Asset Management Shift Inspires IT Transformation Among Middle Eastern Banks

Beyond their mutual language and dominant religion, Beirut and Riyadh have little else in common. Few could mistake the postcolonial, culturally diverse, and sometimes-combustible Lebanese capital perched on the Mediterranean with the sprawling and tightly controlled seat of the House of Saud, once a desert outpost.

Yet for all those differences, their countries often share important diplomatic and economic ties, and—in a very literal way—the two are always moving in the same direction via the Arabian tectonic plate underfoot, responsible for both Saudi Arabia’s vast oil reserves and cedar-topped Mount Lebanon.

Another shared quality is that neither is known for recent capital markets influence. Abu Dhabi, Qatar, Dubai and nearby microstates have successfully built financial hubs in the last decade—in part by creating a haven for capital fleeing political instability elsewhere; by servicing newly developed financial instruments deemed acceptable under contemporary interpretations of Islamic law; and by fermenting a boom in oil prices and local real estate that staked corporate ledgers, public coffers, and individuals’ wealth. Some of the financial institutions involved are local. Many, however, are familiar Anglo-American giants.

As growth in the Emirates has tapered, and as those same large institutions have become bogged down elsewhere, a natural, if somewhat under-analyzed question has emerged: How can smaller banks take advantage of the situation, by expanding both their investment management capacity and building on trusted local reputation? Two recent installations—one Levantine, another Arabian—illustrate the promise of that strategy. For technology providers closely engaged in the process, it also demonstrates the patience required to be successful in the region.

Days of Honey
No one thing explains the opportune moment for firms here; rather, it is a mixture of circumstances. As Boston Consulting Group’s annual global wealth survey estimated last year, private and sovereign wealth in the region has continued to grow at a sturdy 8 percent clip, to about $4.8 trillion. Demand for Sharia-compliant products like Sukuk still outstrips their issuance. The Lebanese expatriate community remains a steady source of capital inflows, while in Saudi Arabia and other Gulf Cooperation Council states, wage increases—partly initiated out of fear of the spread of Arab Spring unrest—have led to more investable income.

I look at it as putting the governance, software lifecycle development procedures in place, orchestrating back-end to front-end processing, and architecting all the exceptional business rules earlier on. Our aim is to change the core of our business. - Gaby Andari, Bank of Beirut

In short, more assets need managing, and unlike Western managers looking to enter the region, commercial banks already have the client relationships in place. What they need is the right platform, and as Bank of Beirut CIO Gaby Andari explains, they need it integrated with their sell-side operations faster.

“Historically, any broad-based core banking transformation will take six to eight years, which is long and doesn’t align with the fast-moving clients we are serving,” says Andari, who oversees additional IT operations in Australia, Cyprus, Frankfurt, London, and Oman. “I look at it as putting the governance software lifecycle development procedures in place, orchestrating back-end to front-end processing, and architecting all the exceptional business rules earlier on. Our aim is to change the core of our business. In the region, there is a lot of penetration from middleware providers like Informatica, for example, which suggests the wake-up call is starting to really cut through. Compliance with global regulatory requirements around data governance and integrity is mandatory, and from our side it also involves more effective client management in terms of standardization, digitization, and analytics.”

The Saudi Arabian bank, NCB Capital (NCBC), faced a different problem as it considered a new cross-asset front office platform. With several parts of its staff—including front-office support, project IT teams, and operations—experiencing an integrated, end-to-end OMS project for the first time, the bank’s IT head for asset management, Matthew Taylor, and COO Sami al-Bashir ultimately decided that aligning back-office processing and testing would become too much to coordinate for a timely, in-house build. “The conscious decision, therefore, was to take a phased approach, so we could focus one hundred percent on each asset class—equities first, and then fixed income, money markets, and multi-asset—in turn,” Taylor says.

Playing to Strengths
The Bank of Beirut and the Saudi bank’s respective selections fell to Misys’ Sophis in Beirut, and Charles River’s Investment Management System (IMS) in Riyadh—a testament to both vendors’ established toehold in the region. Private investment firm Al-Dhabi, the Islamic Development Bank, National Bank of Abu Dhabi, and now Bank of Beirut have all implemented Sophis in the past year, alone. Michel Daenen, who leads Misys’ investment solution efforts in the Middle East and Africa, says being effective here is down to understanding local nuances, and most of all, staying put.

“In Lebanon, there are around 50 banks, and many are still owned by wealthy families. Over the course of time, immigration has yielded Lebanese commercial networks throughout the world and as a result, banking activity from and to Lebanon constantly increases. Half of these banks wouldn’t exist at all elsewhere—they’re essentially very large family offices—so larger Lebanese banks face the challenge of differentiating themselves, and competing by offering new investment products,” he says, before describing vendor competition during his 15 years here as a rollercoaster.

“Many software companies think they could make quick and prosperous profits here,” Daenen says. “But most of them left the region when the 2008 financial crisis occurred without realizing the importance of long-term relationships and commitment that is key in the Middle East. Financial institutions have seen vendors enter the market, make some profits, and eventually exit when things get rough and when those institutions need them the most. Over 30 years on the ground here, Misys has proven we’re different.”

While both firms are targeting high-net-worth clients, each is trying to do something specific with its asset management foray, as well, reflecting their selections.

On one hand, Bank of Beirut is looking to leverage its strength in trade finance—with 35 percent market share, the largest among the country’s banks—to manage more corporate assets, and especially foreign exchange (FX) risk. “In our treasury and currency functions, we were still working with a completely manual process, passing orders from middle to back office, with a lot of multi-tasking entailing delays in processes through the system” Andari says. “With Sophis, the goal was to centralize that, be able to plug in our currency pricing from Reuters directly, have everything running straight through in an automated way with margin calls, limits, exposures, and positions all built in.”

Faster and Deeper
NCB Capital, on the other hand, is focused on a new and fast-growing product offering in the region, discretionary portfolio management (DPM), or “effectively a separately managed account structure,” as Taylor describes it. Equities were the first priority, because of a rapidly increasing number of sophisticated DPM clients being on-boarded, providing the largest risk in terms of IT scalability.

Discretionary management was virtually unknown to the Middle East four years ago, and much of its subsequent local growth is a result of Saudis taking their money out of cash accounts for the first time, looking instead to gain equity exposure to the country’s rampant growth. Servicing the Saudi bank’s more complex asset management clients, though, is a subtler task. With multi-strategy funds and fixed-income managers run out of Jeddah, NCBC wanted greater look-through in terms of underlying assets, risk mandates, and the ability to make broad improvements to its data processes.

The CRD implementation, therefore, wasn’t just about order flow, but bettering controls as different departments interact. “Our fund managers now get valuations from the back office earlier in the day, and being directly hooked up to real-time pricing, they get enhanced data on those portfolios and other fundamentals that wasn’t available before,” Taylor says. The implementation, therefore, has made available information across the firm both faster and deeper.

Compliance Flexibility
Of course, building out buy-side functions at a retail sell-side firm is one challenge; coping with shifting regulatory winds is another, says Stephen Butcher, managing director for EMEA at Charles River. “Compared to Europe and the US, the regulatory framework in the Middle East and North Africa is still relatively small,” he says. But firms here require flexibility in their compliance modules. “For example, NCBC needed a comprehensive library of built-in compliance rules and advanced rule-building tools that provides diverse instrument and regulatory support, and is easily adaptable to help meet demands for stringent risk management and unique requirements for products like Islamic finance,” Butcher says.

Whether for adjusting to changeable opinions on what is Sharia-compliant, or matching up to the Saudi Capital Market Authority’s (CMA’s) new prescriptions around fund distribution, taking CRD’s compliance module, along with the OMS and portfolio management platform, really wasn’t a question for the bank.

Fairly strict CMA rules for Saudi mutual funds—for example, how much one can invest above and below the benchmark—would be difficult, if not impossible, to do with Microsoft Excel models. But the Saudi bank’s broader driver was about better coordinating touch-points with legal and compliance, fund managers, risk management, and regulators at the CMA setting the rules.

Whereas in Western jurisdictions the compliance process is already legislated, Saudi institutions must participate more actively in the rulemaking process, itself—so, first, whose responsibility is it to translate the rule into the process, who validates that rule, who codes it, and who implements and tests it? For most IT teams these are simple tasks, but when a green-field site is involved, they take longer to accomplish.

Lebanon, meanwhile, is a different beast. Historically known as the “Switzerland of the Middle East,” it at one time enforced some of the world’s most stringent bank secrecy laws, reaching a high point with legislation passed in 1956. Some vestiges of that tradition remain—for example, financial firms must possess all client information within their own walls, so any public cloud options are off the table—but the Banque du Liban, the country’s central bank, has gradually sharpened its teeth, owing to scrutiny over the illicit funding of internal conflicts in recent decades. The result is a tricky mix.

“From day one, we knew IT transformation would take longer than expected,” Andari says. “We have to tailor to local practices, and stringent oversight by the central bank. Here, regulators are a little bit more focused on details and mandatory end-of-day reporting of transactions and positions, which is just another advantage of automated processing. Lebanon is tightly monitored internationally for anti-money laundering (AML) and counter financing of terrorism (CFT), and US-based Foreign Account Tax Compliance Act (Fatca) reporting requirements—which apply to dual citizens living here, for example—and are set to present the same issues.”

Tomorrow’s News
In the end, both projects demonstrate why good things come to those who are opportunistic. NCBC is already pondering a fourth Charles River IMS module for its performance and attribution functions, and anticipates more Western-style products like DPM becoming regulated in the kingdom in coming years, reflecting wider sentiment that potential for Saudi growth isn’t going anywhere.

As for Beirut, Andari says the bank is still “just scratching the surface” with digital delivery channels, new diversification options, and cross-selling asset management solutions using analytics. But Andari also knows the bank—and its technology partners—must acknowledge its operational context, too. “For us, if you want to compete, it’s either on price, product, or service, and service is where we want to push the envelope,” he says. “We can maneuver much faster by changing these systems over, with great support from senior management. But to do all this, there is a certain timing and understanding about the political situation here, which of course has become unstable at some past points in time.”

Indeed, caution is classic advice in a part of the world that is passionately proud of—if sometimes also consumed by—its past. For a head technologist in either Arabia or the Levant, the point is to not wander too far ahead of oneself, but figure out the best ways to be ready when the path clears.

As Andari puts it, “I don’t want us caught reading today’s newspaper.”

Salient Points

• Domestic banks in the Middle East are beefing up their asset management offerings as institutions, companies, and high-net-worth individuals and family offices have prospered, introducing new, more complex demands.
• Traditional sell-side firms like Lebanon’s Bank of Beirut and Saudi Arabia’s NCB Capital have taken similar approaches to building out technology, leaning on established relationships with vendors like Misys and Charles River to undertake broader business transformation while also catering to specific needs like treasury or OMS provision.
• Regulation in the region, while generally lighter than in the West, varies tremendously according to jurisdiction. New limitations around fund distribution and increasing reporting requirements are both impetuses for investment banks to automate processing.
• Successful technology providers here require both deep domain expertise as well as unusual patience, with both projects demonstrating the need to acknowledge political context and the ability to install incrementally.