Getting competitive

Circular 331 needs a legal system to back it

Policy initiatives work best when they come as a full package. Seeking to elevate Lebanon’s knowledge economy from a struggling local sector to a world-class hub for entrepreneurship, in 2013 the central bank stepped outside of its monetary policy role by passing circular 331. The decision allows local banks to invest directly in startup companies or in venture capital funds, with 75 percent of the investments guaranteed by the central bank. The entrepreneurship ecosystem – at the time small despite having existed for more than 10 years – welcomed the capital infusion.

Lebanon is a small market with a relatively small population, even including those seeking shelter on its soil. Stakeholders tell Executive that the ecosystem needs more of just about everything, including entrepreneurs with fundable ideas. Some VC funds are even trying to lure Lebanese entrepreneurs living abroad back home in order to qualify for 331-compliant investments (only companies incorporated in-country are eligible). Enticing natives to return (or convincing foreigners to set up shop here in exchange for investments) requires a competitive ecosystem, of which an integral part is a clear-cut legal system underpinning it.

With an out-of-date commercial code, Lebanon’s ecosystem is far from competitive. Incorporation is expensive. Bankruptcy takes years and lacks basic protections for entrepreneurs. Some of the financial tools entrepreneurs need to receive investments and attract employees (such as preferred shares and employee stock options) are possible in Lebanon only through complex legal maneuvers as the commercial code does not allow for them (see story here). For the ecosystem to be competitive, the commercial code needs a serious update.

And the problem is not only related to competition. What happens when a successful Lebanese startup wants to raise money from an investor outside of the country? The complex legal structures the company created to receive investments and hire employees could well confuse and even deter foreign VC funds. Our entrepreneurs deserve better, and frankly so does the whole 331 experiment. We see very little buy-in from parliament or cabinet when it comes to building and sustaining our entrepreneurship ecosystem.

Not a single update has yet passed parliament. Our lawmakers must prioritize updating the commercial code. Without modern laws, we can’t hope to have a modern, competitive ecosystem.

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