No bank in Taiwan has made a more strident play to take advantage of thawing cross-Straits relations with China than Fubon. The truth is that progress for Taiwanese financial services groups in China has been glacially slow, and it will be years before it has any meaningful impact on the bottom line of any Taiwanese bank. But when the money does start to flow, banks across the country will owe Fubon a vote of thanks for getting the pioneering deal through.

When Fubon Financial Holdings bought a 19.9% stake in China’s Xiamen Bank in 2008, it represented the culmination of years of effort and negotiation. The deal was permitted because Fubon bought the stake through its Hong Kong subsidiary, and hence was not a direct purchase by a Taiwan-based bank of a Chinese one; consequently it involved close discussion between not just the People’s Bank of China and Taiwan’s Financial Supervisory Commission, but the Hong Kong Monetary Authority as well.

A minority stake in a smallish Chinese bank is not going to make a big change to anybody’s P&L, and certainly not Fubon’s, but the more important point was that it got all three key regulators around the same table and caused them to hammer out some important issues. Doing so made it easier for what followed: relaxed FSC and PBOC regulations allowing Taiwanese banks to set up business operations in the mainland, a potentially transformative step for the entire Taiwan financial services industry. Fubon launched its first rep office on the mainland, in Suzhou, on December 5.

Like its peers, Fubon must have a rep office in operation for a year before being allowed to upgrade to a branch, and then a further two years before it becomes a subsidiary (and even then only if it was profitable for a year as a branch); it’s only then that they will be able to offer deposits and financing in RMB, which is a crucial part of the product set whether representing Taiwanese businesses or Chinese ones. Development in investment banking and brokerage will evolve from there, a modest securities presence within Xiamen Bank notwithstanding. But the point is, a foothold has been achieved.

Back home, Fubon is one of the largest financial groups in the country, a leading consumer brand with particular strength in Greater Taipei. The investment banking arm, Fubon Securities, includes an impressive presence in brokerage and local underwriting, although the group’s mainstays are more generally seen as corporate lending, wealth management and insurance. As of June 2011 it ranked third by trading value among the island state’s securities firms, and was third for spot trading brokerage, fifth in margin loans, and second in underwriting local IPOs.

But it’s really in Greater China that it will make its name, initially in broader corporate work but in time perhaps also in securities and brokerage. Already the only Taiwanese financial holding company to own a Hong Kong bank, it has set its mainland ambitions firmly on the West Strait Economic Zone centred around Xiamen in Fujian Province – geographically, the closest to Taiwan. Fubon has been a first mover in China, but it’s also been focused and smart.

No Asia-domiciled house has made a more strident attempt to be a regional player than Singapore’s DBS. It’s been this way for more than a decade, as one CEO after another has come to fulfil a vision of a bank from Asia, covering Asia. The latest CEO, Piyush Gupta, puts it like this: “The Asian bank of choice for the new Asia.”

DBS got its pan-regional ambitions underway with the acquisition of Dao Heng in Hong Kong in 2001 and has been steadily adding pieces and bedding down businesses ever since. Today, Gupta aims for a DBS with a 40:30:30 split of earnings, split Singapore/Greater China/South and southeast Asia, chiefly India. In this, it differs from CIMB, the closest comparable approach in the region, which aspires only to be a powerhouse within Asean.

Where does investment banking fit into this? In truth, it’s not the sharpest part of Gupta’s vision; he told Euromoney in September 2010 that “We are really a good commercial bank, a good universal bank.” He said that did not cut out investment banking, but “there is a recognition that this will not be our forte, to go out against the bulge bracket banks in high end capital market transactions. It’s not our principal area of strength.”

Be that as it may, DBS is an exceptionally powerful presence in investment banking in Singapore and is increasingly exporting that into other markets. “We originate out of Asia and distribute globally,” says Clifford Lee, who heads the fixed income business. “From an origination standpoint we are very much focused in Asia: this is where our expertise lies, when we are investing to add more value to the market.” Asia’s occasional opacity is an asset for DBS, he says. “The most valuable commodity in the market now is information. Certain markets are more opaque, onshore and offshore areas of control make things a little less transparent than we would like, and credit information is less available. We hope to be able to navigate through these issues in a more informed manner, considering this is our back yard.”

It is already a leader in all areas of investment banking at home: it has turned up on the landmark IPOs from SingTel’s S$4 billion IPO back in 1993 right through to the deal that took its record, HPH Trust, which raised US$5.5 billion in March. It was instrumental in launching the REIT market (and business trusts, of which HPH was the biggest example) and has handled a greater volume of underwriting on these than anybody else. It is a clear leader with the debt and equity needs of SMEs. It has helped to build one of the greatest duration curves in any local currency debt capital market, beyond 40 years. And it appears on most M&A deals involving a major Singaporean institution.

Along the way has come a sense of what can be achieved in other markets too. It has been involved on cross-jurisdiction equity deals for years: examples are Adaro Energy in Jakarta, San Miguel Brewery in Manila, Astro All Asia Networks in Kuala Lumpur and Australand in Sydney. And generally, the newer frontiers are making a steadily bigger contribution: China, India, Taiwan and Indonesia contributed 17% of group revenues in the third quarter, with earnings up 35% from a year earlier.

It’s perhaps on the debt side where regional strength with a local feel is most valuable. “In the immediate future, we intend to stay relevant and competitive in the G3 space, which is extremely crowded in Asia already,” Lee says. “But it is in local currencies in the region that we really hope to continue to grow. The faster markets open up, the faster we will be able to make headway.” DBS dominates Singapore dollar league tables in the debt side but is also starting to appear more frequently on CNH, or offshore RMB bonds. DBS was a bookrunner on the RMB3.6 billion offshore RMB bond from Baosteel in November – the largest corporate dim sum bond to date. It has appeared on several others as well. “CNH feels more like a credit market than the bank space, which is more of an interest rate play,” Lee says, suiting DBS’s strengths. He says he will “continue to monitor” Indonesia for opportunity, with a focus so far on the high yield space (where it has worked on deals for Indosat and Adaro, among others), and has built a rupee capability in India.

China is an example of a business where investment banking does make a key contribution. Gupta has said corporate and investment banking in China, which drive that business, have been growing at 40 to 50% per year, at least in the run-up to China’s slowdown. This is arguably the great advantage of Dao Heng: the fact that it creates a way in to China rather than starting from scratch. Half of DBS’s customers in China are from Hong Kong, while red chips are responsible for the biggest growth in the Hong Kong business.

Going regional is not straightforward. “The difficulties of maintaining a multi-regional, multi-country strategy or platform for an investment bank are not only must you be very good in your home market, you must at the same time take on the best of the local market players in each of the other countries you set your sights on,” Lee says. “That’s becoming increasingly difficult as domestic banks are improving, increasing in sophistication, and are increasingly able to provide more basic investment banking needs.”

But going regional is now a key part of the DBS plan. “We were born in this region, we’ve been invested in it for a long time, and we invest on a much longer term basis and have ridden the storms,” Lee says. “The competition is harsh but we just have to psych ourselves accordingly to take them on.”

CIMB has long been the pre-eminent investment banking presence in Malaysia. Year after year it sweeps the investment banking categories in our Awards for Excellence, commonly making a clean sweep at the top of the equity capital markets, debt capital markets and M&A league tables to complement the most powerful brokerage in the country.

Nazir Razak, CIMB Group’s CEO – and sometimes referred to in Kuala Lumpur circles as Malaysia’s unofficial finance minister, since his brother, the Prime Minister, is said to seek his advice – rose through investment banking. He built that business before the many mergers that turned CIMB into a full service bank, and it remains the bank’s most impressive arm.

It’s consistently on the deals that matter nationally each year: the RM14.8 billion IPO for Petronas Chemicals Group in 2010, the US$3 billion bonds and US$1.5 billion sukuk from Petronas the previous year, the RMB20 billion Islamic MTN programme for Pengurusan Air, the RM11.2 billion Maxis IPO. And it has been a leader when Malaysia’s national champions have ventured into other markets, such as on the S$1.5 billion sukuk for Khazanah Nasional and US$1.26 billion of trust certificates for 1 Malaysia. Major M&A deals in recent years have included Sin Chew Media and Nanyang Press Holdings merging with Hong Kong’s Ming Pao and the demerger of Telekom Malaysia.

But local excellence is no longer the challenge. “We have gone quite public on the fact that we want to be the top regional universal bank – meaning southeast Asia,” says Dato’ Charon Wardini Mokhzani, CIMB’s deputy CEO and the head of the corporate and investment banking businesses, who combines a smooth confidence with a magnificent Koizumi-styled shock of silver hair. “Within that, that includes also being the top regional investment bank.”

This is a much bigger ask than dominating Malaysia’s investment banking landscape, and it puts them into competition with some powerful local competitors across the region. But there are a lot of signs of progress: CIMB is among the leaders in broking in Singapore, where it has been strong ever since acquiring local broker GK Goh in 2005, and in Indonesia, where CIMB is extremely well entrenched through its ownership of CIMB Niaga, the fifth largest bank by assets in the country.

More recently, CIMB has sought to beef up in Thailand, striking a deal with Siam Industrial Credit Public Company (usually abbreviated, tremendously, as SICCO) to buy 70% of SICCO Securities in September. This broker has 13 branches across Thailand and will be built into the existing presence, CIMB Thai Bank; Charon says that combining their market shares immediately brings it into the top 15 brokers nationally, and should be a platform to build a leader. There is already strength in investment banking. “In Thailand, Bloomberg ranks us number one for IPOs this year,” Charon says. “We are getting there.”

“Clearly, it is going to take time to be in the top three in each market in all categories. But it’s something we think is achievable.”

Next up is likely to be the Philippines, where Charon confirms the bank is in discussions to take a stake in Bank of Commerce, owned by San Miguel. That wouldn’t, in itself, create a meaningful presence in investment banking, but it would give a platform to build one; additionally, it has an agreement to distribute Philippine equities and research. “There are 10 Asean countries and we are present in eight of those [the Philippines and Laos being exceptions – CIMB’s commercial arm already has an established presence in Cambodia].

Evidence is beginning to come through in significant deals, most notably in Indonesia – which, being the region’s most populous market, has the greatest potential. CIMB was, for example, appointed as an underwriter on a bond issue from Indomobil earlier this year, and was an advisor on CVC’s buyout of Matahari Department Stores in 2010. “Because we have the number five bank, we’re really able to offer a complete universal banking-type solution,” Charon says. “Because we are positioning ourselves as an Asean regional bank, we can give regional solutions to clients; it’s surprising the number of southeast Asian companies who are investing elsewhere in southeast Asia. There is a lot of interest in regional investment flows.”

Growth in these cross-border flows will clearly be crucial to CIMB’s success as a regional player. “Intra-Asian trade is a big number, and a growing number; clearly we want to be there, growing with that,” he says. As Asean moves towards a free trade zone, more cross-border trade and investment within the region should follow. “Asean as a unit has a population half the size of China, with a GDP probably bigger than India. As a region, it’s very dynamic.”

One problem with the idea of an Asean bloc (see Euromoney, September 2011) is that it doesn’t yet exist in a meaningful form: there are still different regulations from one market to another and capital does not yet move freely. But Charon tries to present this continued variance as a positive. “Because it is diverse, it is an interesting place to be in: it’s not one homogenous market,” he says. “Finance is finance. The economics which make an M&A effective, or raising capital internationally – these don’t change and can apply anywhere.

“Each country clearly has different regulations and structures, but because we are a southeast Asian bank, we have a very strong indigenous team in these markets. We don’t fly expatriates into another country and ask them to run investment banking. We use the people in the country.”

And how about the opportunity presented by other western investment banks pulling back due to problems at home? “I don’t want to sound like a vulture fund taking advantage of other people’s weaknesses, but you would imagine that as people have issues back in their core domestic markets, they would retreat to some extent from southeast Asia,” he says. “There will be opportunities for southeast Asian banks to step in.”

BOX: Badlisyah Abdul Ghani

One area that both Malaysia and CIMB have excelled in taking an early lead is Islamic finance. Malaysia has the most sophisticated industry, and enabling framework, for Islamic finance anywhere in the world; within it, CIMB is probably the name most closely associated with innovation.

The man most responsible for building CIMB’s Islamic business, particularly on the investment banking side, is Badlisyah Abdul Ghani, now the overall CEO of CIMB Islamic. He made his name being a part of innovative structuring techniques, among them the world’s first ijarah sukuk, and asset-backed deals using the musyarakah structures. Quietly spoken and lacking some of the more outgoing statesmanship that some of his peers assume, he is nevertheless known as one of the most effective and connected people in the Islamic finance industry worldwide. Beyond CIMB, he was closely involved in Bursa Malaysia’s launch of a Shariah-compliant commodity exchange, and is also closely involved in attempts to build fund flows from the Middle East to Malaysia (he is, among other things, head of corporate client solutions for the Middle East and Brunei at CIMB at a group level). He’s on the Islamic capital market consultative panel of the stock exchange and chairs the Islamic capital market committee of the Malaysian Investment Banking Association. His involvement in such a wide range of sukuk from Malaysia has helped to shape the country’s distinct approach to Islamic finance, which differs in some crucial ways from the interpretation of the Middle East; but he has always argued that differences in interpretation, rather than needing to be ironed out and standardized, should be welcomed as a spur for innovation.

All of this has helped CIMB to a position of strength in Malaysian Islamic investment banking, but the place it might really pay off is Indonesia. The opportunity here is vast. Indonesia is, like Malaysia, a Muslim nation, but has almost nine times the population. Islamic finance is far less developed in Indonesia than Malaysia, but all the same drivers that spurred it in Malaysia exist there too: a desire to invest in a way consistent with faith; growing sophistication of the investor base; and a rising wealthy middle class. Most of the necessary legislation is in place in Indonesia now, and it’s really a question of when, not if, Islamic finance becomes widespread. Through its Niaga presence, CIMB and Abdul Ghani are better placed than most to take the opportunity.

There’s just one question that investment bankers in Asia want to ask the region’s top headhunters. Just how bad is the next bonus round going to be?

“The next six month outlook is grim,” says one of the region’s leading banking headhunters. “Given the problems banks are going through, this bonus round is going to be very ugly. There will be cuts between now and the end of the year.”

A second opinion? “I suspect total comp will be cut in half for the good people, and for a lot of others there are going to be zero bonuses,” says another.

A third? “There is a big reduction in compensation,” says another of the region’s biggest movers and shakers. “But the bigger trend is that people have finally realised this wasn’t just a short term aberration in 08 and09. This is the new reality: it keeps coming down.”

Even the handful of top headhunters who are prepared to put their names to bearish quotes aren’t much more positive. “We are seeing higher bases, and I don’t know what’s going to happen on bonuses, but I can assure you they will not be going up,” says John Wright, founder of Global Sage. “More of it will be in stock and deferred. I think everyone needs to adjust their expectations because one thing is certain, compensation in the traditional banks needs to be on a long downward trend as the world works through this drawn out balance-sheet recession.” And Christian Brun, one of the founders of Wellesley Partners and in charge of its Asia operations, says this bonus round “could be comparable to the 2008 bonus round,” which is to say one of the worst in recent times.

Oddly, though, the drop in compensation is one of the few areas headhunters can agree on. Otherwise, the experience is very mixed. Some report a dreadful year, others a record; some say fixed income is the only area where anything is happening, others say that’s the quietest area of all. It’s an environment within which consultants play to their strengths and try to thrive as markets around them fail. “This is not going to be, for any of the headhunters, the best or second best year on record,” says Wright. “But for those who know quality, it’s been a good year.”

Different shops report varied areas of activity. At Wellesleys, it’s fixed income and the buy-side in particular. “Asset management has been interesting,” says Brun. “If you’re looking for a trend, that’s an important one.” There is a sense that where many foreign houses have previously existed with a small sales force, they are increasingly aware that they need to build a stable, sustainable, well-led team. Wright sees this too, at least within fixed income asset management. “The biggest area in fixed income is on the buy side,” he says. “Many asset management firms are hiring heads of fixed income for the region; on the equity side it’s more hedge-fund start ups. Most asset managers are about two things: hiring capital formation people, and having a sales force out here.” Several asset managers have been staffing up in the region, but BlackRock probably stands out.

Some find opportunity in other areas. “Hiring in investment banking has been very active in 2011,” says Wright. “Most of the major bulge bracket players will either have completed or begun changing about half of their executive committees – that means new product heads, new investment banking heads, new equity and fixed income heads, heads of legal and operations. It’s a lot of very senior changes, and there are more to come.” People at a vice-chairman level, for example, have been moving. Others expect focused cuts. “We anticipate that many of the shops that cannot provide local currency, local market access in fixed income, are going to cut back significantly,” says one recruiter.

The development of offshore RMB has created some activity both in asset management and around the dim sum bond market, particularly around high yield. And if not offshore, then China itself remains a mainstay. “Most of what we have done this year has been China, then Indonesia,” Brun says. “The focus on China will continue for everyone next year. That is not going to change.” Another headhunter adds: “China continues to be busy in investment banking. We just don’t see any end to the demand for good bankers with great relationships in China. China is the only bright spot on the compensation landscape this year: it’s the one place where there’s no downturn.” India, by contrast, has been relatively quiet as a hiring environment over the last 12 months; many of the leading practices report more interest in buoyant, domestic demand-driven Indonesia instead.

Other areas of growth include private equity. But one thing that’s been missing this year is a bank conducting a major, bull-headed new buildout. In recent years ANZ and, to a degree, Standard Chartered have kept things moving in the industry, not just because of their own big hires but because of the hires that the banks on the losing end have to make to replace the lost stars. There was also Barclays’ decision to build from their customary strength in debt and forex into a broader equities capability. And in most recent years there’s been an obvious headline departure: in 2010 it was probably Henry Cai, the China banker, from UBS to Deutsche. But there’s been much less in any of those themes in 2011. The one big move everyone talks about is Nomura’s poaching of a team from Deutsche Bank led by Daniel Mamadou, but in any other year that wouldn’t have stood out as that big. And while people highlight Macquarie’s attempts to build up in debt, it’s not as if it was that small a player in the first place. “Premiums are not a feature of life any longer,” says one headhunter. “It has not been a year of any great drama or excitement in recruitment. There are plenty of individual movements, but not any big strategic buildouts of moves into new business. There is a significant transition in the industry, away from an era of highly complex structured products and into a kinder and gentler world.”

Within the recruitment industry itself, there are a few interesting developments. One is a rumoured tie-up of Global Sage with another, global partner, though John Wright would not be drawn on it when asked. The other is the disintegration of Pagoda Partners, set up in Singapore by Nick Burnham and Andrew Britton, who now appear to be going their separate ways. Pagoda did not respond to written requests for comment. In general the bigger, listed firms such as Korn/Ferry and Heidrick & Struggles face shareholder pressure to cut costs (notwithstanding the fact that as an overall firm Heidrick is on course for a year-on-year increase in profitability, based on third quarter numbers) but are considered big enough to be able to deal with short term shocks; for the many boutiques in Asia, a single big team hire in this environment can make all the difference.

It’s not an environment that’s going to make anyone rich, whether headhunter or client. But it still has the potential to be interesting. As one recruiter points out, the dreadful performance of bank stocks means that many people’s long-term vesting stock options have become worthless – and hence they’re a lot more willing to move. For opportunistic hirers, 2012 could yet be a very lively time.

Euromoney, December 2011

Microfinance has its problems, but it can drive the economies of developing nations. So what if it wasn’t there? To find out, Chris Wright heads to the former Soviet republics of Tajikistan and Kyrgyzstan to meet its lenders and clients

In a village in rural Tajikistan, Mastura Asoeva is flicking through her accounts. Perched on a stack of wooden boards in front of piles of stick bundles and clay bricks, the mother-of-four doesn’t look an obvious CEO, but business is good: her basket-weaving operation is growing and, for a fee, she trains women in other Tajik villages in the same skill.

Some 2,400km by road to the north-east in Maevka village, Kyrgyzstan, Taalaibek Gaipberdiev is surrounded by traditional, local carnival costumes that his company makes for lease to the growing population of the nearby capital Bishkek. It wasn’t how he planned to build his business. “Initially, I just wanted a photo studio where children could take pictures in carnival outfits, such as fairy-tale pictures, but at the end of the year our customers asked to lease out the costumes for New Year parties,” he says. “I said no. But they wouldn’t leave my office.” Now he has 3,000 costumes and employs 40 people in an outlet and workshop.

Meet the next generation of banking clients.

To see this article as it ran in Euromoney, click here: CW Microfinance p2

Asoeva is a customer of Tajikistan microfinance lender Humo and Partners; Gaipberdiev a borrower from Kyrgyzstan’s Bai Tushum & Partners. They represent a growing constituency of people in the world’s more poor and obscure locations who are building businesses on the back of microfinance lending. Modest in scale individually, they are a powerful force in aggregate, and steadily growing to be the drivers of their national economies.

Microfinance has problems: that’s understood. There are those who feel it encourages inescapable indebtedness, that its interest rates are intolerably high and that the lenders lack governance or prudence.

But what if it wasn’t there? To find out, Euromoney went to two of the world’s least-visited nations, the former Soviet republics of Tajikistan and Kyrgyzstan, travelling between the capitals by road, to meet not only the lenders but the clients of microfinance.

Euromoney starts its trip in the Tajikistan capital Dushanbe, where a swirling Afghan dust storm has given its wide tree-lined boulevards an orange hue and closed the national airport. There’s always a local theme or need that distinguishes national microfinance industries – post-war rebuilding in Bosnia, agricultural efficiency in south Asia – and in Tajikistan, it’s the empowerment of women.

In a parallel of Yugoslavia, Soviet rule kept a lid on deep ethnic tensions here that dated back centuries. When the Russians left, civil war erupted, killing around 60,000 people and rendering half a million people refugees. The gutted economy, left over after peace was declared in 1997 – its GDP per capita having fallen 70% in the meantime – offered little hope. Many of the remaining working-age men went to Russia, often not returning. “The men in the country unleashed the war, fought the war and left the country, and the consequences fell in a burden on women, children and old people,” says Sulamo Khoshakova, director of the Association of Microfinance Organizations of Tajikistan (AMFOT). Every client, banker, leader who Euromoney meets in Tajikistan is a woman.

Complicated

Microfinance is youthful here. International organizations came in at the end of the war, and the first 10 years of microfinance came under their remit. It’s only in the past six years that local institutions have set up under Tajik legislation. It has not always been straightforward. “Extending loans to women was complicated at the beginning,” says Khoshakova. “Women were only expecting humanitarian assistance. The first steps were to make them understand these loans needed to be repaid.” There were social issues too. “The mentality in this country is that assets belong to men,” she adds. “Women have the capacity, but they don’t have the economic opportunities.”

The message has got through: AMFOT says there are 123 registered microfinance organizations in the country, 78 of which are members of the association. Shoira Sydykova, director at microfinance lender Arvand, says her institution has 15,000 clients – making up a credit portfolio of just 54 million somoni (TJS), or $11.36 million – and believes that in Tajikistan there are 160,000 micro borrowers. Loans vary in scale: $300 used to be a common starting point; these days it’s not considered sufficient to launch a business, and some loans might be as much as $5,000 (Arvand’s average is $660, with 60% of loans going to rural areas). Khoshakova estimates that 12% of able-bodied people in Tajikistan have received microfinance loans. “If there were no local microfinance organizations, most women would not have access to loans,” she says. “I’m quite sure rural women would not approach banks to receive a loan. The name bank dissuades women from approaching.”

Exploding myth

Approaching microfinance institutions (MFIs), it seems, is less intimidating than banks. Nazokat Hafizova runs a beauty salon on one of Dushanbe’s main thoroughfares. It is bustling when Euromoney visits, and the tape-recording of the interview fights a vibrant background noise of blow-dryers and bellowed Tajik and Russian chatter. Hafizova is on her fourth loan from local microfinance lender IMON International: the first, in 2007, bought the equipment; the second the property; the third rehabilitated it; and the fourth bought additional equipment, for more sophisticated laser treatments.

Talking to Hafizova explodes one myth: that microfinance recipients have no idea about finance and approach the lenders wide-eyed. She is, no doubt, among the sharper end of the borrower pool, but one lesson of the trip is just how savvy people tend to be about what is available. “There are numerous microfinance organizations in the city,” she says. “I selected IMON because it has the most attractive interest rates.” Talking about the benefits of information and training IMON has provided involving income and expenditure, she notes: “It is crucial, when the world is facing the financial and economic crisis.” I hear more calm common sense in these interviews than I had in the G20 press conference in Washington two weeks earlier.

The street-smart nature of microfinance recipients can be a double-edged sword. A challenge in microfinance is indebtedness, particularly where the same borrower will go to multiple lenders. Even in rural areas, we repeatedly hear of people knowing exactly how to shop around for loans. Khoshakova says: “When they approach us, we begin to explain something to them, and they say, ‘Of course we know that. Finco is doing this and IMON is doing that.’ They are well informed about what schemes there are in the country.” She adds it is common to find “women receiving multiple loans, borrowing several times”.

A comment from Hafizova, also repeated by others on the trip, concerns the broader social impact of microfinance lending. “My successful business has had an immense impact on my personal and family life,” she says. “I have been able to buy an apartment through the income from this business. I have created new jobs for skilful ladies who are working for me. And my husband has become a client at IMON and launched his own business.” Her sister is about to take a loan to launch her own business too. This is what microfinance advocates argue: improve one person’s life and the spill-over effects are potentially transformative.

Family provision

We leave Dushanbe for the suburbs to find Khakifa Sobirova, who runs a bakery. It’s a hive of industry in a dim room, where a young man in a white bandana hoists loaves in and out of a clay-walled oven while another kneads the dough. They then emboss the bread with local patterns.

In a courtyard, Sobirova is a woman of few words; it later turns out that, in this patchwork country of races and clans, she is Uzbek and understands little of the translator. However, she does tell a story of climbing a rung up the ladder: how the bakery, in the family for 40 years, was galvanised with a $300 loan in 2000 and now bakes its way through five bags of wheat flour a day for sale in the local green market; how it employs three family members and has helped her daughter set up an embroidery business, proudly displayed in a room off the courtyard; and how it has not only empowered a family but kept it in existence.

“Our business helps us a lot to keep the family together,” she says. “I have been able to arrange marriages for three of my children. Two are remaining. Hopefully I can manage a marriage for them as well.” With business good, her husband and son have never had to follow the herd to Russia for work; both drive taxis in Dushanbe.

Paid marriages and family unity will never show up in microfinance statistics, but nothing comes through more strongly in borrower comments than this: not the size of a house, or the food on the table, or a car or a cow, but the sense of providing properly for a family. Sobirova sums it up: “Before, life was difficult.”

Lenders, too, like to keep families together – it’s good for business as well as society. “It is a role model for the next generation to have a family consisting of a mother, father and children,” says Mavsuda Vaisova, general director of Humo and Partners – the suggestion being that this has not been the norm.

This is one of the happier borrower relationships. Sobirova poses cheerfully for pictures with an IMON branch manager, staging a chat about company accounts at the kitchen table, before handing out generous amounts of fresh bread. But is it always like this?

From the customer side, the big problem with microfinance is the rate of interest – although, lacking anything to compare it to, no client we met complained about it or described any problem in meeting terms. AMFOT says interest rates in Tajikistan vary from 2.4% to 3.5% per month. “Of course, it is a very high interest rate – we do understand,” says Khoshakova. “But we cannot simply extend loans at lower interest rates, because the funding we receive is expensive itself.”

Cost of funds is a common refrain among microfinance lenders, particularly when lending in local currency. “The basis for pricing is the cost of funds,” says Sydykova at Arvand. “Since somoni are much more expensive, the interest rates are accordingly higher.” Arvand charges 22% to 26% per year in dollars, 30% to 38% in somoni, but Sydykova says this is much better than working with a loan shark. Robiya Asrorova, a loan officer at IMON, says 10% per month is not an uncommon loan-shark rate – without sympathetic repayment terms – and adds: “There were cases where individual lenders gave out loans for a term of three or four months, then required the money back before the term expired.”

Cost of funding comes up in Kyrgyzstan too, where MFIs cannot do transactions in hard currency, yet get their funding from overseas. Bai Tushum & Partners, a Kyrgyz MFI, says that four years ago the hedging costs for it to manage this risk were 3% to 4%; today, a commercial bank will charge 12% or 13%. “In this situation, it is hard to talk about reducing interest rates for our loans,” says Gulnara Shamshieva, general manager. She says that, depending on external factors, interest rates on loans have swung from 48% a year in 2000 to 24% in 2005, before climbing again. “We have to provide a balance, but MFIs cannot directly affect this situation,” she says. Besides, it’s not an easy business to do cheaply. “We are an institution that operates in rural remote areas, trying to reach clients far from towns and cities,” she says. “We provide loans without any collateral. It’s high risk, high cost.”

Lenders say they have flexible repayment schedules, giving the impression that they are not particularly tough on missed payments, and that their delinquency rates are incredibly low, from negligible to 2%. Asrorova says that IMON has never, in 12 years, sold any property that was pledged as collateral for a loan; Sydykova says Arvand’s non-payment rate is 0.5%, adding: “The repayment rate is very good. It is because the loans are short term.” This is an interesting point, and on the face of it counterintuitive: why does a short-term loan make it easier to pay? Perhaps for someone new to debt, the immediacy of a deadline makes it easier to plan for. Sobirova, the baker, asked about the challenge of repayment, says: “It wasn’t difficult for us. The first loan I received was just six months and I had to repay in instalments.”

Training

Some 25km east of Dushanbe, we are in farmland. Near a cluster of houses, a boy is driving a cow across a field. Neat pats of manure dry outside the entrances to the homes, to be used for fuel. In one of these homes, we meet Mastura Asoeva, the basket-maker. “I am an entrepreneur and farmer,” she begins. “[Before microfinance], our living standard was average.” Then 10 years ago, an international NGO got involved in the local community, providing training in agronomy, engineering and farming, building capacity and eventually leading to an introduction to Humo, one of Tajikistan’s bigger MFIs. A loan provided agricultural inputs, from seeds to training, and the modest 0.1 hectares of land she owned became the source of tree branches for her basketry.

Asoeva exemplifies that – apart from the fact entrepreneurs can thrive anywhere – the money is not a lot of use without training to go with it, which somewhat blurs the line between a commercial lending operation and a development organisation. “Initially, the quality of our products was low,” she says. She got advice on improving them; now she trains people throughout the local region, receiving income for doing so. Today, she talks like a venture-capital recipient. “I have always been able to pay on time,” she says. “I was confident in myself and I have always produced my products with confidence that I would be able to sell them and repay my loan.” She has bought a plot of land to build a new workshop “to expand my production”; the foundations are being put in as we talk.

She has no doubt that, as a woman, life would have been much worse without the loan. “It’s important women have got this motivation, this desire of developing, of moving forward,” she says. “If a person tries her best, she will never fall into poverty.” Without microfinance, though, she says she’d have to go to “individuals”, a common shorthand for loan sharks. “There are many of them in this country,” she says. “They try to make you bogged down in debts.” All four of her children have been educated on the proceeds from the baskets.

Further out of Dushanbe, Burigul Kholova is a farmer in the village of Andigon. Where I am convinced Asoeva could run Hewlett Packard with a bit of training, Kholova, a mother-of-eight, is more guarded and probably more representative of the ordinary rural people who make up the bulk of microfinance clientele. Her first loan was just TJS68 ($14.30) for potato production, followed by another of TJS300 for goat farming, and then others totalling TJS7,000. Today, she combines land farming and livestock, with one hectare devoted to wheat, maize, tomatoes, potatoes and cucumbers, and then cattle that are milked.

The loan started simply: Humo came to the village to explain what it did. Along with the loan came training, on subjects including canning vegetables, cooking biscuits and writing project proposals. Asked what difference microfinance has made, the answer is familiar. “Our business has made a tremendous change to our life,” she says. “We had only a two-room house. With the money we received, we built additional houses, we arranged the weddings of our children and we provided for our children’s schooling.” One is at university. The next goal is “to buy a new tractor to improve our life”.

Remote areas

It is time to get moving to Kyrgyzstan. Heading south in a Land Cruiser with Lotte Pang from the global development institution International Finance Corporation (IFC), which is producing a video on microfinance, Euromoney is swiftly among cotton fields, then craggier, dusty land where little agriculture is supported, beyond hardy troops of goats. It’s out here, in the rural areas, where microfinance reaches places with no alternative. The road becomes uneven, then disintegrates. At times, it is a river bed. Late in the night, the driver points across a river at dim lights on the other side. “Afghanistan,” he says.

After that it takes a full day of driving along the Panj River, which marks the Afghanistan border, to reach Khorog, the capital of the semi-autonomous Gorno-Badakhshan region of Tajikistan. This is not so much Tajik as Pamir territory, and fiercely independent. Tribally and culturally different, it took the losing side in the civil war, and not much development funding has come this way from the government since. There was a time when money in Khorog ceased to exist, and traditional barter took its place, before the Aga Khan started pouring in money. Today, it hosts the University of Central Asia.

Getting this far into the wilderness gives one a new perspective of the challenges that face MFIs. “There are some technical problems faced by microfinance organisations in remote areas, such as not having a computer or internet,” says Khoshakova. Also, keeping track of a far-flung and often large client base with a low average loan amount is a headache. Sourcing personnel is another challenge, since microfinance organisations generally don’t pay well.

Euromoney might have overdone it. Driving up the Pamir Highway, built over the mountains by the Soviets, we blow a tyre at 2am, at an altitude of 4,000m and 90km from the nearest village – in a blizzard. The drivers get out to change the wheel. They hand me a torch and tell me to walk in circles around the car. “Watch for wolves,” one says.

Surviving this, we arrive at dawn in Murgab, a half-Tajik, half-Kyrgyz town, where electricity alternates between the two halves throughout the day. It is utterly bleak and barren but beautiful, and it’s hard to see where an economy could be built here. Much employment comes from the NGOs who have set up here to help. As the sun rises, a stream of grinning children, some probably no older than four, arrive with pails to get water from the well. Japanese stickers on the well’s pump show its foreign providence.

Jigsaw puzzle

It is another full day’s drive amid the mountains and alongside a Chinese border fence, newly moved after Tajikistan ceded a chunk of its territory to China in exchange for road-building assistance, before we reach the magnificent inconvenience of a Central Asian border and cross into Kyrgyzstan. On the other side, the land is more fertile; more populated by yurts. And that brings us to Kyrgyzstan’s theme of microfinance: the fact it is 66% rural (and 34% below the poverty line). “We are a mountainous country and we don’t have many big cities or towns,” says Shamshieva at Bai Tushum, whose own client base is 80% rural. That’s a business model, as well as being a challenge. “We provide access to financial services for all unbankable people in rural areas,” she says. “They have no attractive collateral.”

It is not an easy model to run. In a place lacking financial literacy, the problem of over-indebtedness is acute. “Our credit bureau [an IFC-backed initiative aimed at helping lenders assess indebtedness of potential clients] says about 35% of clients are running between institutions,” she says. “When business is going well, maybe you are able to repay multiple loans, but when it comes to a crisis, it creates problems – and not only for one institution.”Bai Tushum won’t lend to any client who has more than 70,000 som (KGS) – $1,536 – in outstanding loans, but not every lender applies such standards.

There are other problems. We spend the night in the city of Osh. Barely a year ago, this was the scene of bitter violence that one could justifiably call ethnic cleansing. There is still an edge here; a policeman was killed the night before we arrive. Stalin has a lot to answer for in this part of the world: it was he who set the random jigsaw puzzle of borders around these Central Asian states, where in the space of 100km one can go from Kyrgyzstan to Uzbekistan, back to Kyrgyzstan, and back, and back again, and in to Tajikistan, without turning left or right off the road. Tensions between these nations flare frequently, particularly if something such as a proposed hydro plant in one country threatens to cut water flow to agriculture in another – and this is yet another challenge microfinance must face.

Driving further through Kyrgyzstan, another problem becomes evident: corruption. Euromoney is stopped seven times in a day and fined each time. “It is illegal to photograph gas stations,” says one policeman, moving through the pictures on the cameras. There are no photographs of gas stations, but he fines us anyway.

There is a big push on microfinance in Kyrgyzstan. President Roza Otunbayeva has long championed it as a cause, and the National Bank’s Emil Saryazhiev, who heads the department for methodology and licensing, lists the statistics with some pride: 630 microfinance organisations, including four microfinance companies, 317 microcredit companies, 111 microcredit agencies, and 198 credit unions. Shamshieva at Bai Tushum says there is KGS18 billion ($397 million) in microfinance lending nationwide, or 30% of the total banking sector loan portfolio, covering almost 400,000 clients – far more than the banks. Even then, she estimates that only 17% of the economically active population of the country is banked.

Despite the huge numbers, Saryazhiev says: “The National Bank is doing its best to focus more on the quality of microfinance institutions than the quantity.” Amendments are going through on the licensing of microfinance, allowing institutions to upgrade to commercial banks, with the aim that they can provide a greater range of services to rural people, including leasing.

Talking to a central banker, though, exposes another area of potential conflict with this rapidly growing sector. “[Microfinance organisations] should be for the people, not the people should be for them,” he says. “Therefore they should not think about their own profit, they should rather think about assisting people to make up capital and start their own business. Those that are concerned only about their own profit should be step by step pressed out of the market.”

This approach sounds public-spirited but provides no reason to encourage anyone to lend. Microfinance providers believe they do good. “This is our social mission, to help eliminate poverty,” says Shamshieva. However, they also hope to turn a profit. Sydykova at Arvand says: “The profitability and sustainability of microfinance means it is a long-term activity. It means it will exist, it will expand and it will cover larger areas.” It prompts efficiency too, she argues. And Asrorova at IMON suggests customers don’t mind lenders making a profit. “There is immense trust between our organisation and its clients,” she says. “Both parties are interested in getting profit out of this business.”

MFIs are also wary of being seen as somehow invulnerable solutions to poverty. “Sometimes microfinance is perceived as a treatment for all pains, all diseases,” says Vaisova at Humo. “Microfinance provides access to finance. It is not a solution to all problems.”

She is right, and as Euromoney leaves Bishkek, questions remain about the whole model: the rates, the supervision, the habits it can engender. But it is, today, the best available model, and indisputably improving many lives. “If an MFI does not operate in this country, just think of all those people in remote rural areas,” says Shamshieva. “Who will go there? Who will finance them? Nobody.”

Box: Deposits

Microfinance in Central Asia is chiefly about lending, though some institutions are beginning to take deposits. It is not easy to do so. Arvand, for example, has just 660 deposit clients. “The population has not developed a culture of savings,” says Sydykova.

At Bai Tushum, Shamshieva says deposits are vital and not just for customers. “When we started, we considered this mainly from one side: a cheaper source of funding, but it’s also a product for poor people. It’s one thing to get a loan and use money to develop your business, but one day this loan must be repaid: there has to be something at the end of the cycle, something to save.” She says deposits are “one of the ways to reduce poverty” and generate internal sources of funds for the country, but she notes that, these days, they are not really a cheap source of funding anyway.

Box: International Finance Corporation/Lars Thunell

Microfinance has become one of the mainstays of the World Bank’s IFC arm and a passion of its Swedish CEO Lars Thunell.

IFC is working with 110 MFIs in more than 50 countries. Its investee clients had an outstanding portfolio of nearly eight million loans as of June 2011, worth just under $12.6 billion. Yet the feeling internally is that much more can be done; that there are three billion poor people on Earth and, at best, microfinance reaches less than 20% of its potential market.

Microfinance can be defined in a number of ways, but to Thunell, it is chiefly about “the very base of the pyramid. It’s a way of providing access to finance and loans to these people.” IFC’s role, as he sees it, is not just about pouring money in but helping to shape a sustainable industry, with proper training, improved capacity and a supportive regulatory infrastructure. And he likes the idea that microfinance can be an engine for gender equality. “It’s a lot about women,” he says. “Women are the ones who are picking up this opportunity and moving it forward. It allows them to create their business – which in certain cultures creates some tension – and we see that they reinvest the money and spend it on their children’s education, rather than going to a bar and spending the money there.”

Some of the key debates internally at the IFC concern job creation and productive use of loans. Thunell sees microfinance as being a spur to self-employed entrepreneurs in particular, but wonders how many other jobs are created as a consequence. “The debate now is how we move some of the small informal companies into real companies and get them to grow,” he says. There’s also an explicit goal at the IFC to ensure that microfinance lending goes into productive investment, not consumption. “But there is a question how stringent you should be about that,” he says. “If an entrepreneur has a sick child, the best thing might be for him to use the money for that. It’s not all black and white, and you have to recognize that.”

The IFC acknowledges the debate about interest rates but tends to come down on the side of lenders. “The costs are high in terms of administering the systems – there is the cost of money and losses,” says Thunell. “And we have to remember, what is the alternative? Not getting the money at all, or going to one of the peddlers and paying over 100%.

“As a development institution, of course we’d like interest rates to be lower, but at the same time we would like the microfinance institutions to be sustainable. In some countries, a government has come in and said you can’t have an interest rate higher than X. And in some cases that has meant the MFIs disappear. The interest rate came down, but the loan volume came down even more dramatically.”

Asked about the possibility of encouraging a culture of indebtedness, Thunell speaks about improving financial literacy around responsibility, but also makes a more fundamental point about inclusion. “Who am I to decide that here in Europe and the US we should be allowed to borrow but we should not allow the bottom of the pyramid to?” he says. “These are intelligent people, capable people, and if you give them the right education and incentives they will handle it. I’ve been amazed when I’ve visited slums around the world, you see micro businesses all over the place. The question is how you bring those ecosystems into the bigger world to benefit from trade.”

Thunell believes microfinance is “still at the beginning” and says there are “big parts of the world we haven’t really been able to reach”. The financial crisis has made this worse still: as Western banks deleverage, the ability to source funds for MFIs is getting worse. A long-term answer is the development of local currency capital markets, but that takes time.

Part of the problem can be at the top. “There are many places where you still have governments that are either suspicious, or haven’t put in place regulations,” he says. “You have banking regulators who are watching their turf. You need different regulation for microfinance, and sometimes that’s hard to get.”

Other challenges include lenders to MFIs overestimating the risks involved – IFC attempts to guarantee first losses to alleviate the risk – and quality of information, for which IFC often works to develop credit bureaux to help lenders make risk assessment on clients.

However, the message that keeps coming through is the need to build capacity in individual institutions. “In the long run, if we’re going to scale this and reach as many millions of people as we think we need to meet, then we need to make institutions sustainable,” concludes Thunell.

With thanks to Morag Livingston and Jonathan Lewis

A major fund manager says he expects a 25% shrinkage in the developed world’s banking systems, as market turmoil increases pressure on an already beleaguered financial sector.

“The financial system has to shrink,” said Peter Fisher, Senior Managing Director of BlackRock, which had $3.66 trillion of assets under management as of June 30. “We want to inject more capital into it to make individual firms stronger, but the system is too large, and my guesstimate is 25% shrinkage in North America and Europe.”

Global banking is in a perilous state. The International Monetary Fund this week calculated that the euro area sovereign credit strain had had a direct impact of around Eu200 billion on banks in the European Union since the outbreak of the sovereign debt crisis in 2010. The European Central Bank has had to lend to banks struggling to borrow in private markets, and downgrades have taken place on both sides of the Atlantic, most recently for Citi, Wells Fargo and Bank of America earlier this week.

The strain is already prompting bankers, fund managers and policymakers to consider how the next bank failures should be resolved, with a range of different opinions on whether any banks should be considered too big to fail, and what the role of the taxpayer should be in any subsequent restructuring.

Thomas Huertas, a member of the executive committee of the UK’s Financial Services Authority, said that previous methods of failed bank resolution had to be changed. “Better resolution is the key to financial stability,” he said. “Old methods don’t work. New ones are needed. Bankruptcy does not work for banks.” Bankruptcy for banks was tantamount to liquidation, he said, with severe impacts on creditors, financial markets and the economy. “Repeating Lehman is not a good idea,” he said. “Nor, in our view, is continuing ‘too big to fail’. This is a policy too costly to continue.”

Huertas called for a “middle way, to resolve failing banks without putting them into liquidation and without taxpayer support.”

His call was challenged by Peter Fisher, senior managing director of Blackrock. “Something that concerns me greatly is whether we can really achieve a point where a major institution may be resolved without any recourse to taxpayer support,” he said. “I know that’s a consummation devoutly to be wished. But at the same time, it doesn’t seem to be practical to both do that, and address ‘too big to fail’. If we round to zero the likelihood the authorities ever have to reach into their own pocket, we will have created a class of institution that can never fail.”

In particular, he said, seeking capital to shore up banks was going to be difficult without confidence about banks’ futures. “Getting investors to pony up the capital is going to be tricky unless you give us the assurance that banks are too big to fail. So we’re bootstrapping ourselves into a position in which we are doubling down on too big to fail, not removing it.”

Both men were speaking at an Institute of International Finance session within which Wilson Ervin, Senior Advisor to the CEO at Credit Suisse, called for wider use of the so-called bail-in approach to bank resolution, an intended middle ground between taxpayer bailouts and systemic financial collapse. Bail-ins would involve giving regulators authority to force banks to recapitalize using private capital from within the bank rather than public money.

Ervin argued that such an approach would not only make for better resolutions, but help to stop bank failures happening in the first place by reassuring investors. “If you can get to a resolution regime that is clear and predictable and preserves value, I think the markets will value it,” he said. “If we can provide assurance we can get to that type of outcome [a bail-in rather than a bail-out or collapse] that would help to calm some of the issues around the financial sector.”

Investors have mixed views about the practicality of bail-in securities, but clearly want no repeat of 2008. “The events of September 2008 that were most traumatic for investors were the treatment of institutions that came into the grasp of authorities,” Fisher said. “It was not simply the loss of value, or that investors lost money. Each time they touched an institution, they touched it in a different way with a different outcome. That created chaos for investors.”

Malaysia has big ambitions. In 2010 Prime Minister Najib Razak announced the Economic Transformation Programme: a vast, enterprising plan with the overall goal of turning Malaysia into a high-income fully developed nation by 2020.

Perhaps spurred by the arrival of credible opposition in Malaysia for the first time in its modern history, Najib’s reforms go further than broad macroeconomic goals. They include political and social change as well as capital market development and a revamp of corporate governance among Malaysia’s companies. The prize, in economic terms, is a targeted growth rate of 7% annually over the next 30 years, and Malaysian citizens who are four times wealthier in real terms in 2020 than they were in 1990.

[Subhead] Malaysia and world turmoil

In the short term, though, Malaysians are looking at yet another sequence of ructions in the developed world and wondering how it will affect them. The good news: Asean nations are, in the main, in far stronger fiscal positions than most other parts of the world and therefore better equipped to deal with the problems; while Malaysia doesn’t have quite the almost debt-free fiscal position of some peers, it looks dramatically healthier than any western nation you could name. The bad news: Malaysia’s still a major exporter, and can’t be completely immune from problems elsewhere.

“Malaysia is a relatively low-volatility country,” says Dato’ Lee Kok Kwan, Deputy CEO of CIMB. “During downturns it tends to perform much better [than peers] because of that lower volatility. The GDP growth rate for 2011 may be below 5%, but it’s still decent growth.” And to look on the bright side, the flagging world economy has dampened concerns that had been rising about inflation in Malaysia, fuelled by commodity price rises.

Analysts are broadly positive about Malaysia’s outlook. “We rule out a double-dip in the Malaysian economy,” says Manokaran Mottain at AmInvestment Bank. “Robust levels of domestic demand, along with ample liquidity and the government’s ETP, will provide support at the tail end of this year.” He acknowledges, though, that the unstable global economy is certainly a negative for Malaysia, hitting both overall trade and external demand. He expects a 5% growth rate to be achieved, provided there is not a very large drop in crude oil prices or major delays to ETP projects. “As a net exporter of oil, Malaysia still relies heavily on crude oil in terms of generating income for the country,” he says.

Much like Indonesia, there has certainly been no shortage of foreign capital wanting to engage with Malaysia. “We are awash with liquidity,” says Lee. “We’re at the highest level of excess liquidity ever: the central bank needs to sterilize the system.” FDI has increased, after a period of stagnation around 2009. And portfolio flows, which were negative for about three years up to the end of 2009, have become consistently positive, attracted to Malaysia’s commodities and defensive characteristics. Foreign ownership of bonds, too, continues to rise. “The fundamentals are almost zero foreign currency debt, high FX reserves, and significant surpluses in the current account and trade account. The country, structurally, is in very good shape to absorb shocks.”

Internationally, there is a similar view. “Whenever regional markets take a dip, Malaysia outperforms every time,” says Chris Oh, analyst at UBS. “Our view remains that Malaysia will still outperform, although the reality is it will go down.” The Malaysian market, he says, has long been a story underpinned by two themes. “One, it is a relatively under-owned market: foreigners who had not been in Malaysia will come to put money here. Two, on a relative basis, Malaysia has a more stable source of funding from domestic investors.”

[Subhead] Power in banking

Malaysia’s relative strength is probably most clearly illustrated in its banking sector. 14 years on from the financial crisis, it is a powerful industry, with RM1.6 trillion in assets, healthy coverage ratios and low problems with loan impairment. “If you compare the banking sector today versus 1998, the system is significantly different, and stronger,” says Lee. “Delinquencies are low, profitability is decent, structurally it is in good shape, and the reliance on foreign currency is low. 2008 was a severe, multi-standard deviation downturn, but Malaysian banks went through that crisis completely unscathed. Nearly all remained profitable.”

With this has come the development of a relatively deep and liquid capital market. The development of Malaysia’s local currency bond market in particular has been a vital prop to the growth of the financial system and broader economy. Where once Malaysian enterprises would have to seek dollar funding, and incur foreign exchange risk, now a wide range of issuers can tap ringgit funds at durations out as far as 25 or 30 years in some cases. That is a crucial support for long-term project financing, among other things, and as major institutional investors like the Employee Provident Fund continue to gain scale and sophistication, there is more and more reason to be positive about bond market strength.

This is one of the main sources of discussion today. Malaysia’s institutions are in the process of introducing their second Capital Market Masterplan, a document designed to govern the development of the markets over the next 10 years, alongside a corporate governance blueprint being launched simultaneously.

These programs are discussed in more detail in the roundtables within this report, but in essence they aspire to promote capital formation, expand the efficiency and scope of intermediation, deepen liquidity, build capacity, improve governance and help Malaysia become a more international centre. “There’s going to be a lot of work ahead of us for everyone involved,” says Tan Sri Zarinah Anwar, chair of the Securities Commission, Malaysia’s market regulator. “In the first capital market masterplan [which governed 2001-10), it was relatively easy to do because it was a very nascent market. In today’s very uncertain conditions, with so many diverse inputs coming from so many sources, we need flexible terms on how we implement the new plan.” Zarinah says that Malaysia has a “very robust infrastructure”, but notes it “needs to build a corporate governance culture: internalising the spirit and substance of corporate governance.”

[Subhead] Islamic leader

One of the mainstays of the development of Malaysia’s financial services industry and capital markets has been the evolution of Islamic finance in the country, creating what is unarguably the most sophisticated and mature market for Islamic banking anywhere in the world. While most countries are still trying to build a domestic industry, that job is clearly done in Malaysia; for the last few years, the priority has instead been to make Kuala Lumpur a hub to attract foreign capital into Islamic finance. The Malaysia International Islamic Finance Centre is the centrepiece of this initiative, and has already succeeded in attracting some of the world’s biggest name in funds management, such as Aberdeen to Nomura.

“The government has supported the market greatly, and the infrastructure and regulatory environment are already there,” says Encik Mohd Effendi Abdullah, Head of Islamic Markets at AmInvestment Bank. “It’s easy to operate in that system. The next step is, with the government having liberalized the industry, we need to attract foreign investment here into Islamic banking. The government has given several international licences.” For some time, an Islamic megabank licence has been under discussion, although meeting its onerous terms – such as US$1 billion of paid-up capital – has apparently been problematic for bidders. A licence is apparently going to be awarded in the third quarter.

The sense of going international is pervasive at Bank Negara Malaysia, the central bank, on both the conventional and the Islamic side. “The world is highly dynamic,” says Dr Zeti Akhtar Aziz, Governor. “The environment, both domestic and international, is rapidly changing. There is therefore further work to be done.” Partly, this is about product development. “As Malaysia moves up in the value chain and transitions to new areas of economic activity, new kinds of financing will be required.” She refers to urbanization, and an ageing population, as other spurs. But Zeti’s main enthusiasm these days, beyond the domestic duties she has fulfilled for more than a decade, is the sense of Malaysia’s role in a regional and world community. “Going forward, we will become even more interdependent,” she says. “Emerging economies will become more interlinked. Malaysia will be very much part of this process. In fact, our financial institutions are having great presence in other parts of the world while our own financial system will be more liberalized. We will become increasingly connected, especially with other emerging economies.” One of Bank Negara’s priorities today is positioning Malaysia’s financial system to be ready for that, and to be in front of it, in keeping with the national ambition to be a more developed economy.

Again, Islamic finance tends to underline these themes. Dr Zeti has, for example, been at the forefront of the development of the International Islamic Liquidity Management Corp (IILM), a collaborative effort between 12 central banks and two Islamic multilaterals. IILM will issue short-term multi-currency Shariah-compliant liquidity instruments in order to boost cross-border flows between financial centres, and to preserve liquidity among Islamic markets and financial institutions. Zeti personally was a spearhead in this initiative; not coincidentally, IILM’s global headquarters is in Kuala Lumpur.

Going international is not straightforward, though; while Kuala Lumpur has attracted some world-class names to set up in Islamic fund management, for example, it’s less clear that they’ve brought any money with them. With every passing year more people in the country talk about wanting internationals to commit to bringing capital in, rather than just creating an avenue for it to leave Malaysia.

Malaysia’s stock market has been in a period of innovation for several years, trying new initiatives such as launching derivatives, facilitating listed sukuk, launching real estate investment trusts and fostering an Islamic commodities exchange. It’s a significant presence: Dato’ Tajuddin Atan, CEO of Bursa Malaysia, points out that as well as the achievements in the bond market, the stock market is home to more companies than any other in the Asean region. The market needs more secondary liquidity – Atan discusses this in the roundtable elsewhere in this report – and would like a greater chunk of more government-linked companies to be listed (which is a stated ambition of Khazanah, the state entity tasked with improving the performance of those GLCs). But generally, it stands comparison with Asean peers very well.

The stock market also plays into the Islamic theme, with the vast majority of stocks (by number more than by market capitalisation, since most banks are not Islamic) being Shariah-compliant.

[Subhead] New politics

Malaysia is due a general election next year, and it will represent an interesting and potentially divisive time for the country. For most of its history Malaysia has had no credible opposition; the strong showing of Anwar Ibrahim’s coalition in the last election was a major shake-up for the country, and it is widely felt that Prime Minister Najib’s reformist efforts have in large part been prompted by the messages of that election. Najib has recognised the need to end affirmative action policies which have supported Bumiputras, or ethnic Malays, but which have arguably reduced competitiveness and ultimately caused the country to suffer. Ending these policies, while keeping the multi-racial country in some unity, is a major challenge, and the election will be something of a referendum on how he is doing. “There’s very little doubt that the Prime Minister is extremely committed to changing things, but with Malaysia it is a question of delivery and implementation. History suggests we should be cautious in that regard,” says Robert Prior-Wandesforde, head of India and South-east Asia economics at Credit Suisse.

If that test is passed, though, Malaysia otherwise exhibits long-term thinking, and not just because of Najib’s 2020 vision. A great deal of long term infrastructure is approaching the development phase in Malaysia, providing a spur to the economy if the external situation deteriorates. Between October 2010 and June 2011, six rounds of projects – 87 initiatives within 65 projects (out of 131 identified in an initial roadmap document) – were announced, expected to bring in RM170 billion in investment and 362,000 jobs, according to UBS. They are wide ranging: the first round included an Asia e-University, a six-star St Regis hotel in Kuala Lumpur, a foundry plant in the Kulim High-Tech Park, a new low-cost carrier terminal at the airport in Sepang, and a bio-oil fuel plant in Sabah, for example. Numerous others have been announced since from petroleum and gas to education, healthcare, data, technology and mass transit.

Malaysia has a long track-record of wildly ambitious plans and has not always delivered on them. For this series, a group called the Performance Management and Delivery Unit (PEMANDU) is tasked with enabling the projects. “Investors have been sceptical about the pace of ETP implementation as BN [the ruling party]’s other government initiatives in the past are perceived to have disappointed,” says Oh. “The roll-out pace suggests a greater urgency on the part of PEMANDU and the government to roll out the private sector initiatives that will help recharge the domestic economy.” Oh says, though, that investors are really waiting for the roll out of the biggest infrastructure spending projects, such as the MRT (mass rail transit), high speed rail and Klang river revitalisation. One knock-on effect of the initiatives may be warmer relationships between Singapore and Malaysia: one of the biggest projects underway in Malaysia is in Iskander, just across the strait from Singapore. As part of this project, a one-stop customs immigration and quarantine terminal should be built at each of the two land crossings between Singapore and Malaysia, which should halve the time it takes to cross the border.

Not everyone is convinced that Malaysia can do quite what Najib asks in the next 10 years. “That would be a challenging task,” says Taimur Baig, a chief economist at Deutsche Bank. “The country is endowed with rich natural resources and is unburdened by its relatively small population, but in terms of graduating to that next level where you can unambiguously call it an economic powerhouse, the jury is very much still out.” But even if it doesn’t achieve as highly as it aims, there are positive developments underway in Malaysia; at a policy and a regulatory level, many of the ambitions look like international best practice. The big question for the country will be whether those big ideas can trickle down into thorough, effective implementation.

Note: this was a sponsored report and not editorially independent, but is included here as a resource

SECTION 1 – interview with Alisher Ali, Chairman, Eurasia Capital

EM: Set the scene: what is the opportunity in Mongolia today?

AA: Mongolia has so many things going for it. It is physically located next to China, which has become the de facto engine of growth in the global economy. It has been blessed with natural resources. And you have the government and political system: the country is a true democracy, so as a result there is a good chance of the country being able to manage effectively not only its mineral wealth but the economic growth that will come with the development of those mineral resources.

So we have been early believers in Mongolia. We opened our office in 2008 in the same week as the Lehman disaster, and even though the timing may not have been perfect, we are still proud of the fact that we saw the opportunity for Mongolia’s growth potential and investment opportunities much earlier than many others. We built the infrastructure, we focused on building relationships with government entities, and with the corporate sector and international investors. Now we have the largest investment bank in the country, well positioned to capitalize on opportunities. The mission for Eurasia Capital is to provide a bridge between Mongolia and the international markets: to give international investors access to Mongolia growth, and to facilitate the entrance of Mongolian companies and banks to raise capital internationally.

EM: What shifts have you seen in the business climate since 2008?

I’ve appeared at least 20 times in studios for interviews with Bloomberg, CNBC, Al Jazeera and others to talk about Mongolia. And I always get the question: why haven’t we heard about Mongolia before, with its massive resources? The reason was that for years, the Mongolian government, parliament and public in general have had intense debates about how to develop those resources. It took a long time and was frustrating for foreign investors trying to bring big mining projects into production. The big example was Ivanhoe Mines, which discovered the Oyu Tolgoi deposit a decade ago yet only signed the landmark agreement allowing it to develop it in October 2009. But when we set up here there was no doubt in our mind that the government would decide to develop its strategic projects and large mines. The question was when.

The 2008 crisis hit Mongolia very hard: by the first quarter of 2009 the government was running out of money, foreign exchange reserves were depleted and investors were fleeing. It led to a bailout with support from the IMF and a number of bilateral agreements. But that crisis, in my view, had a silver lining, because it helped the government and public to focus on the key need to develop mineral resources. It became clear they had no luxury to wait and debate further. So we were all relieved when, on October 6 2009, they finally came to agreement with Ivanhoe and Rio Tinto. That was a turning point. It was a big sign: this country is ready for business. It was a crucial milestone and the catalyst for a change in investment sentiment towards Mongolia. The country has never looked back since then.

EM: Where are the opportunities in investment? Everyone knows about the mining, but how about the knock-on effects in the economy?

One of the main reasons for us spotting the opportunity in Mongolia early on was our early experience in Central Asia, especially Kazakhstan. Our time in frontier markets and Eurasian countries allowed me to see the parallels: that once you have momentum, and the development of world class resources, you are going to see knock-on effects. Yes, mining is going to be the largest and most important sector for Mongolia, but there will be other sectors and the opportunity is not going to be confined only to mining.

In January 2010 we produced a report called Mongolia Outlook 2010 – a historical document in the development of our firm. It was positive and optimistic about Mongolia at a time when the turnaround wasn’t obvious, but we said that Mongolia was going to go through a multi-year bull market: that there would be growth in GDP and in FDI. Beyond that macro vision, we made two important calls which were – this is important – executable investment recommendations for international investors. The first was that the Mongolian tugrik was going to appreciate and influence FDI. There is no derivative or spot market, so investors had to initiate bank deposits with Mongolian banks, which at that time were offering 16% in tugrik local currency deposits. Those investors who followed our advice made over 25% return after subtracting all costs, a combination of high deposit rates and the appreciation of the currency.

The second important call was that we recommended investors start investing in local equities. In January 2010, this was considered an optimistic call: the local market collapsed in 2008 and was also negative in 2009 in dollar terms. But we were confident the worst was behind us and estimated the market would gain 70% that year. In fact, it went up almost double that amount. In 2010 the tugrik was the second best performing currency globally, and the stock market was the best in the world.

From the beginning I have trained our research team to think in a way so as to come up with actionable recommendations. We look at opportunities in the currency markets, in fixed income, in public equities – domestic and international – in private equity, infrastructure and property, then tailor recommendations around them. We have built indices allowing investors to track performance of Mongolia-related companies listed in countries around the world.

EM: What funds and businesses have you built to do this?

Eurasia Capital Management is a Central Asian investment and fund management business. Silk Road Management, which started in 2008 as a wealth management advisory firm, is now being transformed into a Mongolia-focused investment management firm. We aim to build the largest such institution in the country. Our first product was the first ever venture capital and private equity fund focused on Mongolia, the Mongolia Human Capital Fund, which raised US$30 million from investors. The idea of this fund is to focus on non-resource sectors where human capital is going to be crucial in the success of the business: areas such as media, healthcare, education, professional services industries and information technology. These are industries in their infancy stage that are going to benefit from strong economic growth.

We have plans to launch funds across different asset classes. We intend to launch a publicly-listed Mongolia-dedicated fund. And we have teamed up with a Korean group, Goran Capital Partners, to launch a Mongolia-Korea resources fund and to tap the interest of Korean institutional investors looking for investments in Mongolia. We tailor investment products around the interests of investors.

Eurasia Capital itself has been recognized by several international publications; this year it was named the best investment bank in Mongolia by Euromoney magazine.

SECTION 2 – interview with Ganhuyang Chuluun Hutagt, Vice Minister of Finance, Mongolia

Euromoney: At a time when the rest of the world is struggling, economic projections for Mongolia are extremely positive. Is the outlook realistic?

Minister: The outlook will be as good as the demand for what we are producing. In recent years what we possess in terms of minerals has attracted a lot of investor interest, based on global demand for these commodities: copper, uranium, gold, coal, iron. There will be demand for our products despite what happens with Chinese inflation, the American budget and debt ceiling, and European defaults.

EM: What is a realistic expectation for GDP growth?

Minister: It will depend on what’s going to happen in the US and how it will affect production in China, and what appetite China will have for Mongolian commodities. I don’t think the Mongolian government can become too arrogant: I advocate we watch out for negative trends, and manage risks. Consecutive crises have shown that they do have an impact on the Mongolian economy.

Despite that, the outlook that is being projected by the international community, our development partners and ourselves is pretty positive. We will have tremendous growth in our economy based on mining and the building of physical infrastructure to make our products more available to international markets: border ports, railways, roads, airports. We are going to need to build new cities in the new mining areas, currently mostly in the Gobi. Most of the business will happen around the mines and in the value chain. We need new power plants, new houses, and even here [Ulaanbaatar] with growing incomes we have a minimum of 200,000 people who will need houses and apartments. You don’t need too much imagination to think of the investments behind these numbers in terms of water, sewage, energy, roads, schools and hospitals. It entails huge business opportunities, but mining can support it only through steady and growing cashflows.

What will be the role of the state in all this investment?

The role of the state is going to not diminish in the near future. At this stage of development the government needs to take a leading role, creating not only the environment and good opportunities for foreign investors, but also intervening in managing the economy, supporting our traditional industries such as agriculture, as we did today [in an issue of bonds to support agricultural producers and SMEs]. We need to help our industries in this tough environment with foreign competitors coming in and cheap imports, aggravated by the impact of the strong tugrik. We will need to continue direct involvement such as the development bank, to build public services. This year we budgeted MNT627 billion for capital investments, and the number will go above 1 trillion this year. Altogether in the past 20 years put together, the capital expenditures were only MNT1.6 trillion; in two years we are doing what was done in 20.

What will be the role of the private sector in this?

The private sector has plenty on its plate already. Almost all of the banking sector is in private hands: out of 70,000 registered companies, only 100 are state-owned, although they include the champions.

How do you rate ease of doing business in Mongolia?

We have fared pretty well. Mongolia is one of the friendlier environments in which to do business. Because we are latecomers we can implement some systems immediately: for example we rank one of the top countries in terms of extractive industries transparency. If you compare us with some Eastern European countries, we are pretty similar; if you compare us to former Soviet Republics, we are way better.

And what still needs to be done?

Last year the government announced the year of Business Environmental Enabling Reform, or BEER. The results of it are yet to be fully reflected, but the government made an important decision to continue with reform here in 2011.

Can you explain the mandate of the new Development Bank? For example will it fund small business as well as long-term infrastructure?

It’s not for small business, it is to support large national projects and to help the government invest in energy, infrastructure and to help us utilize our mines more efficiently. It is specifically stated in the law what sort of projects will be funded, and they will include housing. The bank is operational – it has not yet funded projects, but we have given them the guarantee to issue MNT800 billion of bonds. They are working hard to issue those bonds, get the funding and start financing projects.

Are you considering a sovereign wealth fund?

We have set up a stabilization fund, which by the end of the year will have MNT180 billion. When it hits 5% of GDP we will start investing it actively; in the meantime it’s in cash. I will do my utmost to make sure the government makes the right decisions and does not have incentives to spend it all right now. It is a big responsibility for our future.

What are its sources of funding?

Any income that is in excess of certain fixed prices for coal and copper. We also have the Human Development Fund; we put revenues from the mines in that fund and will start investing this money outside of the country to protect our economy and insulate it from foreign currencies, as well as preserving wealth to share with future generations.

You said Mongolia is dependent on demand for commodities. What is being done to diversify the economy away from such reliance on mining?

Traditionally Mongolia has been an agrarian economy: livestock and anything related to it like meat, pelt, felt, wool and cashmere. They are all industries of high potential. Food security is a big concern for us; Mongolia has become self-sufficient in terms of wheat, which is a success. We could focus on and develop other industries: our increasingly educated workforce will be able to drive industries such as tourism and financial services to become major contributors to the economy.

The financial services industry had a rough time in 2009. How is its health today?

Over 95% of the financial industry is commercial banks. The system is doing well: it is growing, NPLs are decreasing on the back of the economic boom, and the stock market has consistently outperformed most others. But we start from a low base and there is a need for reforms. We need to approve the draft law on securities – hopefully this year – and reform in the pensions system will need to happen. We need to overhaul our insurance sector. And with this we will create local institutional investors who will help us create robust, dynamically growing local stock markets.

The world is watching the forthcoming Erdenes Tavan Tolgoi IPO. How transformative will it be for Mongolian markets?

The current capitalization of the local stock exchange is $2 billion; we are talking about $10 billion in an IPO of one company. That’s the magnitude, and if we decide to float some percentage locally it will have a huge impact. Right now 10% is owned by the Mongolian people and another 10% will be sold to Mongolia-based companies. This will provide a strong incentive for international investors to come in early and take part in the trading of those securities.

What is the idea behind giving shares in it to every Mongolian citizen?

It gives people a feeling that they are benefiting from the big national treasure directly. It’s a good lesson to all Mongolian citizens in terms of managing capital, really understanding what a stock market is and how it works, and what being a shareholder entails. It brings accountability to the person, whereas if the state was to manage the wealth for our own citizens, it is more indirect. Tavan Tolgoi will be a better governed organization because it is owned by individuals, not just the faceless state.

With the US and Europe in turmoil, what is your resilience to external shocks?

I don’t think we have been particularly resilient at any time in history. We depend on our buyers; we have one rail line. Economically we are dependent on two neighbours: we import all of our gas from Russia, we export most of our coal to China.

What message do you want to give to foreign investors about Mongolia?

It makes sense to get exposed to Mongolia. It is the top opportunity globally in terms of our mineral resources. We possess almost all the elements in the periodic table. We are tripling coal exports this year. The ambition with our partnership with the London Stock Exchange is that one day Asian investors can trade on the Mongolian exchange with their stocks listed in London, on the same platform, the same systems.

Cashflows are exploding, the budget is in surplus and we have record high cash levels in our treasury. We will one day make a decision on sovereign bonds: we are issuing local currency and giving a very good return to our investors. Debt to GDP is just 17%, so we can borrow, and I think we want to borrow to make investments and increase the capacity of the economy.

SECTION 3: ECONOMY

Economy

Mongolia has experienced rapid economic growth since the global financial crisis. Eurasia Capital, an Ulaanbaatar-headquartered investment bank, estimates that Mongolia became the world’s second fastest growing economy in 2010 in terms of US$ GDP growth rate at current prices, with a 44% year-on-year increase, driven by the 12.9% appreciation of the Mongolian tugrik (MNT), the national currency, against the dollar over that period. This means that Mongolia outperformed the BRIC emerging economies as well as all other leading frontier and high-growth economies globally. Fueled by investment in the mining sector and a significant increase in exports, real GDP growth reached 6.1% last year, according to official data, versus 2.7% in developed and 7.1% in emerging and developing economies. And it is getting better still: in the first half 2011 it was up 14.3%, or in nominal terms 29.1%. The second quarter, with 17.3% year on year growth, was the fastest expansion since 2005.

Significant investments and demand from China, the major market for Mongolian products, have allowed Mongolia to double coal output to more than 25Mt in 2010, up from 13Mt a year earlier. Coal exports increased 2.9 times in 2010, overtaking copper for the first time, and in 1H2011 Mongolia overtook flood-hit Australia as the largest coal exporter to China. Crude oil production rose 17% to 2.2MMbbl, and iron ore output more than doubled to over 3.2Mt. Major manufacturing industries, such as food and beverages, grew 24% in 2010.

Mongolian foreign trade surpassed its historical high in 2010. Trade turnover surged 53.5% year-on-year to US$6.2bn. 2010 was a record year for exports, reaching US$2.9 billion, with a 53.8% annual expansion driven primarily by Chinese demand (it bought 85% of Mongolia’s exports), commodity price increases and volume expansion. Record level exports have been the primary driver of Mongolia’s impressive economic growth. And they are getting better still: Mineral exports jumped 72% year-on-year in the first half of 2011, with coal up 135% and iron ore exports 122%.

Increases in international prices for Mongolia’s major export commodities boosted already substantial export earnings. The price of coal, the largest 2010 export earner for Mongolia, rose more than 14% over 2010, with copper, gold, iron ore and crude oil gaining 28%, 26%, 52% and 8%, respectively.

Eurasia Capital expects Mongolian foreign trade to grow at an even faster rate in 2011. A positive outlook on commodity prices, increased output from existing operations, the launching of new mines, and strong growth prospects in major trading partner markets – particularly resource-hungry China – should fuel increased exports from Mongolia. Eurasia now believes that Mongolian economic growth should beat its original projection of 10% GDP growth for 2011.

Foreign direct investment (FDI), which was considered frozen until as recently as 2008, hit a record high of US$1.6bn in 2010, according to official data, further underpinning the economy. The mining sector was the major destination for FDI.

China was for many years the only major FDI player into Mongolia, accounting for US$2.5 billion between 1990 and 2010. That is changing. Canadian FDI, the second biggest in Mongolia, increased more than 140 times in 2010 to US$147.8 million. Investment from Hong Kong is also climbing.

By sector, geology and mining have attracted US$3.15bn in FDI – 65.3% of the total – since 1990. The majority of this investment has come since 2008, when the mining industry began to entice resources giants around the world. Hong Kong and Canada’s FDI focus is mainly on mining and related activities, while South Korean and Japanese investments have targeted trade and service, engineering construction, and financial sectors. The biggest investor, China, has followed varied targets covering almost every sector. Infrastructure is likely to attract more FDI in coming years, with 1100km of Mongolian railways planned, for example.

Remarkably, Mongolia is thriving with limited inflation. Prices rose around 13% last year, and there were concerns from the World Bank that an expenditure plan – including major increases in salaries – could push inflation over the 25% mark. Yet according to N Zoljargal, deputy governor of Bank of Mongolia, the central bank, inflation has instead declined to around 6.5% year on year in June. In any case, he says, Mongolia is an exceptional case when it comes to considering inflation. “Mongolia has for so long been under-invested,” he says. “So when you see a flow of new cash wealth, how much of it do you sterilize and how much do you let trickle into the economy? That is the challenge we faced in 2010, we are facing it now and we will probably live like this for the next few decades.” Last year the bank sterilized around 30% of net inflows in foreign exchange, feeling that it was short-term and speculative; this year, it has sterilized far less.  “Yes inflation is a worry, with banks over-extending credit in the good days; people argue the economy is getting too hot,” he says. “I say we are nowhere near to that: we are just warming up. Everybody has their own temperature.”

Indeed, some argue inflation should actually be higher, and monetary policy looser. “Economists say that if there is inflation, just take out money from the economy,” says Sambuu Demberel, Chairman and CEO of the Mongolian National Chamber of Commerce & Industry, and a key economic advisor to Mongolia’s president and prime minister. “It’s nonsense. We need money in circulation: the more money the better. People in real sectors want money to create business and profit, but the majority of SMEs don’t have access to lending. We need decisive action to change our monetary environment to drive the economy.”

Rich mineral resources

Mongolia hosts world-class mining deposits, including estimated coal resources of over 160Bt, ranking fourth in the world after the USA, Russia and China. Erdenes Tavan Tolgoi, one of the world’s largest untapped coking coal mines, is a vivid example of a world class resource: it is estimated to contain 6.4Bt of thermal and coking coal worth approximately US$390bn. The Government of Mongolia is in the process of finalizing the deal with international bidders.

Another world class mine is Oyu Tolgoi, which is one of the world’s largest undeveloped copper-gold deposits, rivaling Escondida and Grasberg. Oyu Tolgoi contains approximately 37Mt of copper and 1,300 tonnes of gold, with a project cost of US$5.9bn. Based on conservative calculations, the monetary value of the Oyu Tolgoi project is approximately US$252bn. It may become as much as US$424bn if measured, indicated and inferred resources are taken into account.

Balanced Political Environment

Mongolia is to hold parliamentary elections in the summer of 2012. The newly elected parliament will oversee the implementation of major mining, infrastructure and industrialization projects, which will define Mongolian politics, economy and society for years to come.

The parliamentary election in 2008 saw a brief period of turmoil, but the formation of a coalition government between the two main political parties, the Mongolia People’s Party (MPP) and the Democratic Party (DP), has resulted in a stable functioning government. Domestically, the coalition government has focused on expanding investments in Mongolia’s vast natural resource wealth, diversifying the economy, job creation and improving living standards. Internationally, the government has maintained good relations with Mongolia’s traditional partners, Russia and China, as well as expanding relations with countries beyond its traditional partners.

In June 2011, Mongolia and China agreed to upgrade bilateral ties to a strategic partnership level and to bolster economic ties. The agreement is expected to bring more Chinese investments and financial support into resource and non-resource sectors and infrastructure development. Mongolia also enjoys strategic partnership status with Russia. In terms of “third neighbor” relations, Mongolia has held high-level meetings with Japan, the USA, Korea and India, among others: it expects to sign an Economic Partnership Agreement, roughly equal to a free trade agreement, with Japan in 2012. During the visit of Mongolian President Tsakhia Elbegdorj to the USA in June 2011, the Obama Administration stated that it was committed to developing a broader, deeper and more strategic relationship with Mongolia, including expanded commercial, political and cultural ties. India is actively pursuing cooperation with Mongolia in nuclear energy and mining.

With upcoming elections, the coalition government is eager to start the Tavan Tolgoi coking coal project in partnership with major international mining players. Large mining deals, infrastructure development and poverty reduction will remain recurring themes of parliamentary elections in 2012. There is a wide political consensus among major political parties about the development needs of Mongolia. Therefore, regardless of the election results, the country should be expected to stay on its current course of resource-driven growth.

SECTION 4: CAPITAL MARKETS

Public equities: Best Performing Market Globally

Despite its relative tiny size in global market terms, the Mongolian Stock Exchange (MSE) is increasingly gaining importance for local and international investors intending to gain exposure to the Mongolian market. Naturally, most of the market is resource-related.

Mongolia has so far this year maintained its title as the world’s best performing equity market. Having gained 138.4% (173.7% in US$ terms) last year, the MSE Top-20 Index has continued its global outperformance in 2011 at +43.8% at the time of writing. By comparison, the MSCI Frontier index gained 16.6% in 2010 and is down 11.6% so far in 2011; the MSCI EM Asia index gained 12.9% in 2010 and is down 0.7% year to date; and the Shanghai Composite Index fell 14.3% and 5% respectively.

After the Mongolian Stock Exchange benchmark surged 123.3% within the first two months of the year, hitting 32,954.97 on February 25, it went through a significant correction, losing 43.8% by the end of May. This volatility is a function of speculation, low liquidity, a small free float in listed companies, and unrealistic and uninformed investor expectations. Improved investor sentiment driven by the expected launch of Tavan Tolgoi coal mining operations and proposed IPO, the strategic partnership agreement between the MSE and the London Stock Exchange (see box), and a strong outlook for commodities, contributed to the surge and underpin further growth.

The MSE market capitalization grew 2.5 times in 2010, passing the landmark US$1bn in November 2010  and reaching US$1.7 billion by July 2011. The top five stocks (Coal groups Baganuur, Tavan Tolgoi, Shivee Ovoo and Sharyn Gol, and beverage group APU) contributed 82.1% of this growth. The combination of expected double-digit economic growth, and the experience of other commodity-linked emerging markets, suggests that the momentum has just begun: Kazakhstan Stock Exchange’s market capitalization grew 100-fold to US$100 billion between 2000 and 2008, while the Qatar Stock Exchange grew 31 times from 1997 to 2007 to US$95 billion. Stock market penetration – total market cap representing just 20% of GDP – is relatively low compared to other emerging and even frontier markets, underlining the growth potential.

The MSE, with its huge gains, is still challenged by companies with small free floats and low trading volume. Average daily trading volumes were US$234,000 from January to February 25, and US$33,000 from then to May 30. It is likely that the lack of liquidity will remain a concern in the short term.

The Mongolian government has approved a list of state-owned enterprises that are slated for privatization starting from 2011. These SOEs are in mining, mineral processing, construction materials, power distribution and generation, telecommunications and airline industries. Many will pursue a listing locally on the MSE to serve as a vehicle for privatization and then seek additional listings in regional or international markets to raise capital for expansion and modernization.

The leader among these expected privatizations is the highly anticipated IPO of Erdenes Tavan Tolgoi, expected early next year, and potentially worth over US$10 billion. This government-owned company holds the licence for Tavan Tolgoi, the world’s largest undeveloped coking coal mine. The government has distributed 10% of the company’s shares to Mongolian citizens, with a lock-up period that has not yet been decided, and plans to sell another 10% to Mongolian companies and offer 30% on a combination of domestic and international markets. It should substantially boost MSE market capitalization and liquidity while also enfranchising citizens in the capital markets. “The entire population of Mongolia will become shareholders,” says Munkhtushig Dul, Deputy Director and head of finance and logistics at the MSE. “When that happens, new brokerages will have to develop, as will the capital markets themselves.”

“There are several separate pipelines of new listings,” he adds. “First there are the big strategic mineral deposits, which by law should have no less than 10% listed on the MSE. Then there are many companies with huge assets in Mongolia who are not listed here: we are hoping to repatriate them to create more involvement in the Mongolian markets. And then there are local privately held companies: cell phone companies, food companies, very strong businesses that will need more money.”

There have been no new IPOs on the MSE in the last two years, but it is expected this will change dramatically in the coming years as a number of leading domestic private companies are expected to launch IPOs first internationally and later on MSE. Mongolian private business groups that are expected to launch IPOs at a group or subsidiary level include MCS Holding, Petrovis Corp, Bodi Group, Newcom Group and Monnis Group. New IPOs, whether from state or private sources, should ease liquidity concerns and therefore volatility.

Many Mongolian companies – now over 20 – have listed overseas, often instead of domestically, in locations including Toronto, London, Hong Kong and Australia. But Mongolian authorities do not see this as capital fleeing the country. “I don’t see it as a bad sign,” says Bayarsaikhan D, chairman of the Financial Regulatory Commission of Mongolia. “Companies are using the opportunity to raise funding in large amounts.” The hope is that companies that have listed overseas will come to list more of their stock domestically as the Mongolian market gains in scale and sophistication.

Eurasia Capital believes the outlook for Mongolian equities in the short to long term is very positive. This year, it expects the MSE to retain its title among the top three equity markets, if not the best.

BOX: The LSE partnership

Mongolia took a historically important step to develop its capital markets when MSE and London Stock Exchange (LSE) signed the landmark Master Service Agreement to manage the MSE on April 7 2011.

Through this agreement the MSE will be modernized with the LSE’s support over the next three years. LSE will introduce an integrated securities trading system, create an effective legal and regulatory environment, and will bring infrastructure, technology and human resources capability in line with international standards. LSE has appointed a management team at the MSE to oversee its development and privatization, and has brought in Millennium IT, the leading global exchange technology provider, to assist with trading, surveillance and post-trading infrastructure.

The partnership should bring modern market rules, procedures and operations, as well as broadening tradable asset classes to derivatives and ETFs. The ultimate aim is for MSE to become a regional resources hub for international investors. In future it may even attract resources listings from neighbouring countries.

“The main purpose of the agreement is to bring the stock exchange to international standards,” says Bayarsaikhan. “A lot of work has been done so far on the legal framework, on IT, and in corporate governance and transparency. The future is bright and all the professional players in the market are working hard.”

In Eurasia Capital’s view, this partnership should accelerate the process of MSE becoming a viable source of capital for Mongolian companies and an efficient channel for wealth distribution from mineral resources among the Mongolian population.

Private equity

Flurry of M&A Activity

In recent years Mongolia has seen a flurry of M&A activity, particularly in the resources sector. M&A volumes doubled from 2009 to 2010 to a record level of over US$1bn, most of it in mining, and chiefly coal; international interest has grown dramatically since the investment agreement on the Oyu Tolgoi (OT) mine was signed in late 2009. The origins of acquiring companies were diverse but Hong Kong and Australia led the charge: Hong Kong was involved in US$473mn worth of M&A deals through injections of resource assets into existing publicly listed companies.  Australian companies have not only bought assets but held IPOs.

This year M&A activity is more vibrant still. Total deal value for the first half of 2011 increased 45% year on year to US$636mn, and had reached US$690mn by July 27; Eurasia Capital expects another record year. Close to 50% of the announced deals were reached in participation with Australian companies, suggesting Mongolia will continue to be on the radar of cash-rich mining companies that have strengthened their cash positions through improved operational efficiencies and high commodity prices. The Erdenes Tavan Tolgoi deal will impact this year’s numbers: some bankers estimate the overall worth of the asset at US$15-20bn.

Fixed income: Bond Market Kicking off

Until very recently, not many people knew of the existence of the bond market in Mongolia. But it is becoming more active. The market has been waiting for the right time and conditions while building knowledge, experience, and infrastructure. News about bond issues is not on-and-off anymore; the market is underway.

The Mongolian Government is being cautious in approving new issues, knowing the damage any default would cause to the reputation and credit rating of the market. Government issues have focused on national benefit: for example, in September 2010 it issued a MNT60bn bond, half of which was offered to the public, to fund the “4000 Apartments for Public Servants” project. So far, offers worth MNT69.6bn out of a planned MNT72bn have been launched for project funding.

Backed by confidence in Mongolia’s expected growth, the government is planning another offering to support the cashmere and wool sectors, and small-to-medium enterprises.

Through the Development Bank, established in 2010, big industrial, infrastructure and mining projects will be funded and the government will issue MNT800bn bonds for necessary funding as new projects come up. The Bank also supports those projects by providing guarantees to the loans. Both domestic and international investors can participate.

Corporate bonds will become an interesting area for investors. For most of the companies who intend to tap the debt markets, it is a testing period: they need models to follow, but there have been only 12 issues since 2001. But by waiting, they risk losing out to competitors. Just Agro has made the first move this year to attract bond investors with a MNT30bn bond offering. If successful, other companies may follow.

Trade and Development Bank (TDB) is the only bank in Mongolia to tap the international bond markets so far, with a US$75mn deal in 2009 (successfully repaid), and two new bonds in 2010. Other banks, Khan Bank and XacBank, have followed suit and announced smaller debt issues. But bank deposits, offering more than 11% returns in MNT, remain favoured by many local investors.

BOX: Currency

After an impressive 12.9% appreciation in 2010, the Mongolia tugrik (MNT) has been relatively volatile this year, appreciating 1.6% year to date by August 4. Eurasia Capital believes it will remain a strong currency to hold. This confidence comes from expected capital flows to the large projects in the mining industry and infrastructure: FDI was US$1.5bn in 2010. The revenues from the two mega-projects of Tavan Tolgoi (coal) and Oyu Tolgoi (copper and gold), both under development, will consolidate the MNT for many years to come. Mongolia’s exports of mineral resources will dramatically increase when the necessary infrastructure, including the rail lines, become ready.

The currency is comparable to other resource driven currencies, such as the Australian dollar or Brazilian Real, which have experienced large appreciation. The MNT has emerged as a new resource currency and is increasingly correlated to the export commodities. It represents an excellent carry trade opportunity.

SECTION 5: PROPERTY, INFRASTRUCTURE AND FINANCIAL SERVICES

Property

As mining has brought wealth to Mongolia, the property market has experienced speculation and rapid expansion. After the highest ever price for a luxury residential apartment was registered at US$8000/sqm in the new Blue Sky Tower, an April Fool’s joke by a local broker about Donald Trump’s plans to build 120-storey “Trump Tower” for US$1bn in the center of Ulaanbaatar was picked up and distributed by some respected online sources.

Although Mr. Trump is not planning to build a tower in the capital city of Mongolia, the property market is poised to benefit from the country’s mining-led economic growth. Already, the residential, office, retail and hospitality property segments have consistently grown over the last few years, with supply struggling to meet demand. The market in Ulaanbaatar stabilized in 2010 following the turmoil of 2008-2009, and has benefited from increased inflows of foreign capital. Industry experts expect a period of accelerated growth.

Residential property prices in Ulaanbaatar have nearly quadrupled since 2002, although the global financial crisis corrected the steep market growth up to 3Q2008. The past year’s strong economic growth, national currency appreciation and speculative inflows of foreign capital for Mongolia have driven residential property prices up nearly 20% in the capital; the average residential property prices in 2010 was around US$900 per square meter, although much of that can be attributed to the 12.9% MNT appreciation.

Although foreign investors have an impact, the growing number of wealthy Mongolians is also significant, boosted by successful capital raising by mining companies. Fundamental demand for housing in Ulaanbaatar and nationwide will be a key driver of near-term growth. Since 2005, the population of Ulaanbaatar has increased 22% to 1.16 million, which represents over 40% of the total Mongolian population. More than half of Ulaanbaatar’s inhabitants live in traditional “ger” settlements, whilst the others live in old buildings that are deteriorating fast. Facing the need to accommodate its population, the Mongolian Government has initiated several measures that stipulate construction of mid-budget accommodation through government support. These initiatives include programmes such as the “100,000 Apartments Project” which aims to alleviate the strains on infrastructure services, social services and pollution.

Despite the newfound wealth, more than one third of the Mongolian population lives below the poverty line. Increasing prices might deter low income earners from buying property. However, 2010 was marked by a revival in the mortgage market as major Mongolian banks have started providing loans to the population, albeit at high rates – currently from 11% to 28.8%, with required downpayments as high as 50% (but more commonly 30% and sometimes 10% if the construction company takes on some of the risk).

Ulaanbaatar is again crowded with construction cranes, just as before the 2008 crisis. Maybe Mr Trump will really build a Trump Tower in Ulaanbaatar during the next few years.

Infrastructure

Mongolia’s mining boom may stutter if the country cannot solve its infrastructure problems. Infrastructure is regularly listed among the major inhibitors of Mongolian growth, and vast investment is needed, probably in excess of the current GDP of the country.

The Concession Law, adopted in 2010, sets the legal framework for private sector participation in the development of infrastructure projects. The Mongolian government has approved a list of 121 projects in road and railroad construction, power generation and transmission, industrial development, urban development, telecommunications, education and healthcare, inviting private sector investments. Both foreign and domestic companies can participate in the projects individually or jointly. Concessions can be gained via open tender, competitive bidding or direct contract.

The development and expansion of railroad infrastructure is one of the most pressing issues in the Mongolian economy. To support its mining sector, Mongolia is currently focusing on extending its railroads to major mining areas within the country, as well as on opening trade corridors and export routes to neighbouring countries. In the next five to ten years, the country is planning to build about 5,700km of new railroads, providing easier access to Mongolian minerals and exports to neighbouring and international markets. The railroads will be constructed in three stages. The first stage, which has already started, envisages construction of a new 1,100km main rail line from the Tavan Tolgoi coal deposit to Choibalsan, the town connected to Russia by the existing railroad. The new main line will intersect the existing Trans-Mongolian Railway in Sainshand station in Gobi region. Mongolian Railways was selected to implement the project. The project is in feasibility study stage. It is expected to be completed in the next 4-5 years.

In the near future, major infrastructure projects in Mongolia may offer numerous investment opportunities. Construction of new railroads would create opportunities for investors, construction and operating companies. A new US$10 billion development, the Sainshand Industrial Complex near the Chinese border, will be a hub to process Mongolian raw materials for export, and should spur investor interest. A number of other government-priority projects will be open for private bidding in the coming year.

Financial services

Mongolia’s banking industry endured a difficult financial crisis in which two banks failed. But there is a sense that it has returned to health on the back of the growing economy. N Zoljargal, Deputy Governor of The Bank of Mongolia, the central bank, says the banking system has “never been better than it is today. It is very healthy.” Those banks that survived the crisis are now strong. “During the crisis our banks were well managed, beefed up their liquidity, and since then have seen high growth in assets.” Non-performing loans, which at one stage topped 20%, are now around the 6% mark, he says, and “coming down dramatically” as previously troubled businesses in construction and other areas pay back their loans. As Zoljargal says: “It the economy is growing 10%, it’s hard to produce NPLs. You have to be doing something very wrong.”

Some local banks with distinct strategies look healthier still. Xac Bank’s NPLs peaked around 7% and today stand at 1.7%, according to CEO Bat-Ochir Dugersuren, because its portfolios are well diversified. Xac Bank is an interesting study: founded in 1998 under a UNDP program, it is fundamentally a microfinance institution, with a governance and shareholder structure unique in Mongolia (EBRD and IFC are stakeholders, and the board is independent). Today, SMEs are very much a focus for expansion. “We have big corporates in this country but I don’t believe they are going to expand and carry the country’s growth forward,” says Bat-Ochir. “We need a broad base of promising SMEs to allow double-digit growth to take place in our economy.” Xac Bank, like most, gets around 90% of its income from interest, and accepts that growth in other business lines will have to take place to diversify earnings.

Another example of an unusual strategy is Chinggis Khaan Bank. Chairman Sergey Gromov – a pioneer investor in Mongolia whose holdings also including the leading brewery APU and the insurer Mongol Daatgal, discussed below – says the bank focuses on areas like agriculture and building materials, but not mining. “Agriculture has huge potential,” he says, pointing to the sheer scale of land and the as yet limited use of fertilizer or other techniques.

International players such as ING and Standard Chartered have started to appear in Mongolia, though chiefly with representative offices rather than significant on-the-ground commitment so far. PricewaterhouseCoopers, KPMG and Ernst & Young are also represented.

Eurasia Capital is the nation’s leading investment bank today, and it is likely that this will be a growing part of the market in future. “There will be more of a focus on long term investment funds and institutional investors in future,” says Bayarsaikhan D, Chairman of the Financial Regulatory Commission of Mongolia. As the finance ministry interview explains, two quasi-sovereign wealth funds – the Stabilization Fund and Human Development Fund – are being developed, while a development bank focused on long-term infrastructure has been formed and will soon start lending. The development of new investment, capital markets and securities laws, in varying states of readiness, will help growth.

Another area ready for dramatic growth is the insurance industry. Mongol Daatgal, the country’s first insurer, dates from 1924, but the industry is still in its infancy; only one company provides life insurance, while a handful of others provide property and commercial cover. “It is a very virgin market,” says Batzul Tumur-Ochir, Mongol Daatgal’s CEO. “It only holds 7.4% of GDP, and total premium income in 2010 was just US$30 million for the whole industry. People have not understood insurance, or have seen it as a cost in the past; but now the economy is growing because of the mining industry, people have more money from wages and may spend some on insurance.”

On top of general economic growth, legislation will drive the industry too. Mongolia today does not have mandatory insurance for drivers, but this year a new law is likely to change that. “That will automatically give a 30 or 40% increase to the market,” Batzul says. Professional liability insurance will also become mandatory in the near future, while the growth of the mortgage market is also going to feed through to insurance – through corporates and banks, and through individuals. Batzul plans to enter life insurance too within three years, as he also sees momentum for growth there.

In uncertain times, people love cash. And there’s nothing wrong with that: when it’s impossible to form a clear view on where shares, bonds or property are going, it’s only prudent to keep some assets in the safest available place.

But the world of deposits becomes ever more complicated and differentiated. There are plain old bank accounts, term deposits, online accounts, accounts for first home savers, transaction accounts, deeming accounts, and accounts to link to your broking. And at the same time that consumers are bombarded with ever greater choice and segmentation, they also appear to be crying out for simplicity.

It’s a tricky combination, but it rewards those products that know exactly what they want to be, and then do it with transparency, clarity – and a decent rate.

Take, for example, SGE Credit Union, which offers the products that won both of our term deposit categories, short and long term. For investors putting in $5000 or more, they offer some of the best rates in the business: from 5.5% for a month, to 6.15% for a year, to 6.9% for five years. Infochoice, our judges on the deposit awards, say SGE deposits “have consistently offered some of the highest returns across a variety of deposit tiers and terms.” But Michael Coburn, SGE’s chief financial officer, thinks it’s not just about the headline rate.

“SGE has experienced strong growth in our term deposits and savings accounts generally – well above market trends,” says Coburn. “Obviously price determines activity, but once they’re a member of the credit union we hope superior service means they stay a member. Our philosophy is simple: provide exceptional customer service and provide appropriate products at the right price.”

Coburn says that in today’s market environment, people are prepared to lock up money for a decent chunk of time. “Members currently have appetite for longer investments, with the comfort of knowing their rate is fixed for the entire term,” he says. “We know this and that’s why we’ve priced our deposits the way we have. Longer investments are becoming increasingly attractive given the uncertainty in the curve.” (Curve refers to interest rates at various investment durations.)

An illustration of the quest for simplicity comes with the success of National Australia Bank’s no-branch subsidiary UBank, and in particular its USaver account. UBank wins our overall savings account and online saver account this year; Infochoice notes it has “again led the way this year by offering the highest average interest rate and flexible and secure access options for savers.”

Patrick Nolan, business development director at UBank, says that growth in deposits has been “nothing short of spectacular” since launch two years ago. The USaver account, he says, “combines a couple of key things we saw customers wanted in the Australian market: a great rate, and incentive for rewarding customers for saving; and more control, with an easy mechanism for managing their money.”

USaver has tried to embrace changes in society – much of the feedback from customers comes through channels like Facebook and Twitter – and has made simplicity its calling card for a technologically literate generation. “You can set it all up online, even your ID; end to end, it takes a couple of minutes,” he says. “And, once it’s set up, you can transfer money into it immediately and starting servicing it. The whole thing is about control, empowering customers to make choices on how to manage their funds.”

The no-branch approach is not for everyone; given its parent, UBank is likely to refer those who want face-to-face interaction to NAB itself. “But if you’re comfortable online – and more customers are going that way – our account is very helpful,” says Nolan. It also has a 24-hour call centre – which, it is keen to emphasise, is based in Australia. “We’re not saying because we don’t have a branch we don’t want to talk to customers or understand them. The barriers that may have existed 10 years ago about not having a branch are breaking down.”

[Subhead] Strong backers, and no flaky intro rates

USaver demonstrates two other trends commonplace in the deposit industry. One is the need for a trusted backer. NAB “is critical to us,” says Nolan. UBank’s own logo includes the tagline “backed by NAB”, and without that backing, the bank may well never have got off the ground. “All of the research we do says that the backing is really important to customers: they want to have confidence we are going to be here tomorrow.” Clearly, the financial crisis strengthened this need.

The other is USaver’s insistence on eschewing the idea of a headline introductory rate. “We don’t have an introductory offer that rewards you for six months and then moves you into a different account,” Nolan says. “You get a very good rate of 6.01% for a standard variable rate, and on top of that 50 basis points if the deposit goes through an automatic savings plan – and a huge percentage of our base does that.”

This is a common theme among winners in our awards. ME Bank won the award for the best first home saver product. Ian Hendey, group executive for brand, product and distribution, bemoans the confusing nature of many deposit intro offers. “People will talk simple and low-cost, but their behaviour reflects something completely different,” he says. “If you look at term deposits in the market across the majors you have real variability up and down across their terms. They might bring someone in for six months at 5%, then roll them over to 2.5% after 90 days. Unless you’re truly alert – and the only people who really are alert are those who are searching for hot money, since the majority of people are time-poor – then the funds just roll over. It’s costing people thousands of dollars a year and they are missing out.”

The ME Bank approach is similar to that at UBank (and, for that matter, SGE). “We’ve been clear that we maintain a consistent interest rate, and we don’t play the games of bringing you in at a high rate and rolling you over into a lower one.”

[Subhead] Good times in deposits

Providers agree that this is a good time to be in the deposit game. “We’re seeing a boom in savings products,” says Hendey. Savings and term deposit products have risen to the point where about 10% of people’s income is being saved, he says, in a way that is starting to resemble Asia. “Asian markets have been great savers, whereas historically Australians have been great borrowers of debt. Getting a good mix of savers is critical, and post-GFC people have start to think differently about their approach to saving.”

ME Bank’s first saver product reflects mounting concerns about the affordability of property, although the last year has brought a welcome stabilisation of property prices in many areas. “It’s a good thing for Australia, because affordability was getting away from younger people,” Hendey says.

The premise of First Home Saver is “giving the Generation Ys a chance to get into the market. First time buyers have virtually disappeared; they are down to somewhere around 7% from a peak of 20% a few years ago. I read recently we are at a 17-year low on first home buyers getting into the market, and that isn’t a good thing: it puts pressure right through the economy. The good old Australian dream is getting a lot tougher.”

The account is very easy to set up, accessible over the internet, and provides a solid interest rate (currently 5.5%) while giving people a dedicated savings vehicle that sets them up to apply for a mortgage and, ultimately, gets them into their first home. “It’s giving people, with government support, a real incentive to help with home loan affordability.”

Another area of growth is the cash management account, linked to other functions like brokerage. CommSec won this category with its investment account, offering “one of the highest unconditional interest rates in the market that makes this account a very attractive option for investors,” according to Infochoice.

Brian Phelps, general manager of CommSec retail distribution, says that market circumstances have helped to drive popularity in this product. “It’s been one of our stronger products over the last two years,” he says. “The key rationale is that a lot of clients in the equity markets have divested and parked a lot of their previous investments into cash. Having this product linked directly to their trading accounts, as part of the one-stop-shop scenario we set up for them, made it pretty easy to simply park the funds and hold on until they want to invest again.”

Thanks to that pattern, CommSec has around $4.5 billion of cash in these accounts, double what it was a few years ago.

Another example of the growth in tightly focused products is the arrival of deeming accounts, which cater for recipients of government pensions governed by so-called deeming provisions, which assess how much income people are generating from their investments (and therefore the impact on the pension). Deeming accounts make sure people are earning exactly the rate of interest that the government assumes they are.

“In a financial environment where consumers are unsure what’s going to happen next, particularly in relation to performance of the share market, deeming accounts provide security and certainty by offering a stable interest rate in an account with ‘at call’ access,” says Annabel Hamilton, general manager of marketing and product development at People’s Choice Credit Union (formerly Australian Central Savings and Loans), whose Club 55 account won the award in this category. “Over the last few years, many people, particularly those who are retired or close to retiring, have suffered losses on the share market. Because of this, we have seen continued strong demand for ‘cash’ investments, and our Club 55 account has benefited.” Like other products that are excelling in this environment, it thrives on simplicity: good interest rates, free and unlimited access to many transactions, no monthly account keeping fees, and bundled benefits such as discounts on general insurance and financial planning. It’s available to customers aged 55 and over, which is the key age at which deeming starts to become an issue. It’s clearly found a willing market, as the portfolio balances in the account grew just under 25% last year.

“Across the industry we’re noticing that people are looking for safety and security for their funds,” says Hamilton. “Along with this, they’re also looking for choice and flexibility in their deposit or savings accounts. Consumers are far more astute now and know they can shop between financial institutions for the best deal.” It’s a remark that could have been made by any of our winners in the deposit categories, which just goes to show that there’s a clear pathway to a successful product.

BOXES

Overall savings account

UBank USaver

What the judges say

The winner last year, USaver has again led the way this year by offering the highest average interest rate and flexible and secure access options for savers.

Online saver account

UBank USaver

Base rate: 6.01%

Bonus: 0.5%

Features and conditions

The bonus rate applies if contributions come from the automatic savings plan

What the judges say

USaver has been a stand out performer in the online savings account space in the last year. This product offered serious savers a market leading rate for most of the year.

Cash management account

CommSec Investment Account

Interest rate: 5.5%

What the judges say

CommSec’s CMA offers one of the highest unconditional interest rates in the market that makes this account a very attractive option for investors.

Personal Transaction Account

ING Direct: Orange Everyday Account

Features: ATM fees reimbursed on withdrawals over $200, no monthly account fees or minimum balance, acts as offset account for Orange Advantage home loan.

What the judges say:

This ING Direct innovation offers banking without monthly account keeping fees and offers customer full transaction features at the best price.

Short-Term Time Deposit (30-270 days)

SGE Credit Union Term Deposits

Term rates (min $5000)

1 month               5.5%

3 months             5.75%

6 months             6%

9 months             6.1%

What the judges say

SGE Credit Union’s term deposits have consistently offered some of the highest returns across a variety of deposit tiers and terms between 30 and 330 days.

Long-Term Time Deposit (one year and over)

SGE Credit Union Term Deposits

Term rates (min $5000)

1 year    6.15%

2 years  6.35%

3 years  6.5%

4 years  6.6%

5 years  6.9%

What the judges say

SGE Credit Union’s average rate for long term deposits offered both small and large investors the best return in the last year.

First Home Saver Account

ME Bank First Home Saver Account

Interest rate: 5.5%

What the judges say

ME Bank’s First Home Saver Account provides aspiring home owners with the best possible return under the Federal Government’s first home savers account scheme.

Deeming Account

Australian Central Savings and Loans Club 55 Account

Rates of interest:

$0-$43,199          3.05%

$43,200 4.6%

What the judges say

The Club 55 Account offers customers the highest interest rate in the market with no account keeping fees and useful features

Singapore remains a vibrant market for financial professionals seeking to move onwards and upwards.

“The hiring market remains strong,” says David Webbe, head of financial services for southeast Asia at Korn Ferry International. “Market volatility over the last 12 months has made hirers a little more cautious, but there are still key drivers that mean banks will continue to hire in southeast Asia.”

One of those drivers is location. Singapore is a coverage hub for southeast Asian emerging economies, particularly Indonesia, whose economy has not looked this vibrant for a decade, but also Malaysia, Thailand and even India. The growth of these economies creates clear opportunity for the banks and accountants that service them, and for qualified staff.

“The most significant issue facing southeast Asia hiring today is a relatively tight talent pool,” says Webbe. “If you are trying to make impactful hiring there is still a lot of competition for the best people – and from the search industry perspective, pressure to source the best people.”

Banking headhunters report widespread demand: investment banking, particularly M&A; global markets; private equity; commodities; and in sector terms, coverage for metals and mining, oil and gas, and consumer.

This time last year private banking was the area of greatest demand, and it’s still resilient. “Private banking will remain a growth area because you have an increasing number of high net worth and ultra high net worth people in southeast Asia,” says Webbe, while the arrival of European-based private banks in greater force – Julius Baer being a prime example – has also created demand. “But I think a lesson learned over the last few years is that the experienced private banking professionals make the biggest impact rather than out-of-the-box hires. This has only increased pressure on the existing talent pool.”

In accounting, the latest annual survey for Hong Kong and Singapore financial services recruitment from consultancy Ambition reports particular demand at the junior and middle management level, “rather than at the senior level where hires have been more strategic and lower in volume.” Ambition found accountancy hiring to be strongest in IT&T organizations, as well as offshore oil and gas, services, and healthcare or biotech businesses.  “Skill shortages exist for candidates with excellent technical accounting knowledge and equally candidates with genuine business partnering experience.” Ambition also noted demand in tax and treasury. “Treasury and cash management continue to be a key focus for a number of businesses where healthy cash flow is critical. High caliber treasury candidates are notoriously difficult to find.” The global financial crisis has also increased focus on audit, risk and compliance.

Professionals can expect to be well paid. “Compensation packages remain competitive,” says Webbe. “The best bankers are paid more or less in line with the pay they’ve seen in good years before.” It is easier to negotiate a good package if you are multilingual. “Language skills are still very strongly sought after. The talent pool in Asia is tight; even tighter are highly capable bankers who are fluent in Mandarin or Bahasa.”

Outside banking, the Ambition survey found that a head of audit with 12-15 years experience could expect an annual salary in the range S$180,000-$350,000; a group or regional CFO $250,000 to $500,000; and a head of tax, $180,000-$350,000.

A senior investment banker, a well-established managing director running a sector or coverage for southeast Asia, would probably be getting total compensation of around US$1.5 million. “But there is a real spread on what bankers get paid,” says one headhunter. “$1.5 million is for a mid-ranking MD, not a superstar, but a solid producer.  A regional business head based here would probably be looking at about $3 million or thereabouts.” Mid-ranking bankers below the MD level are likely on around $500,000 to $750,000 per year, and entry level of associates at investment banks is around $125,000, with bonuses which might add $25-50,000 on top of that depending on how good the year is.

“Singapore is not the most highly paid area for investment bankers: Hong Kong is much more highly paid, driven by China primarily,” says one headhunter. He says 2010 bonuses were typically down 10-20% on the  previous year. “We’re still a long way down from 07 in most cases. But nobody’s starving on the back of those numbers. Lots of people are earning $750,000 to $1 million a year, which for normal people in the real world, is a lot of money.”