Archives for March 2009
However, ING is certainly not an exception in the market, and the issue of complexity reduction is core to the cost reduction strategy of numerous European banks.
In fact, while most of the European banks have implemented best practices to reduce their operating cost and increase revenue, very few have addressed an issue well identified by industrial organizations: reducing operational complexity.
In the past decade, in order to decrease the impact of commoditization on their revenues, banks have dramatically increased the complexity of their product offering, their distribution reach, their pricing structure, etc. In addition, the level of complexity in European banks has dramatically increased during this period because of consolidation and acquisitions. An apparent paradox exists between scale and complexity (i.e., larger financial institutions are not able to consistently leverage economies of scale to mitigate the effects of complexity or reduce the amount of proliferation/duplication). In fact, as financial institutions grow, they tend to get more complex because of :
– Complexity of business model: Larger financial institutions tend to have more variety and differentiation in the customer segments served, products/services provided, and the countries/regions (and their respective regulatory requirements) covered.
– Incomplete or inadequate integration: Many large financial institutions are an amalgamation of smaller businesses that have been acquired over the years; however, in many cases the integration of processes and systems is incomplete or inadequate, thereby increasing complexity.
– Decision-making process: Decentralized decision-making is more common in larger banks, but this allows (and often rewards) business leaders to optimize their own products/services, channels, geographies, and business units vs. optimizing for the corporation.
– IT System strategy: Some organization grow so quickly that applications don’t keep pace. This often leads to IT customization, patchwork, and add-ons to support product/geographic and channel proliferation, leading to more complex systems
While implementing best practices at the operational level has certainly generated cost reduction, it has often failed to achieve the full potential of a strategic approach to cost management by not solving the consequences of complexity. Therefore it is crucial for banks, especially retail, to address the issue of complexity in a full front-to-back approach. However, this will require fundamental changes (e.g., change of business model) which are essential to achieve the long-term cost optimization of financial institutions.
Islamic banking has become a major global industry with a growth of 10% to 15% per year over the last decade, to reach between USD 700 and 750 billion of assets worldwide nowadays. Currently, Islamic Banking is particularly developed in the Middle East, is definitively on the rise in the Asia-Pacific region, and is currently in an infancy stage in North Africa and in Europe.
North Africa represents a large and still untapped market of nearly 200 million people, with 95% Muslims, except in Sudan where Muslims represent 70% of the population. Furthermore, with an average GDP per capita of US$2,334 in 2007, the North African region is richer than the African average (US$1,137). Islamic banking is still a niche market in North Africa. This could be explained by the fact that North African consumers are traditionally less conservative than Middle East consumers and are used to conventional banking products and services. Furthermore, governments have not particularly encouraged Islamic banking development in their countries. However, things have recently begun to change with:
– New Islamic banks entering these markets; for instance, the UAE Noor Islamic bank which opened an office in Tunisia in June 2008
– Governments creating new regulations; for instance, in 2007, the Moroccan Central Bank decided to authorize certain kinds of Islamic financial products, called alternative financial products, in response to consumers’ demand.
The demand for Islamic Banking product exists in North Africa but also in Europe, where Muslims population is estimated at nearly 15 million people, and is particularly significant in France, the Netherlands, Germany, Belgium, Sweden, and UK. UK has taken the European leadership in Islamic Banking since 2004, when the FSA authorized the Islamic Bank of Britain, the first Shariah compliant retail bank in Europe. In 2006, the European Islamic Investment Bank, the EIIB, also obtained a license from the FSA. In France, the government recently expressed its wish to change the regulation to allow Islamic banking, and the first Islamic banks should appear in 2009. In the meantime, two Islamic banking products have already been launched in 2008 in a French overseas department, La Réunion, by BFCOI, a subsidiary of Société Générale.
In addition to the large and untapped Muslim population, Islamic banking is currently beginning to attract non-Muslim customers, who are interested in this alternative way of banking. Indeed, a growing number of non-Muslims are turning to Islamic banking as customers, spooked by turmoil in the Western banking system increasingly see the sector as safe and more connected to the real economy. In my opinion, Islamic banking will benefit from this new consumers’ interest and grow even more quickly than it recently did.
Indian banks enjoyed a competition-free era, operating under a protectionist regime, till 1991. The competition from private and foreign banks was hardly noticeable till the government liberalized the Indian economy in 1991. Ever since, the number of foreign banks has grown considerably and currently India has 29 foreign banks operating with around 277 branches and 1034 ATMs (as of March 2008). With the announcement of further liberalization on the cards, how has it affected the local banks?
In 2004, Reserve Bank of India, the central banking authority, announced the roadmap for the presence of foreign banks in the country. During the first phase, between March 2005 and March 2009, foreign banks will be permitted to establish presence by way of setting up a wholly owned banking subsidiary (WOS) or conversion of the existing branches into a WOS. At the end of the first phase, the government would conduct a review and decide on the further actions related to the extension of the national treatment to WOS and permission for mergers/acquisitions of any private sector banks in India by a foreign bank. In a way, this move has been a boon to the Indian banking system, as the local banks have vastly improved their banking processes and services in order to compete with the private and foreign banks. While it is unlikely that the foreign banks would compete in the rural and semi-urban segment, they have captured a good percentage of the urban customer base, from the public sector banks, with their customer-centric operations.
As of last year, many foreign banks were keen to open branches in India, including Royal Bank of Canada and Glitnir, an Icelandic bank. The public sector banks in India like Bank of Baroda and Canara Bank underwent rebranding exercises and image makeover, anticipating competition from foreign banks. However, one set of words played a spoilsport on all such plans : Global Financial Crisis.
As a result of the crisis, many foreign banks in India are reworking their strategy. Some of the banks, like Royal Bank of Scotland (ABN AMRO) and Citibank, are trying to sell off their India businesses. The Reserve Bank of India, which had proposed the review, may not ease the current norms, considering that it would open the financial system to the banks which have been faring badly in other countries. For the time being, the local banks can heave a sigh of relief and concentrate on their own expansion. With the General Elections happening in the next couple of months and a possible change in the government, the proposed liberalization policies may not see the light of the day in the near future.