Is this the future of banking in the UAE?

Published in Gulf News, 28 February 2016

The rapid growth of mobile apps raises questions about what banking might look like in the UAE in the future

Just like cash or a debit card, the future of banking can fit into the palm of your hand. Smartphone banking apps are reaching an ever wider audience and creating novel pressures for the country’s banks. Not only do they have to compete with each other to continually improve their digital services but they are also faced with tricky questions such as what to do with their branch networks. The answers they come up with will shape the UAE’s banking landscape for years to come.

Not all banks in the country have launched a smartphone app but the number is growing all the time. Those that have range from giants such as Emirates NBD and National Bank of Abu Dhabi (NBAD) to smaller players like RAK Bank. Typically, their apps allow customers to transfer money between accounts, pay utility and other bills, and locate nearby ATMs and branches. 

Simply launching an app is not enough though. Once out there it needs to be regularly improved. Mashreq, for example, launched its first mobile app in 2008 and earlier this year released its fourth major upgrade. “The biggest change we have done is to the user experience,” says Aref Al Ramli, Head of Electronic Business and Innovation at Mashreq. “We have taken a bold step in animating the design. We’ve looked at it from the customer experience, making it easier to access with fewer clicks.”

While banks are investing in their digital services, they still have to make up ground. According to a November survey of 2,000 GCC bank customers by EY, 34 per cent of UAE respondents use a mobile banking service but only 45 per cent are happy with it. When asked why they don’t use mobile banking more, 51 per cent said they found it difficult to access. Other common gripes included slow transaction speeds and a non-intuitive user experience.

“Mobile banking has been a spectacular failure so far in the GCC,” says Ashar Nazim, Financial Services Customer Leader for the Middle East at EY. “The journey is still starting. There is a long way to go.”

While there is room for improvement, the direction of travel seems clear enough, with more and more customers using digital channels instead of visiting a branch. And banks are discovering that consumers have clear preferences for using different platforms for different things.

“While internet banking remains the platform of choice for service requests such as statements, applications for new products and information requests, mobile banking is becoming the platform of choice for transactions,” explains Sagheer Mufti, Chief Operating Officer at Abu Dhabi Islamic Bank. “We [saw] an increase of 71 per cent in the number of transactions conducted on the mobile app in 2015.”

In addition to straightforward banking apps, a few institutions have been experimenting with other services delivered via apps. Emirates Islamic Bank, for example, has developed the EI World app where, in return for carrying out transactions such as paying utility bills, users can accumulate points that can be redeemed for vouchers. Abu Dhabi Commercial Bank and Emirates NBD offer similar offerings.

Potentially more interesting are the moves to develop services via other online platforms and apps, including social media networks like Facebook and Twitter. In October 2014, Commercial Bank of Dubai opened a branch on Facebook that offers many of the same functions as a dedicated banking app. Last year, Emirates NBD started offering balance enquiries and other services on Twitter.

There are security concerns that tend to limit the scope of such initiatives, but all banks need to keep an eye on such developments lest they lose ground to their rivals, particularly among the next generation of customers. However, not everyone is convinced there is enough demand.

“We’re not hearing any strong signals from our customer base that they need us to facilitate their banking on their social media channels,” says Suvrat Saigal, Managing Director and Head of Global Retail at NBAD. “We’re focusing our resources on where we know our customers want us to improve, rather than take a me-too approach to channel investment.”

However, what seems inevitable is that digital channels will become ever more important for banks and, as smartphone technology becomes increasingly sophisticated, more people will want to bank via their phones. This, in turn, raises a question about the role of traditional physical branches and whether banks even need them. Most executives insist there is still a role for branches, particularly when it comes to dealing with more complex services such as investment advice, but at the very least the expansion of branch networks is likely to slow down.

“Branches will continue to be important,” says Mosabah Al Qaizi, Head of Electronic Banking Services at Dubai Islamic Bank.  “We envision that they will be leaner in size with a focus on performing more complex transactions. 

“Our aim will also be to continue opening more technologically advanced express banking centres and expanding our full function ATM network, while we see a slowdown in opening large brick-and-mortar branches.”

Through the longer term, the need for branches could be even further eroded. The EY survey found that 60 per cent of customers in the UAE would willingly switch to a digital-only bank.

Watching the future

Published in Gulf News, 28 February, 2016

Gulf banks are starting to experiment with wearable technology, but consumer attitudes to the new devices remain uncertain.

In November, Emirates NBD launched a novel service in the UAE banking market. The bank’s Fitness Account is a savings account that allows customers to earn higher rates of interest the more physical activity they do. Such initiatives are possible thanks to the development of smartwatches like the Apple Watch and Samsung Gear and wristbands like the Fitbit, all of which can keep track of the number of steps someone takes in a day or how far they run. 

Globally, sales of smartwatches have yet to really take off. Juniper Research, a UK-based technology consultancy, says that 17.1 million smartwatches were shipped last year, with Apple accounting for just over half of the total. The rest of the market was dominated by cheaper devices with more basic functionality that are not well suited to the complexity of banking services.

Others put the sales figure higher. Gartner, another research firm, estimates that 30 million smartwatches were sold across the world last year, and it expects the number to rise to 50 million this year and 66.7 million in 2017. Even at these levels, however, the smartwatch is a long way from becoming a ubiquitous part of modern life. Other devices have fared even worse.

For example Google Glass, a high-tech headset designed to be worn like a pair of spectacles, was launched with great fanfare in 2013, but then was withdrawn from sale in 2015 after failing to capture the imagination of anyone beyond a small constituency of early adopters.

Not much traction?

The cautious attitude of consumers inevitably raises a question about how much demand there will be for banking services on devices like smartwatches and perhaps helps to explain the tentative approach of many banks. 

According to a survey by Misys, a London-based software firm, only 15 per cent of banks around the world have a wearable app at the moment, although 52 per cent say they will have one in place over the next 18 months and 72 per cent say it is on their road map for the next three years. Banks in the UAE are no more keen than their peers elsewhere. “The potential for wearable technology in the banking space is yet to be realised in the UAE,” says Mosabah Al Qaizi, Head of Electronic Banking Services at Dubai Islamic Bank.

Of course, it is not simply a case of smartwatches. Other devices could start to become more prominent in the years ahead such as smart wristbands or rings and as technology improves so will their sophistication. At the moment though, the idea of wearable technology for banking services is still characterised more by future potential than current opportunity, and it makes sense for most banks to concentrate on improving their other digital services.

“Banks continue to face challenges with their digital strategies, so it is no surprise only a small percentage support wearables,” says Balazs Vinnai, General Manager of Digital Channels at Misys.

For now, most banks in the UAE are just keeping an eye on the segment, rather than jumping in to the market. The approach of National Bank of Abu Dhabi (NBAD) is typical of many. Suvrat Saigal, Managing Director and Head of Global Retail at NBAD, says it is “excited by the potential applications that could become available” and adds “we are closely monitoring this area”. 

Pay with wearables?

Some banks are moving ahead with services, however. Mashreq’s latest version of its Snapp mobile app includes an Apple Watch component. The bank’s customers will be able to view balances for their current and savings accounts on their watch, as well as details of recent transactions, discount offers and ATM and branch locations.

There are other services that could yet boost the use of wearable technology, in particular using a watch or another device to make payments, perhaps by placing it up against a reader. The Misys survey found that two thirds of banks identified such proximity payments as the most attractive potential area for wearable apps. 

“Early adopters have already started using wearable technology and we see there is huge scope for it to expand to payments,” says Aref Al Ramli, Head of Electronic Business and Innovation at Mashreq Bank. “That is the main potential for the future.”

Medical tourism holds promising economic potential

Published in MEED, 22 February 2016

Healthcare tourism is a $60bn industry and presents an enticing opportunity for hospitals and medical authorities in Dubai and Abu Dhabi

Every year, the UAE healthcare authorities send several thousand locals abroad to hospitals in Germany, the UK, the US and elsewhere.

For patients it means they receive the treatment they need in areas such as oncology, neurosurgery and cardiology that are unavailable locally. But this comes at a price. Dubai Health Authority (DHA) says it spent an average of AED162,000 ($44,000) on treatment for every patient it sent overseas in 2013.

But for each Emirati going abroad, many more are coming to the UAE to receive care, particularly to Dubai Healthcare City (DHCC). Since it was set up in 2002, DHCC has become the biggest medical tourism destination in the region.

The two hospitals and 120 outpatient centres in the city looked after 260,000 international patients in the first half of 2015. The greatest number come from across the GCC, but patients also come from other parts of the Middle East, Europe and Asia.

Infertility treatment is the most common procedure for visitors, followed by cosmetic, dental, cardiac, and orthopaedic treatments. The care they receive can often be life-changing.

In 2014, DHCC treated a 51-year old Qatari man with complex spinal treatment, which allowed him to walk again.

Other patients find they need to make multiple visits. In June 2007, Suha Bashayreh, a Jordanian teenager, was involved in a traffic accident that meant both her legs had to be amputated. She first visited DHCC in May 2009 for prosthetic rehabilitation, and has returned several times since then for follow-on treatment.

As well as improving people’s lives, the sector is also providing a welcome boost to the economy. The local Alpen Capital estimates medical tourism was worth $1.7bn to the UAE in 2013. But in many ways the country is just scratching the surface.

Globally, 12-15 million people travel every year for medical procedures, spending about $40bn-$60bn in the process, according to US-based medical tourism organisation Patients Beyond Borders. Most people prefer to stay fairly close to home, with 85 per cent travelling by flights that last a maximum of six hours, says the organisation.

That presents the UAE with a large potential market, including India, East Africa, Southeast Europe and more besides.

“Because of cost, convenience and cultural preferences, most patients wish to keep medical travel regional,” says Josef Woodman, CEO of Patients Beyond Borders.

“This is good news for the UAE, which carries opportunities to draw from a wide array of countries in the region. Also, the healthcare lag in other GCC countries gives the UAE at least a decade of opportunity to establish itself as the regional destination of choice for short-haul medical travellers.”

More investments are being made to tap into that potential. DHCC is expanding, with a second phase taking shape on a large plot adjoining Dubai Creek. Projects on the site include the WorldCare Wellness Village, which will focus on diseases such as obesity, hypertension and diabetes, and which is being developed by the US’ WorldCare International.

Such schemes should help Dubai close in on its target of attracting more than 500,000 medical tourists a year by 2020, as well as with its Dubai Health Strategy 2021, launched in January with the aim of bolstering the emirate’s position as a regional medical hub.

The activity is not restricted to the DHCC free zone. In November, the UK’s King’s College Hospital (KCH) announced it will build a hospital with 80-100 beds in the planned Dubai Hills area in Mohammed Bin Rashid City, supported by a small network of clinics.

The clinics will open over the course of 2016 and 2017, with the hospital following in 2018. It will specialise in paediatrics, endocrinology, orthopaedics, obstetrics and gynaecology, as well as other acute and general medical services.

KCH already runs a clinic in Abu Dhabi, which mostly caters to locals and expatriate residents. The new clinics in Dubai are likely to have a similar mix of patients, but Simon Taylor, director of commercial development at KCH, says the firm is interested in attracting patients from other countries to the new hospital.

“There is the possibility of attracting inward medical tourists from other places in the Gulf,” says Taylor. “That’s something we’ll be interested to see if we can develop.”

On the whole, Abu Dhabi is less developed than Dubai. There are 39 hospitals and other healthcare facilities in the emirate accredited by Joint Commission International (JCI), a US-based standards body. In Dubai, by contrast, there are 73. Dubai also benefits from having more extensive air connections and a deeper pool of high-quality accommodation.

What Dubai has got going for it is the fact that it’s a central transport hub,” says Taylor. “It’s very easy to get into Dubai, so that’s a big advantage. It’s also got extensive, good-quality hotels. It’s got the infrastructure.”

There are challenges, however. Overall, there are some $90bn-worth of healthcare construction projects planned or under way across the Middle East and North Africa (Mena) region, with $72bn of them in the GCC, according to regional projects tracker MEED Projects. Some of these will be competing for medical tourists, for example the International Medical City project in Oman, which is being developed by Saudi-based Apex Medical Group at a cost of about $650m.

The relatively high cost of care in the UAE is another issue the country needs to grapple with, as it is bound to put off some less affluent travelers. However, price is just one factor that people consider when they travel for medical care, and not always the most important one.

“The UAE is definitely more expensive than India or Thailand, but it’s still [cheaper] than a lot of other places in Europe and the US,” says Jonathan Edelheit, CEO of the US-based Medical Tourism Association.

“For some people it’s not about the pricing, it’s about making sure they’re getting quality. When you deal with insurance companies or governments that send patients abroad, pricing isn’t the key factor. Their main factor is quality and good outcomes.

“One reason why the UAE’s pricing is higher than in some destinations is that all its healthcare, all the doctors and nurses, have to be imported. That is a disadvantage the country has to overcome and the way it’s going to overcome this is by focusing on quality.”

If the UAE manages to do this, there are some important potential economic benefits. Medical tourists often spend more than regular tourists, as they tend to stay for longer and travel with family members or other companions, who help to fill hotel rooms.

Investment in hospital-building programmes and the employment created in those facilities also contribute to economic activity. Healthcare authorities should also find that once more facilities are in place locally, they no longer have to send so many of their own citizens abroad for treatment.

“It’s going to help really boost economies in the GCC,” says Edelheit. “A lot of GCC countries are spending billions sending patients abroad and if they can increase the quality [of their own healthcare facilities] they can start keeping these patients at home and save [that money].”

Region’s growth in military spending slows

Published in MEED, 21 February 2016

GCC military budgets are under pressure, but fears over a resurgent Iran may prompt higher spending

The wars around the Middle East are causing unprecedented suffering for the people of Syria, Yemen and Libya. They are also testing the abilities of the region’s armed forces like never before.

After years of pouring billions of dollars into their military machines during the oil boom, governments in the Gulf and elsewhere are now starting to discover whether all that money was well spent.

A Saudi-led coalition is fighting against Houthi rebels in Yemen from the air and GCC troops have been deployed on the ground, leading to a significant number of deaths of service personnel.

At the same time, many of the GCC states have been involved in the Syrian war too. For now that has been restricted to helping the US-led air campaign and providing funds and weaponry for rebel groups, but there has been speculation that Riyadh might place troops onto the ground there too.

All this is coming at a time when military budgets are coming under pressure from the sharp drop in government revenues as a result of low oil prices. While there has been plenty of discussion about cutbacks to capital spending programmes in Saudi Arabia and the lifting of fuel subsidies in the UAE, less has been reported about the impact that the tighter fiscal environment is having on their armed forces. Yet the signs are that here too governments are taking a more cautious approach.

By some measures, the amount being committed to military spending is still increasing. According to the International Institute for Strategic Studies (IISS), a London-based think-tank, defence budgets across the Middle East accounted for 6.5 per cent of regional gross domestic product (GDP) in 2015. That marks a slight rise on the 6 per cent figure for the year before, although the difference is at least partly explained by military budgets holding steady at a time of declining GDP for oil exporters.

Overall, the growth rate of spending decelerated last year, in spite of the costs involved in the operations in Syria, Yemen and elsewhere. IISS says that regional defence spending rose by 1.2 per cent in 2015, after taking into account inflation and exchange rate changes.

In dollar terms the amount actually fell, from $212bn in 2014 to $205bn last year, as a result of the fall in value of some of the region’s currencies against the dollar. Figures come with a significant health warning, though, given the secrecy surrounding military budgets in most countries.

The Middle East is getting harder to assess and to estimate the spending,” says Giri Rajendran, research associate for defence and economics at IISS. “There are more countries in turmoil which means budgetary documentation is getting poorer. Our estimate is that, from the Arab Spring in 2011 until 2014 spending was increasing at about 10 per cent per annum. Last year in 2015 we think it decelerated quite considerably to 1 or 2 per cent [growth].”

Overall spending in the region is still dominated by Saudi Arabia, which has the third largest defence budget in the world, behind only the US and China.

Riyadh’s $81.9bn outlay is now equivalent to 13 per cent of the country’s GDP and makes up 42 per cent of the total military spend across the entire Middle East and North Africa (Mena) region.

The next largest military spending programme is Iraq’s, at $21.1bn, followed by Israel with $18.6bn and Algeria with $10.8bn. Among the remaining GCC states, the biggest spenders are the UAE and Oman.

One country which is likely to be eyeing an increase in military spending in the years ahead is Iran. Secondary economic sanctions imposed on the country as a result of its nuclear programme were lifted in January, in the wake of the implementation of the Joint Comprehensive Plan of Action (JCPOA) with the EU, US, Russia and others.

Some sanctions remain, however, notably on the sale of military weapons. These will remain in place for a further five years in the case of conventional arms and for eight years in the case of ballistic missiles and related technology.

Nonetheless, the clock is counting down and Tehran can at least look ahead to a time when it will be able to start modernising its creaking air force, navy and army, which have been struggling with obsolete equipment for many years.

“A considerable proportion of Iran’s inventory is so old that it can be considered obsolete,” says John Chipman, director general of IISS.

“Most of Iran’s front-line combat airpower dates back to the 1970s and [is] kept in service by a combination of local maintenance skills and parts bought on the grey market. The same goes for land and naval forces, with the T-54/55 and Chieftain main battle tanks, and the Alvand-class corvettes among those showing their age.”

Despite the limitations of its outdated equipment, Iran continues to be actively involved in projecting its political and military power around the region, most notably in Syria and Iraq. Saudi Arabia has also been flexing its military muscle, although it has relatively little to show for its year-long operation in Yemen, with no decisive weakening of the Houthi forces it is battling against.

The danger is that, as Iran starts to invest in its armed forces once again, the GCC states will feel compelled to act, potentially setting off an arms race in the Gulf, with the US and Europe supplying their GCC allies and Russia and China selling their skills and technology to Iran.

It could also prompt the GCC states to finally start cooperating more closely with each other, as the US has long been urging them to do.

“Previously, Gulf states assumed that they would retain a qualitative edge over Iran. If Iran re-arms, this assumption may no longer hold,” says Chipman.

“While the US has exhorted Gulf states to better coordinate these capabilities, the US still remains at the hub of regional missile defence. If Iran re-arms, this may spur greater cooperation among GCC states, building on the military ties now seen in Yemen.”

Military spending may have decelerated over the past year, but it seems that the trend could well be a short-lived one.

Regional rivals in search of a bigger bang

Published in Gulf States News, 18 February 2016

The prospect of Iran re-equipping and modernising its armed forces in the years ahead seems likely to prompt GCC states to keep buying advanced weaponry, with a focus on missile defence

Government budgets may be under heavy pressure as a result of the sharp fall in oil revenues, but one area that still seems well protected is defence. An analysis of military spending patterns by the London-based think-tank the International Institute for Strategic Studies (IISS), released in early February, shows expenditure on the region’s armed forces is still growing, albeit at a slower rate than in the recent past.

Data published in The Military Balance 2016 show that Saudi Arabia’s military budget last year was $81.9bn, the world’s third largest behind the United States and China, up from $80.8bn a year before. The Bahraini and Omani military budgets also increased. Of the countries where data is available for 2015, only Kuwait seems to have curtailed its spending in dollar terms – and even here military spending rose as a percentage of GDP.

Spending demands are rising to pay for operations in Yemen and Syria. But there are other considerations at play too, centred on Gulf Co-operation Council (GCC)-Iran rivalry. That much is evident from the amount being invested in defensive and offensive missile systems. “Some Arab states have spent substantial sums on defence equipment in recent years, including on missile defence,” IISS director general John Chipman said at the Military Balance’s 9 February launch: “Gulf procurements have largely been driven by concern over Iran’s ballistic missile arsenal.”

All the GCC states except Oman have Patriot surface-to-air systems, designed for use against aircraft, cruise missiles and short-range ballistic missiles. Terminal high-altitude air defence (Thaad) systems, used to target short- and medium-range ballistic missiles, are also starting to enter the region.

Among the most recent deals, the US State Department last July approved a Saudi request to buy 600 Patriot Advanced Capability-3 (PAC-3) missiles at a cost of $5.4bn to modernise and replenish its existing stocks. Kuwait took delivery of seven Patriot PAC-3 missiles in 2015 at a cost of $263m and the UAE received two batteries of Thaad missiles, which it had ordered in 2011.

According to the IISS, “Saudi Arabia’s armed forces remain the best equipped of all states in the [Middle East and North Africa] region except Israel”. However, it is the UAE military “which is arguably the best trained and most capable in the GCC states”, active in everything from supporting an F-16 detachment in Afghanistan to committing the Presidential Guard and other forces who have “incurred significant casualties in Yemen.”

Saudi Arabia uses its Patriots to hit Scud missiles intermittently fired over the border by rebels in Yemen. On 8 February, a Saudi statement said Royal Saudi Air Defence Forces had intercepted a missile as it headed towards Asir. Coalition forces responded by targeting the launch platform inside Yemeni territory, the statement said.

Critical timing as sanctions unwind

It is fears over a resurgent Iran that will fuel future spending. While many economic sanctions have been lifted on Iran, restrictions on conventional weapons sales will remain for a further five years and on ballistic missiles for eight years. GCC leaders may view this time as a critical window in which to bolster their systems before Iran has a chance to re-arm properly.

In terms of offensive capability, Saudi Arabia has DF-21 medium-range ballistic missiles, which are capable of reaching most parts of Iran (with the exception of the far west). Riyadh also has Storm Shadow cruise missiles, while the UAE has a variant known as Black Shaheen.

Iran has both short- and medium-range ballistic missiles, which can strike at a range of up to 3,000km. Its Shahab-3 ballistic missiles are able to strike any part of the GCC. And despite the constraint of sanctions, Tehran has been making efforts to modernise its arsenal, for instance by moving away from liquid propellant to solid propellant which is easier to handle and means missiles can be fired more quickly.

“They’ve looked at a variety of range extension options [and] a variety of ways to increase accuracy,” IISS senior fellow for military aerospace Douglas Barrie said. “One of the biggest issues they still have is the majority of their weapons are pretty inaccurate. You’re talking 1,000 metres [accuracy] at a 500-750km range, which is really of very little military utility.”

Just how much money Iran will be able to commit to modernising its armed forces remains to be seen, and depends on factors including oil prices, the speed of economic recovery, and the cost of supporting allies such as Syrian President Bashir Al-Assad and Lebanese Hizbollah. Russia and China are the most obvious sources of any new weaponry the Islamic Republic does buy.

Given the enmity between Tehran and some GCC capitals, all this means there is a distinct possibility of a missile-led arms race in the years ahead. “If Iran rearms, Gulf states, aware that Iran will always have an edge in terms of force size, will likely look to procure yet more advanced weapons, for instance high-speed precision strike or cruise missiles,” Chipman concluded.

Islamic banks search for growth

Published in Salaam Gateway, 13 January 2016

With oil prices low and concerns about a slowdown in China gathering pace, the outlook for many Islamic financial institutions is rather worrying. The problems are perhaps most evident in the Gulf countries, where low oil revenues are leading to cuts in government spending and tighter liquidity, but slower economic growth is also on the cards for other Islamic finance strongholds in South and Southeast Asia.

In its Islamic Finance Outlook Report for 2016, launched at the World Islamic Banking Conference in Bahrain in December, consultancy firm Middle East Global Advisors described the growth prospects for Islamic finance in the next 12 months as “muted.” Its survey of Islamic finance executives found that 49 percent of them thought the low oil price would slow the growth of Islamic banking, while 21 percent cited interest rate volatility and 9 percent pointed to the slowdown in China as the biggest worries.

These concerns are understandable, particularly in regard to oil prices. “Typically, when oil prices turn south then Islamic wealth creation globally tends to grow much more slowly,” says Jarmo Kotilaine, chief economist at Bahrain’s Economic Development Board.

None of these issues are likely to go away anytime soon. But despite all the difficulties, there is still plenty of room for growth, given the relatively small market share that Islamic financial institutions have in most countries.

The ICD Thomson Reuters Islamic Finance Development Report 2015: Global Transformation predicts that the value of Islamic finance assets will rise from around $2 trillion in 2015 to more than $3 trillion by 2020, with most of that growth coming from Islamic banks.

Banks are targeting a diverse range of areas in pursuit of that growth. According to the Middle East Global Advisors survey, 46 percent of executives think that asset and wealth management services will be the biggest driver of bank revenue growth in the next three years, followed closely by investment banking (43 percent), commercial and industrial loans (40 percent), cross-selling of services (23 percent), and mortgages and personal loans (21 percent).

On a more tactical basis, the survey found that 21 percent of banks were looking at new product launches as their primary focus for growth in 2016, followed by 20 percent looking to expand their financing portfolio. In addition, 14 percent said they were targeting higher fee income and 13 percent said they were eyeing entry into new markets.

How banks approach the task of growth depends to a great extent on the conditions in individual markets. In some countries, there is a strong need for educating the local population first.


In Kazakhstan, for example, the market is in its infancy. The first law regulating the sector was passed in 2009 and there is still only one provider in the market, a subsidiary of Abu Dhabi’s Al Hilal Bank, which set up operations in 2010. Perhaps unsurprisingly, 71 percent of people in Kazakhstan say they have never heard of Islamic banking, according to the Kazakhstan Islamic Finance 2016 report produced by Thomson Reuters. However, 46 percent say they would be interested in using Islamic banking services and products.

It is a similar situation in non-Organisation of Islamic Cooperation (OIC) countries. In Canada, for example, the major local banks have yet to become involved in Islamic finance domestically and no corporate sukuk has yet been issued.

The Canada Islamic Finance Outlook 2016 report from Thomson Reuters estimates that Islamic mortgage products alone could be worth $2.3 billion in the first year following their launch, rising to $17.7 billion in five years. Other areas that the report suggests look promising include mutual funds and takaful.

For the industry to meet its potential in the years ahead, it will need to move into new markets like these. But it will also have to develop its product portfolio within countries where it is already strong. In this second group of countries, the challenges are different but just as daunting.

“One third of the banking assets in the GCC are now Shariah-compliant,” says Ashar Nazim, financial services customer leader for the MENA region at consultancy firm EY. “That means that, going forward, Islamic banks will be competing head-on with big conventional banks. Many of these Islamic banks lack a distinct value proposition beyond Shariah-compliance. Therefore we expect strong headwinds.”

Gulf airlines stabilise at cruising height

Published in Gulf States News, 26 November 2015

This year’s Dubai Airshow was notable for a lack of new orders by the big Gulf carriers, but this may mark little more than a pause for breath as the region’s airlines digest huge recent orders.

More than 1,000 exhibitors from 61 countries turned up to the 8-12 November Dubai Airshow, which reflected in its global status to show off some 150 aircraft on the tarmac, from agile drones made by Abu Dhabibased Adcom Systems all the way up to lumbering Airbus A380s decked out in the liveries of Dubai’s Emirates Airline and Qatar Airways.

So far, so normal: what was unusual was the lack of big new orders. Abu Dhabi-based national UAE airline Etihad Airways exercised options for two Boeing 777 freighters, but that was part of an order for 199 planes announced in 2013. There were no equivalent new deals. Instead, the big manufacturers were left to make more prosaic announcements, such as Toulouse-based Airbus Group’s deal to upgrade the cabins of Oman Air’s A330s.

By comparison, the November 2013 show saw Abu Dhabi and Dubai-based airlines set new records, placing combined orders worth more than $170bn, with Emirates committing to an estimated $99bn spend, low-cost carrier flydubai placing an order worth $11.4bn and Etihad spending more than $67bn, while also announcing the acquisition of a 33.3% stake in Swiss carrier Darwin Airline.

The industry has been debating whether this year’s lack of orders represents a natural lull while the airlines digest huge recent orders, or something more significant. Aviation specialist JLS Consulting director John Strickland suggests the former: “I don’t think the lack of new orders was a surprise. The Gulf carriers – not only the big three, but also airlines like flydubai – already have a lot of orders on the books that haven’t been delivered yet. You can’t expect big orders all the time.”

Smaller Gulf airlines, including Dubai Aviation Corporation’s flydubai (see page 11), are still growing. The big three are also still expanding their networks via distinct growth strategies:

● Emirates is focused on organic growth, although it has a management contract for TAAG Angola Airlines and an important co-operation deal with Qantas;

● Qatar Airways places more emphasis on partnerships, being a member of the Oneworld alliance and a shareholder in International Airlines Group (IAG), the holding company of Aer Lingus, British Airways, Iberia and Vueling; and

● Etihad has the most challenging strategy of the three, with a jigsaw of stakes in smaller airlines such as Air Serbia and Airberlin.

Bahrain-based Gulf Air, seen as a poor cousin of the big three since its regional domination declined and the Qatar and UAE airlines grew, is adding new destinations, most recently with flights to Faisalabad and Multan in Pakistan in October. It is also overhauling its fleet: in September, Gulf Air said it would order up to 50 new Airbus aircraft. This deal seems likely to be signed in early 2016.

Gulf Air’s Bahraini senior management is working to turn around the airline’s fortunes. Maher Salman Al-Musallam joined as deputy chief executive (after a 35-year career with the Royal Bahraini Air Force) and has served as acting chief executive since Samer Majali stood down in 2012. Recently promoted to chief operating officer, Nasser Al-Salmi joined Gulf Air in 1988 as a cadet pilot, and rose to chief pilot and, from November 2008, director of flight operations. Among other second-tier airlines, Oman Air plans to expand its fleet to 70 aircraft by 2020, compared to 32 today. Kuwait Airways is working through an order for 37 Airbus aircraft made in February 2014.

Saudi Arabian Airlines (Saudia) is due to receive the first of eight Boeing 787 Dreamliners before year-end, as part of a modernisation programme, which director-general Saleh Bin Nasser Al-Jasser in late October said would include retiring 19 older planes from its fleet (15 Embraers and four Boeing 747 jumbo jets). Laying the cornerstone of Saudia’s new air operations building in Jeddah, Jasser said the airline’s fleet of 124 passenger aircraft was expected to rise to 200 by 2020. Some 50 new Airbuses are due in the period to 2018, 28 of them arriving in 2016, Jasser told another event, in Cairo.

In his most recent statement, General Authority of Civil Aviation president Suleiman Bin Abdullah Al-Hamdan (who is also Saudia chairman) has said the new King Abdelaziz International Airport will be completed in mid-2016, with a further year needed to test equipment before a 2017 opening.

Saudia is strengthening its presence in Egypt and has decided that women will be employed in administrative jobs. Jasser in late October also said the privatisation of Saudia’s catering company had “reached its final stages now, and will be put on the stock market for public subscription shortly”. He was also quoted saying the privatisation of ground services had reached its final stages.

Judging from the headlines, the region’s aviation industry is planning a bright future. However, the lack of detailed financial results issuing from many airlines makes it impossible to judge the viability of their strategies. Data included in GSN’s graphic may be the best available, but still subject to discrepancies.

Load factors, where they are published, generally look healthy enough, running at 79-80% for Etihad and Emirates and 81% for Sharjah-based Air Arabia (chaired by UAE-based Qatari businessman Abdullah Bin Mohammed Bin Ali Bin Abdullah Al-Thani). Oman Air is slightly lower at 74%.

A few issues are holding back growth. Deregulation of the Saudi domestic aviation industry appears to have stalled and, across the region as a whole, the rapid growth in traffic has highlighted the shortage of airspace open to commercial jets. As flydubai chief executive Gaith Al-Gaith has observed (see box), airlines are finding it difficult to break into new markets. The big three have been met by a wall of opposition from US carriers, while gaining further access to some European markets is also proving tricky.

On the plus side, Iran’s imminent opening up could offer an attractive nearby market to exploit. And low oil prices mean low fuel prices, at least for those airlines that did not order too much fuel when prices were high. Emirates says fuel made up 35% of its operating costs in 2014-15, compared to 39-40% in the previous three financial years.

Overall, barring any sudden shift in corporate strategies, a revival in aircraft orders is likely to happen before long. The big three Gulf carriers have some 876 aircraft on order, so there is still plenty of work for Boeing and Airbus. Add in the smaller airlines and the regional order book swells to 1,200. Airbus thinks the Middle East region will buy 2,460 more aircraft over the next 20 years, with 1,890 as a result of fleet expansion and 570 to replace aging planes. Boeing says it expects the region to need 3,180 new planes over the same period, worth an estimated $730bn.

Weathering the storm

Published in The Gulf, 1 October 2015

The Gulf region’s banking systems appear remarkably resilient in the face of low oil prices.

For GCC governments the oil price has been at a depressingly low level for more than a year now, and there isn’t much hope of a recovery any time soon. That has obvious implications for budgets, government spending plans and the overall health of the economies and, of course, for the region’s banking systems. The longer the oil prices continue to stagnate, the greater the potential effects on Gulf banks.

There may not be many winners among the region’s lenders as a result, but there are certainly some that are more vulnerable than others. It may seem counter-intuitive or just plain unfair that some of the countries with the largest oil and gas reserves should be least affected by the slump in energy prices, while others are being hammered, but that is certainly the case when it comes to the Gulf.

The economies of Kuwait and Qatar, for example, are relatively well placed to withstand the low oil prices environment, although for rather different reasons. In Kuwait’s case the under-spending by the government over the past few decades means that it has relatively small outgoings and ample savings. As a result, it finds it easier than most to sustain its spending patterns.

Qatar, on the other hand, has been able to ride the wave of high oil and gas prices to develop its economy, but still benefits from a low cost of energy production. The upshot is that the banking systems in both countries are fairly well placed to withstand the current difficulties.

“The Kuwait and Qatar banking systems are likely to be the least immediately vulnerable [to low oil prices] given their sovereigns’ very low fiscal breakeven oil prices and large reserve buffers,” says Khalid Howladar, a senior credit officer at ratings agency Moody’s. “These twin strengths will allow them to moderate the effects of a protracted decline through continued public spending, thus helping support their economies and banking system fundamentals. Nonetheless, we still expect subdued asset growth.”

In other corners of the region the picture is rather more mixed. In August, Fitch Ratings downgraded five banks in Oman, citing the weakening environment there and the reduced ability of the government to support the banks. This didn’t go down well with local bank executives who said that it didn’t reflect the intrinsic strengths of the banking system. “It’s annoying and not reflective of the banks’ core stability,” says one senior banking executive in Muscat.

The executive has a point. Omani banks have posted healthy growth rates in terms of overall assets, deposits and loans over the past year, even as the oil price was slumping. And a recent review of the system by the Central Bank of Oman found no problems. In its latest financial stability report, issued in June, the central bank said that a series of stress tests “indicated that the banking sector was also well placed in Oman, and that there were no imminent problems or threats to the sector”.

At the time Dr Qais al Yehyei, the head of the Financial Stability Department at the Central Bank, said that the “Omani macro-financial system looks sound”.

It will be harder to sustain strong growth rates going forward however. As governments try to cope with lower revenues they will be forced to cut their spending, run down their savings and realise the investments of their sovereign wealth funds. Even then, budget deficits are expected to rise, requiring the issuance of debt to cover the shortfall. All that suggests a period of lower liquidity and potentially higher cost of funds for banks. Other signs to look out for include slower loan growth and rising levels of non-performing loans.

Alongside Oman, Bahrain’s banking sector is the most vulnerable in the region. In the case of both countries, this stems from the weak position of the sovereigns, which makes it harder for them to offer meaningful support to their banks, even if their desire to do so hasn’t really changed.

“There is a strong track record of sovereign support in [the GCC] countries,” says Redmond Ramsdale, a director at Fitch Ratings. “We don’t see any change in the sovereign willingness to support banks. However, clearly ability has changed or is changing.”

Signs of a slowdown are also starting to become apparent in Saudi Arabia, where loan growth has decelerated this year. According to Fitch, total loans were up by an annualised 10 per cent in the first half of this year, compared to 17 per cent for the first half of 2014. Fitch says it expects credit demand to hold steady at these lower levels for the rest of this year and then to decline again next year.

In early September, Fitch revised the outlook on four large Saudi lenders, Al Rajhi Bank, National Commercial Bank, Riyad Bank and Samba Financial Group, from stable to negative, following a similar adjustment of its rating for the Saudi government.

“We are starting to see the beginnings of pressure on the Saudi banks from this tougher operating environment,” says Ramsdale. “We’re seeing a slowdown in growth rates. This could start to reflect in some deterioration over the next 18 months in sectors such as contracting and construction [and it] could filter down into retail segments. The slower loan growth could impact on profitability improvements. However, we do expect banks to find some efficiency [gains] over the next two years to compensate.”

This analysis of the Saudi banking sector is one that is broadly shared by the IMF. In a report on the country’s economy released in September, the IMF warned that non-performing loan rates in Saudi Arabia are likely to rise in the current tougher environment. Sectors that it thinks look particularly vulnerable include construction, commerce, and manufacturing, which account for 40 per cent of total bank lending in Saudi Arabia and where activity is closely linked to the oil cycle. The IMF also noted that deposit growth has been slowing, from an expansion of 13.5 per cent last year to 10 per cent by May this year.

The UAE is also feeling the effects. In April Standard & Poor’s revised its assessment of the economic risk trend for the UAE banking system to stable from positive, saying that it believed the cycle of improving asset quality and declining credit losses for banks in the country had come to an end.

The risks surrounding higher interest rates are a further potential source of trouble for the region’s banks. There has been speculation for some time that the US central bank, the Federal Reserve, is preparing to increase its rates. That rise failed to materialise in September as some had expected, but it will inevitably happen at some point. Given the pegs that the Gulf currencies have to the dollar, the authorities in the region would almost certainly be forced to follow with rate rises of their own if and when the Fed takes such action.

London-based Capital Economics is forecasting that the Federal funds rate will be 2.25-2.50 by the end of next year, up from 0-0.25 per cent at present. Jason Tuvey, Middle East economist at the firm, says that will lead to slower credit growth across the Gulf as corporate and household borrowing costs begin to rise. “Government borrowing costs are also likely to increase, a concern for countries such as Saudi Arabia, which are just starting to issue debt in order to finance large budget deficits,” he says.

In May, the Saudi Arabian Monetary Agency (SAMA), the country’s central bank, issued a report in which it warned that a one per cent rise in the local interbank rate, known as SIBOR, would lead to a fall in GDP growth rates and declines in the levels of investment and consumer loans.

However, any concerns over interest rates are secondary to the issue of just how long oil prices stay low and the extent to which governments are willing and able to maintain spending levels in the face of reduced revenues. “The onset of rate hikes by the US Federal Reserve provides another reason to expect growth in the Gulf to slow in the coming years. However, low oil prices pose a much greater threat to the outlook,” says Tuvey.

For all the troubles, however, banks in the region are reasonably well positioned to weather the storm. Most are well capitalised and provisions for non-performing loans are often high. As yet, there has not been much sign of government deposits being withdrawn from the banking systems and asset quality is still strong, according to Ramsdale.

“Overall, GCC banks have strong capital and liquidity buffers, which act as mitigants to rating downgrades. The buffers will be pressured over time but we think that they’re strong enough to withstand it certainly over the next 18 months to two-year time horizon,” he says.

For now at least, it seems that enough lessons have been learnt from previous downturns. “All in all, we believe Gulf banks are generally well-positioned to face the emerging risks of the gradual turnaround in operating conditions,” says Timucin Engin, a credit analyst at Standard & Poor’s.

Making its marque

Published in The Gulf, 1 September 2015

Iran’s automotive sector should be one of the big winners from the deal to lift sanctions, but some Chinese brands could find themselves out of favour.

Iran’s car industry looks set for a brighter future, just as soon as international sanctions are removed. But even as it prepares for growth, the sector is having to deal with some short-term problems that seem to be getting worse rather than better as a result of the deal to lift the trade embargo.

The automotive sector has been one of the hardest hit by sanctions, and western car firms have largely deserted the country, particularly after the embargo was tightened in 2012. That left the two local giants, Iran Khodro Industrial Group and Saipa, to battle it out for market share against Asian brands, most notably from China and South Korea.

With the prospect of the country opening up to western marques once again, the car market is set for another big change. According to observers in Iran, consumers are already reacting by putting off new purchases while they wait for some of the big international manufacturers to start selling their cars in the Islamic Republic once more. That is putting pressure on firms already in the market, who are suffering from falling sales.

“Consumers are waiting to see what happens with the sanctions,” says Mahdi Seifollahi, director of global market development at Mofid Securities in Tehran. “Automobile manufacturers are having a real problem trying to sell their products because everybody is just waiting to see if European car companies will start to sell their products directly in Iran and if the prices are going to go down. People want to see what is going to happen in the future so nobody is doing anything at the moment.”

The biggest losers from the shake-up are likely to be Chinese manufacturers. Local media reports suggest that the Chinese firms such as Chery are already losing market share. Other Chinese manufacturers with a sizeable presence in the market include Lifan, Geely, JAC Motors, and Great Wall Motors. They have all been steadily building up their sales over recent years, but they could now find things far more difficult.

“Chinese cars may seem attractive because of their reasonable prices but they cannot compete at all with European cars in terms of quality and technical features,” said Hashem Yekke Zare, chief executive of Iran’s largest car manufacturer, Iran Khodro, in July. “We need to adopt a new approach towards quality, price and services of our products.”

Iran Khodro and Saipa are not immune from concerns among local consumers about quality and reliability. However, their dominant position in the market, aligned with the enthusiasm of international car brands to re-enter Iran, puts them in a strong position to strike lucrative production and distribution deals. Of the two, Iran Khodro seems to be the more active at the moment. “Several companies have expressed their willingness to cooperate with us. So we can choose a strong and reliable partner,” said Yekke Zare.

Iran Khodro is due to sign a deal with Germany’s Mercedes-Benz to produce commercial vehicles including pick-ups, trucks and buses. The German company is also expected to buy a minority stake in Tabriz-based Iranian Diesel Engine Manufacturing, an Iran Khodro affiliate.

Iran Khodro is also reviving its ties with France’s Peugeot in a deal which will include manufacturing vehicles for export to other markets, and is also working with another French firm, Renault, as well as Japan’s Suzuki. Other foreign marques which have been linked with moves into Iran include Skoda, the Czech brand that forms part of the VW Group.

Some of the companies returning to the market may find that they have to pay for the privilege. Reports in the local media suggest that Iran Khodro has sought compensation from both Mercedes-Benz and Peugeot for the abrupt way they left the country in the past. The French firm said in 2012 that it left Iran to comply with international sanctions that had made it impossible to finance Iran-bound sales.

There may be other problems for the French brands, which have historically been the biggest sellers in Iran because of their production deals with Iran Khodro and Saipa. They could now find that their brand image is diminished in the eyes of consumers looking for something new. A recent survey of more than 70,000 Iranians found that 64 per cent of Iranians preferred German cars, and 17 per cent cited their first choice as Japanese. In contrast only seven per cent named South Korean cars, six per cent said French and just under six per cent said they preferred Chinese vehicles.

Such findings are unlikely to dissuade any company from entering the market in the short-term. The reason for all the activity and enthusiasm surrounding the Iranian car market is understandable given its size and the potential for growth in the years ahead.

According to the International Organisation of Motor Vehicle Manufacturers (OICA), 1.1 million cars were sold in Iran in 2014, making it the 12th largest market in the world and easily the largest in the Middle East region.

Not all those cars were produced in Iran, with some 100,000 being imported. Prior to the deal to remove sanctions, the Iranian car industry had been showing signs of strain, with falling output and a shortage of capital. According to Business Monitor International, production levels fell from 1.6 million vehicles in 2011 to 989,000 in 2012. Overall sales fell from 1.4 million vehicles in 2011 to 650,000 in 2013, before starting to pick up again in 2014.

The situation should now improve and production levels should rise again in the years ahead. In the longer-term, Iran could become a more significant exporter of cars, too. The government has set a target of one million car exports by 2025. The mooted deal between Peugeot and Iran Khodro involves exporting around 30 per cent of production. Iran Khodro has also recently set up a new company to expand co-operation between domestic spare parts suppliers and their international counterparts. The company, Avrand Plastic Company, will target international markets.

Overseas production is also another area of potential growth for the Iranian firms. Saipa already has production sites in Syria, Venezuela, Iraq and Sudan. Iran Khodro also has a production facility in Iraq and recently floated the idea of establishing one in Oman too.

But while the sector as a whole looks set for expansion, there will clearly be winners and losers in the short-term.

Dubai pursues smart grids

Published in MEED, 24 August 2015

Some smart city ideas can seem futuristic and improbable, but the first steps are already being taken around the region in the prosaic world of electricity networks.

US consultancy Northeast Group reckons $17bn will be invested in ‘smart grid’ systems around the region in the next 10 years, in areas such as smart metering, home energy management and battery storage. “Most of the near-term investment will be in GCC countries,” says Chris Testa, research director at the firm. “Countries such as Egypt will make up a larger share of investment, beginning in the early-to-mid-2020s”

Among those pushing ahead is Dubai Water & Electricity Authority (Dewa). In 2014, it announced a three-pronged effort to modernise its network and promote energy efficiency.

The first initiative is to install solar panels on buildings around the emirate. The electricity generated will be used onsite, with any surplus exported to the network. The second element involves the installation of smart meters, which allow customers to easily monitor their consumption and, it is hoped, reduce their electricity use and cut their bills. The third element is to install electric vehicle charging stations around Dubai.

Of the three, it is smart metering that will affect most people first. Dewa plans to install 200,000 devices by January 2016. More than 1 million should be in place by 2020. That could, in turn, open the way for other smart city services down the line.

“Most smart grid investment begins with smart metering. It allows utilities to gain the real-time data that is necessary for many other functions of a smart grid,” says Testa.

“A communications network implemented for smart electricity metering or distribution automation can in some cases also be used for other smart city applications such as smart street lighting, smart traffic controls, or smart water and gas metering. Smart grids also create millions of data points that cities can analyse to improve operations citywide.”