The Intercontinental Exchange (ICE), a global network of regulated exchanges and clearing houses for financial and commodity markets, has announced it will abandon its GPS-based timekeeping system in favour of a more accurate atomic clock. Prompted by an uptick of high frequency trading and upcoming MiFID II regulatory requirements, ICE will partner with the UK’s National Physical Laboratory (NPL) in order to leverage the institutions expertise in atomic timekeeping.
The new MiFID II regulations – set to be introduced at the start of next year – will require financial organisations to achieve traceability of trading events with an accuracy level of up to one thousandth of a second. ICE’s new partnership with NPL will be key to meeting this requirement.
The Intercontinental Exchange could also benefit from NPL’s next generation of optical atomic clocks, which aim to reduce deviation to one second every 14 billion years
The partnership will link ICE’s systems to NPLTime via a fibre optic cable, providing a level of accuracy that will not deviate by more than a second every 156 million years. ICE could also benefit from NPL’s next generation of optical atomic clocks, which aim to reduce deviation to one second every 14 billion years.
ICE is not the first exchange to tap into NPLTime, however, with TMX Atrium already making the switch in August of last year. UBS has also shifted to the atomic system, making it the first major bank to move in anticipation of the upcoming MiFID requirements.
In a world where high frequency algorithmic trading has become the norm, losing time can be costly, especially when interferences occur. In a statement regarding the integration, Leon Lobo, the Strategic Business Development Manager at NPL, said: “Current systems rely on GPS, which is vulnerable to jamming and other interferences and uses equipment that can be inaccurate. Timing issues have led to trading irregularities with the potential to disrupt markets.”
Indeed, according to the UK Government, there are between 80 and 120 GPS jamming incidences each month in the City of London. Such disruptions can create issues for keeping a reliable audit trail. Lobo said: “In today’s markets, timing is everything. High frequency trading represents around 30 percent of UK trades and 50 percent in the US – precise timing offers [a] competitive advantage.”
Islamic banking has been one of the financial industry’s great growth stories over the past few years. The Islamic (interest-free) model has encouraged innovation, both in terms of product offerings and business support. In a break from convention, Islamic banks aim to function as true financial partners for their clients, as opposed to taking on the old-fashioned role of bank as lender.
However, this positive intent has been held back by the issue of standardisation. Despite the best efforts of industry bodies, there is still no agreed interpretation of religious rules in relation to banking. Thankfully, this is starting to improve, as key players mature and the benefits of interbank transactional business becomes apparent.
World Finance spoke to Robert Hazboun, Managing Director of ICS Financial Systems (ICSFS), about these changes and what modern Islamic banking can offer to business partners.
How has Islamic banking changed in recent years?
Since the early 20th century, the Islamic banking industry has flourished. It has been identified as the fastest growing segment within the global financial market. After the 2008 financial crisis, the banking world realised that there must be something wrong with the status quo; the lack of solid supporting assets put banks at risk of huge deficit and bad assets.
Conventional banking sees money as an asset and applies charges according to amount and time. Basically, conventional banks are often more interested in applying penalties for delays than in the client’s business. Islamic banking principles, on the other hand, mean that the bank must be involved in a client’s business, not to rack up penalty charges, but rather to share profits and losses.
Why has demand risen so dramatically?
Several elements have boosted the growth of Islamic banking. The introduction of banking for the unbanked is a major factor, as a considerable proportion of the population in Muslim-majority, resource-rich countries believes that the conventional way of banking is not consistent with their religion and way of life. Previously, these people operated their own equity sharing and financing systems through unofficial domestic institutions. The expansion of Islamic banking instruments, however, has brought them into the financial market.
The main challenge facing Islamic finance at the moment is the variety of Sharia regulations between countries, and even within each country
What’s more, with the concept of profit/loss sharing and the increased participation in a client’s business that Islamic banking offers, customers feel more protected and confident. Islamic banks play more of a partnership role in business, rather than just acting as lenders.
What challenges does the industry still face?
The main challenge facing Islamic finance at the moment is the variety of Sharia regulations between countries, and even within each country. Although Islamic financing regulators, such as the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board, have been very active in recent years, differences still exist. These different interpretations of Sharia rules slow down growth.
Such variety may seem positive in terms of satisfying different views and demands, but in general, not having a unified approach causes rifts between Islamic banks. To overcome this difficulty, it might be useful for all Islamic banks and financial associations to follow an agreed set of rules and regulations.
What services does ICSFS offer to banks?
In the early 2000s, ICSFS realised the need for a complete Islamic core banking system. This is when ICS BANKS Islamic was created. ICS BANKS Islamic is a fully parameterised and integrated solution, designed and developed in compliance with international Islamic standards, including the AAOIFI and the Islamic Fiqh Academy.
ICS BANKS Islamic consists of an Islamic core system that provides common operations between various banking activities, and a series of Islamic modules that cover the various different operational and business requirements of our specialised segments. Its modular architecture fully supports various business needs within the organisation, including core Islamic banking, investments, treasury, trade finance, and profit calculation and distribution.
Our solutions have allowed banks to achieve a competitive edge by offering a complete, integrated, end-to-end suite of Islamic banking applications. These are suited to each bank’s needs.
What sets ICSFS apart from its rivals?
ICSFS both proactively and reactively enhances the business and technological demands of its users with its precise and accurate platform design. This has been created to be relevant for all emerging business trends. Added to this, ICSFS also has a vast pool of highly qualified, certified Islamic bankers, certified Islamic specialists in accounting, and experienced operators with wide technology and banking expertise. We support these experts with proven development and analysis methodology, and research and development expertise that meet Islamic industry standards.
In 2015, a surplus in oil production combined with weakening global demand sent crude prices crashing to near historic lows. In an effort to soften the economic impact of this unprecedented drop in prices, OPEC implemented production cuts throughout its member states, the most recent of which promised to remove 1.2 million barrels a day from worldwide supply.
Although crude prices have somewhat rallied in the wake of these cuts, the crisis has created an uncertain future for the oil-rich nations of the GCC, with many states now looking to diversify their economies as a matter of urgency.
On the surface, the small, petroleum-rich nation of Kuwait appears to be particularly vulnerable to volatile changes in oil prices. Since the country made its first crude oil shipment in June 1946, petroleum has been a cornerstone of its economy. Kuwait is now one of the most heavily oil-dependent nations in the world, with the petroleum sector accounting for more than 50 percent of its GDP and almost all of its export revenues. However, despite this significant reliance on oil, the country’s economic outlook outshines that of its petroleum-dependent neighbours.
While oil plays a crucial role in the Kuwaiti business climate, the nation is far from being a single-industry economy; amid regional economic pressure, Kuwait’s banking sector consistently delivers.
Digital evolution
Following several years of impressive growth, Kuwait’s financial services sector now represents the nation’s strongest industry outside petroleum, while financial and banking companies make up more than half of the market capitalisation of the Kuwaiti stock market. Thanks to this resilient financial sector activity, non-oil GDP growth is expected to rise to three percent in 2017.
Emerging as a major driver of the Kuwaiti economy, the nation’s banks are now looking to build on their success through investment in digital innovation and new technologies. From contactless payments to blockchain wallets, technology is rapidly transforming the global banking sector. As customers increasingly embrace mobile banking, financial institutions are coming under pressure to adapt to their clients’ evolving tastes, and are beginning to place new technologies at the very heart of their operations.
Emerging as a major driver of the Kuwaiti economy, the nation’s banks are now looking to build on their success through investment
in digital innovation
Laila Al-Qatami, Assistant General Manager of Corporate Communications at Gulf Bank, told World Finance: “Globally, banks need to adapt to disruptive technologies and match customer expectations, delivering a highly efficient and relevant customer experience. In Kuwait, we have seen a rise in innovation across all banking operations, particularly in terms of flexible financial products and greater understanding of individual customer needs.”
As the Kuwaiti banking sector undergoes this technological transformation, Gulf Bank is fast establishing itself as a pioneer in digital services by consistently finding innovative new ways to engage with its customers. In addition to offering traditional mobile banking options, the Kuwaiti bank has also developed a range of multichannel apps to help customers manage their accounts and make fast, on-the-go payments.
Recognising that customers now expect remote support from advisors in addition to in-branch services, Gulf Bank has recently introduced a network of interactive teller machines (ITMs). Unlike conventional ATM machines, which are controlled purely by buttons on a digital screen, ITMs allow customers to make real-time video calls to banking professionals. Boasting a host of interactive features, ITMs enable users to conduct a number of different banking transactions, eliminating the need to visit a local branch.
Gulf Bank has also revamped its mobile payments app, introducing a range of innovative features to help customers make secure payments with ease. Al-Qatami told World Finance: “We are the first bank in the region to integrate highly sophisticated biometrics into our mobile banking app.”
In order to speed up the login process, the bank has designed a system that combines touch ID and facial recognition technology, allowing customers to easily enter their accounts without compromising on security. Customers are able to use the camera on their smartphones to take a scan of their face while they blink their eyes, which will then grant them access to their mobile banking without the need to type in a traditional password. This pioneering biometric technology, called ‘Blinking to Bank’, is the first of its kind to be launched in Kuwait and is one of very few similar systems worldwide. “When we designed our mobile banking app, we wanted customers to be able to conduct their banking needs easily and quickly, essentially within three clicks.”
Social media success
Demographically, Kuwait is experiencing remarkable growth in its youth segment: young people make up the majority of the Kuwaiti population, and the median age in the country is just 29. For this young, tech-savvy generation, mobile banking is the norm, with customers expecting on-the-go services as a standard. Mobile banking usage is thus very high in Kuwait, with around half of Gulf Bank’s customers opting to carry out simple transactions – such as money transfers and checking statements – online rather than in-branch.
“Our data shows that customers are spending less time in branches and more time using online and mobile banking platforms as their most frequent way of interacting with the bank”, said Al-Qatami. Due to this emerging trend among its customers, the bank has chosen to focus its strategy on developing its mobile and digital platforms, as it seeks to engage with a younger audience through social media.
1.2m
The number of OPEC barrels of oil per day to be removed from global supply
50%
of Kuwait’s GDP stems from the oil and gas industry
1.6%
The expected recovery of Kuwait’s real GDP in 2017
Boasting more than 82,000 Instagram followers and a similarly impressive number of fans on Twitter, the bank uses its various social media platforms to enter into conversations with its customers and potential clients, swiftly responding to any queries they might have and posting regular, informative content. With this stream of information, customers need look no further than their social media feed for the 24/7 support they require.
According to Al-Qatami: “Gulf Bank has clearly focused its marketing and social media strategy on youth engagement by implementing a communication approach that reaches out and responds immediately to young customers.”
For Kuwait’s younger generations, traditional banking services simply do not meet their evolving financial needs. Convenience is now key, with young people demanding a fully remote banking experience that is accessible from their smartphones.
“They expect to follow up with bank staff through digital chat, video or other real time options rather than having to visit a branch”, said Al-Qatami. “Customers have become more aware and knowledgeable about what they want, and banks are now using technology to try and address these needs.”
Kuwaiti entrepreneurship
In addition to creating a seamless banking experience for its customers, Gulf Bank is also committed to benefiting the community in Kuwait. Through an extensive CSR programme, the bank supports a number of exciting initiatives and events, focused on producing positive changes in the nation.
In particular, the bank hopes to make a difference in four key areas: youth and education, health and fitness, women’s empowerment, and the preservation of Kuwait’s heritage and culture. By supporting such worthwhile causes, Gulf Bank is making tackling inequality a priority, demonstrating its dedication to creating a better future for Kuwait.
Along with its social commitments, Gulf Bank’s CSR programme also aims to foster a culture of entrepreneurship among Kuwaiti youth. Through targeting entrepreneurs and nurturing the country’s SMEs, the bank is committed to establishing a healthy business climate in Kuwait, promoting the creation of an enabling ecosystem for small businesses and start-ups. According to Al-Qatami: “We support and sponsor various initiatives and programmes that foster entrepreneurial spirit and help young people to transform their ideas into successful businesses.”
The bank has partnered with INJAZ Kuwait, a non-profit organisation that teaches entrepreneurial and leadership skills to Kuwaiti youth. Through this collaboration, Gulf Bank offers educational programmes on key business skills to high school and university students, helping students to launch successful careers in the business world. Al-Qatami noted: “We believe that programmes such as this help to address one of the major challenges in our region, which is youth unemployment.”
With Gulf Bank focusing on creating a positive future for Kuwait, the economic outlook for the nation appears stronger than ever. The non-oil economy is set for continued growth, with the Kuwaiti banking sector expected to deliver a robust performance despite the continued regional economic gloom. According to analyst predictions, government spending is also due to pick up in line with a partial recovery in crude prices, ensuring a stable and prosperous business climate in the nation.
Despite continued uncertainty over oil prices, Kuwait’s real GDP is expected to recover to 1.6 percent in 2017. With the country’s banks driving essential non-oil growth, the future certainly looks bright for the Kuwaiti economy.
World famous for its picturesque beaches and golf courses, gracious hospitality and relaxed lifestyle, South Carolina has long been recognised as one of the top travel destinations in the US’ southern region. In 2016, Condé Nast Traveler named Charleston, South Carolina the number one small city in the US for the fifth consecutive year. Aside from its attraction as a top tourist destination, the Palmetto State – as South Carolina is also known – has been making its stamp on the map for business endeavours as well.
Indeed, the past few years have seen record levels of investment and big announcements from world-class brands in South Carolina, along with shrinking levels of unemployment. In 2016 alone, the state’s capital investment topped $3.4bn, which in turn created more than 13,000 jobs through new and expanding businesses. As a result, South Carolina’s unemployment rate continues to decline, to the benefit of the state’s population and economy alike. The numbers speak for themselves: by September 2016, the state’s unemployment rate fell to 4.9 percent, its lowest level since 2001.
Global player
Recognising the numerous benefits South Carolina has to offer, a growing number of multinational companies are setting up shop in the Palmetto State. South Carolina’s roster of world-class companies grew further in 2016 when Teijin announced a $600m investment in South Carolina. Having purchased 440 acres of land in Greenwood, the Japanese company plans to build a new carbon fibre production facility for aircraft and automotive applications, creating 220 new jobs in the process.
South Carolina’s recent growth is partly due to an ongoing push by local entities to promote the state as a thriving business hub
Global fibreglass products manufacturer China Jushi also announced its first North American manufacturing facility will be located in South Carolina, with the first phase of the project expected to pour $300m into the state, as well as introduce 400 new jobs.
Bobby Hitt, Secretary of the South Carolina Department of Commerce, told World Finance: “With a fantastic business climate, an extensive transportation network and a talented workforce, it is no surprise that South Carolina is now home to four of the top 10 global tyre manufacturers, and is the nation’s top producer and exporter of tyres. Companies from all corners of the globe are discovering that South Carolina is just right for business.”
South Carolina’s recent growth is partly due to an ongoing push by local entities to promote the state as a thriving business hub. Yet marketing alone cannot explain its success. In fact, the secret ingredient is also the state’s greatest asset and source of pride: its people. According to Hitt: “The Palmetto State’s loyal, world-class workforce has earned a reputation for making first-class products. That dedication to quality is one of the main reasons why the world’s most respected brands choose to do business in South Carolina.”
This reputation is aided further by the fact that South Carolina has built one of the top programmes for workforce training in the US. Known as readySC, it provides no-cost, customised training to companies making major investments in the state. Working with South Carolina’s technical colleges, readySC has led screening, hiring and training initiatives for more than a quarter of a million workers across almost 2,000 companies since the programme’s inception. With this level of support on their doorstep, companies seeking to expand their operations can find an ideal environment in South Carolina.
Internationally competitive
The state is ideally located midway between New York and Miami, giving companies the ability to serve a rapidly growing population and consumer base in the southeast. It is also connected to a vast logistics network of railways, roads, airports and a dynamic gateway to trade, the Port of Charleston.
According to Hitt: “Because of these factors, South Carolina has led the nation in recruiting foreign direct investment on a per capita basis, and today is home to more than 1,200 locations of foreign companies operating within its borders.” Since January 2011, South Carolina has accrued more than $16bn in capital investment from foreign companies, bringing more than 35,500 jobs to the state.
In South Carolina, a robust logistics infrastructure, skilled workforce, access to growing markets and a business-friendly environment are all key assets that continue to make the state particularly attractive for foreign investment. Today, the state’s diverse economy attracts companies from all corners of the globe. Hitt noted: “The Palmetto State takes pride in offering businesses the competitive advantages they need to be successful in today’s global market.”
Islamic finance is an ever-changing field, full of innovation and growth in equal measure. There are now around 15 Islamic banks and finance companies operating in the UAE. Across the world, Islamic finance has seen rapid growth, with assets reaching $2trn with expectations to cross the $3trn mark by 2018. This development has been driven by a growing Muslim population eager to find institutions that suit its needs.
While a boon for the industry, this growth has also posed challenges relating to how it can be successfully managed in the future. One bank that is working to manage this growth while creating new products is Union National Bank (UNB). Since it was founded in 1982, UNB has established itself as a leader in the field and a company that focuses on the future.
The bank and its subsidiaries now boast an international presence, through which UNB embodies the ‘we care’ ethos adopted upon its establishment. World Finance had the opportunity to speak to the CEO of UNB, Mohammad Nasr Abdeen, about the bank’s successes and the future of Islamic banking.
How has the Islamic banking industry changed in recent years?
In the past three decades, Islamic banking has emerged as a competitive framework and a possible substitute for the conventional banking system. Islamic banking is no longer limited to specialised institutions and has expanded both geographically and in product richness, with structured credit finance receiving most of the attention.
The rapid growth of Islamic banking over the years has resulted in the introduction of complex banking products and structures. Taking note of the demand, a number of western countries have recently started allowing Islamic banks to operate in their respective jurisdictions. The UK became the first leading western country to issue a government sukuk (Islamic bond). The first fully fledged Islamic bank in Germany was launched in 2016, while Japanese lawmakers are now considering issuing regulations that will allow Japanese banks to provide Islamic finance products.
What are some of the achievements of UNB’s subsidiary, Al Wifaq Finance Company?
Al Wifaq Finance Company was established in 2006 as a subsidiary of UNB, offering Sharia-compliant products for the growing Islamic banking market. Al Wifaq is led by a highly qualified management team and a Sharia supervisory board comprising distinguished and eminent Sharia scholars.
The vision of Al Wifaq Finance Company is to be a premier Sharia-compliant finance brand in the UAE. It has acquired a leading role in the Islamic financial sector, offering innovative products and services across the retail, SME and corporate sectors through a growing network of seven branches in the UAE.
As a responsible corporate citizen, Union National Bank plays an active role in the development of the local and international community
Despite turbulent and challenging market conditions, Al Wifaq and Islamic Banking have achieved an asset growth rate of 25 percent, from AED 6.2bn ($1.69bn) in December 2014 to AED 7.8bn ($2.12bn) in September 2016. Furthermore, Al Wifaq continues to play an active role in supporting the local community through its corporate social responsibility (CSR) policy and initiatives.
And how has UNB performed in that time?
In the third quarter of 2016, the group recorded balance sheet growth across all key business segments as it pursued its prudent strategy of growing its business in a sustainable and selective manner. Loans and advances increased by seven percent on a year-on-year basis, reaching AED 73.6bn ($20bn) by 30 September 2016, while customer deposits grew marginally by two percent to AED 74.8bn ($20.4bn). Furthermore, consolidated total assets were up by four percent to AED 105.4bn ($28.7bn) over the same period.
The bank also concluded a five-year senior unsecured bond issuance of $600m under a Euro medium-term note programme. The order book was oversubscribed three times, demonstrating the strong investor appetite for UNB credit. The UNB Group’s focus remains on managing its cost structure efficiently and continuing to invest in future growth areas and technology upgrades to enhance the overall customer experience.
What does 2017 look like for UNB?
During 2017, real GDP growth is expected to grow by two percent in the UAE, according to estimates by the Economist Intelligence Unit. The pick up will partly result from an expansion in oil production capacity and non-oil growth, mainly from the infrastructure, healthcare, transport and logistics sectors. Preparations for Expo 2020 in Dubai are also expected to support economic activity, given related infrastructure spending.
The slump in oil prices and its impact on financing options and demand has prompted substantial rethinks to fiscal policy at both the federal and emirate levels. The government is expected to improve fiscal sustainability through reductions in subsidies for fuel, electricity and water in 2017. Among the more substantive measures that have been planned, a value-added tax will be introduced from January 2018.
Moreover, both the federal government and governments of the individual emirates are expected to make greater use of international bond issuance to avoid draining liquidity from the domestic banking system.
UNB’s stability is well documented. How do you plan to maintain that?
UNB is unique within the UAE banking sector as it is 60 percent owned by the governments of Abu Dhabi and Dubai, with the remaining 40 percent being held by public investors.
We are known for our prudent lending policy, and we do not focus on a specific economic sector as a key driver for growth. Instead, we ensure there is an appropriate diversification of our exposure to the various sectors that make up the local economy. The relationship between risk and return is continually assessed for each sector and business line, in keeping with prevailing economic conditions.
UNB remains well capitalised and has consistently received strong ratings from reputable international rating agencies. The bank has also received several industry awards and accolades. Our success lies in greater engagement with communities, which is at the core of the bank’s CSR programme.
Given this success, does UNB have any plans for international expansion?
Our focus is currently on the UAE. We understand the business environment, the market dynamics and the return on our investment, which is why the latter is higher than in any other location. We entered the Egyptian market by acquiring an established bank and rapidly grew from eight branches in 2006 to 42 branches by end of 2016. The Egyptian market is important for us because of the size and the different services that can be provided there. UNB-Egypt is achieving excellent results over there.
$2trn
The Islamic banking industry’s total assets
$58.3bn
Trade between the UAE and China in 2016
UNB has a branch each in Qatar and Kuwait, which both hold potential due to their resources and growing population. Lastly, UNB was the first bank from the UAE to open a representative office in Shanghai, which we are planning to convert into a fully functional branch soon.
How important is China to UNB’s future?
China’s central bank is expected to pick a Chinese lender to clear renminbi transactions in the UAE, which would strengthen the growing economic ties between China and the Middle East.
From an economic and financial centre point of view, the UAE is the most appropriate location to set up an offshore renminbi market because of the UAE’s role as a trans-shipment point for goods to the rest of the Gulf. Trade between China and the UAE was estimated at $58.3bn in 2016, up from $54.8bn in 2015, at a growth rate of 6.4 percent.
In the longer term, the UAE clearing centre could encourage GCC issuers to tap funding in China through panda bonds – yuan-denominated debt sold by foreigners into Chinese markets. All Dubai International Finance Centre-based operations of China’s big four banks have doubled their combined assets to $21.5bn in the past 18 months, accounting for 26 percent of all assets at the centre.
The main rationale for UNB’s presence in China is to help our customers who deal with Chinese companies and nationals, and vice versa. China has a longstanding relationship with the UAE, which is growing rapidly. UNB’s Egypt operation is also expected to benefit from the growing Chinese-Egyptian relationship. We help our customers reach their respective markets, and conversely Chinese investors and operators in this region.
Hoes does UNB stand out from its rivals?
Over the years, UNB has won several awards for its quality products and excellent customer service in the UAE region and across the globe. CSR is a key area of focus for UNB and is intrinsically embedded in the bank’s vision, mission and strategy. The firm is committed to having a positive impact on our customers, employees and the communities in which it operates, with a dedicated budget allocated for CSR initiatives every year.
UNB is committed to sustainability reporting and publishes its sustainability report and key performance indicators every year by following the latest G4 Global Reporting Initiative guidelines. The bank is also among the initial signatories of the Dubai Declaration on Sustainable Finance, which is part of the United Nations Environment Programme Finance Initiative.
As a responsible corporate citizen, UNB plays an active role in supporting the development of the local and international community by sponsoring various events in different categories, such as education, Emiratisation, community causes, special needs, climate change and the environment. UNB is also a recipient of the Dubai Chamber CSR Label for the second consecutive year.
Spanning just 276 miles at its widest point, Chile is a long sliver of a nation, bordered by the magnificent Andes to the east and the Pacific Ocean to the west. Despite its small size, the Latin American country boasts a rich and diverse natural landscape, ranging from the dry plateaus of the Atacama Desert in the north to the network of icy fjords at its southernmost tip. Too long dismissed by travellers as a remote, far-flung destination, the nation’s natural beauty is now seeing it emerge as a must-visit location.
Just as foreign interest in the Chilean landscape is picking up, the same can be said for its business climate. Reflecting the nation’s diminutive size, the Chilean stock market – known as the IPSA Index – is modest in its scope, yet offers plenty of potential for international investors.
As financial markets around the world were rocked by political and economic turbulence throughout the past 12 months, the Chilean stock market enjoyed a successful year of trading. After five years of reporting unsatisfactory returns, the IPSA Index showed significant recovery in 2016, reaching a total return of 19.3 percent. This impressive result was largely driven by foreign investment in the nation, with international investors showing renewed confidence in the Chilean market.
With its strong institutional set up, small public deficit and low levels of public debt, Chile continues to be the most competitive economy in Latin America, drawing investors from around the world.
A Latin American success story
Since the mid-1970s, the Chilean economy has undergone a miraculous turnaround. From being one of the most protectionist countries in the world, the nation began to embrace free trade four decades ago, with a focus on international commerce in order to open up the economy.
While these economic policies were first implemented under the Pinochet regime, they were continued with the transfer of power to a democratic government in 1990. Now the country remains committed to free trade, participating in trade agreements with a network of countries and welcoming large amounts of foreign investment. As creeping global protectionism poses an ever-increasing threat to international financial markets, Chile is looking towards a positive and open future.
Foreign investors had a busy year on the Chilean stock market in 2016, snapping up shares and helping to drive growth. The country poses the lowest investment risk in Latin America, attracting investors from all over the world with its high quality infrastructure, stable macroeconomic system and rich natural resources. Despite the modest size of its stock exchange, Chile is one of the best-valued economies in the region. In terms of foreign direct investment, the nation is outperformed only by economic powerhouse Brazil.
With a corporate tax rate of 25 percent – well below the 35 percent rate in the US – the country has been successful in luring in foreign investment from North America. Between 2009 and 2014, more than $122bn of foreign direct investment was made in Chile (see Fig 1), with the US alone accounting for around 20 percent of this amount. Among the high profile names looking to expand their presence in Chile is Amazon Web Services, which opened its first offices in the capital city Santiago back in January.
The city is also home to Google’s first Latin American data centre, while Coca-Cola invested $1.3bn in the nation between 2012 and 2016, including $200m for the construction of a new state of the art bottling plant in the Santiago suburb of Renca. According to a 2015 report by the United Nations Council on Trade and Development, Chile is now the world’s 11th largest recipient of foreign direct investment, offering lucrative business prospects for investors in a climate defined by stability, transparency and competitiveness.
The Chilean stock market has also enjoyed a significant boost from the nation’s local pensions fund. The country operates on a system in which workers save for their own retirement by paying 10 percent of their wages into individual accounts called AFPs, which are then managed by private administrators. Workers’ contributions to these AFPs flow into the nation’s capital markets, thus boosting overall growth. The system has now amassed over $172bn in savings and accounts for around 70 percent of Chile’s GDP.
These valuable pension funds performed particularly well on the stock market in 2016, generating more than $900m over the past 12 months, and trading at the highest level in at least six years. With strong pension fund performance and a flurry of foreign investment activity, Chilean stocks are looking more attractive than ever.
Navigating challenges
A drop in oil prices, a slowdown of growth in China and international political turbulence has created an uncertain global business climate for 2017. As a small, commodity-producing country, Chile is particularly vulnerable to external shocks, and as a result its stock market felt the impact of the unexpected results of both the US presidential election and the Brexit vote. Amid these unfavourable macroeconomic conditions, the Central Bank of Chile is implementing a number of strategies in order to cope with the challenges ahead.
In an attempt to jump start economic growth in the nation, the central bank is expected to cut interest rates, following on from an initial cut to its monetary policy rate in December 2016. The anticipated cuts could slash interest rates to a low of 2.57 percent – a level not seen since the subprime mortgage crisis in 2008. Lower rates and additional liquidity should in turn boost the local stock market, further driving economic growth for the country.
With its strong institutional set up and low levels of public debt, Chile continues to be the most competitive economy
in Latin America
The Chilean stock exchange is also experiencing a surge in trading activity due to its high levels of equity risk premium, which currently stands at around eight percent. Given equity risk premiums effectively compensate investors for choosing equity investing over low-risk alternatives, the high premium rate has made local equity an attractive option for Chilean stock market investors.
Furthermore, the nation’s IPSA Index is currently trading at notably discounted levels. Price-earnings ratios are favourable, while per-share earnings are expected to maintain a healthy growth rate, suggesting 2017 will be an opportune year for investing in Chile.
These attractive stock market conditions not only set the Chilean IPSA Index apart from its peers in emerging markets, but also from its competitors in the Latin American region, where foreign backers are increasingly looking to invest.
Political impact
While the central bank looks to combat international economic uncertainty through careful manipulation of its monetary policy, the Chilean business world is also preparing for potential disruption at home. In November, Chile will hold its presidential election, following which the newly elected president will take office in March 2018. The Chilean constitution bars incumbent president Michelle Bachelet from re-election, as consecutive terms are not permitted under the current legislation.
A new Chilean president may indeed signify a new economic direction for the nation, and the election result will undoubtedly have a profound impact on local financial markets. Bachelet’s presidency has been marked by numerous long-term economic strategies, and her government has succeeded in passing a range of significant policies, including ambitious tax and labour reforms and taking the first steps towards rewriting Chile’s constitution.
These far-reaching reforms have had a marked effect on not only the nation’s economic growth and financial markets, but also on the overall levels of business confidence in the region. When Bachelet was first elected in March 2014, the Chilean monthly business confidence indicator stood at a high of 51.8 points, but has since plunged to just 39.2. Similarly, Bachelet’s approval ratings have more than halved since the early days of her presidency, hitting an all-time low of just 19 percent in the summer of 2016.
With business confidence steadily sliding under Bachelet’s watch, the Chilean financial sector is eagerly awaiting election day. Until recently, the leadership race looked set to be dominated by two former presidents: Sebastián Piñera and Ricardo Lagos. While these candidates are both considered pro-market individuals, a new name has come to the fore as well: Alejandro Guillier, a radical left-wing political force and current congressman, has entered the frame as a strong presidential candidate, effectively ending Lagos’ chances of winning. The race now appears too close to call between Piñera and Guillier, creating an atmosphere of uncertainty and nervous anticipation for local Chilean markets.
With the two candidates occupying opposite ends of the political spectrum, this year’s political developments will prove to be significant drivers of the Chilean economy – although whether this impact will be positive or negative remains to be seen.
Most banks today offer both financial and social services. They boast a newfound concentration on raising awareness of important social issues, thereby improving the lives of people across the world. These banks are also focused on keeping the trust of their clients by committing to the introduction of innovative new products and services. By offering more than simple financial products, banks can be agents for social good.
Regional leader
Since its first branch opened in 1979, Jordan Islamic Bank (JIB) has offered a variety of Islamic banking products and Sharia-compliant services to its customers. The pioneering bank has since expanded to 97 offices and 182 ATMs in order to reach all of its clients, wherever they may be.
Speaking to World Finance, CEO and General Manager of JIB, Musa Shihadeh, said the organisation is making outstanding progress to ensure its future sustainability, while also taking on the role as a leader in the region.
One example of the bank’s leadership across the Middle East and Northern Africa (MENA) region stems from its uptake of the ISO 26000 guidelines. Shihadeh told World Finance: “The project was intended to promote a common understanding of ISO 26000 guidance on social responsibility in the MENA region. Through this, we hope to achieve positive results in regards to sustainable environmental, social and economic development.”
In 2014, JIB also initiated a five-year strategy to ensure its operations became more environmentally friendly and sustainable. With the completion of this plan now approaching, the bank has already achieved a number of its ambitious goals.
One such target was making sure half of the bank’s energy needs were supplied by renewable sources. This started in 2015 when JIB made the move to power its head office and several branches with solar power, followed by another 18 branches in 2016. “JIB further developed the plan by establishing two power stations, one in the north of Jordan and the second in the east of the capital”, Shihadeh said, adding that completion of the stations is expected in 2017.
Despite the massive scope of these plans, this is only a small part of JIB’s sustainability initiative. The bank also sponsors local environmental efforts, including the country’s fourth National Student Environmental Conference and the Jordan Environment Society’s recycling programme. It is also in regular contact with customers, offering suggestions on how they can save energy. Shihadeh said the bank also has a number of environmentally friendly financial products that are now available to customers: “JIB offers a special financing programme to encourage citizens to use hybrid cars in order to protect the environment, and to save them the cost of petrol too.”
Jordan Islamic Bank hopes to continue as a pioneer in the Islamic banking industry
while achieving success through its partnerships
Furthermore, the bank is committed to offering products that help those who are in need. Shihadeh said JIB is currently creating products with special terms in order to enable people to start projects that will help pull themselves above the poverty line.
Banking in Jordan
Jordan has a dynamic banking sector, offering both traditional online products and Sharia-compliant banking. In the country’s stable and secure market, Shihadeh said the banking industry is highly committed to innovating and offering new, dynamic products: “The banking sector is committed to supporting and financing the SME sector, which represents the majority of the local economy.”
However, Shihadeh said there is still work that needs to be done in order to make sure Jordan’s banking sector is ready for the future: “All banks in Jordan should be committed to attaining the latest innovative products and technology in the banking industry, as well as looking forward, while gaining the trust of all people.”
Another way Shihadeh believes the industry should develop is by making sure local banks offer finance products with easy terms, together with further incentives to clients who are interested in working within environmentally friendly industries. Poverty and unemployment are other problems Shihadeh believes banks have the power to improve, which they can achieve by making this a top priority and by making greater efforts to promote financial inclusion.
Financial inclusion
“The subject of financial inclusion has become one of the main topics now raised at financial conference tables, both locally and internationally”, according to Shihadeh. “This is because financial inclusion is a key factor in the construction of inclusive and sustainable development across world development strategies, and plays an important role in solving the problems of poverty and unemployment. Greater financial inclusion can also increase productivity, advance the prospects for development and improve both social and financial stability.”
Shihadeh believes a shift is occurring in response to international trends. Specifically, the G20 countries have realised the importance of financial inclusion, which is why in 2010 they established the Global Partnership for Financial Inclusion. Its advancement is considered a priority at JIB. He explained: “Financial inclusion helps protect consumers and promote financial literacy in the community. It provides mechanisms to support SMEs to gain access to funding sources, the development of electronic payment systems and the empowerment of women by providing easy and convenient access to finance instruments.”
Shihadeh said that being at the start of a movement to encourage greater financial inclusion is an exciting prospect. As part of his additional role as Chairman of the Association of Banks in Jordan, Shihadeh is developing a multi-year action plan to fast-track greater financial inclusion in the country. The plan ultimately has three goals: providing access to financial services, encouraging the use of financial services, and ensuring these financial services are of the highest quality.
Jordan Islamic Bank has branched out its services
to other industries and is developing a number of fields that are important to the future of Jordan
This will be a difficult challenge to overcome, and will require both Jordan’s banking sector and its regulatory bodies to work together to transform the industry. According to Shihadeh, JIB is strongly committed to achieving these goals. This includes strengthening the geographical spread of financial institutions to make them more accessible, while also taking advantage of technological developments to make accessing finance easier. From a regulatory perspective, the establishment of a credit information company is also a priority.
Appropriate legislative environments that support financial inclusion while ensuring the products developed meet the needs of everyone in society are also a must. While challenging, an environment that supports companies of all sizes is possible through a lot of hard work.
“In addition to the innovation of new financial products, at the same time we must ensure consumer protection regulations to solidify the fair and transparent treatment of customers, set up a system to deal with complaints, provide adequate information to customer about financial transactions, and provide an advisory service to them”, Shihadeh added. “It is also important to enable companies that are suffering from financing issues – especially those related to providing guarantees – to find a structure that enables them to implement new projects and expand.”
Against this backdrop, JIB has branched out its services to other industries and is now working on developing a number of fields that are important to the future of Jordan. The company is also focusing on the health sector, with new products recently launched to help people finance the cost of their medical expenses. As a leader of the local industry, through efforts like these, the company can start fostering greater financial inclusion and the benefits it brings.
Further expansion plans
The future of JIB looks bright, with Shihadeh setting out a clear list of priorities for the bank moving forward. The bank hopes to continue as a pioneer in the Islamic banking industry while achieving success through its partnerships and agreements. It has also set the goal of reaching one million accounts in the next year – all of which will occur while the bank continues to be a leader in both social and business developments, such as through further investments in green technology.
“We will maintain JIB’s leadership through economic and social development, while meeting the aspirations of our clients and translating the Islamic banking mission in all aspects to serve society”, said Shihadeh.
Though this is in many ways a steep challenge, JIB is set to continue its successful journey into the future. Shihadeh added: “JIB is committed to being a pioneer in Islamic banking globally and to achieving growth in all banking services.
Finally, and most importantly, JIB remains committed to keeping the trust of all our customers, and introducing innovative products and services to their benefit.”
“Policies to strengthen education and training, to encourage entrepreneurship and
innovation… could all be of great benefit in improving future living standards”
Janet Yellen
Since Donald Trump’s surprise election victory in November, the 45th President of the United States has been on a collision course with the Federal Reserve. During his tumultuous campaign, Trump repeatedly attacked the US central bank, suggesting he would remove the current chair Janet Yellen from her position and nominate a more appropriate successor by the summer. Despite these threats, Yellen has remained above party politics, insisting she will complete her full four-year term at the head of the US financial system. In Yellen, it seems, Trump faces a formidable opponent.
Yellen’s appointment as Chair of the Federal Reserve in February 2014 marked a historic moment in the financial world. After rising to the top of a heavily male-dominated field, Yellen is the first woman to lead the US central bank in its 100-year history. The same year as her appointment, Yellen was named the second most powerful woman in the world by Forbes, coming in just behind German Chancellor Angela Merkel. As the gatekeeper to the world’s largest economy, Yellen holds one of the most influential positions in global finance. But as she has proven thus far in her tenure, her great power is equally matched by prudence, diligence and steady resolve.
Journey to the top
“Although we work through financial markets, our goal is to help Main Street, not Wall Street”, Yellen told Chicago audiences in her first official appearance as Chair of the Federal Reserve. Born in the Bay Ridge neighbourhood of Brooklyn in 1946, from a young age Yellen was made acutely aware of the impact of economic hardship on ordinary citizens.
Speaking to The New Yorker shortly after her appointment, Yellen said: “My parents were born in 1906 and 1907. I think the experience of the Depression greatly influenced the way they thought about the world.” Her father, the son of Jewish immigrants from the Polish town of Suwalki, was a family doctor who frequently carried out house calls, while her mother was an elementary school teacher.
Taking a dovish stance on monetary policy, Yellen insisted that, on her watch, Wall Street would be closely regulated in order to crack down on financial crime
After graduating as valedictorian from Fort Hamilton High School, Yellen launched her academic career at Brown University, where she majored in economics. She continued to pursue the subject at PhD level, moving to Yale to study under Nobel Laureate James Tobin, a leading Keynesian economist whom Yellen later described as her intellectual hero. Of the two dozen doctoral students who earned their economics PhDs from Yale in 1971, Yellen was the only woman.
Upon receiving her PhD, Yellen took up an assistant professor position in the Harvard economics department. When, after six years at the prestigious university, she did not make tenure, Yellen turned her attention to the Federal Reserve System, beginning to work as an economist with the Board of Governors in Washington. There, she met her future husband, fellow economist George Akerlof, and the pair were married within the year. In Akerlof, Yellen found not only a life partner but also an intellectual equal, with whom she shared similar views on the social impact of economic policy. The couple have collaborated professionally throughout their marriage, promoting the integration of social justice and public policy into financial theories.
After additional teaching spells at the London School of Economics and the Haas School of Business at the University of California, Berkeley, in 1994 Yellen was nominated to become a member of the Federal Reserve Board of Governors, propelling the now-experienced economist towards a future in public finance. From there, Yellen moved into a position at Bill Clinton’s White House, serving as the Chair of the Council of Economic Advisors from 1997 to 1999.
Just five years later, she became the President and CEO of the Federal Reserve Bank of San Francisco, assuming responsibility for the central banking of the nine states to the west of the Rocky Mountains. Against the challenging backdrop of the banking crisis, Yellen delivered a strong performance in this position, and was promoted to Vice Chair of the Federal Reserve in 2010, making her the institution’s second highest-ranking official. Yellen’s good judgement and commitment to minimising unemployment earned her many supporters in Capitol Hill.
When President Obama confirmed Fed Chair Ben Bernanke would not be re-elected at the end of his term, influential economist Larry Summers initially emerged as frontrunner for the role. However, Summers’ rumoured appointment prompted one third of Democratic Caucus members from the US Senate to pen a letter to President Obama, advising him to instead nominate Yellen.
Responding to their wishes, Obama nominated Yellen to lead the Federal Reserve, calling her “one of the nation’s foremost economists and policymakers”. In February 2014, Yellen was sworn in as the Fed’s first female chair in a modest ceremony in the central bank’s boardroom.
Donald Trump signs House Joint Resolution 41, removing some Dodd-Frank regulations on oil and gas companies
A fractious Fed
Upon her historic nomination, Yellen declared: “More needs to be done to strengthen the recovery, particularly for those hardest hit by the Great Recession.” While her predecessor, Bernanke, was praised for helping guide the US economy through the worst of the financial crisis, Yellen inherited a fractious Federal Reserve, still reeling from the 2008 banking crash. Frustrations lingered over the slow pace of economic growth, and critics accused the Fed of doing little to stimulate the economy in the crucial post-crash years.
Taking a dovish stance on monetary policy and prioritising employment, Yellen soon sought to silence her doubters, insisting that, on her watch, Wall Street would be closely regulated in order to crack down on financial crime. “No one who lived through that financial crisis would ever want to risk another one”, she remarked in her Capitol Hill confirmation hearing.
In fact, Yellen is responsible for helping the economy recover from a crisis that she herself predicted. As early as 2005, Yellen warned of a bubble emerging in housing prices, suggesting the falloff in housing activity could potentially have broader economic consequences. In September 2007, having grown ever more concerned over housing turmoil and irresponsible mortgage lending, Yellen encouraged the central bank to act pre-emptively to deal with what she saw as a looming crisis.
“We could take a wait-and-see approach to the financial shock”, she said at a meeting with Federal Reserve policy makers. “But such an approach would be misguided and fraught with hazard, because it would deprive us of the opportunity to act in time to forestall the likely damage.” Despite Yellen’s warnings, however, the central bank failed to effectively isolate the issue, and by September 2008, the subprime mortgage crisis had boiled over into a full-scale financial meltdown.
Following Lehman Brothers’ monumental collapse, Yellen became the first central bank official to confirm that the US had entered a recession. In the immediate aftermath of the crash, Yellen lent her support to Bernanke in his efforts to stimulate the economy, backing bond buying and quantitative easing.
Janet Yellen in numbers:
101
The number of years the US Federal Reserve existed before welcoming Yellen as its first
female chair
2018
The year in which Yellen’s four-year term as Chair of the Federal Reserve will end
56
Votes Yellen received in favour of her appointment, the narrowest margin in the Fed’s history
1979
The last time a Democrat was Chair of the Fed, prior to Yellen’s appointment
in 2014
While recovery has been slow, Yellen appears satisfied with the progress made in the US economy, both prior to and during her current tenure as Fed Chair. Fortunately for Yellen, many of the potential threats associated with Bernanke’s fiscal stimulus efforts have not come to pass: the US economy has avoided hyperinflation and a crashing currency, and Yellen has successfully managed to stabilise markets. “Now it’s fair to say the economy is near maximum employment, and inflation is moving towards our goal”, she said in a January 2017 speech, just two days before President Trump’s inauguration. But despite striking an optimistic tone about the matter, the Trump presidency could well knock Yellen’s Federal Reserve off its steady course.
The lady’s not for turning
Throughout Trump’s explosive presidential campaign, Yellen became a frequent target for criticism. During the first presidential debate in September, the real estate tycoon attacked Yellen for keeping interest rates low, accusing her of creating a false economy. Taking his criticism further, at one point he suggested that he would remove her from her post as soon as his presidential powers would allow.
Unshaken by Trump’s harsh words, Yellen insisted that she would be staying put. “I was confirmed by the Senate for a four-year term, which ends in January of 2018”, she said at a Capitol Hill testimony. “It is fully my intention to serve out that term.”
Aside from the question of Yellen’s leadership, Trump is also on a collision course with the Federal Reserve over the 2010 Dodd-Frank Act. The sweeping legislation, which was put in place by President Obama in response to the 2008 financial crisis, attempts to ensure greater regulation of the nation’s financial institutions, ultimately bringing the ‘too big to fail’ institutions to heel. Trump has repeatedly called Dodd-Frank a “disaster”, and has suggested that the legislation has made it harder for banks to lend to small businesses and consumers.
Upon his surprise election, Trump vowed to do a “big number” on the legislation, and has since delivered on his promise: in his second week in the Oval Office, President Trump signed an executive order intended to dramatically scale back the legislation. As he issued the memorandum, he said: “We expect to be cutting a lot out of Dodd-Frank.” According to the executive order, Trump’s Treasury Secretary, Steven Mnuchin, will meet with the Securities and Exchange Commission – along with other regulators – in order to find elements of Dodd-Frank that can be amended or cut entirely.
The removal of the Dodd-Frank Act would be a significant blow for the Federal Reserve and, by association, Yellen. The legislation is perhaps the most significant change to US financial regulation since the Great Depression of the 1930s, providing long-overdue protection to consumers and earning praise from both sides of the political spectrum. Despite Trump’s best efforts, it is unlikely Yellen’s Federal Reserve will give up Dodd-Frank without a fight. In fact, since Trump’s election, Yellen has repeatedly promised to protect it.
“Dodd-Frank was a very important road map for strengthening the financial system and mitigating the chance of another financial crisis”, she said in January. Stressing the value of the legislation, Yellen said the Dodd-Frank reforms had created a “substantially safer and sounder” financial system, where banking malpractice and financial risk-taking no longer run rampant on Wall Street.
While Trump may have met his match in Yellen, it is important to remember that her leadership term expires in 2018. What’s more, two seats on the central bank’s seven-member board of directors are currently vacant, while Vice Chairman Stanley Fischer’s term also comes to an end next year.
With Trump thus able to make a host of significant appointments at the Federal Reserve, the central bank may well move in a more hawkish direction. Indeed, the president’s attacks on the institution’s independence and his dismantling of the Dodd-Frank Act suggest this transformation could already be underway. Without Yellen at the helm in the near future, the Federal Reserve could be heading towards an uncertain future.
Curriculum Vitae
Born: 1946, Brooklyn, New York | Education: Yale University
1946
Yellen was born into a middle-class Jewish family in Brooklyn, New York. She showed academic promise from an early age, graduating as valedictorian from Fort Hamilton High School.
1971
After earning an undergraduate degree from Brown University, Yellen received a PhD in economics from Yale, where she studied under Nobel Laureate James Tobin.
1977
After spending six years as an assistant professor at Harvard, Yellen took up her first position with the Federal Reserve, working as an economist with the Board of Governors in Washington.
1997
Following a long teaching spell at two prolific business schools, Yellen moved into a position at the White House, serving as Chair of President Clinton’s Council of Economic Advisors.
2004
In June, Yellen began a largely successful six-year term as President of the Federal Reserve Bank of San Francisco, assuming responsibility for the largest district in the US.
2014
In a historic moment for global finance, Yellen was sworn in as Chair of the Federal Reserve, becoming the first woman to hold the position in the central bank’s 100-year history.
Positioned as the geographic, economic and political bridge between Asia and Europe, Turkey is one of the world’s fastest growing and most diverse economies. With a population of 79 million and a labour force of 31 million, the country has posted an average growth rate of 5.2 percent since 2010. Turkey’s average GDP growth rate is one of the fastest among OECD countries.
The country’s economy has also continued its strong performance despite political and geopolitical problems in the last year. It grew by 4.7 percent in the first quarter of 2016 and 3.1 percent in the second, which is high compared to a number of EU and OECD countries. Turkey has also attracted more than $120bn of foreign direct investment in the past decade, making it one of the world’s most attractive investment destinations.
A number of attributes are behind the trust that growth investors have in the country. First, Turkey’s favourable demographics and good education system, with 50 percent of its population aged under 30, have created strong momentum for the economy. Second, the government has implemented crucial structural economic reforms in recent years.
The main objectives of these efforts were to enhance the efficiency and resiliency of the financial sector, to increase the role of the private sector in the economy, and to place the social security system on a more solid foundation.
Such reforms have contributed to creating a strong banking sector and have had a major impact on Turkey’s resistance to economic shocks. Turkey now has Europe’s lowest debt-to-GDP ratio at around 30 percent, a budget deficit of around one percent and a low level of household debt.
Third, the country is currently undergoing several important infrastructure transformations to be completed by 2023, with more investment on the way. Projects include a new Istanbul Airport, a high-speed railway system and a third bridge across the Bosphorus, which recently opened. With all of these attributes on hand, Turkey is one of the most promising economies in the world and remains an exciting market for investors.
Insurance focus
The Turkish insurance market, which is currently worth around $30bn, consists of three main segments: life, private pensions and non-life. Growth performance in the life segment is generally linked with personal loan growth, as most of the premium production comes from credit-linked life insurance products. The private pension market looks promising going forward, with the number of customers already exceeding six million. Further potential growth in this segment is also expected, thanks to increasing government support and measures designed to boost the participation of white-collar employees in the private pension system.
Zurich Turkey’s mission is to be the insurer with the most innovative insurance offerings in the Turkish market
On the other hand, the performance of the non-life insurance segment is directly linked to the overall economic activity in Turkey. The non-life insurance market has grown by 15 percent per annum in the past decade; in 2016, it grew at a rate of 32 percent. The sector is worth approximately $10bn, and if you look at the fact the ratio of insurance premiums to GDP is around 1.3 percent, it should grow almost seven times to reach a level comparable to the EU. Hence, there is huge potential for further growth in the non-life segment.
As a clear reflection of this, most of the insurers operating in the non-life segment are either foreign-owned or partnered, showing that it is a popular area of investment for foreign companies.
Zurich Turkey operates in the high-potential, non-life segment of the Turkish insurance market. Zurich Group entered Turkey in 2008 through an acquisition and has since invested $500m into the sector. At the end of 2012, we launched a restructuring programme to reposition our profitable and sustainable growth, which has been extremely successful. As a result, Zurich Turkey was recognised by World Finance as Best Non-Life Insurance Company, Turkey in 2016 for the fourth year running.
Since the end of 2012, we have focused our restructuring programme on bancassurance through our two distinguished, exclusive banking partners. In that time, we managed to increase our bancassurance market share to eight percent. As a result of our efforts, we are now among the top three firms in the market in terms of premium production per bank branch. As the only company to hold exclusive bancassurance agreements with two separate Turkish banks, Zurich Turkey is now ranked in the top two companies in the market in terms of profitability.
The firm’s success since 2012 is not limited to financial performance. Customer satisfaction peaked with the launch of the Transactional Net Promoter Score and our effective complaint management efforts. Zurich Turkey is currently ranked in the top two on sikayetvar.com, Turkey’s most popular online complaint communication platform. Our employee engagement score has gone up by approximately 45 percent since 2013. It is also one of the highest in the Turkish market, as well as within the Zurich Group’s countries, thanks to a number of measures taken to boost employee engagement.
Innovating to meet trends
With a young population increasingly demanding innovative products and an omnichannel customer experience, Turkey has transformed itself into a digital hotspot over the past decade. Currently, almost half of all Turkish citizens own at least one laptop or desktop computer. Furthermore, mobile phone usage is at around 97 percent, which is quite high compared to some other developed countries, while around 70 percent of individuals and more than 90 percent of companies have access to the internet.
The number of people who use internet banking has grown to almost 45 million, a 400 percent increase from 2007. More than 15 million of these citizens are ‘active internet banking customers’, meaning they use internet banking at least once every three months.
97%
Mobile phone usage in Turkey
45m
Turks use internet banking
1,400%
The growth in Turkish mobile banking users since 2007
From a mobile banking perspective, the picture is even more striking: the number of people who use mobile banking has grown by 1,400 percent since 2007 to almost 20 million, 12 million of whom are ‘active’.
Turkish companies are also adapting well to this change: the number of commercial and corporate internet banking customers has reached three million, 1.3 million of whom are ‘active’. In 2015, transaction amounts were even more impressive: more than 250 million money transfers, 200 million payments and around 50 million credit card-related transactions were made via internet banking. The total monetary amount of these transactions was around $800bn.
Moreover, the value of the Turkish e-commerce market exceeded the $6bn level, with more than 12 million e-commerce customers in the country. All these figures clearly indicate how fast Turkey is proceeding on its digitalisation journey.
The threat of cybercrime
The digitalisation of Turkey’s economy has had a profound impact on the insurance industry. First, customers’ swift adoption of digital services has brought the technology and finance sectors closer together. Companies in the Turkish financial services industry increasingly utilise financial technologies not only to improve their back-office business, but also to serve innovative products and services to their customers. The Turkish banking industry has been the first adopter of financial technologies, and the insurance industry will be the next.
Second, and more importantly, digitalisation brings new types of risks; namely, cybercrimes. The insurance industry will need to play a vital mitigation role in these risks. Today, between 10 and 15 million people per annum are affected by cybercrimes in Turkey. Recent surveys indicate that 86 percent of people in Turkey are concerned about ID theft and cybersecurity.
The case is similar for Turkish enterprises as well: on average, Turkish companies spend more than €40,000 per year on efforts against data leakage. Zurich Group’s 2016 Global Small and Medium Enterprises Survey also revealed that Turkish SMEs, which constitute around two thirds of the Turkish economy in terms of revenues generated, have increasing concerns over stolen customer data and money theft from cyber-attacks. As these risks are new to our country, the Turkish insurance sector is now at the beginning of its journey to provide appropriate coverage.
What’s next?
As a crucial outcome of its new strategy and restructuring programme, which was adopted at the end of 2012, Zurich Turkey’s mission is to be the most innovative insurance company in the country. We see innovation as the engine of further sustainable profitable growth, and we closely follow trends and look for customer-centric solutions. Currently, Turkish citizens’ main concerns are about identity theft, which has been a hot topic since a number of Turkish citizens’ data was leaked during the first half of 2016. In light of this, Zurich Turkey started to provide a new cybersecurity product to its customers, named ID-Safe. ID-Safe is a new generation product that helps customers protect their crucial information, such as passwords and credit card numbers, from cyber-threats.
Zurich Turkey’s customers who use ID-Safe can benefit from various security coverage options, like identity fraud and password coverage
Customers who use ID-Safe can benefit from various security coverage options, like identity fraud and password coverage. But the most interesting feature of this product is that its services are not limited to the coverage provided for cyber-threats; the product also actively helps customers protect their information. This is primarily achieved through a Web Radar service provided to policyholders.
Policyholders enter all their information into a secure database, and the service regularly scans the web in order to detect any misuse of this information, warning the policyholder if something is wrong. Furthermore, antivirus software is also provided to policyholders for free, which helps them protect their computers.
Cybersecurity is becoming a bigger risk, not only for individuals, but also for enterprises. In light of this, and combined with our mission to be the most innovative insurer in the Turkish market, we are currently working on a similar cybersecurity product for SMEs. We seek to continue to serve our customers with the most innovative insurance offerings.
The European vision of an economic project was predicated on four essential freedoms: labour, goods, services and capital. Despite celebrating its 60th anniversary in March, the project has been profoundly shaken, painfully overshadowed by lacklustre economic performance and heightened political tension.
Six decades ago, political theorists hailed closer economic ties as the answer to inspiring a new age of political accord. As people experienced the inevitable benefits of deepening economic integration, they argued, political support for the European project would increase. Further, the increasing attachment to the project of integration would gradually erode nationalistic tendencies. Recent events have dented that theory.
Yet, with political threats to the union mounting, the EU has reverted to its founding philosophy: European Commission President Jean-Claude Juncker has turned to the fourth freedom of the single market – the freedom of capital – in the hope of breathing new life into the economic project.
Shortly after the UK voted to leave the EU, the Commission called for the acceleration of the Capital Markets Union, a project aimed at reinvigorating the European economy by unlocking the benefits of fully integrated capital markets. A communication from the Commission argued: “In the current political and economic context, developing stronger capital markets in the EU is even more important.”
As a result, the project in capital integration has returned to the forefront of policy efforts, promising to address the weakness of European capital markets. If the vision becomes reality, European businesses will receive the funding fix they need to drive growth more broadly in the economy and, with any luck, restore confidence to the floundering economic union.
The growth gap
At the heart of the reform proposal lies the notion that incomplete capital integration has left many European businesses with limited access to capital markets, forcing them to become heavily reliant on crisis-ridden banks. Theoretically, the full integration of capital markets would counteract this, creating open, competitive and efficient European financial markets, improving the allocation of resources within the EU and providing businesses with a greater diversity of funding options.
Many European businesses have limited access to capital markets… forcing them to become heavily reliant on crisis-ridden banks
The US is often used as an example to illustrate the transformative potential of better-functioning capital markets in Europe. World Finance spoke to Robert van Geffen, Director of Policy at the Association for Financial Markets in Europe (AFME), who said: “The post-crisis environment has made it clear that an over-reliance on bank lending can lead to a slower economic recovery, particularly when you compare it to the situation in the US, where capital market financing was able to quickly provide the necessary finance to firms after the crisis.”
The positive growth figures seen in the US can be traced to its deeper and more diverse capital markets. Meanwhile, in the EU, the majority of financing to small and medium-sized enterprises (SMEs) occurs through bank lending, with weak capital markets restricting businesses’ options – particularly during their early, high-risk stages.
Before a company goes public, capital markets can provide crucial funding such as business angel and venture capital investment, fulfilling a function traditional banks cannot. “The appetites for risk are different. Often, capital markets can better match investors’ risk appetites with the needs of those looking for funding”, Anna Bak, manager of the securitisation division at AFME, told World Finance.
Considering start-ups, scale-ups and generally higher risk businesses play a central role in spurring growth, there is a clear call for greater opportunities in high-risk equity funding. Van Geffen said: “In particular, while start-ups constitute just a small proportion of total SMEs, they are a very important driver for the creation of jobs in Europe, adding a disproportionate number of jobs to the labour market.”
Crucially, European capital markets fall well short of those in the US, with private placements, angel investor networks and venture capital all lagging behind. For example, in 2014, the amount raised by European venture capital firms for SMEs in the US was €28.4bn ($30.7bn), compared with only €4.1bn ($4.43bn) in Europe. In 2015, angel investors provided American SMEs with €22.7bn ($24.5bn), while SMEs in Europe received just €6.1bn ($6.6bn). Further, European stock and bond markets are also limited when compared to their US counterparts, with eurozone stock markets worth just 47 percent of GDP in 2014, compared with 146 percent in the US.
Freeing the market
The Commission’s proposal argued many of the shortcomings found in the EU’s capital markets could be ironed out if barriers to capital movement were reduced. While the efforts to achieve capital market integration began 60 years ago, the freedom of capital in Europe is still held back by the diversity of regulations set between member states. “There is significantly more fragmentation that exists in the EU, which does not exist to the same extent in the US”, van Geffen said. “This makes having truly integrated capital markets more complicated.”
Venture capital investment in SMEs (2014):
€28.4bn
US
€4.1bn
Europe
Business angel investment in SMEs (2015):
€22.7bn
US
€6.1bn
Europe
European capital markets tend to be organised along national lines and, as such, national discrepancies in financial, technical, legal and administrative rules prevent the true freedom of capital coming to fruition. As a result, investors overwhelmingly stick to home markets. A report by AFME entitled Bridging the Growth Gap found that 65 percent of the global investors surveyed felt market fragmentation and a lack of understanding in regard to cross-border differences discouraged investment.
Smaller member states with under-developed capital markets could have the most to gain from greater capital movement. With the system in its current state, it’s not hard to see why investors are reluctant to make cross-border payments to a small country like Malta, which has a population of just 400,000 and adheres to a host of individual rules and regulations. Risk levels can also be difficult to compare across member states, with diverse insolvency laws creating major differences in the potential losses ensuing from bankruptcy. The harmonisation of regulations would help pave the way for greater investment from within Europe and abroad. Harmonisation could also facilitate the rise of new players, such as user-led IT or app platforms.
The EU’s accelerated policy efforts are due to be completed by 2019, with the Commission putting forward a range of measures to tackle the barriers preventing the free movement of capital. A particular focus has been placed on venture capital, with the proposal of a new framework seeking to create opportunities for fund managers of all sizes, and expand the range of companies that can be invested in.
The majority of the proposed measures focus on reducing the discrepancies between capital market rules in member states. For one, the green paper emphasises the intention to move towards the harmonisation of insolvency legislation – an enormously complicated undertaking that would certainly encourage more capital freedom. Another key measure proposes to reform the prospectus process, which could dramatically simplify the procedure for firms seeking to issue debt or equity. Many proposals have yet to fully take shape, but similarly fall into the theme of coordinating financial, technical, legal and administrative rules across the union.
Taking stock
While it is clear that the economic performances of the eurozone and the US differ considerably, many argue it is a mistake to put too much emphasis on capital markets. Professor Ewald Engelen of the University of Amsterdam told World Finance: “There are some parts of Europe where it is obvious that there is next to no credit provision being undertaken by banks, especially not to small and medium-sized enterprises. The question is: does the lack of credit provision have to do with the provision of capital, or does it have to do with the macroeconomic conditions in those countries?
“It has nothing to do with the absence of a capital markets union, it has everything to do with the fact that in the eurozone, governments decided on quite harsh austerity measures from 2010 onward.”
Capital markets provide less funding to small businesses in the EU than they do in the US
Furthermore, although capital markets provide less funding to small businesses in the EU than they do in the US, there is a limit as to how far regulatory changes can bridge this gap. The disparity also comes down to cultural differences, which inevitably take far longer to change. “There is a difference in risk culture for start-up funding between the US and EU. For example, in the US, investors will not necessarily consider an earlier bankruptcy by an entrepreneur as a bad thing, but rather as an opportunity the entrepreneur has probably learned from, whereas in Europe it is seen as being overly risky and investors will feel discouraged to invest”, said van Geffen. On top of which, the EU will always face a certain level of fragmentation when compared to the US as a result of its language barriers.
The Commission’s restless efforts to deepen capital market integration in the single market won’t be a quick-fix solution for growth in Europe. For one, it is unlikely to be able to bring EU capital markets in line with those of the US. For another, capital markets are far from the only factor holding back growth in the EU relative to the US. Instead, the ironing out of member state disparities will likely prompt a gradual improvement in European capital markets and a modest uptick in funding opportunities for businesses. That said, such an improvement could mark an important step in the recovery of the single market, especially if growth can inspire greater confidence in the wider economic project.
