Security cheques in the UAE on course for extinction

December 6, 2017 By in Bank Tags:

Nothing in this article is to be construed as legal advice. This is an economic analysis of what I see as being possible rational decisions.

What are security cheques?

Let me first explain: a post-dated cheque has traditionally been used in the UAE as a last ditch guarantee in the event that a bank or other party cannot be paid by the person signing the cheque, often in the case of a loan or service rendered or goods supplied, ahead of an expectation of receiving payment in the future at some point. This is because a criminal case could be filed against that person in the event that the cheque is presented and then returned if there are insufficient funds in the account related to it. The ultimate penalty for this in the past was jail, providing a lot of leverage to the party trying to recoup their funds. There are various laws surrounding how a bounced cheque is handled by the legal system but the spirit of the law seems clear to me and that is to stop people from behaving in a fraudulent manner. However, various parties, including banks, company suppliers and vendors as well as individuals such as landlords have used the letter of the law to apply anti-fraud rules to economically distressed companies and persons.

Why do I say this? Well, think of it this way: If the intent of the law was to, for example, jail people who cannot pay back a loan then there would be a law that specifically states that. However, in the absence of a security cheque that bounces, a person who fails to pay back a debt does not necessarily face the same fate as a person who has bounced a cheque and certainly the path to the final legal judgement is much more balanced. This reasoning clearly points to the fact that the law was not meant to punish those in financial distress. It is the spirit of the law that has been twisted and put to use for purposes not intended. I am not a mind reader, but the logic certainly points to these conclusions. Continue reading →

Stark SME stats don’t tell the full story

November 27, 2017 By in SME Tags: , ,

The issue of lending to SMEs in the UAE was discussed at the Middle East Banking Forum in Abu Dhabi on Wednesday, where a number of solutions were raised to tackle a perceived dearth in funding for the country’s small businesses.

Mubarak Rashed Al Mansoori, the governor of the Central Bank of the UAE, said the Bank was working on a multi-pronged solution to the conundrum, one of which is to encourage private equity (PE) investors to take up some of the slack left by the banks.

Important as it is for PE players to participate in the SME sector, it’s worth remembering that their contribution forms a different part of the capital structure for businesses of all sizes. There’s undoubtedly a place for equity investment in SMEs, but that doesn’t mean they won’t need debt as well.

That’s not to say that the Central Bank is looking for solutions in the wrong place. But it’s worth noting that the bank has already done everything in its power to support the SME segment. The banking sector and the SMEs themselves, however, deserve a little more scrutiny. Continue reading →

Clearing up misconceptions about Islamic finance

November 19, 2017 By in Finance Tags: ,

Nizar Al Shubaily, an experienced Islamic banker, co-authors with me on Islamic finance. Although I believed that I was well versed in matters related to Islamic finance, the prevalence of misunderstood terms and concepts in the media and elsewhere have often confused matters.

Mr Al Shubaily has helped me understand a few things.

To start off, let’s take a step back and think about the meaning of interest in the financial sense. Interest is simply a fee paid on a debt, expressed as a percentage of some other number, usually the current or original amount of outstanding debt. There is nothing magical about using a percentage, or relative, amount to describe what is paid on debt as opposed to a fixed or absolute amount.

Does it matter if you say the fee is 10 per cent of an outstanding debt of US$100, versus a fee of $10? Not really. We also have to think about usury, defined as an unreasonably high interest charge or fee on a debt. Of course, it is not always clear what “unreasonably high” means in this context in terms of the general definition of usury.

Here we come to the first widespread misunderstanding in Islamic finance: it is commonly reported that “riba”, the Arabic word for payments with respect to debts (prohibited in Islam), is the equivalent of usury. But if this were true. then it would mean that if there is a level of interest on debt which is unjustified, then there must be a lower level that is justified. That is patently untrue. So what does riba, the prohibited action under Islam, actually mean? Continue reading →

Why the cash flow statement matters

November 10, 2017 By in Finance, Analysis Tags: ,

Cash flow for me is the most important financial statement as it can corroborate or invalidate what I see on the income statement. In the last three weeks I’ve looked at the income statements, balance sheet statements, and the link between the two for various companies. Today I will use Shuaa’s Q3 2017 financials to show how the cash flow statement can provide insight into the more famous income statement.

Cash flow basics

A little refresher course in accounting first. Cash flow accounting as a measure of the performance of a company is flawed because it does not reflect the timing of transactions. For example, if a company is paid an annual subscription to provide a weekly magazine, then cash flow accounting would recognise a large income upfront and then the expense of publishing the weekly magazine is recognised about evenly across the year. This can make things look far better than they are. There are other situations where the opposite could happen, or where the effect is on the balance sheet, eg depreciation. Continue reading →

Understanding First Abu Dhabi Bank's Q3 Financials

November 3, 2017 By in Analysis Tags: , , 1 Comment

I often try to provide alternate ways of looking at issues as a way of adding to the dialogue. Two weeks ago earnings season began and in my first article I looked at the income statement of some banks and in a subsequent article I examined the balance sheet of a bank. This week I link the income statement to the balance sheet statement using First Abu Dhabi Bank’s Q3 financials.

Banking Sector Review

Two weeks ago I looked at the first banks to report their Q3 financial performance. The main thing that I was looking at was source and quality of profits and the increase in profits. If profits came from core business, which is lending, then I considered this better quality profits. If the source of profits was due to sources that were difficult to repeat or maintain, such as operating expense efficiencies, large increases in investment or fee income, or a large decrease in the impairment charge, then I considered this lower quality profits, even though they might be important.

Last week I took a look at another bank but this time examining it from my long running worry that banks might be increasing profits by increasing their loans at a time when the return on assets for some was deteriorating. I was concerned about why some banks might be lending more in a more challenging market. Looking at the balance sheet of the bank that I reviewed, ADCB, it was clear that there was a conscious de-risking of the balance sheet by management followed by a balance sheet optimisation strategy that looked like deploying their balance sheet into stable markets.

This week I look at First Abu Dhabi Bank’s Q3 performance. I’m not trying to make an absolute judgment about performance but rather to explore ways in which to study the performance. Also, keep in mind that FAB completed its merger earlier this year and this will have one-off effects. All numbers are quarterly year on year, i.e. comparing Q3 2017 to Q3 2016. Continue reading →

Abu Dhabi Commercial Bank's Q3 financials

October 27, 2017 By in Analysis Tags: , 2 Comments

Following on last week’s article analysing the Q3 financial performance of Dubai Islamic Bank, Union National Bank and Mashreq, on Wednesday I had a look at how the other banks are performing and was pleasantly suprised when I visited the Abu Dhabi Commercial Bank website.

ADCB’s good investor relations

The pleasant surprise was not that ADCB had its financials up; I would expect that given DIB, UNB and Mashreq all managed to. The surprise was that ADCB provided a spreadsheet with its financials. But wait, there’s more. ADCB also provides historical numbers. Astounding, this is true investor relations. For all companies that do this, I sal­ute you. For companies that don’t, please understand that investor relations isn’t just a link on your website to your financial statements.

Dear Securities and Commodities Authority: Please consider requesting all listed companies to provide their financials, including historical, on spreadsheets and make them available on their websites.

ADCB balance sheet strength

Back to ADCB. I’m impressed. Last week, I looked at the income statement and the quality of earnings. This week I’ll look at the balance sheet statement. First some checks. One of the important issues when looking at “deposits and balances due from banks”, which is one of the liquidity pools available to a bank, you need to also look at “due to banks”. If a bank has in the interbank market loaned US$100, this might look good, but if it has borrowed $100 from banks, then the net effect is zero. ADCB has Dh10 billion net due to it in the interbank market. ADCB has a further Dh21bn in cash and on deposit with central banks, usually also considered a high-quality liquidity pool. What does this mean? You have to look at it in terms of the customer deposits of Dh163bn. This means that ADCB’s high-quality liquidity pools are 19 per cent of customer deposits, which is fantastic. But wait, there’s more. Continue reading →

Earnings Quality vs Quantum of Earnings

October 21, 2017 By in Analysis Tags: , 5 Comments

The third quarter (Q3) is over and earnings season has begun as listed companies release their Q3 financials. We’ll take a deep look at these financials, starting with the heart of the economy – the banking sector. My main aim here is to look at the picture that the financials give and try to understand what might be going on in terms of a longer term trend. My focus is the quality of earnings and the direction that earnings are moving in.

I want to take a moment and clarify a few issues. I am looking at earnings and not at creditworthiness, which looks positive given the capital adequacy ratios of these banks. The second point is that I am selecting the larger banks that first released earnings, so selection is not based on financial performance. Indeed, the banks that released earnings first should be applauded for working to provide investors with important transparency and timely provision of information. Continue reading →

Innovation needs perspective not isolation

October 16, 2017 By in Entrepreneurship Tags: , ,

I was honoured to be invited to Bahrain this week to give a talk at an event organised by Bahrain Development Bank’s Rowad Programme, a comprehensive platform providing multiple layers of support to Bahrain’s entrepreneurs and start-ups.

Rowad’s breadth and depth are far greater than anything else that I have seen in the region, and addresses multiple facets of the challenges faced by entrepreneurs and startups. The programme comes as close to being a super-contained entrepreneurial ecosystem as I have seen. If you are an entrepreneur I urge you to seriously consider their offerings. If you are an investor you might consider looking at the entrepreneurs and start-ups that Rowad is supporting as when entrepreneurs have that breadth and depth of support then they should have a greater probability of success.

The Rowad Talk, moderated by the programme’s co-founder Areije Al Shaker, was a dynamic event that featured some good discussions with the audience. One point in particular, about the necessity for entrepreneurs to seek external feedback, deserves elaborating upon. Continue reading →

Sharjah’s cost advantage a win for UAE startups

October 4, 2017 By in Entrepreneurship Tags: , ,

Entrepreneurs are facing pressure from multiple challenges with a major one continuing to be the cost structure of doing business in the UAE.

Sharjah appears to provide a solution.

This section of today’s column is co-written with Najla Al-Midfa, General Manager of Sheraa and one of the region’s thought leaders and active architects of entrepreneurship ecosystems in the UAE.

If you are a regular reader of my column you will know that I am a little bit exasperated at what I see as deep denial in the business community about current and future economic challenges. On a personal basis this has created a challenge for me in restructuring my family investment portfolio in response to those same economic challenges. This has led me to an interesting insight.

The part of the portfolio that I was looking at that led to this insight was the real estate sub-portfolio. The real estate sector does not have as much transparency in terms of price discovery as, say, the listed equity markets. An investor needs to be continuously in the market, working with real estate brokers, to truly know where the prices are for different types of real estate in different locations. The flight from high cost residential to middle and low cost residential is relatively well known and logically sound. It is a great defensive move and one that investors believe will protect their investments and their yield. What was surprising to me was finding out that prices for these types of residential properties was rising at quite a healthy rate in the Emirate of Ajman.

A little investigation made it clear why. We have all heard about people working in Dubai but living in Sharjah due to the latter’s more affordable cost structure. What anecdotal evidence suggested was that commercial prerogatives were following personal ones, ie some companies based in Dubai who need to manage their costs are moving part, if not all, of their work force to Sharjah. So some of those working in Sharjah simply decided to live in Ajman to free up even more of their income for savings or discretionary expenditure. Continue reading →

Financial reality more important than predictions

September 24, 2017 By in Asset Management Tags: ,

About a year ago I wrote about the UAE as a financial center and in particular compared it to Singapore. The article states:

Let’s go back to Singapore with a GDP of $293 billion and population of 5.5 million versus our GDP of $371 billion and population of 9 million. So not only is their market cap four times larger than ours as a percentage of GDP, but their GDP per capita is about $53,000 versus our $41,000. [Data source: The World Bank]

In short, the statistics indicated at that time that Singapore was far more efficient as a financial center.

Let’s move to the present day, a year later. A Dubai International Financial Center (DIFC) report, compiled in partnership with Thomson Reuters, was recently released. The DIFC report studied the wealth and asset management opportunities in the Middle East, Africa and South Asia region (Menasa). I got to page six of this 50+ page report and found some statistics that contradicted my view of the world. I summarise them in the table below.

Continue reading →