On the face of it, the story of financial markets and their regulator, the Capital Markets Authority (CMA), looks like just another manifestation of Lebanese chaos. Institutions and measures that were prescribed by law in context of the CMA’s creation (in this case, Law 161 of 2011) are overdue in their implementation. Not just in one regard but in the form of three delays: the privatization of the Beirut Stock Exchange (BSE), the creation of a tribunal or court that is specialized in financial matters, along with an independent committee that has the sole authority to mete out sanctions.
This compendium of delays is no detraction from the necessity to have an institution that regulates financial markets, however. Also, ranking stakeholders in banking and finance express their satisfaction with the CMA and its regulatory work. Jean Riachi, chairman of FFA Private Bank and chair of the financial markets committee at the Association of Banks in Lebanon (ABL), gives the CMA a good evaluation in his initial comments to Executive. “The CMA regulation is one of the main topics that we address in the [financial markets] committee. I see the performance of the CMA so far as very positive from the standpoint of regulation. It was necessary to have a body that puts regulation and also controls their implementation,” he enthuses.
A generally supportive but somewhat cautious view of the CMA is presented by Anwar Jammal, the chairman of Jammal Trust Bank (JTB). He tells Executive: “I believe that the creation of the CMA was essential and I hope it will continue to maintain its independence from the political process, and not be subject to abuse as is the case with everything else. CMA independence, as one of the ‘arms’ of financial regulations, is crucial.”
Fadi Osseiran, the head of Blominvest, opines: “What the CMA has been doing is emphasizing control and business conduct to make sure that local institutions deal properly with their clients, whether they deal on local or international markets. And I think they have been doing a good job.”
However, beneath the official comments that bankers and financial intermediaries give for the record, the debate on the CMA has a darker underbelly. Gossip purported from among the ranks of stakeholders like banks, currency traders and other private sector financial institutions betrays the existence of a schizophrenic combination of behaviors where complacency with the status quo is mixed with contradictory views and attitudes.
Some persons are complaining about the CMA’s performance and its staff, while lamenting at the same time that the financial markets tribunal and the independent sanctions committee are institutional components they are urgently waiting for. When the microphones are switched off, other voices from the market make it evident that the CMA has been a topic for conspiracy theorists. There are allegations that there were political or sectarian aspects in the regulatory organization’s three-year history. Then there are opinions, always presented strictly “off record,” that target specific CMA members, complaining about their personalities, their style of communication and even their competence.
Meanwhile, people in finance seem to be doing business as they know how. That means they are busier dealing with international financial hubs (on behalf of their local clients) than with financial markets in Beirut, and are hardly holding their breath in anticipation of the BSE’s purported new lease of life, including the addition of an electronic junior market. All the while, the Lebanese capital market in its entirety looks destined to emerge – in the best case scenario of all missing components being deployed before mid-2017 – with a delay of more than a decade, given that the need for this market had been determined back when the millennium was in its infancy.
What is at stake? Only the heart of our economy. Or more precisely, the non-banking half of the financial engine that should power the Lebanese economy, is missing.
Some issues in this saga are easier to fathom than others. In the first item of discussion about the CMA performance, it is convenient (from a viewpoint of defenders of the CMA) that Lebanon has a dysfunctional government. The blame for the delays in the implementation of law 161 and the procrastination in privatizing the BSE, appointing judges to the tribunal and empowering a sanctions committee can be put squarely at political doors. No one can dispute the CMA’s claim that they are only waiting for decisions by cabinet, parliament or ministers, and that they have been doing all they could in the meantime (see interview with CMA Executive Board Member Firas Safieddine here).
There are allegations that there were political or sectarian aspects in the regulatory organization’s three-year history
Also compelling is the age card with its trump of inexperience. With not even four years of operational existence under its belt it is difficult to fault the CMA for their lack of experience or their incomplete market knowledge and still fledgling familiarity with all companies that are constituents of the Lebanese financial markets. The youth argument still works for the institution, for example, when it comes to rebutting allegations that there is not enough progress with capital markets on the development side when compared with the regulation side. Or even when Safieddine denies the existence of a problem in the lack of a tribunal with the argument that no dispute has happened yet which would require judicial settlement.
Plausible explanations are finally hard to dismiss when it comes to minor but ultimately annoying practical flaws, like the problem that CMA officials can sometimes be hard to catch at their desks. When one tries to reach the CMA, one has a chock-full of phone numbers to call – at least two per staff member. But an observer calling any number may get the impression that this institution must be located on some moon circling a faraway planet like Saturn or Jupiter, judging from the many attempts when phones are simply ringing off their hooks. According to the CMA, improving this situation (which already existed for at least one year) is a work in progress and a simple matter of renewing the phone system.
Where things get complicated
However, the dilemmas surrounding our still non-existent capital markets have aspects that are more complicated. These include issues of a technical nature, as well as fundamental questions over control and freedoms in financial markets. One example of major technical concern for market participants is the matter of “exempted offers” for funds or financial products. According to FFA’s Riachi, the CMA addresses the exempt offers in a restrictive and unusual way. “Elsewhere, if it is an exempt offer, it does not need any prior approval. In Lebanon, it needs prior approval even if it is called an exempt offer,” he says.
Even though admitting that the CMA works very fast in responding to applications for selling funds and although an application is considered as approved if the CMA does not issue a comment on it within two weeks, Riachi says that the required approval process is too burdensome on companies which want to offer funds to a handful of professional investor clients, especially when the originator of this product is based in a jurisdiction outside of Lebanon. “In most countries, an exempted offer is defined by the limited number of persons you can market it to and the need for these persons to be qualified,” he specifies and adds that as a financial intermediary in Beirut, “you still have to go to CMA when you have a product that you want to offer to a handful of clients”.
“We are new to the market and we need to get to know it and need to understand its offerings”
For the CMA, Safieddine counters, “exempt is not translated as something that doesn’t need approval”. He argues that the exemption of an offer must necessarily be based on criteria which are set by the regulator. Complicated products, even if they are offered to only a handful of clients, must be reviewed in his opinion and he says that the demand to have each and every securities offer or funds product be submitted for approval is “for their own protection” of market participants. Beyond that, he downplays the argument over exempt offers to mainly just being a sign that the two parties still lack familiarity with one another. “The mentality that the market exhibits is only proof that we need to get to know each other. We are new to the market and we need to get to know it and need to understand its offerings,” he proclaims.
Then there is the matter of currency trading platforms. This is a complex, technical issue involving leverage margins and minimum account sizes that raises questions of how much control is healthy, what limits should be imposed on market participants, and how important specialized operations like forex trading are for a marketplace that aims at becoming internationally successful (see story here).
An exchange with a future?
Next there is the legacy issue of the Beirut Stock Exchange. It has taken on two dimensions: the first question is how to invigorate the BSE after more than a decade of disappointing performance and the second question is whether the addition of a junior market will provide a satisfactory return. Since the BSE was reopened 20 years ago, it could not live up to expectations in the number of new listings. Nor could it impress in recent years due to the low number of trades and abysmally weak turnover, the tendency of market capitalization to stagnate and the resultant dwindling of a market cap as a ratio of GDP, a benchmark by which Lebanon lags behind the Middle East and North Africa, not to mention other world regions.
JTB’s Jammal describes an Electronic Trading Platform as making “great sense” but raises questions about the viability of such undertaking: “I wouldn’t know how much it would cost to develop the platform, but I doubt the trade volume will ever be large enough to justify the investment. A prerequisite for such a costly endeavor is that laws have to be changed and others introduced to encourage companies to go public and enlist on the Beirut Stock Exchange,” he says, pointing (as an example for a not necessarily rewarding expenditure) to an advanced recording system that automatically tracks phone conversations a banker has with dealers. According to him, the system’s installation was required under CMA regulations and rightly admonished this when the institution visited JTB, but the $ 30,000 investment into a dealer recording system is hardly viable by the amount of business related to it.
Jammal says he would enthusiastically welcome a boost to the BSE through listing of the state-owned telecoms operators MIC 1 and MIC 2 (known in the market as Alfa and Touch) or by having a percentage of shares in every single Lebanese bank traded on the BSE. But, as he sees things, he neither expects a lot of movement on an electronic trading platform (ETP) nor does he regard it as the CMA’s role to get actively involved in this matter.
We need to shift the dynamics of the market toward an investment mentality. This is where the capital markets need to come in.
“The role of the CMA is not as much to promote stock market activities per se as it is to promote transparency and secure stability of the financial markets leading to a greater participation by businesses. I think the essence of the role of the CMA is the development of the stock/financial markets in line with best practices,” he says.
FFA’s Riachi also expresses doubts about the viability of an ETP. “I am not a big fan of the idea [of an electronic trading platform],” he declares, adding: “I might be wrong, but for me, an electronic exchange does not increase liquidity. What increases liquidity in small markets like Lebanon are market makers. We therefore should find ways to encourage the emergence of market makers. Electronic exchanges don’t usually work, especially when talking about small and medium-sized enterprises (SMEs). It is about marketing, discussing with your broker, not technical what SMEs need, plus we already have an electronic exchange in place with the BSE. It is totally electronic.”
The development challenge
In the broader question of how much regulation is necessary and when regulation turns into an obstacle for development, many private sector stakeholders naturally gravitate toward prioritizing development. The CMA agrees that market development is crucial but has a predilection to issue regulations. “Regulation alone does not lead to development. I think we need much more effort, much more creativity and more […] incentives, and this has to do not only with the CMA but also with the fiscal policies. But the point is that we need a champion for this. This champion should be the CMA and we have not seen it yet materialize,” says BlomInvest’s Osseiran.
In his view it is easier to regulate than to develop because one can adopt regulations that exist in the United States, Europe or the Arab world. Not so in building a market. “For developing, you need to have imagination, creativity, and that is not an easy thing,” he reasons, but adds that the private stakeholders are in communication about this issue with the CMA “and they are promising that they will do something about it”.
Overregulation is also a concern for Riachi, who also sees a deficiency in development. “We are not making enough progress in developing capital markets in Lebanon, which is the other mandate of the CMA. I think that we are overdoing the regulation part and this will be a handicap for the other part of their job,” he says. Financial forms and requirements for being listed or offering securities might deter some issuers and firms from Lebanese capital markets, he says, advising: “We should be realistic and not have regulations that are too tight.”
Entwined with the development question is perhaps the systemic relation of necessary institutional support and concealed dependencies in CMA decision making. The CMA’s Safieddine emphasizes that the entity is “not a subsidiary of the central bank” – but it seems that certain decisions, even something as trivial as taking a picture or disclosing a biography of a CMA official, require approval by Central Bank Governor Riad Salameh.
At the same time, the acknowledgement of the CMA’s importance and its empowerment by parliament and other political institutions must be considered as imperfect, seeing that the CMA has been waiting for a long time for political decisions to create entities such as the financial markets tribunal and the sanctions committee.
An additional new symptom of the excessive weight of banking in the economic fabric, at the expense of capital markets, may be reflected in the emphasis on the Association of Banks’ recently presented draft for a national strategy on financial education and literacy (see comment piece here). The CMA is not indicated as a top stakeholder in the creation of a higher council for financial literacy, although Safieddine points out to Executive that: “The national financial education strategy is at the core of our mandate.”
The draft document does not include the term ‘investment,’ as far as Safieddine has seen, and he emphasizes that this omission indicates a flaw. “The Lebanese consumer should [be made to] understand that investment is not just buying a car or a house. We believe that we as the CMA can give much more lucrative ideas about investment and create a national virtual investment competition. We can show them what investment is. We need to shift the dynamics of the market toward an investment mentality. This is where the capital markets need to come in. Today the banks’ association is talking about where money grows in terms of deposits; we need to show that investments generate money growth as well and perhaps at a larger pace than the growth coming from deposits and their compounded interest.”
Gnawing at the roots of the nation
It is undeniable that the Lebanese government has not been doing its job in many regards. There is an avalanche of pressing concerns, such as the government’s inability to provide basic services (water, electricity, solid waste management) and social safety nets (medical care, welfare, pensions). This has been to the detriment of the economically vital system of financial markets. This makes it all the more difficult to draw public concern to an issue such as financial markets, which is both obscure and complicated for Joe and Jill Beiruti. As Osseiran points out: “From a citizen’s perspective, the garbage problem is much more important.” On top of that, it’s not even sure that the capital markets topic gets the attention it deserves from all economic actors, even though the opportunity cost of not boosting the capital markets could be reaching proportions of double-digit percentages in lost GDP (at the very least cumulative over several years).
Last but not at all least on the minds of market participants is the issue of transparency in appointments of key personnel. Whispers (or even screams) heard by Executive contained decidedly unfriendly terms such as “pompous,” “behavior unbecoming of the position,” and “ignorant and unwilling to learn”. The perception of a “difficult character” was among the most benign descriptions, which were generally directed at one person: the head of the CMA’s control unit, Khalil Ghalayini.
However, the only market participant who would comment on record about Ghalayini was BlomInvest’s Osseiran. He explained apparent dislikes with the control unit’s mandate and gave a shining endorsement of Ghalayini’s competence, saying: “The hardest person in a bank is the auditor or the compliance officer. What do you expect? [Ghalayini] is a sheriff and has to implement his responsibility. About the way in which he is doing his job, you might say he could be nicer, but I don’t think that this is really important. The regulation is new, and somebody is enforcing it, and you feel of course a bit uncomfortable with that, so you blame it on the person. I think he is doing a great job. I commend him publicly and [behind closed doors]. I am not saying he is easy with us. He never treated us in favor; we might agree and we might disagree with him, but we never felt that he is not doing a professional job.”
The problem for our country is the enormous opportunity cost arising from the delay in building capital markets and trade platforms that will power the domestic economy
Ghalayini was not available for an interview. Safieddine would not speak on behalf of the CMA to the issue of personality of an official but confirms on the record that “the audit process is approved by the board and every single report and every single audit is overseen by the board. We stand behind the financial control unit in terms of implementing proper supervision of the market”.
In the sum total, the emergence of Lebanese capital markets is progressing at a rate that combines the unpredictable with the reliable. It looks to be on track, but ever so slowly, with nothing easy or certain about the timing. London’s role as the world’s premier financial hub in a European time zone may be up for grabs in a post-Brexit world, but traders in Paris and bankers in Frankfurt by all appearances don’t need to worry that Beirut would be a viable contender, even for a regional role.
The problem for the Lebanese economy is not the loss of this opportunity to ascend to an international hub (which would have required more energy than even a Rafic Hariri in his heyday could have exerted, given the Lebanese political mess). The problem for our country is the enormous opportunity cost arising from the delay in building capital markets and trade platforms that will power the domestic economy.
This development of financial markets would not only help Lebanon to have something resembling a true economic resilience and diversify itself out of dependence on debt markets and the banks that control so much of our fortune. From Safieddine’s vantage point, functioning capital markets would also be crucial for the success of all the efforts that are currently being poured into the entrepreneurship ecosystem. He says that CMA participation in a delegation visiting San Francisco and Silicon Valley in September functioned as a fact-finding mission which only confirmed their view that functional capital markets are important to move the ecosystem toward bearing financial fruit. The CMA board member enthused: “San Francisco was a major example how developed capital markets would reflect on [the] growth of SMEs, middle class and startups.”