KPMG is a worldwide community of impartial member corporations providing audit, tax and advisory providers, working in 147 international locations. Right here, the agency’s head of monetary providers, Ovais Shabab, fields questions from CFI.co
What units KPMG’s skilled providers aside in KSA?
KPMG in Saudi Arabia has a novel worth proposition in its tailor-made choices that leverage native expertise and experience and its international community.
KPMG is the lead auditor for 9 of 11 Tadawul-listed banks, and has deep information of the Kingdom’s monetary sector. We even have sturdy relations with the regulators and the of assist finance corporations, asset-management corporations, fintechs, and the insurance coverage trade. With our solution-based method, our advisory providers are well-received by our stakeholders and shoppers.
What’s your observe report of Saudization? Saudization is a coverage applied by KSA’s Ministry of Labour and Social Improvement requiring Saudi corporations and enterprises to fill their workforces, to a sure stage, with Saudi nationals.
“The lending house within the Saudi banking sector has seen continued development in mortgage financing all through the pandemic.”
KPMG plans to create greater than 700 jobs over the following 5 years for Saudi nationals, in-line with the Kingdom’s coverage. At the moment, our localisation price stands at 42 p.c and is quickly shifting in the direction of our 60 p.c goal. At KPMG, our capital is human capital — and that’s why we proceed to put money into our folks. In the end, they are going to make the distinction after we handle the challenges of our shoppers as a agency. Our studying and improvement efforts vary from LEAP, the management programme for younger expertise throughout all features, the SOCPA programme for our audit staff, and the TAX Academy. We now have a devoted staff to offer our folks with related upskilling programmes to remain forward of the curve — all sturdy efforts to assist Saudization.
What’s your outlook on the Saudi banking sector’s efficiency in This autumn 2020?
We foresee that This autumn of 2020 is prone to be a nexus of a number of divergent themes, given the macro-economic developments which have taken place this 12 months. Within the grand scheme of issues, the closure would rely upon the continued tenacity and resilience of the sector based on measures taken by the Saudi Central Financial institution and particular person banks. We now have noticed a number of efforts in the direction of prospects’ endurance in the back of a powerful capital base and funding construction of the trade. As such, we don’t foresee a unique proposition for the remainder of the 12 months.
Will the brand new 5 p.c actual property transaction tax assist to drive development within the financial institution’s mortgage enterprise in coming quarters?
The lending house within the Saudi banking sector has seen continued development in mortgage financing all through the pandemic. It’s a mirrored image of the housing demand within the Kingdom, and testomony to authorities assist measures. The implementation of actual property transaction tax (RETT) have primarily been welcomed by retail property patrons as a step-down of the tax price from 15 p.c again to 5, being a non-claimable part of the acquisition value basically. If these previous traits are consultant for the final quarter, then, coupled with the introduction of RETT and the sale drives witnessed every year-end, it’s fairly seemingly that the general banking sector will finish FY 2020 with out main affect on profitability.
KPMG’s Q3 2020 Banking Pulse report states that the method of loss quantification continues to be a problem for banks. How can they overcome it?
The general internet profitability of Saudi banks declined six p.c for the year-to-date interval from FY 2019 as a consequence of greater anticipated credit score losses of SAR12bn — a period-on-period enhance of 41 p.c. At current, the method of loss quantification continues to be a problem for banks within the absence of “days overdue (dpd) backstops” for services topic to cost vacation and helpful qualitative data of debtors basically. This interprets right into a continued want for judgmental overlays to cater for information gaps and due to this fact, the general anticipated credit score loss governance course of is ever extra necessary.
Do you foresee extra potential banking mergers in Saudi Arabia? If that’s the case, why?
The M&An area within the banking sector is shifting in the direction of the creation of the biggest lender in Saudi Arabia, with a proper settlement between Nationwide Industrial Financial institution and Samba Monetary Group (SAMBA). This bodes nicely for the merging entities and the sector basically. The entities can leverage on the expertise of Saudi British Financial institution and Alawwal Financial institution and concentrate on value and income synergies. With vital investments in know-how and folks already made by Saudi banks in latest previous, cultural and infrastructural integration will probably be a precedence. Well timed and efficient stakeholder engagement, in addition to pre-merger planning, stay the important thing for reaping all anticipated post-merger synergies.
Are Saudi banks able to embed ESG into their enterprise methods? What are the doable advantages of such a transfer?
A key aspect gathering swift momentum within the banking sector is ESG: three central components in measuring the sustainability and societal affect of a enterprise. The rapid well being and financial crises pushed the sustainability agenda to the back-burner. Nevertheless, KPMG’s view means that ESG will more and more develop into central to the financial equation globally, and Saudi Arabia will probably be no exception within the post-COVID world. Whereas the pandemic might have slowed progress, banks throughout the globe proceed to embrace the ESG agenda. New merchandise and fashions are continually developed, examined and commercialised. Retail banks are creating distinctive, sustainable banking and investing services. The underside line is that banks can not afford to miss ESG, and should embrace it to keep away from constrained development and elevated regulatory and public scrutiny.
How does the VAT enhance to fifteen p.c affect banks?
The latest enhance within the value-added tax (VAT) price from 5 to fifteen p.c has launched some complexities to the tax issues of the banking sector. Given the combination of taxable and exempt provides that banks present, the elevated VAT price will result in deductibility challenges on operational and capital expenditure referring to exempt provides. Along with managing the affect of VAT on fee-based providers, banks face the problem of managing a ten p.c enhance in VAT incurred on their purchases. Tax know-how options will probably be wanted greater than ever earlier than to minimise threat whereas taking into consideration competitiveness, profitability, and cashflows.
How do you price Saudi banks by way of deploying tax know-how options post-VAT enhance?
Until it’s a international financial institution with a good diploma of non-zakat obligations (zakat obliges people to donate a sure proportion of wealth annually to charitable causes), we haven’t seen loads of tax-specific applied sciences within the banking atmosphere — as in contrast with the extra extensively applied product and accounting applied sciences resembling product administration and evaluation instruments. If the financial institution has company earnings tax obligations, now we have seen some use of consolidation kind accounting instruments.
On the oblique tax aspect, we all know that some banks have purchased oblique tax options. This seems to be inconsistent by way of effectiveness — managing VAT may end up in advanced calculations. On prime of that, there are challenges with the completeness and accuracy information that many companies face. To enhance on this house, we anticipate that banks will proceed to make use of senior tax professionals to handle the complete tax atmosphere.
Buying the mandatory abilities and expertise stays a problem, as a result of as knowledgeable atmosphere tax is comparatively new (however growing) in Saudi Arabia. However it’s evolving quickly and presents a significant problem by way of preserving up-to-date. Know-how can positively play a task, nevertheless it additionally will depend on the banks’ capability to make use of and handle applied sciences nicely, from folks and working mannequin views.
Banks require a goal working mannequin for tax — an end-to-end mannequin to run taxes earlier than know-how is launched. From a governance perspective, it’s sensible to have a voice at board-level to make sure the wants of the tax staff usually are not ignored. Even when there are sturdy accounting programs in place, taxation brings a unique dynamic. It’s not know-how first, however reasonably the opposite manner round; first your working mannequin, then your folks, then the appropriate know-how.
At the moment, for banks in Saudi Arabia, tax goal working fashions are at early phases of improvement. With extra adjustments to the tax atmosphere, together with the prospect of e-invoicing, the necessity for a powerful tax working mannequin to assist the administration of tax threat is changing into ever extra pressing.
About Ovais Shabab
Over 22 years working in KPMG places of work in Kingdom of Saudi Arabia, UAE and Pakistan, Ovais has gained vital expertise of multi-locations and multi-cultural environments. He’s at the moment managing a portfolio of shoppers concerned in numerous sectors and having distinguished complexities. Throughout his affiliation with KPMG he has labored on numerous audit and advisory engagements resembling due diligence, enterprise restructuring, compliance & inner controls critiques and accounting advisory initiatives.
Skilled and Trade Expertise
Ovais epitomizes a wealth of assurance and advisory expertise within the monetary providers sector, amassed over 20 years of his affiliation with numerous KPMG places of work. Throughout his 15+ years with the Saudi apply, he has led profitable engagement supply to a few of our flagship Audit shoppers. His sound credentials have enabled him to advise and efficiently collaborate with outstanding regulatory our bodies in KSA, together with SAMA, SOCPA, and CMA.
For all engagements, Ovais stays answerable for Presentation to the BODs, Audit Committees and Senior Stage Executives for speaking the Audit Plan and Outcomes of our audit; and liaison with the Senior Administration all year long to grasp key developments and points; suggesting options and enhancements within the enterprise processes.