The steady decrease in Kafalat loans, which dropped by 17.2 percent in the first 10 months of the year compared to the same period of time in 2012 is likely to increase even further by the end of year due to the instable security situation in Lebanon, according to Kafalat chairman Dr. Khater Abi Habib. This comes off the back of a 16.4 percent drop between 2011 and 2012.
However, the decrease in Kafalat loans is one of the country’s few maladies that cannot be dismissed as just another instance of Lebanon’s dire economic circumstances. While most sectors have experienced a slight or significant decrease in extended loans, many have remained constant, while the high technology sector actually saw a fair increase.
Kafalat has presented an extraordinary resource for entrepreneurs since its inception in 1999 at the initiative of the government, the Association of Banks, the central bank, and the National Institute for the Guarantee of Deposits. Through Kafalat’s program, entrepreneurs of small- and medium-enterprises including startups can take out a collateral-free loan from commercial banks based on the feasibility of their business plans. The program has created an incentive for banks to lend by guaranteeing 90 percent of the bank’s loan for amounts of up to $200,000 and has broadened the sphere of who can open a business. Many entrepreneurs in Executive’s top 20 Lebanese entrepreneurs have been beneficiaries of the scheme.
The economic downturn has not hit all sectors to the same extent, tourism reflects the most significant fall from grace. As President of the Association of Hotel Owners Pierre Achkar told Executive in September, “all hotels are partially closed.” News like this may make entrepreneurs in the tourism industry think twice before expanding their businesses, or delving into startup projects.
The tourism sector received 122 loans by the end of October 2013, compared to 166 in the same period in 2012, a 26.5 percent decrease. As the number of tourists travelling to Lebanon has decreased, particularly with the hesitation of lucrative Gulf tourism, banks are understandably tightening their loans to this sector, blocking even the bravest of entrepreneurs adventurous enough to start a business in these turbulent times. Banks have increasingly refrained from offering the Kafalat Plus program — a completely collateral-free loan — to the sector, says Abi Habib, and have favoured the Kafalat Basic program, where they can take up to 50 percent of the value of the loan in collateral.
Closely following tourism’s misfortunes was the industrial sector, with a decrease of 25.7 percent in the number of loans. Remaining comparatively constant however were the agriculture and crafts sectors.
In contrast, the number of loans to the high technology sector actually saw an increase, showing that not all entrepreneurship is hindered by the economic downturn. Though still not making up a great percentage of Kafalat’s loans, the number of loans extended in the technology sector actually increased by 23.5 percent from 13 to 17 projects between October 2012 and October 2013.
Trends and guarantees
Lebanon’s entrepreneurs have been fairly resilient to the various stresses the country has witnessed. “[Economists] wonder why our economic activity in this country hasn’t dropped further,” says Abi Habib. He ventures that Lebanese entrepreneurs being so accustomed to civil instability is a central reason the country has not witnessed a number closer to an 80 percent drop in loans. But as long as hard times continue, he adds, people will be more skeptical of launching or expanding their enterprises.
A similar resilience can be attributed to the banks, who continue to lend. Although banks are not required to share with the program the number of Kafalat loans they refuse, Kafalat has not been made aware from the side of the entrepreneurs of a higher than average number of rejections.
Nonetheless, the banks would more likely be conservative if it were not for Kafalat’s guarantees, particularly when lending to startups, for whom Kafalat’s incentives guarantee 90 percent of the loan, given that only one or two out of 10 are likely to succeed. In fact, Kafalat’s program for startups is operating at a loss, and is subsidized by more profitable programs that handle less risky businesses.
Despite a general decrease in Kafalat loans, the small but growing high-tech sector presents a glimmer of hope for economic growth, however limited, through entrepreneurship.