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Summer 2015

2 | Deloitte | A Middle East Point of View | Summer 2015

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Deloitte | A Middle East Point of View | Summer 2015 | 3

A word from theeditorial team

I am the first to confess that I am a control freak. Andlike any self-professed control freak–unable to trust or todelegate–would tell you, time is of the essence. Timemanagement is your friend.

The plethora of books and resources that exist to helpyou manage everything from spatial to emotionalintelligence points to one thing: you manage, you win.

This issue of Middle East Point of View is all aboutmanagement, from social media to cyber risk viacompliance risk and initial public offerings (IPOs).

The first of our series of articles is managing compliancerisk. Mandy Green, in her article Managing compliancerisk: where are you now?, surmises that although“managing compliance risk remains a high priority fororganizations across the Middle East North Africa(MENA) region[…]the existence of Anti-Bribery andCorruption (ABC) policies continues to lag behind fororganizations in the region,” although this lag “isexpected to be addressed in the short-term as MiddleEast economies continue to integrate with the widerglobal community through inward and outwardinvestment.”

On managing investments, Declan Hayes and KarinHodson explore Sub-Saharan Africa and wonder if it isthe next frontier for Middle Eastern investors. “Investorsfrom the region,” they say, “are increasingly recognizingthe significant opportunities that Africa offers.” Theyconsider the benefits and risks that include politicalinstability and humanitarian disasters such as the Ebolaoutbreak.

Political instability in the region does not seem to beaffecting investment in construction as pointed out byCynthia Corby in her article The beat goes on. Ms. Corbysays: “Despite lower oil prices, the forecast forconstruction projects awarded in the Gulf CooperationCouncil (GCC) countries in 2015 is the highest on record[…] what does this tell us about the economic backdropin the region?”

On asset management, Dr. Hatim El Tahir explores therise of the Eurosukuk as an alternative financing andinvestment platform. Dr. El Tahir says the Eurosukukmarket is an “emerging niche market that will arguablycreate other subsector opportunities in Europe andelsewhere in the world where there are mature andwell-regulated debt capital markets.”

Yet as we all seek opportunities for growth anddiversification, what lies at the heart of our strategycould also be feeding the cyber risks our organizationsface, says Fadi Mutlak in his article on cyber security Are you safe?

No better time than the present then to manage therisks associated with the use of Information Technologywhether for growth or exposure. Take social media forexample: while its surge in some parts of the MiddleEast exceeds certain global averages, its use is a“double-edged sword,” say Hani Khoury and EliasMaayeh (The time is now) exposing organizations to“risks related to data, technology, people and structure.”

Whether you’re a partner in a family business managingan Initial Public Offering (We’re going on an IPO!), or a bank manager looking to maximize profitability(Spread the risk) or a board member managing yourorganization’s knowledge (Distinguishing fact from fact)we at the Middle East Point of View are confident thatyou will find our expert insight very valuable.

And as any control freak would tell you, there is nopower without knowledge.

ME PoV editorial team


In this issue

Managing compliance risk Where are you now?Mandy Green

The beat goes onCynthia Corby

Investing in Sub-Saharan AfricaThe next frontier for Middle East investors?Declan Hayes and Karin Hodson

Rise of the Eurosukuk marketAn alternative financing and investment platformHatim El Tahir

6

10

16

22

Contents


26

32

36

42

48

Table of contents

We’re going on an IPO!Martin Pierce and Yaser Al Dahoud

The time is nowHani Khoury and Elias Maayeh

Are you safe?Fadi Mutlak

Distinguishing fact from factZiad Zakaria

Spread the riskFarid Massoud


It is often said that the only constant is change; and when reflecting on the current Middle Eastregulatory landscape, this certainly holds true. Withthe tide of regulatory change expected to remain inthe medium-term, can compliance officers in theregion be confident that they are keeping up withthe wave of change?

Managingcompliance risk Where are you now?

Forensic – financial crime

It’s all a matter of priorityIn keeping with international trends, and reflecting the ongoing emphasis of international legislation and enforcement activity, managing Compliance Riskremains a high priority for organizations across theMiddle East North Africa (MENA) region. Anti-MoneyLaundering (AML), sanctions, fraud and CounterTerrorism Financing (CTF) continue to top the list of initiatives that businesses are taking to counterfinancial crime.

Interestingly though, while we have seen progressglobally in the fight against bribery and corruption in

recent years, the existence of Anti-Bribery andCorruption (ABC) policies continues to lag behind fororganizations in the region. This lag is expected to beaddressed in the short-term as Middle East economiescontinue to integrate with the wider global communitythrough inward and outward investment.

Perhaps the most noteworthy concern in terms ofprioritizing financial crime risk is that, despite the currentglobal focus on cyber security issues including hacking,data losses or breaches and other information leaks,organizations across the Middle East still do not haveformal cyber security initiatives in place.


As a region known for its financial services and energyinterests (both of which require a high degree ofconfidentiality of information) the Middle Eastrepresents an attractive target for cyber criminals.Industry research reveals increased cyber security threatsin the Gulf Cooperation Council (GCC) region, which wehave seen manifest in the widespread banking malwarein the United Arab Emirates (UAE) and recent phishingattacks in Saudi Arabia.

With the increasing focus on cyber security byprominent experts, authorities and media houses, theapparent lack of policy on the issue is counter-intuitivebut is reflective of a historical deficiency in both, thesetting of clear and active local regulation, as well as inin-house efforts to combat the ever-increasing threatcyber security poses. Change is soon to set in however,as both local and international governments push theissue of cyber security to the top of their political andlegislative agenda. We expect this will become anincreasingly prominent concern for companies in theMiddle East region, particularly given the level ofreliance on technology being used to fight financialcrime.

Reputation is critical The risk of reputational damage associated withcompliance failures continues to be the key driver for managing compliance risks in the Middle East.Increasingly though, businesses are having to balanceregulatory compliance with furthering their businessobjectives. That these two points should be at the top

of the corporate wish list is reflective of the ongoingtransformation of organizations in many economiesacross the Middle East region following the globalfinancial crisis.

A key challenge continues to exist for organizations in emerging markets: to balance meeting these twoseemingly competing priorities while maintainingbusiness integrity. Banks in the GCC, for example, have had a traditionally low customer penetration rate and are changing their focus to attract and retaincustomers from untapped markets. In this environment,differentiation is important, which means thatreputation is vital. The possible loss of correspondentbanking relationships–which limits the ability of regionalfinancial institutions to operate in a truly globalcapacity–for compliance-related reasons is just oneexample of the potential fallout of compliance failures.

Low levels of confidence in existing complianceprograms Of big concern is that while organizations appear tohave assessed the key compliance risks affecting theirbusinesses, their ability to manage these risks usingexisting compliance programs is limited. In a recentsurvey1 conducted by Deloitte, almost half ofrespondents highlighted a lack of confidence in theeffectiveness of their existing financial crime programswhen compared with both domestic and internationalregulatory requirements, while over 50 percent of thosesurveyed questioned the ability of their compliancepolicy to prevent illicit activity.

This lack of effectiveness is particularly noteworthy given that many locally established financial institutionsare actively looking to expand their presence globally,either by expanding into other jurisdictions or throughthe acquisition of customer bases. This is in line withinternational trends and reflects an ever-changingregulatory environment, combined with an absence ofstructured and robust regulatory guidelines in certainjurisdictions.

If financial crime programs are not meeting the currentregulatory needs, their ability to support ongoingstrategic or operational change in a time of ongoing

While we have seen progress globally inthe fight against bribery and corruptionin recent years, the existence of Anti-Bribery and Corruption (ABC) policiescontinues to lag behind fororganizations in the region


regulatory uncertainty poses a key risk. The responsesalso point to the potential for vulnerability to the impactof financial crime. Financial crime is quite often linked to terrorist funding, so should a financial institution beso implicated, it can result in a devastating fine andtarnishing of reputation.

The above weaknesses also highlight the importance of the culture of compliance management existingwithin organizations. Having comprehensive writtenpolicies is meaningless as we see more and morefinancial institutions having to demonstrate to regulatoryagencies that they have effectively embedded policiesinto the business.

Are organizations managing risks effectively? Organizations continue to rely upon a combination ofpeople, process and technology to manage compliancerisks. However, against a backdrop of increasing costsand scarcity of appropriately trained resources,businesses are increasingly turning to technology as the primary means of managing compliance risk. Whilethis highlights the need for greater efficiency at a timewhere budgetary pressures continue to exist, fightingfinancial crime requires a multi-faceted approach.

Sanctions, fraud and Anti-Bribery and Corruption (ABC)programs management depend on due diligence andtechnology, while AML programs mainly use customeron-boarding and profiling and due diligence to revealrisk. Combating the Financing of Terrorism (CFT) relieson suspicious transaction reporting and technology, andof course, cyber security is largely technology-based.However, as the regulatory environment has evolvedover the past decade, Know Your Customer (KYC)processes have increased in their complexity and nowrequire a more sophisticated response. Human capitaland specialist skills will continue to be sought after, andthe organizations that succeed will be those that arecontinuing to invest in recruiting and training staff.

Similarly, technology continues to be the most efficientmethod of managing ‘business as usual’ processes suchas transaction monitoring, while the use of regulatoryintelligence is also becoming more prominent as firmsseek to balance the cost of compliance with the need to

remain vigilant on combatting financial crime. Whilehistorically it has tended to be used as a reactivemeasure, as with most compliance activity, the truebenefit of this work comes with undertaking itproactively.

Although the future of financial crime managementappears to be in the use of technology, businesses in theMiddle East region need to ensure they are not overlyreliant on it. We expect that effective complianceprograms will continue to demand a balance oftechnology with human intervention to ultimately serve tomanage the risks associated with operating in the region.

Managing financial crime risk remains one of the mostimportant challenge organizations in the Middle Eastface going forward. The need for compliance officers to anticipate regulatory change, think smarter aboutmanaging the associated risks and maintain the visibilityof regulatory efforts on the C-suite agenda has neverbeen greater. Similarly, regulators need to supportorganizations by providing robust regulatory support for managing the fight against financial crime. Only then will we see the tide of regulatory change turn.

by Mandy Green, Director, Forensic Services, DeloitteCorporate Finance Limited (regulated by the DubaiFinancial Services Authority)

Endnotes

1. In Q3, 2014, together with Thomson Reuters,Deloitte launched a joint survey of financial crimeprograms in the Middle East.www.deloitte.com/financialcrimesinmena2015

Although the future of financial crimemanagement appears to be in the use oftechnology, businesses in the Middle Eastregion need to ensure they are not overlyreliant on it

Forensic – financial crime


The beat goes on


Despite lower oil prices, the forecast for constructionprojects awarded in the Gulf Cooperation Council(GCC) countries in 2015 is the highest on record.With construction generally considered as aneconomic barometer for the GCC, what does this tellus about the economic backdrop in the region?

Construction


According to MEED Projects magazine, the forecast forprojects they expect to be awarded in the GCC in 2015is US$172 billion, the highest on record. Total projectsplanned and underway for the GCC amount to US$2.8trillion, with the majority of the spend being onresidential, mixed-use, leisure and hospitality projectsamounting to US$1.1 billion.

This is all against a backdrop of lower oil prices,continuing political unrest and reduced InternationalMonetary Fund (IMF) growth forecasts across the GCC.It is also impacted by the deepening recession in Russiaand, as reflected in the IMF World Economic Outlookupdate in February 2015, the projection for globalgrowth in 2015 has been lowered to 3.5 percent, only a small increase from 2014. As per the IMF, the GCCexport oil earnings are expected to decline by US$300billion from the original estimate in October 2014.

Understanding the recent macroeconomicchanges in the regional contextGiven the heavy dependence of the GCC constructionindustry on energy revenues, the most significant eventof 2014 for the industry has been the sharp plunge in oilprices, which have declined by about 50 percent sinceJune 2014.

As a result of this new price environment, all GCCcountries, with the exception of Kuwait, will run fiscaldeficits in 2015. In the short-term, it is not perceived tobe a pressing concern due to available financing andlow debt levels, however, if oil prices remain subduedfor an extended period, this will place a growing strainon public finances and may adversely impact theircapital and social spending levels. Most oil exportersneed oil prices to be considerably above the US$62/bblprojected for 2015 to cover government spending,which has increased in recent years in response to risingsocial pressures and infrastructure development goals.

Most oil-exporting countries in the GCC have significantfiscal buffers, which allow them to avoid sudden cuts in spending in response to declining oil revenues,nevertheless, most GCC countries are now expected to slow spending growth in the Industrial and Oil & Gassectors in 2015 compared to what was projected in2014. So far US$18 billion in this sector has been put on hold, while other projects planned and underwayamount to US$2.8 trillion. Oil price and economicvolatility could make Government commitment forreforms towards diversification and infrastructureprojects more urgent and, possibly, politically easier to implement.

Given the heavy dependence of theGCC construction industry on energyrevenues, the most significant event of2014 for the industry has been thesharp plunge in oil prices, which havedeclined by about 50 percent since June 2014

GCC projects planned and underway (2015) – US$2.8 trillion

1,400,000

1,200,000

1,000,000

800,000

600,000

400,000

200,000

UAE

Source: MEED Projects

SaudiArabia

Qatar Oman Bahrain Kuwait

0

Water

Transport

Power

Oil

Industrial

Gas

Construction

Chemical


Government spend on infrastructure and capital projectsis expected to continue in order to achieve theirstrategies for diversification, and is expected to drive the demand and growth of the building constructionmaterial industries in the GCC region. Preparations forbig events are expected to generate healthy projectactivity across the GCC that will act as a catalyst for theother planned mixed use and infrastructure projects, not to mention the significant focus on development of downstream industries that will further aid thegrowth of the building construction materials industry.

Markets overview: opportunities and challengesSaudi Arabia is strongly focused on diversifying theeconomy to reduce its oil dependence, implying thedevelopment of non-oil sectors, and construction plays a major role here. Demographics are a key factor drivingdiversification: with an estimated 50 percent of itspopulation under the age of 25 and its high growthforecast, job creation becomes a priority, as well as theprovision of expanded social services to citizens. Majoreconomic cities planned across the Kingdom are part ofthis objective. The new cities are expected to contributeUS$150 billion to the country’s GDP by 2020 andprovide job opportunities for 1.3 million people. KingAbdullah Economic City (KAEC) is the largestconstruction project budgeted at US$93 billion. Majortransportation infrastructure projects are underway orplanned, including the Riyadh metro for US$22 billion orthe King Abdulaziz International Airport expansion. Witha large number of projects under construction in SaudiArabia, it is forecast that built asset performance willgrow by 70 percent over the next decade, the secondhighest growth rate behind China. But for Saudi Arabiato achieve this, it will need to deliver a high quality builtenvironment. That need is driving the adoption ofinternational quality standards and best global practice.

There is plenty of optimism in Dubai and Abu Dhabigiven the large number of projects in the pipeline, the expected project awards for Expo 2020 and AlMaktoum International Airport and Abu Dhabi’songoing 2030 Vision with projects currently underconstruction such as Abu Dhabi Midfield Terminal, Reem Island, Etihad Rail and Yas Mall.

Governments are likely to continue spending on socialinfrastructure projects, with a continued focus ontargeting increased tourism and business demands, thus focusing on significant tourism and leisureinfrastructure projects.

Factors such as rising labor and material costs, and slowpayments seem to impact contractor’s profitability andfuture expectations. There is appreciation for the needto focus on traditional problems including cash flowcycle, time delivery for projects and delivering within the budget, and access to qualified workforce.

Qatar progresses with Qatar National Vision 2030 and the 2022 World Cup. The government has beeninvesting heavily to upgrade infrastructure, including a well-integrated road and rail network, and the newHamad International Airport to facilitate the forecastgrowth of tourists. Hospitality is likely to see significantgrowth in the coming five years driven by the upcomingevent, though this should be aligned with enhancing theleisure side creating future leisure attractions, to avoidthe risk of hotel rooms oversupply after the event. Socialinfrastructure such as healthcare and education has alsofound significant allocation in the country’s budget, toensure diversification and growth towards a knowledgebase economy.

In the short-term, it is not perceived tobe a pressing concern due to availablefinancing and low debt levels, however,if oil prices remain subdued for anextended period, this will place agrowing strain on public finances andmay adversely impact their capital andsocial spending levels

Construction


To further understand the state of the industry as weface it today, below are the viewpoints of a number ofkey decision-makers:

China State Construction Engineering CorporationMiddle East is the regional operation of the world’slargest construction company and top home builder,that started its Middle East market entry with the iconicPalm Jumeirah Villa Project over ten years ago. Wespoke to Mr. Yu Tao, President and CEO of China StateConstruction Engineering Corp Middle East. We askedMr. Tao about the current market and opportunities andhe noted that there are visible signs that the buildingmarket is really coming back, with more tender inquiries,specifically for hotel projects, in accordance with theDubai government’s plan to attract more transit visitors.On the other hand, he observed that the infrastructuremarket is taking longer to recover. However, Mr. Taosaid he sees great potential around support related toDubai Expo 2020 and the increasing population puttingmore demand on infrastructure needs.

Commenting on the funding issue, Mr. Tao highlightedthat: “We expect funding to be the ongoing challengewhen you look at the extent of infrastructure projectsplanned and underway, that is why we have developeda unique proposition for our clients, which is to offerproject funding or export credit opportunities.” Whencommenting on cost controls, he said they expect thatmanaging costs effectively throughout the work processwill remain a priority as the tender process is verycompetitive having and impact on the tender margins.Mr. Tao added that he expects ongoing challengesregarding design variations and managing variations toremain a feature of the construction industry, particularlybecause of the complexity of projects and timescales inwhich designs are done and executed, and said theyhave strong processes to track and manage changeorders to ensure they recover all additional value foradditional work done.

Mr. Tao further acknowledged that the clients of todayare much more cost-conscious and put a lot of pressureto manage the budget efficiently, and noted that profitmargins across the industry are very low. Even globally, contractors have been struggling to meet a two-percent margin, while carrying the burden offunding a 10-percent retention, making the sectorhighly risky. He felt that the industry has to find a way to create an environment conducive to the healthydevelopment of the market that takes contractors’concerns into consideration.

Qatar Society of Engineers is a non-profit professionalorganization formed by approximately 200 Qatariengineers. We spoke to Mr. Ahmad Jassim Al Jolo,Chairman of the Board who shared with us his thoughts on the Qatari construction market. The localconstruction sector, he said, faces the challenge of non-robust building codes, leading to uniformity andinconsistency due to consultants bringing to the market

Oil price and economic volatility couldmake Government commitment forreforms towards diversification andinfrastructure projects more urgent and,possibly, politically easier to implement


their own standards. The Ministry of the Environment(MOE) is working on producing a solid Building Code toachieve standardization. Another challenge that needsto be resolved is high construction costs–Qatar is themost expensive GCC country for construction–which ismainly caused by the cost of materials. Qatar being asmall country relative to its planned expenditure, needsto import its material and labor and is constrained froma logistics point of view. Doha’s old port capacity isoften considered as a source of increasing costs, causingbottlenecks and delays on projects delivery time. Not to mention the ambitious infrastructure programs of neighboring countries in the region leading tocompetition for materials and qualified employmentworkforce.

In summary, there are several key factors driving theplanned capital projects included in the US$2.8 trillionplanned and underway. These will need to be carefullyplanned and controlled so as not to exceed budgets andappropriately structured to achieve the necessary debtand capital funding. The whole life cost of these assetsshould be assessed to ensure they have the intendedeconomic impact, they deliver value for money and thatthe day-to-day operation and maintenance costs arereduced to sustainable levels.

by Cynthia Corby, Partner, Construction industryleader, Deloitte Middle East

Governments are likely to continuespending on social infrastructureprojects, with a continued focus ontargeting increased tourism and businessdemands, thus focusing on significanttourism and leisure infrastructure projects

Construction


Investing in Sub-Saharan AfricaThe next frontier for Middle East investors?


Investors from the Middle East region areincreasingly recognizing the significantopportunities that Africa offers for investors. In thisarticle we explore the key investment themes andopportunities that are driving this and some of thechallenges to be considered.

Investing in Africa


Historical connectionsTrade links between Africa and the Middle East aredeep-rooted and historically significant. From the MiddleEast traders who brought Islam to North Africa tomodern day political and economic support and tradingof agricultural, natural resources and hydrocarbonproducts, the ties between the regions have grown ever stronger.

Leading global economic growth ratesSub-Saharan Africa is forecast to record the highest GDPgrowth rate between 2014 and 2018 at 4.8 percent.Strong GDP growth is anticipated to be underpinned bythe rise of the middle class, population growth, thedominance of youth, rapid urbanization and the fastadoption of digital technologies.

North America

Western Europe

Sub-Saharan Africa

Middle East and North Africa

Asia and Australasia(including Japan)

Latin America

Historical GDP

Source: EIU

2011-20133.3%

2014-20182.9%

2011-20130.8%

2014-20181.6%

2011-20132.4%

2014-20182.6%

2011-20132.1%

2014-20182.6%

2011-20133.7%

2014-2018

4.8%

2011-20133.1%

2014-20184.0%

2011-20133.8%

2014-20183.8%

Forecast GDP

Transition economies

Sub-Saharan Africa is forecast to be the fastest growing region in the world over the next 5 years as measured by projected GDP growth rates


In addition to higher forecast African population growthwhen compared to the rest of the world, a significantportion of the population is anticipated to enter themiddle classes. Indeed, by 2030 over half a billionAfricans are projected to be middle class. While thesenumbers are very impressive, it should be noted that 60percent of those considered middle class today live on c. US$4/day, though their relative purchasing power issignificant.

More than 200 million Africans (20 percent of the totalpopulation) are aged between 15 and 24, and thatdemographic is expected to grow to c. 320 million by2030. These younger Africans form a large share of therising middle class and seek to access a wider choice offood, consumer goods, entertainment and increasedconnectivity.

In addition to the growth in population andconsumerism, Africa is increasingly concentrating inlarge urban areas, which permits an increase in thespeed of economic development and the spreading of the costs of infrastructure over a larger number ofinhabitants. Major urban areas are predicted to link up populations and create sizable markets and tradeopportunities. The fast adoption of digital and mobiletechnologies has also allowed Africa, in certain instancesand in certain sectors (e.g. banking) to leapfroghistorically poor infrastructure investment.

Alongside the anticipated consumer-led economicgrowth described above, hydrocarbon deposits and thebenefits of other extractive industries have been, andwill continue, to be a significant source of income forthese countries.

Investors positioning to take advantage The opportunities that these economic developmentspresent to investors are significant and in recent yearsboth international corporations and private equity havebeen actively acquiring in sectors beyond the traditionalEnergy & Resources sector. As put by David Rubinstein,CEO of the Carlyle Group at the US-Africa LeadersSummit held in Washington, D.C. in August 2014: “Thegreat explosion in private equity, if it is going to occuranywhere around the world in the next couple of years,is probably going to be in Africa, particularly Sub-Saharan Africa, where the penetration rate is aboutone-twelfth or so of what it is in the United States.”

Indeed, in the period between 2012 to the end of 2014 Africa-focused funds, such as Private Equity andInfrastructure have raised in excess of US$10 billion with some of these investors originating from theMiddle East.

In addition to the growth in populationand consumerism, Africa is increasinglyconcentrating in large urban areas,which permits an increase in the speed of economic development and thespreading of the costs of infrastructureover a larger number of inhabitants

Investing in Africa


These investors are targeting sectors that will directlybenefit from the rise in middle class population anddemographic movements. In particular, internationalcorporations have successfully acquired in the foodstuffs, retail and other consumer staple and consumerdiscretionary categories.

The growth in consumerism will lead to an increase in the need for innovative financing solutions andconnectivity to access them. Quality assets within theFinancial Services and Telecommunications sectors arealso attracting foreign investors.

Closer to home, car dealership chains and automotivefranchises are of particular interest to Middle Eastinvestors, leveraging the existing relationships that thesegroups have from their existing businesses.

Not without its challengesAlthough the opportunity and potential investmentreturn is high, key challenges are faced when executingM&A activity in Africa. From political instability, tohistorical under-investment in infrastructure andhumanitarian disasters such as the Ebola outbreak,investors need to carry out significant due diligence onboth the external market and competitive landscape of a target business, which includes reviewing the historicaland forecast financial and commercial performance.Moreover, as with Middle East countries, ownershipregulations and the importance of choosing the rightpartner also need to be carefully considered andintegrity due diligence carried out on new businesspartners.

The three key issues to keep in mind are:1. Financial disclosure and due diligenceGenerally, there is limited financial disclosure, both forlisted and unlisted companies operating in the region,which means that access to valid, accurate, completeand reliable financial information can fall short ofinvestor expectations. The lack of certain informationmakes it essential that an extensive diligence process be followed with an experienced advisor.

Indeed, in the period between 2012 tothe end of 2014 Africa-focused funds,such as Private Equity and Infrastructurehave raised in excess of US$10 billionwith some of these investors originatingfrom the Middle East

Fund name Final close(US$m)

Fund sector

Regionalfocus

HeliosInvestors III

1,100 Generalist Pan-African

Abraaj AfricaFund III

990 Consumer led sectors

Sub-SaharanAfrica

DPI ADP IIFund


Pan-African

Carlyle Sub-SaharanAfrica Fund

698 Generalist Sub-SaharanAfrica

AmethisFinance Fund

530 Generalist Pan-African

LeapFrogFund II


Pan-African

2. Local ownership requirementsMany countries have adopted, or are in the process ofadopting citizen empowerment laws, which typicallyrequire a minimum percentage of local shareholderownership. The challenge though is that localshareholders are often unable to raise required fundsespecially in capital-intensive projects and are seekinginternational backers.

3. The right partnerWhile this is important in transactions, it is especiallycritical when the local partner is relied upon to drivelocal relationships. Deficiency of suitable local partnersmay act as an obstacle for investors or, worse, result inunder-performance from a poorly executed investment.

ConclusionWith the combined African economy expected to growat double the rate of advanced economies between2014 and 2019, the potential investment opportunity is unquestionable. The challenges and associated risk of executing M&A activity on the African continent canbe greatly mitigated by the ability to identify high qualityassets through local network connections; partneringwith an appropriate local partner to do business; andensuring that a competent transaction advisor isappointed with skilled resources and knowledge of localmarkets to navigate the significant complexities uniqueto the continent.

by Declan Hayes, Managing Director, TransactionServices, Deloitte Corporate Finance Limited (regulatedby the Dubai Financial Services Authority) and KarinHodson, Partner in Deloitte South Africa and Head ofTransaction Services in Africa


Although the opportunity and potential investment return is high, keychallenges are faced when executingM&A activity in Africa. From politicalinstability, to historical under-investmentin infrastructure and humanitariandisasters such as the Ebola outbreak,investors need to carry out significantdue diligence on both the externalmarket and competitive landscape of a target business.

Investing in Africa


A new debt capital market instrument has emerged,the so-called “corporate sukuk” which has seensteady growth in several parts of the world includingthe Middle East, Asia, Europe and the United States.The key differentiating factor of this asset class is adifferent risk and return profile investment that may also possibly have uncorrelated features toconventional financial market yields or risks. Just intime it seems, as David Sproul, UK Chief Executive of Deloitte, said “the low growth environment of thepast five years, coupled with levels of consumer andgovernment debt, mean the big business has to take alead in driving a new era of wealth creation in the UK.”

Rise of theEurosukuk marketAn alternative financing andinvestment platform

Islamic Finance


Concurrently to this growth in the sukuk market,increased insights into the development and need for‘alternative financing’ are gaining prominence andimportance for both governments and the privatesectors. The significant increase in global sukuk issuancethrough market growth in several jurisdictions supportsthe notion that the sukuk is an alternative, as well asethical investment asset class: investing in the realeconomy, with emphasis on social and environmentalsustainability. It also features investment through equity-based and asset-backed structures.

Sukuk, as per the Islamic Financial Services Board (IFSB),can be defined as certificates, each of which representsthe holder’s proportionate ownership in an undividedpart of an underlying asset where the holder assumes all rights and obligations to such an asset.

The need for an industry-sponsored research to validatethis proposition is well overdue. Industry think tanks and thought leaders are keen to dive deep into thisemerging niche market that will arguably create othersubsector opportunities in Europe and elsewhere in theworld where there are mature and well-regulated debtcapital markets.

A new industry research: the context and rationale Responding to the need to understand this developmentin the Islamic capital market, a number of industryresearch collaborative initiatives have surfaced in recentyears. However, critics believe that institutions offeringIslamic financial services should generously fund industryresearch and align research planning with theorganization’s strategic business objectives.

Current collaborative research is set to investigate therise of the Eurosukuk in four European countries aimedat addressing the opportunities and challenges of thegrowth of a global corporate sukuk market and thepotential demand for a Eurosukuk from blue-chipEuropean corporates.

The broad objective of this industry study is to buildpractical knowledge and gain a better understanding of how the Eurosukuk serves as an alternativefinancing/investing asset class for blue-chip Europeancorporates. In addition, it hopes to produce practicalinsights into how this new asset class can create interestfrom Middle Eastern investors–to invest in high quality(Sharia’-compliant) assets in medium-sized Europeancorporates–who are arguably in need of risk capital togrow their markets. The research has set to highlightthree objectives based on a three-way dialogue toaddress topical and timely regulatory practical issues for four European countries namely, France, Germany,the United Kingdom, and Turkey.

The three specific objectives of the study are:• Develop and validate a conceptual framework for aEurosukuk market addressing the key regulatory andtax implications for the growth of this asset class inEurope;

• Identify key determinants and growth drivers of aEurosukuk market in manufacturing and industrialsectors–energy, technology, healthcare, agricultureand pharmaceuticals–that are evidently showingstrong growth trends in corporate Europe;

• Produce a blueprint report proposing structures,sectors and industries, and markets that are most likelyto see growth, supported by project-oriented casesand scenarios. The report will also seek to define whatprogressive roadmaps and actions are required frompotential investors and how the Eurosukuk fits inwithin the context of the broader global Debt CapitalMarket (DCM).

Initially the four key European markets mentioned abovehave been identified for this research due to the strongeconomic base and contribution to their GDP of Small-Medium Enterprises (SMEs). In addition, preliminary

The significant increase in global sukukissuance through market growth inseveral jurisdictions supports the notionthat the sukuk is an alternative, as well as ethical investment asset class


analysis indicated that generally, the regulatory and taxlaws in these jurisdictions are favorably supportingIslamic finance to varying degrees. However, it wasrevealed from first phase of the research that two othercountries have also developed an enabling environmentfor Islamic financial services, namely the Republic ofIreland and Luxembourg.

The research is wrapped around four key areas:• The socioeconomic, regulatory, and tax environment;• Assessment of the corporate bond and financingrequirements;

• Analysis of industries and scale of transactional needs; • Project-oriented cases and structures.

Sukuk issuance and listing in EuropeFollowing the success of the inaugural sovereign sukukissued by two western market sovereigns in 2014, anumber of sovereigns and corporates in Europe are alsoplanning sukuk issuance, while regulators in manyEuropean countries are working to ease the path ofIslamic Finance transactions, in particular the sukuk. Theissuance in 2004 of the EUR100 million sukuk by theGerman state of Saxony Anhalt was a milestone in theprogression to issuance by a major European sovereign,the first of these being Britain’s GBP200 million sukuk inJune 2014. The sukuk was heavily oversubscribed byinvestors in the UK, Middle East and Asia, attractingorders of GBP2.3 billion–over 10 times higher than theamount sold. Subsequently, Luxembourg followed withthe issuance of its inaugural 5-year, EUR200 millionsukuk in September 2014.

Needless to say, some European stock exchanges havecome to the fore in this activity as key listing exchangesfor the sukuk; the London Stock Exchange has thelargest value and size of sukuk listed globally, with the Luxembourg and Irish stock markets also active.

Key research assumptions and prospectsOne factor driving the trend towards greater investmentin Sharia’-compliant instruments has been the impact of the global financial crisis. Trust–in particular amongwealthy individuals and institutional investors–has been

adversely affected. In addition, other key driving factorsof growth of this asset class may invariably besummarized as below:• Shortage of classic bank financing in most Europeancountries due to Eurozone crisis amongst others.

• Strong growth of “ultra-high-net-worth” individuals–particularly the double digit growth in Asia–creating ademand for alternative investment opportunities andnew asset classes. Credit Suisse estimates that globallythere are close to 34,000 “ultra-high-net-worth”individuals with a net wealth of US$100 million ormore, and 3,000 family offices.

• Savvy professional investors from the Middle East and elsewhere in the world are Sharia’ cautious andlooking for investment opportunities in Europe andemerging markets which have high quality assets inarguably soundly regulated markets.

• Medium-sized and larger blue chip corporates areemerging from the global financial crisis looking for growth opportunities and risk capital to achieveexpansion goals.

Nurturing this market A practical approach to educate market participants onthe benefits and uses of the Eurosukuk is the creation of a specialized industry group–an industry-supportedinitiative which can follow up on the market growth and development and help improve communicationsbetween the different stakeholders on the two blocksissuers on the one hand, and investors on the otherhand.

by Dr. Hatim El Tahir, Director, Islamic FinanceKnowledge Center, Deloitte Middle East

One factor driving the trend towardsgreater investment in Sharia’-compliantinstruments has been the impact of theglobal financial crisis

Islamic Finance


We’re goingon an IPO!


Becoming a publicly listed company is a milestone in the life of anyorganization. The rewards for achieving such a development areundoubtedly very compelling, but the journey is also fraught withchallenges that require a substantial commitment of time andresources on the part of the business, not only to aid in thetransformation process but also to fulfill the expectations ofexternal stakeholders once the company is listed. This articlehighlights certain Initial Public Offering (IPO) challenges to familybusinesses and how to mitigate them.

Family Business


Family businesses, are you ready for the IPO?The decision to seek an IPO is typically driven by bothfinancial and non-financial considerations, with theformer including access to broader funding, facilitatingan exit for a partner and realizing financial gains, andthe latter improving a company’s profile, enhancing thefounders’ reputation and achieving a legacy for futuregenerations.

For family businesses, one of the main attractions of an IPO is to aid in succession planning through theenforcement of certain corporate disciplines that comewith being a regulated entity. Although the GDP of theMiddle East is largely oil-based, family businesses are thesecond biggest contributor to GDP, with an estimated

value of US$1 trillion.1 With the majority of familybusinesses expected to be passed down to the nextgeneration within the next ten years, successionplanning will have a major impact on the way MiddleEastern businesses and economies will evolve during thisperiod. Studies indicate that, globally, only one in tenfamily businesses survive to their third generation. Thisissue is even more relevant in the case of Middle Easternfamily businesses, which are, on average larger and more diversified than their American and Europeancounterparts.

GCC market regulators have been increasinglypromoting IPOs as the regional markets continue tomature. In June 2015, Saudi Arabia opened up thecapital markets to foreign investors. As such, the IPOmarket has been very active recently with severalsuccessful family offices listing on either regional orinternational markets as highlighted in the table below.

While the timing of an IPO is critical, it is even morecritical to the success of the IPO that the business isready when the market opportunity presents itself.Hence, it is never too early to start preparing for thismilestone.

While the timing of an IPO is critical, it iseven more critical to the success of theIPO that the business is ready when themarket opportunity presents itself

FamilyBusiness

Country Exchange Sector Listing date

Percentageoffered

Offer size Stockperformance

DAMAC* UAE London SE Real Estate December2013

13.1% US$348m 268.6%

Abdul Mohsen AlHokair**

KSA Saudi SE Leisure andTourism

June 2014 30.0% SAR825m 76.0%

Al HamadiCompany**

KSA Saudi SE Healthcare July 2014 30.0% SAR630m 122.3%

* From listing up to delisting on 16 March 2015 **From listing up to 26 April 2015

Source: Zawya and Bloomberg

Family businesses listed on international and regional markets


Particular IPO challenges for family businesses While there are a number of challenges to beconsidered in the context of an IPO, those that are mostrelevant to family businesses are highlighted below.

Family readinessIt is natural for family businesses to have internaldifferences between family members. These differencesusually arise as the business transfers generations, withmore members of the family who may have differentideas as to the company’s development becomingactively involved in the day-to-day running of thebusiness.

If these differing views and aspirations are notadequately addressed, they can be detrimental to the stability of the business and lead to division, loss in direction of a successful business and destruction in value. For example, due to inadequate successionplanning, the family feud at the internationallyrenowned Gucci business in Italy escalated, resulting in a total of 18 lawsuits between different familymembers by 1987.2

Business readiness Business readiness is a challenge that is pervasive to all businesses, but is even more pertinent for familybusinesses. Sustainability and decision-making in afamily business tend to be dependent on the founder,while decision-making for a listed company is expectedto be centralized and involves all stakeholders as part of best corporate governance practices. For example,owners of family businesses need to be receptive to the possibility of having non-family executives andindependent directors involved in its business affairs.

“An IPO puts significant demands on management’stime and resources in dealing with advisors andinformation requests during the IPO process. What isusually a significant change for family-owned businessesis the additional ongoing reporting and regulatoryobligations post-IPO, to manage external stakeholders

with more frequent performance reporting, managinganalysts and dealing with a governance framework with non-family members on the board. This increasedworkload should not be underestimated at the risk of neglecting the day-to-day business and resourceplanning and should be an important consideration for the board and senior management in the run up to an IPO,” says Adnan Fazli, Head of Equity CapitalMarkets at Deloitte.3

Loss of controlIPOs result in the dilution of control (dilution of 25 to 55percent depending on the exchange) which means thatfamily members will no longer have complete controlover the decision-making process in the business.Furthermore, the company will be held accountable toexternal parties such as active investors and, in certaininstances, even competitors.

Finally, decision-making in family businesses isinfluenced by the long-term reputation and values held by the family founders and their offspring (i.e.contribution to the social welfare of society), whichmight not be the main focus of IPO investors who aremore attracted by the company’s profitability.

CommunicationAccording to Tharawat magazine, IPO communicationconsists of three aspects: explaining the business;explaining the IPO transaction; and post-IPO disclosurerequirements.4 Unlike other companies, family-ownedbusinesses tend to more closely guard information andare more information sensitive.

Family Business

Business readiness is a challenge that ispervasive to all businesses, but is evenmore pertinent for family businesses


Investors in an IPO transaction will heavily scrutinize the target business. Family businesses have to be in aposition to explain their historical results and businessplan going forward. Special attention will be given torelated party transactions and whether conducted in the normal course of business. Equally important iscommunication with existing stakeholders (e.g. theemployees) who should not feel threatened by the IPO and its added pressures on the business. SuccessfulIPOs include remuneration schemes that increasemanagement and employees’ commitment and loyaltythroughout the IPO process.

Additionally, it is critical that the IPO process remainhighly confidential to prevent potential adverse impacton value. Once a company announces its intention tofloat, the company is expected to operate and will beviewed by analysts as a publicly listed company whencomparing it to its peers.

Finally, post IPO communication with investors makessignificant demands on management, as more frequentand timely financial reporting is required. Listedcompanies are expected to regularly and openlycommunicate their management team changes,historical financial performance and forecast strategies,disclosures that family businesses are not typically used to.

There are several strategies that family-ownedbusinesses can implement to mitigate thesechallenges including: Family governance“Most business families are now conscious of the needto introduce a level of governance separate from thefamily business,” says Walid S. Chiniara, Deloitte Privateleader, Deloitte Middle East.5 Family governance “helpsput the house in order.” It defines the relationshipamong family members, and their relationship with their financial wealth.

Family governance mitigates the risk of family conflictsthat negatively impact the performance of the business.Establishing this governance in advance helps minimizeany disruption during the IPO process.

Pre-IPO restructuring/carve-out During the IPO readiness process and equity storyformation, a family group might decide to exit some ofits non-core businesses, whether for operational or taxstructuring purposes. A company can exit some of thesebusinesses via a separate IPO, giving the family businessowners and management firsthand experience of theIPO challenges (increased demands, loss of control andincreased communication) without exposing the overallfamily-owned business.

According to Tharawat magazine, “a good strategy tominimize some of the negative aspects of going publiccan be to take only part of the business public, keepingthe rest private. This is easier where there are a numberof businesses, but even where there is only onebusiness, there may be appropriate splits–for instance,the product/service side of the business could be listed,while the real-estate side of it remains private.”6

Private placement then IPOA common approach for an IPO involves a two-stepprocess before undertaking the actual IPO, a minoritystake of the business may be sold to another interestedfinancial investor who will partner during the transitionalperiod to get the business ready for the IPO. Havingthese partnerships potentially with a private equity firmor other family-owned businesses that have prior

Family governance “helps put the housein order.” It defines the relationshipamong family members, and theirrelationship with their financial wealth.


Family Business

experience in taking businesses public can be of greatvalue for a first-time IPO candidate.

Additionally, this will expose the family business to someof the challenges of the IPO including the increasedscrutiny and sharing of decision-making with a partnerwho will be more understanding of the sensitivities ofthe family business.

This can be implemented as a dual-track, a parallelreadiness strategy between IPO and private placement,which gives the family business the opportunity tochange between the two options at a very late stage in the process.

IPO readiness “IPO readiness not only helps prepare the business for a streamlined IPO process, it also significantly enhancesthe valuation. It is important to undertake an IPOreadiness well in advance of the proposed IPO as it can take up to 24 months for the business to achievereadiness,” says Adnan Fazli. “The main areas in ourexperience that impact the timeline are articulating an equity story/strategy, corporate and organizationalstructure, appropriate track record to support the equitystory, financial reporting environment in line with otherlisted peers, ability to accurately forecast, and theissuer’s internal resources to ensure they are fit for the demands of the IPO process and the post-IPOenvironment.”3

ConclusionIPO represents the pinnacle of any family business’ long-lived heritage. Recognizing the challenges faced by bothfamily owners and managers and addressing themupfront, will ensure that the company is well preparedfor this transformational change when the opportunityis right and will enhance value. Additionally, undertakingthe right strategies will reduce the risk of the impact ofadverse challenges which are inherent to any familybusiness seeking a public listing.

by Martin Pierce, Managing Director, TransactionServices and Yaser Al Dahoud, Manager, TransactionServices, Deloitte Corporate Finance Limited (regulatedby the Dubai Financial Services Authority)

Endnotes

1. ‘GCC’s family businesses: Leveraging the benefits ofstrong fundamentals’. Article | 16 September, 2012 |By Rashed Al Ansari, n.d. Web. 23 Jan. 2015.http://www.khaleejtimes.com/biz/inside.asp?xfile=/data/opinionanalysis/2012/September/opinionanalysis_September7.xml&section=opinionanalysis

2. Gordon, Grant, and Nigel Nicholson. Family Wars:The Real Stories behind the Most Famous FamilyBusiness Feuds. United Kingdom: Kogan Page, Ltd,2010. Print

3. Adnan Fazli. IPOs for Family Businesses. 26 Jan 2015. 4. ‘IPO Communication - Getting the Story Right’.

Tharawat Magazine 9 (2011): n.d. Web. 4 Dec. 2014.http://www.tharawat-magazine.com/en/family-business-issue-9/1839-ipo-communication-getting-the-story-right-2

5. ‘Family offices in developing economies most costeffective, says new research’. Article | 21 November,2014 | By Michael Finnigan, n.d. Web. 4 Dec. 2014.http://www.campdenfb.com/article/family-offices-developing-economies-most-cost-effective-says-new-research

6. ‘The aftermath of an IPO – what families in businessought to know before they go public.’ TharawatMagazine: n.d. Web. 4 Dec. 2014.http://www.tharawat-magazine.com/en/family-business-articles/finance/1568-the-aftermath-of-an-ipo-what-families-in-business-ought-to-know-before-they-go-public

IPO represents the pinnacle of any familybusiness’ long-lived heritage. Recognizingthe challenges faced by both familyowners and managers and addressingthem upfront, will ensure that thecompany is well prepared for thistransformational change when theopportunity is right and will enhance value.


The world has transformed into a global village with people just one click away. Social media hasbecome the essential factor in reshaping the globe–empowering youth, women, governments andentrepreneurs–while, most importantly, encouragingfreedom of speech in our part of the world. Butwhat of the risks associated with this exponentialrise in the use of social media?

The time is now

Social media

The Arab Spring in 2011 played a vital role in theexponential growth of social media in the Middle Eastand according to the U.S. Census Bureau, social medianumbers continue to grow in the region, exceedingglobal average numbers, with many countries, inparticular Saudi Arabia and the United Arab Emirates(UAE) showing strong social media penetration. Thesurge in social media use, however, is a double-edgedsword: while allowing end-users to transform theInternet from a monologue to a collaborative mode ofcommunication, it also exposes organizations to risksrelated to data, technology, people and structure.


Social Indicators Saudi Arabia United Arab Emirates

Social media penetration as a percentage of the total population

51% 81%

Average time social media users spend on social media each day

2 hrs 48 min 3 hrs 17 min

Percentage of mobile users using social media apps on their phone

51% 52%

Social media indicators in Saudi Arabia and the UAE

Source: US Census Bureau, Global Web Index Wave 11

680,747views per corporate YouTube channel

190 milliontweets per day

>40% of social media users access content from their mobile phone

78% of consumers trust opinions of others

>62% of Fortune 500 companies have an active corporate Facebook or Twitter account

2nd largest search engine in the world is YouTube

10.5 billion minutesare spent on Facebook each day excluding mobile

2.9 billion hoursare spent on YouTube each month

8 out of 10companies are talked about on Twitter

80% of companies use social media for recruiting

No.1Web activity is Social Media

#1

>1 billion active Facebook users

Where social media is concerned, these factors are oftenbeyond a company’s control yet can ultimately impair itsreputation. Facts and figures sourced from The SocialMedia Revolution 2015, show the importance of socialmedia in our daily lives.

The importance of social media in daily life

Avoiding social media in order to protectone’s reputation is no longer an optionfor businesses. Companies have thechoice to engage internal auditors toassess social media risks and recommendmitigation plans from a fresh andindependent perspective.


According to a recent Deloitte survey, 87 percent ofexecutives interviewed rated reputation risk as “moreimportant” or “much more important” than otherstrategic risks their companies are facing.

Meanwhile, based on a different survey, 78 percent of interviewees view social media as a moderate to highrisk. In addition, 45 percent do not have a formallydocumented social media policy or are unaware of oneand 47 percent do not have a formal policy governingmobile device usage for social media or are unaware ofone. Finally 69 percent do not have any internal audit or risk review of social media activity or are unaware of one.

Leading practices for social media are still evolving but organizations should take the preemptive steps to mitigate the risks rising from social media, which have the biggest impact on revenue and brand value.Organizations should conduct an enterprise-wide socialmedia assessment and accordingly develop a socialmedia strategy aligned with its business objectives. It isimperative for an organization to map the risks identifiedand establish processes governed by policies andprocedures to ensure that controls are mitigating thoserisks. Accountability and ownership of controls shouldbe established and supported by monitoring tools.

Avoiding social media in order to protect one’sreputation is no longer an option for businesses.Companies have the choice to engage internal auditorsto assess social media risks and recommend mitigationplans from a fresh and independent perspective. A moretraditional, fragmented internal audit approach will be a formidable exercise: internal auditors should thereforeadopt a more holistic, and modern auditing approachinclusive of the different Information Technologyplatforms and involving a wide range of departmentssuch as Human Resources, Legal, Marketing and others.

These internal auditors will focus on social media risks surrounding data, technology, people and theorganization and ensure that they conform to anyapplicable regulatory requirements. Given the emergingthreats pertaining to social media, organizations should

consider investing in additional resources andcapabilities related to cyber threat management andbrand protection solutions that include Cyber ThreatProfile Analysis, Suspicious Program Diagnostics, Anti-Phishing Capability Diagnostic and Social MediaImpact Survey.

The United States, Canada and Australia are pioneeringcountries in enacting a number of regulations aroundsocial media. In the Middle East, regulatory agencies willlikely become more active in regulating social media byissuing pronouncements; this particularly rings true foragencies overseeing the financial sector, in order tostrike a balance between risks and opportunities. Forany company or organization that has not yet takenactive steps towards a social media audit, the time isnow.

by Hani Khoury, Partner, Enterprise Risk Services andElias Maayeh, Senior Manager, Enterprise Risk Services,Deloitte Middle East

Social media

Public

Source: Deloitte Resources: How cyber criminals make use of social media

Organization

People

Technology

Data

Loss of productivity

SocialEngineering/

impersonation

Falseimpression/

misguidance

NegativePublicity

Unsatisfiedconstituents

Copyright issue

Lack of situationalawareness

Privacy riskHR policy violations

Identity theft

Vulnerabilities

Unauthorized disclosureIntellectual property

leakage

Virus/Worms/Trojans

Loss of controlover content

Trademarkinfringement

Brand/Reputationloss


Your business growth strategiesare at the heart of the cyber risksyour organization faces

Are you safe?


Cyber Security

Most reports on cyber security revolve around acommon theme: despite heightened attention thenumber of cyber incidents–and their associatedcosts–continues to rise. They typically point to the growing sophistication of hackers and otheradversaries as a particularly intractable problem, and some deliberate over whether being secure iseven possible in today’s rapidly evolving landscapeof cyber attacks.


Global cyber crime statistics and costs of cyber crime paint an equally alarming picture:

The major motivation behind cyber attacks

The cost of cyber crime

73%

18%

8%

1%

38%20% 19%

12% 9%

2%

Malicious code

Active persistent

threat

Unauthorized access

Suspiciousactivity

Credentialabuse

Denial of service

24%

22%

19%

6%

6%

Top 5 industries attacked in 2014

Categories of incidents in 2014

*Statistics provided by Symantec ’s Internet Security Report 2013 & Ponemon Institute - The Impact of Cybercrime on Business Report 2013

Estimated annual cybercrime cost to consumers

Estimated annual total costof cyber crime

≈ US$144B ≈ US$444B

Estimated number of adults that fell victim to cyber crime

≈ 431M

2014 largest single cyber crime cost

≈ US$189M

Top 5 per record costs by industry

US$233 Health Care

US$215

US$207

US$169

US$150

Pharmaceuticals

Transportation

Communications

2013 average per capita cost per data breach

≈ US$194

2013 average number of breached records per incidents

≈ 28,765

2013 average total cost(indirect/direct) of data breach

≈ US$5.4M

* Statistics provided by Symantec ’s Internet Security Report 2013 & Ponemon Institute - The Impact of Cybercrime on Business Report 2013

New cyber threats are beingidentified everyday globally

≈ 1.6M

Cyber crime

Hacktivism

Cyber espionage

Cyber warfare

Financial institutions

Manufacturing

Information & Communication

Retail & Wholesale

Health & Social

Financial institutions


The Middle East in particular is on high-alert with threedimensions of threat elevating the level of risk aboveglobal averages:

Regional geo-political instability The growing political instability in various conflict zonesthroughout the Middle East has given rise to numeroushacktivist groups that have wreaked havoc on publicand private institutions, both regionally and globally.These notorious, self-professed electronic armies usemalicious and destructive techniques to undermine thesecurity of the Internet as a means to promote politicalends.

Perceived economic wealth The Middle East, more specifically member states of theGulf Cooperation Council (GCC), is perceived as a regionof economic wealth. To cyber criminals who are tryingto exploit governments, public and private institutionsfor financial gains, this makes the Middle East a centraltarget for attack and indeed has been.

Above average malware infection rates Since 2012, every country in the Middle East has had,almost without exception, at least double (and in somecases ten times) the number of infected systems thanthe global average as per Microsoft’s quarterly report on the average malware infection rate per country (see chart below).

In short, the strategic things you do togrow your business or achieve yourmission are at the heart of the cyberrisks your organization faces

Cyber Security

120

Average malware infection rate per country

100

80

60

40

20

Q3 – 2013 Q4 – 2013 Q1 – 2014 Q2 – 2014

Worldwide UAE KSA Qatar Palestine

Oman

Source: Microsoft

Kuwait Lebanon Jordan

0


Two questions arise: what are the underlying reasons forthis trend and how can organizations actually reverse itto start winning the cyber risk battle?

The first question depends a lot on the organizationitself. Over the past two decades, we have woven afabric of always connected, always on in our economyand society via the Internet–a platform that wasdesigned primarily for sharing information, notprotecting it.

Your organization, whether functioning in the public or private sector, has no doubt benefitted from thisconnectivity–driving innovation, efficiency, andperformance that were unthinkable a generation ago.You’ve likely used it to transform relationships withcustomers, build new revenue streams, or overcomegeographic constraints. Or perhaps it has enabled you to gather data that shape your market strategy,accelerate the launch of products and services, orautomate diverse operational systems.

You have probably also extended your capabilitiesthrough outsourcing, partnering, and the use ofcontractors, or engaged in reorganization, mergers,acquisitions, and divestitures. With that said, thisincreasing digital reach has added layers of complexity,volatility, and dependence on infrastructure not fullywithin your control. Your efforts to grow, serve,differentiate and streamline introduce new gaps andopportunities that attackers will try to exploit–becauseyour adversaries, too, leverage the Internet toaccomplish much more, much faster, and fromanywhere. In short, the strategic things you do to grow your business or achieve your mission are at the heart of the cyber risks your organization faces.

When we consider this inherent link between businessperformance, innovation and cyber risk, it becomes clear that protecting everything–while perhaps notimpossible–would be economically impractical andwould likely impede some of your most importantstrategic initiatives.

Which brings us to the second question and the centraltheme of this article. If protecting everything iseconomically impractical then what should you beprotecting? And at what level of investment?

In the interest of helping organizations answer theseand other questions, members of the World EconomicForum’s Partnering for Cyber Resilience initiative recentlyproposed a conceptual framework for measuring theimpact of, and exposure to, cyber threats. Known ascyber value-at-risk, the model provides a starting pointfor quantifying cyber risk, ultimately allowing executiveleaders to make more informed, confident decisionsabout their organization’s risk tolerances and thresholds,cyber security investments, and other risk mitigation and transfer strategies.

It becomes clear that protectingeverything–while perhaps notimpossible–would be economicallyimpractical and would likely impedesome of your most important strategicinitiatives


Cyber value-at-riskThe concept of cyber value-at-risk is based on the notion of value-at-risk (VaR), which seeks to express therisk of loss over a specific period of time. Similarly, cybervalue-at-risk seeks to use probabilities to estimate likelylosses from cyber attacks during a given time frame.

Cyber value-at-risk considers three components of cyber risk:1. The vulnerability profile2. The assets 3. The profile of attackers and the potential threat

actors to an organization.

Vulnerabilities take into consideration the number ofunpatched systems inside an organization, the numberof previous compromises it has experienced, and thematurity level of its defending systems as defined by the number of security updates applied, the number of defensive software components installed on thenetwork, and the network typology and infrastructure.

Assets vary by organization, but on the tangible sidethey typically include funds and financial instruments,infrastructure, production facilities, and financial lossesincurred through temporary business disruption,complete business interruption, and regulatory fines. On the intangible side, assets frequently encompassintellectual property (IP), customer or employee data,and a company’s reputation.

Attacker profile looks at the type of threat actors,whether they’re amateurs, state-sponsored, or part oforganized crime rings; their motivations (e.g. financialgain, theft of trade secrets, destruction, reputationdamage); and the sophistication of the attacks they tend to perpetrate.

While still a work in progress, the next steps for thecyber value-at-risk framework is applying real-world datato the model. The hope is that exposing the potentialbenefits of cyber value-at-risk will prompt industryparticipants to share more of the data needed to makethe model work effectively. In the meantime, cybersecurity leaders at their organizations can use the notion of risk-based quantification, in tandem with a Secure.Vigilant.Resilient™ approach to cyber riskmitigation, to position themselves to use the cybervalue-at-risk model and justify budget requests to theexecutive team and board.

by Fadi Mutlak, Partner, Cyber Security Leader, DeloitteMiddle East

Cyber value-at-risk components

Source: World Economic Forum, “Partnering for Cyber Resilience: Towards the Quantification of Cyber Threats”

Vulnerability

Assets

Profile of attacker

Tangible assets

Intangible assets

Type of attackers

Type of attacks

Tactics andmotivations

Existingvulnerability

Maturity level ofdefending systems

Number of successful breaches

Cyber Security


Distinguishingfact from fact


A fact is a fact, they say. Or is it? Learning todifferentiate between data, information andknowledge, says this author, is key to understandingKnowledge Management, which spurs organizationsto achieve competitive advantage.

Knowledge Management

“Knowledge is justified true belief,” said Plato centuriesago. Two millennia after the Greek philosopher gaveknowledge its definition, Knowledge Management (KM)has emerged as a strategic tool in business. The KM field has received much attention from academics andcorporate sectors in the last 30 or so years1 but despitethe fact that a vast amount of research has beenconducted in this field, there is still no universalagreement as to a common definition. A comprehensivedefinition for KM within the business environment hasbeen presented by researchers Elias M. Awad andHassan M. Ghaziri, as “a systematic, organized, explicit and deliberate ongoing process of creating,disseminating, applying, renewing and updating theknowledge for achieving organizational objectives.”2

To date there is still wide misconception about thedifference between Knowledge Management (KM) andInformation Management (IM) to a point that the twoterms are sometimes used interchangeably. A survey of40 companies in the United States, Europe and Japanshowed that many executives think that KM “begins andends with sophisticated IT systems.”3 Though one of themost common ways to describe knowledge is to actuallydistinguish it from data and information.4 If on theexecutive level there is misconception regardingKnowledge Management, unfortunately it is highlyprobable that this misrepresentation is cascaded downthe corporate ladder.

In a general sense, Data Management (DM) andInformation Management (IM) lack the “human aspect”prominent in Knowledge Management. While DM andIM are definitely crucial constituents of the modernbusiness environment, their main role is to handle data,information and Explicit Knowledge (easy to copy,codified knowledge stored in a database/found indocuments), whereas Knowledge Management dealswith Tacit Knowledge i.e. hard to copy, non-codified,often personal/experience-based knowledge.

Regardless of the universal mindset limiting theimportance of Knowledge Management in sophisticatedIT systems storing knowledge, organizations willing toacquire competitive advantage should undoubtedly seekdisseminating knowledge horizontally and verticallythrough all possible channels. These, of course, includesophisticated IT systems–on which employees may postlessons learned from projects they participated in, forexample–as well as other channels such as socialnetworks, internal chatting platforms, conferences and most importantly, interpersonal communication.

These channels proliferate and prosper in anorganization incorporating Knowledge Management inits organizational culture. This includes taking ownershipof the concept and promoting it on all levels of thecorporate ladder. It is the duty of higher management tospur employees, convincing them to remove boundariesbetween what they think should only belong to themdue to personal reasons or confidentiality paranoia andto offer their knowledge unconditionally.

Knowledge is classified in terms of public versus private,component versus architectural, hard versus soft, explicitversus tacit and other. But most commonly knowledge isdivided into two, Explicit and Tacit.

Tacit Knowledge is the form of knowledge we aremostly interested in. It is context-dependent andpersonal in nature. It is combined with experiences,interpretations and reflections and can therefore beregarded as a high-value form of information that is


If on the executive level there ismisconception regarding KnowledgeManagement, unfortunately it is highlyprobable that this misrepresentation iscascaded down the corporate ladder


ready to be applied to decisions and actions. TacitKnowledge resides not only in the documents,organizational routines, processes, practices and norms of an organization but also in its collaborativememory/learning as well as in the memories/learnings ofan organization’s human resources. For an organizationto take effective ownership of Knowledge Management,it should foster a culture characterized by trust,openness, teamwork, collaboration, risk-taking,tolerance for mistakes, autonomy, common language,courage, and time for learning.5

Ultimately, Knowledge Management efforts focus onorganizational objectives such as improved performance,competitive advantage, innovation, the sharing oflessons learned, reduction of waste, integration andcontinuous improvement of an organization.6 Reachingthese sought objectives and securing intellectual capitalthrough knowledge management necessitates buildingon widely agreed upon pillars/success factors. Threemain success factors are:

• Eliminate barriers to sharing knowledge: these barrierscan be different from one organization to another and may vary from confidentiality paranoia, lack ofdedicated resources, short-term thinking, poorknowledge-sharing vehicles or knowledge tools notalways aligned with communication trends (socialnetworks, mobile apps, webcasts.)

• The human aspects of knowledge sharing: thoughsupported by a technological platform, knowledgemanagement is not only a technological tool. It is alsoabout effectively managing people assets and needsto be balanced evenly between people and learningorganizations, process and technology, collaborationand exchange.

• Define a clear roadmap and long-term strategic plan:first start to understand the current level of maturity of the company in the space of KM and what theconcept means for your company. Like in any project,it is important to define an efficient approach andstrategic plan. KM is an evolutionary process and must be defined within your terms. It is crucial tocontinually make the business case and have a strongand continuous sponsorship from top management toachieve sought results.

Tacit Knowledge Explicit Knowledge

Drawn from experience and is the mostpowerful form of knowledge

Can become obsolete quickly

Difficult to articulate formally Formal articulation possible, and can beprocessed and stored by automatedmeans, or other media

Difficult to communicate and share Easily communicated and shared

Includes privately held insights, feelings,culture and values

Formally articulated and shared

Hard to copy Can be copied and imitated easily

Shared only when individuals are willing to engage in social interaction

Can be transmitted

Tacit Knowledge vs. Explicit Knowledge

INDIVIDUAL KNOWLEDGEtactic or explicit

ORGANIZATIONALKNOWLEDGECORPORATE KNOWLEDGE

IntranetLibrary

ArchivesInformation

Systems

Experience

Advice

External sources

Errors

Learning

History

Sources of organizational knowledge (Debowski, 2013)



As can be seen in the diagram, organizationalknowledge is a combination of individual knowledgeand corporate knowledge. While knowledge-sharing isdefinitely a valuable practice in any organization, evenone in which the human resources come from similarbackgrounds, it attains higher valuable magnitudeswhen fostered in multinational organizations housinghuman resources that are diverse in many ways.

Knowledge Management is seen at the center of global economic transformation, it addresses policies,strategies, and techniques aimed at “supporting anorganization‘s competitiveness by optimizing theconditions needed for efficiency improvement,innovation, and collaboration among employees.”7

KM represents a shift from “info-war” betweenorganizations to “k-warfare” (knowledge warfare).8

Increasingly, it is seen as outstripping traditionalresources such as land, labor and financial capital and isconsidered the key source of comparative or competitiveadvantage. For some, knowledge is “economic ideas” or “intellectual capital” and is brought up in terms of“stockpiles,” “reservoirs,” “exchange,” “capture” and“utilization,” without questioning whether it can actuallybe managed or understanding its epistemology–knowing it exists and understanding its context and,hence, its importance.

If you’re convinced that Knowledge Managementshould be the next strategic tool that should beimplemented in your organization, here are some tips that you should stick to:

Do• Lead from the top.• Make sure to cut across boundaries.• Spread awareness regarding KM through seminars,presentations, conversations.

• Think of KM initiative in terms of being part of anongoing knowledge management activity, not as a‘project’ that is done and finished.

Connectedness

Transitions between different understandings

Data

Source: Bellinger et al., 2004

Information

Knowledge

Wisdom

Understanding

Understanding relations

Understandingpatterns

Understandingprinciples

Ultimately, Knowledge Managementefforts focus on organizationalobjectives such as improvedperformance, competitive advantage,innovation, the sharing of lessonslearned, reduction of waste, integrationand continuous improvement of anorganization


Don’t • Go against the organization’s culture.• Expect people to change overnight.• Limit the knowledge-sharing mechanisms solely to IT channels.

KM represents a shift from a focus on information to a focus on the individuals that create and own thatknowledge. Inarguably, an organization with aneffective Information Management system in use hascompetitive advantage over one with no IM system orpoor IM system installed. But an organization that valuesand fosters KM and clears itself from misconceptionssurrounding it, is far more capable of attainingcompetitive advantage than any other. Simply put:Knowledge Management helps a learning community to learn more easily and effectively. It involves thecollection, sharing and application of collectiveexperiences and therefore it can only be applied in an organization willing to substitute the old saying‘knowledge is power’ with ‘knowledge-sharing ispower.’ This assertion is further validated by thesignificant drop in single-authored publications.

by Ziad Zakaria, Director, Consulting, Deloitte Middle East

Endnotes

1. Xu, Y. and Bernard, A., Quantifying the value ofknowledge within the context of productdevelopment. Knowledge-Based Systems, 24(1), 166-175, 2011; Laleci et al. 2010

2. Elias M. Awad, Hassan M. Ghaziri, “KnowledgeManagement,” Pearson Education, Second Edition,Delhi, 2008.

3. Hauschild, Moritz, Rüdiger Karzel, and CorneliaHellstern. Digital Processes. Basel: Birkhaüser, 2011.Print.

4. Spender, J.-C. Business Strategy, 1996. Print.

5. Albers, A. et al. ‘Knowledge-Based DesignEnvironment.’ Microsystem Technology. 11.4-5: 254-260. 2005. Web.

6. Gupta, Jatinder N. D. Creating Knowledge BasedOrganizations. Hershey, PA: Idea Group Pub., 2004.Print.

7. Sousa, C. A. A. and Hendriks, P. H. J. The diving belland the butter-fly–the need for, 2006.

8. Baumard, P., “Organization in the fog: aninvestigation into the dynamics of knowledge,” 1966.

Definition of data, information and knowledge by leading researchers in the KM field

Authors Data Information Knowledge

Wiig (1993)

– Facts organized todescribe a situation or condition

Truth and beliefs,perspectives andconcepts, judgmentsand expectations,methodologies andknow-how

Nonaka(1994)

– A flow of meaningfulmessages

Commitments andbeliefs created fromthese messages

Choo et al.(2002)

Facts and messages Data vested with meaning

Justified, true belief

Quigley(2005)

Text that does notanswer questions to a particular problem

Text that answers thequestions who, when,what or where

Text that answers thequestions why andhow

Davenport(2008)

Simple observationsData with relevance and purpose

Valuable informationfrom the human mind

Debowski(2013)

Unorganized,unprocessed facts

Aggregation of data An understanding ofinformation based onits perceived relevanceto a problem area



Spread the risk


The Middle East is experiencing an ever moreunstable geo-political climate that is challengingbank management to calculate the risks of long-term business service offerings, thus challenging the banking sector to enhance its performancemanagement competencies through bettermanagement experience, stronger and efficientcredit controls through a unified informationtechnology system/platform and processes to bettercollate credit data, portfolio management andperformance.

Fund Transfer Pricing


The banking sector worldwide, and especially in the Middle East, faces the challenge of sustainableprofitability. Banks are facing a multitude of regulatoryrequirements to conform with Basel III, putting pressureon capital adequacy ratios in the form of increasedcapital requirements from shareholders.

Current historically low interest rates, increasedcompetition and the fast growth of Islamic financeproducts, which rather than transfer risk, work on asystem of shared risk, are eroding traditional profitmargins through increasing compliance costs andexpenditure on more flexible and innovative lendingproducts.

Adopting the Fund Transfer Pricing (FTP) model is key toproviding banks’ management and employees with theoperational and performance tools to better managetheir profitability reporting via their own branches,customers, officers, products, segments and channels, in addition to improving their overall assets and liabilitymanagement (ALM), creating a competitive advantageand strategic benefits.

What is Fund Transfer Pricing, its objective andits need?In simple terms, Fund Transfer Pricing (FTP) is a methodused mainly in banking to internally measure andevaluate the profitability of loans, deposits and otherproducts. The deposit division gets funds fromcustomers in the form of deposits, which are thenhanded on to the treasury division for appropriatedeployment. These funds are then handed on to thelending division for lending to customers as loans. Incase of shortage of funds from deposits for loans,treasury secures additional funds from the marketplace.The net interest income, composed of interest incomeand interest expense in principle constitutes the majorcomponent of a bank’s profit.

By viewing the bank’s income statement and analyzingthe net interest income it would seem as though allloans are profitable and all deposits incur loss. But this isnot the case. Each deposit is valued as a source for loansand likewise each loan has its own cost of funding.

Fund Transfer Pricing is illustrated in the chart below.Once a deposit is received, it passes through the fundingcenter (Treasury) on its way to the loan division. Thefunding center earns a spread for handling the interestrate risk resulting from the gap in the maturity of thefunds.

By viewing the bank’s incomestatement and analyzing the netinterest income it would seem asthough all loans are profitable and alldeposits incur loss. But this is not thecase. Each deposit is valued as a sourcefor loans and likewise each loan has itsown cost of funding.

Assets(Loan division)

At FTP rate(Charge)

At FTP rate(Credit)

FundingCenter

(Treasurydivision)

Liabilities(Deposit division)


Fund Transfer Pricing

The purpose of FTP is to set a value on each deposit andallocate a cost to each loan that a bank has and at thesame time addressing the impact of liquidity, interestrate risk and maturity transformation on the bank’sfinancials.

With increasing competition within the financial sector,information on products and customers profitability will optimize management decision on areas like costcontrol, levels of profitability and resource allocation.

Going back to the banking sector, compulsory depositswith central banks that are usually computed on thebasis of specific percentages on sight and termcustomers’ deposits subject to certain adjustments andexemptions in accordance with local banking regulationsof each country are indirectly relevant to Fund TransferPricing. These deposits are not available for use in thebank’s day-to-day operations and therefore can’t beinvested in lending, hence, decreasing the amount offunding available and increasing funding costs to thebank.

FTP is important since it insures that benefits, togetherwith the costs and risks, are all allocated to the differentbusiness lines moving downwards to products andcustomers. FTP is not new: it has been there for productpricing purposes and analyzing profitability but hasgained importance in light of the recent financial crisisand the current economic environment. A key factor inthe recent crisis is the failure to compute Fund TransferPricing correctly, which ended up valuing very riskyassets that looked profitable where in fact they weren’t.All this resulted in a number of new regulatoryrequirements, including liquidity standards set by Basel III, impacting Fund Transfer Pricing and requiring a major response from financial institutions and how FTP structures are associated to the best practiceprinciple for liquidity management.

It will be naïve not to expect that these requirementswill soon find their way to the banking sector across the region. Until then banks, whether commercial,specialized or Islamic are urged to use Fund TransferPricing and state their funding costs accurately. Banksneed to follow two protocols: firstly, through training,mentoring and communication, unify their thinking andawareness regarding the importance of Fund TransferPricing; secondly, through focusing on strategies topromote the process of the FTP system and integrate it in their IT systems and benefit from its output.

by Farid Massoud, Principal, Audit, Deloitte Middle East

FTP is important since it insures thatbenefits, together with the costs andrisks, are all allocated to the differentbusiness lines moving downwards toproducts and customers

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