Emerging markets are fast becoming the place to be for many offshore banks, but there are a number of hurdles to overcome in order to establish a foothold in the region
As expatriates are lured to the emerging markets to work, so offshore banks have been looking to set up shop in these countries to offer their products and services. An important factor encouraging this trend is the limiting nature of the banking and investment services available in the area's domestic markets.
With little available choice, international investors are frequently seeking far more bespoke financial solutions than those available in the local market. Investors unfamiliar with local financial services have been turning towards products from offshore centres and from companies whose names they are familiar with.
In some regions, where there is a threat of domestic political upheaval or economic weakness, resident nationals are also attracted to the safety and security of bank accounts and investment services in established, stable offshore jurisdictions. They may want to acquire investments overseas and seek to consider succession planning through the creation of appropriate trust vehicles.
In addition, for those living in the emerging markets, the offshore jurisdictions of the Channel Islands and the Isle of Man not only offer the tax benign status that investors require, but also provide the political and economic stability many investors in these regions are naturally seeking. International banking groups, which have been establishing operations in such countries, are a natural port of call for many investors and their financial advisers.
Furthermore, there has been an influx of expatriates into these regions, which are progressively seen as places of future wealth creation. Many expats have been recruited to work in the emerging markets on large-scale industrial projects or capital infrastructure schemes such as roads and dams. Globalisation has also increased the trend for people to move around the globe working for multi-national companies.
Taken together, the various scenarios above constitute the demand side of the equation, however, equally important from the perspective of the offshore banks is the supply side. At a basic level, it is important for the offshore banking industry to target those parts of the world where it is relatively easy for product providers to promote international financial services.
The emerging markets are also an attractive proposition for offshore banks because many developed countries continue to have prohibitive regimes and competing on a cross-border basis in the European Union is difficult. However, in some emerging markets, banks are prohibited from promoting their products unless they are willing to also invest considerable resources in opening an office, obtaining a licence and recruiting local staff. Not surprisingly, those regions where there is no requirement to have a physical presence are becoming increasingly popular among the offshore finance professionals.
Ultimately, if sufficient business is being generated, it may be cost effective to consider an office in the region or alternatively to form a joint venture with a locally-based institution, which will distribute offshore products and services to their existing clients.
For offshore banks, one of the keys to success in the emerging markets is to develop a good understanding of the countries that best match their capability in providing products and services. Among the considerations are language and cultural issues. The perfect example is the development of Shariah-compliant products, which are popular in the Gulf.
Regarding language, if a bank wishes to develop its business in Latin America, for example, it needs to have the appropriate language skills among its staff. If the organisation lacks the specialist expertise in this field, it will not make successful inroads, regardless of the general growth in the marketplace. Investment in specialist staff has become an evident trend in offshore jurisdictions and is set to continue as competition within emerging markets accelerates. It is also important for banks to have a profile in the locations they are targeting. Banks that have their headquarters in emerging market territories will have an advantage over a typical international banking group that has its headquarters in London, Continental Europe or New York.
Simply exporting banking services offered in the institution's home market is unlikely to rival tailored services developed by banking groups that have an insight into the marketplace. A one-size-fits-all approach no longer applies in the traditional markets and it certainly will not be appropriate in the emerging markets. Banks with operating experience in these regions can call upon local assistance to help with the due diligence procedures, which is a distinct advantage when taking on new business.
It is clear that emerging markets will form a key part of the growth of offshore centres generally, as the reducing tax burden in developing countries and the oversupply of financial services means those regions are likely to be less of a focus because of the intensity of onshore-based competition.
The emerging markets, which are fast becoming the new natural territory for some offshore banks, will therefore become an even greater priority in the future. The challenge for the offshore banks is to make sure they evolve to offer the products and services that are relevant to these emerging markets as they too evolve as major wealth creation centres. key points
Emerging markets provide a growth opportunity for offshore banking services
Expats unfamiliar with local services are turning towards offshore products
Banks setting up in emerging markets should consider local and cultural issues
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress