As you wait for your bags at the airport in Erbil, the capital of the northern region of Iraq, a large sign reads “Welcome to Kurdistan”. But the sponsor’s name plastered below is not the Kurdish Regional Government or a local firm, but Lebanon’s own Byblos Bank.
In the decade since the invasion of Iraq, no region has grown as much as the semi-autonomous Kurdish region. And the province has paved the way into the Iraqi market for many Lebanese, with more than 6,000 currently working there according to the Lebanon-Kurdistan Friendship Association. The Kurdistan Board of Investment estimates there is more than $760 million in Lebanese capital invested in the region, the second largest of any Arab country behind only Kuwait.
Banking on business
In the banking sector Byblos itself first opened a branch in Erbil in 2007 and now has expanded beyond Kurdistan to establish branches in Baghdad and Basra, while the Intercontinental Bank of Lebanon and Bank of Beirut and the Arab Countries (BBAC) are also well established.
These success stories are leading other banks to take the plunge, with Credit Libanais, Banque Libano-Francaise (BLF) and BankMed all heading to Erbil in the next year. Maurice Iskandar, head of the International Division at BLF, believes it is the perfect time to invest.
“We consider the Iraqi market as a vast and growing one… Iraq remains a primary destination for Lebanese exports and investments, having been for many years the most important export destination for Lebanese products,” he said. “It is in many ways a strategic location and a natural market for our expansion.”
Yet there are issues over the potential growth of the industry in Kurdistan — the region is already home to 14 state-owned banks and 30 private ones, while personal banking remains in its infancy. In this climate, new investors may find it difficult to develop a decent market share.
BankMed, which is unusually due to open branches both in Erbil and Baghdad simultaneously rather than using the former as a springboard for the latter, said they were hoping their strong position in neighboring Turkey, where their affiliate T-Bank has 27 branches, will help differentiate them from their rivals. “Our presence in Turkey, in particular, is a definite plus for our customers in Iraq given the significant trade flow between the two countries,” a spokesperson for BankMed said.
Too many fish in the pond?
While banking is undoubtedly still growing, there are other areas where the relatively small market may already have become overpopulated. Toufic Tasso was among the first to realize the potential for top quality private higher education in Kurdistan. The Lebanese-French University was eventually established in 2007, the first private institution of its kind in Erbil.
Yet five years on and the university is still to turn a profit, while Tasso, the university’s president, admits that the market has become heavily competitive. Ten rival private universities have set up, while the regional government has continued to subsidize growing public universities. The 800 students being taught per year is below capacity by almost 200.
“I would say for the time being (the market) is definitely saturated,” Tasso said. “It is not necessarily saturated in terms of quality offer, but it’s not a market that is now in dire need for new universities.”
He points out that the culture of private education, so prevalent elsewhere in the Middle East, is not dominant in Kurdistan, highlighting tuition fees as an example. “It’s a totally different market than, let’s say, the Lebanese and Emirati models where people are used to private education in most cases — they know that they have to pay a price and that is adjustable with time.”
“Here we have lots of trouble changing the tuition fees every year to adjust for inflation. For them, when they start those are the fees whether it’s a two year program or a four year program, whether inflation is weighing on their costs or improving their revenues.”
Servicing up services
It may be that services, an area where the Lebanese have traditionally excelled, offers the best opportunity for new investors to the market. Erbil itself is barren of much of the luxuries that are so prevalent both in Beirut and the Gulf, as economist Riad Khouri pointed out. “If we were in Erbil and we wanted a nice Lebanese lunch, there is no nice restaurant. Let’s say we wanted to go and buy a certain book or DVD, the shops don’t exist. If you want to go to a club in the evening, they are not there,” he said.
The regional government certainly plans for this to change, aiming to increase tourism exponentially in the coming years. Some 1.7 million tourists visited the Kurdistan region in 2011, the majority of whom were from other parts of Iraq. The regional government hopes this figure will rise as high as 2.5 million, necessitating growth in the hotel market.
Erbil’s Rotana Hotel became the city’s first 5-star hotel when it opened in 2010, with much of the capital behind the project Lebanese. The development, which cost $55 million, was the result of a partnership between the Lebanese group Malia and the Italian company DIVA. Malia chief Jacques Sarraf has targeted the Kurdish market heavily, holding several major assets, of which the Rotana is the most prized.
Thomas Touma, the hotel’s Lebanese manager, said the hotel had benefited from its pioneer status. “We have been profitable since we opened, the profit has grown month by month, but we started with a profit,” he said, declining to give more detailed financial numbers. “We are seeing double digit increase on occupancy rate due to increased demand and short supply,” he added.
Touma admits that the market is going to get a lot tougher in the coming years as “five or six” 5-star hotels, none of which are Lebanese-owned, are due to open. However, he is hopeful that instead of undermining Rotana’s profits, the rivals will help spur the market.
“There is a new five star hotel open next to us — they opened and we did not see any drop in our occupancy or restaurant returns,” said Touma. “This is due to the fact that demand is increasing on a daily basis.” The statistics seem to suggest he may be right, with the Kurdistan region’s investment board announcing in July that tourism in the first six months of the year was up 75 percent on the same period in 2011.
The Rotana’s success appears to be pushing others into the market. In July, Lebanese real estate company Zardman announced the launch of a 200,000 square meter project in Erbil, which will include 269 luxury apartments, a medical center, a hotel and high-end shopping and entertainment centers (slated for completion in 2015).
Yet, there is one issue that continues to dog the region, and that is consistent allegations of corruption. There is a widespread perception that the duopoly of the two main political parties — the Kurdish Democratic Party (KDP) and the Patriotic Union of Kurdistan (PUK) — has organized the system to make it work for them. Diplomatic cables released by WikiLeaks showed that the United States believed corruption in the Kurdistan region was “pervasive”, and could hinder foreign investment in the oil-rich area. While few people were willing to talk on the record about the issue, Touma hinted that bureaucracy can slow down a project significantly. “Being a new country under development there are still a lot of procedures, a lot of laws that have not been communicated well,” he said. But Lebanese-French University’s Tasso denies that the only way to succeed in the region is through greasing palms.
Investing in Kurdistan is undoubtedly a great opportunity for Lebanese businesspeople, yet there are pitfalls to be wary of. And while the service sector is undoubtedly in its infancy and the potential for growth is there, whether Kurdistan has enough attractions to become the regional business and tourism hub the government wants it to be remains to be seen.