Jehad Al Humaidhi graduated from the Kuwait University in Mathematics and Economics. After graduation, she joined the IT programming team at Ahli United Bank (previously known as Bank of Kuwait and the Middle East). She has been fundamental in developing systems, databases, and other advanced technology for the bank over many years. While helping the bank develop advanced technology capabilities throughout her career, she has also taken up major managerial roles, particularly since 2011.

In 2011, she assumed the responsibilities of the technology, central operations, and administration hub before becoming the deputy chief executive of the bank for the entire technology and support functions in 2018.   Jehad Al Humaidhi has vast experience in both conventional and Islamic banking as well as board-level experience in key technology boards of directors in Kuwait including the boards of K-Net, Ci-Net and Gulf Custody Companies.  

International Finance: Ahli United Bank reported a 15 percent growth in net profit in 2018. Being part of the Kuwait banking industry, what are the drivers of growth for Ahli United Bank?

Jehad Al Humaidhi: The bank’s performance in 2018 came in line with the strategic direction, confirming its ability to produce sustainable growth and sound financial and credit standing, despite the political and economic instability in many parts of the world. The bank is inspired to provide innovative products and services and sustainable returns balanced with high discipline, risk management and cost control. The bank keeps a firm grip on both liquidity and equity values. This commitment reinforced our leading position in the market.

For the 12 months ending on December 31, 2018, Ahli United Bank reported a year of strong growth with net profits of KD51.3 million derived from the core business, a rise of 15.3 percent on the KD 44.5 million achieved in 2017. Net operating income has increased by 3.3 percent reaching KD84.4 million as opposed to KD81.7 million in 2017. The bank has enhanced its provisions coverage by adding more provisions as they might be required to ensure a higher quality of financial books and a loss absorber buffer.

The increase in operating income underscores the strength of the bank’s business model focusing on corporate banking, retail banking, private banking, and treasury, all conducted within an effective risk and control framework. The return on average equity (ROAE) and return on average assets (ROAA) of 14 percent and 1.4 percent, respectively, continue to be among the best in the market.

In line with the bank’s eagerness to meet customer expectations, we have used technology to make significant strides in achieving our customer experience milestones in 2018. By upgrading our technology and online banking applications, we have delivered state-of-the-art mobile and online channels in the region. With the opening of our fully digitised branch in Avenues Mall in Kuwait in 2018, the bank is taking a major step toward fintech innovation for a new a new era of seamless operations and hassle-free banking.

Global economic fluctuations can impact Kuwait’s revenue. Against this background, have the repercussions of these factors affected Ahli United Bank’s performance? And what has been the subsequent effect on the banking industry?

Jehad Al Humaidhi: Kuwait is an active player in the world economy, particularly in the area of hydrocarbons production, being a member of the OPEC. We always face challenges as business is underpinned by an economy that has a large share of its GDP coming from hydrocarbon sales. The state of Kuwait, by having one of the largest sovereign and savings funds in the world, manages to provide a reasonable buffer to absorb those temporary fluctuations with the help of a stable, balanced, and peaceful political landscape as well as balanced diplomatic relationships with other nations. Similarly, the fluctuations in the US and global interest rates also have limited impact on Kuwait because of prudent monetary policies that are also flexible with a currency pegged to a basket of currencies all operating under strict supervision of the authorities and Central Bank of Kuwait (CBK). Ahli United Bank, and Kuwait banks in general, remain profitable, well capitalised, and liquid.

What were the significant roadblocks encountered while achieving a robust performance last year? How were they addressed?

Jehad Al Humaidhi: The bank generally did not face real roadblocks in 2018, but only a few challenges. Our research capabilities and professional executive teams usually provide insights about the expected market movements and changes ahead of time.

One of the top challenges concerns cybersecurity, with the number of attacks rising worldwide even against institutions that are known to maintain higher security standards. Ahli United Bank has addressed these challenges through further investments and allocation of capital to strengthen our systems in collaboration with the Ahli United Bank Group. A dedicated team that works around the clock is monitoring the networks and analysing portal activities. We conduct training sessions not only for employees but also for customers through our social media and online channels. Ahli United Bank always disseminates alerts through tellers, ATMs, and digital channels to create awareness among dealers and customers.

Another challenge has been the compliance layer and the increasing cost of compliance. The bank has addressed the challenge by automating all main anti-money laundering (AML) functions and by closely monitoring customer behaviours with an end-to-end enhancement of its related procedural manuals. All activities are being supervised closely by the respective Audit and Compliance Board Committee of the bank.

With inflation hitting the market due to higher utility bills and the gradual reduction of the government subsidies for the sake of economic reforms, Ahli United Bank has taken solid steps to cut unnecessary costs, streamline a number of processes, and automate others. We involved employees in initiatives to create awareness on energy savings and cost optimisation, which eventually resulted in Ahli United Bank having a cost-to-income ratio that is among the best in the market.

What drives Ahli United Bank’s decision making and how is the swift adoption of digital technologies accelerating the transformation of your customer experience?

Jehad Al Humaidhi: The board of directors at Ahli United Bank provides a more than adequate and updated vision for the bank in general. The strategy is reviewed by the executive management whereby the commitment is created and tightened up with strict budgets. The strategy clearly defines time-to-the market with robust project plans and steering teams turning the plan to reality, while constantly measuring performance.

With the overall global move towards digital transformation, we have identified opportunities and potential systems, and introduced products, services, and processes in a number of projects.

Successful digital transformation efforts always start with a clear understanding of the strategy, current and future state operating models, and risk appetite. Organisations need to decide whether they are disrupting the market and leading digital transformation, or whether they seek to play a waiting game, monitoring the competitive landscape and reacting as needed to defend market share. Leaders then must consider the impact on people, including how easily they can adapt the culture of the organisation and behaviour of individual employees to new approaches and how customer interactions will change for the better. Ahli United Bank Kuwait has taken the lead and we have decided to create a digital forum which will realise several digital projects, then enrich the customer experience, save costs, and speed up the time to market.

What are your views on the domestic capital markets? What are the necessary efforts required by policy makers to enhance it and currently how are policy makers changing the course of the country’s capital markets?

Jehad Al Humaidhi: Boursa Kuwait’s had numerous achievements to its credit in 2018 that were in line with Kuwait’s State Vision 2035 and mainly focused on turning the country into a regional and, possibly, a global centre of commerce and finance.

The bourse embarked this year on a path that prioritised international standards of operations that were aimed at attracting foreign capital and investments. One of the chief highlights was the Standard and Poor’s (S&P) rating, which affirmed Kuwait’s AA/A-1+ long and short-term foreign and local currency sovereign credit ratings, with stable economic outlook.

Boursa Kuwait is also being upgraded to an ‘emerging’ market, starting from September 23, 2018. Also among the achievements was the Morgan Stanley Capital International’s (MSCI) intention to include the Kuwait Index in its 2019 annual market classification review for a potential reclassification from frontier market to emerging market status. Locally, the Boursa Kuwait has reclassified its indices to include three major indices: the Main Market Index, the Premier Index, and the All Share Index to emulate the stock exchange processes at global markets.

The new classification aims to bolster transparency as well as increase liquidity and the number of shares traded. Boursa Kuwait also launched the over the counter market (OTC) back in November 2018. The fresh market aims to create a transparent environment by bringing buyers and sellers together using fully supervised mechanisms.

To derive the benefits of well-functioning markets, adequate and well-defined regulations for issuers, investors, and intermediaries are critical. The markets require robust supervisory arrangements on an ongoing basis to protect investors from market manipulation and to manage systemic risks. Such a framework in turn needs to be anchored in a good investment climate that includes a sound corporate governance framework, reliable and quality accounting, creditor rights, property rights, and bankruptcy and competition law. Finally, markets need advanced infrastructure, exchanges, trading platforms, clearing houses, and custodians all working toward supporting market activities and investors relations.

Kuwait is more typically known as a source of investment rather than a destination due to the size of its sovereign wealth fund, but the government aims to reverse this trend by attracting more foreign direct investment as a key economic diversification tool outlined in Kuwait Vision 2035. The FDI focus is on high-quality direct investments since the country is not desperate for capital, but looking forward for added value, innovation, and transformation of the economy.

It seems Kuwait stocks had outperformed most of their peers in the region last year. This means, the domestic stock market might capture the interest of international investors. How do you see this opportunity as a good fit to boost liquidity?

Jehad Al Humaidhi: Inclusion of the Kuwait market in an emerging market benchmark and an improvement in oil prices have helped Kuwaiti stocks outperform their regional peers in the past few months although trading continues at a lower level than is deemed desirable. This emerging market accession signifies the growing investor confidence in the Kuwaiti market as well as the rapid and successful implementation of reforms and wide-ranging developments that have enhanced international investors access to the Kuwait Stock Exchange. The inclusion is expected to lead to a significant inflow in foreign investment, which will boost liquidity in the domestic capital market and contribute to more balanced market conditions and stability.

Kuwait is a prosperous country, largely financed by its oil revenues. How do you foresee its economic expansion in the next five years?

Jehad Al Humaidhi: Kuwait’s public and external balance sheets will remain strong over the next two years, primarily underpinned by sizeable foreign assets accumulated in the country’s sovereign wealth fund. Ample financial assets, low debt, and a sound banking sector allow Kuwait to undertake the needed reforms from a position of strength and at a measured pace. The national mission believes that the fiscal adjustment should be primarily expenditure-based, supported by non-oil revenue mobilisation.

The post Ahli United Bank: Using technology for leadership appeared first on International Finance.

While there is a lot of excitement around blockchain with regard to how blockchain can break down barriers, improve trust, and enhance traceability and transparency of transactions, a PWC survey notes that regulatory uncertainty is a key concern that mars the development of blockchain projects, followed by the lack of trust, and interoperability. Blockchain regulation is something that has seen a lot of knee-jerk reactions from governments in different parts of the world. Regulators worldwide have shown a mixed reaction to tokens and initial coin offerings (ICOs).

Malta along with Switzerland and Singapore has moved toward forming regulations on tokens to speed the growth of blockchain development. The US, on the other hand, has shown a typical agnostic approach to regulation, leaving it to the different states to come up with their own regulations. The official People’s Daily of China, called for the regulation of blockchain technology at the domestic level. The Chinese Communist Party’s official media, however, doubled down on the government’s commitment to harnessing the technology’s benefits.

With the haphazard manner of blockchain regulation, companies are left to guess how regulators in their jurisdictions will regulate commercial activities migrating to the blockchain. PwC advises blockchain entrepreneurs to keep abreast with regulatory developments and to engage with lawmakers at all levels. What if the government of a state itself took a proactive stance to blockchain regulation while keeping blockchain entrepreneurs in the loop?

That is what the Mediterranean island nation of Malta with its unique geographic position straddling Europe, the Middle East, and Africa has gone ahead and done, as it tries to position itself as the ‘Blockchain Island’. In the middle of last year, Malta became the first country in the world to provide an official set of regulations for blockchain, cryptocurrency, and distributed ledger technology companies. The goal was to provide companies the ability to work in a regulated environment.

The government understood the fact that serious entrepreneurs in the blockchain, cryptocurrency, and distributed ledger space needed legal certainty. In fact, the paranoia of operators in these sectors is that one or two years after they have set up operations and started growing their businesses, the ruling dispensations of the day might one day come up and tell them that their operations are not within the law.

Even though very few countries have legislated on blockchain technology, Malta wanted to gain a first-mover advantage by providing entrepreneurs the assurance of legal certainty. Malta became the first country in the world to offer a comprehensive DLT regulatory framework when parliament passed laws regulating the technologies in October. What’s unique about Malta’s laws are that they go beyond financial focused technologies and have a broad ambit while dealing with ICOs, cryptocurrency exchanges, and digital currencies.
Malta’s comprehensive laws
The first law is the Malta Digital Innovation Authority Act (MDIA). The MDIA establishes the Malta Digital Innovation Authority while also certifying the DLT platforms. The focus of this law is on internal governance arrangements and it outlines the duties and the responsibilities of the authority that will certify distributed ledger platforms. The goal of setting up the MDIA is to provide legal certainty and to improve the credibility of the operators who use the platform.

The second law, the Innovative Technology Arrangement Services Act (ITAS Act) involves the arrangement of DLT platforms and the certification of the platforms. The bill regulates cryptocurrency exchanges and other operators in the cryptocurrency market.

The third law, Virtual Financial Assets Act (VFA Act) regulates ICOs, cryptocurrency exchanges, and wallet services providers, among others. The law went into effect in October last year. It gave companies registered in Malta that seek to launch ICOs six months to comply with the laws. The government also gave cryptocurrency exchanges one year to comply with the law.

But does Malta as a destination for blockchain startups have a value proposition other than the regulatory environment? The government of Malta says that the Island nation’s overall value proposition is underpinned by a number of critical pull factors. In addition to the bespoke regulatory authority, MDIA, for distributed ledger platforms, the Malta Financial Services Authority also has a reputation for being meticulous and business-friendly.

In addition, Malta has a highly developed operational infrastructure to support innovative businesses highlighted by the presence of professional legal firms as well as a strong cluster of the top four and medium tier audit firms.

Malta’s Junior Minister for Financial Services, Digital Economy, and Innovation within the Office of the Prime Minister of Malta, Silvio Schembri, told International Finance: “Malta enjoys a highly stable political and economic environment. The sustained growth of the blockchain industry is being supported by investments in innovation that are planned for this sector just like those for the AI industry.  Our strong ICT infrastructure, which is 5G ready, ever-growing gaming industry, and strong financial services sector, a tech-savvy population – the huge human capital that lies in our talent base –  and our drive to be innovative act as solid foundations to deepen Malta’s first-mover advantage in the Blockchain sphere.”

Moreover, With the publication of the government consultation paper on the establishment of the Malta Digital Innovation Authority, the framework for the certification of distributed ledger technology platforms and related service providers and a Virtual Currency Act, Malta has made great strides towards making the country a leader in DLT regulation. “The three acts that are now in effect – the Virtual Financial Assets Act; the Malta Digital Innovation Authority Act and the Innovative Technology Arrangements and Services Act providing a holistic regulatory framework,” Schembri added. Malta did not stop there, and after a public consultation, the Malta Financial Services Authority published its fintech strategy based on six pillars: regulations, ecosystem, architecture, international links, knowledge, and security.

“The two elements of this strategy which appear to be most anticipated by stakeholders are the setting up of a regulatory sandbox, under pillar 1, and the establishment of an innovation hub, under pillar 3. The authority plans to issue a consultation document on each of the six pillars of the strategy, with that on pillar 1 expected to be published in the coming weeks,” Schmebri told International Finance.

Exante, a financial and technological company created by professional traders, with ten offices in Europe and Asia and more than 300 employees, is one of the innovative blockchain companies using Malta as a base. It claims to provide the greatest number of markets among brokers in Europe, and describes itself as the only one to offer cryptocurrencies since 2012.

With regard to Malta’ s advantages as a blockchain hub, Patrick O’Brien, Exante’s spokesman, told International Finance: “Malta’s advantageous geographical location, being within three hours direct flight from other European financial centres was partly the reason behind Exante’s choice to move to Malta. With an accessible, respected, and forward-looking regulator, we believe that the Island’s stable political arena was a perfect choice. Malta’s banking sector, composed of a combination of solid and reliable Maltese banks and major international banks, played a role in addition to the forward-thinking ability of our government in the blockchain and crypto space.”

Exante, on the whole, encourages blockchain-initiatives made by the government in Malta and is actively involved in their implementation. Having established a highly-profitable hedge-fund bitcoin fund a few years ago while closely cooperating with many bitcoin exchanges, the founders of the company have amassed a wealth of experience in this technology.  Exante shares its experience for carrying out other projects aimed at developing not only blockchain in Malta but other crypto technologies as well.  

Ana Bencic, the founder, and CEO of another blockchain startup based in Malta, NextHash, also speaks highly about the close interaction between blockchain entrepreneurs and the regulators in Malta. “Malta has already built up a sizeable crypto community that is bringing awareness about its blockchain prowess to the rest of the world.

Not only today but even more in the future, the entrepreneurial world will not be limited by jurisdiction but by the availability of a digital community and infrastructure. In Malta the blockchain community itself is very strong and, considering the size of the country, you can smoothly communicate with the regulator and your peers,” Bencic told International Finance.

NextHash, which trades under the brand Nexinter, is a digital asset platform. Nexinter is currently operating as a regulated crypto exchange in the European Union using Estonian licenses and the Maltese MFSA notification.  With regard to Malta’s approach to technology innovation, Bencic told International Finance, “Malta is keen to explore new evolving technologies and to deeply understand whether they will bring true innovation and sustainable growth. This is indeed an attractive environment for startups because of its agility and the infinite possibilities to extend their reach as well as the ability to comply with regulatory frameworks without major headaches.”

Challenges of scale
What are the challenges that Malta can face as it tries to position itself as a blockchain innovation hub? With Malta’s limited population and size, how will companies scale smoothly after a point?
“Malta has been one of the first jurisdictions to identify the opportunities associated with this new sector and has spearheaded the way in adopting a regulatory framework.   

Although the government has pitched the country as ‘Blockchain Island’, the challenges which lie ahead will be in retaining strong industry players who have or intend to relocate to Malta for purposes of making use of Malta’s regulatory framework,” says Exante’s O’Brien. Another question that arises is whether the Maltese immigration system will be flexible to allow growing companies to meet their talent needs by enabling smooth movement of talent from outside Malta.   The strong economic growth that Malta is currently experiencing has had a significant impact in reducing the level of unemployment in Malta and consequently the availability of labour.

 “Over these last few years, the economy has experienced an influx of foreign workers to support the growth in the various sectors of the economy including those in the blockchain space and related areas.  As a result, the government has reviewed the process to allow non-Europeans to work in Malta to improve the efficiency with which such applications are duly processed to ensure that these meet the requirements of the industry’” says Minister Schembri. 

Malta’s main aim with regard to talent is to attract the best talent from abroad while supporting its local talent resources and industries. “Since blockchain is a new industry, not just for us but for the world itself, bigger countries that are now looking at what Malta’s DLT legislation as a blueprint. As a government, we immediately sought to take the necessary actions to strengthen the existing skills and prepare future generations to pursue a career in this new emergent industry. In fact, very recently, 19 students were awarded scholarship grants to pursue their Master’s degree in DLT.

This was done through an investment of €160,000 and it is interesting to note that the background of these students is in diverse areas such as law, finance, business and management. Through this master’s programme we sought to fuse ‘stand-alone’ professions with a new emergent industry, an approach which is likely to mould such sectors as we know today,” added Schembri.

Yet another challenge that companies in the blockchain field faced in Malta according to a Times of Malta report in March was the resistance on part of banks with regard to opening accounts for crypto and blockchain companies. The paper reported that banks were declining these companies requests to open accounts claiming that such accounts were outside their ‘risk apetite’.

The companies, on the other hand, were complaining that the banks were not differentiating between cryptocurrency and blockchain even though the two were not always linked. With regard to the reluctance of banks to open accounts for crypto and blockchain companies, NextHash’s Bencic said, “This is indeed one of the problems that the industry is facing as a whole. It is still an overall problem to open a bank account in Malta for crypto-related companies.

Nevertheless, we deeply understand the challenge that banks are facing and we can disclose that we managed to obtain an account with the help of our policies and infrastructure. We still believe there is are some gaps between the regulator and the banks in Malta, as also elsewhere in EU and around the world. Nevertheless, we are confident that such gaps will shrink over time and Malta will be playing a leading role to make it possible.”

The Maltese government got itself involved to resolve the issue with Minister Schembri himself holding talks with banks and their stakeholders for a better understanding of the industry. The Malta Financial Services Authority (MFSA) and the Financial Intelligence Analysis Unit (FIAU) then jointly published a consultation document to provide guidance for credit institutions, payment providers and electronic money institutions that have the capacity to open accounts for entities using financial technology, according to the Malta Business Observer.

Malta’s government did not put a number on the blockchain investments that Malta has attracted. However, the government highlighted the fact that under the VFA Framework, the MFSA has registered 13 VFA agents and the authority has received notifications from a number of entities who are operating under the transitory provisions. The MDIA also approved three systems auditors for DLT projects. The government considers this an important milestone since VFA Agents and systems auditors will both assist authorities throughout the supervision and licensing process. It believes that this will ensure market stability, integrity, and consumer protection.

Packed summits
Blockchain conferences organised in Malta are well attended by industry delegates from all over the world. “It is interesting to note the level of participation in recent blockchain themed conferences in Malta. These conferences attracted more than 5000 delegates putting Malta as an attractive jurisdiction to a substantial number of operators in this space,” says Minister Schembri, highlighting the global interest in the Maltese blockchain sector.

Eman Pulis organises the Malta AI and Blockchain Summit, a successful forum that highlights Malta’s blockchain value proposition to the global technology community.

“The Maltese Islands have a lot to offer, particularly in terms of their location – such a central position makes us an ideal point of connection between markets in Africa and Europe. We also have other advantages, such as an English-speaking population and a favourable climate, with plenty of leisure opportunities, making Malta a great place to relocate to,” Pulis told the International Finance.

Besides providing companies and executives opportunities to network and do business in Malta, The Malta Blockchain Summit also works closely with initiatives such as Malta Enterprise. In November, the Malta AI and Blockchain Summit will also be launching Malta Week, which offers not one, but two shows. “We are inviting investors to come and explore what Malta has to offer in this show-packed week – and the synergy between the Malta AI and Blockchain Summit and the Medical Cannabiz Summit make it an excellent chance for a conversation on the myriad investment opportunities to be found when blockchain and medical cannabis cross paths,” added Pulis.

So how does the government visualise Malta’s blockchain sector’s growth in the coming years?
The government believes that the onset of the new legal and regulatory framework has established very strong foundations for the sector making its future bright.

 It says the plans for a regulatory sandbox, the development of a high-end incubation centre, and equally, the plans to attract venture capitalists and accelerators will further strengthen the development of the industry in Malta. In addition, the government believes these developments will strengthen the overall ecosystem and attract the service clusters that are an integral part of a development strategy set for this sector.

“We are on the right path and should continue to gain a strategic competitive advantage in the global economy as leaders in the field while attracting investments and positioning the country as a hub for the application of emerging technologies and their development,” said Minister Schembri.

Malta’ success in drawing further blockchain investments partly depends on how its competitors – both far and near – fare, especially with regard to the regulatory environment they offer. NextHash’s Bencic is optimistic that regulators will progressively better regulate the crypto sector. She also believes that going forward, regulations will be progressively harder and licences will become harder to obtain for new entrants.

“We are also curious and eager to observe how the current exchanges will adapt and survive in a progressive regulatory environment. Nevertheless, it is key not to mistake blockchain technology for crypto companies, where blockchain tech is the underlining technology behind the cryptocurrencies. We believe that companies developing just the blockchain technology and not dealing with financial instruments should be considered and regulated as regular technology companies.”

Exante’s O’Brien is of the opinion that blockchain’s future is bright in the sense that in the same manner in which email became a ‘killer app’ for the internet, identity solutions will be a ‘killer app’ for blockchain. “While many would still argue the applicability of Blockchain on a global level, they cannot ignore the paradigm shift felt throughout the world. In 2018 alone, more than € 2.1 billion was spent on blockchain implementation globally.

The cascading effect increased investment in ICOs by sixteen-fold and more than a dozen countries are officially developing their own cryptocurrency,” he says. Nevertheless, he sees the Asean nations as potential trailblazers in the global blockchain sweepstakes because of their tech-savvy populations and the obvious demographic dividend they enjoy. “While the decentralisation movement largely began in the West, it has certainly made its way East, as jurisdictions in the region have come to shape global conversations and developments across the wider industry. 

One of the primary reasons the Asia-Pacific region looks poised to be a trailblazer in blockchain is its consumer market. Not only is it big – the size of Asia’s middle class is expected to reach 3.5 billion by 2030 – but it is especially eager to embrace new technologies. The region’s enthusiasm for cutting-edge technologies can be attributed to its uniquely young, technology-curious population,” added O’Brien. But as of now, Malta is enjoying its moment under the Mediterranean sun as the world’s first ‘blockchain Island’.

The post How Malta became the blockchain island appeared first on International Finance.

The climate change policies of governments across the world can change drastically depending on their current political priorities. But the importance of climate change responsibility is not lost upon the movers and shifters of the world – the logistics giants. The world’s logistics companies are responsible for a sizeable chunk of the carbon emissions. While governments dilly dally on climate change action, the top logistics companies are making massive changes to the way they shift and move goods across the world, with the impact on the environment and the future generations in mind.

Deutsche Post DHL and Fedex have unambiguously embraced the modern environmental zeitgeist with a slew of e-mobility and alternative fuel initiatives that have major short term and long-term implications.

DHL is pursuing ambitious climate change goals. Under the company’s Mission 2050 initiative, it seeks to reduce logistics-related carbon emissions to zero by 2050. E-mobility is a priority at DHL and that’s were StreetScooter, an electric vehicle startup acquired by DHL comes into play. DHL, today, has more than 10,000 alternative fuel vehicles on the roads across the world as part of a switch to e-mobility.

FedEx has been pursuing a ‘Reduce, Replace, Revolutionise’ strategy to reduce its carbon emissions intensity. The logistics company is doing transformational work in increasing the carbon efficiency of its legacy vehicle fleet. According to Fedex, its strategy focuses on reducing impacts and improving productivity while creating new, more efficient, and innovative solutions.  Fedex claims that these efforts have contributed to a 37 percent reduction in carbon dioxide emissions intensity on a revenue basis across the enterprise since financial year 2009, a period in which revenue grew by 84 percent. FedEx also reduced 2.7 million metric tonnes of carbon dioxide emissions through fuel and energy saving initiatives last fiscal year alone, the company claims.

E-vehicles take over logistics

In 2018, DHL’s fleet already had 10,843 alternative fuel vehicles out on the road and more than 9,000 of these vehicles are StreetScooters – the electric delivery vehicle now designed and manufactured by Deutsche Post DHL Group. In addition, DHL uses 3,500 e-trikes and 7,800 e-bikes for postal delivery in Germany. “Partnerships with major cities are a particularly interesting aspect of our activities – we lead by example, demonstrating that e-mobility can become the norm in logistics,” Alexander Edenhofer, a DHL company spokesman told International Finance.

“On the road to zero-emission logistics, Deutsche Post DHL Group wants to provide 70 percent of its own first and last mile services with clean pick-up and delivery solutions by 2025. Delivery by foot, bicycle, and electric vehicle are the modes of choice for reducing carbon emissions and local air pollutants in urban areas. More and more of our vehicles feature e-mobility solutions – from all electric drive vehicles and cargo bikes for short distances, to plug-in hybrids and fuel cells for longer distances,” Edenhofer added.

DHL’s StreetScooter e-vehicles cover a distance of 75 kilometres on a charge and save 32,000 tonnes of carbon dioxide emissions annually. E-mobility solutions also make for smarter operations at DHL. The total cost of ownership of StreetScooter e-vehicles has proven to be comparable to that of diesel vehicles.

Even though the cost of purchase of e-vehicles are higher, DHL observes that the maintenance and wear and tear costs of StreetScooter e-vehicles are 60 to 80 percent lower than diesel-driven vans. DHL Express has also announced that it will add 63 electric cargo vans to its US fleet of green delivery trucks in 2019. And since April 2016, DHL Express in Paris has been operating one of the first ten 100 percent electric MAN eTGE vans.

In FedEx’s Global Citizenship Report released to the media, the company announced that it will be adding 1,000 Chanje V8100 e-vehicles to the FedEx Express fleet in California.  These e-vehicles can travel more than 150 miles when fully charged and are expected to save FedEx 2,000 gallons of fuel while avoiding 20 tonnes of emissions per vehicle each year. FedEx added 445 electric vehicles in FY18, bringing the total number of its e-vehicles on the road to more than 2,554.

On May 24, DHL Express and StreetScooter announced their collaboration on a new electric delivery vehicle. The new ‘H2 Panel Van’ will become the first 4.25 tonne electric vehicle with an added fuel cell, which will provide additional power and enable a range up to 500 kilometres. In a first step, DHL Express has ordered 100 of the fuel cell vehicles, with delivery expected from 2020 through 2021.

Similar to the larger WORK XL, the H2 Panel Van will be realised in collaboration with Ford.

The new van fits into DHL’s larger environmental goals. “With the H2 Panel Van, DHL Express becomes the first express provider to use a larger number of electric vehicles with fuel cells for last-mile logistics. This underscores our aspiration to be not only the fastest and most reliable provider on the market but also the most climate-friendly,” Markus Reckling, CEO of Deutsche Post DHL told the media. “The H2 Panel Van is another example of how Deutsche Post DHL Group is working towards its zero-emission goal for 2050,” Reckling added.

E-vehicles on the road

DHL’s StreetScooter e-vehicles are currently on the road in Netherlands and Austria as well. In addition, DHL has also sold 500 StreetScooter e-vehicles to Japanese logistics company Yamamoto. DHL considers Japan to be a market of interest as far as e-mobility is concerned. The StreetScooter e-vehicles have penetrated rural areas of Germany as well, as they are being used for the joint delivery of mail and parcels.

Fedex Express is testing e-vehicles in China and Europe with the strategic goal of scaling the adoption of commercially viable e-vehicles in those markets as soon as possible. The logistics company also completed assessments to determine the return on investment with regard to using electric forklifts instead of propane forklifts.

In future, Fedex Freight plans to incorporate Tesla Semi tractors into its fleet. At the current time, Fedex is focusing on developing the charging infrastructure for e-vehicles with facilities to be upgraded to ensure that they can charge a number of vehicles at once. Fedex’ commitment to e-mobility starts at the top with Fedex Chairman and CEO Frederick W. Smith serving on the Electrification Coalition since 2009. The focus of the non-profit group of business leaders is to enable the deployment of electric vehicles at a mass scale.

“Partnerships with major cities are a particularly interesting aspect of our activities – we lead by example, demonstrating that e-mobility can become the norm in logistics,” Alexander Edenhofer – Deutsche Post DHL spokesman

Fedex is making massive changes to its legacy transportation platforms to improve carbon efficiency through the Reduce and Replace parts of its strategy. With a focus on fuel saving behaviours and systems, Fedex has saved 655 million gallons of jet fuel since 2006 across 59 projects. The Fuel Sense programme saved 94 million gallons of jet fuel in 2018. Under the Replace strategy, Fedex’ s aircraft modernisation programme saved 109.6 million gallons of fuel avoiding more than one million tonnes of carbon dioxide emissions. The company also seeks to revolutionise its energy management approach – for example, it plans to introduce onsite microgrid pilots with higher investments in fuel cell technology and solar energy.

Deutsche Post DHL implemented its Green Electricity Policy in 2018, which defines options for sourcing electricity and the process of purchasing electricity within the framework of the DHL Group’s environmental and energy policy. “We make sure that electricity generated from renewable sources or ‘green electricity’ is the primary source of electric power in the group and aligns with relevant sustainability guidelines,” said DHL’s Edenhofer. Overall, the use of green electricity across the DHL Group was already at 77 percent in 2018.

Aircraft fly on alternative fuels

An interesting part of these e-initiatives at logistics companies is the effort to fly aircraft on alternative fuels. Fedex’s goal to obtain 30 percent of jet fuel from alternative fuels by 2030 reached a milestone last year. 

Red Rock Biofuels, which will supply low-carbon, renewable jet fuel to FedEx Express, broke ground on its biorefinery in Lakeview, Oregon in July 2018.  The first delivery of alternative jet fuel is anticipated in 2020.  Also in FY18, the ecoDemonstrator, a Boeing 777F built for FedEx Express, became the first FedEx plane to fly 100 percent on biofuel during a short-term period that also tested and gathered data on 35 new technologies.

The Boeing 777F EcoDemonstrator is equipped with lasers, cameras, and flies on 100 percent biofuel. It has a cargo bay outfitted with rows of computer test stations. DHL, until now, has not operated aircraft with low carbon emission fuels. However, the company has conducted tests in this regard and is working on options for running aircraft with alternative fuels in the future, a company spokesman said.

According to the report from the Intergovernmental Panel on Climate Change (IPCC) it requires far-reaching transitions to the use of energy resources and transportation and the operations of the industry and infrastructure to limit global warming to 1.5 degree Celsius above pre-industrial levels.

That includes reducing carbon emissions to 45 percent below 2010 levels in the next decade. Is this a realistic target? If you consider the rise of populism across the world and the hostile reaction of populists to climate change action, there might be limited action from governments to tackle the disaster the world is facing. However, millennials and the Gen Z can be assured that the top logistics companies of the world are incorporating vast operational and infrastructural changes to reduce carbon emission intensity as a real measure, not just a corporate social responsibility programme or a token slogan for reputation management. It’s time other industries took note.

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As with many travel-related industries, medical tourism is being boosted by rapidly growing outbound Chinese healthcare traveller flow. Thanks to an expanding middle class, a fast ageing population, and surging demand for cosmetic surgery, the number of Chinese who travel out of China for medical treatment has hit the 20 million mark.

The developing economies have a 43 percent share of the medical tourism market and the Southeast Asian nations are expected to be at the forefront of the medical tourism market till 2023. South Korea is a significant destination for medical tourism in Southeast Asia, especially for cosmetic procedures. Chinese healthcare tourists especially target Southeast Asia for cosmetic surgery and cancer treatment.

Thailand has been a popular medical treatment location for visitors from Europe, the Middle East, and other regions in Asia for a long time. Between January and April 2018, the number of Chinese healthcare tourists to Thailand is reported to have increased by 30 percent. The Bumrungrad International hospital in Thailand reputedly receives more foreign patients than any other hospital in the world. Thailand now has 66 JCI accredited hospitals which rank it fourth in the list of countries with the most JCI accredited hospitals after Saudi Arabia, China, and the UAE.

Malaysia breaks out

Amid all the interest in the Southeast Asian countries, one country is emerging fast as a breakout nation among the healthcare tourism destinations in the region – Malaysia. Malaysia’s healthcare tourism industry grew at a CAGR of 17 percent between 2015 and 2018 against a 15 percent growth rate of the Asia Pacific region as a whole.

In 2018, Malaysia’s healthcare tourism industry achieved close to RM1.5 billion ($361.7 million) in hospital revenue, excluding the figures for dental services and wellness clinics. This potentially added RM 5 billion ($1.2 billion) to Malaysia’s GDP. The calculation is based upon the multiplier effect estimated in the Global Wellness Tourism report by Stanford Research Institute.

A multiplier effect of 2.24 times hospital spending, which includes out of hospital spendings such as transportation, accommodation, and tourism activities, is used in the calculation for GDP impact in addition to adding the estimates for wellness and dental services. Previously in 2015, the Malaysian healthcare sector recorded a 23 percent growth in revenue following significant investments into promoting Malaysia as a healthcare tourism destination.

The majority of healthcare travellers come to Malaysia from Indonesia due to the availability of superior medical care facilities compared to home. The citizens of Pakistan and Bangladesh also visit Malaysia for the same reason. Singapore and Japan are the second and third biggest sources of healthcare tourists to Malaysia and patients from these countries are attracted to the cheaper healthcare treatments at world-class facilities available in the country comparable to those in their home countries. Similar reasons motivate Australian and European healthcare travellers to visit Malaysian hospitals.

“Malaysia’s healthcare sector is continuously highlighting our pillars of strength – world-class quality, affordability, and ease of accessibility. Our seamless and end-to-end healthcare travel ecosystem coupled with strong government regulation make Malaysia’s healthcare system truly one of a kind,” Sherene Azli, CEO of Malaysia Healthcare Travel Council, an initiative to promote Malaysia as a healthcare travel destination under Malaysia’s Ministry of Finance told International Finance.

Malaysia’s ministry of healthcare ensures that healthcare travel to Malaysia stays affordable by monitoring ceiling rates for procedures offered by healthcare providers. The key differentiator of Malaysian healthcare for patients from the Middle East and the Western countries remains the cost. According to Patients Beyond Borders data, healthcare travellers to Malaysia from the US stand to save up to 80 percent of their healthcare procedure costs for similar treatments in Malaysia.

For example, while a coronary artery bypass graft (CABG) costs on an average $92000 in the US and $33000 in Thailand, a CABG procedure of similar quality at a JCI accredited hospital in Malaysia costs only $20,800 on an average. Similarly, while a total knee replacement which costs $28,000 on an average in the US and $16250 and $13200 in South Korea and Thailand respectively, costs only $7800 on an average at a Malaysian healthcare facility of similar quality. For some cosmetic procedures, however, the cost of treatment is comparatively lower in Thai hospitals and clinics compared to Malaysia.

Higher mobility helps

To an extent, Malaysia is now gaining from increased affluence and mobility in the APAC region and the fact that the country is located in the APAC region, which had a head start over others in healthcare tourism. For the affluent class of countries like emerging APAC economies such as Indonesia, healthcare systems and facilities at home are unable to meet growing local demand or the facilities fall short of the demands of the new middle class. Also within the APAC region, there is a growing affluent middle and upper-middle class who can afford healthcare treatment abroad. The healthcare tourism market in the APAC region is forecast to grow at 22 percent CAGR between 2017 and 2023.

Malaysia has seen an increase in the number of healthcare travellers from the US and Europe. Currently, Malaysia plans to increase the penetration of the country as a healthcare destination in its target markets while aggressively raising the country’s healthcare profile in secondary markets such as Bangladesh, Brunei, and the Middle East. With regard to marketing efforts, Malaysia Healthcare is launching an international healthcare travel campaign titled Malaysia Year of Healthcare Travel 2020 for next year. The initiative intends to propel Malaysia as a reputable and reliable global healthcare travel destination while enhancing the impact of healthcare tourism on the wider Malaysian economy.

The Malaysian government had said in 2017 that the country is targeting to generate revenue of RM2.8 billion or approximately $725 million from healthcare tourism in 2020. The plan is to target healthcare travellers from China, Myanmar, Vietnam, and India as key markets in addition to Indonesia. Healthcare tourism a key priority for the government – in 2016, the Malaysian government had invested $5.2 billion or approximately 10 percent of its budget in the healthcare sector to develop facilities, infrastructure, pharmaceuticals, and medical tourism.

The government is also redefining healthcare services in the country’s healthcare hubs Penang, Johor, and Melaka. It is developing six niche medical research facilities and several multi-speciality facilities in the region to develop it as a central hub for attracting medical and research investments and tourists. The Malaysian government had earlier identified medical travel as one of the National Key Economic Areas to drive the nation into the category of high-income nations by 2020.

Government steps in

Specifically, while presenting the Malaysian budget of 2018, the prime minister had announced major plans to make Malaysia as a key healthcare tourism destination. Among the decisions announced is one to promote Malaysia as the fertility and cardiology hub of Asia with the support of expanded eVisa services and high-end medical tourism packages. He also announced plans to introduce a flagship medical tourism hospital programme with special incentives.

The investment tax allowance for private healthcare facilities promoting medical tourism was also extended to the end of December 2020. In the budget, the prime minister also announced that the exemption of income on the value of increased export of healthcare services rate from 50 percent to 100 percent for private healthcare during the period 2018 to 2020. In addition, a tax incentive for investment in four- and five-star hotels was extended for another two years. The tax incentive for tour operators was also extended to 2020.

Cardiology and fertility treatments are already in high demand in Malaysia from patients of the target countries. Based on the flagship hospital programme, select hospitals will be able to step up organisational internationalisation. Smoother immigration clearances for medical travellers were also announced through the Malaysia Healthcare Traveller (MHTP) programme including the introduction of an eVisa and online visa application services.

The double tax deduction for accreditation expenses was also extended to ambulatory care centres and private dental clinics. Under Malaysia’s National Transformation Programme of 2015 that has a significant focus on healthcare, Malaysia has been able to become the 14^th largest exporter of pharmaceutical products in Asia with local drugs being exported to over 50 countries.

One of Malaysia’s value propositions as a healthcare tourism destination is the scenic locales in the country. This helps it promote healthcare treatments along with tourism activities in Malaysia for the family of the person seeking treatment. Another value proposition is the number of low-cost airlines that connect Malaysia with other regions in the Asia Pacific.

The availability of low-cost airlines significantly reduces the cost of travel for patients and those who accompany them. In addition, Malaysia is centrally located in the APAC region making it easily accessible. The Malaysian government is also touting Halal treatment options to Muslim and Middle Eastern patients such as sutures and medical products that do not contain porcine (pork-derived) elements.

More JCI hospitals needed

So how easy is for Malaysia’s healthcare tourism sector to achieve the targets set by the government? To increase its attractiveness as a healthcare tourism destination and to achieve the targets of the NTP, Malaysia has to increase the number of JCI accredited hospitals. It also needs more facilities like Thailand’s Bumrungrad hospital, which routinely sees up to 1000 foreign patients a day.

In addition, Malaysia will also have to focus on developing and marketing more treatments that are not widely available elsewhere in the region. Malaysia can also step up focus on wellness and prevention programmes to develop holistic wellness and prevention packages that can be marketed globally. The ability to offer Halal treatment options and caregivers of the same gender to Muslim patients is one aspect that can be developed into a differentiator that attracts Middle Eastern and Muslim patients worldwide. With the combined efforts of the government and the private sector, Malaysia’s healthcare travel sector is poised for an interesting period of growth.

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China, often referred to as the factory of the world, is seeing companies re-shore their production to other Southeast Asian countries because of the fear of punitive Trump tariffs, if they continue to exporting out of the mainland. China’s exports to the US are more than four times the amount of US exports to China —and so, Washington has some credibility in asking for a rebalancing of bilateral trade.

The reality is that Southeast Asia has been the backyard of Chinese manufacturers for over a decade now. The region, therefore, has been part of the US-China supply chain for some time now.

Economists had anticipated this transition in supply chain to take place eventually with or without the trade war. The reason is that Southeast Asia had reduced its exposure to the West and has been working closely with the Chinese manufacturing companies since at least two decades. China’s industrial powerhouse Guangdong, for instance, is no longer the low-cost industrial hub it used to be because of rising wages and significant environmental changes.  

“Southeast Asia has been part of the extended supply chain from China since early 2000s – the countries and companies in the region reduced their exposure to the west by working with the Chinese companies after the Asian financial crisis. Also, since the 2008 global financial crisis, the Chinese manufacturers have been establishing even more closer links through joint ventures or foreign direct investment in the region, driven primarily by rising labour costs in China and the need to diversify risks.

This means that Southeast Asia was a destination ready for the shift away from China,” Abhineet Kaul, director public sector and government consulting, Frost and Sullivan, Singapore told International Finance. The ASEAN China Free Trade Agreement in 2002 also helped in this trend brining average tariffs between Asean and China to under 1 percent. The trade war, in my opinion, has just accelerated the momentum towards Southeast Asia,” adds Kaul. 

Japanese companies check out

In light of Trump’s recent tariff threats, Japanese multinational Casio and print-maker Ricoh have moved part of their production from China to Japan and Thailand. This way, production capacity has moved to Southeast Asia from China.

US imports from China declined 13.9 percent in the first three months of 2019. Last year, the American Chamber of Commerce in China and the European Union Chamber of Commerce in China conducted two separate surveys which found that these tariffs could lead to an increase in production costs and a decrease in profits for businesses on the mainland.

Southeast Asia is poised to become the biggest beneficiary of the trade war according to Japanese investment bank Nomura. Importers in the US and China are sourcing goods from Southeast Asia and some parts of Northern America to dodge the punitive tariffs their governments have imposed as tit for tat on certain goods.

Nomura economists highlighted that Vietnam stands to benefit the most from trade diversion. Last year, the country’s largest export to the US was electrical machinery. Bloomberg in a report said that American exports from Vietnam increased 40.2 percent in the first quarter of 2019 compared to the previous year, pointing to the fact that it could supersede the UK as a US trade partner in the next few years.

Vietnam benefits from trade war

Vietnam’s foreign investments in the first quarter spiked by 86.2 percent to $10.8 billion and its GDP rose 7.9 percent as a result of increased exports to the US and China. Beyond the busy streets of Vietnam’s capital city of Hanoi, manufacturing units are making men’s garments for American brands such as Hollister, Bonobos, and Express. Also, Apple’s main assembler Foxconn is moving more of its production out of China by investing more than $200 million in India and Vietnam.

What is attractive about Vietnam is the low-cost labour, decent tax incentives, and close proximity to China. But, the Chinese manufacturers are struggling to recruit workers around Ho Chi Minh City and are forced to set up factories in the remote parts of the country, that are lacking in the necessary infrastructure and skill sets. Frost and Sullivan’s Kaul says that the rise in import tariff collection in the US indicates that companies have not been able to recalibrate their supply chains in time for the trade war, hurting both US importers and consumers as well as Chinese exporters.

“The top companies in China which had trade ties had invested to diversify their supply chain to Southeast Asia and to Mexico, Brazil, and parts of Africa, as the costs of labour was increasing in China. For example, one of the top bicycle companies in the US, Bicycle Corporation of America or BCA, a subsidiary of Kent cycles assembles frames imported from China from Shanghai General Sports in Kunshan. They had planned to import frames from Cambodia even before the trade war. However, while capital expenditure takes time, the rise in tariff hit businesses immediately,” says Kaul.

Guangdong vs Vietnam

China’s southern manufacturing base Guangdong has a population of 104.3 million, while Vietnam has a population of 95.5 million. This means that Guangdong has the capacity to draw migrant workers from the rest of China if necessary — which is not possible in Vietnam. Economists believe that the impact of the supply chain shift on Vietnam’s economy will be small but noticeable.

Southeast Asia is on the brink of a new economic cycle. The region’s lower-middle income countries such as Indonesia and Cambodia have a chance to grow because of the Trump Trade War.

Companies are incentivised to boost their production capacity in Cambodia because of its good investment incentives and tax exemptions. Luxury brand Steve Madden is shifting its production to Cambodia from China and will have 15 percent of its products sourced from its Cambodian plant this year.

Taiwanese electronics manufacturing company Pegatron has moved some manufacturing of networking gear to Indonesia, and the shipping has begun from the Bataam Island.

In recent years, Taiwanese manufacturers have been setting up manufacturing plants in different parts of Southeast Asia with the intention of diminishing their dependence on China as part of the government’s New Southbound Policy. “Laptop maker Compal has established production lines in Vietnam, Wistron has set up facilities in the Philippines, and Inventec in Malaysia.

Taiwanese companies that opened factories in China to manufacture electronics for American multinationals are moving their production back to Taiwan. These companies assembling devices from Chinese production bases have established a crucial link in the global tech supply chain because the likes of Dell and Hewlett Packard typically just slap their labels on the Taiwanese-made electronic goods.  Taiwan’s GDP increased 2.1 percent in the first quarter, according to Nomura economists.

Companies in China are also becoming aware of Malaysia’s electrical and electronic (E&E) sector which is the fourth biggest beneficiary of the trade war, particularly because the remaining Chinese imports comprises electronic products. Analysts have said that products from Malaysian companies in the semiconductor and chip-related industries might be in great demand as a result of trade diversion.

Another positive is that Malaysia is a fellow signatory to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), offering companies a preferential access to markets such as Australia, Canada, Japan, Mexico, and Indonesia.

Despite the migration, companies with an extensive manufacturing base in China will have to maintain a small portion of their capacity on the mainland.  

Companies will have to prepare themselves to make long-term, strategic decisions if Trump decides to impose another round of tariffs on Chinese-made consumer goods. Kaul explained that the challenge for those companies exists in two parts: The first part is regarding the investments from China into ASEAN and other part is about the exports from ASEAN into the US.

Although Southeast Asia is expected to benefit in the long run through trade wars and high investments in the region, limitations in foreign direct investments in some sectors will bring some challenges. Chinese investors will face behind-the-border barriers related to trade, such as logistics, licensing, and competition for skilled manpower with competitors from other East Asian countries.

For exports, some countries in Southeast Asia such as Singapore have free trade agreement with the US, but there is no ASEAN-US FTA. This means that the US can raise tariffs on select Southeast Asian countries in an effort to ‘punish’ them for accepting Chinese investments and for being a back-door to the US market, says Kaul.

“What the trade wars indicate is that the status quo is no longer accepted and that tariffs can be used as a tool for war to ‘punish’ countries for issues not related to trade. This is uncharted territory for humans since the first time humans bartered to trade,”  concludes Kaul.

The post Trump trade war impacts Southeast Asian supply chain appeared first on International Finance.

A 2019 report by Tech Collective further augments this view. It said “The Southeast Asia region is ripe for tremendous growth in the fintech industry in 2019.” The primary reason for the same, it said was the fact that only 27 percent of the adult population across the Asean had an actual bank account.

A report from international lender Robocash further clarifies the extent of the unbanked population and the fintech opportunity present therein. It says, in Indonesia, only 48.9 percent of the population had a bank account in 2017, but 54.8 percent borrowed money. In the Philippines, only 34.5 percent had a bank account while 58.6 percent of people had made borrowings. While in Indonesia, only 49 percent of the population had a bank account, in Vietnam, this figure is quite low at just 31 percent. This disparity between the banked population and population participating in financial activities present a huge opportunity for fintech companies in the region.

Ajit Raikar, co-founder and CEO at Validus Capital, a Singapore-based peer-to-peer lending  fintech startup, further reinforced this view to International Finance. Citing consulting firm, KPMG, Raikar said, “There is an unmet need for access to basic banking services. Only 27 percent of the region’s 600 million inhabitants had a bank account in 2016.” This, he added, “is where fintech startups can come in to fill gaps and accelerate financial inclusion in the region.”

He further claimed that his company alone had facilitated over SGD230 million in financing for Singapore’s small and medium-sized enterprises (SMEs). This, he said had a positive impact on over 300,000 citizens of the island state-city, directly or indirectly.

According to EY, there are more reasons than the one mentioned above as to why the region is witnessing a rapid adoption of fintech innovation. Its ASEAN FinTech Census 2018 report lists “rapidly expanding economies, young-urban-digitally-savvy population, increasing mobile and internet penetration apart from largely underserved, small and medium-sized enterprises (SME) and consumer markets by traditional financial institutions” as the other factors driving growth of fintech in Southeast Asia.

With regards to internet adoption, Southeast Asia is the fastest growing in the world. This was estimated at 58 percent in 2018, up from 53 percent in 2017. Citing Google and Temasek, a report by Robocash stated that the number of local Internet users was expected to reach 480 million people in a year in this region. The report further predicted that the internet economy in Southeast Asia would increase to $ 200 billon by 2025. This is a four-fold increase from the $ 50 billion in 2017.

So, while internet penetration is high, digitisation of financial services does not seem to have really picked up pace. According to a fourth quarter 2018 report by Cento, Southeast Asia is the fastest growing digital economy, although less than 2 percent of the economy is digitised. This huge digitisation gap further increases the growth potential for fintechs in Southeast Asia.

Justin Hall, partner at Golden Gate Ventures, an early-stage VC firm focusing exclusively on Southeast Asia, seems to concur with the earlier mentioned facts. When International Finance queried him about the unique promise he sees in Southeast Asia versus other regions, he said, “Southeast Asia is one of the fastest growing, dynamic markets in the world. It possesses some of the most populous markets. Its emerging middle class is a boon to local economies and technology adoption – from mobile phones to internet services, infrastructure to online payments – is rapid. In simplest terms, Southeast Asia is a new growth opportunity in the same way India and China were before it.”

Supportive governments

Apart from these, the Asean governments need to be credited for the growth of fintech in their respective regions. In an effort to make its population get used to a cashless or a digital payment system, these governments have launched various initiatives that help create a conducive environment for fintech.

Speaking on the same, Raikar said, “With many countries in Southeast Asia having a large unbanked population, governments today are embracing the ‘cashless society’ agenda more than ever before. Going cashless helps to create financial identities for these individuals and accelerate financial inclusion in the region.”

Citing Singapore as an example, Raikar said, the government of this island city-state had launched initiatives such as the national QR code and NETS that further augur well for the future of fintech startups the region.

“In its push for a cashless society, the Singapore government has launched a national QR code standard to unify a fragmented e-payment landscape it has also deployed NETS, an electronic payment service provider, to centralise the e-payment systems, bringing cashless payment to hawker centres and coffeeshops nationwide. To incentivise more hawkers to use the e-payment system, NETS has also launched an initiative to ensure hawkers get faster access to their funds from NETS transactions,” he explained.

He further added that other countries in the Asean region such as Vietnam and Indonesia too were already working towards a cashless society. “Vietnam strives to become a cashless society by 2020 and reduce the number of cash transactions at large-scale retailers to less than 10 percent, while Indonesia has revamped its regulatory framework as it aims to become Southeast Asia’s digital hub by 2020,” Raikar said.

Meanwhile, in the Philippines, the country’s central bank has established a regulatory framework called The National Retail Payment System or NRPS to support digitisation of financial transactions. The objective of this is the establishment of a safe, efficient, and reliable retail payment system in the country. According to the central bank’s website, the key outcome of the NRPS is “to increase adoption of electronic retail payments from 1 percent electronic payments in 2013 to 20 percent electronic payments by 2020.”

In Malaysia, its central bank, the Bank Negara Malaysia had introduced a financial technology regulatory framework way back in 2016. Through this, the central bank sought to provide a regulatory environment that would be conducive for the deployment of fintech solutions. Its website states that this includes reviewing and adapting regulatory requirements or procedures that may unintentionally inhibit innovation or render them non-viable. As part of this process, the Financial Technology Regulatory Sandbox Framework (Framework) is introduced to enable innovation of fintech to be deployed and tested in a live environment, within specified parameters and timeframes.

Additionally, as recently as in September 2018, it launched the Digital Finance Innovation Hub in association with The United Nations Capital Development Fund and Malaysia Digital Economy Corporation. The objective of this was “to enable service providers, including financial institutions and fintech start-ups, to use technology in promoting inclusive finance, including through the introduction of products and services that meet the needs of the underserved in Malaysia.”

Such initiatives by the governments in the region further augment the growth of fintech in the region. Commenting on the same, Raikar said, “The friendly regulatory environment coupled with the desire to drive financial inclusion and become cashless societies, provide fintech startups ample room for growth and development. The future is promising for the industry.”

Commenting on the same, Joel Yarbrough, VP Asia Pacific at Rapyd, a global fintech-as-a-service startup with offices in London, Singapore, Silicon Valley, and Tel Aviv that enables any payment type for in-country or cross-border commerce, told International Finance, “I’m very positive on the role that government and regulators in the region have played in creating that emphasis, but at the same time there is no ‘one answer’, there is a mix of many different answers, and the market needs to be encouraged to find the right one for each segment or use case.

Things like interoperability, eKYC, strong authentication, and progressive regulation are all important, and the fintech industry overall benefits from governments innovating and competing with each other in these areas.”

Open to innovation and abuse

The interest of Asean governments in encouraging fintech is also because of the many technology and innovation advantages they bring to the table. Empowered by emerging technologies, such as artificial intelligence, blockchain, and machine learning, these companies could help offer basic financial services such as bank accounts, loans, credit cards, and insurance to the large population that currently do not have the same. Technologies like blockchain in particular could drive down operational costs of remittances that are currently expensively taxed. It would also help several SMEs that are currently not being served by the existing financial systems in the region.

Of course, as always, there are two sides to any coin and fintech too has some negatives. According to the Deloitte Singapore FinTech Festival 2018 report, the biggest risks related to fintech is its misuse for tax evasion, money laundering, or for making fraudulent transactions that bypass traditional financial systems.

The fourth and final reason that is boosting the growth of fintech in Southeast Asia is the openness to use fintech products. A November 2018 report from Deloitte conducted in partnership with Robocash Group stated that, of the respondents polled, 82 percent of Asean customers’ showed willingness to use new fintech technologies and products, compared with 76 percent in Europe, 77 percent in North America, and 49 percent in Latin America. The report further said that countries in the Asean region had the highest potential to grow their fintech markets up to 2020.

Yarbrough corroborated the Southeast Asian region’s fintech promise to International Finance. He explained, “Asean is a high growth, extremely digital, social, and mobile market. At the same time, there is a large population that is under-banked, under-supplied in credit, or that doesn’t have full access to international markets electronically. Given the openness to using the Internet for almost everything else, we see that same openness and education being a fertile ground for fintech adoption.”

Despite the obvious advantages of the region, accessing trained fintech talent is a challenge for startups in the region. Citing EY, Raikar said that “Three in five (60 percent) of Southeast Asia fintech companies surveyed found that they lack the tech talent required for their business.”

Recruitment firm Hays further emphasised the same with a focus on Malaysia. In a May 2019 article it was cited as saying that Malaysia was facing a shortage of talent to support the digitisation of its banking and financial services.

Natasha Ishak, senior manager for banking and financial services at Hays further explained that the previous few years had seen the introduction of various financial products and services, and this had affected talent shortage across various domains ranging from product development to contact centres and compliance departments.

That said, the governments in the region have already noticed this issue and are taking corrective measures. With regards to Singapore specifically, Raikar said, “Both the government and organisations in Singapore, have already taken steps to bridge this gap. These include initiatives such as The Adapt and Grow which aims to help Singaporean workforce transition into new job roles in growth sectors, and partnerships forged between corporations and educational institutions to create a vibrant entrepreneurial community such as NUS Enterprise setting up a cybersecurity startup hub with SingTel Innov8 as well as their collaborations with Singapore Airlines to promote the aviation industry.” This, Raikar said, will allow fintech companies to get the right talent needed and bridge the gap ensuring long-term sustainable growth.

Meanwhile, Yarbrough opined, “On the government side, I think smart university and workforce training are important, particularly in critical domains like machine learning.” He however also said that the region was ramping up quickly the development of talent required to operate in the fintech space. “We have people moving into the region, moving from traditional financial companies, but most excitingly an amazing base of young talent that is educating itself and scaling quickly,” he added.

Big companies also enter

So, whats interesting is it’s not just startups that are embracing fintech. Large established companies are also using their existing platforms to provide financial services by using technology. In Asean region, fintech pioneers include Grab, Lazada Group and Go-Jek. Grab which originally was in the transport business is now offering payments, rewards, and loyalty services apart from loans and insurance. On the other hand, retail company Lazada Group now also offers e-wallet payments and SME lending. Meanwhile, Go-Jek in 2018, spun off its e-wallet service Go-Pay as an independent app. By end of the year, this app had partnerships with almost 400,000 merchants helping transaction volumes to exceed $6 billion.

So while the Asean region definitely seems to be attractive for receiving new investments in fintech space, the question arises as to whether the fintech innovations in the region, especially in the payments space were reaching a saturation point. According to Justin Hall of Golden Gate, “We have barely scratched the surface of fintech. There is a still a huge amount of innovation and value-creation to be unlocked, and much of that is dependent on the new industries and verticals we will see emerging and evolving over the next few years.

The explosion of agent-led networks (‘social commerce’), gig economies, IoT-enabled products, and data collection means that financial services will need to scale and evolve in very interesting ways to keep up, and I think we’re going to see really intriguing use-cases here that we don’t see anywhere else.”

So to conclude, while large players are also diversifying into the fintech space, there seems to be scope for new innovative fintech startups to flourish as well in Southeast Asia. A perfect storm of supporting factors led has unleashed the fintech innovation spirit in Southeast Asia. Given the demographics, the openness to technology, the government support, and the quantity of investor funds flowing into the region, the pace of fintech innovation in Southeast Asia is set to accelerate in the future.

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In 2015, Forbes recognised Chile as The best country for business in Latin America. The country has become a breeding ground for fintechs because it posseses a pool of highly qualified labour force coupled with a tax friendly regulation, backed by free trade agreements with more than 30 countries. 

The Chilean Government is spurring innovation through investments in startups and larger establishments that are seeking a market presence in Latin America. The report pointed out that 89 percent of startup founders in the country already have entrepreneurial experience — with 8 percent of startups being women founded. Most founders were aged between 26 to 30 when they first started their companies. 

Startup Chile — an initiative by the Chilean Government through CORFO, Chiles’s economic development agency, is a government supported startup accelerator and Chile’s signature entrepreneurship programme. It is arguably the most significant reason why the country is positioned as the entrepreneurial hub of Latin America. Startup Chile was founded in 2010 with a vision to transform the country’s entrepreneurial culture and to put Chile on the global map as the hub of innovation in Latin America.

The Wall Street Journal reported that three out of four startups fail despite raising capital. So, ultimately the value they bring up is not only the jobs they create, but also the skills that the entrepreneurs acquire in tackling the global market. The accelerator has time and again emphasised that its goal is to help startups to absorb higher benefits from the programme than just monetary assistance. Startups get $40,000 equity free in StartupChile’s seed program. Since its founding, it has accelerated more than 1,500 startups. These startups are exposed to mentorship and entrepreneurship training, in addition to opportunities in building a global network. 

Cabify, Vaijala, The Intern Group, CargoX, Keyword Tool, Doist, Data Campfire and Slidebean are some examples of how startups in Latin America have flourished on a global scale with the entrepreneurial guidance of Startup Chile. Many of these startups still continue to operate in Chile. 

As of 2016, Startup Chile’s cohort had collectively raised $30.5 million in Chile and more than $420 million abroad. These startups have been responsible for creating 5,162 jobs in the country and across the world as of that period. More than one-third of startups that go through Startup Chile establish an office in the country that ranks seventh on the global index for entrepreneurial activity.  

Startup Chile Executive Director Sebastián Díaz Mesa in an interview with International Finance explains the significance of the accelerator programme and how it has helped startups in the country progress in the last decade. Diaz Mesa is a former strategic communications practitioner, founder of startups, and an academic as well.

International Finance: How is Startup Chile fuelling Chile’s entrepreneurial ecosystem?
Sebastián Díaz Mesa : Startup Chile was born to solve a myriad of problems related to entrepreneurial skills that still persists in Chile. The country has invested the largest amount of money in entrepreneurship and innovation in the entire Latin American region. However, the new companies, SMEs, and startups were focusing on the Chilean market only.

So every time we have an economic crisis, for instance, it impacted these SMEs and startups — and all the money and effort put in was pretty much wasted in the event of a crisis. In order to avoid those circumstances we are trying to help entrepreneurs access other markets. This way, they can avoid the impact of those economic crises and establish sustainable companies in the country. 

Because Chile is so far away from everything there is a huge cultural impact on our entrepreneurs — and it reflects while they are trying to approach new markets like Europe or America. Eventually they start to believe that they are not capable of competing with foreigners.

Keeping that in mind, Startup Chile was established to prove to the Chilean ecosystem that it is possible to set up local businesses from Chile and to position the country as a startup hub for the entire region.  As far as the policy goes we are planning to attract new entrepreneurs organically because at some point Startup Chile is bound to disappear. 

Back in 2016, we served several Chilean and global companies which shows in our numbers. At the beginning of  Startup Chile there were no Chileans because they were unable to compete with foreigners — but that situation has now changed. Organically around 40 percent of Chileans in each generation are now prepared to compete with foreigners. So, in terms of entrepreneurial skills, Chileans are getting better with time. 

What kind of startups are Startup Chile targeting? Why?
There are three main requirements for startups to become an eligible prospect for Startup Chile. First of all, the startups have to be technology-based, because technology is the only component that will help them to swiftly expand into other markets. The scope for scalability is quite high. 

That said, industrial 4.0 revolution is a continual challenge in Chile. So the development of technology-based startups will help address this challenge while creating new technology-based industries in the country.

Secondly, startups should target a global market or problem because they require to access new markets and grow on a global scale.

Lastly, they need to understand how they will be using Chile as a platform to grow.  We know that Chile is located far away on the global map and hence our market is quite small. We are not asking the potential startups to establish their headquarters in the country but to somehow use Chile to scale globally. 

For example, they can set up their call centers or pay salaries in the country. The idea is up to them but they should have a strong reasoning for using Chile as their base. All in all, we require to capture value for the reasons we are accelerating. 

How progressive is Chile’s fintech support ecosystem from regulatory, investment, and talent standpoint?
I would say that in terms of talent Chile is becoming a fintech hub in the region. A study conducted by Ernst and Young mapped all the fintechs in the country. It seems that we have more than 130 fintechs in Chile right now, marking Chile as a global hub for fintechs in Latin America.
However, there is a regulation gap for fintechs not only in the country but in the region as a whole that needs to be addressed. 

What is the value proposition that Startup Chile offers for fintechs looking to launch in Chile?
Sebastián: We don’t have a specific focus on any industry and we can have as many fintechs as we can get. We are putting more effort in business development and not any technology in particular. So basically our aim is to help startups build connections with local market, global networks, and investors. Startup Chile has a huge corporate network. 

All the major corporations in the region come from Chile. So it’s a great opportunity for startups to connect and strike a deal with them. That’s the value proposition of Startup Chile across all industries. 

How is the government helping build Chile as an innovation hub that can support global businesses and global operations for fintechs? How far has Chile progressed on that front?
The Chilean Government’s involvement is huge. The state will step in when the private sector in Chile is unable to take care of  a gap in the economic activity. The Chilean Government has identified that innovation is a key factor relevant to the country. It has created a large number of programs to fill in the gap. With that, the number of venture firms, corporate venture firms, and startups are growing  organically. So the role of the Chilean Government is to close gaps when required in strategic markets. 

What is the future of payment startups in Chile and Latin America?
Sebastián: We don’t have many regulations. These are super easy markets to test on a pile of new products. It seems more companies are looking to bring innovative solutions to payments. The thing that we need to speed up is regulations because they are mostly framed for big banks and corporations compared to startups and entrepreneurship. On one hand, Latin America is focused on bringing fintechs and startups from all over the world but at the same time there is a struggle with regulations. 

What are Startup Chile’s plans to promote startup growth in the country, especially fintechs, in the next five years?
Sebastián: We strongly believe that every single industry, especially with what we have here in Chile they need to work on the products — and this is not just for the financial industry.

The post Startup Chile: Building Latin America’s startup hub appeared first on International Finance.

The new medical policy — the Compulsory Private Health Insurance System, also known as Dhamani — is designed to provide a basic insurance coverage for expats, their families, and tourists in the Sultanate. Sheikh Abdullah bin Salim Al Salmi, CEO of Capital Market Authority, told International Finance, “Dhamani is seen as a means to an end, rather than being an end in its own right. Dhamani is a multi-payer system, where employers or sponsors pay for the health insurance of their employees or sponsored-individuals.”

Currently, the Capital Market Authority is working with relevant institutions to implement the council of ministers’ decision to introduce Dhamani in gradual phases. In practice, each phase will be introduced only after ensuring that the previous phase was successfully implemented.

“Dhamani was designed with the intention to facilitate proper health insurance for employees and visitors. Inclusion of families and dependents of expatriate workers in Oman is subject to contractual obligations between employers (or sponsors) and employees,” he said.

In recent years, the insurance industry in Oman has witnessed tremendous growth. The health insurance industry for the first time achieved a bigger market share in terms of total insurance premiums compared to the motor business, local media reported. Last year, the industry accounted for 33 percent of the total premiums, with a significant growth rate of 30.5 percent between the period 2011 and 2018.

So far, the industry’s robust growth has been attributed to two reasons. The public is fully aware of the importance of health insurance, and another reason is that employers in the private sector are willing to provide medical covers to all workers in an attempt to attract and retain talent.

Now the Oman government’s plan to implement Dhamani simply highlights the possibility of a much favourable health insurance environment for Omani citizens and reflects upon the scope for the industry’s growth in the coming years. “Upon examining the presence and extent of coverage of the private healthcare facilities, it has become evident that we need to encourage the establishment of more healthcare providers within stipulated patient’s rights and quality care standards,” Sheikh Al Salmi explained. Currently, the number of employees in the private sector covered by health insurance is 450,000, and the number is expected to reach above two million with Dhamani in place by the end of this year.

Standard & Poor’s GCC Insurance Outlook 2019 report found that Oman’s insurance market will grow up to 10 percent this year. The forecast in part depends on Dhamani and its phased rollout which is aimed at incrementally increasing the utilisation of medical services at private healthcare facilities.

Investment banking advisory firm Alpen Capital in its GCC Healthcare Industry report said that the healthcare spending in Oman is expected to reach $4.9 billion in 2022. The healthcare expenditure on outpatient and inpatient services is predicted to grow at an annualised average rate of 10 percent to $1.5 billion and $2.3 billion. The bed requirement is expected to grow at a CAGR of 3.2 percent through 2022. This means that there will be a demand for more than 1,100 new beds in order to have a capacity of 7,937 beds.

It seems that Dhamani has come just in time to ease the anticipated burden on Oman’s private healthcare system. Although Oman’s healthcare industry is small, it has outshone many of its peer countries because of firm political will and dedicated workforce planning. The country adopts a free market economy approach, where investment is key to driving competition and market growth.

“The Capital Market Authority believes that providing the right incentive would attract more investments in the insurance industry. For example, mandating the health insurance and a streamlined (electronic) claims and payment system, would provide the right incentives,” Sheikh Al Salmi explained.

The Standard and Poor’s report observed that intimidating factors such as cut-throat competition, high operating and regulatory costs, volatile investment returns, and strict accounting standards would have negative side effects on insurers’ earnings in 2019. In order to stabilise these factors, the government “would require establishing the rules for a fair competition and equal playing field as manifested by strict monitoring to minimise market manipulation,” Sheikh Al Salmi said. In saying so, Sheikh Al Salmi is pointing to the fact that the health insurance industry is in need of increased provisions amid stringent standards and regulations to lower the weight on insurers’ earnings.

In fact, “The prime benefit of Dhamani is the provision of effective and consistent means to ensure compliance with employers’ duties vis-à-vis health and medical care as outlined in the labour law,” he added. This approach is more forward-looking for insurers in Oman who are eager to secure their position in the overcrowded medical insurance market.

With Dhamani, insurers will have an opportunity to tap into Oman’s extensive market potential to unlock premium growth.   “Dhamani will help converting hidden operational costs to a single cost that can be budgeted and monitored systematically. It is hoped that such cost will go down in time, contingent on claim ratio,” Sheikh Al Salmi explained. The Capital Market Authority is also looking to bundle the care components of other insurance products such as life and repatriation, as well as workers’ injuries and compensation. In general, this will facilitate better risk management and reduce costs for insurance companies.

Dhamani might end up hurting the insurance industry and the private sector if the pricing is not appropriate. For that reason, Sheikh Al Salmi said, “The minimum required basic health coverage necessitated careful selection of coverage and development of network criteria, bearing in mind employers’ cost tolerance range.”

Dhamani is already claiming victory in small measures by stretching out its benefits to expats and Omani citizens in the private sector as well.  Sheikh Al Salmi went on to note that there will be an even distribution of healthcare services for Omani citizens. The scheme is anticipated to boost capacity in the healthcare system by reducing the current traffic and easing the burden on healthcare facilities, which in turn will lead to the possibility of extending medical services to other segments as well.

In the case of expats, Dhamani will provide them with smooth access to healthcare services through the adoption of simplified procedures. “This is guaranteed by the adopted policy of no compromise on quality of care or delivery of employer’s duty of care, as well as continuous monitoring and refinement, especially as the Capital Market Authority has already identified roles and duties for insurance companies, and healthcare providers,” Sheikh Al Salmi concluded.

The post Why the Oman government introduced Dhamani appeared first on International Finance.

This way, the Chinese have already paved the path to assert their influence on the Africa’s development — the continent where half of the world’s population will reside at the turn of the next century.

If China is having a civilisation shaping influence on Africa, can its civilisational rival Japan be far behind? Japan is slowly making its mark on Africa’s development to counter the Chinese influence on the continent, through similar deals and assistance. For decades, African countries have sought the help of the US, the UK, France, and the multilateral institutions like the World Bank and the International Monetary Fund to finance their infrastructure deficits. But what’s fascinating today is that China has superseded those countries in establishing goodwill on the continent in a much shorter time span. A decade ago, China ousted the United States as Africa’s largest trading partner.

Integrated approach the only way

If Japan had to counter China’s influence in Africa, it had to embark on the journey with an integrated approach like China. In 2016, the Japanese Prime Minister Shinzo Abe pledged $30 billion during the fourth Tokyo International Conference on African Development (TICAD). The pledge included $10 billion for infrastructure projects carried out in cooperation with the African Development Bank.

Japan has transformed the TICAD framework from basic government assistance programmes to private sector-focused activities such as trade and investment. With that, its approach to cooperation with Africa has become of more or less similar to China’s.

The Japanese government recently announced that it will establish a permanent joint council this year to link the government and the private sectors to coordinate Japanese investments in Africa. The council will comprise government officials, economic organisations, and Japanese companies operating in the African countries.

The council will hold two or three meetings each year, with the foreign minister, the trade and industry minister, and a business industry representative serving as joint chairpersons.

The Japanese involvement in Africa has already  politicised its relations with China and Africa. To Beijing, the possibility of Japan building high-quality infrastructure at a similar cost is a cause for concern. The Chinese Ministry of Foreign Affairs accused Japan’s outreach efforts as an attempt to ‘feed conflict’ between China and the African countries.

Currently, there are more than 440 Japanese companies operating in Africa. Engineering companies including JGC are establishing plants in Nigeria, while Mitsubishi Electric and chemical company AGC have opened sales offices in South Africa and Morocco.

China’s long-time influence on the continent has led to the commonly held belief that it is the more dominant partner of African nations than Japan. Even though Japan is lagging behind China in its engagement with Africa in numerical terms, the Japan International Cooperation Agency (JICA), which manages the country’s overseas assistance, has in fact provided aid for some of the most crucial infrastructure projects — and these involvements remain low key.  

For example, the JICA has provided assistance for the critical Tanzania-Zambia railway flyover bridge, and the construction of the Mwenge-Morocco highway. It has also signed a $112 million loan for assisting in infrastructural development around the Port of Mombasa in Kenya.

Data from Refinitiv shows that in the last decade, with regard to completed merger and acquisition deals, Japanese firms are significantly closing the gap with Chinese firms in Africa. So far this year the number of completed Japanese deals in Africa is four, while China has one, according to the data from Refinitiv.

Stanford study

The question now is whose influence on Africa is overall positive for Africa? Japan or China?

Scholars from Stanford University who studied Chinese investments in Africa from 1991 to 2000 found that Chinese investments are not often complemented with economic growth. Cheaper Chinese imports, for instance, have hurt small African local manufacturers leading to loss of employment opportunities. Unlike Europe and the United States, China often acts favourably to countries isolated by others for political reasons because it prioritises geopolitical interests over western concerns such as human rights.

The eagerness of African leaders to pursue loan deals with Africa and the Chinese eagerness to indulge African nations with loans continues unabated. When Nigeria’s President Muhammadu Buhari attended the Forum on China and Africa Cooperation in Beijing last year, he pursued an additional $6 billion in infrastructure loans from the Chinese state banks.At the summit, China’s President Xi Jingping also pledged $60 billion fordevelopment in Africa.

Most of the financing that African nations receive from China is in the form of loans. Chinese companies are also encouraged to invest in African projects. The outcome may not always be positive for the loan recipients.

African nations cancel projects

At times African nations have withdrawn from or cancelled deals with China. President of Sierra Leone Julius Maada Bio, who took office in April, cancelled a deal for China to build a new $400 million international airport at Mamamah. The deal was previously signed by his predecessor, but now the government is considering innovating the current international airport citing that the project is ‘uneconomical’. The decision to cancel the project also stems from the World Bank’s warnings that it could potentially increase Africa’s debt burden.

There is also a sense of fear that Kenya could risk losing the Port of Mombasa to the Chinese if the Kenya Railways Corporation (KRC) defaults payments to Exim Bank. KRC accepted the $2.3 billion loan with an agreement that the authority’s revenue will be used to clear the debt owed to China’s Exim bank. The fate of Sri Lanka’s Hamabantota Port hangs over the Mombasa port. China insists that any future dispute in the KRC project will be handled through an arbitration process in its own courts. This shows the inordinate leverage that China exerts on African nations.

Western media have raised allegations that China’s loans to African nations are leading them to a debt trap and that China is clandestinely picking up assets in Africa cheaply.

Despite that, Chinese companies have emerged as top competitors in the African market. Between September and October 2018, the Japan External Trade Organisation carried out a survey on Japanese-affiliated companies and their business operations in 24 African countries.

According to the survey’s key findings, Chinese companies climbed the top ranks for the first time as competitors in the African market. That said, the survey also showed that 76 percent of companies in Africa desire firm support from the Japanese government.

That said, the Government of Japan during TICAD VI promised to bolster the initiatives taken by African countries which will help to reinforce development across the continent. Also, several Japanese companies have shown significant interest in African markets. For example, last year Daikin Industries planned its business expansion in Africa and also considered a new Indian plant to produce products for the continent.

Japan hopes to become Africa’s single most valuable trade partner. The country has said that it plans to link Africa with Asia and include it in the Free and Open Indo Pacific Strategy. At the opening session of TICAD VI, Prime Minister Shinzo Abe said that Japan intends to foster peace and prosperity in the international community. “It is my wish that the self-confidence and sense of responsibility spawned there as a result come to envelop the entirety of Africa together with the gentle winds that blow here,” Abe said.

To this end, Japan and India are slowly investing efforts to create a joint program—theAsia-Africa Growth Corridor—which pledges to bring real benefits to Africa.

The plan has already led to conflict warnings from China. Chinese tabloid the Global Times warned: “If India and Japan design the corridor to deliberately counterbalance China’s BRI, they should think twice before rushing into it.”

But this is not to say that Japan’s interest inAfrica is purely selfless. Japan’s poor natural resources have encouraged it tobecome heavily reliant on the international markets. For the same reason, Japan’s Official Development Assistance (ODA) is focused on select African countries with abundant sources of raw materials.

With that, the continent has only become a political playing field for both China and Japan to play out a historic rivalry.

The post If China is in Africa, can Japan be far behind? appeared first on International Finance.

A House of Commons committee appointed to study the Carillion saga came up with the finding that Carillion’s accounts were systematically cooked to present optimistic assessments of revenue while completely discarding internal controls. An audit company, which was Carillion’s auditor for close to two decades and was paid £29 million for its services, did not once qualify its auditing opinion of the company and simply signed off the outlandish figures presented by the directors. Yet another firm paid £10 million by Carillion for its internal audit services, failed not only in risk management but also in financial controls.

KPMG South Africa in a soup

While UK’s parliament came down hard upon Carillion’s auditors, in South Africa, Big 4 audit firm was caught in a disturbing scandal. KPMG suffered collateral brand damage after it became known that the company had allegedly abetted the once powerful Indian-origin Gupta family in their shenanigans in the state capture issue. The firm was accused of helping the Gupta family, once called South Africa’s shadow government, evade taxes and indulge in corruption. Although KPMG denies any willful abetment of crime, it admitted to missing several red flags with regard to the family’s accounts. Eight senior KPMG South Africa officials were forced to resign including its CEO Trevor Hoole.

Testifying to the truly global nature of the ethical decision-making challenges and Big 4 audit scandals is the fact that India is seeking to ban Deloitte Haskins Sells and a KPMG affiliate BSR and Associates for their audits of a unit of Indian company Infrastructure Leasing and Financial Services (IL&FS), which nearly collapsed under mismanagement and has been placed under government control.

According to Reuters, India’s Corporate Affairs Ministry informed a company law tribunal that the auditors ‘miserably failed’ to fulfil their audit duties for IL&FS Financial Services (IFIN). There was more bad news for KPMG from UK regulator Financial Reporting Council, which analysed KPMG’ s audits and reported that they were substandard. According to Bloomberg, the regulator said auditors at KPMG do not challenge management enough, are not sufficiently skeptical, and are inconsistent in their execution of audits.

Fence eating the crop?

It is clear that as far as global capitalism is concerned, the fence is eating the crop. How do investors ensure that their money is in safe hands if the gatekeepers of capitalism are abetting corporate malfeasance willfully or by implication? The UK FRC report has drawn sharp reactions for the reform of the industry including calls to dismantle the Big 4. The Parliament committee in the UK believes that the wider economy risks a crisis of confidence in the audit profession as Carillion was not an isolated failure.

The committee said that the failure was the symptom of a of a market that works for the audit firms but fails the wider economy with umpteen conflicts of interests. The committee’s final report recommended that the British government should refer the statutory audit market to the Competition and Markets Authority. The CMA review could consider the breakup of the Big 4 into more audit firms as well as severing off audit units from other professional services units. Not surprisingly, the auditors have opposed these terms and have instead suggested a system of joint audits or lending their staff to smaller firms, so that smaller firms could get a share of the work.

Following the collapse of Enron and Arthur Anderson, the US addressed the auditing fraud issue by implementing the Public Company Accounting Oversight Board (PCAOB) through the Sarbanes Oxley Act of 2002. The monitoring of auditors has greatly increased in the US since the creation of PCAOB. Audit committees in the US are also said to have improved their willingness and ability to monitor auditors.

Investors are eligible to ask for strong audit committees of the board and pay more attention to what audit committees do. The US is a nation of laws and there is strong law enforcement. What happens when auditors make mistakes in countries where the law is not as strictly enforced as the US? The issue of ethical violations at auditors is no way restricted to the Big 4, but the Big 4 are symptomatic of the wider industry. If ethical decision-making falls by the wayside at Big 4 auditors, how do smaller independent audit organisations stop succumbing to the pressure to retain clients at any cost?

Smaller firms and pressure

“The question in 2001 was ‘If Arthur Andersen, one of the largest and apparently most technically proficient practices was brought down because of malpractices, why can’t this happen to smaller firms? They are under greater pressure from the sheer power of larger corporate clients,” Wesley Montechari Figueira, managing director at VBR Brasil Group, an independent accounting firm in Brazil told International Finance. VBR has clients in manufacturing, retail, and energy and around 30 percent of its gross revenue comes from international clients operating in over 25 countries. Accounting scandals are not new in Brazil, neither are scandals involving the Big 4 audit firms.

The Latin American country’s former president Dilma Roussef was impeached for apparently cooking the books of her country’s accounts. In December 2015, the American auditing watchdog PCAOB fined Big 4 leader Deloitte’s Brazilian unit $8 million for the most serious misconduct uncovered by the body till then. A probe into Deloitte’s audit of Gol, a troubled Brazilian airline with shares listed on the NYSE, found that Deloitte’s employees in Brazil, including managers and partners, had doctored paperwork, concealed evidence, and withheld information from inspectors. Similar incidents were again recorded in Deloitte’s audits of Oi a Brazilian telecom company that filed for bankruptcy in 2016.

Figueira is of the opinion that internal regulations and technology are of limited help in tackling the issue. “As in other professions, technology is replacing personal contact and while internal regulations can help govern ethical decision-making, they are not the only solution. Ongoing staff training, monitoring, and evaluation must complement regulations.”

“What we have learnt from past malpractices in accounting is that Brazilian accountants must end their willingness to ‘accommodate’ dicey situations rather than confront them. This must stop. Brazilians tend to like a ‘friendly’ auditor. The small and often non-existent fines imposed by our SEC, association of accountants or other governing bodies, speaks volumes about the battle we still have with ethics,” adds Figueira. Deloitte Brazil then faced the ignominious situation of an independent monitor overseeing its work till mid-2017.

At that time the PCAOB had just fined Deloitte Mexico $750,000 for tampering with documents in an audit done in the central American country. Operating out of Mexico, the team at independent auditor JA Del Rio claims that it has created a culture of learning from others mistakes. “We deliver an ‘unusual operations’ report every month to the relevant authorities, in compliance with our ‘prevention and identification of operations with resources of illegal origin’ policies.

“Our internal risk team keeps track of our clients’ business behaviour and their activities through risk matrices while our compliance officer identifies and evaluates risks associated with bad practices, integrating compliance and anti-bribery guidelines within our policies and processes, Bernardo Del Rio, managing director at JA Del Rio told International Finance. With headquarters in Guadalajara and offices in Mexico City, Leon, Monterrey and Bogota, Colombia, JA Del Río is a multilingual accounting firm focused on helping foreign companies do business in Latin America.

Carlos Mercero, a managing partner at Shilton, Weyers & Associates, an Argentinian company that provides audit, tax, consulting and advisory services to over 250 local and international clients from a variety of sectors, told International Finance that while encountering issues, both in the audit and in tax returns, Shilton, Weyers, and Associates, always takes the technical viewpoint. “Our work and effort to detect client fraud focuses on the key point that all managers, at all times, face the same risk and the temptations of bad behavior. And this is perhaps the main lesson we should never forget; that the risk of fraud never disappears,” he adds.

Never done before

In 2014, The head of the South African Revenue Service hired KPMG South Africa to conduct a forensic investigation into an intelligence unit of the national revenue service as well as four officers in the unit. KPMG SA’s report went on to suggest that the unit was using illegal methods and was therefore ‘rogue’ in nature. The report became a major embarrassment for KPMG as it came to be known that an auditor at the company had simply ‘copy-pasted’ the report from elsewhere. A commission appointed by the South African Institute of Chartered Accountants (SAICA) to probe the affair concluded that when a person cuts and pastes a report, it is not only dishonest but unethical.

After a KPMG international investigation into the South African unit, KPMG simply retracted parts of its report into the rogue unit probe – something absolutely rare in the world of auditing. Elsewhere in Africa, Egyptian Independent accounting firm Mazars Mostafa Shawki’s managing partner Dr Ahmed Shawki who keeps an eye on the African audit scenario told International Finance, “It is very dangerous for any accounting firm to mix politics and professionalism, and inconceivable that a big company can conduct a forensic audit, issue a report, and later withdraw it, as KPMG did in South Africa.” Mazars Mostafa Shawki serves over 1000 clients from two offices in Cairo and Alexandria, has 25 partners and employs 468 professionals.

“One of the key learnings from the KMPG South African scandal is that every firm should have a centralised system for client acceptance and engagement. The completion of a standard form ensures due diligence is undertaken prior to the provision of professional services,” adds Shawki. “Those completing the client acceptance forms should be a centrally-located team of risk management professionals.”

In the context of the accounting scandals in the emerging markets and South Africa,”  Mazars South Africa partner Kariem Hoosain recommends that auditors should pay special attention to politically-connected clients and understand the relationships of employees charged with governance and key executive and management staff. “It’s also vital to exercise genuine professional sceptism, particularly where you have a dominant chairman, CEO, or other key executives in the client, and apply rigorous and consistent quality assurance policies and procedures, irrespective of the so-called ‘great reputation’ of the client. Audit partners and managers should not become complacent.”

Hoosain added that partners and managers should go that extra mile to perform additional work where higher risk has been assessed, and not be constrained by budgets. “Partners should have open and frank discussions with those charged with governance, where fee estimates are inappropriate to the risk profile of the client,” says Hoosain.

Coming back to the FRC UK review of KPMG’s audits, the regulator reported that the decline in quality over the last five years was unacceptable and reflected poorly on efforts by the previous leadership to improve the work. “This is further evidence that problems at KPMG are profoundly systemic,” Atul Shah, a professor of accounting and finance at the University of Suffolk had then told Bloomberg. “They are a profit-maximising business rather than a professional firm with standards of independence, character and integrity. To reform the Big Four, we must address these cultural problems and conflicts of interest.”

Is rotation a solution?

How do governments in the UK and in the emerging markets confront the looming crisis of confidence in the auditing companies and their audits? It is evident that the monopoly of the Big 4 has to be broken to increase the pool of auditors and opportunities must be created for gradually increasing the mid-tier auditors’ share of the top audits. In most markets including the emerging markets such as India, the Big 4 auditing firms invariably audit virtually all of the major companies and corner the most important audits.

India had instituted a system of rotation of auditors through its Companies Act 2013. However, observers believe that this has not helped the smaller firms lay their hands on the major audit pie, because most of the major audits are rotated within the Big 4. The fact is that there is ample circulation of the same staff within the Big 4 audit companies ensuring that their culture remains the same. The aim of the Indian Companies Act is thus largely defeated. The issue of rotation is also being actively discussed in the UK.

In Africa, currently there is no clear move to limit the number of audits the Big 4 do or to rotate the auditors. In Egypt, the Financial Regulatory Authority is implementing rotation for public-listed companies every six years. In addition to the Big 4, three other big firms – BDO, Grant Thornton and Mazars – play a big role in the Egyptian audit market. Mazars Mostafa Shawki’s Ahmedi Shawki says that perhaps the implementation of a joint auditor concept is a solution.

On the other hand, Mazars South Africa Partner Kariem Hoosain suggests a solution similar to the one suggested by the UK Big 4 in response to the parliament committee hearing. “There are some practical challenges associated with a rotation strategy. ‘Smaller’ companies may not have sufficient capacity and expertise to take on the work that the Big 4 would need to shed. A better approach would be to “phase-in” mid-tier firms through graduated joint audit assignments. There doesn’t seem to a global push to do so, although it is under consideration in the UK.”  

In Latin America, smaller audit companies seem to be diffident that such an arrangement can be worked out in the region. And there is no desire to create pressure on the auditors as seen in the UK or Africa. Mazars Uruguay partner Luis Martinez argues “In many cases, there’s a problem of size and capacity; only these very large firms can do the work. However I do concede, joint audit and rotation may help spread the workload across the market.” Mazars is an international audit, accounting, tax and advisory services organisation with more than 23,000 professionals operating in 89 countries. In the region it is rare for smaller audit firms to audit larger companies, although some do audit such companies, especially those not listed on the stock exchanges.

Mexican company JA Del Rio Managing Partner, Bernardo Del Rio says “I think it could help, especially if national regulators required rotation. This could in effect open up the field for smaller firms as these subsidiaries individually could never compete with the head office of a large player in a specific country.”

VBR Brasil Group’s Figueira sees pros and cons in an approach that uses a single firm to undertake an audit and one that uses other firms and organisations’ resources. “When one larger firm is involved, there’s a single methodology which makes things faster and the cost to the client is likely to be smaller. And while there’s always an element of pressure, there’s no significant pressure from external third-parties on the audit department. However, with a single firm it’s easier to ignore or hide country-specific problems, individual teams are less accountable and less-experienced professionals may be used.”

According to him, a multi-firm approach tends to give greater independence to auditors. Equal partners in different locations can discuss problems and not allow themselves to be overruled by the larger client nor the ‘larger partner’ somewhere. This also reduces the pressure that a single firm is subject to during fee negotiation and the impact any negative feedback may have, since the opinions are formed within an audit department elsewhere.

“Differing methodologies and processes can be a benefit, leading to a more in-depth analysis of a problem and clearer conclusions – the ‘clash’ between different views and methods can be a plus. More senior staff are likely to be used as the command chain is shorter.” With regard to the cons he adds,” But, differing methodologies can for sure, slow things down, it may be difficult to agree and approve costs or measure the quality and quantity of work undertaken.”

Big 4 audit firm break up

Angus Dent is a leading UK chartered accountant and former CFO and CEO of AIM- and TSX-listed technology businesses as well as the founder of UK business P2P lending fintech startup ArchOver. With regard to the UK, Dent told International Finance that the break up of the Big 4 as the political leaders want is easier said than done. “We need to break the oligopoly that is the Big 4, although that’s easy to write and hard to enact. Companies need more choice. Only with choice is there competition and the audit service that the paying companies and users of the accounts need,” says Angus. Companies are complex, so auditing is therefore complex as well.

The big four have large technical departments, which is a big overhead and a barrier to entry for smaller firms. “Perhaps we could see the two chartered institutes, ICAEW and ACCA, build a technical service to rival those of the Big Four. The ICAEW already provides a service to members, but currently it is not as well-resourced as a single one of the Big Four’s technical departments,” adds Angus.

A shared technical service is one idea put forth as a solution to help smaller firms to gain a share of the top audits. “The existence of a shared technical department providing services to smaller firms could be very useful. This would overcome the main obstacle for smaller firms which is to have an efficient and strong enough structure to provide services to all types of clients, regardless of the size of the company,” says Shilton, Weyers & Associates Carlos Mercero. In Latin America, Mazars Uruguay partner, Luis Martinez is open to the idea “Technical departments need to be good, not large. And when a firm is global – and there are many global firms beside the Big 4 – resources can be shared, as in the case of Mazars. I like the idea of national bodies having technical departments to help smaller firms.” 

However, Mazars South Africa Partner Hoosain is sceptical about the idea. “Technical assistance by way of shared-pooled resources can only have a very limited impact. The main issues to consider is a lack of specific industry experience, understanding the client and its operations, key risk drivers, group structures, related parties and so on and key audit team members’ independence from the client. There would also be other practical challenges such as investment, cost sharing and prioritising requests from firms at ‘crunch’ times when reporting deadlines have to be met,” says Hoosain.

Let reform start from London

So what reform can governments and audit professional bodies consider that are within the realm of possibility. In the UK, Angus Dent is of the opinion that limiting the number of audits of FTSE 350 companies that the Big 4 will help.

“A simple start would be to say that the Big Four could only have a maximum of around sixty audits each of the FTSE 350 companies – that would spread things around and force some of the smaller FTSE 350 companies to seek the services of other audit firms. Two years later, the number of these audits that can be conducted by the Big Four could be dropped to forty each and so on.”

 According to Angus, this would force more effective competition and give the bottom half of the top ten an incentive to invest in technical departments, or club together and put more money in to the ICAEW, knowing that they would get more work than they are currently able to snag. At present they don’t invest in audit services for larger companies because they see little or no return on it as a result of the Big Four’s oligopoly. Considering the global reach of the accounting scandals, Angus Dent believes that auditing reform started from the UK would have global impact. “Start in London and let the UK be the standard bearer for global reform. London is already a world centre for finance; let’s make it the world centre for quality audit, audits that can be relied upon. If that happens, the rest of the world will follow,” concludes Angus.

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