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Laying the foundation

Lebanon must empower its Capital Markets Authority

by Executive Editors

It is possible to have too much of a good thing. Take Lebanon’s banking sector: with assets of nearly 400 percent of GDP, it is both the backbone of the economy and the preferred financier of state debt. But unfortunately, it also may be holding the rest of the country’s financial sector back by smothering demand for equity with cheap debt offerings, a general consequence of an outsized banking sector.

Whether or not this is true in Lebanon’s case — anecdotal evidence suggests it is at least in part — the country would doubtless gain from a rebalancing of the financial sector. Larger capital markets would go hand in hand with better financing options for companies which today rely on debt, and help diversify the country’s economy away from its almost singular reliance on banking.

This would be good for everyone involved, even banks. As our special report (see the full report here) details, bankers and financial advisors are pursuing several strategies to reel in capital — one of which is to offer well heeled clients specialized investment and wealth management options. Having access to a slew of financial products cooked up here in Lebanon would put local bankers at an advantage over outside competitors, at least initially. And more generally, deeper markets and a more sophisticated financial sector will lift all boats, bankers included.

If Lebanon is to promote its financial sector, the first and most obvious obstacle is its lack of trustworthy institutions. In this, Lebanese authorities have made a good start: the Capital Markets Authority was established in 2011, paving the way for better securities trading and thus hopefully more wealth creation by publicly listed companies and financial advisories.

But key parts of the CMA remain unimplemented due to the government’s incompetence. For instance, the sanctions committee — which has statutory authority to impose both administrative and monetary punishments for those who misbehave — is not yet functional because members have not been nominated and approved by the cabinet. Without a functioning sanctions committee, the CMA is toothless, relying instead on other regulators to enforce compliance.

A similar situation exists with the separate but equally essential capital markets court, set up by the same law as the CMA to resolve disputes involving financial instruments, hear cases of insider trading and other crimes, and consider appeals of CMA decisions. These holes in Lebanon’s regulatory structure must be swiftly and properly filled.

But another concern deals with the narrowness of the CMA’s remit. Some bankers have complained to Executive that current financial regulations put them at a disadvantage. So called ‘briefcase bankers’ fly into Beirut, close deals and fly out — sometimes with a literal briefcase filled with cash — all without needing to comply with the same rigorous standards that apply to Beirut based financial advisors. This must stop. The CMA’s authority should be expanded to put an end to the activities of these vultures once and for all. Otherwise, not only will Beirut be at a disadvantage when it comes to attracting financial firms, but the Lebanese who trust these outsiders with their cash will be exposed to unnecessary risk.

Such regulatory moves are not, alas, a panacea for Beirut’s financial sector — for true vibrance to take hold, many more steps will be necessary. They are, however, the necessary preconditions for any scale of growth. If Lebanon wants to make good on its stated ambition to diversify the financial sector as a conduit for economic growth, it must power up the CMA. Now.

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Executive Editors

Executive Editors represents the voice of the magazine.

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