to come up with new and bold ideas. Now that better days might be on the horizon, savings and retirement should be looked upon in the same light.

How Thai Life Insurance is successfully pioneering the use of ‘sadvertising’

Posted on by Max Tomlin

In today’s world, online advertisements regularly clock up more views than a Hollywood blockbuster. Over the past decade, the work of branding has changed beyond recognition. The digital era has kicked off the rise of the viral video, opening up a brand new path into the hearts and minds of customers.

Advertisements no longer need to be a quick bid to blare out product information, or a loud attention-grabbing pitch to uninterested listeners. Instead, with a combination of the internet, social media and the new possibility of content going viral, brands are able to tell a story that appeals to consumers’ hearts and shapes brand associations. The challenge for companies today is to present their brand image through content that people actively want to watch, share and discuss.

The art of going viral

Emotional marketing is about bringing topics of love and concern to consumers, prompting a strong sentimental response – be it sadness, happiness or anything in between. Crucially, a deep understanding of the consumer and his or her interests must be reflected through the commercial.

Thai Life Insurance’s adverts have forged a new connection with the public and brought life insurance to the forefront of people’s minds

The art of emotional advertising is something that has long been embraced at Thai Life Insurance. Over the course of the past 15 years, our advertisements have reached huge audiences both at home and abroad, and have even been recognised at the Cannes Film Festival. While only a few minutes long, they have frequently been the subject of online challenges daring viewers not to cry. If you were to add up the number of views across all of our videos on YouTube, the total comes to more than 100 million. The reason for this popularity is their ability to resonate with people on an emotional level: millions of people feel that they have gained something from sharing these videos with their friends, family and acquaintances.

Such advertisements are part of an increasingly popular marketing form that has come to be known as ‘sadvertising’. This has taken off as a marketing technique in parallel with the uptick in digital media consumption. Philip Kotler, an advertising expert known as the father of modern marketing, has characterised the digital branding of Thai Life Insurance as a classic case study of the sadvertising phenomenon. In his book Marketing for Competitiveness: Asia to the World in the Age of Digital Consumers, he pinpoints the form as emblematic of the era of unlimited expansion.

The success of these commercials has come with myriad benefits. They have simultaneously forged a new connection with the public, brought life insurance to the forefront of people’s minds, and prompted people to engage with the company’s ethos and culture.

Appealing to the heart

Far from being traditional commercials, our videos have a cinematic feel and focus on bringing the importance of our products to life through storytelling. In just a few minutes, a video can tell a story that gets right to viewers’ hearts. In the case of Thai Life Insurance, we must confront the audience with the importance of life insurance and highlight the fact that life insurance is essential to both our own lives and those of the people we love. The concept behind our entire campaign is the value of life and love – two features that form the core of the life insurance business.

The videos are life-inspired. They motivate people to think of their loved ones, and encourage the audience to appreciate the values of love and concern for both family and society. One commercial, named My Son, focuses on the importance of performing good deeds for our loved ones before it becomes too late. Another film, My Girl, centres on the strength of a parent’s love, even when their children are imperfect. Unsung Hero revolves around a young man who performs selfless deeds without expecting anything in return. The Silence of Love follows the story of a schoolgirl who is bullied because her father is deaf and mute, and ultimately underscores the power of the father’s ‘silent’ love.

The key to the success of our videos is their ability to capture people’s attention with a controversial topic. They take on real issues that exist across society, which ultimately prompts viewers to think deeply and pause to comment. Over the course of just a few minutes, our commercials inspire people to consider the big questions: why are we born? Who do we live for?

Communicating values 

The stories told in our campaigns are designed to contrast other commercials in the space and make Thai Life Insurance stand out. However, their ability to reach people on an emotional level also makes them the perfect vehicle for communicating a message. Crucially, emotional videos do not just sell products; they can also foster a sense of goodwill.

Over the past 15 years, Thai Life Insurance’s stories of love and sacrifice have been watched by millions and inspired people throughout society. By encouraging people to make improvements and change their behaviour, the videos can even be an impetus for social change.

To be an iconic brand, it is important to clearly stand for something and to hold values that can engage and inspire people. In the modern world, consumers seek a company with a conscience: they seek the truth, and appreciate good governance. What’s more, they look for brands that understand the value of others and do not take advantage of their consumers. As such, it is crucial for brands to build up trust and promote values that resonate with their customers.

This is why it is also important that company culture lives up to the values espoused in the campaign. At Thai Life Insurance, social goals are an important part of our business. Indeed, our brand is inspired both by people and for the good of people.

A spiritual organisation

This people-first approach is the makings of what we call a ‘spiritual organisation’: one that seeks to truly understand the consumer. This helps us ensure that the principles people see in the public-facing videos are reflected in the way we work.

At the heart of this concept is a culture of generosity and trustworthiness. This mentality runs in the Thai Life DNA, from the employees in headquarters to those working in the branches or sales teams. Our sales agents, life insurance personnel and life insurers must always go above and beyond to support Thai society; it is these values that will make consumers love, trust and ultimately bond with the brand.

We work to actively run the business in a style that prioritises human value beyond business value. This comes from the full cooperation of everyone in the organisation, who are each driven by a shared purpose. On top of having the requisite skills, knowledge and abilities, Thai Life Insurance’s employees must also be caring, generous, compassionate, trusting and sharing. What’s more, they must hold strong morals and ethics, and never leave anyone behind.

Like the protagonist in Unsung Hero, we encourage all staff to be understanding and provide each other with sincere support. For instance, all headquarters and branch staff must also be responsible for sales support by giving all employees the opportunity to learn how the agents work.

This focus on human value over profits is a major factor that contributes to continuous growth at Thai Life Insurance, and will be an important part of what drives the company to be sustainable in the future. Essentially, we believe that when society is strong, Thai Life Insurance will be strong as well. The company not only aims to maximise profit and market share, but also to give some of this profit back to society. The value of Thai Life Insurance is not reflected in the form of the highest profit or market share, but in the mind set of its employees and the strength of its brand. This will provide the momentum for sustainable profit and growth in the future.

Ultimately, through the combination of an ethical company culture and inspiring videos, Thai Life Insurance is able to pursue our goal of being an iconic brand that inspires all Thai citizens. It is this brand image and company culture that together forms the secret to sustainable growth. We believe that Thai Life Insurance will continue to exhibit sustainable growth up until its 100th anniversary, and far beyond.

Santander Free Zone enables new companies to flourish in Colombia

Posted on by Max Tomlin

Each day, in both the minds of citizens and in organisations of all kinds, the concept of sustainability is becoming more and more significant. This is being catalysed by younger generations, who appear far more concerned with ethical practices than their elders were.

At present, we know that the success of organisations, regardless of their industry or size, depends in large measure on how they treat the people affiliated with their business. This means the shareholders, customers, workers, suppliers, government and the community in which they operate. It has never been more important for organisations to ensure they can meet increasingly demanding corporate governance requirements. Fortunately, one way they can do this is through using free trade zones.

Free trade zones

The Santander Free Zone (SFZ) has become a regional centre of development in Colombia and the wider South American community. We have successfully promoted competitiveness in the region through attracting local investment, creating employment opportunities and driving sustainable policies. We are especially committed to promoting companies that are responsible in their business practices; we welcome them into our community so they can forge connections with others and expand their social and environmental activities.

SFZ intends to generate an environment where people can grow both personally and professionally; where they can innovate, learn and enjoy each day

In a financial sense, free trade zones benefit organisations enormously by providing a supportive space in which companies can grow and help each other. In turn, this also means Colombia prospers economically. What’s more, free trade zones can attract some of the best talent from a diverse range of industries, while it can also assist those who choose them as a place to work. At SFZ, we have numerous permanent positions, as well as training opportunities, to spur on professional development and ensure talent retention in the area. All the while, SFZ aims to promote cleaner production methods, which can be taken up by the companies settled there.

The inception of Santander

SFZ was conceived as a business park and designed to generate wealth in the Santander region of Colombia. The purpose of our corporate social responsibility programme at SFZ is to generate a positive and sustainable impact over time through the articulation of our management, with social and environmental expectations of the members of the SFZ community and its groups of interest. Every company that comes to SFZ is committed to our vision, which aims to encourage sustainability through healthy business practices at all times.

The teams that operate within the free trade zone subscribe to the holistic concept of ‘doing well by doing good’. This mantra means involving oneself in activities that promote the happiness of others. These words have inspired workers at the site, helped Colombia to succeed in a competitive world, and enhanced the wellbeing of people in the wider area. Each organisation within the SFZ believes that personal development, social progress and the efficient use of environmental resources are all important to achieving sustainable economic growth.

In this regard, SFZ has strong guidelines to direct the management and the community of the growing number of companies that operate in the area. Firstly, organisations are asked to align their business objectives towards the wider social and environmental philosophy of the free trade zone. Second, they are required to understand the needs and expectations of different members of the community so they are able to accommodate them. Third, they are asked to come up with a scalable and inclusive management plan that covers the participation of all relevant parties. Lastly, SFZ also aims to promote good practices within the community with regards to governance, environmental sustainability, working conditions and human rights.

SFZ intends to generate an environment that offers opportunities for high-quality, permanent jobs. We want it to be a place where people can grow both personally and professionally; where they can innovate, learn and enjoy each day. To achieve this objective, we work hand in hand with our users and with the support of our public and private allies.

Moreover, SFZ wants to focus on the development of Colombia and the wider region. One of the major reasons behind the creation of a free trade zone is to build a competitive and sustainable platform for organisations, but also to contribute positively to the region’s presence on the global stage. Therefore, we are continually working towards the promotion of new investments, both domestic and foreign, that generate a multiplier effect in terms of employment, social welfare and economic development. Additionally, we promote the interaction and collaboration of existing users with users of other zones.

Ensuring sustainability

At SFZ, we have identified the importance of design to promote the zone’s aims as a business hub and leader in sustainability. When the site was first developed, its architects had environmental concerns at the forefront of their minds. It was also designed to ensure that companies coming in and out of the zone could share and adopt existing environmental practices. All of these aspects meet regulations in Colombia and also act as a strategic tool for businesses.

It is essential that the SFZ community partakes in global efforts to cut carbon emissions and ensures that the human impact on the land is reduced as much as possible. To do this, there are now eco-efficient processes in the park, as well as a culture that promotes environmental sustainability. SFZ constantly raises awareness of what best practices can be used and encourages its community to turn to natural resources whenever possible. Indeed, there is much enthusiasm for sustainability efforts across the area.

Thanks to this approach, SFZ’s offshoring and outsourcing park has a relevant inventory of achievements and accomplishments after six years in operation. It has some of the finest service users around, who take on board the message of inclusivity, sustainability and a commitment to job creation. Interestingly, our space has offered a lot of first jobs to young people, with many also using the area for higher education purposes. Educational institutions can be found in the park, including SENA (the National Vocational Training Agency) and the Santo Tomas University, which encourage professional and academic development on site.

The companies that use SFZ have created social networks and other initiatives to spread information that can help would-be employees find a job there. An online portal, shared with universities and other local authorities, means members of the Colombian population can look for jobs any time they need to.

Regional development

So far at SFZ, there have been 30 new companies created, four of which were born off the back of foreign investment. Together with supporting organisations, there are 51 companies, and these have generated more than 1,500 high-quality jobs. A significant number of these organisations collaborate and create partnerships with one another in order to enhance the SFZ community.

Additionally, we are working together with the Chamber of Commerce of Bucaramanga and the Regional Commission of Competitiveness to design and create better strategies to increase competition in the region. We want to promote bilingualism and international awareness of Colombia, in order to drive competition in the area.

SFZ is part of a group of pioneers in Colombia that voluntarily calculates its carbon footprint. In 2016 we received the certification of Greenhouse Gas Verification, which has become one of the key influencers in the decision-making and environmental management strategy of the company. We operate a wastewater treatment plant with optimum levels of removal, and have achieved a level of 30 percent of waste use. We also implement energy-efficient projects, and projects on biodiversity and business.

In 2015 and 2016, the Financial Times awarded us prizes for the Best Free Zone of South America, Latin America and the Caribbean, as well as Highly Commended Americas 2017. It paid special attention to our training, skills, education and language programmes, recruitment assistance and sustainability efforts. We are very proud to receive these awards in recognition of the great members of our team – shareholders, directors and employees – who are motivated by the trust that our customers and suppliers have in us. We have worked tirelessly to build and consolidate a world-class platform for competitive and enduring organisations to be a part of.

Disruptive technologies are challenging the traditional financial order – but to what extent

Posted on by Max Tomlin

“Times change, and we change with them”, or so the saying goes. There is clearly some truth in this, especially for those of us who have witnessed the transformation of mobile phones from unwieldy bricks to flashy touchscreen devices; the internet from sluggish and screechy ethernet connections to the wireless Internet of Things; and televisions from cathode-ray antiques to curved, 4k-ready screens.

Retail in particular has undergone some profound changes and many of these are due to attendant technological developments. The experiences of Amazon, which saw it evolve from its foundations as an online bookseller in 1995 to a provider of everything from television shows to groceries, are intimately bound up with technological advance.

The likes of Amazon, Apple and Google have found a ready market for their forays into financial services

Only last month, for example, Amazon opened its first UK supermarket, complete with hundreds of ceiling-mounted cameras and electronic sensors to identify each customer and track the items they select. What’s more, shoppers travel the store swiping their smartphones kitted out with the Amazon Go app.

It is perhaps unsurprising, therefore, that a company as successful and innovative as Amazon has extended its reach beyond supplying goods to customers. In fact, since having launched Amazon Lending in 2011, the business has advanced loans in excess of $3bn to small businesses in the UK, US and Japan, who might otherwise have failed to secure credit from traditional lenders.

Those merchants are suppliers to Amazon, and so the company benefits from hyperlocal merchants with expanding product lines, increasing the breadth of Amazon’s offering as well as its geographic reach. Of course, the loans also generate interest.

The march of fintech
This is not an isolated case. Across the globe, fintech – from Monzo’s real-time spending updates to bKash’s mobile payments service for unbanked third-world consumers – is on the advance. And as global retailers and major tech players take advantage of these developments – with Apple, Google, Facebook and Square operating their own payment systems – we need to ask ourselves: is the hegemony of banks under threat?

The fact Amazon, Apple and Google have found a ready market for their forays into the financial services sector should not be wholly surprising. After all, these are companies whose existence depends on being able to quickly react to shifting patterns of consumer demand. Faced with a generation used to getting more and more from fewer and fewer vendors and suppliers, the move makes sense. Importantly, 30 percent of consumers are prepared to bank with the likes of Facebook and Google if the companies offered such services. The dog followed its nose; it wasn’t wagged by its tail.

Clearly there is something of a challenge to traditional institutions; banks have invested heavily in fintech so as not to be left behind. For the time being, however, they can likely breathe easily: Amazon Lending’s figures pale in comparison to the $130bn provided to small banks by JPMorgan Chase in that same time period. With significant cultural and regulatory barriers to overcome, we may be waiting some time for the likes of Amazon to be making serious strides into the financial services sector.

The blurring of the lines between consumer-facing retailers and financial institutions should not be dissuaded as the developments are likely to serve in the interests of the consumer

For one, banking rules and regulations are prohibitive and fiendishly complex as they have been formed by banks and their regulators over decades. Look at the recent wrangling and attention paid to the implementation of MiFID II, for example. Furthermore, bankers are experts in their field – accustomed to stringent levels of compliance – while the likes of Amazon and Apple are not subject to anywhere near the same levels of scrutiny and regulation.

They have no demands on the nature and adequacy of their assets. The appropriateness and qualifications of their executive is, other than perhaps those imposed on public companies, limited to the pressures of their investors. Can we really expect them to dive headfirst into legally choppy and potentially costly waters? This would see them compete head-to-head with some of the industry’s most established players for potentially marginal gains.

A shifting environment 
Yet the landscape may be changing. The US Office of the Comptroller of the Currency is pushing ahead with exploring a form of special purpose national bank charter for fintech companies. Additionally, Brian Knight, Director of the Programme on Financial Regulation and Senior Research Fellow at the Mercatus Centre at George Mason University, has advocated a form of non-depositary charter and a ‘sandbox’ scheme similar to that operated by the Financial Conduct Authority.

There is certainly a groundswell of opinion that the blurring of the lines between consumer-facing retailers and financial institutions should not be dissuaded as the developments are likely to serve in the interests of the consumer. Subject, of course, to appropriate oversight.

Nonetheless, the large, consumer-focused businesses with technology at their core are already engaging in providing financial services and it is not unreasonable to expect this to deepen in the future. After all, in the late 1990s, we all thought our lecturer was mad for suggesting that one day a single device would combine portable audio cassette players, cameras and mobile phones. He was right. How the times have changed.

Sam Pearse is a Partner in Pillsbury’s corporate and securities practice

The modernisation of Greece’s insurance sector

Posted on by Max Tomlin

Since 2010, the Greek economy has been in a severe recession, one that has added insecurity to the intrinsic volatility of the local business environment. This has left the country needing to implement fundamental financial reforms in the face of account deficits, deteriorating household incomes and waning investor confidence. That being said, the social and moral crisis within Greece is deeper than merely the economic downturn.

More than ever, the insurance sector is being called upon to play an active role in the Greek market and leave a positive footprint on society in general

During these unprecedented times of cultural and financial tribulation, the key to Greece’s transformation lies in stability, trust and proactive care for all. Today, more than ever, the insurance sector is called upon to play an active role in the Greek market and leave a positive footprint on society in general.

By complementing the social security system, insurance companies can provide citizens with quality health services and help them protect their financial futures. In order to facilitate this transformation, insurers will need to design long-term strategic plans with a clear vision for a sustainable future, while meeting their customers’ needs.

Transformation strategy 

As a top insurer, NN Hellas strives for the modernisation and reliability of the sector, emphasising values in business. A critical area of focus was the multichannel distribution model, for both traditional and alternative channels. More specifically, the operating model was streamlined by centralising all channels for retail and corporate customers, as well as life and brokerage of non-life lines of business. The company has also restructured its exclusive network of insurance advisors and designed innovative technological tools to assist them in applying the best sales practices and customer service techniques.

Additionally, NN Hellas renewed its bancassurance agreement with Piraeus Bank, for a duration of 10 years, with the possibility of an extension of five more years. Piraeus Bank, the leading bank in Greece, will continue to offer NN Hellas life and health products to its customers on an exclusive basis.

Care, clear, commit

It’s clear the only way to achieve sustainability and growth is through transformation, but no restructuring plan can be successful without guidance from an established set of core values. This is the journey the management team at NN Hellas has embarked upon since Q4 2016: transforming the organisation into the best-in-class insurance company, while upholding the values of ‘care, clear, commit’ in its day-to-day operations. These values have led the company to a solid and transparent model of internal corporate governance, building the foundation for solid decision-making and leadership.

With these values in place, the revamped framework has provided a foundation for the optimisation of internal processes, increasing efficiency and leading to the surgical reform of NN Hellas’ corporate strategy. A thoughtful review of the company’s roles and responsibilities has provided the appropriate architecture for cooperative, empowered employees and executives to deliver a timely and professional service to external end-customers, business partners and colleagues.

NN Hellas has also focused on developing its product and services strategy, offering its consumer base a range of avant-garde insurance solutions. The company continues to broaden its portfolio in the primary and secondary health sector by expanding its strategic partnerships to the benefit of its clients. At the same time, it has introduced new insurance programmes that are linked to investments, additional benefits and riders, helping Greeks safeguard future income streams.

Although this transformational journey has barely reached its one-year anniversary, we are already seeing our reformation initiatives have a positive impact. Throughout 2017, new business sales were up 30 percent on the previous year, setting an impressive 10-year sales high. Furthermore, NN Hellas remained Greece’s number-one foreign life insurer, with a 21 percent market share YTD June 2017, while the second-in-rank foreign company is at 14.7 percent, according to the Hellenic Association of Insurance Companies. By the end of 2017, NN Hellas will continue to rank among the top players in the life and health sector, realising its vision of becoming Greece’s best-in-class insurance company, while still adhering to its core values, ‘care, clear, commit’.

Growing popularity of SEZs demonstrates the raft of benefits they offer

Posted on by Max Tomlin

Targeted industrial and development policies have re-emerged as the go-to apparatus for attracting investment to strengthen domestic productive capacity and international trade competitiveness. Meanwhile, the global launch of the UN’s Sustainable Development Goals (SDGs) has driven home the need for governments worldwide to promote and facilitate not just more investment, but the right kind of investment.

A proven policy option for developing-country governments is the establishment of special economic zones (SEZs). These zones can promote investments capable of delivering the desired capacity-building and technology diffusion outcomes and, in addition, offer significant latent potential to attract and leverage sustainable development-oriented investment.

SEZs – sometimes called export-processing zones, industrial development zones, free trade zones or a range of other epithets – have seen a spectacular rise in popularity over the past few decades. Situated in geographically demarcated and administered hubs, with a wide set of advantages designed to lure investment and stimulate trading opportunities, SEZs became de rigueur in the 1990s and early 2000s as a vehicle for host countries to develop manufacturing capabilities and competitive industrial labour forces. Apart from direct fiscal incentives, a range of other benefits – such as dedicated services and infrastructure or administrative management assistance – may be conferred to enhance the efficiency and cost-effectiveness of operations in the zone.

176

Number of SEZs in 1986

4500

Number of SEZs in 2015

From a policy perspective, the concentrated nature of an SEZ provides policymakers with a demarcated, purpose-built industrial site of manageable scale to negotiate the complex demands of developing industrial activity-oriented infrastructure and the affiliated regulatory environment. An SEZ, therefore, provides quasi-laboratory conditions where policies and industrial development approaches can be tested, with a view to replicating them on a larger scale if successful. They also provide fertile ground to hone business linkages with regional or global value chains, thereby stimulating trade participation.

As a result of these benefits, the establishment of SEZs mushroomed from an estimated 176 zones in 1986 to more than 4,500 in 2015, with the bulk based in developing countries. Nonetheless, developed countries, including Ireland, New Zealand and the US, also boast them.

Triple challenge

The economic success of SEZs is not necessarily guaranteed, however. In recent years, the operating environment has toughened, and today three challenges in particular confront the zones.

The first is the difficult global economic environment: since the global financial crisis of 2008, demand for trade has been chronically weak, while trade growth itself has been slow. With two thirds of global trade depending on the operations of multinational enterprises, foreign direct investment (FDI) in economic zones has been choked as a result. Indeed, the road to global FDI recovery has been bumpy, and the level of investment flows remains below the peak level seen in 2007.

The sheer number of economic zones also means there is fierce competition between them – within regions and globally – as countries liberalise investment rules and up the ante with investment promotion measures, competing to attract investors to their zones.

The second challenge is the erosion of location-based advantages. For economic zones, the slow growth in global trade and investment is compounded by the erosion of location-based advantages that traditionally profited SEZs. That is, the locational factors that previously attracted capital to investment opportunities have been altered by technological advances. Cheap labour and abundant land are no longer sufficient to ensure investors will sign up, as enhanced digitalisation and the proliferation of automation have become important drivers of competitiveness, and thus determinants of investment.

The third challenge relates precisely to the sustainable development imperative, which has moved to a high position on the global agenda since the announcement of the SDGs in 2015. The SDGs will determine the development objectives of the international community over the next 15 years. Multinational enterprises and SEZs alike are under considerable pressure to curb their impact on communities and the environment, while also pursuing business activity that will help advance the SDGs. As such, a marked shift in corporate behaviour and business models is already under way. This change has largely been directed from within corporate ranks, as reputational risk factors prompt the private sector to adhere to ever-stricter environmental, social and corporate governance (ESG) standards.

The power of larger firms is driving this change not only within industries, but across entire value chains, with smaller competitors and suppliers being actively encouraged to change their behaviours. This has put SEZs – which are an integral part of global and regional value chains – at the centre of international pressure to comply with elevated ESG standards and explore sustainable development business models.

Five ways to sustainability 

The latter challenge, in fact, also presents the first opportunity for SEZs to reinvigorate their competitiveness through a shift in perspective and presentation. A 2013 United Nations Conference on Trade and Development (UNCTAD) survey of SEZs indicated that the zones provide limited sustainability-related services – if any. However, a handful of pioneering SEZs explicitly offer services across multiple areas of sustainability, including the areas of labour practice, environmental sustainability, health and safety, and good governance (or actively combatting corruption). Such commitments have stood them in good stead.

Maintaining the broad notion of these hubs as centres of excellence, SEZs could reconfigure themselves into sustainable development zones, establishing themselves as models for incubating pro-SDG business activities. The conversion of SEZs into SDG-oriented hubs could also aid cost-effectiveness and provide a solid platform for promoting and facilitating investment in specific and interrelated SDGs sectors. This could, in turn, inject impetus into a host country’s broader efforts to advance sustainable development imperatives, potentially delivering SDG-hub prototypes that could be replicated elsewhere.

At the same time, SDG-focused conversion could reorient economic zones that have lost focus by providing them with a new strategic purpose and, potentially, a new lease of life.

The second opportunity for SEZs to become more competitive is to adopt a partnership approach, which could also revitalise stagnant, uncompetitive economic zones. Investment promotion agencies (IPAs) and outward investment promotion agencies (OIAs) are specialised in catalysing FDI – often in challenging environments and difficult circumstances. These institutions play an important role in identifying and seeking out opportunity, and providing financing and services for investment projects, especially in developing countries. Forming strategic alliances with IPAs in their own countries and with OIAs (including development banks) in FDI-source countries could benefit SEZs, particularly if such alliances are organised around common objectives – for instance, to promote and facilitate private investment in sustainable development sectors or issue areas.

Enhanced competitiveness 

The potential goals and benefits from such partnerships could foreseeably include information sharing, technical cooperation and the marketing of SDG investment opportunities, among others. OIAs in particular possess the requisite competencies in order to: secure financial resources for SDG investment projects; help reach out to their private sector client base in home countries; assist in mitigating project risks; complement expertise in project preparation, assessment and approval; and partner in project monitoring and impact assessment. Inclusive, multi-stakeholder platforms, such as UNCTAD’s World Investment Forum and its technical assistance packages, can provide opportunities to facilitate such partnerships.

The third opportunity is the adoption and strategic integration of digital technology, which is key to the survival of SEZs. The incorporation of digital technologies in global supply chains across most industries has had a profound effect on international production. Digitalisation presents challenges but also opportunities within these international production networks. SEZs’ very lifeblood is the provision of value chain linkage opportunities to firms located within the zone. It is therefore essential that they advance digital adoption and connectivity if they are to remain as competitive and relevant players within these networks.

Fourth, SEZs could strengthen their position if they hone in on creating linkages with domestic firms – in particular, by attracting lead firms that can link up directly with producers and anchor down activity in the zone. These firms can provide technical support, training, finance and even inputs. They can also help set benchmarks to assist supply firms, something that is often tricky and complex.

Lastly, numerous new forms of private finance have sprung up in recent years, which have broadened the scope and diversity of investor bases that can be sought out. SEZs could stand to benefit if they explore these innovative financing options. They include venture capital funds, fintech firms, impact investment funds and crowdfunded ventures. Although still in their infancy in many developing countries, such investors nevertheless provide viable funding streams to smaller firms (that often set up shop in SEZs) that might otherwise be overlooked by risk-averse finance institutions, such as banks. In India, for instance, venture capital has helped boost start-ups in sectors with high growth potential, with international and domestic operators providing funding to promote growth in sectors such as IT and biotechnology.

For SEZs to survive in the challenging current environment, SEZ policy must innovate, moving away from the provision of low-cost export hubs with weak standards, towards the establishment of global centres of excellence in sustainable development. Through novel competitive advantages, secured by providing not only high-quality infrastructure but also robust accompanying environmental and social standards, SEZs can be restructured to increase their effectiveness in attracting investment from multinational enterprises seeking increased sustainability integration in their value chains.

PSD2 is here – but what does this mean for the banking industry?

Posted on by Max Tomlin

It may have felt like a long time in the making but, on Saturday January 13, the Second Payment Services Directive (PSD2) officially came into effect. The directive is set to reinvent banking and payments as we know it, ushering in a new era of ‘open banking’, where customers have unprecedented freedom in how they access financial services. This new mandate aims to provide more flexibility and freedom to users, with customers essentially being able to mix and match individual solutions as they see fit.

As we progress through 2018, we hope to see banks clubbing together to establish mutual standards over how to implement PSD2 securely

As a result of this, banks are now required to share their application programming interfaces (APIs) with third-party applications. However, many have still not been advised on how to do this securely.

Weaknesses in sharing APIs
The principal weakness in sharing APIs is the simple authentication that is widely used by most API management solutions to confirm that the client app on a device is genuine and has been authorised to utilise server assets. If a cyber-criminal breaks through an app’s security and decompiles its code, they could potentially root out the encryption keys. Attackers can then trick the system into recognising them as a legitimate client, giving them access to anything the API is authorised to connect with.

To prevent attackers from exploiting an API in this way, banks will need to ensure that the cryptographic keys they use to authenticate themselves cannot be accessed. This can be done through techniques such as code obfuscation, a process that renders code into unusable scrambled code; or debugger detection, which will detect whether the application has been used in a debugging environment used by hackers.

Can PSD2 function securely?
The only way we can be sure PSD2 will function effectively and securely is through the use of mobile banking. However, mobile phone systems tend to actively discourage secure communication between different applications so that the privacy of the end user is protected. This means that no application is able to see what other applications are on a mobile device because barriers have been put in place to avoid mobile phones working as interim solutions. Nevertheless, PSD2 wants to break these barriers. Therefore, it is vital there is perfect integration and authentication between the banking and third-party application’s customer data. Without this, user data, including account details and usernames, are at risk of exposure due to a lack in security.

Taking responsibility
The truth of the matter is that PSD2 is something everyone is going to have to deal with, and it is going to have a big impact on mobile application development. As we’ve said before, the onus really is going to be on the banks. The PSD2 regulation makes it clear that they are responsible for the ownership, safety and confidentiality of their customers’ account data.

The only way the banks can ensure the security of their customers’ data is by implementing the technology and counter measures that they should already have in place in their mobile applications. Basically, the best and most secure way to allow third parties to share their APIs is for the banks to force an authorisation through the mobile banking applications. This should then allow them to directly communicate with the end user before any third-party application has been permitted access to the data.

Furthermore, as we progress through 2018, we hope to see banks clubbing together to establish mutual standards over how to implement PSD2 securely. Such standards will involve: securing the API; securing authentication between the applications; and creating a mutual code of connection for anyone that wants to use it.

Overall, banks are going to have to do everything they can to maintain their well-founded reputation as leaders in security, including creating a united approach to ‘open banking’, as they work on their own solutions throughout 2018.

FBNInsurance continues to prosper despite Nigeria’s sluggish economy

Posted on by Max Tomlin

For many years, Nigeria’s economy was one of the fastest growing in the world. However, this changed in 2016 when the country was hit by depressed oil prices and a decline in production due to vandalism. Last year, Nigeria experienced its first full year of recession in 25 years of prosperity, according to the World Bank. Fortunately, however, the country has quickly overcome this decline, and is now emerging from its recession.

FBNInsurance’s CEO has overseen a management team that has navigated the young company to heights that only established players can aspire to reach

In 2018, Nigeria’s GDP is forecast to return to positive territory. What’s more, the Nigerian Government has launched a three-year plan to make economic growth more sustainable and boost recovery, with reforms aimed at diversifying the oil-dependent economy. If implemented successfully, it could put the country back on track to achieve long-term economic growth for years to come.

Amid recent adversity, some businesses have managed to remain prosperous, weathering the storm with remarkable success. FBNInsurance is one of those few. Its achievements despite the unfavourable economic climate have been recognised by World Finance, which named the company the Best Life Insurer in Nigeria in 2014 and 2016.

A new culture

FBNInsurance’s success was not easy to achieve in Nigeria’s sinking environment, making it a noteworthy milestone given the market’s recent underperformance. The company started to operate in the local insurance sector in 2010, later expanding into different cities across the country. Having passed the tests of a difficult economic background, it has also broken the market’s historic scepticism by crafting a new culture among people and businesses in Nigeria.

Thanks to its affiliation with FirstBank and the Sanlam Group, two leading African financial institutions, FBNInsurance was expected to succeed from the beginning. Shortly after its establishment, however, the management at FBNInsurance realised that with a tough market forming, more than good inheritance was
needed to ensure success.

Val Ojumah, who has been the Managing Director and CEO of FBNInsurance since it was founded, recalled its early stages: “We had a very rough start. Getting business was a great challenge. If we thought the name was all we needed to survive, we were quickly proved wrong. We had to dig in really deep and carve a niche for ourselves.” Having survived its infancy, the firm has become one of the fastest growing insurance companies in the country.

Such performance has been a direct result of the expertise of those in leadership positions at FBNInsurance. Ojumah highlighted the board’s essential role in providing a strategic vision, as well as the quality of its staff, whose daily commitment has been key to enabling the company’s growth. In this hard-working
corporate culture, FBNInsurance’s CEO has overseen a management team that has navigated the young company to heights that only established players can aspire to reach.

Strategic moves

Three years after it began operations, the company acquired Oasis Insurance, a general insurance company, which was rebranded as FBN General Insurance. After becoming FBNInsurance’s subsidiary, its losses turned to gains in the first year.

Today, FBNInsurance continues its upward trajectory, defying all expectations. In 2010, the company had a gross written premium of only NGN 20.5m ($136,287). More recently, results had remarkably improved: by the end
of the 2016 financial year, the written premium reached NGN 9.9bn ($27.5m).

Despite starting from scratch, the company managed to make profit fast. At the end of 2016, FBNInsurance declared a profit after tax of NGN 2.23bn ($6.2m), while total assets reached NGN 29.5bn ($82m). These results are a major achievement, especially taking into account the country is still recovering from a recession and that, historically, the insurance market has low penetration. Ojumah attributed the company’s success in remaining profitable during these hard times to “a strong underwriting culture and a deep
attention to the customer’s needs”.

Another aspect that has allowed FBNInsurance to maintain a prominent position in the industry despite turbulence is its solid presence in the retail segment. “Our strength is in retail sales. We have more than 2,000 financial advisors who comb the nooks of the country, selling insurance and increasing our market share,” Ojumah highlighted.

The company’s retail team has become a model for others operating in the industry. In fact, retail sales generated almost 70 percent of FBNInsurance’s income in 2016. Such results are based on a deep understanding of the market. “Ours is a market with deep trust issues, following years of sharp practices and unfulfilled claims,” said Ojumah.

Consequently, FBNInsurance has worked painstakingly to improve the available offerings in Nigeria’s market. “Winning the trust of the people takes time and effort, but we have been able to do that one policy at a time,” Ojumah said.

Recognised success

Over the years, FBNInsurance has not only won the people’s trust, it has also garnered accolades from other stakeholders along the way. Among the awards it has acquired, the company won the Sanlam Emerging Markets Cup of
Nations Rising Star award in 2013 and 2016, thanks to its high premiums.

FBNInsurance’s expansion and accomplishments in the last few years have multiplied its awards. Inspen Online, a site specialising in insurance and pensions, named FBNInsurance its Insurance Company of the Year in 2016. There was also recognition for the company’s head, Ojumah, who was recognised
for his management skills.

In the same year, the main Pan-African research and credit rating agency, Agusto & Co, gave FBNInsurance an A+ rating. The agency noted: “The rating reflects FBNInsurance’s strong profitability and capitalisation levels, satisfactory investment management and a moderate exposure to underwriting risks.”

Ethical insurance

The awards and recognitions that FBNInsurance has achieved have not made the company complacent, and it continues to set goals for the future. Adenrele Kehinde, Chair of the Board, described some of these aims: “Our three-year strategic aspiration is to be the most profitable life insurance company in Nigeria based on return on equity. We hope to fulfil this aspiration by consistently achieving strong and sustainable growth, improving customer experience and satisfaction, enhancing operational efficiency across key functions, and building a competent workforce.”

Customers remain at the top of the company’s daily priorities. “We are a people’s company, committed to doing business by ethical means, while also having a positive impact on local communities through our corporate responsibility and sustainability actions,” Kehinde explained. Education, health and community development are some of the areas in which the company’s policies have made the biggest impact.

On FBNInsurance’s fifth anniversary, the company donated a dialysis machine to the Lagos General Hospital. Moreover, in 2016 the company partnered with the Rotary Club of Omole Golden, in order to provide screening and immunisation for breast and cervical cancer to 750 girls and women.

In the last three years, the insurer has also supported Jakin NGO, a Lagos-based not-for-profit organisation that provides back-to-school kits for vulnerable and disadvantaged students. With FBNInsurance’s support, the programme has already provided 3,000 children with school supplies.

Furthermore, the company has provided scholarships to 250 disadvantaged students of Aragba-Orogun, a rural community in South Nigeria, giving them a chance to access proper education. In another campaign, FBNInsurance’s staff donated toiletries, food and money to several orphanages and homes for the elderly.

Having crafted a new insurance culture in Nigeria, FBNInsurance is not taking its achievements for granted; it’s using them as a platform to take the next step. With 136 permanent
staff, 74 temporary employees and more than 2,000 retail agents in 28 sales outlets across Nigeria, the company has become a solid
player in the insurance sector.

Looking ahead, Ojumah explained that FBNInsurance seeks to continue extending its retail footprint “until every insurable Nigerian has an FBNInsurance policy”. The company’s
management is determined to take FBNInsurance to the next stage and turn it into
an insurance powerhouse. n

Policing the ICO highway

Posted on by Max Tomlin

Daniel Wang, an ex-Google software engineer, is one of the pioneers of the blockchain community in China. After being involved in several start-ups in the sector, he founded Loopring in 2016, a Shanghai-based non-profit organisation. Loopring aims to build a protocol that will help cryptocurrency users shift from one cryptocurrency to another through a virtual order book. The end product will be similar to a decentralised cryptocurrency exchange, over which Loopring will have limited oversight.

To fund its ambitious plans, Loopring raised approximately $45m through an initial coin offering (ICO) in August 2017. This fundraising mechanism is often used by blockchain start-ups to finance their projects. Through ICOs, companies create and auction digital tokens, which can later be used on their platforms or sold on cryptocurrency exchanges.

China cracking down 

Everything was going according to plan for Loopring until September 4, when the Chinese central bank announced a ban on China-based ICOs. Although rumours of an imminent crackdown had already been making the rounds in the local blockchain community, the announcement sent shockwaves through the market. Few people thought that the authorities would take such drastic measures, as Wang explained: “We didn’t expect a complete ban on ICOs in China. We believed our regulators were more open-minded, given [that] China’s mobile payment and internet-based financial start-ups were flourishing. So when the ban was announced, we were shocked.”

What is viewed as a threat by some regulators is an opportunity for others. Companies that were planning to issue tokens in China and South Korea have tacitly relocated to other jurisdictions

The ban sparked fears of a heavy-handed crackdown, as Wang recognised: “Many people I know worried about being restricted from travelling abroad, or even taken into custody. As in many other countries, there is no proper law in China for regulating cryptocurrencies, so the term ‘penetration regulation’ used by regulators leaves a lot to [the] imagination regarding the potential penalties and their severity.”

Many investors asked for a refund, which the company promptly processed. Loopring is now getting ahead with its original plans. But the ban served as a reminder that regulators can throw a spanner in the works anytime they want. Shifting from one token to another has become difficult for China-based users, with the authorities closing down several exchanges.

Even non-Chinese blockchain companies were severely affected. Loi Luu, co-founder of the Singapore-based blockchain start-up Kyber Network, which conducted its own ICO in September, said: “We had to exclude Chinese [investors] from participating in our token sale event. As a platform that thrives on traffic, the exclusion of Chinese supporters was a huge loss.” Eventually, the company got around the problem by issuing a non-transferable token available exclusively to registered users.

Chinese authorities justified the ban as a precautionary measure against fraud and Ponzi schemes. The risk to financial stability is real. Andrew Sheng, Chief Advisor to the China Banking Regulatory Commission, told World Finance: “There is no deposit insurance scheme covering such currency, but if there is widespread loss, the public will claim that regulators have been silent on the product’s dangers and [that] they have acknowledged that it is permissible to invest in such products. Shifting from legal currency into cybercurrency can be very fast, and therefore the risk is systemic.”

Even for blockchain enthusiasts such as Wang, the crackdown can be helpful if proper regulation is on its way. He noted:  “The ban of ICOs is very necessary as there are so many people in this country who don’t have a good sense of risk, and some of them even believe a tenfold profit on their initial investment is guaranteed.” Chinese officials have indeed signalled that the measure is temporary until a licensing scheme for exchanges and ICOs is put into place. In the meantime, the ban may crash the speculative bubble that has given ICOs a bad name, as Wang observed: “More companies were planning ICOs, but some of them had nothing to do with blockchain technologies and were designed as pyramid schemes. The ban will not force true blockchain believers to quit, so I’m still optimistic about the Chinese blockchain ecosystem.”

For Luu, the ban may even have positive side effects. He explained: “The adversity will likely force people to think outside the box, and the determined ones will find ways to get around it. Some might register in countries like Singapore or Switzerland, where there is established infrastructure, stable politics and abundant talent. That might force them to get out of their comfort zones and introduce higher-quality projects in order to stay relevant.”

To ban or not to ban

China is not the only country reining in the cryptocurrency frenzy. Regulators around the world are struggling to grapple with increasing demand for digital tokens (see Fig 1), partly prompted by low interest rates and diminishing margins in other markets. As of mid-November, more than $3.2bn had been raised through ICOs in 2017, according to data published by CoinDesk, a website covering cryptocurrencies. Furthermore, some ICOs themselves were valued at over $200m (see Fig 2).

The valuation of most tokens is volatile, spurring concerns of an uncontrollable bubble. Speculation is rampant according to Luu: “Most ICO projects don’t have a working product, let alone a revenue stream, so investors are putting money on the promises of these projects, many of which have a high probability of not working out.”

For some regulators, an all-out ban is the easiest way to tackle uncertainty. In October, the South Korean financial regulator effectively prohibited South Korean companies and investors from getting involved in ICOs.

The regulator’s decision came as a surprise to insiders who expected South Korea to take the lead in the Asian market. Leon Song, Communications Manager at Proof Suite, a blockchain start-up registered in Estonia but primarily operating in South Korea, said:  “Although there were growing concerns over the growth of fraudulent cryptocurrency projects within the country, it was never expected that they would pull an all-out ban on ICOs like China did.” Proof Suite, which develops blockchain-based investment platforms and helps users tokenise real-world assets, has a global outreach and was not directly affected by the ban, although it launched its own ICO a few weeks after the ban. That being said, it had to adjust its business model in South Korea. Song added: “It did affect our plans to help tokenise Korean companies. We are now focusing less on business operations within South Korea as companies and individuals are now not allowed to host any form of ICOs.”

As with many other blockchain enthusiasts, Song believes that the ban will be temporary, especially since the local cryptocurrency community is coming together to lobby the regulator. But some damage has already been done in Song’s view: “Fraudsters will always remain, and companies can even register in other countries and still host ICOs within South Korea. This regulation will not only slow down the nation’s overall process of understanding and leveraging this new, innovative technology, but it also ultimately results in the nation losing valuable and legitimate companies.” If anything, the ban will be ineffective, with Song believing that “it is the equivalent of banning the consumption of pepperoni in order to regulate the consumption of pizzas”.

$3.2bn

Amount raised through ICOs in 2017 (as of November)

40%

of central banks may use blockchain applications over the next decade

Many experts believe that the decision was driven by political considerations. Professor Sooyong Park, Director of the Blockchain Research Centre at Sogang University and former President of the National IT Industry Promotion Agency, said: “The Korean Government is afraid that investors – who in general are Korean citizens – may lose money and will start complaining. To avoid those kinds of problems, the government took the easy road and banned ICOs instead of improving regulation. There was no need for a ban. From my point of view, they overreacted.”

Opportunities still abound

What is viewed as a threat by some regulators is seen as an opportunity for others. Companies that were planning to issue tokens in China and South Korea have tacitly relocated to other jurisdictions, notably Hong Kong and Singapore. The latter is attracting innovators through its regulatory sandbox, which permits fintech experimentation for a limited period of time. Ravi Menon, Managing Director of the Monetary Authority of Singapore, told the Financial Times in November that Singapore is interested in hosting non-speculative ICOs.

Similarly, Japanese regulators have taken a light-touch approach. Japan was one of the first countries that recognised bitcoin as legal tender and has since become a major cryptocurrency trading centre. The regulator, the Financial Services Agency, has warned investors of potential risks associated with ICOs. Nonetheless, it has recognised 11 cryptocurrency exchanges and has endorsed a plan by a consortium of Japanese banks to issue J Coin, a digital currency to be used for payments and money transfers.

Despite the relatively favourable regulatory framework, few firms have issued tokens. Shirabe Ogino, a board member of the Fintech Association of Japan and founder of the fintech companies Zaisan Net and Phantom AI, said: “Many Japanese companies are thinking to do an ICO, but only a few have done it so far. Perhaps next year we will see more. There is not much know-how on ICOs, so everybody wants to see what is going on elsewhere first.”

Alarmists have warned that Japan may follow the path of other Asian countries and ban ICOs altogether. However, Ogino dismissed these claims: “I don’t believe the regulator will do that in the near future. They are supporters of cryptocurrencies. But they will probably issue a more clear message on ICOs, specifying which ones are legal and which [are] not, and which qualify as securities.” That being said, speculation that Japan may become a safe haven for blockchain companies fleeing other Asian countries is also unfounded, according to Ogino. “Due to the language barrier, we cannot attract many foreign companies to issue tokens here,” he said.

Tightening EU and US regulations 

Regulators in the developed world rarely adopt a heavy-handed approach to digital affairs, and banning ICOs is not a feasible option for them. However, they have to walk a tightrope between inertia and overregulation.

The problem is more complex for policymakers in the EU, where member states may have different views, delaying unified action. Some national regulators, including the ones in Germany and the UK, have issued warnings over the risks associated with ICOs, while others have skipped the issue, waiting for European watchdogs to act first.

The European Commission has set up a taskforce to look into fintech innovation, including blockchain and cryptocurrencies. Several stakeholders have lobbied the commission to consider newly minted cryptocurrencies as a “novel asset class” that would require light-touch regulation. Others have called for strict rules that will stop ICOs being used as a conduit for money laundering and other illegal activities.

At the core of the regulatory debate is a battle over the future of blockchain, said Anna Felländer, visiting fellow at the Swedish House of Finance and an advisor to the Swedish minister of digitalisation: “There is a balancing act between an open blockchain, that is more efficient and democratic, and closed systems, that can be more easily regulated but may favour oligopolies. At the moment, closed blockchains are gaining momentum through increasing investment.”

Creating a level playing field for all parties is paramount, said Felländer: “EU regulators should come together with blockchain start-ups and financial institutions to create a regulatory sandbox and agreed standards at the EU level. There has to be a flexible governance system that maintains the blockchain’s robustness. Then you need to open a dialogue with non-European countries on international standards.”

A hint about the EU’s thinking on the matter came in November when the European Securities and Markets Authority (ESMA), the EU’s financial regulator, issued two statements on the risks for investors and issuing companies. The agency warned investors that they may lose “all of their invested capital, as ICOs are very risky and highly speculative investments.”

The watchdog also stressed that firms involved in ICOs that qualify as financial instruments will be subject to relevant legislation. This includes the recently updated Markets in Financial Instruments Directive (MiFID II), the strict conditions of which are seen as onerous in parts of the financial world. “ESMA is just emphasising that investor protection should prevail and that some ICOs fall under regulation already in place,” said Emilie Allaert, Head of Operations and Projects at  the Luxembourg House of Financial Technology, a platform backed by the Luxembourg Government that supports fintech companies.

Regulators in the developed world rarely adopt a heavy-handed approach to digital affairs, and banning ICOs is not a feasible option for them

ESMA’s statement could be a first step towards a more robust regulatory framework, according to Allaert: “It is important for the EU to position itself, because many countries have already done that. Existing regulation such as MiFID and the Alternative Investment Fund Managers Directive (AIFMD)  are all about protecting investors, but right now they are leaving investors in the dark on ICOs.” Crucially, the watchdog warned investors that putting their money into ICOs registered outside the EU would leave them without any legal protection. This is a conundrum for regulators, said Allaert: “With ICOs you never know which jurisdiction you are in. Is it the country of the founder or the country where the ICO is registered? And are ICOs really registered anywhere? This is a truly global market, which is something we have never seen before.”

In the US, memories of the subprime loan crisis have stoked fears of another speculative bubble, this time on the blockchain. Jordan Belfort, the notorious ex-financier whose story inspired the film The Wolf of Wall Street, warned last year that ICOs are the “biggest scam ever”.

Responding to these concerns, last summer, the Securities and Exchange Commission (SEC) issued a statement warning investors that some cryptocurrencies issued through ICOs might be deemed securities, and therefore would be subject to relevant US regulation. This is a reasonable approach, according to Dr David Andolfatto, Vice President in the research department at the Federal Reserve Bank of St Louis: “It is people raising funds in exchange for promises, which is an old human activity already regulated in the US and elsewhere. The fact that this is happening through ICOs simply means that the securities issued are slightly different in the sense that they exist on the blockchain. But this shouldn’t detract regulators from intervening as they see fit.” In November 2017, SEC went one step further, warning against ICOs endorsed by celebrities and charging two token-issuing companies with fraud and selling unregistered securities.

States can do it too

If start-ups can create digital money, why can’t central banks do the same? This question, first posed by several economists, is not merely academic anymore. Chinese officials have signalled that China may soon issue its own state-run digital currency in an attempt to control the cryptocurrency market. Several other countries – including Estonia, a pioneer in digital innovation, and Uruguay – are also experimenting with digital currencies. In a survey by the Cambridge Centre for Alternative Finance, 40 percent of central banks said that they may use blockchain applications, including cryptocurrencies, over the next decade.

Issuing digital money is not something new to central banks. Their reserves have long been more electronic than physical in form and are also cryptographically secured. Opening their digital coffers to the public is an idea that many experts endorse, as Andolfatto explained: “I see a lot of merit in the idea of central bank digital currency, that is, letting people and businesses open accounts at a central bank. People already have paper accounts with central banks—that’s what money in your wallet is. So why not permit digital accounts as well?”

But a full-blown cryptocurrency would be trickier, Andolfatto explained: “Issuing digital money in the form of a cryptocurrency like bitcoin is an entirely different matter. Regulators would worry whether this anonymous digital cash would be used for criminal purposes. I don’t see any major central bank issuing such a cryptocurrency in the foreseeable future.”

Riksbank, Sweden’s central bank, is exploring the possibility of issuing a digital currency, the e-krona, as an alternative option to cash. The bank is still investigating whether this could be a
blockchain-powered cryptocurrency. Felländer, who is closely following the discussions, said: “We need to build financial infrastructure that could be easily adapted when blockchain technology is fully adopted in the banking sector.” An e-krona directly issued by the central bank will open up the system to new players, Felländer added: “This means that traditional banks will not be the obvious intermediary for the e-krona. New intermediaries, such as wallet providers, would be able to compete.”

Some have even suggested that the European Central Bank (ECB) could create its own cryptocurrency; an e-euro for everyone to use. It’s a distant but not unrealistic goal, according to Felländer: “The question is not whether that will happen, but when it will happen. Sweden is very mature in digital affairs, but this could take longer for nations that depend on cash and use it in other ways. They have a different emotional relationship with it and the anonymity it provides. So it could take years until the ECB does it, and there are bumps along the way.”

Economic shamanism

Posted on by Max Tomlin

Science and magic have always had a lot in common. Pythagoras, who is sometimes described as the first ‘pure’ mathematician, ran what amounted to a pseudo-religious cult with all kinds of strange teachings and an interest in esoteric symbols. The first mathematical models of the cosmos were developed by Greek mathematicians for the purpose of astrology. Chemistry grew out of alchemy, whose practitioners included scientists such as Isaac Newton. In the late 19th century, the discovery of the cathode ray tube, with its eerie green glow, seemed to excite the spiritualist community as much as it did the scientific community.

And then there are the moon landings, which some still claim were a staged illusion, but which were certainly performed to amaze the soviets with the magic of American missile technology during the Cold War.
Today, things have changed: magicians are seen as mere paid entertainers, while scientists are revealing the deeper truths of the universe. But if there is one field that seems to remain especially close to its magic roots, it is economics.

Neoclassical economics was, of course, explicitly modelled on Newtonian science, not magic. The idea was to model human society as if it were a kind of machine, ruled by scientific laws. However, as John Rapley noted in his wide-ranging and entertainingly written book Twilight of the Money Gods, this insistence on scientific rigour actually had the effect of turning the field into a kind of religious doctrine based on perceived truths. He observed: “It would prove tempting for many an economist to say their assumptions were beyond question since a century of research had established them, and thus their findings were beyond critique.”

At the same time, their role as interpreters of economic forces has given economists an air similar to that of priests or shamans. Paul Samuelson’s 1948 textbook Economics, according to economist Robert Nelson, was meant to promulgate “a religious commitment to the market” and to “the priestly authority of economists.” It also hardened the role of abstract mathematics as the official language of economics.

Alan Greenspan, Rapley noted, was lauded for his “shaman-like power over global markets”. Similarly, for the quantitative finance experts who designed the complex derivatives that blew up during the financial crisis, he proclaimed: “Like a temple priest using a sacred language or a witch doctor mouthing incomprehensible spells, they sold a fairground trick to buyers who trusted in their authority.”

Blasphemous economists
Like other sects, economics maintains strict control over its members to make sure they do not depart from orthodoxy. In his 2009 book A History of Heterodox Economics, the late economic historian Frederick Lee described how mainstream economists have used their organisational power “to prevent the hiring of blasphemous economists, to deny them tenure, or to directly get them fired for teaching blasphemous material”. According to Rapley, one of the reasons the work of heterodox economists such as Hyman Minsky was considered “heretical” was because it eschewed abstract mathematical arguments; it was “not even written in the temple language in which economists held their debates… [and] you can’t work at the Vatican if you don’t speak Latin”. Things are tough in magic school.

Finally, another thing that makes economists similar to shamans is their strange combination of passivity and activity in the face of the gods. On the one hand, their official policy is that they can’t predict markets. For instance, the efficient market hypothesis states that markets are hyper-rational entities that somehow incorporate all available information, so no one can make better predictions (which is strange, since in other fields – such as transportation – unpredictability is not associated with efficiency or hyper-rationality).

Money washes around the world at an increasing rate, creating storms that seem to come out of nowhere. Economists don’t even try to predict these storms, but instead ascribe them to “random shocks”. Ben Bernanke, for example, mused in a 2009 commencement address: “Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect.” Indeed, economist Noah Smith wrote in 2017 that models typically assume “recessions are like rainstorms, arriving and departing on their own”. Economists are like shamans praying for rain, with the difference being that they know their prayers have no effect.

On the other hand, economists are granted enormous power over our lives. As Rapley noted: “Economists don’t just observe the laws of nature, they help make them.” Furthermore, their experiments are often as disruptive as anything that nature might throw at us. Rapley gave the example of Russia’s adoption of a market economy after the collapse of the Soviet Union, the effects of which could be measured as a sudden decrease in expected lifespan: “In the scale of human suffering, Russia’s conversion to a new creed ended up rivalling many of the great religious crusades of the past.” This magic is powerful stuff.

Now for our next trick
So, how are the economic shamans responding to the financial crisis, which many see as a crisis in faith (apart from advising a punishing programme of austerity to atone for our sins and purge us of guilt)? In concluding his sweeping book, Rapley sounded an optimistic note: “The money gods have fallen. Thus, economists are once again free to begin doing the one thing they have always been good at – finding practical solutions to the problems that the public square has asked them to solve.”

I’m not so sure about the last part. I would argue that economists are failing exactly because they have proved poor at providing practical advice for problems that ail us: inequality, inflation, financial instability, and so on. Meanwhile, the real money gods – namely the financial sector, which created the crisis in the first place – are as powerful as ever.
However, I do share Rapley’s optimism that economics is in for an exciting time. It is certainly time to learn some new tricks.

Agustín Carstens: a figurehead for emerging markets

Posted on by Max Tomlin

 “As unconventional monetary policy starts to normalise, I think markets will start to discriminate more among asset classes like emerging markets”

Agustín Carstens

Shortly after Dominique Strauss-Kahn resigned as head of the IMF following a scandal over sexual abuse allegations in 2011, Agustín Carstens’ name arose among those tipped to replace him. Carstens was at that time the governor of the Bank of Mexico, a position he took in 2010 after a solid career in the public sector, where he served as secretary of finance among other key posts.

Outside Mexico’s borders, Carstens had built an international reputation, making him a suitable candidate to lead the IMF. A few years before he had the chance to compete for the top position, Carstens served as the IMF’s deputy managing director. As an outstanding representative of emerging markets, Carstens quickly gathered support and was shortlisted alongside Christine Lagarde who was, at that point, France’s finance minister. At the time, he argued that “a pair of fresh eyes could see European problems with greater objectivity”. However, Lagarde eventually took office at the IMF, where she has remained ever since.

Despite not having achieved his ambition to head up the IMF, the Mexican economist made it clear to the global community that he was prepared to disrupt the tradition of placing more developed countries at the top of the most relevant international economic organisations.

Carstens finally achieved that goal in December 2017, when he became General Manager of the Bank for International Settlements (BIS). The international financial organisation, known as the bank for central banks, was established in 1930 and is owned by 60 member central banks of countries that, together, make up about 95 percent of global GDP.

Global influence
At a time when Mexico is being battered by the policies of the Trump administration, which include the construction of a wall on the boundary between the two countries, one person from the southern side of the border is breaking free of the usual limits of influence, reaching a global level. As head of the BIS, Carstens has started to play a key role in one of the major institutions plotting the course of the world’s economy.

Agustín Carstens in numbers:

$5bn

Amount Carstens saved Mexico after the financial crisis

4%

Rise in inflation under Carstens

80%

of Mexico’s exports go to the US

2006

The year Carstens became Mexico’s secretary of finance

Speaking to World Finance, Vice Chairman of the BIS, Raghuram Rajan, highlighted what he thinks is the new general manager’s main virtue: “[Carstens] has the unique capacity of being trusted by everyone, both by the emerging markets, which believe he will understand their issues, and by the industrial countries, where he is seen as a very pragmatic and balanced person, but forceful when he needs to be.”

Rajan, who is currently a professor at the University of Chicago, met Carstens in 2003 when both economists were working for the IMF. Since then, Carstens has not only been a respected colleague to exchange ideas with, but also a trusted advisor. In 2013, when Rajan was appointed governor of the Indian central bank and had to fight an inflation rate of over 10 percent, his Mexican counterpart told him not to focus on the exchange rate, but on bringing inflation down credibly. “That was exactly what we had to do. We [set] inflation targets and the rupee has
been very stable,” Rajan recalled.

Although he was raised in a family of accountants, Carstens developed outstanding skills in the field of economics. He acquired his knowledge in the prestigious Instituto Tecnológico Autónomo de México, where he received a BA in economics. A few years later, Carstens became a prominent student at the University of Chicago, an institution known for favouring free markets and the tight control of monetary policy. In just three years, he completed a masters and a PhD in economics.

Later, he served in various positions in the public sector: he served as secretary of finance under President Felipe Calderón’s administration between 2006 and 2009, before becoming head of the Bank of Mexico, where he kept Mexico’s monetary policy under control between 2010 and 2017. He interrupted his second mandate to move to the BIS in December 2017.

During his tenure, Carstens’ authority and talent for overcoming difficulties in Latin America’s second-largest economy didn’t go unnoticed internationally. His performance not only earned him multiple awards from specialist magazines and the academic world, but his fellow colleagues have also acknowledged him. For example, in 2015, he was elected to lead the International Monetary and Financial Committee of the IMF. But there were more achievements to come.

San Agustín
Following the 2008 financial crisis, Carstens saved the country from losing around $5bn, earning him the nickname ‘San Agustín’ (Saint Agustín) in the Catholic country. Carstens’ success during this precarious time was partly due to a scheme he had helped create in the 1990s, which allowed the country to hedge against collapses of oil on the futures market. In early 2008, when Carstens was commanding Mexico’s finances and oil prices were high, his department used the hedge and helped the nation avoid a massive loss after a sudden decline in prices caused by the economic crash later in the year. Moves like this earned the Latin expert a great deal of praise. “Both as a finance minister and subsequently as a central bank governor, Carstens has been extremely reliable and innovative, even though most bureaucrats wouldn’t feel comfortable with taking such steps,” Rajan said.

Another challenge Carstens faced was controlling Mexico’s currency in troubled times. During Carstens’ final year at the Bank of Mexico, following a period of calm, inflation accelerated, mainly due to the uncertainty brought about by Trump’s election to office in the US, where Mexico sends 80 percent of its exports. Carstens had anticipated this upheaval, predicting that Trump’s victory would hit Mexico “like a hurricane” before the election. Since 2016, the inflation rate climbed markedly, to more than six percent, exceeding the three percent target Carstens had set. He reacted fast: in his final stretch at the institution, the economist hiked interest rates from three percent to seven percent – the highest level it reached in the post-crisis period.

Although Carstens was not happy about finishing his administration with the highest inflation rate in more than eight years, he said in an interview with Reuters that he was proud of his achievements. According to Carstens, concerns about inflation prove the country’s progress over time, as “an inflation level above six percent was not acceptable any more”. Speaking to journalists at the time he submitted his resignation letter, he said: “My departure must not to be taken as a reaction to the current juncture.”

Dealing with major local issues like this has strengthened Carstens’ skill set and prepared him for the next stage in his career. Despite the bittersweet feeling he had upon leaving the Bank of Mexico, he celebrated the “unexpected honour” of having the opportunity to lead the BIS.

Atypically in politics, Carstens’ departure from the Mexican central bank was announced a year in advance, which allowed a soft transition for the economy at a delicate moment. It also gave leaders at the Bank of Mexico time to find someone who could reach the high bar set by the former leader.

Technocratic governance
The BIS is managed by an elite group that represents the world’s central banks. However, Carstens is not new to this group; he had been part of the management board of the BIS since 2011. He has now climbed to a prominent position in the exclusive institution, working alongside figures such as US Fed Chair Janet Yellen, European Central Bank President Mario Draghi and Zhou Xiaochuan, Governor of
the People’s Bank of China.

Carstens’ dual viewpoint makes him capable of understanding his fellow practitioners as well as the markets’ expectations of central bankers

In December 2017, the economist moved to Basel, Switzerland, where he took over from Jaime Caruana, the former governor of the Bank of Spain, as the BIS’ general manager. According to Rajan, Carstens’ appointment at the BIS reflects the nature of the institution: “The BIS is not run by the political establishment at the very top like the IMF. The BIS is much more technocratic and that makes a difference, because technocrats are far more able to emphasise the most meritorious candidate in an open field.”

Michael Kuczynski, Fellow of Pembroke College and an associate of the Centre of Development Studies at the University of Cambridge, also believes in the quality of the BIS’ personnel: “The BIS has remained an institution of measured tone and outstanding quality in terms of its gathering and evaluating economic and financial intelligence, and in this its authority continues unmatched and unchallenged, unlike that of its more talkative cousin, the IMF.” According to Kuczynski, having Carstens at the head of the BIS “is a good deal, more likely to safeguard its authoritative tone”.

A new perspective
Although Carstens ensures continuity for the BIS, its vice chairman states that the Mexican economist also represents a turning point at the institution. Rajan said: “By appointing Agustín, the message is clear: the BIS is saying that, as an international institution, it will pick the best from around the world.” Carstens embodies how far emerging markets have come.

Indeed, his Mexican origins give him a unique perspective, one which Kuczynski sees as an advantage for the institution: “Observers of the international economy sometimes say that to understand what is really likely to be going on in Wall Street, you have to be in Lagos [Nigeria] or in Sydney [Australia], but that to understand what is really likely to be going on in Lagos or in Sydney, you have to be on Wall Street: Carstens has the advantage of that particular dual sensitivity.” This dual viewpoint makes him capable of understanding his fellow practitioners as well as the markets’ expectations of central bankers.
The global economy is enjoying an upturn, and forecasts for the years to come are upbeat in spite of a few warnings. Still, Carstens will have multiple challenges to work on in his five-year term at the BIS. Rajan summarised the main three issues at the top of the new BIS manager’s agenda: to complete banks’ regulations, to engage in the process of withdrawing emergency monetary policies, and to lead the discussion on the risks of easing monetary policies, spillovers of leverage and others. “The BIS has the opportunity to go from being an agency that warns to being an institution that pushes for
structural changes,” Rajan concluded.

As a part of this change, Carstens will be one of the key figures in these processes. But he will also be in charge of demonstrating the advantage of global financial institutions having a dual vision in a world with a new balance of power. If he succeeds, he will set a precedent for other organisations to follow.

Curriculum Vitae

Born: 1958 |  Education: Instituto Tecnológico Autónomo de México

1982: Despite coming from a family of accountants, Carstens completed a degree in economics at the Instituto Tecnológico Autónomo de México in his native Mexico City. He excelled during his time at university.

1985: Having received a scholarship from the University of Chicago, Carstens moved to the US and undertook a master’s degree followed by a doctorate in economics.

2003: This year saw Carstens take on the role of deputy managing director at the IMF. Years later, he was shortlisted to become managing director, but lost the position to Christine Lagarde, who still holds the role.

2006: Carstens moved into the private sector to become secretary of finance under President Felipe Calderón’s administration. He served in this role for three years before moving back to the private sector.

2010: Carstens returned to the Bank of Mexico where he had interned between his bachelor’s and master’s. Here he took on the role of governor of the Banco de México, Mexico’s central bank.

2017: Cutting his second mandate at the Bank of Mexico short, Carstens moved to the BIS to become its general manager. He took over the position from Jaime Caruana, who retired from the bank.

GDP: what’s in a number?

Posted on by Max Tomlin

Impressive though Chinese GDP figures are, few analysts trust them. This problem came to a head at the beginning of 2017, when a top official in the northeastern province of Liaoning came clean about the extent of fabrication going on behind the GDP figures for his district. The province, which has a population around the size of Spain, had been declaring growth figures that were around 20 percent higher than they were in reality. The provincial governor described it as “large-scale financial deception” that “involved many people”. He further disclosed that the falsification dated back to 2011, though even this is uncertain as many speculate that it went even further back. The revelation was received as a revealing insight into the credibility – or lack there-of – surrounding Chinese growth figures.

This is not the first time that cynicism regarding China’s official figures has come to the fore. It was back in 1995 when Zhang Sai, then the head of China’s National Bureau of Statistics (NBS), pronounced that the “phenomenon of false and deceptive reporting has spread in some localities and some units”. It soon became commonplace for the Chinese press to run sensationalised stories calling out data falsification, which often came accompanied with the slogan ‘jiabao fukuafeng’, meaning the ‘wind of falsification and embellishment’. This eventually inspired a heavy clampdown led by the NBS, which posted investigative teams to provinces and central departments in a bid to stamp out the practice.

A number of analysts have created their own Li-inspired growth proxies in the hopes of revealing the true rate of Chinese growth

But the suspicion was not over. A 2010 Wikileaks release uncovered what is now a notorious conversation that transpired in 2007 between the US Ambassador to China and Chinese Premier Li Keqiang, who at the time was a provincial governor in Liaoning. Li was quoted as saying that the growth figures in his province were “man-made”, “unreliable” and should be “for reference only”. He explained that he instead relied on three alternative measures to take the temperature of the economy: electricity consumption, rail cargo volume and the amount of loans being distributed.

Economical with the truth
Enthused by these comments, a number of analysts have created their own Li-inspired growth proxies in the hopes of revealing the true rate of Chinese growth. The Economist was the first to do so, kicking off the ‘Li Keqiang index’ in 2010, which combined the premier’s three metrics into a single index.

These indices have gradually become more refined, with analysts exploring other metrics that are likely to reflect growth. These may include floor space under construction, tonnes of cement used or even litres of beer consumed. One of the more well-known of these indices is the China Activity Proxy (CAP), which was fashioned at the independent research firm, Capital Economics. It is based on a set of five indicators, including the volume of freight being shipped on China’s roads, railways, inland waterways and by air, as well as the area of floor space currently under construction. “The indicators are relatively low profile, so they should be subject to fewer questions about data manipulation,” said Chang Liu, a China specialist at Capital Economics.

One thing that becomes clear when looking at the various iterations of the Li Keqiang index is that in comparison, the official growth statistics look suspiciously smooth: while the headline growth figures tend to come out consistently on or near target, the CAP shoots around in a far more volatile manner (see Fig 1). The conclusion to be drawn from this mismatch, which is broadly acknowledged among analysts, is that authorities have found a way to tweak the books to give the illusion of lower volatility.

The most talked-about difference, though, is that the Li-inspired figures tend to come in noticeably lower than official figures, implying that China is actually exaggerating its growth. Illustratively, the CAP has generally hovered below the level of the official figures, while the past few years have even greater divergences. “It is notable that, after moving together for nearly a decade, the two lines started to diverge in 2012,” said Liu. In fact, by the end of 2015, the CAP had dipped below four percent, implying a dramatic slowdown in growth, while official growth figures sailed through cleanly at 6.8 percent. Suspiciously, this divergence coincided with the first time China’s GDP was at risk of falling below the official growth target. The conclusion seems clear: central powers were intervening to iron out the fall in growth. Indeed, it looks like they were exaggerating growth by somewhere in the region of two percentage points.

That being said, there are several objections against taking economic measures, like the CAP, at face value. Firstly, there are questions surrounding the best way to weight each of its constituent parts. Furthermore, and perhaps most importantly, the Li Keqiang index and its copycats all hold a particularly strong focus on the industrial side of the economy, owing to their heavy emphasis on metrics, like cargo volume. This is a problem when trying to gauge growth in an economy that is in the process of transitioning away from heavy industry towards a more services-based economy. The index ends up being a better gauge of the strength of the industrial sector than growth more broadly. The further the economy shifts towards services, the more flawed Li-inspired indices will become.

Some researchers believe that a more sensible approach to detecting any data falsification is to look into satellite images and use nighttime light as a proxy for economic growth. It is well established that growth correlates with the quantity of light emitted at night, and with the right number-crunching, this can be used to assess whether official statistics are being manipulated. Embarking on this approach, researchers led by Hunter Clark from the Federal Reserve Bank of New York recently devised a deep dive into nighttime satellite images of China. Their findings throw new light onto the matter: while wary of technical limitations, they conclude that assertions of data falsification may have been exaggerated.

Inflation matters
In an effort to hone in on any foul play, most analysts point towards the inflation metric known as the GDP deflator, which is used to translate nominal growth into real growth. This oft-overlooked measure is a pivotal moving part in the growth equation because when inflation is understated, it creates the illusion of faster growth. In fact, it does this to the extent that when the deflator is understated, growth will be exaggerated by the same amount. As a result, discreet decisions surrounding the GDP deflator can wind up making a substantial difference to headline growth figure.

One thing that becomes clear when looking at the various iterations of the Li Keqiang index is that in comparison, official growth statistics look suspiciously smooth

While China publishes both nominal and GDP growth, decisions regarding the deflator go on behind closed doors so that while analysts can access the figures for themselves, they can only speculate as to where they came from. The researchers at Capital Economics dug into this quandary and found that an unlikely sequence in the deflator measure is likely to be warping the final GDP figures. Their line of reasoning is that the Chinese deflator measure does not account for import price changes in the usual way, leading to inflation being understated.

This is not necessarily an intentional manipulation by the Chinese, as it could easily reflect accounting difficulties inherent to transitioning economies. But according to those at Capital Economics, it could well have pushed the growth rate up by one or two percentage points in 2015.

Cook the books
Another well-known problem with Chinese official statistics is the fact that the career trajectories of local officials have long been linked to the economic performance of their principality. Officials that preside over high rates of growth and investment are awarded with promotion and recognition. From the point of view of a local statistician, any request to tweak results would be difficult to disobey, given that they would be coming from a direct superior. “Since the local statistics office is part of the local government, the local government leader can easily exert pressure on the local statistics office to mis-report,” said Carsten Holz, Professor of Social Science at Hong Kong University of Science and Technology. It is notable that local officials might also have incentives to underreport; for instance, a poorer county may underestimate growth figures out of fear of losing subsidies.

While this opens up plenty of scope for misconduct, it doesn’t necessarily follow that the Chinese headline growth rate will be biased. Contrary to what you would expect, the national growth rate is not calculated by finding the sum of all provincial growth. Instead, the NBS compiles national growth figures with the help of its own survey teams, which don’t have any clear incentive to cook the books. In fact, the official growth rate that it comes up with is consistently far lower than the sum of provincial growth, and the discrepancy between the two is not insignificant: in 2016, it came to CNY 2.76trn ($401bn), according to Reuters’ calculations, which is greater than the GDP of Thailand.

Another problem with Chinese official statistics is the fact that the career trajectories of officials have long been linked to the economic performance of their principality

This is not to say that the national numbers are entirely untainted by local manipulations. The NBS has its own survey teams in approximately one third of all municipalities and counties, but also collaborates with local teams. With this data, it publishes an overall rate for national GDP, but falls short of publishing its own provincial estimates that would reveal discrepancies at the regional level. As Holz explained: “The NBS, in compiling GDP statistics, mostly relies on data that it collects itself, but to some extent also uses data that is collected by lower-level statistics offices and the NBS then makes adjustments to these data. How such adjustments are made, we don’t know.”

Truth be told
The Liaoning scandal, however, has landed pressure on Beijing to generate more credible GDP results. Against this backdrop, the NBS recently announced a crackdown on GDP data collection. In an interview, the deputy leader of the NBS explained that, from 2019, his own office will start to publish regional as well as national GDP figures.

$394bn

China’s official GDP 1990

$1.21trn

China’s official GDP 2000

$11.2trn

China’s official GDP 2016

As of yet, details of the change are unclear. “The provinces may continue to publish their own data, unless the NBS ends up with enough power to suppress their authority to publish their own data,” said Holz. But even if provinces continue to publish data, the NBS’ numbers will draw attention to those provinces where regional-level statistics are exaggerated. This would not eliminate the incentive for local officials to try and push up growth figures for their region, but it would make it more difficult for them to do so. Asked whether the change would make numbers more credible, Holz noted: “As long as the evaluation of local government cadres includes economic growth criteria, data coming out of local statistics offices will continue to be falsified.”

World Finance spoke to Song Houze from the Paulson Institute, who recently spent some time examining GDP manipulation in Liaoning. He felt that the upcoming reform misses the fundamental problem, and instead argued that inaccuracies are affecting the NBS itself. He explained: “All Chinese industrial firms above a certain scale are required to report their financials directly to [the NBS], and this is the primary source based on which Chinese industrial statistics are computed. But in Liaoning, many firms that are below this threshold have exaggerated their revenue to be qualified for inclusion. As a result, the data of Liaoning’s industrial sector has been exaggerated.”

An example is that in 2015, 12,304 firms exceeded this threshold, but after the 2016 data revision, that number had dropped to 8,025. Houze explained: “Since even the data directly collected by the central authority can be manipulated, I am not sure whether this recent policy can fundamentally fix the problem of data inaccuracy.”

Reality 2.0
The perception is that Beijing’s drive for credibility isn’t entirely convincing. Problems remain in terms of the transparency of the techniques used by national statisticians to convert local figures to national figures, and to generate the all-important deflator figure. Meanwhile, the suspicious smoothness of GDP remains revealing. In the end, the crackdown will have little impact if the real problem lies with the NBS itself. If manipulation is going on at a national level – through the deflator or other means – there is little to suggest this will stop.

The answer must centre around the decisions being made behind closed doors at the NBS. If we concede that Beijing is perfectly able to shift around growth rates at will, the question is why and when they would exploit this. To some extent, the debate will come down to how much trust to put into China’s national statistical body. Holz’s stance is that the NBS has “little or no incentive to falsify data, and every incentive, as a professional body and as part of the central government, to report data that accurately reflect the underlying economic activity”.

The truth is that there is inevitably some room for manoeuvre when it comes to calculating GDP

Yet it seems there is certainly some incentive to exploit this wiggle room. For one, the propaganda impact of hitting targets head on, time and time again, could be of value to politicians. Holz’s own analysis has found that China’s official growth figures are likely to be a round number without a decimal, implying that authorities have occasionally been tempted to shift around their sums to achieve a neat target rate.

In addition, from the point of view of Chinese politicians, it may be tempting to clandestinely generate some added clout on the international stage by releasing consistently impressive growth figures. However, the opposite incentive might also be proposed – for instance, with the US stoking tensions in relation to China’s export strategy, it may be helpful to understate growth.

It is easy to argue that secrecy is a clear indicator that manipulation is taking place, but the truth may be more equivocal. Holz said he suspects that adjustments are made honestly, but that even with the intention of deriving accurate values, there is simply “no precise way of doing so”. He also dug into the issue surrounding the deflator and found that plausible alternatives imply growth has generally been overestimated by around one percent. But, on the other hand, he said other equally plausible measures indicate that growth had in fact been underestimated. The main issue is that there are inherent difficulties in measuring inflation in an economy with rapidly changing product characteristics and product variety.

Truth and lies
The truth is that there is inevitably some room for manoeuvre when it comes to calculating GDP. It is often the case that different numbers might simultaneously be justified, or that legitimate tweaks are made. Seemingly trivial – but ultimately influential – judgements underpin all GDP figures.

Three years ago, the GDP of Nigeria was revised upwards by 89 percent overnight when statisticians changed the weightings allocated to different parts of the economy. Back in 2014, Italy managed to escape a recession when its GDP accounting was expanded to include its black economy of prostitution and drugs. What’s more, in the US, the Boskin Commission of 1996 prompted a revision that altered real growth rates instantaneously.

At times, these revisions are legitimate, while others are politically motivated and manipulative. Indeed, according to Walter J. Williams, a specialist in government economic reporting: “President Lyndon Johnson would review the GNP reports before their release and if he did not like it, he would keep sending the GNP estimates back to the Commerce Department until they got the numbers ‘correct’.”

Ultimately, Premier Li Keqiang’s critique of ‘man-made’ GDP has a lot of logic to it.