Investing in an electronic future

20 September 1996
MEED Special Report:Banking

ARAB Financial Services (AFS) is working hard to restore itself as a significant force in the Middle East financial services market. The Bahrain-based company re-launched its travellers cheques in March, a new general manager was appointed in August and it is studying the possibility of marketing electronic banking services. This follows a good performance in 1995 when net profits rose by almost 600 per cent to $3.9 million.

These and other developments should help complete the job of erasing the memnory of the shock of December 1993 when the US Treasury Department listed AFS as a designated national of Libya under US sanctions against the country. The measure, which was never fully explained by Washington, seemed to have been prompted by the fact that Libya had a direct stake in the company of just over 11 per cent through the Libyan Arab Foreign Bank and Libyan Arab Foreign Investment Company. There was also a further indirect Libyan stake of about 10 per cent through AFS' other institutional shareholder's. It took just six weeks to have the order lifted in the US, but harm had been clone to some areas of the company's business. Later in 1994, AFS' founding chairman Abdulla Sacidi left the board of directors.

The company resumed operations on 3 February 1994 and started to build up its activities in wholesale banknote trading, corporate card programmes and bureau processing It decided not to re-enter the travellers cheque market immediately because of a collapse in demand in major markets affected by UN sanctions, reduced business in the Gulf and fierce competition which had eroded margins.

The decision to re-enter the market in 1996 reflects confidence that demand for cheques is on the rise again. Competition has been reduced and only American Express Bank, Citibank and Thomas Cook, part of the HSBC Group, are still forces in the region. AFS estimates that the Arab traveller's cheque market is now worth about $1.500 million - 2.000 million a year. This compares with about $3,500 million - 4,000 million when AFS was founded in 1984. The company became the largest issuer of travellers cheques in the Arab world two years later.

AFS' capital structure continues to be its main long-term advantge. Its paid-in capital of $60 million has been contributed by 55 Arab banks. Arab Banking Corporation (ABC), the largest bank in the Arab world in terms of assets, has a 36 per cent stake. Other shareholders include National Commercial Bank (NCB), the largest bank in Saudi Arabia, which has 12.5 per cent of AFS' shares and supplies its chairman, Abdulhadi Shayif. Other shareholders include National Bank of Egypt, National Bank of Bahrain and Qatar National Bank, all leaders in their respective markets. MashreqBank, the largest private bank in the UAE, has a 1.14 per cent stake. Iraq's Rafidain Bank, which is in international liquidation, has a small minority holding. In its role as supplier of financial services to its shareholders, AFS had a $10 million Iraqi bank payment that was passing through the US system in August 1990. It has been frozen since then. The amount was fully provided for in 1990, 1991 and 1992 and will be written back when sanctions against Iraq are lifted.

Re-launch strategy:

Mahmood al-Koofi, acting general manager since September 1995 and confirmed as general manager in August, has shared in AFS' short but eventful life. A Bahraini national, AI-Koofi joined the company at its inception and has served in most of its divisions.

AI-Koofi says the re-launch of AFS travellers cheques is a key element of the company's future strategy. 'We want to bank on our expertise as a major issuer of travellers cheques,' he said in an interview. 'Travellers cheques allow us to be seen at all levels in the banking community. This by itself adds to our credibility. It will help us to market other products that we are about to introduce to the market.'

APS supplies more than cheques lt issues Visa and MasterCard and revenues from both sources rose strongly in 1995. Dealing in foreign banknotes grew by 30 per cent in the year. To help cut costs in this sector, a contract has been signed with Guard Force International which has set up a Middle East head office in Babrain to serve AFS. This has cut the cost of repatriating banknotes and associated insurance expenses. AFS set up a foreign money dealing operation in Syria in June 1995.

The key to the future is AFS' technology and bureau services. Its computer hardware and software have been modernised. Goals for 1996 include installing a local area network and establishing a card processing and authorisation system to meet Visa and MasterCard mandatory procedures. Photo-imaging for payment cards has been launched. This allows the production of personalised cards, a service that is being marketed to regional banks. AFS' bureau processing unit is also winning business from third parties for dealing with payment card operations. Gulf Air has been using the unit to support its Falcon frequent flyer scheme.

Capitalising on its financial product processing software, AFS is aiming to develop as the leading Arab company supplying electronic banking, personal payment instruments and other services. The rewards from this strategy will grow as the volume of activity expands. So the priority is convincing more institutional clients that it makes sense to contract out more of their back-office operations to AFS Says Al-Koofi 'We are saying to the banking community that we can help them tap into the new technology.'

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