Global Banking &
“Finance” has been a core discipline in your life, as a student who studied finance in the late 70s, to a seasoned Professor of Finance since the 90s and a practitioner with a whole career spanning over 3 decades in the financial industry, how do you see the state of the industry back and then?
If I may reflect back and examine the financial industry across the last 3 decades, I think most financiers in my generation would agree that the industry is changing from focusing mainly on the return on equity to focusing on both qualitative and quantitative dimensions beyond numbers. To say the least, you can hardly sustain the same level of growth if you continue with the same business models or the “banking as usual” mode.
We have a dilemma that textbook finance does not comprehensively address real world challenges. Concurrently our real world day-to-day practices do not accommodate the constantly evolving pressures and trends. We have been taught to measure the return on equity and target profit, the single bottom line. Now we are requested to target the triple bottom line. So yes, the financial industry in terms of theory and practice is outdated.
In your opinion, what are the contributing factors that led to this situation? Could the financial crisis be the reason behind this situation?
As a finance veteran, it has always come as a surprise how financial markets never fail to have a crisis almost every decade. Black Mondays, Black Tuesdays, Latin American Debt Crisis, South East Asia crisis, and Saving & Thrifty crisis…etc. It is an industry plagued with crises.
The 2008 financial crisis is a shattering moment that has shaken the foundations of mainstream banking. Notwithstanding the fact that it destabilized the industry to the core, it is more of a symptom of the industry’s falloff rather than a root cause. It is more of an alarming sign urging the financial industry to pause and reconsider its assumptions and its relationship to the whole ecosystem.
What is more compelling is the rise of major developments known as “Megatrends” that are bound to change business fundamentals. Thus apart from the 2008 global financial crisis, the industry has ever since been encountering serious developments that are constantly putting pressures.
For example, the concept of “Sustainability” – a rising trend – has gained traction and is urging governments all over the world to pursue inclusive growth or sustainable development. What is this telling the financial industry? It is testifying that the grand design was originally not made with the poor and the environment in mind. Suddenly, there is social and environmental risk on the rise urging the revision of mainstream risk management. Banks are in need to run re-evaluation of all types of risks and update them to avoid future crises since the banking risks are no longer the traditional ones we used to know including credit risk, market risk and operational risk.
Sustainability is also telling us that we have to develop new business models to address financial inclusion, funding of SMEs and entrepreneurs as well clean energy, waste recycling and energy efficiency. All this requires conceiving new systems, structures, policies and capacity building techniques.
Shadow banking is another case in point. Informal economies are a tantalizing development. The fact that formal economies failed to accommodate low-income disenfranchised segments left a big amount of wealth outside the financial system. How to get it inside remains to be rethought.
Technology is another megatrend; from “big data” that impact product design to Fintech to Crypto Currencies, these are all rising modalities that urge prompt revision within the industry. IT fraud and electronic crimes remain to be added to the operational risk of banks.
Also topping the list is facing evolving international regulatory and compliance requirements including new risk management techniques and capital adequacy requirements in addition to tighter banking supervision. Compliance cost, data reporting, and necessary IT infrastructure are becoming additional costly mandates. Basle III will add further capital and supervision requirements that will put pressures on banks’ profitability and trigger the risk –return trade- offs.
Banks cannot sustain their profitability unless they undergo a fundamental revision. Every new development is testifying that it is no longer “Banking as Usual”. Many financiers acknowledge this but still few act upon it.
It is important to note that the new trends are destabilizing but not necessarily threatening; if well understood and preempted they could well lead to the revival of the industry and with it create a new round of balanced growth. It is time to take a step back and rethink.
What type of rethinking is necessary if “finance” is to evolve? Which opportunities and challenges does finance bring?
The rethinking is towards bonding with the whole ecosystem not just shareholders; towards creating value rather than only making profit. The nub is to rethink the role of the financial industry in the economy and the society at large. Agile financial institutions can take advantage of the transition, but it is not easy to adapt and evolve. The main issue is how to create value in non-monetary terms and how would this be reflected on banks’ financials. An issue we need to address to enable the transformation.
Egypt has recently been witnessing remarkable economic growth, tell us about its highlights
GDP growth rate reached around 5% in the current fiscal year 2017/18 compared to 4.2% and 3.5% in 2016/2017 and 2015/16 respectively. Also, inflation is taking a downward spiral since its peak in July 2017 reaching 33%, it recorded 17% in January 2018 and is poised to go lower. Foreign exchange reserves hit a record high of USD 42.5BN in February 2018 exceeding the figure recorded before January 2011, and is now covering 8 months of imports. Tourism receipts remarkably surged by 256% in Q1 2017/18 to record USD 2.7BN up from USD 0.8BN a year earlier. In addition, according to the Ministry of Planning (MoP), the construction sector, manufacturing and the extractions sectors grew by 10.7%, 10% and 14% in Q2 2017/18 respectively.
In your view, what are the main drivers of economic growth right now in Egypt?
Current economic growth in Egypt is the function of taking bold and effective reform and regulatory measures on several parallel tracks in a timely manner. This is happening despite the presence of massive challenges. Here, it is important to raise the resilience of the Egyptian economy and its capacity to reboot, when decisions are made right.
Egypt’s successful reform program has played a critical role in stabilizing the economy through liberalization of the exchange rate regime and fiscal consolidation measures, which assertively restored the competitiveness of the economy and encouraged private sector activity, projecting higher investments and job creation in the medium and long term.
Equally important, the Central Bank of Egypt’s (CBE) exchange rate reform has proven to be a “turning point for the economy,” increasing macroeconomic stability and removing most currency restrictions that were earlier replaced to end a chronic dollar shortage that earlier crippled the economy and intimidated investors. Credit rating agencies have applauded the measures and have upgraded the financial outlook to “positive”.
In parallel, the GoE has already commenced a structured approach to overhaul the investment climate believing that a dynamic and strong private sector is an essential prerequisite for growth transformations. The modernized regulatory framework is working its way to alleviate the key bottlenecks that impeded the growth in a relatively short time and create a level playing field for all investors, enhanced competition, greater trade integration, and complete removal of trade barriers along with improved access to finance and land. The government successfully introduced several legislative and regulatory reforms such as the introduction of VAT, Civil Service Law, in addition to investments, and industrial licensing, all of which are likely to boost investment in the approaching period. Recently, the parliament has approved Egypt’s first Bankruptcy Law, the latest in structural developments in the GoE business legal framework and is part of the overall reform efforts to facilitate a healthy business environment for foreign and domestic investors, as well as, local small and medium enterprises as the process of unwinding insolvent companies becomes easier.
In addition, the amendments made to the Capital Markets Law introduce new financial instruments including Sukuks, protect rights of minority shareholders, and lower securities registration fees to encourage SMEs. Broadly speaking, macroeconomic stabilization provides a solid basis for broadening the scope of structural reforms to attract investments, raise the growth potential, and create employment opportunities.
How does the Egyptian government determination to proceed with huge infrastructure projects and huge budget commitments fit in the growth scenario?
Parallel to these structural reforms, economic growth is propelled by ambitious and unconventional Mega Infrastructure Projects that are being implemented with a high degree of dynamism. It is remarkable that these mega-projects run across the whole of Egypt – rather than being Cairo centric- and well leverage its geopolitics and natural resource richness. Some view this as burdensome and should not be addressed at this point of time because they are not Egypt’s priority. In my opinion, they represent the structural base for further sustained inclusive economic growth on the medium and long term. These mega projects will significantly boost job creation.
As a case in point, the headline act for 2018 will be the opening of the Zohr gas field that will help to place Egypt in the league of world’s major energy producers. Also, plans are underway to construct the largest Solar Park in the world in the city of Benban in Upper Egypt. This project will help Egypt tap into its massive potential for solar energy and scale back its use of expensive—and polluting—fossil fuels. The Suez Canal development project aims towards upgrading the infrastructural and industrial capabilities of cities like Port Said, Ismailia, Suez, Ain Sokhna, and Al Tor City in Sinai.
The GoE’s strategy extends to develop the country’s impoverished south along the Red Sea coastline. Golden Triangle is a continuation of a plan that goes further south to cities like Marsa Alam, Safaga, and Qoseir. As the government tries to revive its tourism sector, the cities south of Ain Sokhna all the way down to Marsa Alam can become major tourist destinations. As a new economic zone, envisaging USD 18BN in investments, with the first phase accounting for USD 5.5BN, three-quarters of it private. Infrastructure and utilities projects have been charted out, including a logistics hub to be built behind Safaga Port.
Lately, an agreement was signed between Dubai Ports Worldwide and the Suez Canal Authority to launch the first phase of a marine terminal in Ain Sokna over an area of 30KM which will integrate with Jebel Ali free zone.
Although ambitious and successful, these measures remain within the mainstream. Do you detect any evolution or progressive strides in the Egyptian financial industry over the past period?
Absolutely. Parallel to these impactful structural and regulatory reforms, the financial industry has been experiencing a subtle but a deeply founded overhaul. There is a growing tendency to bring the industry closer to its ecosystem, being more responsive to the needs of the masses, and more focused on inclusive growth and the sustainable development of the country. The financial industry has witnessed a series of regulations that urge the banks to address Financial Inclusion. In my opinion, this counts as a second reform. The first successful round of banking reform (2004-2010) that addressed non-performing loans, consolidated the sector and ensured a competent and solid financial sector that well weathered the global financial crisis and 2 revolutions erupting within couple of years 2011/2013. Now the Egyptian financial industry is experiencing a well-spelled evolution that is felt across several fronts.
The Central Bank of Egypt (CBE) – with the support of the Egyptian government- has ushered a national commitment towards Financial Inclusion. Egypt’s current socio-economic challenges urge addressing SMEs to rebuild and reinforce this vital base. SMEs account for around 80% of GDP and 75% of employment. Today, the number of MSMEs in Egypt exceed 7M with a credit gap of USD 10BN. Currently financial institutions are urged to provide loans to small and medium businesses; new regulations mandate all banks in Egypt to give out 20% of their total loans to SMEs, with 5% interest rate.
In tandem, Egypt has been committed to become a Cashless Society. Regulations have been made in 2016 to launch the mobile payment system, another milestone towards the evolution of the financial industry in Egypt bringing it closer to the populace. Expanding mobile payments will be instrumental in advancing financial inclusion. Mobiles are widely spread in Egypt with a penetration rate 103%, one of the highest in the world. Having a mobile payment platform will revolutionize the industry and further deepen its role in achieving inclusive growth. This national determination has found expression in the establishment of the National Payment Council personally presided by the Egyptian President.
The dynamic evolution of the financial industry in Egypt is one of high pace. It is challenging banks to cope and revise policies and practices. But it is definitely healthy.
How Does AAIB fit in this dynamic landscape?
There is a seamless fit. AAIB’s distinction lies in its dual feature; a legacy of solid corporate and investment banking tradition that spans over half a century coupled with a progressive and innovative drive. AAIB has a record of accomplishments as an industry trendsetter. Along this spectrum, we have been committed to meaningful and impactful business to help create value to all stakeholders. The bank’s human resources are agile, proactive, and well trained to read the future and move ahead. The current economic dynamism in Egypt certainly avails a precious opportunity for the bank to sustain its growth and contribute to the economic growth of both Egypt and the region.
In what ways does AAIB’s investment banking expertise assist international businesses interested in investing in Egypt? What are AAIB’s plans for continued growth, investment and further strengthening the foundations of the bank?
AAIB has solid credentials as an investment and corporate bank leveraging a comprehensive financial platform to support its international clients with integrated solutions. The bank has both commercial and investment arms and is fully equipped to act as a trusted advisor providing complex solutions that sharply address our clients’ specific needs and challenges. We guide clients to grow in the right direction.
Another advantage is leveraging a financial group providing consolidated investment and financial services including asset management, brokerage, leasing and mortgage finance. Along with our strong regional presence, we are right on track maintaining our distinction and realizing our vision to become the gateway of international business into the region.
There is much AAIB can do to build on current economic growth especially that we already have a strong client base in emerging Gulf markets including Saudi Arabia, Kuwait, Bahrain, Oman and Qatar.
There are huge prospects for our business progress especially that Egypt expects private investments to take the chief role in driving economic growth this year. Private investments are projected to contribute 60% of economic growth in the current fiscal year, compared to 48% last year. FDIs are also projected to respond positively as well by increasing significantly over the medium term due to the higher certainty and clarity regarding the foreign exchange policy paired with the new Investment Law and the CBE’s decision to lower interest rates. FDI inflows reached $8.7BN during the 2016- 2017 fiscal year, up 26% when compared to the $6.9BN in the previous fiscal year.
How is AAIB helping support SME’s and their growth?
The bank has been a forerunner in developing its business to attend social and environmental dimensions. Despite our tradition focus on large corporates, AAIB has been agile in expanding its client base, moving to the Middle Market segment for loan portfolio diversification and the base for creating new revenue streams and uncontested segments.
Moreover, the bank will be further downscaling by tapping the bottom of the economic pyramid. AAIB aims to serve the micro entrepreneurs segment through a dedicated Micro Finance subsidiary, Sandah, in partnership with excellent partners- KfW GmbH and Sanad Fund respectively. Effectively speaking, Sandah will start operations this April 2018. Sandah is planning to leverage on its wide branch capillarity, advanced digital capabilities, and its human resources, which are trained to address the growing needs of its diverse client base.
AAIB has its fingerprint in boosting Egypt’s economy especially in Energy sector and Renewables. The bank has succeeded in financing the World largest Solar Park in Egypt in its first stage in Benban city in Aswan.
How has technology and the move to cashless society transaction impacted the way you do business?
With increased adoption of digital channels, the role of the branch is undergoing a change from a transaction-based entity to customer advisory one, which will significantly curb operational overheads.
As we speak, AAIB is currently upgrading its Core Banking System and replacing its legacy systems to drive agility and efficiency to its clientele. Forward looking, the adoption of financial technology applications (Fintech) and Mobile Banking will allow customers to transfer money without the need to go to channels.
Which unique products and services were created as a direct response to the needs and desires of the clients?
AAIB has a reputation among its clients of its proven ability to innovate and customize products. The bank boosts distinguished calibers who are well groomed to provide tailor- made solutions customized to our clients’ needs across different sectors. Our corporate portfolio services include mergers and acquisitions, advising on equity placements, feasibility studies, valuations, escrow arrangements, agency services and raising finance through syndicated loan market. In addition, AAIB has a leading role in the debt capital market products such as securitization bonds and corporate bonds that assist in promoting various instruments and diversifying the Egyptian market’s sources of finance.
But I always say product distinction does not last as they get replicated easily. The true distinction materializes at the relationship level and this is very proprietary and cannot be replicated easy.
Still our edge lies in the “powerful synergies” that are inherent in the bank’s lines of business, locally and regionally as a Financial Group and corporate legacy of distinguished performance and international exposure for over 50 years. Moreover, the Gulf region provides a solid geographical base for expanding in investment services, especially that AAIB is the first private sector bank to establish presence in the Gulf region (Dubai, Abu Dhabi) in the early 1970s. AAIB is a true partner to its clients. We never let go during times of uncertainty.
AAIB is known for its strong commitment to Sustainable Finance. Can you tell us more about it?
AAIB has been a forerunner in rethinking finance. We have realized the inherent connection between economic growth and social, environmental and governance concerns early on since 2003. The starting point was our commitment to achieve growth, so we started a decade ago but it is a tedious process.
Ever since, we have been committed to advance sustainable finance in Egypt and the region. We have constantly been endeavoring to ensure that our business integrate the ESG into its operations. This entailed several measures to revise our business to include environmental and social dimensions. AAIB has been the first in Egypt to join the UN Global Compact in 2005 and the Equator Principles in 2009 to become the first bank to introduce social and environmental risk management in its credit operations. The bank also joined the UNEP FI in 2017. We have also been a forerunner in issuing our Sustainability Report based on the GRI guidelines.
We are also committed to become a driving force to create an industry move on both the regional and global level towards enacting sustainable finance. Our ambition goes beyond the bank to advance an industry movement within the Egyptian banking sector and that of the region towards sustainable finance by launching MOSTADAM; the first platform in Egypt and the MENA region to enact and promote sustainable finance through capacity building, policy advocacy, and promoting sustainable products and services. MOSTADAM is a joint effort between AAIB, the United Nations Development Program, and the Egyptian Corporate Responsibility Center. To date MOSTADAM, has secured the engagement of 60% of the Egyptian financial sector. In 2016, it achieved a partnership with Frankfurt School of Finance and Management to provide two certified programs in SMEs Finance as well Climate and Renewable Energy Finance grooming a new generation of bankers with a new mindset capable of achieving balanced growth.
It is redeeming to see our consistent efforts bearing fruit on the industry level. It feels good to witness the transformation of the Egyptian financial industry driven by all stakeholders.