In Good Faith the Enormous Potential of Islamic ﬁ Nance

November 2018 Vol.9 Ed.10

 Christine Lagarde on regulating fintech  In conversation with Már Guðmundsson  Kalin Anev Janse on ESM bonds  Didier Borowski on recession forecasting  Abdul Haseeb Basit on Islamic ﬁ nance  Kenneth Cheong on Asian green bonds

In good faith The enormous potential of Islamic ﬁ nance

BTN_11.18_001_cover copy.indd 1 31/10/2018 17:00 Invested in the future.

You don’t thrive for 230 years by standing still.

As one of the oldest, continuously operating financial institutions in the world, BNY Mellon has endured and prospered through every economic turn and market move since our founding over 230 years ago. Today, BNY Mellon remains strong and innovative, providing investment management and investment services that help our clients to invest, conduct business and transact in markets all over the world.

To learn more, visit bnymellon.com

Untitled-1.indd 1 13/09/2018 10:32 Contents

November 2018. Vol.9 Ed.10

4 ABOUT OMFIF 5 LEADER 6 REVIEW / AGENDA 9 Cover: In good faith – Islamic finance 22 TRILLION DOLLAR SAVINGS Lex Sokolin 9 ENORMOUS POTENTIAL OF 23 DIRECTING CAPITAL TOWARDS ISLAMIC FINANCE SUSTAINABLE GOALS Faizal Karbani Kenneth Cheong 10 GREEN SUKUK BECOMING 24 A REGULATORY APPROACH 6 MAINSTREAM TO FINTECH Kat Usita Christine Lagarde 11 OVERCOMING ISLAMIC 25 MANAGING EXPECTATIONS FINANCE INEFFICIENCY Didier Borowski Otaviano Canuto Inquiry 27 12 TOO BIG TO IGNORE Julia Demidova 27 CHART OF THE MONTH: HUNGARY INCREASES GOLD RESERVES TENFOLD 13 ISLAMIC FINTECH 30 OMFIF ADVISERS NETWORK POLL UNENCUMBERED BY STATUS QUO Shelving of Aramco IPO is ‘calculated’ Abdul Haseeb Basit In conversation 14 MÁR GUÐMUNDSSON with Danae Kyriakopoulou

Worldview 18 FROM PHYSICAL TO DIGITAL Eva-Maria Dimitriadis 14 19 PRIVATE CREDIT EMERGING IN AFRICA 24 Ryan Martin 20 FOLLOW THE MONEY James Cannings 21 ASIA RETURNS TO ESM BOND MARKET Kalin Anev Janse

OMFIF.ORG NOVEMBER 2018 BULLETIN 3

BTN_11.18_003_Contents.indd 3 31/10/2018 16:59 Black Wednesday, About OMFIF Brexit and the making of Europe... Dialogue on world finance and economic policy SIX DAYS IN THE Offi cial Monetary and Financial Institutions Forum is an independent think tank for central banking, economic policy and public investment – a non-lobbying network for best practice in worldwide public-private sector exchanges. At its heart are Global Public Investors – central banks, SEPTEMBER sovereign funds and public pension funds – with investable assets of $36tn, equivalent to 45% of world GDP. With offi ces in London and Singapore, OMFIF focuses on global policy and investment themes – particularly in asset management, capital markets and fi nancial supervision/regulation – relating to central banks, sovereign funds, pension funds, regulators and treasuries. OMFIF promotes higher standards, performance-enhancing public-private sector exchanges and a better understanding of the world economy, in an atmosphere of mutual trust. ‘GRIPPING PORTRAYAL’ Kenneth Clarke Membership ‘Required reading’ Membership offers insight through two complementary channels – Analysis and Meetings – where members play a prominent role in shaping the Norman Lamont agenda. For more information about OMFIF membership, advertising or ‘Dramatic account’ subscriptions contact membership@omfi f.org Alistair Darling

Analysis OMFIF Analysis includes commentaries, charts, reports, summaries of meetings and The Bulletin. Contributors include in-house experts, advisers network members and representatives of member institutions and academic and oﬃ cial bodies. To submit an article for consideration contact the editorial team at analysis@omﬁ f.org

Meetings OMFIF Meetings take place within central banks and other offi cial institutions and are held under OMFIF Rules. A full list of past and forthcoming meetings is available on www.omfi f.org/meetings. For more The Amazon bestseller by information contact meetings@omfi f.org William Keegan, David Marsh and OMFIF Advisers Network Richard Roberts The 173-strong OMFIF advisers network, chaired by Meghnad Desai, is With a foreword by made up of experts from around the world representing a range of sectors: Helmut Schlesinger monetary policy; political economy; capital markets; and industry and investment. They support the work of OMFIF in a variety of ways, including contributions to the monthly Bulletin, regular Commentaries, seminars and other OMFIF activities. Membership changes annually owing to rotation. Available to buy at: omfi f.org/shop OMFIF.ORG

BTN_11.18_004-005_About_Leader.indd 4 31/10/2018 11:12 Leader

O cial Monetary and Financial Institutions Forum Islamic finance scales u 30 Crown Place, London, EC2A 4EB United Kingdom mfi I hanks to the concentration of wealth in oil-rich economies and the Teelmen amnise ela sanas e Islamic finance BOARD mae is me la an ee efine as a a cncin finance aid as, Chairman il iddleton Deputy Chairman ile esecin saia la Islamic finance iinall cse n e eail ai Aa market; it has since grown to attract mainstream investors. The industry ooma imis boasts assets worth more than $2tn, and is expected to exceed $3tn by 2020. dad onustiece on lende This month’s Bulletin looks at this small but fast-growing and dynamic auen obets market, documenting its present state and development trajectory. ete ilin cnis eamine e lins eeen Islamic finance an e inesmen ens sc as een finance e eelmen een ADVISORY COUNCIL enad esai, Chairman s cs an e iialisain finance Islamic finec a obel, US Chairman e is a innain in Islamic finec ile slimmai oannes itteeen, Honorary Chairman countries in Asia have been at the forefront of the development of Islamic ouis de ontellie, Deputy Chairman an ceidi, Deputy Chairman finance cs alasia lance e ls fis een s in ian onuo, Deputy Chairman an in ea is ea Innesia isse e fis seein een s Hani ablai Deputy Chairman a fieea n n se cees ae allcae climae a mit, Deputy Chairman taiano anuto, Aslian edi environment-related projects and obet onson,illiam eean, designed to comply with Islamic law. on onblum oman amont, ese eelmens eec a in insle oalu abiio accomanni, iels esen ed uman, focus on innovation and sustainability asa ande Be, Ben enlin, Chair, in investment practices. This was a OMFIF Economists Network key theme at this year’s International EDITORIAL TEAM Monetary Fund-World Bank Group anae iaooulou, Head of Research annual meetings in Bali, where OMFIF imon Hadle, Production Manager launched two new reports: on the ulian ae, Senior Editor ulie eAbenoli Subeditor development of capital markets in Ben obinson, Deputy Head of Research Africa, and on the application of Bain atel, Economist blockchain technologies to central at sita, Economist illiam oninsbBon, Editorial Assistant banks’ interbank payments systems. aell elamaide, US Editor Adjusting investment shifts in the MARKETING emaic an scieal files is stosi, Head, Business Development of the global economy will drive the tean Beci Communications Manager eelmen ne secialis finance ames iteald Senior Marketing Executive markets. Strictly no photocopying is permitted. It is illegal to reproduce, store in a central retrieval system or transmit, electronically or otherwise, any of the content of this publication without the prior consent of the publisher. While every care is taken to provide accurate information, the publisher cannot accept liability for any errors or omissions. No responsibility will be accepted for any loss occurred by any individual acting or not acting as a result an cnen in is licain n an secific mae reference should be made to an appropriate adviser. anae iaooulou oman umbe I Chief Economist and Head of Research

OMFIF.ORG NOVEMBER 2018 BULLETIN 5

BTN_11.18_004-005_About_Leader.indd 5 31/10/2018 11:12 Review

»11 October, Bali »19 September, London Africa ‘must deepen Assessing the UK’s national savings’ economic outlook

AFRICAN countries must SPEAKING at an OMFIF meeting in London, deepen markets for national Silvana Tenreyro, member of the Bank of England’s savings as a prerequisite Monetary Policy Committee, discussed inflation, for sustainable growth, the productivity puzzle, and the outlook for the UK Dondo Mogajane, director economy in the light of an assumed-orderly Brexit and general of the South geopolitical developments between the US and China. African Treasury, said in Bali, launching the second annual Absa Africa Financial »8 October, Singapore Markets Index, this year in an interactive digital Consequences of version. Visit omfif.org/analysis/ US growth reports to download the full report JAMES Bullard, president of the Federal Reserve Bank of St. Louis, spoke at an OMFIF Foundation City Lecture. He remarked that the US growth surprise has allowed the FOMC to normalise its policy rate, but that faster productivity growth will be needed.

»11 September, Singapore Achieving inclusive »2 October, New York Central banks face ‘hot breath’ growth in Asia OMFIF and the International Finance over QE Corporation organised a seminar to discuss ideas and best practice on inclusive and innovative POLITICAL constraints on the Fed growth. Topics of discussion and ECB to combat a future recession included demography, will be much greater than after the globalisation, digitalisation, 2008 crisis. That was a conclusion and the process of of an OMFIF seminar discussing 10 channeling infrastructure years of quantitative easing. With investment to Asia. central banks feeling the ‘hot breath’ Speakers included Jingdong of politicians, leeway for technocratic Hua, vice-president and solutions is constrained. treasurer of the IFC.

6 BULLETIN NOVEMBER 2018 OMFIF.ORG Agenda

»9 October, Bangkok Countries ‘share risks and rewards’

EMERGING market countries and advanced economies face »Wednesday 7 November, London similar challenges and potential rewards from a complex pattern of The efficacy of risk and opportunity in the world macroprudential policies economy. That was a theme of a symposium organised by the Bank A roundtable with Donald Kohn, member of the Financial Policy Committee at the Bank of England and of Thailand and OMFIF. vice-chairman of the Federal Reserve (2006-10). Topics of discussion include macroprudential policies and the »25 September, London transformation of the world economy for central banks. Where next for the euro? »Monday 12 November, London OMFIF organised a lunch discussion with Peter Praet, member of the executive board of the European Central Bank. Topics included the outlook for the Leadership in the UK and European economy, implications of unwinding unconventional monetary policy, Brexit scenario planning and the challenges in maintaining price stability and financial stability. A roundtable with Lord (Norman) Lamont, chancellor of the exchequer (1990-93) and Lord (Christopher) Tugendhat, »3 October, London »11 October, Bali vice president of the European Commission (1981-85), on the UK’s negotiation process and the economic and Conventional OMFIF-IBM political impact of the different Brexit scenarios. approaches report launch »Monday 10 December, London ‘AFTER many years, we finally OMFIF organised a roundtable to Balancing the roles of the are close to achieving our dual mark the launch of an IBM-OMFIF European Central Bank mandate objectives and are finally report on central bank digital returning to a more conventional currencies. Discussion focused on A lunch discussion with Ignazio Angeloni, member of the supervisory board of the European Central Bank. policy approach,’ said Charles the findings of the report and the The meeting focuses on how the ECB balances its Evans, president of the Chicago broader questions surrounding the roles of monitoring the euro area’s banking sector Federal Reserve, at an OMFIF application of digital currencies and while stimulating banks to lend more. City Lecture on the US economic blockchain technology to the global outlook and Fed policy. payments system. »Thursday 31 January, London Much admired Outlook for reserve asset management for 2019 commentator A seminar on the outlook for public sector investment management in Europe for 2019, along with REGINALD ‘Reggie’ Dale, OMFIF economic and financial developments in 2018. It advisers network member, who died brings together a group of economic experts and on 18 September, was a much-admired asset managers from a public sector background. commentator on European politics and economics with a matchless catalogue of contacts in Brussels. For details visit omfif.org/meetings

OMFIF.ORG NOVEMBER 2018 BULLETIN 7 e s In ai Islamic ﬁ nance

In good faith

8 BULLETIN NOVEMBER 2018 OMFIF.ORG

BTN_11.18_008-009_coverOpener.indd 8 31/10/2018 11:28 nomous otential o Islamic ﬁ nance Sector must offer an alternative proposition to conventional institutions

Faizal Karbani aia la claifi es se iiins aiacmlian ansacins ae Simply Ethical free from contractual uncertainty and ambiguity in the key commercial terms and subject matter of the underlying deal. The intention here is to prevent disputes arising between two contracting parties. amles iie acii l e e sale alcl en i cmes siness ae an fi nance e minan the provision of gambling. Such activities are prohibited because they Wparadigm is a secularist one in which religion has little or no role are seen to be, on balance, damaging to people and society. Moreover, la Islamic fi nance callenes is mel transactions are interest free. This is probably the biggest single Islam does not subscribe to a secularist view of life; there is no ieence eeen Islamic fi nance an cneninal fi nance Islamic separation of ‘church’ and ‘state’ as such. When it comes to business fi nance s e le mne e a se ale an a meim an fi nance Islam las n clea inciles a eliees ae eece ecane i is n e se as a cmmi an ae ean inees to follow. Failing to follow these guidelines would, from a believer’s nens Islamic fi nance l ae a e ineesase perspective, contravene divine law and guidance. fractional reserve banking system has had several harmful consequences. Today the Muslim population is around 1.8bn, or one-quarter of all These include greater wealth inequality, as lenders who loan money ele i is eece me an n an incease on interest will naturally favour those who have the most collateral, aains an aeae eece acss e l namely the rich. The interest-based system also encourages debt. This is means a in me an ele ill e slim I is places a burden on the indebted and can lead to failure of businesses, nsisin a Islamic fi nance is ilin maeial scale an aacin loss of assets and further recessionary pressure in the event of economic interest from governments and the private sector across the world. downturns. Moreover, giving commercial banks the right to create money ain sai a e lal mae Islamic fi nance accns and lend on interest incentivises them to increase the money supply. If s e ls fi nancial asses e easn is is a e the money circulating in the economy increases at a faster rate than the e a as sae e inenainal fi nancial ssem as cme m eal cin s an seices e esl is in ain and been dominated by non-Muslim economies. Although they make up e Islamic fi nance ins as enms enial is a large portion of the global population, many Muslims live in some of depends on it being true to its underlying principles and presenting an the most economically deprived countries in the world, especially in Asia alternative value proposition. So far the industry, in trying to establish and Africa. isel in eisin fi nancial ames as ce man cs an seices a mimic e ecnmic eecs cneninal fi nancial Overcoming perceptions transactions. To gain wider acceptance from Muslims the industry must In e las eas Islamic fi nance as sae emee in e demonstrate that its offerings are in line with the spirit and letter of lal fi nancial lanscae in an me a en a e Islamic law. For non-Muslims there is no religious imperative to adopt Muslim population is asserting its sensitivities in everything from ese cs e nl a e ill e aace is i Islamic fi nance ealcae an asin anin an fi nance offers something different to conventional products. Perhaps non- e Islamic fi nance ins is en eceie as cmlicae Muslims will be attracted by the industry’s ethics, or by its more equity- perhaps partly because of the use of Arabic terminology. A brief rather than debt-based approach. framework, which I outline below, ought hopefully to highlight how I e Islamic fi nance sec can il is isincie ale simple it can be. proposition, there is little doubt it can enjoy substantial, sustainable Islam is pro-business and pro-trade. It recognises and embraces the growth. In time, it can grow to occupy a credible and long-term place in need for people to earn a livelihood and encourages honest and lawful e lal fi nancial ssem as a alale alenaie e cneninal ins ee is a maim in Islamic la a alies siness an ineesase fi nancial ssem ae ein is emissile nless eessl iie Faizal Karbani is the Founder and Chief Executive of Simply Ethical.

OMFIF.ORG NOVEMBER 2018 BULLETIN 9

BTN_11.18_008-009_coverOpener.indd 9 31/10/2018 11:28 n good faith slamic ﬁ nance

Green sukuk becoming mainstream upportive regulation critical to adoption of shariacompliant bonds

Kat Usita Sustainable capital a more mainstream investment largest emitters of greenhouse M Malaysia was the fi rst country choice over the coming years. gases, became the fi rst country to formally support green suu nitial offerings have been to issue sovereign green suu, issuance, establishing the oversubscribed, though this there were concerns that ustainable and esponsible mostly refl ects the shortage of some projects to be funded nvestment uu framewor green bonds generally rather by the bond might carry riss hen adau nergy fi rst in . ome to the worlds than an inherent interest in of deforestation. owever, a Wissued green suu in largest base of suu, Malaysia their slamic counterpart. close reading of the issuance to fi nance a megawatt is also increasingly looing he challenge for issuers is documents shows there are solar project in Malaysia, the towards renewable energy. he improving awareness around safeguards to ensure these m offering was immediately government is greening its suu more broadly, allowing projects do not adversely affect oversubscribed. ptae of the energy mi, with a target of investors to become more used forest areas and reserves. he worlds fi rst sovereign green generating of electricity to slamic fi nance products, and level of detailed information slamic bond was similarly high, from renewable sources by then tapping those who have provided can mae an issuance when ndonesia raised .bn . his reuires signifi cant clear objectives that green more attractive. earlier this year. hough not investment in infrastructure suu can match. he demands of climate unusual for green bonds, the for solar, wind and hydro power change, population growth and intense demand for these early generation and storage. he Strict requirements urbanisation create fi nancing issuances of green suu mae green suu maret is critically ecause green suu are a gaps that innovative fi nancial clear that there is much room for important in fi nancing this ind relatively novel product, maret products must fi ll as soon as the asset classs epansion. of infrastructure on such a large growth is largely dependent on possible. stablishing supportive he global green bond scale. the regulatory environment. regulatory framewors and maret is estimated to be or issuers of green suu, MajorityMuslim countries boosting green activities will worth around bn. he ey the product is the natural have good reason to establish help green suu grow out of to accelerating its growth is intersection of three bases of framewors that support their niche corner and into the widening the products available investor demand sustainable green suu maret growth, wider green fi nance maret.  and aligning them with investors investments, infrastructure particularly those nations with Kat Usita is Economist at environmental, social and development and sharia a clear need for sustainable OMFIF. governance mandates. compliance. merging marets infrastructure, such as Malaysia. s with green bonds, suu can have high demand for the fi rst ncentives for climatefriendly be classifi ed as green based on the two, and pursuing the third activities boost demand for underlying asset and investment enables Muslim investors to green securities, and ta strategy. y defi nition, suu can participate. arious estimates deductions encourage issuers only fi nance shariacompliant say that the slamic fi nance to consider green suu for activities, a broad category maret will eceed tn by the fundraising. .bn that includes climate resilient end of . ts rapid epansion mplementing higher and sustainable projects. he in recent years coincides with and stricter disclosure mount raised by strictness in classifying suu the boom in green fi nance, as reuirements can mitigate ndonesia with worlds reuires transparency and well as the increasing attention concerns over greenwashing. fi rst sovereign green clarity in identifying what the paid to global infrastructure t can also minimise the cost Islamic bond instrument fi nances. ecause needs, which are projected to of due diligence, especially of this, green suu may prove reach more than tn between for interested investors still especially attractive to investors now and . unfamiliar with suu. hen who are wary of greenwashing. reen suu should grow into ndonesia, one of the worlds

10 BULLETIN NOVEMBER 2018 OMFIF.ORG

BTN_11.18_010-011_Kat.Otaviano.indd 10 31/10/2018 10:23:56 Overcoming Islamic ﬁ nance inefﬁ ciency hariacompliant baning draws parallels with investing

Otaviano would involve joint ventures assets, but the sectors circumvents destabilising Canuto in which partners bring in estimated annual growth rate is debtdefl ation dynamics, avoids M capital and management with between . hile just contracts containing mury corresponding proportional Muslimmajority countries hold ris defi nitions and imbeds a shares of profi ts. his includes of global shariacompliant commitment to bac all fi nancial arrangements in which the assets, these have epanded to contracts by assets and activities slamic fi nance refers to a way fi nancier provides of other territories. in the real economy. lthough Iof conducting fi nance that the capital for the creation evertheless, the sector this, on the face of things, is a respects sharia law, including and operation of a business, faces signifi cant challenges. good thing, it means derivative banning interestbased eeping its ownership, while the Many aspects of slamic fi nance instruments such as options and transactions and ensuring ris customer provides management suffer from emulation and re futures are diffi cult to obtain. f sharing between parties. haria and labour. Profi ts are shared engineering of conventional one considers that a prudentially compliant contracts are intended according to a preestablished instruments, which result wellmanaged, mature fi nancial to rule out features that would ratio and, if the business fails, in ineffi ciencies and higher system brings economic mae them ain to gambling or the fi nancier incurs all of the transaction costs. uu lac advantages that outweigh its maing money from money, losses unless it is demonstrated standardisation and riss are potential instability, slamic while engagements in businesses it was the customers fault. more diffi cult to assess than fi nance then implies an considered immoral or ethically here is also the possibility with conventional bonds. inevitable opportunity cost. problematic are forbidden. of cost plus selling structures. n addition, asel core parallel can be made hese principles mean many nstead of taing a loan to capital reuirements place with investments that refl ect conventional products must be purchase something, a client slamic fi nancial institutions environmental, social and amended to fi t into the slamic can convene with a fi nancier, at a disadvantag, owing to the governance principles. n those fi nance framewor. here are no with the latter buying an item different way in which capital is cases, performance below non pure debt securities in slamic and selling it to the former at structured in slamic bans. portfolios is compensated, fi nance, with interest replaced a higher price on instalment, he orld an roup has from the standpoint of investors by the rate of actual return with a provision that the provided support to overcoming preferences, by ensuring on contracts of echange or selling price cannot be raised such obstacles, both by issuing adherence to certain principles ris sharing. hariacompliant once the contract is signed. and supporting independent as a value in itself. ban deposits are collected on n the event of default or late issuances, including the amples of nonfi nancial a profi t and losssharing basis payments, options include third provision of a shariacompliant compensation can also be found instead of fi ed predetermined party guarantees, collateral investment guarantees for in nonMuslim faiths the liabilities. ll fi nancial contracts guarantees on the customers infrastructure projects. he inde in urope for must be baced by assets, belongings, or a penalty fee to worlds fi rst green suu for eample only selects companies transactions or activities in the be paid to an slamic charity. renewable energy and other classifi ed as respectful of real economy. environmental sustainability Christian values. haria slamic fi nance instruments Principle value projects was launched last year compliance may well be deemed can be matched to some slamic fi nance assets have been in Malaysia with the support as a benefi t greater than any conventional products as long forecast to reach more than of the orld ans Malaysia economic opportunity cost for as interest and speculation .tn in , with slamic nowledge ub. those who favour its use.  are absent. ae for eample bans and shariacompliant owever, perhaps the Otaviano Canuto is a Member leasing a house with a property suu bonds comprising tn toughest issue is tied directly of the OMFIF Advisory Council transfer at the end rather than and bn respectively. to one of slamic fi nances most and a former Vice-President lending for an acuisition with slamic fi nance corresponds positive features fi nancial and former Executive Director fi ed interests. nother instance to almost of global fi nancial stability. slamic fi nance of the World Bank.

OMFIF.ORG NOVEMBER 2018 BULLETIN 11

BTN_11.18_010-011_Kat.Otaviano.indd 11 31/10/2018 10:23:58 n good faith slamic ﬁ nance

Too big to ignore slamic ﬁ nance sector left unscathed by ﬁ nancial crisis

Julia are reuired to share profi ts industry. n , it grew by .. Demidova and riss, and interest rates he industrys growth has since M are banned. s a result, slamic slowed, due to political instability fi nancial institutions were hardly across the Middle ast and low oil affected by the fi nancial prices. evertheless, at the end of crisis. here were, however, some last year it was worth more than nvestors looing to diversify defaults on suu at the time, .tn, and that fi gure is epected .tn otal amount slamic Itheir portfolios are increasingly mostly concerning periodic rental to rise to .tn by . turning to shariacompliant payments similar to a mortgage espite this signifi cant growth, fi nance is epected to products. lobalisation and in conventional economies the profi tability of slamic bans grow to by awareness of shariacompliant but these are generally rare. has plummeted. his is because initiatives have prompted ince , slamic fi nancial investment portfolios are too investors to start adopting the institutions legal and governing concentrated on specifi c sectors ethical principles of slamic structure have improved, for such as commodity, energy and fi nance. emand for slamic eample with the introduction of consumer sector fi nancing. till, bonds nown as suu is special purpose entities. assets have grown twice as much rising, and etends beyond slamic he differences between as traditional investments. fi nancial institutions. onMuslim suu and bonds etend beyond he slamic fi nance model is regulatory reforms and framewor governments are een to tap into structure. nterest rates on bonds based on profi t and loss sharing, to enhance its resilience to future the slamic fi nance industry, as are are fi ed, regardless of losses so it is not impacted by any fi nancial shocs. egulation must conventional fund managers. or gains. Meanwhile, suu are disruption of fi nancial marets. be addressed jointly between ut demand for sharia a legal contract between the Conventional institutions, conventional fi nancial marets compliant products outstrips issuer and the buyer. onds are a meanwhile, tae advantage of and slamic fi nancial marets supply. ast month, bu habi proof of debt, whereas suu are maret volatility. here is a to ensure sustainable and slamic an raised edbn a proof of ownership. here are high correlation between assets effi cient growth in the rapidly through a rights issue that was fi ve also practical differences, such and liabilities any losses on an changing slamic industry. he times oversubscribed. his refl ects as how suu and bond issuers investment would be refl ected fi nancial crisis also led to tighter the signifi cant growth within the raise capital, and how investors on the balance sheet through supervision of liuidity ris slamic fi nance industry and an are rewarded. slamic scholars a decrease in liabilities. his management in both slamic increasing appetite for slamic agree that money is just a means is a better ris management and conventional fi nancial bonds. nlie their conventional of echange and not the asset. he strategy, and shows that slamic institutions. counterparts, suu and sharia capital committed by staeholders institutions have a more he slamic fi nance sectors compliant products are stable can bring returns, which are systematic approach than their popularity is unliely to wane any and impartial. slamic institutions derived from the effi cient and conventional peers. uring the time soon. n ctober, ingapore are generally more cautious. ethical use of capital. Moreover, fi nancial crisis, slamic launched a shariacompliant inde he atar nternational slamic bonds mature at preagreed value, bans helped stabilise the global for funds based in the country. an, for eample, delayed its while suu mature at maret economy and were not affected by s the Muslim population grows issuance of m suu on the value. the collapse of ehman rothers. and the world gains a better international maret. his was he fi nancial crisis highlighted understanding and awareness of due to high rates and an epected Fastest growing industry the need for change, particularly ethical sharia principles, demand increase in ederal eserve he growth of slamic fi nance regarding the slamic fi nance for slamic fi nancial products can rates in , which meant higher maes it too big to ignore. efore sectors supervisory and legal only epand.  funding costs. the fi nancial crisis, it was the infrastructure. he latter should Julia Demidova is Commercial n slamic fi nance, investors fastestgrowing part of the fi nancial align with global fi nancial Partnership Manager at OMFIF.

12 BULLETIN NOVEMBER 2018 OMFIF.ORG

BTN_11.18_012-013_Julia.Basit.indd 12 31/10/2018 10:18:12 Islamic ﬁ ntech unencumered y status uo entrepreneurs highlight potential scope of slamic ﬁ nance industry

Abdul in property assets from as little in ulf Cooperation Council and building framewors to Haseeb Basit as . t was the fi rst slamic countries, whose earnings often embed these values within the lipses fi ntech business authorised by the fall below the income thresholds global economic system. hey inancial Conduct uthority. that bans will service. are drawing especially on the n the , ahed nvest Money wors with employers to epertise of fi ntech businesses. became the fi rst shariacompliant allow them to pay their worers roups lie the slamic he focus in both conventional roboadvisory platform directly into an ewallet and inech Panel aims to bring and slamic fi nance since authorised by the ecurities and provides them with a debit card, a together actors in this space, the fi nancial crisis has change Commission. t allows mobile money app and remittance including startups, bans, been ensuring more stringent customers to start saving and services that are cheaper than investors, government regulatory conditions are being investing in companies that pass those offered by the incumbents. departments and practitioners, met. hese are designed to their shariascreening framewor, s slamic fi ntech enters capital to address problems that reuire prevent the sorts of systemic meaning they are in permissible marets, based platforms collaboration and collective shocs eperienced a decade industries and are not too heavily lie slamicMarets.com are design thining. he fi rst ago. his has generally resulted leveraged. he business recently providing fi nancial intelligence initiative to come out of the panel in bans holding more capital to epanded into the . for the slamic economy. hey is the i ccelerator, a virtual protect customers, which in many ustainable and ethical have entered into agreements to community of entrepreneurs instances has reduced their ability investment is not limited to wor with several institutions with a physical coworing to lend to and service clients. he eisting asset classes. pffect, a in the CC and outheast sia. and acceleration space in sector is yet to see a fundamental based crowdfunding platform More innovation in this space is development. retooling to become more ethical, for small and mediumsied coming. he maret would benefi t he is home to the second sustainable and inclusive, and enterprises, has focused on from a truly digital slamic highest number of slamic fi ntech seems destined to follow the supporting ethical companies challenger ban, and demand fi rms in the world, after Malaysia. damaging boombust cycle. largely overlooed by traditional for slamic M lending remains he development of the sector cohort of entrepreneurs in investors and platforms. unserved. in the has been helped by the slamic fi nancial technology n addition to these novel proactive government support, sector is trying to inspire ventures, slamic fi ntech fi rms UK a hub for innovation primarily through policy and change. his new breed feels are beginning to compete more isting slamic bans have gone regulatory advances that have strongly about fi nances ethical directly with eisting fi nancial through a period of consolidation afforded eual opportunities to imperative, especially after the service providers. wo such over the past few years. he slamic fi nance. events of , is unencumbered businesses are Primary inance emphasis today at slamic fi nance his, coupled with a coming by fi nancial legacy and not and nsurealal. Primary inance conferences is fi rmly on fi ntech. together of a large pool of fi ntech limited to the status uo of has created a home purchase Most often, the discussion stays and slamic fi nance talent, conventional fi nance models. plan that offers an alternative to within the bounds of reprising positions the as an ideal place slamic fi ntech companies, interestbearing mortgages, based models developed by mirroring for slamic fi ntech development to lie conventional fi ntech fi rms, on a coownership model between conventional fi nance, rather than continue. he uestion remains have focused on innovation in fi nancier and homeowner. rethining fi nance framewors to as to whether the traditional three main areas low regulatory nsurealal has developed sharia focus on consumer choice, ethics, fi nancial sector is willing and friction, unserved customer compliant home insurance, sustainability and inclusion. able to adapt into a more ethical, needs, and technologyled and will soon epand to other few organisations, such as sustainable and inclusive version products that compete on price. insurance products. the esponsible inance and of itself.  Pioneers have emerged. nited rab miratesbased nvestment oundation, are Abdul Haseeb Basit is Co- ielders is an investment platform Money focuses on the large bringing together the slamic and Founder and Principal of that enables customers to invest population of migrant worers ethical sectors by benchmaring Elipses.

OMFIF.ORG NOVEMBER 2018 BULLETIN 13

BTN_11.18_012-013_Julia.Basit.indd 13 31/10/2018 10:18:12 In conversation

Managing volatile caital os Mr umundsson, governor of the Central Bank of Iceland, and Danae Kyriakopoulou, OMFIF’s chief economist and head of research, discuss celands capital ﬂ ow management policies, the etent of baning sector reform and the signiﬁ cance of central ban independence.

Danae yriakooulou ou are starting your th year as leverage ratio if the compleity of regulation was reduced. e need governor of the central ank having taken the helm shortly to be open to the possibility that more is needed in the regulatory after the eginning of a maor fi nancial crisis that hit Iceland in fi eld. he low leverage ratio might hit us in the future, but there and demonstrated the challenges osed y volatile caital is signifi cantly more capital and liuidity in the baning system os on a small oen economy. What did you learn from that globally. dont thin a baning crisis is imminent, at least not on a exerience and ho have the caital o management tools global scale. introduced since then orked to manage the imact of groing D Central anks across advanced economies have come under exosure to international fi nancial markets attack over their exanded remits ith some eole arguing Mr umundsson he main lesson we learned is that it is very that certain functions currently erformed y central anks risy to try to construct an international fi nancial sector in such a should e rought ack to the urisdiction of elected olicy- small country as celand that has its own currency. e also learned makers. hould the rosect of reduced oer e a orry or that large and volatile capital fl ows must not be ignored, and that come as a relief for central ankers policymaers should not thin that echange rate fl eibility, MG: his issue varies signifi cantly from country to country. Central infl ation targeting and interest rates are the only tools of monetary baners need to acnowledge the diffi cult position they are in, and policy and that microeconomic regulation or supervision are more generally that politicians globally have not stepped in to the suffi cient. e have added macroprudential instruments to deal with degree that they needed to in terms of crisis management and fi scal foreign currency riss in domestic balance sheets. e have imposed policy. Central bans, as the saying goes, were the only game in both a liuidity coverage ratio and net stable funding ratio in foreign town. dont thin thats something central bans should relish, but currencies on our bans. Parliament has also granted the central you have to deal with the situation as it is. ban power to restrict foreign currency borrowing by households, he other complication is that there is a limit, especially in small municipalities or corporations that do not have foreign currency countries lie mine, on how many institutions you can have and earnings or assets. his hasnt been used yet as such borrowing has how many separate groups overseeing fi nancial stability you can so far been almost noneistent. create. hat is why, for instance, in my country, the pendulum is e have introduced a specifi c capital fl ow management tool, which still swinging in the other direction. hen capital controls were is a reserve reuirement on capital infl ows into the bond maret and introduced in , the central ban was tased with managing highyielding deposits. ometimes you need such tools to deal with those, which was a huge and diffi cult tas. big surges in capital infl ows or situations where the monetary policy In Iceland, a domestic group of experts has proposed giving channels are not woring. t has wored well, though most of the time even more power to the central ban by moving microprudential we would prefer not to use such measures. ut if we have to use them, regulation and supervision under the roof of the central bank as we will. well. ecently the government decided to set up a wor stream in DK: he anking sector as at the heart of the Icelandic crisis. order to bring this about. here are obvious positives and benefi ts here is a deate among economists and regulators on hether to this. n celand, there are only three major bans, so the micro gloal efforts around fi nancial sector reform have gone far immediately becomes macro, and vice versa. t the same time, this enough. Do you think e have fundamentally changed the safety might complicate the functioning of the central bank and there is of anks a reputational ris. f the central ban taes over microeconomic MG: asel was a step in the right direction, although would have supervision, then we need to thin about some internal separations preferred a higher leverage ratio. minimum leverage ratio of is in order to mitigate reputational ris. rather low, but this was what was possible to compromise on at the n general, dont thin we have found the optimal solution. time. thin international bans would be willing to have a higher Politicians must be more involved in some instances, and thin >>

14 BULLETIN NOVEMBER 2018 OMFIF.ORG

BTN_11.18_014-016_InConversation_Gudmundsson.indd 14 31/10/2018 10:16:55 Politicians globally have not stepped in to the degree that they needed to in terms of crisis management and ﬁ scal policy.

OMFIF.ORG NOVEMBER 2018 BULLETIN 15

BTN_11.18_014-016_InConversation_Gudmundsson.indd 15 31/10/2018 10:17:08 In conversation

the system we set up in , with the establishment of a inancial tability Council with the ﬁnance minister chairing, was a step forward. ut dont thin thats the end of the story. DK: he lo cost of energy in Iceland has attracted the energy-intensive crytocurrency community. Does the central ank itself see a motivation to research the alication of distriuted ledger technology to its holesale interank ayments systems as it considered issuing a digital currency MG: e follow developments in this ﬁeld and what other central bans are doing very closely. e recently published a report on the pros and cons of introducing a digital central ban currency. e are not proposing anything yet, and are not even saying that we thin this should be done. e are saying this needs to be discussed, because any introduction of a CC will probably necessitate legislative changes. central ban digital currency is liely to be based on a centralised ledger, not a distributed one. ut then, distributed ledgers may be useful for other kinds of transactions, but the technology is not yet fully developed. t is improving and we will have to wait and see. 

Profile

Education: Studied economics and mathematics at the University of Gothenburg before receiving his bachelor’s degree from the University of Essex and an MPhil in economics from the University of Cambridge.

Career: Guðmundsson became an economist with the Central Bank of Iceland in 1980, and served as economic adviser to Icelands ﬁnance minister between 91. He returned to the central bank for 13 years, latterly serving as chief economist. For ﬁe years he was member of senior management of the Bank for International Settlements, before becoming governor of Iceland’s central bank in 2009.

16 BULLETIN NOVEMBER 2018 OMFIF.ORG

BTN_11.18_014-016_InConversation_Gudmundsson.indd 16 31/10/2018 10:17:09 Worldview This month’s expert analysis

Didier Borowski on institutions rejecting growth forecasts 1.40 25 Ryan Martin on 1.20 private credit emerging 1.00 19 in Africa 0.80 0.60 0.40 0.20 0.00 1990 1992 2001 2002 2008 2010 2018 Recession periods (National Bureau of Economic Research) Period of negative GDP growth

Proprietary index

Kalin Anev Janse on Asia returning to ESM 21 bond market

Christine Lagarde on a regulatory approach 22 24 to fi ntech Lex Sokolin on artifi cial intelligence taking over fi nancial services

OMFIF.ORG NOVEMBER 2018 BULLETIN 17

BTN_11.18_017_Worldview.indd 17 31/10/2018 10:15:54 Digital economy

From physical to digital Cybersecurity investment is tantamount to impact investment

Eva-Maria the increasing recognition of out online. ust years ago, niche area of technology. t is Dimitriadis the challenges facing corporates only around of the world had impact investment in the proper C5 Accelerate and investors. owever, these internet access. oday, more than sense of the term and should investments have focused on of the population around be given its legitimate place in the physical world and issues .bn people use the internet. ethical investment framewors. lie climate change. he need his number is rising daily. he Private euity and venture he Global Impact Investing to protect our environment is internet has transformed the capital can play a major role in Tetwor defi nes impact clear the massive growth of our world and more data have been protecting the digital world. investment as investment digital lives means the same care created and stored over the last Many online entrepreneurs ‘made into companies with the must be paid to cybersecurity decade than in the previous benefi t from the clouds intention to generate social and the new frontier for ethical , years. ata are being affordability and accessibility. environmental impact alongside investment. created so fast, measurement Companies such as Amazon a fi nancial return. his is Cybersecuritys social and units cannot eep up. igabytes eb ervices are removing nothing new. n , nvestment environmental impact is digital are insuffi cient and we are now traditional barriers to entry such ssociation fi gures showed rather than tangible, but is every measuring in ettabytes or tn as infrastructure costs related that infl ows into ethical funds bit as important as protecting our gigabytes at a time. to information technology, and eceeded bn for the fi rst time. oceans and forests and combating The digital world is entrepreneurs are surrounding The rapid growth in signatories to poverty. Peoples lives are providing opportunities that themselves with teams dedicated the nited ations principles for increasingly connected, and many are increasingly accessible, to ensuring users safety online responsible investment highlights day-to-day activities are carried thanks to advances like cloud with innovative products and computing. owever, there is a solutions. he money and proportionately large ris. here nurturing that allows these ust years ago, only around of the world big data gathers, so does criminal companies to grow is mostly had internet access. oday, more than of the opportunity. n the industry being provided by venture capital we say there are two types of and private euity fi rms that are population around .bn people use the internet. companies: those that know they looing to mae a difference. have been hacked and those that he internet is the fi rst and dont. tories about data breaches only truly global commons. t are commonplace. iruses lie has created arguably the greatest opetya and annacry have global good and continues devastated systems; major to provide opportunities for corporations have lost countless everyone, from businesses of all customer records to hackers or sies to consumers, governments internal mishaps. and individuals. he digital world must receive the same Booming business attention and investment into Protecting the digital world is a protecting it as the physical booming business. Companies world. nvironmental, social and devoted to areas such as governance investment must data protection and identity evolve beyond the physical and management have no trouble into the digital.  fi nding investors. he challenge Eva-Maria Dimitriadis is is for that investment to be Chief Oerating Offi cer of C properly understood. t is not a Accelerate.

18 BULLETIN NOVEMBER 2018 OMFIF.ORG

BTN_11.18_018_Dimitriadis.indd 18 31/10/2018 10:15:17 Emerging markets

Private credit emerging in Africa Asset class offers safer means to access growth markets across continent

Ryan Martin Europe. Research by Private Debt (78). The direction of reform in 2018, published by the United Altica Partners Investor indicates that 69% of Africa stands in stark contrast Nations Conference on Trade and loans in Europe and 75% in the US to protectionist tendencies in Development, forecasts African are covenantlite. Moodys has developed markets. foreign direct investment infl ows called these ‘distressingly weak’. Ms ability in to generate to rise by 20% to $50bn this year. private sector growth and jobs rivate credit is a strategic, Private debt in Africa is constrained. ocal fi nancial Investing for impact Pmainstream asset class in The opportunity for private debt institutions and corporations fi nd Global investors increasingly international portfolios. Its appeal in Africa is substantial. At its core dollar funding a challenge because expect managers to engage with centres around a constellation is a shortage of adeuate fi nance of high costs and lac of fl eibility stakeholders on environmental, of desirable characteristics, to mid-market corporate and of local borrowing. social and governance issues including a yield premium, fi nancial institutions. he credit Private equity alone cannot throughout the lifecycle of downside capital protection gap for small and medium-sized fund Africa’s economic investments. Aligning these and lower duration sensitivity enterprises in sub-Saharan Africa diversifi cation. eaving aside with the UN’s 2030 sustainable than competing credit sub-asset is $140bn, says the International recent performance challenges, development agenda and the classes. iversifi cation into Finance Corporation. in many cases ceding control IFC’s 10 environmental and social private credit can help optimise This opportunity is augmented is unattractive or premature. standards is integral. portfolio effi ciency. by structurally superior growth Limited exit opportunities deter Delivering sustainable here is signifi cant global and investment prospects. SSA investors from making allocations transformation for African interest from sovereign funds, has been the fastest-growing to Africa-focused funds. companies with respect to pension funds, insurers and region after developing Asia Private credit is a more corporate governance and skills- family offi ces. Most investment since 2000. A demographic attractive route to accessing transfer enables local companies is directed towards developed dividend, growing labour force growth opportunities. It is a safer to adopt international standards. markets in the US and Europe. and rapid urbanisation underpin asset class offering downside his will benefi t employment, There are indisputable signs of burgeoning demand. By 2034, protection through seniority and productivity and growth. maturity in developed markets. Africa will have a larger workforce a contractual return component. Private credit offers investors A ‘wall of money’ effect, high than China or India. The emergence of private credit the safest means to access earnings before interest, taxes, African leaders are focused on funds testifi es that investors are growth markets, as well as the depreciation, and amortisation developing market-orientated recognising this opportunity and prospect of higher risk-adjusted multiples and intense competition policy. This year has witnessed committing signifi cant capital. returns in less effi cient and less seem to have compressed returns the establishment of the Single Investors should prioritise competitive environments. It and diminished the appeal of frican ir ransport Maret sectors that governments also enables investors to diversify private credit. Returns on vintages and the Continental Free Trade deem strategically important their private debt exposures immediately after the European Area, creating a market of more to diversifi cation, as well as and take advantage of different debt crisis offered 13%-15% on an than 1.2bn people and GDP of businesses that benefi t from economic cycles and risk that is unlevered basis for senior debt. $2.5tn. The World Bank’s Ease of urbanising populations with arguably more attractively priced. Industry observers note expected Doing Business index illustrates higher spending power. Undoubtedly, the private credit returns have compressed towards this shift. Countries like Rwanda Consumer spending in Africa is opportunity in Africa will become 7%-8%. In the US, net internal which rans nd, Morocco projected to reach $2.1tn by 2025, a crucial channel for accelerating rates of return are closer to 6%- (70), Kenya (81), Botswana (82) up from $1.4tn in 2015. Business- economic development and 7%, with cash yields of 4% or less. have comparable or markedly to-business spending is expected closing the credit gap.  Industry-wide available capital better scores than more familiar to reach $3.5tn by 2025, an Ryan Martin is Head of is at a record $251bn, of which emerging markets like India increase of around 50% from 2015. Sovereign and Macro Strategy 95% is concentrated in the US and (101), Brazil (126) and China The World Investment Report at Altica Partners.

OMFIF.ORG NOVEMBER 2018 BULLETIN 19

BTN_11.18_019_Martin.indd 19 31/10/2018 10:14:47 Regulation

Follow the money echnology is transforming the ﬁ ght against money laundering

James Cannings suspicious transactions and crime’ as one of three focus Università ensuring legitimate payments areas in its 2018-22 supervisory Bocconi can fl ow freely. ew technology strategy. The central bank can be used to reduce the believes fi nancial institutions 2%-5% number of false positives have a responsibility to be at Amount of global GDP lost while identifying suspicious the forefront of fi nancial crime to money laundering every n June this year, the European transactions. The Monetary prevention. is willing to year Inion adopted its fi fth nti Authority of Singapore is using take tough measures, holding Money Laundering Directive. past data to train machines to commercial banks responsible Responding to the growing identify suspicious transactions for enabling fi nancial crime and passed through non-resident popularity of digital currencies, that can be prioritised and referring them to the public bank accounts in its Estonian virtual currency exchange investigated by humans. In prosecution service when subsidiary between 2007-15. platforms must now perform the private sector, HSBC has necessary. has made it clear After internal investigations ‘know your customer’ checks and partnered with UK start-up ignorance of money laundering is uncovered that a large number monitor transactions. Likewise uantea to use to fl ag not an excuse. of its Estonian non-residential in sia, outh oreas fi nancial suspicious activity. This should incentivise bank accounts were suspicious, services commission now fi nancial institutions to tae Danske Bank’s chief executive requires users of virtual currency Fewer excuses safeguarding measures. Money offi cer resigned. hese cases exchanges to hold real-name Advances in AI technology laundering prevention is a highlight the potential fi nancial bank accounts. These are steps give fewer excuses for non- costly business. Financial stability risk that arises from in the right direction. Detecting compliance. Regulators have crime compliance costs UK money laundering. It can money laundering is essential to an opportunity to step back banks around £5bn every year, destabilise commercial banks and fi ghting other fi nancial crimes, while banks take preventative according to the British Bankers’ undermine trust in the fi nancial such as terrorist fi nancing measures against money ssociation. here are also fi nes system. and the evasion of taxes and laundering. This would be a for banks who fail to spot money Regulators need the sanctions. welcome change, given the laundering earlier this year, cooperation of fi nancial was fi ned m. he adoption institutions for preventative of new technology in this area measures to be effective. Policy- ‘The seemingly daily advances in AI technology can be cost effective for fi nancial makers must ensure the right institutions. This puts them on conditions are in place for banks give fewer excuses for non-compliance.’ the same page as regulators, to do this, by encouraging the with cost-saving technology development of new anti-money alleviating stress on regulators’ laundering technologies, like the dvances in artifi cial unmanageable task authorities overstretched resources. UK Financial Conduct Authority’s intelligence and machine face. Money laundering takes Banks also face severe regulatory sandbox. This closer learning could allow fi nancial up around 2%-5% of global reputational ris. s chief relationship between regulators, institutions to reduce costs and GDP every year, according to fi nancial offi cer resigned in technology companies and banks better detect money laundering. the nited ations offi ce on September. ABLV, Latvia’s third- will only strengthen the fi ght The issue is the large number of drugs and crime, and Europol largest lender, was liquidated against money laundering.  transactions passing through estimates that only around 1% after the US Treasury accused it James Cannings is a fi nancial institutions every day of EU criminal proceeds are of facilitating money laundering. postgraduate student at it is impossible to monitor them confi scated. e ederlandsche A scandal at Danske Bank has Università Bocconi and former all using traditional methods. Bank listed ‘taking a hard stance seen its share price fall 30% Programmes Assistant at egulators must balance fl agging on fi nancial and economic since March; a reported €200bn OMFIF.

20 BULLETIN NOVEMBER 2018 OMFIF.ORG

BTN_11.18_020_Cannings.indd 20 31/10/2018 10:14:21 Europe

Asia returns to ESM bond market Investors trust Europe to resolve its problems and create growth

Kalin Anev Janse predecessor, the European the European economy to create Armed with these data, the European Financial Stability Facility. higher standards of living and ESM can draw conclusions Stability At the start of the debt crisis, more jobs. such as the one above to better Mechanism almost 40% of ESM/EFSF bonds The reason these trends can understand investor preferences in the primary market went to be spotted so accurately is that and supports its euro area olatility returned with a Asian investors. Over the years, the ESM has, since its founding stability mandate. Vvengeance to fi ed income that number gradually fell. in 2012, put great effort into The ESM helped preserve the markets in the middle of this Investors say the reasons for this monitoring trading of its bonds. integrity of the euro during year, propelled by political are manifold, but are largely to We know of course who buys EMU’s worst crisis. In that events such as the election of a do with low yields in Europe. At ESM bonds upon issuance. But time, it has also developed into right-wing Italian government the same time, Asian investors we also ask all banks in our a centre of ecellent maret and the threat of a global trade have been net sellers of ESM market group to report every intelligence.  war. As often happens, many bonds in the secondary market deal in the secondary market. Kalin Anev Janse is Secretary people commented that this since 2015. This has yielded a database of General of the European could have serious implications more than 200,000 trades. Stability Mechanism. for the cohesion of European Marked intelligence monetary union. These two trends caused the We at the European Stability total volume of ESM bonds held Mechanism believe such by Asian investors to decline opinions are unfounded. In 2010, steadily since 2013. This year, many wrongly predicted the euro however, the outfl ows are at area would break up. Today, EMU their slowest pace since 2015. is much stronger than before The data show there has been Europe’s sovereign debt crisis, a clear infl ection point since a economically as well as in its trough in 2017. institutional architecture. If the primary-market interest There is evidence that illustrated by recent deals investors have not lost interest endures, net outfl ows may well in the euro area. In two ESM end soon. The decision by the deals before the summer, Asian European Central Bank to end its investors returned to Europe’s quantitative easing programme books in high numbers: 13% and by the end of 2018 is likely to 17%, well above the full-year accelerate this trend. average of 4% in 2017 and 9% in The data underpin what we 2016. at the ESM hear when meeting Asian investors have always Asian investors: that they trust been loyal supporters of bonds the ability of the euro area to fi issued by the ESM and its its problems, and the capacity of

‘At the start of the debt crisis, almost 40% percent of our ESM/EFSF bonds in the primary market went to Asian investors.’

OMFIF.ORG NOVEMBER 2018 BULLETIN 21

BTN_11.18_021_Janse.indd 21 31/10/2018 12:22:11 Digital economy

Trillion dollar savings rtiﬁ cial intelligence is set to tae over ﬁ nancial services at a cost

Lex Sokolin networs, a type of data applications focus on integrating utonomous crunching method that is best fi nancial data and account actions esearch powered by an vidia graphics with software agents that can card. e are unliely to see iller hold conversations with clients bn robots, but rather good robot and support staff. n the middle umber of smart computing statisticians solving problems offi ce, as regulations become devices in the world utonomous esearch across large data sets. vidence more comple and processes Arecently completed a suggests neural networs mae trend towards realtime, deep dive analysis into the fewer errors in such tass than artifi cially intelligent oversight, then hired junior staff to clean development and application of their human counterparts. rismanagement and now the data and senior staff to audit artifi cial intelligence in fi nancial Contrary to popular belief, can your customer systems can the algorithm. he net result is services, and came to a tn also be used in a creative capacity become very valuable. n product a hollowing out of the middle, conclusion. hat is the sie to eplore ideas uicly or to do manufacturing, analyses credit which is a natural outcome of of industry cost eligible to be emotional tass. ris using new types of data. or power law distribution from automated or augmented over he potential of artifi cial instance, it determines insurance technology. the net years, as technology intelligence is a challenge for underwriting ris and assess he future of in fi nancial implementations shift from the traditional economy and claims damage using machine services can tae several routes. proofs of concept to production. a capitalist society. Most vision on customersubmitted ne potential path is that tech he movement is here research is publicly available images. companies lie maon and because much of the needed through academic archives oogle continue to add sills corpus has been built over and much of the code is open Several routes for AI to their smart home assistants, the last decades. rtifi cial source, with the popularity of n the alone, .m fi nancial with maon lea sporting intelligence reuires hardware machine learning courses at top services employees are over , sills already, with massive computing power universities syroceting, along eposed to the impact of these outcompeting fi nance companies and data sets with millions with associated compensation technologies. inancial fi rms in the process. nother potential of rows across various types levels. his open source nature see potential cost savings of path is the eample of China, of human activity. hese implies that the core research bn in customerfacing roles, where tech and fi nance merge to assets have emerged from the cannot be owned. owever, large bn in the middle offi ce and build full psychographic profi les development of the web. here tech and attention companies bn in product manufacturing. of customers across social, are .bn people and bn smart have been building powerful hile those are large numbers, personal and fi nancial data. he computing devices, powered by outofthebo implementations it is possible that instead of cost last road is towards decentralised a bn cloud storage maret. of , channelled through sticy cutting, the technology will lead autonomous organisations enture capital has fl own into software as a service platforms, to productivity improvements. that are built by the crypto machine learning companies which are hard to replicate. hey his would imply that staff community to shift power bac to at a rate of bnbn per year, own the cloud, on which sits. is retained and upsilled to the individual, with sills made attracting human and fi nancial he liely result is reinforces focus on highend, creative or from open source component capital. monopolistic behaviour, emotional tass. ut some initial parts. n each of these cases, we he discussed today automates lowvalue human indications point in the opposite should be careful to understand is not science fi ction, but judgment tass, and accrues direction. microcredit lender and regulate the ethical a mathematical approach shareholder returns. with an underwriting model, considerations of giving so much to building selfimproving n fi nancial services, and for eample, shared that over of ourselves blindly to software.  regressions called machine machine learning have an impact the last year they fi red many of Lex Sokolin is Global Director learning. subset of this across the organisation. n the their human underwriters once Fintech Strategy and Partner at discipline involves neural front offi ce, the most promising the model was trained. hey Autonomous Research.

22 BULLETIN NOVEMBER 2018 OMFIF.ORG

BTN_11.18_022_Sokolin.indd 22 31/10/2018 10:13:27 Sustainable investment

Directing capital towards sustainable goals reen bonds in sia show power of ﬁ nancial institutions at their best

Kenneth Cheong direct capital that can broaden popularity of investing. BNY Mellon bans investor base in bond his demand, however, marets. n turn, they allow reuires two things. irst, the 50% bans to etend loans in support maret needs assets in which of green projects and companies. to invest. econd, the investors he rise in issuance of green ffi cial institutions t the same time, it is gratifying fl owing into these asset classes, bonds observed in 2018 Oand fi nancial marets, to see a broader issuer base as including green bonds, reuire especially in the sia Pacifi c corporates increasingly mae greater transparency and region, can play a major role in forays into direct green bond lower fees from alternative- investors can mae effective propelling green development issuance. investment managers. his decisions about investment and combating climate change opens an opportunity to and redemption. Managers will around the globe. nlie Technology investment address challenges in providing probably need to develop new other parts of the world where Multiple factors are spurring information on a timely basis to structures and strategies to meet environmental, social and green bond epansion, both as infrastructure investors while these demands. rustees, too, governance goals are often a fi nancial opportunity and an offering core trustee and agent need to bring new nowledge, realised through direct corporate ethical commitment. ccording services. creativity, and fl eibility to debt, bans tend to be at the to Mellon research, on the ey trends include improved navigate novel and comple forefront of change in sia ace for ssets, more than half data capture, analytics and structures. P a c i fi c . of investors epected allocations secure cloudbased systems, all n addition to helping local and This institutional trend is to alternative assets to increase of which can simplify reporting regional bans raise capital for a way for fi nancial marets to in . procedures. his increases lending, the trends highlighted foster sustainability. ans above should help connect the use green bonds not only to right capital pools with investor promote their criteria, but demand. hese principles can, to encourage corporate green he need for technology investment increases as and should, be applied not only to and social activities in their investors enter asset classes with which they are institutions and investors in sia, marets through lending and less familiar, as is the case with green bonds in sia but to all green bond supporters m i c r o fi n a n c e . Pacifi c. unds reuire systems that provide high throughout the world.  he green bond maret in uality, uptodate information to ensure investors Kenneth Cheong is Managing sia Pacifi c is a case in point. Director of Corporate Trust, Green bonds lend institutional can mae effective decisions. Asia Pacifi c at the B bacing to the nited ations Mellon. The information sustainable development goals contained here re ects the for water, infrastructure, uch demand raises the staes effi ciency and removes the need personal views of the author sustainable urban development, for asset supply across many for heavy investment in bac and may not re ect the and climate and biodiversity. alternative asset classes, from offi ce personnel. vies of B Mellon. It is for hey help direct capital towards hedge funds and private euity he need for technology general information purposes projects that support the s, to infrastructure and debt. he investment increases as investors only and is not intended to and introduce a ey lens focused latter two help eplain the more enter asset classes with which provide legal, tax, accounting, on impact and returns than rise in green bonds they are less familiar, as is the investment fi nancial or among investors within and into that BNY Mellon and others case with green bonds in sia other professional advice on sia. are observing. t is not hard to Pacifi c. unds reuire systems any matter. This does not hey also address a capital mae the connection between that provide highuality, up constitute a recommendation supply gap in sia by providing these fi ndings and the increasing to-date information to ensure y B Mellon of any kind.

OMFIF.ORG NOVEMBER 2018 BULLETIN 23

BTN_11.18_023_Cheong.indd 23 31/10/2018 10:13:05 Digital economy

A regulatory aroach to ﬁ ntech uarding against emerging riss without stiﬂ ing innovation

Christine It can enable faster and cheaper of traditional intermediaries to monitor the economies of its agarde transactions, store records diminishes. members. hat gives the M International securely and execute so-called Third, in a globalised world, a uniue global perspective. Monetary Fund smart contracts automatically. But fi nancial shocs uicly e must understand innovative the technology has also been used reverberate across borders. technologies, learn from them, for illicit purposes. Responding to a crisis requires and perhaps even adopt some n 1876, when Alexander egulators face a diffi cult concerted action. And a global of them to improve regulation, IGraham Bell was awarded a task. On the one hand, they must fi nancial system may transmit supervision and surveillance. n patent for the telephone, the only protect consumers and investors shocks more quickly. some cases, it will be enough to way to communicate rapidly over against fraud and combat tax apply existing regulations. In long distances was by telegraph. evasion, money laundering and loal action others, new approaches may be The dominant company in that the fi nancing of terrorism. hey o far, national authorities have required as risks emerge and as maret dismissed ells invention must also protect the integrity reacted with varying degrees distinctions between entities and as a useless toy and rejected an and stability of the fi nancial of regulatory stringency. If activities brea down. ne thing opportunity to buy his patent. The system. On the other, they must this uncoordinated response seems certain: we should not rest, as they say, is history. beware of stifl ing innovation that continues, activity will simply put off action until the answers This anecdote illustrates benefi ts the public. y engaging migrate towards more lightly become clear. Instead, we must the unpredictable nature of with market participants at the regulated jurisdictions in a race begin to consider the regulatory technological innovation. centre of fi nancial innovation, to the bottom. Because crypto- framework of the future. Today, some enthusiasts say regulators can stay abreast of assets know no borders, a global We must do so in a manner crypto-assets may represent the benefi ts of new technologies approach is vital. attuned to the rapid pace the beginning of a similar and identify riss. eveloping Such an approach is taking of change, and with the breakthrough. Others condemn a forward-looking regulatory shape. The Financial Action awareness that unexpected crypto-assets as little more than framewor calls for creativity, as orce has given guidance new opportunities and risks a fad or a fraud. We should not fl eibility, and new epertise. to its members on addressing may emerge. One approach, dismiss them so lightly. money-laundering and terrorist- undertaken in Hong Kong, Crypto-assets are just one Crisis lessons fi nancing riss associated with Abu Dhabi and elsewhere, is to example of how new technologies The experience of the 2008 crypto-assets. The Financial establish regulatory sandboxes are being used to deliver fi nancial fi nancial crisis and its aftermath Stability Board, which coordinates where new fi nancial technologies services. dvances in artifi cial yielded three important lessons. fi nancial regulation for the can be tested in a closely intelligence promise to extract First, trust is the foundation of the economies, is studying ways to supervised environment. more value from ever more fi nancial system, but it is fragile monitor crypto-assets. bove all, we must eep an abundant and ubiquitous data. and can be shaken easily. The G20 agrees with the FSB’s open mind about crypto-assets ts applications in fi nancial Second, risk accumulates assessment that crypto-assets and fi ntech, not only because services include enhancing in unexpected places. In the do not pose a threat to stability, of the risks they pose, but also fraud protection and regulatory years before the crisis, fi nancial though they could pose a threat in because of their potential to compliance, potentially instruments emerged that were the future. The G20 asked the FSB improve our lives. hen in doubt, epanding access to services and poorly understood by investors, and other standard-setting bodies think of Bell and his telephone.  deepening fi nancial inclusion. such as collateralised debt to continue their work on crypto- Christine agarde is Managing Financial technology offers obligations. It is unclear whether assets and report on progress. Director of the International considerable promise, but a decentralised fi nancial system The International Monetary Monetary Fund. his is an it also poses risks. Consider will be more stable or less. There und can serve as a forum for the edited version of an article that distributed ledger technology, is a chance that emerging risks exchange of ideas and forging fi rst aeared in Finance which underpins crypto-assets. will go undetected as the role consensus. It is the job of the Fund Develoment magaine.

24 BULLETIN NOVEMBER 2018 OMFIF.ORG

BTN_11.18_024_Lagarde.indd 24 31/10/2018 10:12:41 International monetary policy

Managing expectations Institutions turning their back on growth forecasts

Didier the business cycle, it is unclear between the highest and lowest are taken into account. In the Borowski how an isolated economist could. forecasts will rise signifi cantly. meantime, investors may fall Amundi This is why some institutions This hypothesis has proven to into the illusion of an endless have given up forecasting be fruitful: by constructing a cycle. The deeper this belief is growth and are holding back monthly synthetic indicator anchored, the higher the ris of consensus expectations. based on this difference, we ‘boom bust’ – repeated economic ecent fi nancial turmoil owever, consensus forecasts are obtained a better leading expansion and contraction. Rhas renewed concerns over not necessarily better recession indicator of the cycle (see chart). By overestimating growth and an impending crisis. Given indicators. It is striking that our two corporate profi ts, investors are the importance of the Federal But forecasts are not idle. As metrics (variance and gap led to buy overpriced equities. Reserve’s monetary policy a cycle matures, the variance of between the highest and the They will not notice their mistake for global fi nancial marets, forecasts increases. Long cycles lowest forecast) remain very until it is too late. he ed, if investors are questioning the generally come with a rise in low by historical standards. The it falls in the same trap, could strength of the US economy. The imbalances debts, trade or fi scal situation differs from the late overreact and precipitate the issue is whether the Fed can go defi cits. hey are also weaened 1990s (before the IT bubble burst) end of the cycle by excessively much further in its monetary by infl ationary pressures. and the period just preceding the tightening its monetary policy. If normalisation (which would Forecasts thus naturally begin fi nancial crisis. he current this happens, the conditions of a tend to increase both long-term to diverge, which could signal a cycle – which is on the verge of ‘boom bust’ will be met. It simply interest rates and appreciate the turning point. There is usually becoming the longest expansion remains to be seen if the boom is dollar) or if now is the time to high variance during periods of in US history – appears like it will over.  predict the ‘end of cycle’ within crisis or fi nancial turbulence. last forever. Didier Borowski is Head of the next 12-24 months. In the There is low variance during A dissensus is likely to emerge Macroeconomic Research at latter case, there would be no periods of epansion, particularly once 2020 growth forecasts Amundi. increase in interest rates next at the beginning of a cycle. Under year and the equity market would these conditions, a gradual soon stop climbing. increase in variance should Forecast dispersion as an indicator of economic cycle Growth forecasts are therefore indicate a turning point. Proprietary index, extracted from consensus data* crucial, not only to correctly 1.40 anticipate corporate profi ts Emerging dissensus 1.20 (the heart of stock market o confi rm this hypothesis, my 1.00 dynamics) but also to predict team and I used consensus data infl ation and unemployment, to build a monthly synthetic 0.80 essential ingredients of monetary indicator of expected variance 0.60 policy. Yet the Fed has often over the next 12 months. We 0.40 acknowledged that its own failed, but this can ultimately be 0.20 economic forecasts are no explained by a mimetic bias that 0.00 better than those of consensus is well-known among economists. forecasts. The Fed’s expectations herefore, it may be better 1990 1992 2001 2002 2008 2010 2018 regarding the federal funds rate to look at another metric. As Recession periods are no more accurate than those the cycle matures, it is probable (National Bureau of Economic Research) of investors. that at least one economist will Period of negative GDP growth

f the ed, with all the means stray from the consensus view. Proprietary index at its disposal, cannot predict n this case, the variance will not Source: NBER, Datastream, Consensus Forecasts, Amundi research *Highest-lowest forecast at the 12-month horizon correctly the turning points of move much, but the difference

OMFIF.ORG NOVEMBER 2018 BULLETIN 25

BTN_11.18_025_Borowski.indd 25 31/10/2018 10:12:05 Members promote higher standards and best practice in the world economy

The independent think tank for central banking, economic policy and public investments

MEMBERSHIP offers insight into ANALYSIS includes research MEETINGS take place within major themes of interest through two into issues relevant to member central banks and other neutral complementary channels – Analysis institutions and public and private venues. The frank, collaborative and Meetings – where members play a sector counterparties, focused on and non-hierarchical nature of prominent role in shaping the agenda asset management, regulation and meeins els ﬁ ms an insiins through high-level, practical exchanges supervision and global political and improve understanding and and timely, practitioner-led content. economic themes. performance.

OMFIF is a peer-to-peer membership network of central banks, sovereign funds and public pension funds with investable assets of $36.2tn, equivalent to 45% of world GDP, and their counterparts in asset management, banking and professional services.

For further details on Membership contact [email protected]

BTN_10.18_016_membership.indd 16 13/09/2018 16:50 Inquiry

The number

Electric car maker Tesla $312m ended the third quarter of 2018 with $312m net proﬁ t, its ﬁ rst since heavy spending began two years ago to launch and increase production of their Model 3 automobile.

It has used $6.2bn of cash in the form of operating losses and capital spending, but Tesla produced almost $900m in free cash ﬂ ow, which greatly exceeded investor expectations.

The chart Hungary increases gold reserves tenfold Each month we take a look at a chart from the world’s central Central60 Bank of Hungary’s gold holdings, tonnes banks. This month, the Hungarian National Bank. 50 he bank purchased .4 tonnes of gold in the ﬁ rst two weeks of October, increasing its total gold holdings 10-fold to 31.5 40 tonnes. his is the ﬁ rst time in more than 5 years that the central bank has changed its gold reserves. Governor Gyrgy Matolcsy 30 explained that the move is intended to improve the security and stability of ungarys wealth and that there are no investment 20 concerns behind the holding of gold reserves.

he sie of the countrys gold holdings is approaching levels last 10 seen during ungarys golden train period, when it received 3 tonnes of gold bars and coins at the end of the second world war. 0 owever, ungary remains a relatively small gold holder, ranking outside the top 5 globally, according to the World Gold ouncil. 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

In contrast, Russia has been purchasing almost 20 tonnes each month in 2018. Source: International Monetary Fund, Central Bank of Hungary, OMFIF analysis

OMFIF.ORG NOVEMBER 2018 BULLETIN 27

BTN_11.18_027_Inquiry.indd 27 31/10/2018 12:20:13 OMFIF Advisers Network

Louis de COUNCIL Montpellier CAPITAL MARKETS MONETARY POLICY State Street Global Advisors George John Adams Iain Begg China Financial Hoguet Meghnad Desai CFA Research London School of Fabrizio Services House of Lords; Foundation Economics chairman, OMFIF Saccomanni LUISS University Advisers

Yaseen Anwar Marek Belka Industrial & Soh Kian Frank Tiong former prime Otaviano Commercial Bank minister of Poland Canuto Scheidig of China DBS Bank World Bank Group DZ BANK

Irena Aslihan Ben Shenglin Asmundson Stuart Harald Gedik Zhejiang University California Mackintosh Benink OYAK Anker Academy of Internet Department Group of Thirty Tilburg University Bank Finance of Finance

Robert Georgina Johnson Gary Smith Baker Paul Newton International London & Oxford Mario Blejer Institute for New Barings Banco Hipotecario Economic Thinking Finance Capital Markets Corporation

Hani Kablawi Xiang Saker Stewart Chairman EMEA and Songzuo Stefan Fleming CEO Global Asset International Nusseibeh Bielmeier Hermes Fund St Antony’s Servicing BNY Mellon Monetary Institute DZ BANK Managers College, University of Oxford

William Keegan Niels Thygesen The Observer University of Copenhagen Hans José Manuel Jukka González- Blommestein Pihlman Vivid Economics Standard Páramo BBVA Chartered Bank Ted Truman John Kornblum Peterson Institute for Noerr Brigitte International Economics Mark Burgess Colin Granville Jamieson Coote Robertson Queen Mary, Bonds SW1 Consulting University of London Norman Marsha Lamont Vande Berg House of Lords Stanford University Michael Cole-Fontayn Fabio Graham Association for Scacciavillani Oman Investment Hacche Financial Markets NIESR Johannes in Europe Fund Kingsley Witteveen Moghalu honorary chairman, Tufts University OMFIF Advisers Lutfey Siddiqi Akinari Horii Thomas Finke National The Canon Barings University of Institute for Global Singapore Studies NETWORK Volker Gao Haihong Bahar Alsharif Frederick Hopson Janusz Reiter Wieland Harold James Institute of World German Council David Badham Matthew Hurn Anthony Robinson Princeton Economics and of Economic University Franco Bassanini Korkmaz Ilkorur Philippe Sachs Politics Experts Eduardo Borensztein Karl Kaiser Nasser Saidi Consuelo Brooke David Kihangire Pedro Schwartz Katarzyna Colin Budd Christian Zajdel- Hemraz Ben Knapen Vilem Semerak Jankee Michael Burda Gärtner Kurowska Ludger Kühnhardt Song Shanshan DZ BANK World Bank formerly Central Shiyin Cai Celeste Cecilia Lo Turco Marina Shargorodska Group Bank of Mauritius David Cameron Bo Lundgren Paola Subacchi Forrest Capie Mariela Mendez David Suratgar Trevor Stefano Carcascio Murade Miguigy Murargy José Alberto Tavares Greetham Pawel Desmond Cecil Moreira Royal London Kowalewski George Milling-Stanley Narodowy Bank Efraim Chalamish Jens Thomsen Asset Winston Moore Management Polski Moorad Choudhry Wilhelm Nölling David Tonge John Chown José Roberto Novaes Jorge Vasconcelos Vladimir Dlouhy de Almeida Gottfried von Bismarck Daniel Hanna Philippe Obindah Gershon Michael Oliver Jack Wigglesworth Standard Lagayette formerly Banque Jonathan Grant Paul Wilson Chartered Bank Francesco Papadia de France Peter Gray Robin Poynder François Heisbourg Poul Nyrup Rasmussen

28 BULLETIN NOVEMBER 2018 OMFIF.ORG

BTN_11.18_028-029_AdvisoryBoard.indd 28 31/10/2018 10:26 OMFIF Advisers Network

MONETARY POLICY INDUSTRY & INVESTMENT POLITICAL ECONOMY

Andrew Antonio Andrew Denis Large Joel Kibazo Armellini Hedge Fund Adonis JK Associates former MacShane Standards Board House of Lords ambassador, Avisa Partners OSCE

Kishore Jean-Claude Frits Gerard Lyons Jürgen Mahbubani Bank of China Bastos de Bolkestein National Krönig formerly European (UK) Morais Die Zeit University of Quantum Global Commission Singapore

Robert Laurens Jan Rakesh Oscar Bischof Brinkhorst David Owen Mohan German-British Lewisohn University of House of Lords Yale University Soditic Forum Leiden

Albert Boyd Vicky Pryce Athanasios Peter Bruce Centre for Orphanides Bressand McCleary Business Day Economics MIT Sloan School European 39 Essex & Business of Management Commission Chambers Research

Luiz Eduardo Nagpurnanand Caroline Melin Jenny Corbett Brian Reading Prabhala International Australia National independent University of Butler Walcot Partners Economic University economist Maryland Synergies

Maria Edoardo Willem Nick Butler Antonieta Del Robert Reviglio King’s College Middelkoop Skidelsky Cassa Depositi e Commodity Tedesco Lins London House of Lords Prestiti Discovery Fund University of São Paulo

Célestin Olivier John Hans Eichel Michael Monga former German Rousseau African Fonds de réserve Campbell minister of Stürmer Campbell Lutyens Development pour les retraites ﬁ nance WELT-Gruppe Bank

Miroslav Danny Quah Mark Crosby Lee Kuan Yew Jonathan Christopher Singer Monash Generali CEE School of Public Fenby Tugendhat University TS Lombard Holding Policy House of Lords

Natalie Jeffry Takuji Tanaka John West Shumpei Dempster Takemori Japan Finance Frieden Asian Century World Gold Harvard University Keio University Ministry Institute Council

Makoto Hans Genberg Daniel Elliot Hentov Utsumi The Seacen State Street William White formerly Japan Titelman OECD Centre ECLAC Global Advisors Finance Ministry

Tarisa Steve Hanke Pasquale Linda Yueh Watanagase The Johns Roel Janssen St Edmund Hall, formerly Bank of Hopkins Urselli NRC Handelsblad University of Mazars Thailand University Oxford

Hans-Olaf Yosuke Ernst Welteke Paul van formerly Henkel Kawakami Deutsche University of Seters formerly Tilburg University Bundesbank Mannheim Japanese Ministry of Finance

Mumtaz Khan Thomas Middle East & Asia Capital Kielinger Die Welt Partners

OMFIF.ORG NOVEMBER 2018 BULLETIN 29

BTN_11.18_028-029_AdvisoryBoard.indd 29 31/10/2018 10:26 Inquiry

Advisers network poll Shelving of Aramco IPO is ‘calculated’ Network suggests Saudi social reform is delayed rather than scrapped

This month’s poll focuses on the developments surrounding Shelving Aramco’s IPO is a sign of waning commitment Saudi Arabia’s mooted initial public offering of Saudi Aramco. to Vision 2030, yes or no, % of respondents Participants were asked: ‘Saudi Arabia has shelved the proposed initial public offering of state-owned oil 30 company Saudi Aramco. Is this a sign of the kingdom’s waning commitment to its ambitious Vision 2030 reform programme?’ Respondents from the advisory board believed that Saudi Arabia halting the IPO was not indicative of a lack of commitment to its reform programme. Instead, most agreed it was strategic, as offi cially reported by the ingdom 48 52 itself. Confi dence in the outloo for oil prices was suggested Advisory board Social media as a factor for this. Social media narrowly agreed with the advisers, adding to the consensus that Saudi Arabia will press Yes on with its reform plan. Most participants responded to this No poll before the news about the killing of Jamal Khashoggi 70 came to light, which understandably has overtaken the discourse around Saudi Arabia and precipitated foreign investment outfl ows from the ingdom.

This is indeed a reality check and The shelving of the IPO has come This decision may be a sign Saudi proof of Saudi Arabia’s waning as a shock to potential investors. rabia is now more confi dent commitment to the Vision 2030 hile offi cially this is being played about the short and medium term project. down as a postponement, waiting outlook for the oil price. for more optimum conditions, it Hans Blommestein, Vivid Tavares Moreira, formerly Banco does appear more like a waning of Economics de Portugal the kingdom’s commitment to its ambitious Vision 2030 programme. No, it may have been just a shrewd Hemraz Jankee, formerly Bank he fulfi lment of audi rabias judgment as to market conditions. of Mauritius long-term vision requires many But now with the Khashoggi shorter term adjustments although scandal, both the offer and the t is a refl ection of more positive if the adjustments are too great reform are in jeopardy. expectations on oil price. then they may lose the ability to Meghnad Desai, London School Miroslav Singer, Generali CEE orchestrate. of Economics Holding Colin Robertson, SW1 Consulting

December’s question:

Which arts of the orld ould most eneﬁ t from improved regional trade agreements?

30 BULLETIN NOVEMBER OMFIF.ORG

BTN_11.18_030_POLL.indd 30 31/10/2018 10:00:23 The OMFIF Podcast Subscribe to the OMFIF podcast for the latest news and insight on ﬁ nancial markets, monetary policy and global investment themes. Published weekly, the podcast features input from a range of academic experts, policy- makers and investment professionals.

Podcasts available include:

In conversation: Fed talk: assessing a Islamic ﬁ nance series: Jeffrey Frankel decade of QE SRI and green sukuks

Mark Sobel, OMFIF’s US David Marsh, OMFIF Michael Griff erty, president chairman, is joined by chairman, speaks with of the Gulf Bond and Sukuk Jeff rey Frankel, professor Fabio Natalucci, deputy Associati on, and Maya of capital formati on and growth at Harvard director of the monetary and capital Malek, managing director of Amanie Advisors, University’s Kennedy School of Government. markets department at the Internati onal join Kat Usita to discuss socially responsible They discuss the dollar’s current status as an Monetary Fund, and Mark Sobel, OMFIF’s investi ng and green sukuk. They discuss the internati onal reserve currency, the questi ons US chairman. They discuss the impact of intersecti on between green fi nance and over its decline, what the future holds for quanti tati ve easing in the light of the Federal Islamic banking, and how the green sukuk is the dollar, and the role of the Internati onal Reserve’s recent interest rate rise and policy sti ll in its nascent stage, but has mainstream Monetary Fund. normalisati on strategy. potenti al as market awareness increases.

Download now from iTunes or omﬁ f.podbean.com

BTN_11.18_031_podcast.indd 31 31/10/2018 11:31:22 Untitled-3DZ.indd 1 1 09/01/201815/12/2017 14:3511:39