Middle East meets the challenge of fast growth

Published: 30 June 2008

As the historic crossroads between three continents, the Middle East has long been a transport and trading hub for the industrialised nations and global corporations alike. As the region's emerging markets look towards a future independent of oil revenues, both national and private sector investors increasingly look to HSBC for support in the region's drive toward full economic development.

Mukhtar Hussain is Global CEO of HSBC Amanah and CEO for Global Banking and Markets Middle East and North Africa. He spoke to Global Banking and Markets Editorial Director Neil Taylor about the strategic importance of the region, and the growing maturity of the Islamic finance sector.

What is your vision for the Middle East, and what role does HSBC play in it?

To begin with we have a privileged position in the region. We've been present in the region since long before it became fashionable. We've been here for sixty years, we were the first bank to establish a presence in a number of markets, and we've been in the region through both challenging periods and the currently very exciting times and I suppose that's given us a perspective about the future and about the role we have to play in that future.

In terms of looking ahead, it sounds trite, but one can only be excited by the sheer range of things that's going on in the Middle East. We've seen the emergence of capital markets; we've seen world-class companies develop; we've seen more cross-border flows than ever before; and we've seen the world coming to the doorsteps of the sovereign wealth funds to seek support.

It's a unique period in this region's history, and given the relationships that we at HSBC have established, and the trust factor that is associated with those relationships, we have an important role to play in supporting our clients whether they be clients based in the GCC looking to expand outwardly, or clients globally who are interested in developing relationships in the region itself. So it's a very exciting period both for developments within the region and as the region becomes more significant globally.

The Middle East faces some major economic challenges at the moment, with the soaring price of oil, excess liquidity, inflation and the fact that many currencies are still pegged to the dollar. Is this a bad time to invest in the region?

I think the answer is that clearly the region is challenged, but it's challenged by issues of growth, not issues of constraint.

The challenges of deploying liquidity are there, but what a number of governments have done is to focus that liquidity on long-term infrastructure; on developing necessary social infrastructure, particularly in education and health; and that incremental liquidity is being put to good use for the long term.

Moving on from that, given the sheer scale of growth, inflation is a fact, there's no doubt that there are supply bottlenecks in the economy both as far as labour is concerned, and in the sheer distribution capability within the region, capacity issues in terms of finding contractors or EPC capacity in particular, but they are being managed.

So yes, there are challenges, but they're challenges of growth as opposed to challenges of a declining economic environment elsewhere.

The region is building for the long-term future and in many cases it's using oil revenue to develop for a future without oil, in many generations' time. And HSBC is very much a partner in building that future.

The economies of the region are developing at very different rates, and cultural, political and economic differences often serve to broaden that gap. What role can HSBC play, regionally, to help investors stay connected across the Middle East?

The role that HSBC can play is to ensure that we offer strong advice to our clients in terms of how they consider opportunities, particularly when they're bidding in regulated markets, what the expectations of them are and what the processes and procedures are that they're required to fulfil. I think that it's a process of experience, and as you become more familiar in conducting cross-border business, those practices become more ingrained.

So I think that will evolve and it will evolve successfully. We also have a role to play in investor education and awareness through research in the region's stock markets.

Secondly, I think in terms of how these countries both work together and work in a more collegiate pattern, this again is a maturing process and as counties begin to understand and appreciate each others' objectives, there will be more signs of cross-border cooperation rather than less. It's an evolving market.

The whole concept of the Middle East as a region is becoming much more visible. It's visible in terms of intra-regional trade, it's very visible in terms of cross-border investment, and that means that the region becomes more fungible and tends therefore to act with a greater degree of consistency as apposed to historical nationalistic considerations: Certainly in the private sector. We know from history elsewhere that the power of regional cooperation can stimulate investment, trade and employment.

Does HSBC have a unified strategy for the region?

We've got one brand, and it's HSBC. The branding exercise in the region has worked very well indeed, and customers, whether they're in Egypt or the UAE or in Saudi Arabia, customers recognise that brand, so we believe clients have had a consistent experience across the region. Our strategy is to continue to grow our business across the region, to expand our footprint and deepen our penetration, serve our customers better.

I think the strategy here is completely aligned with the global strategy, We are emerging markets focused and financing led. We clearly, given the strength of our franchise, do have a well-established platform here, and that's evidenced through the awards that we've received from a number of publications across a number of different categories.

We've always had a leadership position for example in global sukuk in the Amanah side, and we remain at the top of the tree for that; there are other awards that evidence our continued pre-eminence in the M&A field; we have been recognised in terms of the investment banking side in a number of different respects, as well as on the debt capital markets side.

What I think these awards demonstrate is the fact that we remain highly active in these markets, we're able to leverage the Group's tremendous capabilities in the developed world in terms of the business that we can do with colleagues in Hong Kong, London and New York and it's the ability that HSBC has to leverage not only its geographical presence but also its global expertise across industry sectors and products that defines us and also makes us very competitive in these markets.

How does HSBC's strategy in the Middle East differ from that of other financial institutions?

One, we are a universal bank, and therefore the scope which we provide embraces both commercial and investment banking.

We are different in many respects from our competitors because some might argue that we're a local bank, albeit one owned by foreigners, rather than a foreign bank operating in local climates. And that's an important distinction because having been here for such a length of time, the regulators and our client base really do regard us as effectively a local bank.

I think secondly we distinguish ourselves in just the sheer range of services that we provide. We are a full-service institution and that gives us tremendous scope in the markets that we cover to be involved across the full waterfront of activity, whether that's in the PFS world or the CMB world or in the Global Banking and Markets world or indeed in the HSBC Amanah world. And it's our ability to pull all of those different elements together, to leverage the fact that we've been here for 60 years, and that we haven't been fair-weather friends. We've been here through times which were less euphoric. Let's not forget, that oil prices were USD8 per barrel in 1998, a decade ago. And we were looking down a slightly different barrel at that time.

The other measure of relevance is our level of participation in markets. If you look at what we've been involved with across the geographical spectrum and across the range of activities certainly in the Global Banking and Markets world, we would argue we have been at the forefront of developing capital markets, we've been at the forefront of privatisation programmes, we've been at the forefront of cross-border transaction that have defined the market. And I think that demonstrates a level of relationships and a level of relevance.

When clients want to do new and important things which break the mould or establish new parameters, we're often seen as a house that can deliver that. With it comes a huge sense of responsibility to get it right.

The Middle East's financial markets are still at an early stage in their development. What role do you see for HSBC in fostering the region's securities industry?

We have to recognise that it took the US and Europe the best part of two or three decades to build their capital markets. And the reality is that you don't build a capital market overnight. It takes a while and it can only function if there is a flow of issuer activity and if there's an educated investor market.

When DIFC [the Dubai International Financial Centre] was conceived as a regional financial centre, there was a sense of 'can they really make it work? Can they attract the people? Can they really drive a set of value-added advantages that establish DIFC as a relevant destination for both global and regional financial institutions?' That was the kind of argument that we heard five years ago. Now I think history has demonstrated that DIFC has been very successful in terms of creating a critical mass of global, regional and international financial institutions that now populate the DIFC, and therefore that objective has been successfully met.

In the case of DIFX [the Dubai International Financial Exchange], we're still in the early stages of a process where a market is being established.

We should recognise the importance of the OMX transaction, which the Government of Dubai did through Borse Dubai, and DIFX is part of Borse Dubai. One of the elements of that particular transaction was to engage NASDAQ in providing operational oversight and strategic development of the DIFX platform.

As the program of privatisations develops in Dubai, and there is more private sector activity in the years ahead, DIFX may well mature into being a more successful market.

At the same time, HSBC was the first international bank to open a brokerage on the Abu Dhabi and Dubai stock markets and beyond the UAE, we're also actively supporting the Qatar Financial Centre, and supportive of the ongoing developments in Bahrain and Saudi Arabia.

Mukhtar Hussain, head of HSBC Amanah
and Global Banking and Markets in the
Middle East and Africa

You recently became Global CEO of HSBC Amanah. Is it a challenge to promote Islamic finance to such a diverse potential customer base?

Far from it. HSBC Amanah was established ten years ago; we celebrate our tenth anniversary this year. I would say without fear of contradiction that as HSBC Amanah we are one of the best-recognised brands in the Islamic finance industry.

The reaction to an Islamic proposition delivered by HSBC Amanah in most of the countries where we have launched it has been very favourable and it's been very well received by clients.

Clearly as the regulatory environment evolves, then there may well be requirements for us to structure our activities in accordance with the regulators' wishes and best practice. In some markets, such as Malaysia for example, that has meant the incorporation of a separate Islamic finance focussed subsidiary.

In other markets we will continue to operate through our existing network, but I would strongly state that the evidence that we have seen demonstrated through the financial performance of the business has been very encouraging and the business has continued to grow not only in the Middle East but elsewhere.

So I don't think it's difficult. What it requires is a recognition of the circumstances in each of those markets. In Malaysia, the government has been very successful in promoting the growth of the Islamic financial services industry. The government has taken a lead role in that and we have been delighted to take a full and active role in the growth of that market. We are in the midst of a strategic review for HSBC Amanah and this helps us to focus on growing this business within the group. To my mind HSBC Amanah is the ultimate manifestation of the world's local bank.

How close are we to seeing the concepts behind Islamic finance services accepted alongside conventional investments by non-Islamic investors?

I think the best example of that was probably demonstrated when the first sovereign sukuk was issued by the government of Malaysia.

Malaysia is a very mature borrower, it's a very well-regarded name in the capital markets and they could have just chosen to issue paper to conventional investors in the international capital markets. However, what they chose to do, and we were the principal advisor and lead manager in this transaction, was to create a sukuk which was essentially asset-backed. There were assets that secured the borrowing, which is a requirement under Shariah, the transaction was marketed to Islamic and conventional investors, and there was an equal level of demand from both constituencies.

The conventional industry recognised that there were features provided by the sukuk which gave them both attractive pricing and additional security, and therefore what it demonstrated was a willingness and a maturity in the conventional market to be able to look at a sukuk structure and to understand what that meant from a risk and reward point of view. We've had a mixture of conventional and Islamic investors in a number of transactions since then, and it's now become a mainstream concept.

In other markets, there is a recognition of Islamic financial services, there is a demand pattern and there is a need. This is probably best demonstrated in the UK, which has over the last couple of years been able to look at its own environment in terms of developing Islamic mortgages and recently enacted legislation to take out stamp duties in order to facilitate this.

It's very much demand-led. The sukuk instrument is now very well understood and valued by investors all over the world, and it is not at all unusual for large parts of sukuk issues from the Middle East for example, to be bought by investors in the United States or Asia.

Other countries are beginning to look at that marketplace, including Hong Kong, Japan and France. So this probably grew from a niche, but it has become more mainstream, both from the issuer and the investor sides.

Does Amanah offer any unique advantages for clients searching for cross-border investment in the region's emerging markets?

Clearly people recognise that given our global presence and our long-standing commitment to the region, we're a natural partner to talk to. And from an HSBC Amanah point of view, we are actively sought out for the expertise that we can provide in markets such as the Middle East, Europe and Asia.

I think that the client base is maturing. They do have choices and we're not the only or monopolistic provider but I think that there is recognition of the value that we can provide both in terms of our knowledge base of those markets and institutional targets that may be appropriate for investors wanting to expand across borders.

If a company in Shanghai wants to expand into the Middle East and it's looking for advice or financing, what we'll do is we'll judge what is in the best interests of the company, alongside the objectives that they have set, and if it's appropriate we'll offer an Amanah solution, if it's not we'll offer a conventional solution. But the key objective is to facilitate the needs of the client, and we can do so through both conventional and Islamic options.

You'll give them a joined up solution
Absolutely, which is really what we're all about.