The Lebanese investment landscape of the past few years has come to resemble the country’s terrain; when first considered it is a seemingly attractive environment like that of the Mediterranean coastline, but as one travels further inland it suddenly becomes hilly and cumbersome. Tainted by a political balance that rests on a knife’s edge, an outdated corporate law and the looming specter of corruption — Lebanon is the 102nd least corrupt nation according to Transparency International — the country has failed to foster the entrepreneurial spirit embodied in so many of its diaspora nationals the world over. Moreover, throughout the years of conflict in Lebanon, local banks have been reluctant to go out on a limb and finance new and enterprising ideas. Rather, they have been focusing on centralized, conservative banking practices and only lending to well-established clients who hold large amounts of collateral.
Enter the global financial crisis and the subsequent recession and things begin to take on a different light. While economies around the world continue to contract, and their respective governments scramble to inject much needed capital in a last ditch effort to stave off a depression, Lebanon sees itself drowning in a sea of liquidity. Most of the banks in the country have registered a net profit of around 20 percent in 2008 and the combined assets of Lebanese banks have grown 14.6 percent to reach $94.3 billion in 2008, according to research conducted by BLOMINVEST Bank. Compare those figures to Lebanon’s real GDP, expected to be around $29 billon according Central Bank estimates, and the opportunities for venture capital and the inception of small and medium-sized enterprises (SMEs) and startups becomes unparalleled throughout the region, and for that matter the rest of the world.
Planting the seeds of commerce
Recognizing this ample room for expansion, many local financial institutions, as well as the Lebanese Central Bank (LCB), have been working at creating a framework for startups and SMEs to set up shop in the country. On the debt side, one such institution is Kafalat, which offers guaranteed loans from Lebanese banks for SMEs and startups at rates that are fully subsidized by the LCB. Kafalat Innovative is the startups arm of Kafalat that offers guarantees of up to $200,000 and guarantees 90 percent of the value of the loans granted by the local banks. Kafalat also posts their financials online — a rare practice in Lebanon — and up until the end of 2008 had guaranteed loans for over $466 million. “We are here to facilitate the access of loans to businesses. The loans are guaranteed by us and the interest, which stands at 6.1 percent, is fully subsidized up to seven percent by the Lebanese Central Bank. So people, in effect, now have access to free money with the final interest rate born by the investor close to zero percent,” says Elie Boujaoude, head of Kafalat Innovative.
Perhaps the most important aspect of Kafalat loans is that since many of the sectors in which Kafalat offers loans guarantee are “value added” sectors, which the local government has an interest in encouraging, the usually unwieldy step of loan processing has become significantly less challenging. Most Kafalat loans take only about two months to process. Moreover, LCB Governor Riad Salameh stated in a recent interview that 2009 would see “initiatives to facilitate credit for new businesses created in 2009.” Those initiatives have yet to materialize because “we are still waiting for feedback from the Ministry of Finance as to whether we will involve other sectors [other than value added] in accordance with the 2009 budget,” says Wael Hamdan, head of the Finance Unit at the LCB.
On the equity side, the non-profit Bader Program facilitates access to equity investment for startups and SMEs through its Lebanese Business Angels (LBA) program. The LBA program is aimed at facilitating funding for young entrepreneurs in high impact sectors through its network of potential investors. “We do open doors but that is just a small part of what we do. What we are really doing is creating a platform — we help entrepreneurs who have an idea to go from the idea to the actual realization of their business,” says Antoine Abou Samra, managing director of the Bader Program. In order to spur on entrepreneurial activity in the country, the Bader Program, working in unison with the LBA, provides consulting to potential entrepreneurs on how to formulate effective business models, corporate strategies and implement financial forecasting tools in order to attract investment and successfully set-up shop.
However promising these elements may be at face value, they must be taken with a grain of salt. The intrinsic difficulties of the Lebanese market still plague the country’s investment climate and seriously impede the ability of the market to reach its full potential. It has almost become a national custom that the public sector stunts the growth of the private sector in Lebanon. “The legal system does not provide enough protection. Either the investor wants too much protection, which triggers the paranoia of the entrepreneur, or he does not get protection and this leaves him with a bad experience with the market which ends up with people reluctant to invest in Lebanon,” says Nagy Rizk, fund manager at the Building Block Equity Fund, the first Beirut-based private-equity fund geared specifically toward Lebanese companies. “If you go bankrupt in Lebanon you go to jail, so rather than getting protection and being allowed to restructure you just allow inefficient people to survive.” At the present time, reforming the public sector to encourage investment is about as logical as it is ephemeral. “We saw a lot of these things [talk about reforms] but the problem is in order to get one thing done you need [a political] consensus and this becomes a self-defeating approach to things,” Rizk concludes.
Waiting for the blossom
Theoretically, investors and entrepreneurs should be queuing up to take advantage of the unique financial landscape that Lebanon currently provides, not to mention the repatriated skilled Lebanese coming from abroad in the wake of the global recession. In practice, however, the investment market has yet to see this materialize. Even if expectations are running high, “it would be logical to assume that Lebanon would be seen as more attractive for startups since the onset of the economic crisis in the Gulf. But we have not yet seen anything tangible,” says Boujaoude. How long Lebanon’s public institutions will continue to drag their feet while all the natural elements for growth in new businesses continue to amass is anyone’s guess. The market won’t wait forever. Will the Lebanese?
