Author: Max Tomlin

Mass effect: the employee shortage

Posted on by Max Tomlin

Not too long ago, the biggest concern in terms of demographics was the exponential global burden of overpopulation. With millions already dying from starvation and acute poverty, the notion of adding billions more to the roster without triggering further human suffering seemed nothing short of ludicrous. As for the planet itself, given the rapid depletion of fossil fuel reserves, as well as the damage inflicted in order to feed ever-expanding populations, the consequences were deemed to be catastrophic.

According to Jane Falkingham, Professor of Demography and International Social Policy, and Director of the ESRC Centre for Population Change: “In the 1970s, when the global population passed the four billion mark, some academics, such as Paul Ehrlich, were arguing that there was a ‘population bomb’ and the world was ‘minutes away from famine’. However, these doomsday scenarios did not transpire, as technological innovations changed the way we manufacture goods and the ‘green revolution’ increased yields and agricultural productivity.”

When people are more productive, they can earn more, pay more taxes and save more, creating a beneficial cycle for the economy

The rapid advancement of medicine, together with a corresponding decline in infant mortality rates, has resulted in people living far longer. Such developments have coincided with sociological trends that now see people leaving it later to have children, while having fewer when they do so. Consequently, ageing populations are the demographic challenge du jour.

The number of economies facing this issue is rising, tipping the entire planet into an unprecedented state of affairs. “According to the UN population division, which is sort of the font of all wisdom on population and demographic matters, with a handful of exceptions global population growth is basically grinding to a halt”, said George Magnus, economist and expert on global demographic trends.

Ageing population
Falkingham told World Finance: “In 1901, average life expectancy for a man in [the] UK was 45. By 2001, it was 75 years – a rise of 30 years in 100, equivalent to three years every decade, or 3.6 months a year, or two days a week, or around seven hours a day! These improvements in life expectancy reflect advances in medicine and public health, as well as rising standards of living, better education, improved nutrition and changes in lifestyles.”

As a result, population ageing has ensued, with one especially large generation making the phenomenon all the more visible: the baby boomers. According to the UN report World Population Ageing 2015, the portion of the global population aged 60 years or older increased by 48 percent between 2000 and 2015. By 2050, it is expected the number will have tripled since 2000.

“It’s a bit like watching a snake eat its prey: you can watch the prey work its way through the snake’s body”, Magnus explained. “In a way, the baby boomers are the ones who are at the bulge in many societies, and that bulge is gradually working its way through working age. A good part of it is entering, or has already entered, the period of retirement, and that will continue for a considerable period of time.”

By the middle of this century, no age group is expected to swell as fast as that of the over-60s. Furthermore, those within that group will become increasingly aged as well: the UN report forecasted that, between 2030 and 2050, the share of the globe’s population aged 80 years or over will increase from the current level of 14 percent to more than 20 percent.

At present, developed parts of the world hold the most concentrated shares of older citizens, with as many as one in four citizens being aged 60 or over (a figure that is expected to rise to one in three in the foreseeable future).

Interestingly, this shift is also expected to take place in developing nations, with the portion of people aged over 60 rising from the current 5.5 percent of a population to 9.8 percent by 2050. As this is the same percentage currently seen in advanced economies, the movement signifies a challenge truly global in scope (see Fig 1).

As Falkingham noted, such developments have significant consequences: “Rapid changes in age structure make it more difficult for societies to adjust, and the speed of population ageing has important implications for government policy in the fields of health and social care, and pensions. Some countries of the global south are growing old before they grow rich, presenting an additional challenge to the development of systems of social protection.”

In extremely poor developing countries, it is common for families to have numerous children as something of an insurance policy: by doing so, parents can better ensure a few of their offspring will survive birth and childhood, and in adulthood at least one will earn a good enough wage to care for their elderly parents. Naturally, this approach falls in parallel with economic growth: as an economy develops, child mortality declines and personal incomes grow. In correlation, fertility rapidly falls.

In the past, birth rates have been reduced due to widespread diseases, or conflict and war. Yet, today, it is cultural norms that have caused the drastic reduction in the number of children that people are having. Magnus added: “This is a unique phenomenon in human history.”

In advanced economies, individuals now consider numerous other factors when planning a family, such as the kind of education and lifestyle they can provide for their children; more often than not, these are better when offspring are fewer in number.

Dwindling workforce
As equality in the workplace improves and better career opportunities are afforded to them, women are leaving it later to start a family. This factor can account for Japan’s low birth rate, which is currently 1.4 children per woman – far lower than the 2.1 average needed to ensure the country’s long-term economic stability. For the country – which also has the most aged population on the planet, with 33 percent aged 60 or older – there is a mounting pressure on both the state and those of working age.

30 years

The increase in life expectancy in the UK over the past century

48%

The global increase in people aged 60+ between 2000 and 2015

1.5m

The number of skilled immigrants required to sustain Germany’s state pension system

83%

of Norwegian mothers with young children are in employment

“The definition of working age is a bit of a moving feast nowadays”, Magnus told World Finance. Traditionally, this term encapsulated those aged between 15 and 64, with pensions being available from the age of 65 since Prussian statesman Otto von Bismarck introduced the idea of government-supported retirement in 1881.

However, with increasing numbers of people staying in education for longer and more opportunities for workers to retire early, the working age range is now shrinking in many developed states. Magnus explained: “Assuming, just for the moment, that we’re talking about the 15 to 64-year-old age group, this age group is coming under a lot of pressure, because at one end of the cohort – the over-65s – that group of people in society is doubling over the next 20 or 30 years, and the number of workers who are growing up to replace them as they retire is shrinking very slowly, because we’re not having enough babies to grow up to become workers.”

The working age group is the faction that overwhelmingly creates economic value within society: they have the jobs and the income, they create wealth, and they purchase goods and services, while older individuals remain dependant on them to provide the tax revenues they need for their healthcare, pension payments and so on. Not only does the burden on those of working age and the state both increase in ageing populations, but economic growth also suffers.

Companies feel the pinch of both fewer workers and customers. The latter is significant in accumulation, particularly as consumption patterns begin to shift, with demand moving away from durable goods such as electronics and cars towards services such as healthcare and nursing homes. The consequence is a shrinking demand for jobs in certain areas and growth in others – both of which can be exponential. In the US, for example, the domestic construction industry is already suffering both from shrinking demand as a result of a declining home ownership rate, and labour shortages due to the retirement of baby boomers.

Saving habits also change as people grow older. During their 20s and 30s, people are far more likely to borrow and spend more on their homes, children and careers. By their 40s and 50s, however, such obligations lessen, while incomes are also likely to be higher, meaning people begin to save more, particularly as retirement looms. When that time does come, over-65s use their savings, together with state support, to live. When accreted, this shift can have a significant impact on an economy, causing growth to slow as consumption falls. Though higher savings in an economy may serve to increase investment and cause faster output growth as employment rises, this rate will eventually plateau.

Experience is king: Japan boasts one of the highest proportions of older workers in the world

Demographic dividend 
Magnus told World Finance: “The so-called ‘demographic dividend’ is a phase that demographers have identified, where youth dependency is declining, the working age population is swelling, and… the over-65 cohort of the population has [not yet] begun to expand – so this is otherwise known as the ‘sweet spot’.” This phase occurs when the population bulge is of working age and is having fewer children, but at the same time there lacks a substantial increase in the number of elderly dependents. The state therefore benefits from a high number of people saving and consuming more, while also paying more taxes, yet without having the growing burden of pensions and healthcare.

Numerous western economies have enjoyed the demographic dividend and benefited immensely from this incredible window of economic opportunity. Further afield, China is an excellent example of exploiting the sweet spot to phenomenal success: in doing so, the country propelled its economic development forward at a simply astronomical rate to become the second biggest economy in the world.

Despite the importance of this dividend for numerous emerging economies with youthful populations, there is a risk of missing out on it all together. Magnus pointed to one example in particular: “We only have to think back to the Arab Spring to be reminded about what potentially can happen if you have a lot of young people growing up without hope and without aspiration for employment… The demographic dividend, in other words, is really only something that can be exploited successfully if you have a strategy to put people to work, otherwise it just gets wasted, and if push comes to shove, it can end up in disruption, conflict and violence.”

As Magnus noted, we cannot assume that, say, India and Brazil can and will successfully exploit it. “I think it’s certainly a mistake to say it’s a foregone conclusion”, he said.

International aid
The fastest and perhaps most obvious way in which the working age population can swell is via immigration. Through policies that encourage an influx of young workers, pressure is reduced on those in the middle and, in turn, the reliant cohort of elderly individuals. However, there is considerable social and political opposition to inviting droves of immigrants into a state: long have ‘foreigners’ been accused of stealing jobs and placing undue stress on public services. This hostility has only worsened of late in many countries – an unfortunate consequence of the ongoing refugee crisis, which has crystallised in a handful of European countries in particular.

One such country is Germany, western Europe’s chief recipient of Syrian refugees. Interestingly, Germany also faces the worst case of population ageing in the region. According to a study by Hamburg’s World Economy Institute, not only is Germany’s birth rate now the lowest in the world, it is also declining faster than that of any other industrial country (see Fig 2).

Moreover, it is estimated that approximately 1.5 million skilled immigrants are required to sustain Germany’s state pension system; by 2060, two workers will be needed to support every retired person in Germany. Yet despite this very real and looming problem, when Chancellor Angela Merkel agreed to receive more refugees in 2016, she was met with public outrage.

Aside from the social backlash, though immigration may be the fastest solution, the difficulties with which such policies can be applied are numerous. Helping newly arrived citizens to integrate into a population, particularly given language barriers and cultural variances, is both costly and difficult to implement successfully. However, a failure to do so can lead to growing unemployment and even rising levels of crime if the newly arrived immigrants are not afforded the opportunities they require in order to positively contribute to the economy.

For governments hoping to improve their existing labour participation rates, another approach is to increase the numbers of those who are traditionally under-represented – namely women and older people. While such a move can be met with opposition, there is a clear logic behind it.

As Magnus explained: “It’s perverse, but it’s not an accident that the countries that have the highest participation rates of women at work also have the higher fertility rates… You wouldn’t normally think that’s the case, but it is; the link really is ubiquitous and readily affordable childcare. Scandinavian countries, for example, have quite high female participation rates [see Fig 3], and they also have the most generic forms of affordable childcare.”

A far cry from the former fears of a population bomb, today’s biggest demographic challenge is that the young are too few and the old too many

According to the OECD, while the number of women in a workforce is determined to an extent by labour market conditions, cultural attitudes and female participation, certain policies, such as flexile working arrangements, childcare subsidies, paid parental leave and child benefits, are also crucial.

Female employment is incredibly important for a country’s ongoing economic growth. Moreover, it will prove vital as populations age and governmental expenditure on pension schemes and age-related ailments mounts. In order to include more women in the workforce, attitudes towards them in the workplace need to improve, and glass ceilings must be removed.

As evidenced by Scandinavian countries, putting measures in place that allow women to have both careers and families is essential. Of course, promoting female employment while also bolstering a country’s birth rate is no mean feat, particularly as the two seem so at odds with one another.

Norway, though, is an excellent example of how individuals can combine their personal and work lives with great success for the economy. According to the OECD Observer, around 83 percent of mothers with small children in Norway are in employment, while both fertility rates and labour participation have steadily risen since the 1970s. Today, the Norwegian fertility rate is 1.9 children per woman, one of the highest in Europe.

This success began when the country experienced an increase in labour demand as a result of its economic growth, which was simultaneous with greater educational attainment among women. Interestingly, this has become a cycle that feeds into itself: greater labour supply means more revenue from taxes, which in turn means more state money can be ploughed into services such as childcare and support for working mothers. With more help from the government, more women are more likely to work.

Experience with age
There is also the option to encourage older people to participate in the workforce. This has already started to gain momentum in western countries, though it is in its early stages and is still disregarded by many. In Europe, if given the opportunity, individuals are more likely to retire early – to do so is widely regarded as ‘the dream’. In Japan, on the other hand, experience is king. There is a great deal of respect for the aged, which explains why the proportion of older workers is much higher than in other countries. Again, attitudinal changes are required for a shift to take place, which will be aided by the automation of processes that will enable people to work longer.

Magnus explained that another method for boosting a country’s economy is to increase productivity: “If only it were a light switch that you could switch on from one day to the next… If tomorrow’s working age population is more productive than today’s, then we may have already advanced a long way into resolving the problem.” As underlined by Magnus, when people are more productive, they can earn more, and when they earn more, they pay more taxes and save more, thereby creating a beneficial cycle both for the individual and the economy.

He continued: “So innovation – it always has been our salvation. From the invention of the wheel to the jet engine and the internal combustion engine, and so on and so forth.” In order to spark innovation, however, governments must make greater investments into education, research, funds and the like. “The future really is, in my view, about investment in human capital and in new products and processes.”

A far cry from the former fears of a population bomb, today’s biggest demographic challenge is, in simplistic terms, that the young are too few and the old too many. Significantly, this is not a problem limited only to wealthy countries; it is one that is global in scale and set to worsen in the coming years. Yet despite the terrifying figures being brandished and corresponding alarm regarding economic decline, this demographic challenge does have viable solutions. The road that each country chooses to go down will be individual and specific to its own internal circumstances and challenges, whether that means inviting more migrant workers or pushing up the pensionable age. In any case, the best solution – as always – lies in our saviour: innovation.

Currency manipulation: Donald Trump’s disorderly blame game

Posted on by Max Tomlin

To paint a picture of the dynamics of currency manipulation in 2017 is to quickly find oneself in a chaotic whirlwind of heated accusations and staunch denials. On his campaign trail, President Donald Trump promised to get tough on currency manipulation, asserting he would label China a “currency manipulator” on his first day in office. Meanwhile, China was pulling out all the stops to increase the value of its currency, rendering its exports less competitive. The president’s stance has subsequently softened.

In economic terms, Trump’s recent U-turn on his promise to accuse China was a logical move. Yet, his ability to flip-flop between extremes emphasises the disorderly nature of the international debate on currency manipulation, which is riddled with pent up tensions but presents few clear facts.

Naturally, government officials are anxious to deny any wrongdoing. This was evident when an article published by the Financial Times – comparing the current account surpluses of Japan, China and South Korea – was met with furious criticism from a high-ranking official of the South Korean Finance Ministry. The official, who had interpreted the article as an imploration for Trump to label Korea a currency manipulator, branded the article “factually erroneous” and threatened to take action against the paper.

The often-conflicting viewpoints of prominent economists do little to clarify the issue. An analysis by the Peterson Institute for International Economics argued while economists were quick to decry the manipulative policies of larger nations, they often overlooked the policies of smaller economies like Hong Kong and Singapore. Conflicts of opinion also emerge in response to international developments on the topic. For example, Peter Navarro’s complaints concerning Germany have drawn contrasting viewpoints from economists such as Paul Krugan, Laurence Kotlikoff and Matthew Klein.

Slippery accusations
Of course, there is a reason currency manipulation is difficult to pin down: the line between manipulative actions and innocent policy choices is often hard to define and easily blurred. World Finance spoke to Kaushik Basu, Professor of Economics at Cornell University and former Chief Economist at the World Bank, who said: “Given that it is considered perfectly reasonable for central banks to intervene to curb volatility and stabilise the exchange rate, and it is difficult to formally differentiate between a manipulative intervention and a stabilising intervention, manipulation is difficult to prove formally.”

The line between manipulative actions and innocent policy choices is often hard to define
and easily blurred

To take one example, South Korea is often the subject of suspicion over its exchange rate policy, but authorities insist they simply perform “smoothing operations” in order to counteract volatility in the currency markets.

While large stashes of foreign exchange reserves are often considered a smoking gun, central banks presiding over a floating currency have good reason to build such reserves. Often, central banks will hoard reserves to use as a buffer, pre-emptively counteracting the consequences of potentially destabilising shocks. Indeed, the International Monetary Fund (IMF) actively encourages governments to intervene in exchange markets in order to counter disorderly conditions.

Finding the facts
In an effort to cut through the ambiguity, the IMF splits the issue. First, in order to identify currency manipulation, it states there must be a fundamental misalignment of the exchange rate. Second, there must also be intent to manipulate the exchange rate for the purposes of gaining an unfair advantage in international trade.

Crucially, one without the other cannot be conclusive. Judging misalignment relies on the complicated and laborious task of determining what the exchange rate should be. If misalignment is present, the incriminating evidence tends to be found in large trade surpluses and current account deficits. Often, large trade imbalances are interpreted as a conclusive measure and provide the ammunition for nations to be branded as manipulators. By this logic, China’s $293bn trade surplus makes it an easy target, as does Germany’s $285bn.

However, imbalances alone are not enough and could arise for a number of reasons. As Russell A Green, Rice University’s Will Clayton Fellow in International Economics, explained to World Finance: “Trade and current account surpluses are essentially driven by savings investment imbalances. The exchange rate is one factor that is going to influence the amount of foreign goods consumers will want to buy, but there are other factors as well. For example, if the population of a country is very concerned about saving for the future, then they may have a big trade surplus simply because they are saving so much relative to their investment.”

Chinese whispers
The fluid interpretation of ‘intent’ provides the grounds for many of the world’s heated disputes. While the IMF lists a number of signifiers (including an excessive and prolonged accumulation of foreign assets, a changing current account or a large-scale foreign exchange intervention) it is hard to prove these actions are being leveraged to gain an unfair advantage.

“The problem arises from the fact that, even when a central bank targets a specific rate, it does not have to admit to doing so. All you have to do is to say you are holding it at a level where it would stabilise anyway”, Basu told World Finance.

Trade surplus:

$293bn

China

$285bn

Germany

Foreign exchange intervention and capital controls are not the only policies that affect the exchange rate. The IMF also pointed to other actions signifying intent: namely monetary or financial policies abnormally affecting capital flows. “For each country that has its own monetary policy, it becomes very difficult to distinguish in practice between domestic policy and exchange rate policy… the two are pretty inextricably intertwined”, said Green.

This could give weight to accusations levelled against Japan, as its characteristic loose monetary policy has resulted in the dwindling value of the yen in recent years. Of course, any accusations are quickly met by an insistence the policy is not intent on affecting the exchange rate, but instead geared purely towards an inflation target.

Indeed, it is hard to find a case where a fundamental misalignment accompanies clear intent, making it almost impossible to declare manipulation is taking place without some degree of ambiguity.

A clear-cut case
Given such wide room for interpretation, China’s history of currency play provides an example that is unusually clear-cut. During the mid-2000s, the country’s exchange rate policy leaned on both capital controls and foreign exchange intervention, allowing the People’s Bank of China to build a hefty $3.99trn in foreign exchange reserves.

“In China’s case, they were quite explicit… the IMF quoted Chinese officials saying that they needed to keep their exchange rates low because they had a large population in rural areas they were migrating to urban areas, and they needed to provide them with jobs to maintain domestic stability”, said Green.

This is “easily interpretable” as intent to skew exchange rates in the favour of Chinese workers. As such, naming China the “grand champion” of currency manipulation may once have been justifiable, but Trump’s assertion has long been out-dated.

While the lines of play for currency manipulation are often blurred, labelling China a currency manipulator in 2017 would have been entirely baseless. Basu said: “China’s foreign exchange reserves peaked in June 2014, when it reached $3.99 trillion dollars. It has fallen substantially since then, dipping below the 3 trillion mark in January this year. The release of these dollars would have lowered the value of [the] dollar and raised that of the yuan. So if any charge can be brought against China at this time it is that of raising the value of the yuan and curbing its own exports.”

While cold economic facts can clearly be influential, the role of politics is forever present. “No country will stand up and say ‘I am manipulating my exchange rate’, so there is always going to be room for interpretation – and that’s where politics comes in”, said Green.

Even when the charge against China was clear, the IMF did not officially deem currency manipulation was taking place. This, too, can be traced back to politics: “After the Asian financial crisis, the IMF had a very big credibility problem in Asia, and I think the IMF felt that, if they sanctioned China, that China and perhaps other countries in Asia would simply turn their backs on the IMF”, said Green.

Thus, any formal accusations surrounding currency manipulation are unlikely to find footing with the IMF. In turn, the international rules of currency manipulation will inevitably remain fuzzy, and accusations will continue to be relegated to the realms of geopolitical posturing.

Branches fall as banking goes digital

Posted on by Max Tomlin

There is no doubt the global financial crisis changed the economic landscape. But perhaps one of its most lasting effects was the creation of an inherent distrust in retail banking. While never truly beloved, few believed the biggest players in the banking industry were capable of suddenly toppling.

Almost a decade on, and with new regulations in place, a wave of start-up banks have sought to take advantage of the enduring scepticism, winning over customers left frustrated by conventional banking. But what makes these banks different? Well, they are launching without branches, operating entirely in app form.

Decisions made 30 years ago could be making it more difficult for older banks to implement new features

To the average person, it seems a tempting offer. With many apps now capable of performing the traditional functions of a branch, there is little for a customer to miss out on. If through cutting overheads they can offer better deals than those of the bigger banks, then start-ups may quickly make the transition from novelty to contender.

However, despite the benefit of being built for the modern world, digital-only banks still face a tremendous uphill battle. While free from the burden of legacy systems, they lack the wealth, expertise and momentum that some of the oldest lenders have been amassing for hundreds of years.

Technological tipping point
With an increasing number of digital-only banks hoping to gain the ubiquity of Uber, the global market is already becoming crowded. Many have formed partnerships with ATM networks in a bid to give their customers free access to money while cutting overhead costs.

The UK has become a particular hotspot, with favourable regulations providing a platform for digital banks to flourish. Last year Monzo launched its banking service in beta, issuing 50,000 prepaid debit cards as part of a system trial. In January, Monzo announced it had reached 100,000 users and planned to launch a free current account. Meanwhile, Atom Bank began offering a fixed-saver account, and plans to launch a full suite of financial products – including mortgage services – in the coming years.

With a wealth of experience at the helm, it would be a mistake to dismiss these challenger banks as merely a fad. Atom’s Chief Executive, Mark Mullen, is the former CEO of First Direct, and the company’s Chairman, Anthony Thomson, founded Metro Bank. They have also attracted substantial investment, with Monzo drawing over £22m ($26.8m) in investor funding and Atom Bank backed by in excess of £219m ($262.2m).

Aside from the favourable regulatory environment, the rise of digital-only banks can also be attributed to a tipping point in technology. Speaking to World Finance, Ben Andradi, Head of Europe at IT consultancy firm Syntel, said the ubiquity of powerful computers has ensured customers are constantly connected, and the proliferation of open-source software has substantially dropped banks’ IT costs. Rather than build their own IT systems, companies can easily rent cloud services from companies like Google and Amazon.

“Rather than having your own data centre or your own server farm, with the cloud you can buy this service as almost a utility”, Andradi explained. “This makes it far easier for small start-ups to really scale, and all the privacy issues withstanding, can kind of do it all themselves.”

Digital infrastructure
A common sales pitch among digital-only banks is that older banks simply can’t match their established IT footprint. While older banks have spent decades building their infrastructure, decisions made 30 years ago may be making it difficult to implement new features.

In an interview with The Guardian, Monzo co-founder Tom Blomfield said the immediacy of the services Monzo offers can’t be matched by established banks: “If you slap this app on top of NatWest’s systems, the phone wouldn’t buzz when you make the transaction. It would buzz three days later, when the bank finally posted to its ledger.” Monzo’s app also has a multitude of financial tracking abilities, monitoring location, time and other data points tracing spending habits, allowing users to take a closer look at how they are using their money.

The accelerated rate at which digital-only banks can develop new products gives them
an edge on their more established competitors

Andradi believes Blomfield may be right, with many traditional banks relying on older systems built in house: “All of that becomes difficult because what you need is what we call ‘always on’ and ‘highly responsive’. If you’re on legacy, it wasn’t built for something like that.”

While clever, and perhaps something established banks will struggle to replicate, a few extra financial tracking tools are not enough to revolutionise the market. Andradi suggested, however, it is not only the gimmicks that digital-only banks offer, but also the accelerated rate at which they can develop new products that gives them an edge.

“It’s about how responsive you can be to the marketplace, because the marketplace changes all the time”, he said. “Look at mortgages: you used to have traditional mortgage products, it was the breadwinner only getting a mortgage. Now you have buy-to-let, you have parents and children sharing mortgages. All these product sets have to be developed and tested. If you have a digital infrastructure, you are able to bring those products to market that much faster.”

While people may be hesitant to go through the process of changing their bank account, being the first to bring a product to market could capture the first batch of new customers.

Migrating the financial ecosystem 
Despite this, established banks still have a tremendous advantage. At a minimum, brand recognition ensures a certain degree of inertia, with older banks benefiting from having been in the market for so long. Additionally, with many of the bigger banks integral to the overall financial ecosystem, it’s unlikely they are going to fall away any time soon.

Still, established banks are going to have to update their systems to remain competitive. Andradi said Syntel uses a number of propriety tools to help update banks’ legacy systems, but affirmed the transition is never simple: “It’s almost like you built your house on a particular foundation, and now you’ve got to change the foundation while living in the house, so this is a non-trivial heavy lifting process. They were created in a different era where you didn’t have all this technology infrastructure at all, so clearly their business model requires a lot of heavy lifting to shift to the new business model.”

1,046

UK bank branch closures in 2015-16

30-40%

Potential savings from updating mainframe architecture

Their new business model certainly includes fewer branches. In the UK, 1,046 bank branches closed between January 2015 and December 2016, according to a survey conducted by Which?. This undoubtedly reduced overheads, but Andradi believes streamlining back-office functions yields greater savings. He asserted a bank moving away from an old mainframe architecture could make substantial cost reductions: “That alone generates 30 to 40 percent cost savings, so you are able to use those savings to invest in the changing of business models and so on. That’s the kind of play that we see happening now.”

With these savings, established banks can nullify one of the key benefits touted by digital banks while keeping the momentum they have spent decades cultivating. Established banks also have an advantage when it comes to attracting the best talent: while a major bank or technology company can offer a large salary and job security, challenger banks often can’t be quite so generous.

“If you’re a small start-up, you may find tech savvy guys decide, sure, I might go ahead and join a Google, an Amazon, or a PayPal, but if I were to join a small bank starting up in the north of England, it could be quite tough”, Andradi said. “So that’s the challenge I think; it’s great to have the infrastructure but you need people, you need tech savvy skills to do this stuff.”

Regulating competition
It is still too early to discern the extent to which digital-only banks can grow, but the market is beginning to react. Andradi thinks the biggest players, while facing their own challenges, are not going anywhere: “But what we will see is, and you see this already, is a lot of competition, the regulators allowing a lot more banking licences and digital-only banks playing in small niche areas.”

In the UK specifically, Andradi sees a fight for the consolidation of the leading position behind the ‘big four’: “I think the interesting dynamic is what happens beyond the top four, in that number five or number six position. My theory is that the regulator will probably not allow too much consolidation at the top end to maintain competition, but clearly may allow consolidation at the lower end of the market.”

While they may boast a head start on the established banks, digital-only challengers will have to fight in order to maintain that lead – especially if established banks go on a digital journey of their own. But whether or not digital-only banks prove to be a success, one thing seems clear: traditional bank branches will continue to be uprooted as retail banking adapts to the modern financial climate.

The end of money

Posted on by Max Tomlin

On November 8, 2016, Indian Prime Minister Narendra Modi launched the biggest financial experiment in the nation’s history. In a televised announcement, Modi gave his citizens just four hours’ notice of his controversial ruling: that virtually all the nation’s cash would be immediately taken out of circulation. All 500 and 1,000 rupee notes were instantaneously declared worthless, and the Indian population were given just 50 days to deposit their newly voided notes in their bank accounts.

In the weeks that followed, chaos flared throughout urban and rural India. Equating to around $7.50 and $15 respectively, the invalidated 500 and 1,000 rupee notes had previously accounted for approximately 86 percent of the currency in circulation in India – a nation where 90 percent of all transactions are carried out in cash.

With the main media of exchange suddenly removed, Indian consumers faced long lines at local banks, empty ATMs and a barrage of ever-changing information as they struggled to adjust to their new near-cash-free economy. Markets took a drastic hit as workers abandoned their jobs to wait in line at the bank, desperately hoping to deposit or exchange their cancelled notes.

Now, less than half a year on from Modi’s dramatic demonetisation, the long-term effects of the decision are becoming clear. The nation’s expansive informal market has borne the brunt of the surprise policy, with many small businesses folding under the prolonged financial pressure. With home and car sales plummeting and investments drying up, the IMF has slashed India’s growth rate by a full percentage point.

Although Modi’s decision appears both radical and misguided, many countries are likewise moving towards a cash-free future. From Scandinavia to sub-Saharan Africa, consumers around the world are abandoning cash en masse, opting instead for digital payments and on-the-go banking (see Fig 1).

The problem with cash
Money is fast becoming digital. In at least eight countries, including Kenya and Zimbabwe, more people have registered mobile accounts than traditional bank accounts, while cashless payments have overtaken the use of notes and coins in many advanced economies. In the eyes of some high-profile economists, this trend towards digital payments is something to be encouraged.

For all the advantages of cash – convenience, anonymity and liquidity, to name a few – paper money comes at a cost. Even as cash usage falls, today there are more high-denomination notes in circulation than ever before. In the US, 20 times more cash is floating around than just 40 years ago, with cash in circulation hitting a record $1.5trn in January 2017. Incredibly, 80 percent of all US currency is made up of $100 bills – enough for every citizen to be carrying 35 of them at any one time.

But given how infrequently the average US citizen professes to come into contact with a $100 bill, it is safe to assume the majority of these notes are feeding into a vast underground economy. From tax evasion to terrorism, the anonymity of paper money allows a global, cash-based black market to thrive.

While the use of cash may be on the decline in the legal economy, the prevalence of big bills allows criminals and corrupt individuals to hide large volumes of illicit funds. According to the UN Office on Drugs and Crime, criminal markets including drug trafficking, human smuggling and fraud are now worth an incredible $2trn a year.

Clamping down on the criminal use of cash was the driving force behind Modi’s extreme demonetisation effort. Describing the move as a “historic purification ritual”, the Indian Prime Minister has since defended his policy, insisting it will help to clean out the black market’s cash supply and eliminate counterfeit notes.

If the rise of cryptocurrencies has taught us anything, it’s
that eliminating cash doesn’t eliminate crime

Bhaskar Chakravorti, an economics scholar and Executive Director of the Fletcher School’s Institute for Business in the Global Context, said: “The initial argument made by Modi was that these bank notes were demonetised to flush out the underground economy – known as the ‘black economy’ in India – or to flush out the illegal activities carried out by underground groups and terrorist groups.”

But while combatting crime may have been Modi’s initial aim for demonetisation, in the months since the move, another target has emerged: cutting the cost of cash. In every nation across the globe, the use of cash incurs a significant cost, from the price of printing money to ATM maintenance and withdrawal fees. At every stage of the complex supply chain, paper money comes with a substantial price tag.

“In India, the cost of cash is very high”, Chakravorti told World Finance. “The logistics of moving cash in a country like India is a very costly affair, given the nation’s poor infrastructure, congested cities and low density of ATMs, particularly in its rural areas.”

Indian consumers, meanwhile, are forced to pay both the real-world cost of ATM fees and the implicit cost of time spent going to collect cash, with such losses eating into margins, particularly among the poor. What’s more, India’s cash-based economy allows between 98 and 99 percent of all citizens to avoid paying taxes, with prolific cash usage contributing to a huge loss of potential revenue for the government.

While the cost of hard currency may be higher in India than in most developing and advanced economies, the same problem exists for countries across the globe: consumers, businesses and governments are losing billions of dollars annually in cash-related costs.

A Swedish success story
More than 350 years ago, Sweden made history by becoming the first European country to print paper money. Now, the Scandinavian nation is leading the race to become the world’s first completely cash-free society.

Unlike India’s overnight transformation, Sweden’s journey towards a cashless economy has been a gradual process. The transition began as early as the mid-20th century, when banks convinced employers and workers to pay and receive salaries through digital bank transfers. Since then, Sweden has slowly fallen out of love with paper currency, while non-cash payments have been on the rise (see Fig 2).

These days, Swedish retailers are legally entitled to refuse payments in coins and notes, and it is impossible to purchase a ticket for the Stockholm metro using cash. According to the nation’s central bank, cash transactions accounted for just two percent of all payments made in Sweden in 2015, while the number of notes and coins in circulation has fallen by 40 percent since 2009. What is perhaps most unusual, however, is the rate at which the nation’s financial institutions are going cash-free.

More than 50 percent of Swedish bank branches are now cashless, meaning customers simply cannot make a deposit or withdrawal. For many Swedes, these traditional banking services have been rendered almost obsolete by the hugely popular mobile banking app Swish. Used by almost half of the population, the app is the product of a collaborative effort by six Swedish banks, and allows users to transfer money at the tap of a button.

Cash-free Kenya
Just as mobile banking has driven the cash-free revolution in Sweden, technology is having a similarly transformative effect on the Kenyan economy. According to the World Bank, half of all mobile money transactions in the world now take place in the African nation, where annual transfers have reached an impressive $10bn.

This widespread use of mobile banking can be credited to the meteoric rise of M-Pesa, a mobile phone-based finance service. When M-Pesa was first launched in 2007, few Kenyans had access to a traditional bank, and fewer still had a bank account. Since its debut, the mobile service has become ubiquitous in the daily lives of millions of Kenyans, and has leapfrogged the debit card-based path that most developed countries have for years pursued (see Fig 3).

Now, half of the nation’s total GDP is transacted through M-Pesa, and the service has extended financial inclusion to millions of customers beyond the reach of formal banks. M-Pesa’s remarkable impact on Kenya’s financial system has served to demonstrate the transformative potential of mobile money systems in the developing world.

Today, a number of M-Pesa-inspired mobile money services have sprung up throughout sub-Saharan Africa, Latin America and southeast Asia, as these nations look to leapfrog the traditional banking system. According to the World Bank’s calculations, mobile money is now available in 81 percent of low-income countries.

Although geographically and economically disparate, both Sweden and Kenya have succeeded in digitalising their financial systems, without dramatically killing off cash. This isn’t to say, however, that demonetisation never works – provided the process is sensible and, most importantly, gradual. In March 2016, for example, the European Central Bank declared it was phasing out the seldom-used €500 note – a move that has largely gone unnoticed by tax-paying participants in the legal economy.

Chakravorti said: “The €500 note used to be called the ‘Bin Laden’ note, as it used to be popular with terrorist organisations, who used it to essentially enable the cash transactions that they needed to maintain their network. In a situation like that, where you’re removing a banknote that consumers hardly ever use, it makes perfect sense to demonetise it and make it that much more difficult for illegal and underground transactions to take place.”

Bad economics
While big banknotes are being successfully scrapped everywhere from Europe to Singapore, India exemplifies the dangers of a poorly executed demonetisation drive.

“Your hardship won’t go to waste”, Prime Minister Modi promised concerned citizens shortly after the demonetisation came into effect. “The country will emerge from this like gold.” But even now, months on from Modi’s controversial move, the fallout from the decision continues to wreak havoc on India’s informal economy and vulnerable small businesses. Demonetisation opened a Pandora’s box for the nation, and the ensuing crisis has been hardest on the rural poor.

According to Chakravorti “It has had a disproportionate effect on the poor, and particularly people who make their earnings on a day-to-day basis using cash… Low income individuals tend to do virtually everything using cash.”

Despite the prime minister’s advice to embrace mobile banking in the wake of demonetisation, this option simply hasn’t been feasible for millions of rural, low-income Indians. Although the nation is home to some of the largest cities on Earth, 67 percent of the Indian population still lives in rural areas, where internet connection is patchy and unreliable at best. For these rural communities, a lack of digital infrastructure means e-payments are not a suitable alternative to cash.

Instead, the overnight cash shortage saw many rural and low-income Indians turn to goodwill and bartering in order to carry out transactions, demonstrating tremendous adaptability in the face of adversity. Yet while millions of Indians still struggle to adapt to Modi’s new cash-light economy, the prime minister insists the move is for the greater good, by working towards eliminating India’s expansive black market.

But in this endeavour, Modi has been unsuccessful. India’s black economy may well account for more than 20 percent of the nation’s GDP but, crucially, the majority of this wealth is not held in cash. According to Chakravorti: “Only about five to six percent of assets in the underground economy are held in cash, and 95 percent of those assets are held in non-cash instruments… Demonetisation means you are just getting rid of cash that is used by day-to-day citizens, and not making any significant dent in removing the underground system.”

In his attack on India’s black market, Modi has failed to observe the fact that removing a criminal’s currency does not eliminate crime itself. The causes of crime are indeed complex, and while high-denomination notes may facilitate illegal activity, crime is not explicitly tied to cash usage. From poverty to debt, the economic motivations that encourage illegality are vast and difficult to address. Similarly, as Modi pushes for money to become digitalised in India, he must be aware that crime is heading in the same direction.

Prime Minister Modi’s demonetisation of high-value banknotes wreaked havoc on India’s informal economy

The dangers of digital finance
If the rise of cryptocurrencies has taught us anything, it’s that eliminating cash doesn’t eliminate black markets. Hidden in the shadowy corners of the internet, online illegal activity is thriving thanks to the birth of bitcoin and other seemingly untraceable payment systems. In October 2013, the FBI made its biggest dark web bust to date: shutting down the Silk Road, an online anonymous marketplace used to sell illicit substances and materials. In its short, two-year lifespan, the site reportedly saw over $1.2bn in sales, arguably making it the world’s largest communal marketplace for drugs.

In other less shady corners of the web, however, an increasing number of law-abiding citizens are falling victim to a range of complex and costly cybercrimes. Today, online criminals have become sophisticated hackers, able to drain entire bank accounts in mere minutes. With cyber-attacks on the rise, the prevention and prosecution of such crimes is now an international priority. This very issue sparked the creation of the BITCRIME agency, a German-Austrian research project dedicated to investigating effective criminal prosecution of financial crime committed with virtual currencies.

Speaking to World Finance, BITCRIME researchers confirmed they have observed a sharp increase in virtual currency-related crime in recent years. “One particular type of crime that we are seeing more frequently is extortions using ransomware”, said Dr Paulina Jo Pesch, Project Coordinator at BITCRIME Germany. “Ransomware is a malware that encrypts users’ data and demands a ransom payment to regain access to the data. In these crimes, blackmailers almost always use bitcoin for the ransom payment.”

2%

of Swedish payments were made using cash in 2015

50%

of Swedish banks do not carry any cash

81%

of low-income countries have access to mobile money

50%

of the world’s mobile transactions take place in Kenya

Fraud and extortion are nothing new in the criminal world, but this means of payment certainly is. Whereas such offenses have previously been carried out using conventional paper money, bitcoin and other cryptocurrencies can now provide criminals with a fast, convenient and near-untraceable form of payment. Pesch explained: “Criminals can benefit from using bitcoin, for instance, as receiving an online payment is much less risky than a cash handover in real life. In this way, clever blackmailers are able to minimise the risk of being identified and punished.”

It is this promise of anonymity that makes virtual currencies so attractive to large-scale criminals, whose illicit transnational activities demand discretion. As many bitcoin sceptics have pointed out, law-abiding citizens simply don’t need completely anonymous, untraceable transactions. If, for some reason, the average consumer were to wish for a degree of anonymity when making a purchase, then they would still have the option of using cash, which is only affected by financial regulations in quantities greater than $10,000.

Bitcoin does, however, boast a large number of lawful users, many of whom have dabbled in the currency simply out of curiosity. This legal user base makes it difficult to calculate how many bitcoin transactions are made for criminal purposes, although researchers have made informed estimates. According to the BITCRIME agency, the darknet Silk Road marketplace represented a significant nine percent share of all bitcoin transactions at its peak, suggesting criminal activities do indeed make up a substantial portion of virtual currency usage.

However, while bitcoin was touted as an entirely anonymous system when it was launched in 2009, law enforcement officials have become more adept at following the digital trail it leaves behind. Bitcoin-tracing evidence has played a major role in two Danish trials this year, while multiple arrests have been made worldwide following the collapse of the Silk Road. Yet as tracing technology improves, bitcoin systems are also evolving to provide greater anonymity. Pesch warned: “Even with the most advanced software, investigators will not be able to successfully solve all cases.”

Committed to cash
Futurologists have long predicted cash will one day become obsolete. With the advent of blockchain technology, mobile money and similar innovations, it appears we are indeed heading towards a cashless world. Yet for all the convenience that digital payments offer, many remain reluctant to fully part with their notes and coins.

Chakravorti noted: “There are a number of reasons why people still like to have physical money – for emotional reasons as well as security reasons… Our connection with money is very different to our connection with photographs, films, books and other things that have been replaced with digital alternatives.”

Cash may have been relegated to second-class status in Scandinavia, but elsewhere in Europe paper money remains popular. Germany is one of the most cash-intensive economies in the developed world, with over 80 percent of transactions still being carried out in physical currency. In neighbouring Switzerland, the central bank has no plans to demonetise its largest bill, insisting the 1,000 franc note remains a useful tool for transactions. Even in cash-light Sweden, two thirds of citizens believe access to paper money is a human right.

This reluctance to give up cash may indeed be justified; despite significant technological advances, digital money is unlikely to ever match cash for liquidity and ubiquity. Even as the finance sector undergoes a digital transformation, cash remains king – for now.

The GCC has more to offer than just oil and gas

Posted on by Max Tomlin

Though the economies of the GCC member states have evolved significantly over the past decade, recent economic challenges make further diversification crucial. In an effort to make this a reality, GCC countries continue to implement numerous policies to support economic diversification. Such reforms involve strengthening the business environment, developing infrastructure, increasing access to finance for SMEs and improving educational opportunities for citizens.

Bahrain and Oman have also introduced a number of incentives to attract foreign investors. In Bahrain, for example, one particular draw for external parties is its tax-free environment, which boasts no direct income tax, except for oil and gas industries. World Finance had the opportunity to speak to Merza Al Marzooq, Founder and Managing Partner at Alatheer Business Gate (ABG), about why so many foreign companies are rushing to invest in Bahrain and Oman.

Fiscal incentives
In a bid to encourage foreign investment into Bahrain and Oman, various incentives are now in play. Al Marzooq told World Finance: “For example, there is the provision of industrial plots in industrial zones for nominal charges, as well as reduced charges for water, electricity and fuel, in spite of recent price increases.” To further attract FDI, interest-free or subsidised loans with long terms for repayment can be arranged, while financial assistance for the development of economic and technical feasibility studies is also an option for foreign companies.

Visas and permits for foreign workers are key to attracting foreign investment, as are tax exemptions from corporate tax and customs duties

Naturally, the expedited arrangement of immigration visas and permits for foreign workers is a key feature in this initiative, as are tax exemptions from corporate tax and customs duties, which can be granted by governmental bodies.

In terms of infrastructure, the proximity of Oman’s Sohar special economic zone to the Sohar Industrial Port gives it a considerable logistical advantage. Likewise, the industrial area and free trade zone complex, which is centred around the Duqm port and dry dock project, “is another great benefit for international companies”, according to Al Marzooq. “Such advantages have really proven to have a positive impact in increasing investment, particularly foreign investment.”

Comprehensive services
ABG provides a range of business consultancy and advisory services, starting from company formation and commercial registration services. “We walk with you from starting a business to making it thrive by offering a wide range of services to companies looking to establish new entities or expand their business”, said Al Marzooq.

Services include professional advice and assisting clients in matters related to business formation and commercial registration. They also include the vital preparation of draft articles and memorandums of association, as well as other official documents. Clients thus have the administrative backing they need to operate in Bahrain and Oman, with the added confidence of ABG being authorised by the countries’ respective authorities to assist local and foreign investors in their official registration. Al Marzooq added: “We take away the hassle so that you can
focus on your business.”

Another key service provided by ABG is consultancy services related to local business regulations. “Given ABG’s long and wide experience in business in Bahrain and Oman, we have the necessary expertise required to advise local and international investors on the structure and types of entities they can form, in addition to tax and other regulations applicable in Bahrain and Oman”.

Finally, the company also offers accounting, function outsourcing and business advisory services. Al Marzooq explained: “ABG offers an extensive array of services to foreign investors, including setting up accounting functions, bookkeeping, payroll and HR outsourcing services.”

Muttrah, Oman

Home of business
“The ideal business environment always plays a pivotal factor in attracting opportunities; political and economic stability are key factors to encourage capital investment”, said Al Marzooq. Aside from enjoying such factors, Bahrain and Oman also have highly strategic locations, together with a community friendly environment.

Furthermore, despite wider economic difficulties, Bahrain’s growth reached 2.2 percent in 2016, while Oman’s real GDP growth was 1.6 percent, according to the IMF’s forecast in Q4 2016. Al Marzooq explained: “Oman and Bahrain have promising ability to grow.”

In response to the market’s ongoing evolution, ABG plans to broaden its portfolio by introducing new lines of business services, including business acceleration, fundraising and investment matches. When asked about the company’s plans for the future, Al Marzooq focused his answer on ABG’s continued expansion in the years to come: “ABG has developed a strategic business plan to expand operations not only in Bahrain and Oman, but in the wider region as well. Along with this vision, our main goal is to provide the best possible service to investors, so that they in turn can expand and improve their operations, to the benefit of all parties and local communities.”

The politics of the IMF

Posted on by Max Tomlin

With the global economy still reeling from two world wars and one devastating depression, the worldwide community decided on a new approach to international relations: liberalism. Forsaking the power politics of realism, proponents advocated robust international cooperation in a bid to revive the world economy and consolidate peace.

Such an approach took shape with the establishment of two supranational organisations, the first and biggest of their kind. At the historic New Hampshire-based Bretton Woods Conference of 1944, delegates from 44 nations across the globe came together to create the International Monetary Fund (IMF) and the World Bank. The former was officially founded on 27 December 1945 with 29 member countries; financial operations commenced on 1 March 1947.

From that first meeting in New Hampshire, it was established that the thrust of the IMF’s mission would be to promote greater economic cooperation within the international arena. Though today the IMF maintains its mandate has remained as such, over the years the organisation has evolved alongside a changing global landscape, becoming an extraordinarily powerful organisation as a result. And while it indeed plays the role of oft-needed international lender, there are those who argue the IMF actually causes far more harm than good.

Crisis in Indonesia
Perhaps the biggest mark against the IMF is its interventions in Indonesia during the 1997 Asian financial crisis. The crisis saw the entire region flooded by economic woes, during which the IMF recommended Indonesia float its currency. The result was disastrous: the rupiah sank immediately, tremendous inflation followed, as did food riots. Desperate for a solution, Indonesian President Suharto got in touch with noted economist and currency expert Professor Steve Hanke of Johns Hopkins University.

Many argue receiving a
loan from the IMF is when
a country’s problems
really begin

“Suharto knew that the inflation and food riots would continue, and that he would become extremely vulnerable, if not expendable – he was very clear about it”, Hanke told World Finance. “I agreed to become his chief advisor, and recommended that Indonesia should install a currency board system similar to Hong Kong’s in which the rupiah would trade at a fixed exchange rate to the US dollar, backed 100 percent by US dollar reserves… The rupiah would be fully and freely convertible.”

On the very day that Suharto announced Hanke was his new advisor, the rupiah appreciated 28 percent on both the spot market and the one-year forward market in Singapore. Having fully embraced Hanke’s suggestion, Suharto gave a ‘state of the state’ speech outlining the plan, known as the IMF Plus. This plan involved the structural reforms recommended by the organisation, alongside a currency board and a rupiah fixed to the dollar. Things, however, quickly turned sour.

Hanke explained: “All hell broke out politically and internationally.” The IMF, led by the US and the Europeans, he explained, strongly opposed the idea of a currency board. But what some considered suspect about this reaction was its misalignment with other initiatives endorsed by the IMF: mere months before, in February 1997, Hanke had guided the implementation of a currency board in Bulgaria with the IMF’s blessing. The outcome was outstanding: inflation stopped almost immediately, and the economy soon stabilised. The same strategy was also included in the Dayton Peace Accord for Bosnia and Herzegovina in August of the same year, again with the backing of the US and the IMF, the former of which Hanke acted as a representative for. Further still, it was just a matter of months afterwards that the IMF recommended the same course of action for both Brazil and Russia.

“It was very strange getting this huge push back”, said Hanke. “And in particular, [Bill] Clinton, who was the president at the time, he was pushing very hard not to do this. While I was advising Suharto, he called us three times, and Clinton said, ‘If you do Professor Hanke’s currency board, you’re not getting the $42bn [in foreign aid that had been pledged to Indonesia]’. Ultimately, Suharto stuck with the plan and was going to institute it, but then the US sent about half of the Pacific fleet to do exercises off the coast of Jakarta. The military got very nervous and backed off of the currency board idea… Suharto dropped it. This was in May of 1998.”

One can ask the question why, in the case of Indonesia, the IMF – and, in effect, the US – went against the regularly given prescription. Hanke suggested: “They weren’t worried that [the currency board] wasn’t going to work – they were panicked that it would work!”

Though the US had helped Suharto overthrow his predecessor and had forged in him a vital regional ally, the economic crisis of south-east Asia and growing corruption within the regime had made Suharto a looming liability for the West. Given the level of power Suharto wielded during his dictatorship, his ongoing leadership had become too risky for the US to allow it to continue.

Hanke told World Finance: “The main thing is that the US, as it often does, was engineering what it thought was going to be – and what it ultimately was – a regime change. They wanted to get rid of Suharto, and they wanted the Asian financial crisis to take care of him, which they thought would not be the case if they followed my advice and put in a currency board. So it was a very scandalous affair on the part of the IMF; it’s all recorded and it’s a real black mark because they were literally involved in the middle of overthrowing a government.”

Former President of Indonesia, Suharto

It’s all about US
In order to understand how and why this was even possible, it is necessary to go back to the very beginning. Though numerous countries were involved at the Bretton Woods conference, the US played an undeniably dominant role in establishing the IMF and dictating how it would operate. A crucial factor in its make up, and in the US’ ongoing influence within the organisation, was the distribution of voting power among member states. Rather than allocating votes in accordance with the size of a member’s population – which would be the most democratic approach to take – the US instead pushed for voting power to correspond with the volume of contributions made. Unsurprisingly, those contributions made by the US, the world’s biggest economy, were far greater than those of any other member state.

By contributing $2.9bn – double the amount made by the UK, the second biggest contributor at the time – the US was guaranteed twice the number of voting rights, together with veto privileges and a blocking minority. The manoeuvre enabled the superpower to secure near-absolute control of the IMF’s activities.

In order to further consolidate its dominant role, the US also claimed the right to remain fully informed about the financial comings and goings of every single member state, thenceforth and permanently.

Adding to some people’s belief that the US has used the IMF to peddle its own agenda is the fact the organisation’s headquarters – as well as those of the World Bank, for that matter – are located in Washington DC, just a short walk away from the White House, rather than near the UN headquarters in New York, as initially discussed. Hanke said: “The reality is that this should not surprise anyone. I mean, the United States is a big imperial power – why wouldn’t they have a lot of influence?”

1945

The year the IMF was officially founded

189

Member countries today

$668bn

The organisation’s annual quota

As an indication of just how important the IMF is to the US, Hanke pointed to an occasion that he witnessed while serving as one of President Ronald Reagan’s economic advisors: “Reagan himself actually personally lobbied 400 out of 435 congressmen to obtain an approval for a quota increase [for the IMF]… It is very rare… I never observed that kind of personal lobbying!”

When the idea of the IMF was first conjured up, the world was a desperate place. The international community was shell shocked from a level of human suffering that, even decades on, is beyond comprehension, while economically so much that had been achieved in the decades prior had been brought crashing down. In such a broken landscape, international cooperation was needed more than ever – even the need to feel as though something was being done and that change was going to happen had bourgeoned phenomenally.

While states may have joined the IMF with the very best intentions, the organisation that was discussed in New Hampshire is quite different to the reality that was produced. The IMF’s course has changed over the years in response to global challenges and complexities, yet it is now clear that shaping this course are the political motivations and inclinations of the global hegemon.

Hanke agreed with this theory: “It’s evolved into a very political organisation, and [Indonesia] was a perfect illustration of something that was completely politically motivated.”

Political building bloc 
There are three major events that can be singled out as having altered the course of the IMF throughout the years. The first, of course, was the Bretton Woods Conference. The second was the 1973 oil embargo.

In response to the growing credit needs of developing economies, the IMF initiated the Extended Fund Facility in 1974, which enabled member states to take loans of up to 140 percent of their quota. Without checks in place, many took out loans imprudently.

As the debt burden of developing economies mushroomed, it became impossible for western banks to default on these loans without collapsing. The IMF therefore stepped in to act as an international lender; facilitating the balance of payments had become its new mission. It was during this time that the IMF first earned a reputation for imposing harsh conditions, with many arguing to this day that it does so to entrap borrowers and, in turn, yield more power.

Third, there was the Mexican peso crisis of 1994-95, which was sparked by the currency’s devaluation against the US dollar in December 1994. The devaluation rattled markets and caused dire consequences for the Mexican economy, alongside a significant spill over across the region, and even beyond to Asia.

In a bid to limit the widespread impact of the crisis, the US organised a $50m bailout for Mexico, administered through the IMF. Ultimately, it was Mexico’s adoption of the Brady Bonds Initiative – which was formulated by the US Government, Wall Street banks and the IMF – that proved successful and alleviated the region’s turmoil. Hanke maintains the success of the Mexican deal was largely the result of the work of Jacques de Larosière, who he praises as being the last great managing director of the IMF.

History suggests the US has used economic crises to broaden the scope of the political power it wields through the IMF

At the time, however, a great debate arose as to whether a moral hazard had been created that would encourage serial borrowing in the future. Adding further to the criticism that had begun proliferating about the IMF was the outcome of its intervention in Mexico: under imposed economic reforms, the country experienced a severe recession. Banks collapsed, unemployment boomed, the population living in extreme poverty rocketed to more than 50 percent, and the average national wage dropped by some 20 percent.

Crucially, the Mexican crisis marked a significant transition for the IMF, from having an overarching goal “to rebuild the international economic system”, according to its website, to one that attempted to prevent crises through “strengthened and broadened… surveillance”. Hanke underlined: “It’s really like a hydra-headed monster – you do away with one mission, and then something else pops up.”

He added: “To drum up that new business and so forth, you become more political. So that is one cost that’s associated with the hydra – more politicisation of the whole thing and less emphasis on the technical. And if you’re not relying so much on the technical, you get weaker [with fewer] competent people.” It is this point regarding the IMF’s competency – or arguably lack thereof – that has led some to proclaim the organisation’s involvement actually causes irrevocable damage to a given economy.

Indeed, many argue that receiving a loan from the IMF is when a country’s problems really begin. Hanke went so far as to say: “I would say that [the majority of] countries that have been involved with IMF loans… have been countries that serially come back to the IMF, because they go from the frying pan into the fire with these IMF programmes. They all fail! So that’s the proof of the pudding.”

It can certainly be argued that the US has used economic crises, such as Mexico and the Asian financial crisis, to broaden the scope of the political power it wields through the IMF. Yet it is precisely because of this politicisation that the IMF has lost the technical prowess that enables it to promote economic progress in a recipient state.

Though this politicisation allows the IMF to peddle the agenda of its strongest member, it does so over the needs of those it claims to help in the first place.

The rise and fall of the US mall

Posted on by Max Tomlin

In 1956, consumer retail was revolutionised. The Southdale Centre in Edina, Minnesota was the first of its kind: a large, spacious building filled with modern shops and public art. Its climate-controlled environment offered respite during the freezing Minnesota winter, a forum for bored teenagers and bargains for savvy shoppers. It was the birth of the US shopping mall: a cultural institution that would extend across the country and define America’s suburban landscape.

But while the modern shopper has evolved, the mall has not. No longer able to attract the footfall they once boasted, many malls in the US are now struggling to fill floor space and falling into disrepair. Victims of online shopping, changing consumer tastes and, in some ways, their own success, a number of malls are now trapped in a swift decline. As shopping centres continue to close, however, new developments are being born; while the malls of the future are reimagined to better reflect the communities they represent, others become something else altogether.

King of retail
The history of the modern US mall dates back to the opening of Southdale and its designer, Victor Gruen. Gruen was an Austrian-Jewish architect who immigrated to the US in 1938. His mall aimed to capture part of the life he had left behind in Europe: the bustling town square. US communities were beginning to spread into the suburbs, and Gruen sought to replicate the feel of a medieval market or the Greek agora: a community space where people could meet, exchange ideas, and purchase goods and services. While shops were an important part of the design, they were by no means the entire point of the space. Gruen envisioned a mall that included amenities such as medical centres, schools and even residences.

As a lucrative investment opportunity, mall construction quickly ballooned and the market became saturated

Following its debut in the 1950s, the US quickly fell in love with Gruen’s creation. Malls allowed people to shop in warm and friendly environments without needing to venture into the city. They brought numerous retailers and services together in a single location, something main streets and cities could rarely offer.

As US suburbs grew – drifting further from city centres – the popularity of malls only increased. Over 1,200 shopping malls shot up in the US after the earliest examples were built in the 1950s. They became an institution, a prominent fixture in the cultural zeitgeist of suburban life.

At times it seemed like the mall would remain the undisputed king of retail forever, but following a wave of closures at the turn of the millennium, numbers continued to dwindle and further closures now appear inevitable.

Real estate research firm Green Street Advisors measures the health of the mall industry annually. By examining factors such as occupancy, sales per square foot and the demographics malls serve, Green Street assigns grades on a scale from A++ to D. In its outlook for 2017, Green Street graded more than 300 US malls at C+ or lower, underscoring a risk of closure in the near future. Combined, these malls account for only five percent of the total value of malls in the US, but once a mall begins to slide, it can be almost impossible to prop it back up.

Suburban growth
Much to the ire of their creator, malls have diverged greatly from their original concept. In a 1978 interview, Gruen made it clear he did not support the direction modern malls had taken. “I am often called the father of the shopping mall”, he said. “I would like to take this opportunity to disclaim paternity once and for all. I refuse to pay alimony to those bastard developments. They destroyed our cities.”

The biggest criticism of malls is the negative impact they have had on the previously established urban landscape. Robert J Gibbs, President of Gibbs Planning and author of Principles of Urban Retail Planning and Development, said malls have been disastrous for the main streets and urban centres once found at the heart of local communities.

“The first generation of malls built in the mid-1950s to mid-1960s devastated small towns”, Gibbs said. “They pulled out the department stores from the city centres and shifted the centre of commerce from downtown to the mall. Most of the downtowns then struggled for about 25 to 30 years. The effect was devastating.”

By their very nature, malls were built big and, as they grew, needed to move further from the town centres and communities they served. Encircled by wide highways and often lacking sufficient public transport connections, many malls became impossible to access without a car. This only worked to encourage greater urban sprawl (see Fig 1), and subsequently the construction of even more malls. As a lucrative investment opportunity, their construction quickly ballooned and the market became saturated.

“The suburban sprawl they generated was not sustainable and they became undervalued properties around the malls”, explained Gibbs. “People moved away from that area to another suburban place, further away. So it was an unsustainable model. As the neighbourhoods declined around the mall, the malls then lost their customers and declined themselves.”

The biggest victims of the mass construction of malls were the retailers in main streets and cities. “At their peak, [main streets and cities] had about 80 percent of the market share of retail”, Gibbs said. “After the malls left, it dropped down to five percent of the market share.” For the most part, the cities and urban centres never truly recovered from the loss of custom. “There’s only been about 23 or 30 American cities that regained maybe 20 percent of the market share, from the 80 percent they had”, Gibbs said.

Falling sales
It is not just disappearing consumers that have led to the gradual decline of many malls: the business model that once drove them makes increasingly little sense in the modern retail environment.

The traditional architecture of a mall was a single, long, enclosed hall that connected two major department stores at either end. These department stores, often referred to as ‘anchor stores’, were the main attractions. Along the walkways connecting these stores, smaller boutiques would open and subsequently attract a portion of the people walking past. Gradually, malls began to experiment with different shapes and sizes, but the fundamental premise of connecting department stores always remained the same.

1956

Launch of the first US mall

1,200+

Malls in the US

300+

Malls in risk of closure

Naturally, these department stores commanded a substantial amount of power over the mall’s developers and owners. As the main attraction, they were able to negotiate everything from signage locations and the size of parking lots to exceptionally low rents. The enduring popularity of a mall’s anchor stores was integral to its ongoing survival; a department store closing could trigger a spiral of declining visitors, reducing spending and ultimately closing stores.

Unfortunately for mall developers, the department stores that supported them in the past are now beginning to flounder. In 2016, Macy’s announced it would be closing 100 stores. Sears also plans to close over 150 stores, while JC Penny has announced a number of store closures over the last two years.

The challenge for many malls is, once a department store closes, it can be difficult to find something to fill the void. For a start, there are few modern retailers operating on the scale of a traditional department store. While some malls may be able to find a cinema to fill the space, many already have one. If a mall were to lose multiple department stores at the same time, the drop in footfall would be catastrophic.

The Starbucks Effect
For the malls that do end up closing, the space they occupied offers a vast range of opportunities for entrepreneurs, investors and government bodies alike (see Fig 2). “The failed malls are easily redevelopable into other land uses”, Gibbs explained. “In some cases, developers are keeping the mall structure and turning them into employment centres, community colleges and city halls.”

These redevelopments don’t necessarily mean retail is completely removed from the equation, but rather scaled down to a more suitable level. This might mean dropping retail space from one million square feet to 100,000 square feet – a level far more sustainable in the long term.

Gibbs outlined another alternative: tear the mall down and redevelop the property into a walkable and dense mixed-use community. In a relatively small space, retail, housing and employment are all connected, reducing the average person’s dependence on a car and encouraging more integrated communities.

“That’s attractive to a wide range of home buyers, from Millennials to empty nesters to seniors [and] young families”, Gibbs said. “It’s a more vibrant community because there is more to do, because you’re not dependent on the automobile, and it’s more sustainable, it takes less resources.”

The popularity of this style of development can also be very profitable for developers, with buyers showing a willingness to pay a premium to live in a more connected area.

In 2015, research firm Zillow identified what it called the Starbucks Effect, in which properties located within a quarter-mile of a Starbucks increased in value substantially faster than those further away. The huge footprint left by a failed mall presents the perfect opportunity for the development of such a community. Gibbs recalled one property he worked on was bought for $1m and sold for $30m just two years later.

Gibbs said: “[This was] because [the developer] was able to put in hundreds of residential units, new retailers in a walkable format, and he created a major employment centre. So I’m very optimistic about how these old malls can be torn down or converted into mixed use communities.”

While the malls that fail may find new life as mixed-use centres or be completely redeveloped, the malls that remain will not necessarily survive unchanged. With added pressure from online shopping, merely boasting a wide selection of shops is no longer enough to draw customers in their droves. To win back consumers, malls are increasingly beginning to resemble Gruen’s original vision.

Change in management
Matt Billerbeck, Senior Vice President at architecture, planning and design practice CallisonRTKL, believes the current wave of mall closures is at least partly due to the sheer number of sites that opened between the 1950s and 2000s.

Billerbeck said: “It was too much of a good thing, and there were just more shopping centres than the market could support, straight up. I don’t think anyone is going to argue with that. The natural evolution of competition is some of those would start to fade no matter what, even in a decent economy.”

With added pressure from online shopping, merely boasting a wide selection of shops is no longer enough to draw customers

With online shopping taking somewhere between 10 and 20 percent of mall sales, customers no longer need to travel for the basic and frequent purchases that once got people through the door. To combat this, Billerbeck said leading malls are improving their selection of stores and creating more reasons to visit.

One such example, according to Billerbeck, is the South Coast Plaza in Los Angeles: “It’s every store you could think of. So on a big shopping day, if you want to shop, they have the entire collection. When you get together with friends and you want to see it all, try on everything and make a big set of purchases, or you’re just having fun, you’ll make that bigger trip.”

But the way stores operate is also changing. While some department stores like Nordstrom are generating strong interest, the classic format of a store stocking a curated selection of brands is dropping in popularity. Billerbeck said alternative, specialised and more exclusive brands are emerging to fill this space: “There’s all sorts of other retailers out there like Bonobos, Warby Parker and Apple; these things are the new attractors to shopping centres, they’re the reason people arrive.”

Billerbeck believes, with the right management, those shopping malls freed from the demands of a department store could make substantial changes to cater for more specialist and attractive brands.

He said: “At one point you would do anything to get a department store to sign a lease in a shopping centre. As they go away, all kinds of new opportunities open up. We’re doing several nice projects around North America based on that exact dynamic: department store goes away, what do we do with the extra parking field and how do we expand the shopping centre?”

More than 300 US malls are currently at risk of closing

Malls of the future
However, it is not just store selection that is being reconsidered. Since shopping no longer commands enough draw for people to make the trip to centres, both current mall owners and developers are working to incorporate residential, office and other facilities into malls.

“The shopping centre in the US is going to be more like Asia”, Billerbeck said. “It’s the retail destination you go by every day to and from work, more like Europe, more closely connected, and more integrated into a neighbourhood.”

The trend of more connected malls has long been the norm overseas. Unlike the US, these malls are generally located in urban centres and are well connected to public transport. Overall, they tend to be more accessible and don’t draw people as far away from their homes. By virtue of this, the facilities are often composed of far more than just shops; incorporating services, amenities and even event spaces. Since there is more to do, they have a greater appeal.

Billerbeck said: “The idea that shopping centres used to be these abstract areas where you would leave your community, leave what is a normal day to day lifestyle pattern, leave your regular commute to and from work. That was one pattern of behaviour and then the shopping mall was a whole other thing… that’s changing.”

These more connected centres that include residential, office, retail and entertainment – like music venues or even stadiums – look a lot more like Gruen’s original vision. Billerbeck is quite optimistic about the kind of lifestyle these new malls encourage: “These are things that are more closely connected to communities and more driven by transit, healthier for the environment, more about a variety of choices and supporting cultural events. Less formulaic and more individualised, more personality driven. It’s a richer, deeper, broader experience, it’s kind of the way we hope our cities would look, and I think that’s the idea, that these are going to be seamlessly connected participants in the urban landscape.”

While the explosion of mall construction in the US may well be over, those that remain are on the brink of a new future for retail. Whether taking a revised role in the urban landscape or being completely reimagined, the self-destructive model adopted by previous mall developers appears to have come to an end. Instead, the malls of the future will seek to take a bigger role in both shaping and growing communities; no longer serving as merely retail destinations, but as communities in their own right.

JAB Holdings to buy Panera Bread for $7.5bn

Posted on by Max Tomlin

On April 4, Krispy Kreme owner JAB Holdings signed a $7.5bn deal to acquire bakery chain Panera Bread – representing the biggest restaurant deal in US history. The news caused shares in Panera to jump 14 percent, reaching record highs of $312.98. The companies hope to close the deal in the third quarter of 2017, but are currently awaiting approval from shareholders and regulators.

Panera’s founder and CEO Ron Shaich said: “Panera has been the best performing restaurant stock of the past 20 years – up over 8,000 percent. Today’s transaction is a direct reflection of those efforts, and delivers substantial additional value for our shareholders.”

Panera owns 2,000 US restaurants and employs over 100,000 people, generating annual revenues of $5bn. Following the announcement, JAB partner and CEO Oliver Goudet said: “We have long admired Ron and the incredible success story he has created at Panera… we strongly support Panera’s vision for the future, strategic initiatives, culture of innovation and balanced company versus franchise store mix.”

If the deal to buy Panera Bread goes through, JAB will have spent over $40bn on US acquisitions in the past decade

If the deal goes through, JAB will have spent over $40bn on US acquisitions in the past decade. Panera will become the latest in an extensive portfolio including luxury shoemaker Jimmy Choo and beauty manufacturer Coty.

More recently, JAB has made significant moves in the food and drinks market, acquiring Peet’s Coffee, Caribou Coffee and Keurig Green Mountains since 2012. One of its biggest steps in this area was the $1.35bn purchase of doughnut maker Krispy Kreme in 2016.

“The move provides JAB Holdings with the significant opportunity to expand restaurants into the global markets and strengthens the positioning of retail products toward the supermarket space”, explained Darren Tristano, President of food industry research and consulting firm Technomic.

Considering the positive impact the announcement had on Panera shares, it is expected the company’s investors will give the deal the green light. JAB shareholders are likely to follow suit, given the company’s past enthusiasm for expansion. Furthermore, Panera is unlikely to see a better offer than JAB’s: “We view the acquisition price as high enough to preclude a competing financial suitor”, said Wedbush Securities Analyst Nick Setyan.

Consequently, US antitrust regulations may present the biggest obstacle to the merger. The Federal Trade Commission could order JAB to divest at least some of its restaurant assets in order to pass muster.

Currently, the market for coffee shops and breakfast chains is dominated by titans like Starbucks and Dunkin’ Donuts. The prospect of a new competitor is a promising sign, particularly as JAB seems willing to take an active role in the market. A JAB statement outlined this ambition: “[JAB hopes to] invest in and work with [Panera’s] management… to continue to lead the industry.”

UK develops recession-detecting warning system

Posted on by Max Tomlin

On April 6, the UK’s Office for National Statistics (ONS) announced a drive to bolster its recession warning system, introducing a new procedure for devising early GDP estimates. The UK has repeatedly been found among the best performing nations when it comes to creating accurate early GDP estimates, yet statisticians at the ONS believe they could have been quicker to identify the 2008 recession.

The ONS found while the economy had contracted in the second quarter of 2008, official statistics suggested the economy was still growing

The ONS analysis re-evaluated the numbers produced around the time the economy was tipping into a recession in 2008. It found that while the economy had contracted by 0.7 percent in the second quarter, official statistics suggested the economy was still growing. This inaccuracy had very real implications, with the Bank of England unable to stimulate the economy until months later.

Several improvements have been made to the current estimation system, including the incorporation of more timely tax data. By evaluating VAT returns as they come in each month, the ONS will have an insight into wage changes as they happen, rather than relying on business survey responses. The VAT data also provides a far larger sample size than survey responses, and will supply a greater volume of new data on smaller businesses, providing a more representative measure of economic growth.

Commenting on the improvements, The ONS Head of National Accounts, Darren Morgan, said: “It is vital that ONS is able to pick up turning points as soon as they happen, enabling policymakers to respond quickly… the improvements announced today improve the quality of GDP estimates and help to reduce the size of future revisions.”

How Colorado became a global tech hub

Posted on by Max Tomlin

The state of Colorado – famous for being home to the stunning Rocky Mountains – has become internationally renowned for its flourishing tech scene. With its innate entrepreneurial spirit, strong history in innovation and surplus of independent thinkers, Colorado is a natural fit for start-ups and fast-growing companies. This status is furthered by the great deal of support offered to innovators and an exceptional level of cooperation within the community.

At present, Colorado ranks among the top five US states for entrepreneurship and innovation, and hosts the largest start-up week in North America. Colorado is also the birthplace of Techstars and numerous other innovative accelerators, such as a growing community of angel investors, which are helping new companies to get started without heading for the coasts.

To put Colorado’s thriving tech scene into perspective, out of the 10 metro areas with the highest tech start-up density in the US, Colorado is home to four, with Boulder being ranked as the number one area nationwide.

Colorado ranks among the
top five US states for entrepreneurship and innovation, and hosts the largest start-up week in
North America

Much of the state’s success is due to Governor John Hickenlooper’s vision of Colorado becoming a leader in innovation, which culminated in the creation of the Colorado Innovation Network (COIN) in November 2011 and the subsequent appointment of the state’s first Chief Innovation Officer. With a mission to advance connections in the global innovation ecosystem, COIN has become a catalyst for innovation in Colorado.

Over the past five years alone, COIN has produced four innovation summits and sponsored several innovation challenges to inspire new ideas and collaborations that have produced a positive social impact. Due to the work of COIN, Colorado is now the epicentre of today’s
innovation conversation.

A global tech hub
With its exceptional level of innovation, Colorado breeds new ideas, which is helped by the willingness of CEOs, mentors and entrepreneurs to support those starting out. According to Stephanie Copeland, Executive Director of the Colorado Office of Economic Development and International Trade: “Coloradans have an inclination towards constant experimentation and innovation. Tech companies in Colorado support each other’s growth and share the resources they need to scale. Moreover, organisations such as the Colorado Technology Association provide leadership for the industry and help to coordinate public-private partnerships that support Colorado’s tech community.”

Then there is the Colorado Energy Research Collaboratory, a clean energy research consortium focused on renewable energy, energy efficiency and the reduction of adverse impacts from fossil fuels. Copeland told World Finance: “It is a uniquely Colorado partnership. The Collaboratory unites the science and engineering research capabilities of four outstanding institutions: the Colorado School of Mines, Colorado State University, the National Renewable Energy Laboratory and the University of Colorado Boulder. Together, these four institutions offer a breadth of research capabilities and a spirit of cooperation, unmatched by any American clean energy research community.”

Adding to this strong support system is the fact it’s also cheaper and easier to do business in Colorado: with one of the lowest corporate income tax rates in the nation, Colorado offers companies a unique advantage to grow and compete in the global market.

Copeland explained: “Lower taxes and a predictable political climate [within the state] create stability for businesses that are making or considering making significant investments in Colorado. Colorado’s central geographic location also creates an ease of doing business in North American markets, and the Mountain Time Zone allows for same-day communication with both US coasts, Europe, South America and Asia.”

Clean technology
Colorado was one of the first states to recognise the value of a balanced energy economy that incorporates cleantech. According to Copeland: “The integration of renewable energy and Colorado’s rich energy resource base puts the state at the forefront of energy development for the nation, and the world.” Colorado was also the first state to pass a voter-approved renewable energy standard in 2004, which required utilities to supply a percentage of energy from renewable resources.

Consequently, the state is now among the top 10 in the country for solar energy production, the top five for wind energy jobs (see Fig 1), and the top five for advanced biofuels companies. This is largely due to there being almost 2,000 cleantech companies in Colorado, which provide jobs for 26,000 people and a further 86,000 indirect workers in supporting industries.

Colorado is also home to several highly innovative R&D centres, such as the Wind Blade Component Manufacturing Facility at the National Renewal Energy Laboratory’s National Wind Technology Centre. “The centre is now working on ways to augment the manufacturing process for wind turbine blade components. These advances in low-cost composite materials will help manufacturers build longer, lighter and stronger blades to create more energy”, Copeland told World Finance.

Harnessing talent
When asked what makes Colorado such a magnet for start-ups, Copeland could summarise her answer in one word: talent.

“Cleantech companies are attracted to Colorado because of our highly skilled and educated workforce”, she said. “Access to world-class higher education programmes and research institutions produce the very best scientific research talent.”

In fact, Colorado is the second most educated state in the nation, with 38 percent of the population holding a bachelor’s degree. According to TechAmerica Foundation’s 2013 Cyberstates study, it is also third in the nation for hi-tech workers per capita.

The nurturing of talent is particularly evident in the field of energy. The Colorado School of Mines in Golden is one of the few universities in the world to offer programmes from baccalaureate through to doctorate levels in all key subjects related to energy. Colorado is also home to Education Corporation of America’s Ecotech Institute, the world’s only college entirely focused on training students for careers in cleantech.

It doesn’t stop at education: the level of investment made into the state’s job training programmes is quite extraordinary, while business growth is also incentivised with grants for those relocating to or expanding in Colorado.

Copeland noted: “Our labour pool is essential to the innovation that our state’s economy benefits from. With numerous high-performance education and research institutions and a plethora of job training support organisations, Colorado’s workforce allows resident employers to create, grow and compete in a global economy.”

A solar panel field in Colorado, US

Ideal business climate
Copeland told World Finance: “Innovators, large corporations and Fortune 500 companies like Ball Aerospace, Lockheed Martin and Davita Healthcare have already discovered that Colorado does business better, and have made Colorado their home.”

As a result of its renowned tech scene, Colorado has one of the fastest growing economies in the US. Its economic status, together with its favourable and stable tax structure, is an ideal foundation for businesses to propose and plan for future growth. “Colorado also has integrated, cutting-edge infrastructure that helps businesses reach markets across the country and world, both quickly and efficiently.”

The support given to tech companies is helped further by the fact that Colorado has one of the highest per capita concentrations of federal research facilities in the nation. This includes the Solar Technology Acceleration Centre, the largest testing facility for solar technologies in the US. These laboratories are a huge economic driver for Colorado. According to Copeland: “The federal laboratories really foster innovation and stimulate technology transfers between companies and local educational facilities.

“That old adage about living to work or working to live doesn’t apply in Colorado. Here, we’re simply living our lives to the fullest, all at a lower cost than our coastal counterparts. Sure, our inviting business climate is hard to beat, but everything else we have to offer from arts and culture to recreation and wellness takes living in Colorado to a whole other level.”

With one of the lowest corporate income tax rates in the nation, Colorado offers companies a unique advantage to grow and compete in the global market

Copeland also explained that, contrary to popular belief, Colorado isn’t all snow-covered mountain peaks: “We’re a diverse playground made up of flourishing urban areas, uninterrupted open spaces, scenic alpine roads, dry desert cliffs and quaint rural towns steeping in history. As a result, we’re a magnet for adrenaline junkies, foodies, art lovers, nature seekers and fitness fanatics.”

As a result, Copeland argued much of the appeal of Colorado rests in its favourable climate: “Want to know the secret to Colorado’s reputation for being home to some of the nation’s happiest, healthiest and most productive people? The climate here is one of our best-kept secrets – and we promise it’s not too good to be true. Around 300 days of sunshine and four temperate seasons get us outside and energise us to pursue the best powder days and BBQ afternoons – sometimes all on the same day.”

At an average altitude of 6,800ft above sea level – the highest of any state in the US – Colorado’s mild winters and low-humidity summers allow for outdoor activities all year round. Furthermore, as the nation’s leader for arts funding, culture is always around the corner. Such a backdrop lends itself to Colorado’s favourable business climate, which includes performance-based, calculation-driven incentives, such as the Job Growth Incentive Tax Credit and the Colorado First Job Training Programme, as well as a stable government tax structure that allows businesses to plan for the future with certainty.

Copeland concluded: “When companies choose to do business in Colorado, they know they’ll be able to tap into our invigorated workforce, partner with innovative peers, reach global markets, and collaborate with a business-friendly government that has their bottom line in mind.” In short, there’s no support you can’t find in the exceptional state of Colorado.

US approves $43bn ChemChina-Syngenta deal

Posted on by Max Tomlin

On April 4, the US Federal Trade Commission (FTC) approved a $43bn merger between Swiss chemical company Syngenta AG and China National Chemical Corp (ChemCorp). While Syngenta hailed the decision as a “major step” in the process, FTC approval carried the condition that each company must divest three types of pesticide: the herbicide paraquat, the insecticide abamectin and the fungicide chlorothalonil.

The FTC said in a statement: “Syngenta owns the branded version of each of the three products at issue, giving it significant market shares in the United States. ChemChina subsidiary ADAMA focuses on generic pesticides and is either the first or second-largest generic supplier in the United States for each of these products.”

In order for the deal to go ahead, ChemChina will sell ADAMA’s stake in the production of pesticides to Californian company AMVAC. Meanwhile, Syngenta spokesman Paul Minehart said: “Syngenta will continue to provide a high quality, broad portfolio of products and solutions to US farmers.”

The merger marks the latest
in a series of deals between
the world’s six largest suppliers of chemicals

The deal is expected to close by the end of June, but is yet to gain approval from regulators in Mexico, China, India and the EU. That said, the FTC worked closely with these bodies when making its decision, limiting the scope for objections to emerge in the coming months. The EU judgement is due on April 18.

Given the Chinese government owns ChemChina and that Syngenta’s offerings will make crop management far cheaper and more effective, the merger could see the country take one step closer to reaching its food security goals.

This issue has become particularly pressing, with demand for grain in China continuing to rise as a result of a growing middle class. Farmland has also become increasingly scarce, as housing projects continue to be rolled out across China.

The merger marks the latest in a series of deals between the world’s six largest suppliers of chemicals; a $130bn transaction between Dow Chemicals and DuPont gained EU approval in March, while Monsanto and Bayer are pushing through a $66bn coupling.

The creation of these three giants will certainly raise concerns regarding competition. Greenpeace said: “[The ChemChina-Syngenta deal] is another indication that Big Agibusiness is in turmoil.”

With the deal likely to increase farmers’ dependency on the major providers, regulators will have to be increasingly vigilant to ensure consumer rights are protected and environmental damage is kept to a minimum.

Trump promises Dodd-Frank reform

Posted on by Max Tomlin

US President Donald Trump has reiterated his campaign trail pledge to overhaul the sweeping Dodd-Frank banking regulations – which were introduced in response to the global financial crisis of 2008.

Speaking in a meeting with top business leaders at the White House on April 4, Trump said: “We’re going to do a very major haircut on Dodd-Frank. We want strong restrictions, we want strong regulation. But not regulation that makes it impossible for the banks to loan to people that are going to create jobs.”

Trump has attacked the
Dodd-Frank Act for inhibiting the creation of jobs and making it more difficult for banks to offer loans

Trump has been a vocal critic of the Dodd-Frank regulation since he first announced his candidacy in June 2015. Taking a staunchly Republican position on banking regulation, Trump has attacked the reforms for inhibiting the creation of jobs and making it difficult for banks to offer loans. In February, the President signed an executive order to review the act.

Introduced in 2010 by the Obama administration, the Dodd-Frank Act aimed to eliminate the financial misconduct synonymous with 2008 financial crisis. The legislation sought to reduce banks’ reliance on debt for funding, in addition to improving transparency on Wall Street and promoting financial stability.

Upon its introduction, the Dodd-Frank Act marked the most radical change in the US banking system for over 50 years. While its supporters claim the legislation protects the US economy from future crises, its critics believe it to be overly restrictive and harmful to the competitiveness of US business.

Despite Trump’s pledge to repeal the act, amending Dodd-Frank may prove difficult for the President. Any changes to the current regulation would need to pass through Congress, making the affair a lengthy and complicated process. Given Trump’s recent setbacks in repealing Obamacare, targeting Dodd-Frank could well be a costly and fruitless task.

We need a fresh look at risk management

Posted on by Max Tomlin

From Merrill Lynch to Lehman Brothers, the collapse of a financial institution is inevitably followed by widespread scrutiny of its risk management strategy. Experts often retrospectively reveal that, in the majority of cases, the collapsed organisation simply did not have adequate liquidity to cover its expenses.

Prior to the 2008 financial crisis, a lack of liquidity risk regulation fuelled a culture of risk-taking on Wall Street. And yet, in the years that followed, liquidity risk has become subject to strict rules and intense scrutiny.

From being an unremarkable factor that no one talked about, the banking crisis turned liquidity risk into one of the most heavily regulated areas in the financial world. The reason for this abrupt change is clear: the 2008 crisis ultimately revealed that a lack of liquidity underlies every risk in the financial marketplace. For example, when a customer fails to pay interest on a loan, it results in a liquidity risk. Similarly, when there is fraud within an organisation, this too impacts liquidity. Even when markets themselves change and fluctuate, it affects the liquidity profile of an organisation. In this way, all financial risk is closely related to liquidity.

Given how liquidity affects all other types of risk, we can call liquidity a second order risk. In order for any organisation to manage such a risk, it needs to adequately regulate, order and control its primary risks. Therefore, if a company looks to control its credit risk, it is, in effect, also controlling its liquidity risk.

The speed of illiquidity
Liquidity impacts organisations faster than any other kind of risk, and the transformation from being liquid to illiquid is as debilitating as it is rapid. Many organisations are unable to cope with the speed with which their liquidity deserts them, and as a consequence, they eventually fail.

It rarely takes more than 90 days for an organisation to move from liquid to illiquid. In 2007, this was the time it took for Northern Rock to move from being the poster child for creativity to the first UK institution in more than 150 years to suffer the ignominy of a bank run.

In the years that have followed the 2008 financial crisis, liquidity risk has become subject to strict rules and intense scrutiny

Given the speed with which liquidity can impact an organisation, the suggestion that liquidity models should be constructed over the long term seems almost absurd. If liquidity is to be managed effectively, then companies must think of the short term.

Historically, liquidity has been regarded as a compliance risk, and has thus been considered subjective to a great extent. Highly liquid assets are sought, but what matters most of all is actually the market’s perception of what constitutes highly liquid assets and what does not.

Just because a regulator considers sovereign holdings to be liquid assets, this does not mean, for example, that Greek Government debt is more liquid than any other risky asset holding. This was made all too clear during the spectacular financial meltdowns in both Iceland and Greece, and it is unfortunate both practitioners and regulators seem to have learned little from these mishaps.

The importance of cash flows
In order to successfully manage liquidity, it is crucial to have a sound understanding of cash flows. It should be known that cash flows are subject to all of the primary risks a financial institution has undertaken. For instance, if an American company takes on bonds from the Korea Development Bank, then it is also taking on a number of additional risks. In addition to the customary counterparty risk and sovereign risk, the American organisation would also be taking on a foreign exchange risk if the bonds were in Korean won.

There would also be a potential interest rate risk, as well as a Korean equity risk, whereby the Korean markets may negatively impact the price of the development bank bonds. The American company would also have to consider the transfer risk involved, where the counterparty would be excluded from foreign exchange remittances on account of sovereign controls. Finally, there would also be a number of operational risks that would have an impact on price and yield for the American company. As markets fluctuate and the creditworthiness of Korea Development Bank changes, cash flows would also change to reflect market perception of the bank.

Each of these scenarios would have a significant impact on expected cash flows. Along with the aforementioned potential risks, cash flows are also affected by both macro factors and market factors. If a financial institution can adapt to such changes, then they will receive a revised cash flow, but if these changes are too much to handle, the organisation will likely default on its payments.

Risk interrelationship
As I have mentioned, all financial risks are closely interlinked. Let’s consider another example that illustrates this relationship: an IBM employee in the US takes a mortgage for $800,000 on a home in Washington DC for 30 years, fixed at 4.5 percent. Each year, the IBM employee will pay a portion of the initial mortgage, plus interest to the bank. If interest rates were to go up by 50 basis points, then interest payments per annum would increase by $30,000.

However, the IBM employee’s salary increase policy simply would not cover interest rate increases, meaning the expense profile of this person would increase in line with the rising interest rates (see Fig 1). This would in turn affect the creditworthiness of this customer, as they will be forced to either cover this new $30,000 tax burden by other means, or else fail to make their repayments.

This example again demonstrates how all risks are interconnected and interrelated. Taking this into consideration, an astute risk manager always applies a holistic approach to managing both cash flows and liquidity. By managing primary risks more effectively, risk managers can in turn handle liquidity risk. Indeed, any attempt to understand liquidity risk in isolation is entirely misguided, and an effort must be made to understand the close correlation between all financial risks.

Analytical approach
At Kamakura, we take an in-depth, analytical approach to risk management. In order to better understand risk in all its forms, we run a stochastic process that provides our experienced analysts with numerous different potential scenarios. Such scenarios include changes in market conditions, macro factors and counterparty creditworthiness.

After running this stochastic process and analysing the different scenarios that may arise, we can effectively assess how a customer’s cash flows change based on all the potential risk factors that could impact them. This allows our analysts to arrive at an ‘at risk’ number for the customer. This unique approach gives our customers valuable insight into the various scenarios that could impact their liquidity cash flows.

It is also more structured than standard risk management assessments, as it takes customer behaviour patterns into careful consideration, including how prepayments and early withdrawals can affect cash flows.

Our approach also takes into account an organisation’s risk appetite and risk tolerance, and models liquidity as a second order risk, correctly identifying the key risks associated with each asset class. We look to manage liquidity through the careful management of other, related risks, and strive to correctly identify the relationships between risk categories. Our strategy is rooted in a well-accepted approach already popularised through value at risk, and provides a good alternative to the standard gap analysis that is traditionally employed to understand cash flows. The approach crucially seeks to integrate with the ‘value at risk’ techniques that are currently in place within most organisations.

Approaches to understanding liquidity risk have always been varied, with some methods proving more successful than others. To achieve the best results for clients, risk managers must establish clear decision parameters, setting limits on each point of their modelling horizon and ultimately arriving at ‘best effort’ liquidity estimates.

It is clear any attempt to model liquidity on a standalone basis is flawed, as there are simply too many associated risks that need to be taken into consideration. Instead, risk managers should look to understand liquidity by means of analysing the primary risk drivers and related risks that closely affect liquidity.

South African credit drops amid Cabinet reshuffle

Posted on by Max Tomlin

On April 3, Standard & Poor’s (S&P) downgraded South Africa’s credit rating to “junk” status for the first time in 17 years. The ratings agency cited concerns over South African President Jacob Zuma’s recent executive reshuffle, which has plunged the African National Congress party into political turmoil.

Zuma’s decision to dismiss widely-respected Finance Minister Pravin Gordhan caused particular concern. Gordhan had gained a reputation for his financial prudency and was regarded as a safe pair of hands by many. But, on March 31, an overnight Cabinet reshuffle saw Gordhan replaced by Zuma-loyalist Malusi Gigaba.

“The downgrade reflects our view that the divisions in the ANC-led government that have led to changes in the executive leadership, including the Finance Minister, have put policy continuity at risk”, S&P said in a statement.

S&P cited concerns over South African President Jacob Zuma’s recent executive reshuffle, which has plunged the African National Congress party into political turmoil

Just two days after he was officially appointed, Gigaba pledged to focus his efforts on a “radical economic transformation”. He said: “For too long, there has been a narrative or perception around [the] Treasury, that it belongs primarily and exclusively to ‘orthodox’ economists, big business, powerful interests and international investors. The ownership of wealth and assets remains concentrated in the hands of a small part of the population. This must change.”

Zuma echoed this notion and said the reshuffle was intended “to bring about radical socioeconomic transformation and to ensure that the promise of a better life for the poor and the working class becomes a reality”.

Gigaba’s unorthodox approach and proposed swing to the left has prompted concern among the business community. A coalition of top business leaders, named the CEO Initiative, said in a statement: “[We are] gravely concerned and disappointed by the ill-timed and irrational dismissal [of Gordhan].

“This decision, and the manner in which it was taken, is likely to cause severe damage to an economy that is in dire need of growth and jobs.”

The S&P reiterated this concern: “The negative outlook reflects our view that political risks will remain elevated this year, and that policy shifts are likely, which could undermine fiscal and economic growth outcomes more than we currently project.”

Ratings agency Moody is yet to change South Africa’s status, but has put the country on a watchlist for a possible ratings downgrade.

Arab banking’s evolution

Posted on by Max Tomlin

Consistent, sustained growth is a deceptively simple-sounding goal for the finance industry, and one that appears to be increasingly elusive. According to the IMF’s Global Financial Stability Report, published in October 2016, many banks require substantial reforms and a rethink of management in order to escape the current climate of low profitability. While only the tip of the iceberg when it comes to the challenges facing global markets, low interest rates and outdated thinking have eroded the profitability of many established players.

It is this challenging environment that makes strong results particularly noteworthy, as only the most successful banking institutions are able to navigate such uncertain times. To achieve positive figures requires an institution to be disciplined, dedicated and focused, not only in terms of the bottom line, but also in terms of an underlying positive ethos that drives the decision-making process.

One region experiencing rapid development within its banking industry is the Middle East, with a range of finance providers now jockeying for leading positions as the industry modernises at a rapid rate. Of particular note is Kuwait International Bank (KIB), which posted notable results for 2016, during what was certainly a challenging year.

Chairman of KIB Sheikh Mohammed Jarrah Al-Sabah told World Finance: “I am proud to say that 2016 was a particularly successful year for KIB, as we have managed to achieve impressive results across several key areas, including the enhancement of our financial position, the restructuring of our business activities and the streamlining of our internal operations.”

Originally founded as Kuwait Real Estate Bank in 1972, KIB has operated as a full-featured Sharia-compliant bank since 2007. Currently, the bank has 28 branches across Kuwait.

A year to remember
In 2016, KIB made substantial strides on the retail side of the bank’s business. Al-Jarrah said: “In an effort to make our customer experience simpler and more convenient, we have made substantial investments to upgrade our IT infrastructure and streamline our systems and processes. Also, we continue to enhance our products and services, introducing more innovative and state of the art Sharia-compliant banking solutions, which are crafted to meet the ever-changing needs of both customers and the market.”

Overall, the bank’s 2016 figures demonstrated both substantial strength and improvement over a number of key performance indicators. In total, the bank achieved a net profit of KWD 18.2m ($59.7m) for 2016, a growth of 14 percent compared with the previous year (see Fig 1).

“In specific areas, we witnessed substantial growth in financing revenues, which increased by 12 percent to reach KWD 71m [$232m], compared with KWD 63.2m [$206.6m] recorded for 2015”, Al-Jarrah explained. “Total assets reached KWD 1.85bn [$6.05bn], primarily due to a growth in the overall financing portfolio by KWD 95m [$310m] to touch KWD 1.27bn [$4.15bn], compared to KWD 1.17bn [$3.82bn] at the end of 2015. This marked an eight percent growth.”

KIB also recorded a 17 percent increase in the bank’s investment portfolio over the previous year, while customer deposits reached KWD 1.12bn ($3.66bn), a 10 percent increase on the previous year. Return on equity reached 7.2 percent, in comparison with 6.5 percent for the previous year. The bank’s non-performing loan ratio was maintained at 1.4 percent, while the total provision coverage ratio has increased to 231 percent, compared with 199 percent the previous year.

Al-Jarrah noted: “KIB continues to maintain a comfortable buffer in maintaining capital adequacy ratios in compliance with the Central Bank of Kuwait’s regulations concerning Basel III. Capital adequacy ratio was 20.5 percent at the end of 2016. The financial leverage ratio as of 31 December 2016 was 10.7 percent.”

These successful figures are beginning to add up for KIB, with 2016 culminating in a ratings upgrade. “In an important testament to our stability and financial strength, KIB’s credit ratings were raised in October 2016 by Fitch Ratings. Fitch upgraded our viability rating and affirmed our long-term issuer default rating at ‘A+’, with a ‘stable’ outlook.”

Planning for success
KIB’s successful 2016 was thanks to far more than just the strong fundamentals of its core business. Al-Jarrah explained: “Much of our continued success can be credited to the successful implementation of our forward-thinking strategy, which has been extremely successful in enhancing our position within the Islamic banking sector, setting us well on our way to achieve our vision of becoming the Islamic bank of choice in Kuwait.”

The plan dates back to 2015, when KIB formulated a strategy to develop and enhance all aspects of its operations. This included performance, market growth, asset quality, organisational structure and, perhaps most importantly, product and service offerings. Ultimately, the goal of the plan is to make KIB the Islamic bank of choice in Kuwait for both customers and employees.

According to Al-Jarrah, the strategy has so far shown positive results, while also positively impacting many different levels of the organisation: “Since its launch, we have successfully completed a number of pivotal changes within our organisation, restructuring our core departments, establishing new business units and divisions, as well as adding several talented, experienced and dynamic professionals to our executive management team. We have also focused a lot of our efforts on reinvigorating and streamlining all internal operations in order to maximise effectiveness and efficiency.”

As government expenditure shrinks and investment in projects decreases, banks witness an increase in their financing costs

Despite the successes so far, KIB has made no indication that it plans to slow down anytime soon. “The next stage of the plan, which is scheduled to roll out throughout this year, focuses on enhancing KIB’s competitive edge within the banking sector”, Al-Jarrah said. “I believe the success we have seen so far in the implementation of the first two phases has set a solid foundation for us to achieve that goal.”

Al-Jarrah also said another key factor behind KIB’s success is the wealth of experience among the bank’s management team. “Our employees have been major contributors to our recent success; KIB is proud to house a team of highly motivated banking professionals.”

As the continued development of the bank’s employees is key to its future, fostering local talent is essential. Al-Jarrah said: “Our goal is to continuously attract aspiring young Kuwaiti professionals of both genders, thereby providing a wealth of career opportunities and professional training programmes for newly graduated Kuwaiti nationals. We are also committed to investing in our employees and promoting their professional growth and development, which is why we continue to provide professional training and development opportunities across all divisions and levels.”

For example, the bank maintains a comprehensive programme of training initiatives year-round, which are designed to enhance the skillsets and abilities of all employees. It is also currently implementing a new performance management process that is designed to balance performance assessments with career aspirations and professional development.

Al-Jarrah said: “I am quite proud to say, in a testament to our outstanding employment strategies and ongoing efforts to support local human capital, we were honoured at the 15th ceremony for recognising excellence in workforce nationalisation policies in the private sector in the GCC. The ceremony took place under the auspices of the Council of Ministers of Labour and the Council of Ministers of Social Affairs of GCC States.”

Corporate social responsibility
Though now a staple in the banking sector, corporate social responsibility (CSR) programmes vary wildly in their scope and effectiveness. However, for KIB, such a programme is core to the bank’s ongoing success. “One of our biggest focus areas as an organisation has been social responsibility, and I am proud to say that KIB continues to have one of the most comprehensive CSR programmes in the region”, Al-Jarrah explained. “We believe social responsibility to be a core component defining an organisation’s success, as any successful organisation is expected to play an active role within its local community and actively contribute to social development.”

Al-Jarrah said KIB has a responsibility to not just provide the best financial solutions to customers, but also to operate the best social initiatives and programmes that truly serve all segments of KIB’s community: “CSR has been the cornerstone of our vision since inception, was solidified further after the firm’s transformation into a Sharia-compliant bank. We have always sought to be true corporate citizens and have worked diligently to fulfil our duty towards Kuwait, its people and its society, beyond our economic role.”

The importance of a CSR charter or programme comes down to a number of factors, both from a consumer and a business perspective. “One of the trends that has driven the prevalence of social responsibility within organisations is that customers have become increasingly interested in socially conscious companies; the ethical conduct of companies now influences the purchasing decisions of customers. Additionally, investors around the world are changing the way they assess companies’ performance, and are making decisions based on criteria that include ethical concerns. Even employees are looking beyond paycheques and looking into a company whose philosophies and operating practices match their own principles.”

In this sense, adopting a long-term CSR programme, as is the case at KIB, is also a long-term investment in the bank’s employees, community and future. For 2017, the bank is focusing on supporting initiatives that cover a number of key areas, including religion, humanitarianism, social causes, philanthropy, sports, environment, healthcare, nationalism, culture and education.

The specifics of KIB’s CSR strategies are varied and far-reaching. The bank promotes Islamic values, particularly through the holy month of Ramadan. Moreover, prior to this celebration, KIB distributes a collection of Koran and Du’a recitations, which feature some of the most prominent reciters in the Islamic world. The bank also supports a countless number of youth-focused events and initiatives, which are designed to encourage young people to build the future of the country, including encouraging aspiring professionals to pursue a career in banking. The bank is also an active participant in many job fairs for students.

Another focus for KIB is the health and wellbeing of various communities in Kuwait, ranging from efforts to fund cancer and diabetes support organisations, to being a regular host of a mobile blood bank at its head office. The bank has also sponsored the late Abdullah Mishari Al-Roudan’s indoor football tournament for five years running, and sponsored both the late Jassim Al-Sharhan’s Ramadan football tournament and the Flair Fitness Competition.

KIB has also made efforts to sponsor talented individuals, including honouring inventor and engineer Mubarak Taher, who received an international patent for his system, the Dynamic Network for Oil and Gas Production.

Kuwait City, Kuwait

Supporting local communities
On a national level, the bank has sought to support events that stimulate sustainable national and social development. KIB sponsored the Hala Ramadan Exhibition in 2016, an event created to support successful local youth initiatives. The bank also offered its backing to Light Expo, an event that featured leading businesswomen and young female entrepreneurs, as well as focusing on encouraging innovative small projects in Kuwait. KIB was also a sponsor of the Fifth Tmkeen Youth Empowerment Symposium. “These are examples of where KIB has been able to make a substantial difference to communities in Kuwait”, Al-Jarrah told World Finance.

According to Al-Jarrah, as a leading financial institution, KIB recognises the key economic role the bank plays in the national landscape, and is fully conscious this gives it the opportunity to be a major force for good in Kuwait. As such, KIB plays a significant role in helping to make a positive impact in society, which is a reflection of its deep-rooted commitment to serving its community with integrity in every way possible. These positive efforts reflect both the bank’s overall performance and its ability to meet the expectations of customers and shareholders.

“We believe that we have a responsibility to not only provide the best financial solutions, but to also provide the best social initiatives and community programmes that truly serve all segments of our community”, Al-Jarrah explained. “As an Islamic financial institution, we consider social responsibility to be our duty towards our community, which comes as a benefit, rather than a cost.”

Al-Jarrah also said social responsibility is particularly important in Kuwait, as CSR values are fundamentally woven into Arab culture: “Yet, even beyond that, social responsibility remains important in the Arab world, mainly because of the need for sustainable economic development. Governments, civil society organisations and academic institutions should all be involved in this effort.”

Al-Jarrah added that companies have a particularly important role to play: “They must be involved and contribute to the betterment of the societies in which they operate. They can do this through CSR initiatives that align with national development objectives in a diverse number of areas.”

It is often within local communities that companies’ CSR programmes are able to make the biggest difference to individuals. While broad directives might prompt general and gradual change in the world, working on a local level can make an immediate difference in the lives of individuals. Consequently, KIB constantly strives to actively participate in community activities, which are aimed at bettering both the local community and the national economy.

As the GCC grows from an economy that is heavily focused on oil exports to a more diversified institution, it will have to develop its finance sector to match

“Companies must work to the best of their abilities and available resources to enhance various aspects of society and support the different segments within it”, Al-Jarrah said. “Moreover, they must focus on social issues with the highest impact and steer their social responsibility efforts to create sustainable and long-term improvements.”

That said, CSR programmes are also capable of making a significant impact at a corporate level as well. Combining both the macro and micro benefits of CSR is something KIB is working hard to achieve: “We have always believed in integrating social responsibility into the very fabric of our organisation, and we therefore seek to embed corporate citizenship into our business practices and corporate values across our entire organisation – encouraging our employees to be more socially aware and active in their communities. Our all-encompassing social responsibility philosophy has enabled us to never lose sight of one of our most important core values: fulfilling our duty towards the society in which we belong. In doing so, we recognise that our credibility with stakeholders is further enhanced, as well as our corporate reputation.”

When trying to attract the best staff in addition to a loyal customer base, a sturdy CSR programme is a necessity in the modern business environment. Stakeholders have become more knowledgeable, and increasingly they tend to make decisions based on the reputational status of organisations. Accordingly, organisations must set themselves apart through more intangible means.

“CSR has a strong, positive effect on corporate image, which in turn positively affects stakeholder perception of the organisation; even employees may be attracted to work for, or be even more committed to, corporations perceived as being socially responsible.

“Our CSR programme has worked to improve our credibility within different segments of the Kuwaiti community. As credibility with our stakeholders translates into the satisfaction of our customers, we consider social responsibility to be a necessary determinant of building our reputation; which in turn affects how our clients, the community, our current employees and even potential employees view us.”

Arab banking development
The Arab banking industry has been full of swift evolutions and changes, making it one of the most exciting areas of finance at the moment. Al-Jarrah said many of these changes have been focused on the careful running of banks: “As a direct response to the 2008 financial crisis, new regulations such as Basel III have been established, introducing more stringent financial controls and restrictions over banking activity. These new regulatory frameworks have gone a long way in strengthening banks’ resilience and their ability to absorb losses in financial crises. In many ways, they have completely changed the way in which banks operate, and their approach to risk management.”

However, there have also been substantial developments in the retail banking sector. Al-Jarrah said the retail sector has been experiencing a higher growth rate than corporate banking, and is presenting a new wave of challenges and opportunities: “Also, it is important to note that our customers’ demands have evolved, as they have become more technologically savvy, more connected, better informed and less loyal to a single bank. This has forced the Arab banking sector to adapt and meet their changing needs.”

While the global banking industry is facing its fair share of challenges, Al-Jarrah explained the GCC is facing a particularly tricky climate with the prolonged instability of oil prices. “The ongoing instability in oil prices continues to pose a threat, which comes as no surprise as oil is the driving force of many of the Arab economies.

$1.85bn

Kuwait International Bank’s total assets

17%

The increase in the bank’s investment portfolio over the past year

231%

The bank’s total provision coverage ratio

“At a macroeconomic level, oil prices have taken a toll on national GDP, and therefore growth. We have witnessed its effects trickle down to the banking sector. As government expenditure shrinks, investment in projects decreases and costs for businesses rise, investment and commercial banks witness an increase in their financing costs.”

Although this presents problems, the current climate can also be seen as an opportunity for growth. “Banks must carefully monitor the dynamic business environment to effectively and constantly adapt to changes when needed”, Al-Jarrah explained. “Also, they must proactively work on keeping up with the requirements to modernise systems and maintain international compliance with legal, audit and accounting standards in order to achieve required operational efficiency amid competition, and to counteract any possible volatility in the future. Although this is a challenge, it is also a source of motivation, driving us all to provide the best services and banking solutions to individual and corporate customers alike.”

Al-Jarrah said, if the situation of unstable oil prices persists, the market is likely to witness major changes in government spending, foreign investment in the region and implementation of development plans: “Kuwait is a prime example of that, as these developments have motivated the Kuwaiti Government to forge ahead with many development projects, in a bid to diversify income and boost market performance. Not only does this reflect the government’s commitment to move ahead with its development plans, it also signals that capital spending will not be affected by the drop in oil revenues, at least in the medium run. Additionally, I believe the shifts taking place in the global economic landscape have created an opportunity for the Islamic banking industry in the GCC, opening the door for banks in the region to augment their position as key international players.”

A new beginning
As the sector develops, the Arab banking is increasingly finding a united voice to meet these challenges, with both KIB and Al-Jarrah at the forefront of these efforts. Speaking in Beirut at the Annual Arab Banking Conference in November, Al-Jarrah’s opening remarks as Chairman of the Union of Arab Banks called for the establishment of an Arab lobby: “Through this conference today, the Union of Arab Banks is looking to explore the possibility of establishing an international Arab banking lobby, stemming from the union’s commitment to promoting financial stability and economic cohesiveness, despite the political and security challenges the world is currently facing.”

He also warned of the impact of unstable oil prices, and the potential consequences should the migration of domestic capital continue at its current rates. “To put things into perspective, the combined assets of Arab banking institutions exceed the total value of the Arab economy”, Al-Jarrah told World Finance. “Through the establishment of a consortium, we aim to enhance the competitive edge of the Arab banking sector by redirecting investments made abroad to the local banking sector. The consortium intends to decrease international dependency from foreign debt. This will positively affect investments in the region by boosting new projects, creating job opportunities and driving economic development across the entire Arab region.”

The agreement could make for an important moment in the Arab banking world, creating a united voice that would be far more capable of addressing the challenges the region presents.

Al-Jarrah added: “Driven by the belief that cooperation will help mobilise human capital, conserve and maximise resources, and build capacities, the consortium will allow for a collaborative effort to strengthen the Arab economy. This cooperation is a prerequisite to building a solid foundation that is rooted in peace and stability, in addition to being a key component towards achieving balanced, sustainable and comprehensive development.”

However, such unity is not necessarily easy to create. Despite facing the same challenges, uniting so many organisations in a coordinated effort is difficult in any field, let alone banking. Al-Jarrah said building greater trust and confidence in what are relatively young institutions is the first challenge.

“So far, there has been great development in enhancing their reputation around the world and among ourselves, and in doing so there is now a better understanding of the strength and integrity of these institutions. There have also been great efforts made in encouraging the Arab banking sector to help drive social and economic development within the Arab region, as opposed to elsewhere.”

Al-Jarrah said there are other fields in which the organisation is working to improve. “Further efforts are to be made by the Arab banking sector by taking an active role in helping boost the economy by capitalising on its financial and human resources, as well as committing to promoting financial stability and cohesiveness, despite the political and economic turmoil plaguing the region.”

In holding chairman positions at both KIB and the Union of Arab Banks, one may think that Al-Jarrah may have an impossible amount of work in front of him. However, the goals of both organisations are one and the same: “Many of my key responsibilities involve a wide scope, such as building the reputation, enhancing the framework and creating awareness for Islamic banking, both in the region and globally. Furthermore, an important item on my agenda is strengthening Arab banks across the region by building reputation and harnessing capabilities to achieve the higher goal of developing the Arab financial sector.”

Future-centric
As the GCC grows from an economy that has been heavily focused on the export of oil and other goods and services for the past two decades (see Fig 2) to a more diversified and resilient institution, it will have to develop its finance sector to match.

Al-Jarrah believes a well developed financial sector is intrinsically linked to economic development: “With the improvement of the financial sector comes the reduction of inefficiency, the proper identification of profitable business opportunities, the mobilisation of savings, and the enhancement of goods exchange and productivity. As we work to develop these financial mechanisms, we will witness a more efficient allocation of resources, a more rapid accumulation of physical and human capital, and faster technological progress, all of which feed economic growth.”

He also said that, conversely, these advancements go hand-in-hand at a macroeconomic level. “Developments in the financial sector must work simultaneously with policy changes by government decision makers, which encourage robust regulations for financial activities and consequently, facilitate financial development.”

Overall, the future for banking in Kuwait looks promising, despite the challenges that exist in the region. Islamic finance has developed rapidly, and as the GCC continues to find new industries to foster, banking and finance has found a bigger sector to fill.

“Amid the ongoing instability in the energy sector and the changing global economic landscape, the banking sector in Kuwait and the GCC continues to perform strongly”, Al-Jarrah said. “As I’ve already mentioned, the challenging economic climate seems to have encouraged governments across the GCC to undertake fiscal reforms and actively pursue income diversification. Consequently, many governments in the GCC are forging ahead with widescale national development schemes.” One such example is the recently announced plan to transform Kuwait into a business and cultural hub for the region by 2035, which will also inevitably create countless opportunities for the sector.

“I would also say that the shifting global economic paradigms are opening the door for Arab banks, particularly Islamic banks, to assume a greater role on a global level, particularly as the world continues to recognise the importance of socially responsible investments.”

In an industry as vibrant as Islamic finance, even more innovations and achievements are expected to emerge in the coming years. While the region faces its challenges, a promising future awaits both KIB and the people driving the incredible creativity behind this bank. Indeed, the next decade may see financial institutions have as big an impact as oil.