Risky business

Too small a market for investment banking?

The Beirut Stock Exchange is no place for a wolf

No matter what some might say, the Beirut Stock Exchange is economically insignificant. Few companies are listed, with real estate giant Solidere and a handful of banks taking up the largest share of the market, and there has not been a new listing since the turn of the century.

This sad state of affairs is begging for change, and many investment bankers are hoping to see more companies going public in the coming years (see story). It could certainly bring about many positives. A new flow of companies opening up their capital to outside investors would lead to an increase in investment banking services revolving around financial advisory, restructurings, mergers and acquisitions, and initial public offerings (IPOs).  This could help change economic norms in a country where the dominant corporate structure is still the family one, whose organizational structures are often opaque at best. Opening up such businesses to outside investors could promote open finance, transparent governance and even feed into wider economic growth.

Yet investment banking is certainly not a panacea to Lebanon’s woes, and could in fact exacerbate them. The global financial crash, caused in large part by the rapid and uncontrolled growth of investment banking, shows that the sector is certainly a double-edged sword.

As such, it is vital that if the sector is to grow then so must the regulations. The agency in charge of regulating the markets, the Capital Markets Authority, entered into the game late and has been slow on the uptake. Established in 2011, it is progressively issuing and implementing new regulations for the stock exchange.

But the slow pace of activity begets concerns that the market regulations will fail to keep up with further developments in the financial sector. Regulations need to be installed quickly and efficiently to prepare for the potential of a brighter future while simultaneously safeguarding against a runaway financial sector undertaking increasingly complex transactions.  In the coming decades, as family businesses are passed down to a younger generation with new ideas, or split and sold off among several shareholders, Lebanon may see more IPOs and more need for investment banking. Going public could have many benefits for the companies, but these must be met with strict and timely regulations.

For Lebanon’s investment banking sector to have a positive impact on the economy, it is vital that an increase in capital market activity is paired with a serious improvement in regulation.

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