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Kemi Adeosun (r), Nigerian Finance Minister, at a joint press conference with IMF Managing Director Christine Lagarde last month. Adeosun denied reports Nigeria has requested a $3.5bn loan from the World and African Development Banks


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Nigeria’s Finance Minister has denied reports the country has requested a $3.5bn loan from the World Bank and the ADB
According to the Financial Times (FT), Nigeria has submitted a request to the African Development Bank (ADB) and the World Bank for emergency loans worth $3.5bn. Yet shortly after the report was published, several local news outlets shared a statement from the Nigerian Finance Minister, Kemi Adeosun, in which she denied such a move had been made.

The FT wrote that the request was submitted in order to fill the gap in Nigeria’s widening budget deficit, which has reached $15bn. Purportedly, $2.5bn was requested from the World Bank and $1bn from the ADB. The FT described it as the “cheapest way possible” to reduce the budget deficit, rather than being an emergency measure.

Purportedly, $2.5bn was requested from the World Bank and $1bn from the African Development Bank

However, in her rebuttal, Adeosun was quoted as saying: ““The truth is that Nigeria, as part of the plans to fund the 2016 budget currently undergoing the approval process of the National Assembly, has indicated an intention to borrow [NGN]1.8trn principally for investment in capital projects to stimulate the economy.”

Whether the loans have actually been requested or not is unclear. What is clear, however, are the mounting challenges facing Nigeria. With its oil and natural gas sector contributing 75 percent of government revenue and a total export revenue of around 95 percent (according to the US Energy Information Administration), Africa’s biggest economy continues to be badly hit by the global oil crisis.

Adding further pressure to the slowing economy are escalating financial problems, in addition to hefty social spending programmes under the leadership of President Muhammadu Buhari. These are aimed at providing an economic stimulus, yet so far have achieved the opposite.

Given the financial difficulties in which Nigeria finds itself, confirmed reports of loan requests from international organisations such as the ADB and the World Bank could well be expected in the coming year.



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The removal of sanctions on Iran may trigger at least $50 billion a year in foreign investment to finance a rebound in an economy hit by the oil slump, the country’s central bank governor said.
“Our country can absorb a great deal of foreign investment, considering its potential,” Valiollah Seif said in an interview with Bloomberg at his office in Tehran, days after the trade and financial curbs were lifted last weekend. “I think more than $50 billion per year isn’t far-fetched,” he said.
Iran has already reaped some benefits from the implementation of last year’s nuclear accord, negotiated with world powers including the U.S. and European Union that were the prime movers of the sanctions regime.
About $32 billion of oil revenues previously frozen in accounts overseas are now accessible, and will probably be used to buy commodities, Seif said. The coming months will see moves toward normalization of Iran’s currency regime and financial system, Seif said. He said the dual exchange rates should be unified within six months.
Sanctions coupled with loose monetary policy under former president Mahmoud Ahmadinejad have saddled Iran’s banks with one of the highest non-performing loan ratios in the region, behind Libya and Yemen, according to the International Monetary Fund. Seif said the problem is being addressed, with risky loans down to 12.6% of all credit, or about $30 billion, from 15% two years ago.
“One of the methods we’re assessing with regards to addressing this issue is setting up asset management companies which can buy some of these bad loans,” he said.
The bank chief said Iran will consider raising funds on international debt markets in the future via a euro-denominated bond issue, though that’s “not one of our first priorities” and would be contingent on how much foreign direct investment the country can attract.

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By James King



A slower growing economy and tighter liquidity environment are presenting the United Arab Emirates' lenders with a new set of challenges. Will expanding their international presence provide a solution?

The United Arab Emirates has worked hard to diversify its economy in recent years. These efforts have pushed the contributions of the non-oil sector to about 70% of the country’s gross domestic product (GDP) according to its ministry of economy. But in common with other commodity exporters, the UAE has not been immune from the fall in global oil prices. With the price of crude oil expected to remain depressed over the medium term, the country’s growth model is now being put to the test.

The International Monetary Fund expects the UAE's GDP growth to slow to 3% in 2015, a marked decrease from the 4.6% recorded in 2014. In this lower growth environment, government revenues – some 60% of which are generated from the oil and gas sector – are expected to decline by about 20% in 2015. Meanwhile, the country’s fiscal balance is likely to turn negative in 2015 and 2016, though substantial financial reserves will offset the impact of these deficits in the coming years.

Oil price impact

"The drop in oil prices was always going to hit the economy with a slight lag, and that lag has now passed. We expect to see growth slow for the remainder of this year and into 2016. The weak oil price environment looks likely to last longer than in it did in 2008 and 2009. If that’s the case trend growth will fall, which will be reflected in falling asset prices, including equities and real estate," says Simon Williams, chief economist for the Middle East and north Africa at HSBC.

Cumulatively, these conditions mean that things are set to become more difficult for the country’s banks. In the years since the financial crisis, the UAE banking sector has enjoyed robust growth off the back of a booming economy, high oil prices and lavish government spending. Yet, the prudent regulatory environment established by the country’s central bank has ensured that this growth has been channelled effectively, with the UAE’s banks now in a good position to endure this more challenging environment. By the end of 2014 the sector had an average capital adequacy ratio of 18.2%, and an aggregate return on assets and return on equity of 1.7% and 13.6%, respectively, according to the central bank.

Nevertheless, the difficulties posed by lower oil prices are already being felt by most lenders. Over the coming quarters, credit losses are expected to rise as earnings growth cools and asset quality falls. In addition, the withdrawal of sizeable government and government related entities’ deposits from the banking sector is already contributing to a tightening of liquidity.

Liquidity challenges

"I think the liquidity environment will tighten, while borrowing needs will increase as government entities find themselves running deficits rather than surpluses. If US rates rise that will put further pressure on the sector," says Mr Williams.

In October 2015, the National Bank of Abu Dhabi reported a $13bn decline in government deposits over the previous year. This trend was mirrored by the sector as a whole, which has registered a 13% fall in government deposits since the start of 2015, according to data from Standard & Poor’s. Volatility in the country’s money market rates in recent months reflects this worsening liquidity position. Overnight, three-month and one-year interbank rates have all spiked to multi-year highs throughout the second half of the year, pointing to the growing concern among the country’s lenders.

“In response to a more challenging liquidity environment, the market may see an increased number of UAE banks looking to raise funding through the debt capital markets. There may also be increased appetite for bond issuance from governments within the region,” says Shayne Nelson, chief executive of Emirates NBD, the UAE’s largest lender by Tier 1 capital.

Markets elsewhere in the region are facing similar liquidity challenges. Saudi Arabia’s domestic bond issuance programme, which started with a $5bn issuance in mid-2015, is a testament to the estimated $360bn in lost export revenues that the Gulf Co-operation Council (GCC) region has endured over the past year. The country's domestic bond issuance programme, which has been introduced to plug a gaping budget shortfall, also has implications for Emirati banks.

 “Saudi financial institutions act as important fund providers in the wider GCC banking market, so any deterioration in the kingdom's liquidity position should have some impact on the UAE banking system,” says Suha Urgan, associate director of financial services ratings with Standard & Poor’s.

Taken together, the performance of the UAE’s banks is now beginning to cool. Indeed, most lenders have started to show signs of a slowdown in their third-quarter results this year. Emirates NBD recorded just 2% net profit growth quarter on quarter, while the National Bank of Abu Dhabi’s net profits fell by 3% year on year and 8% quarter on quarter. Meanwhile, Abu Dhabi-based First Gulf Bank’s net profits were effectively flat over the third quarter compared with the same period in 2014.

"On aggregate I expect to see credit growth in the banking sector to slow over the coming year. This will be accompanied by an increase in the cost of funds," says Mr Williams.

SME caution

Meanwhile, this more challenging market environment is putting pressure on lending to small and medium-sized enterprises (SMEs). Though SMEs contribute about 60% to the UAE’s GDP and account for 92% of all firms in the country, according to figures from Emirates NBD, bank lending levels to the sector remain exceptionally low. Current estimates indicate that only about 5% of all bank lending is geared towards SMEs in the country.

Yet, in the current environment, SME default rates are on the rise, in turn leading to greater caution among the country’s lenders. “In terms of the SME sector we are expecting to see higher default rates emerge in the last quarter of 2015 and the first quarter of next year,” says Mr Urgan.

Moreover, the introduction of a credit bureau in late 2014 now provides the banks with credit information on consumers and companies dating back to October 2012. While this has increased levels of transparency and will lead to market improvements over the long term, it has also clarified the state of indebtedness of some corporate entities. As a consequence, a number of lenders are now limiting their exposure to riskier clients by recalling loans and limiting their lending activities.

Meanwhile, for SMEs with an eye on trading and global markets, matters have not been helped by the appreciation of the dirham, according to HSBC’s Mr Williams: "Nearly every emerging market currency has weakened against the US dollar over the past year. Yet, due to the dirham's peg, there hasn't been a nominal change against the dollar in the UAE and in real terms the currency has actually appreciated,” he says.

For international lenders, the country’s SME market is also a source of some risk. Standard Chartered’s decision to end its relationship with UAE businesses with less than $10m annual turnover in October 2014 emerged as a result of pressure from the US regulators who were pressing for the lender to reduce its risk profile. Indeed, a number of international lenders have withdrawn from the UAE banking market in recent years as both regulatory and market dynamics have taken their toll. The Royal Bank of Scotland, Lloyds and Barclays have all reduced their presence in the country.

Islamic finance

A notable exception to this trend has been Mitsubishi UFJ Financial Group’s banking arm, the Bank of Tokyo-Mitsubishi UFJ (BTMU). In October 2015, the bank announced the launch of its Islamic finance window out of Dubai. Covering the Europe, Middle East and Africa (EMEA) region, the move follows the bank’s foray into the sukuk market through its Malaysian unit in 2014, in which it became the first Japanese lender to tap the sharia-compliant debt market. The transaction was also the world’s first yen-denominated sukuk.

“We decided to make our branch in Dubai the centre of our EMEA Islamic finance strategy. This is because we see huge potential for growth across the GCC. We are starting with very simple products, including commodity murabaha financing and deposits. By the first half of 2016 we’re planning to introduce istisna and ijarah-based products,” says Shichito Tobari, managing director and regional head for the Middle East at BTMU.

As noted in The Banker’s Top Islamic Financial Institutions 2015 report in November, while the growth of the global Islamic banking market is beginning to plateau it still outpaces its conventional counterpart by some measure. As such, BTMU’s move into sharia-compliant finance is viewed by the bank as a means of tapping into this potential, as well as expanding its customer base.

“Most countries in the region require significant infrastructure investments and we see a lot of opportunity to capitalise on this demand. Across the region both sovereigns and corporates are looking for US dollar liquidity and that’s where we have an edge because we have a strong balance sheet,” says Mr Tobari.

Digital innovation

Despite the challenges, the UAE’s banking sector is building on its reputation as a regional leader in terms of its technological and digital innovation. While a number of banking markets across the GCC have invested heavily in these areas in recent years, the UAE is emerging in a league of its own. This is evident both in terms of the products and services on offer, as well as the ways in which customers are now engaging with the banks.

“The percentage of [Emirates NBD] customers regularly using digital services reached 42% of the customer base, with transactions done outside the branch network now reaching 87%, a new milestone for the regional banking industry and on a par with international best practices in developed markets,” says Mr Nelson.

According to data from Emirates NBD, the bank has now reached an inflection point where it is observing digital transactions increasing by 29% annually against a fall in branch-based transactions of 17%. In turn, this process is helping the lender to manage its branch costs while sourcing about 10% to 15% of new business through digital channels.

In September 2015, Emirates NBD became the first bank in the central and eastern Europe, Middle East and Africa region to participate in Visa’s Digital Engagement Programme. The programme connects financial institutions and technology companies in order to accelerate the development of new payments and commerce services.

In addition, the bank’s roll out of mobile cheque deposit technology, as well as a toll-free remittance app covering India, the Philippines and Pakistan, point to the growing trend of digitisation in the market.

Global growth

Looking ahead, a number of the UAE’s lenders are now actively seeking growth opportunities abroad. The intense competition in the domestic market, coupled with the worsening macroeconomic environment, looks set to accelerate this process. Speaking at a media event in July, the chief executive of Abu Dhabi Islamic Bank, Tirad Al-Mahmoud, said that the bank was eyeing acquisition targets in south-east Asia, the Middle East and north Africa for 2016.

The National Bank of Abu Dhabi (NBAD) commenced operations in India in November 2015. The lender was granted a full banking licence by the Reserve Bank of India and will provide wholesale banking services, including debt origination and distribution, project finance, trade finance and asset finance. The move comes as NBAD seeks to develop its position along its so-called west-east corridor.

Similarly, Emirates NBD looks set to continue its strategy of both organic and inorganic expansion over the coming year. “Emirates NBD uses a mix of organic and inorganic initiatives to expand its international footprint. We have no defined time frame however, and the markets covered within our current plans are the Middle East and north Africa, Turkey and south Asia,” says Mr Nelson.


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