LeadersOpinion

Not just the apps

by Executive Editors
written by Executive Editors

There’s cross pollination potential being missed in a certain Lebanese ecosystem. Nowadays, everywhere you look there’s a link between technology and entrepreneurship that seems to suggest the latter is only possible if it incorporates the latest advances in the former. This is a global trend, and it’s driven by the market. Remember, a street vendor is an entrepreneur, but that vendor will need several lifetimes of work to become a unicorn (a company valued at $1 billion or more, in venture capital parlance). For better or worse, entrepreneurs make the biggest headlines when they’re associated with VC, and VC needs big, big wins to cover losses in the majority of its portfolio companies. Big, big wins typically come from tech companies, not from hospitality, food and beverage or even small design or ad firms, and yet these small players are the cartilage helping to keep Lebanon’s economic backbone limber and upright.

Central bank circular 331, approved in late 2013, freed up some $600 million in capital for entrepreneurs in Lebanon’s “knowledge economy”. While the text never actually mentions the word “technology,” there’s a very heavy tech focus in the ecosystem. However, Lebanese entrepreneurs are still pouring blood, sweat and tears into “traditional” ventures with much success (see story here). Some of these non-tech entrepreneurs complain of a lack of financing opportunities in an ecosystem obsessed with apps, online marketplaces and the internet of things. Worse, the insight and experience many have gained after years of trial and error does not seem to be filtering its way into the “hubs” of the country’s knowledge economy.

In an effort to cover 331 from an editorial perspective, the magazine’s eyes and ears are on the newest players entering the game. We see the events, meetups, dinners, conferences, etc., and notice a glaring lack of input from anyone talking about the “old economy”. This is unfortunate, particularly when we begin dreaming of the potential social entrepreneurs can have in making a difference in the daily lives of people in Lebanon and the wider region, if not the world.

This country has social and cultural diversity as strengths and any number of problems most would point to as weaknesses. These weaknesses, however, are opportunities. The more minds we have working together, sharing advice and experience, the more chances we have to find scalable, commercial solutions that actually improve people’s lives. A better blending of the ecosystem’s old and new will maximize its impact both locally and abroad.

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Entrepreneurship

The legal building blocks of the ecosystem

by Matt Nash
written by Matt Nash

Lebanon is an awful place to start an innovative, new business venture – from a legal perspective, at least. There are a few general rules that apply to startup companies: 1) Around 90 percent are expected to fail; 2) Founders typically have no cash, investing all they have (and all they can raise) into the business; and 3) Founders typically have no assets (especially in the earliest days of the business), making traditional bank loans all but impossible as a fundraising option. While Lebanon’s startup ecosystem is growing by leaps and bounds compared to 10 years ago, the country’s commercial code – established in 1942 – is in need of updating, ecosystem stakeholders report. Archaic regulations make starting up costly, and a labyrinth of administrative procedures mean closing a failed business can take years. Young companies hoping to attract investors by offering preferred shares or trying to lure top talent with employee stock option plans jump through hoops like a lion in a three-ring circus. Given that Lebanon is trying to position itself as an incorporation destination for startups from around the world, legal complexities certainly make it less attractive (in the US, for example, one can incorporate online in the state of Delaware for $500, everyone interviewed for this piece noted). Aside from this, the overall impact of outdated laws on Lebanon’s entrepreneurship ecosystem, however, is difficult to quantify.

“There are always workarounds,” explains Abdallah Jabbour, head of Lebanon for Entrepreneurs. “They might be ugly, but things are possible.” Jabbour likens Lebanon’s legal infrastructure for startups to the country’s internet infrastructure – woefully inadequate. “Broadband and legal are the most important long-term investments [the government could make in this sector]. They’re the real enablers.” While Jabbour describes the workarounds as “not optimal,” he says Lebanon’s legal ecosystem “is not killing ventures before they start.”

Step 1: Choosing a corporate structure

One potentially costly mistake startup founders in Lebanon make is launching business activities before incorporating a company, explains Alain Noujaim, a partner with Noujaim Law Office which works with young businesses. Without a corporate structure for their enterprise, startup founders have nothing to limit their liability should a contract dispute arise. Noujaim’s advice? “As soon as you need to deal with third parties and contracts, incorporate,” he says.

Central bank circular 331 – which made around $600 million available to Lebanese startups that are part of the “knowledge economy” – specifies that investments can only go to joint stock companies incorporated locally (article 1). Noujaim reasons that, while this is an expensive option, it is the best corporate identity for a startup in Lebanon. By law, a local joint stock company, known as a Société Anonyme Libanaise, or SAL, must have a paid-up capital of $20,000, a lawyer on retainer and an auditor as well as an independent auditor appointed by a court. Incorporation and associated fees for forming a joint stock company add another $3,600 or so to the total cost of starting up, Noujaim notes. As a comparison, a limited liability company must have a paid-up capital of $3,333, a lawyer on retainer and only one auditor in certain circumstances (meaning some are not required to have full-time auditors). However, limited liability companies in Lebanon have complicated shareholding rules (shares are known as units, not shares, and are difficult to transfer) and cannot issue bonds or convertibles, which startups frequently rely on when raising capital. The consequence of this, at least in the pre-331 days, Noujaim says, is that several of the startups he worked with incorporated outside of Lebanon to reduce costs and red tape. Companies receiving investments through circular 331, however, must incorporate in Lebanon.

Step 2: Hoop jumping

In the venture capital world, preferred shares are important. Those investing in a startup – whether a venture capital fund or a private/angel investor – typically receive preferred shares in the company in exchange for the cash infusion. This type of share class comes with more privileges than common stock, (perks vary, depending on the agreements between investor and startup), but typically without voting rights, which is not legally possible in a Lebanese joint stock company. There are workarounds for issuing preferred shares without voting rights, Noujaim explains, (such as creating an offshore company to own the startup), but the extra legal maneuvering drives up the cost of the transaction.

The same is true for employee stock options. Given that startups are usually cash poor, they rely on offering employees stock in the company to attract a high-quality workforce. As these shares also do not have voting rights, Noujaim explains issuing them faces the same challenges as issuing preferred shares to investors. On top of that, founders need to protect themselves from anyone seeking to take the equity and run, so employee shares are usually “vested” over a period of time, (five years for example), instead of given all at once, and tend to be based on an employee’s performance. Again, Noujaim says, such options are not possible under Lebanon’s commercial code, so lawyers tend to write several deferred share transfer agreements between startup and employee, driving up the cost of the transaction further.

[pullquote]To date, none of the amendments have been passed by parliament and only a few are ready in a final draft form for the legislature’s consideration[/pullquote]

Step 3: The long goodbye

If a startup fails – as is very common – closing up shop can take years says Rami Alame, head of financial services and ventures at Ororus Advisors, a law firm which works with startups. This problem, unlike the others, cannot be easily fixed. Where some of the other issues startups face from a legal perspective can be mended by updating laws, the process of filing for bankruptcy drags on because of the administrative procedures involved, Alame explains. The complexity and time involved in a bankruptcy is bad for startup founders keen to quickly move on to a new venture. Alame notes that Lebanon also lacks bankruptcy protection, particularly a business judgement rule. While Alame admits it is rare, under the law an investor in a startup that fails can take the startup to court by arguing that the founders made bad management decisions, which led to the company’s demise. A business judgement rule allows founders and management some leeway to make decisions, Alame explains, whereas without it, founders and management can have their every decision picked apart in court. A guilty verdict could even land a startup founder in jail, although Alame stresses this is a rare outcome. He advises startups to include arbitration clauses for potential bankruptcies in term sheets when negotiating investments to avoid the courts, which are overburdened, slow-moving beasts in Lebanon.

No quick fix

Startups are not the only entities that would benefit from updates to the commercial code. Jabbour, of Lebanon for Entrepreneurs, has been helping draft a new law related to private equity and venture capital companies (which Executive covered extensively in June). He says the PE/VC law is part of a basket of 13 updates to the commercial code that the Office of the Prime Minister has been working on since 2010. To date, none of the amendments have been passed by parliament and only a few are ready in a final draft form for the legislature’s consideration, Jabbour says. Executive was unable to reach the Office of the Prime Minister for comment, but with parliament convening very rarely in the past few years – resulting in an ever growing agenda – passing these draft laws is unlikely to happen soon.

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LeadersOpinion

Getting competitive

by Executive Editors
written by Executive Editors

Policy initiatives work best when they come as a full package. Seeking to elevate Lebanon’s knowledge economy from a struggling local sector to a world-class hub for entrepreneurship, in 2013 the central bank stepped outside of its monetary policy role by passing circular 331. The decision allows local banks to invest directly in startup companies or in venture capital funds, with 75 percent of the investments guaranteed by the central bank. The entrepreneurship ecosystem – at the time small despite having existed for more than 10 years – welcomed the capital infusion.

Lebanon is a small market with a relatively small population, even including those seeking shelter on its soil. Stakeholders tell Executive that the ecosystem needs more of just about everything, including entrepreneurs with fundable ideas. Some VC funds are even trying to lure Lebanese entrepreneurs living abroad back home in order to qualify for 331-compliant investments (only companies incorporated in-country are eligible). Enticing natives to return (or convincing foreigners to set up shop here in exchange for investments) requires a competitive ecosystem, of which an integral part is a clear-cut legal system underpinning it.

With an out-of-date commercial code, Lebanon’s ecosystem is far from competitive. Incorporation is expensive. Bankruptcy takes years and lacks basic protections for entrepreneurs. Some of the financial tools entrepreneurs need to receive investments and attract employees (such as preferred shares and employee stock options) are possible in Lebanon only through complex legal maneuvers as the commercial code does not allow for them (see story here). For the ecosystem to be competitive, the commercial code needs a serious update.

And the problem is not only related to competition. What happens when a successful Lebanese startup wants to raise money from an investor outside of the country? The complex legal structures the company created to receive investments and hire employees could well confuse and even deter foreign VC funds. Our entrepreneurs deserve better, and frankly so does the whole 331 experiment. We see very little buy-in from parliament or cabinet when it comes to building and sustaining our entrepreneurship ecosystem.

Not a single update has yet passed parliament. Our lawmakers must prioritize updating the commercial code. Without modern laws, we can’t hope to have a modern, competitive ecosystem.

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Entrepreneurship

Into a new dimension

by Thomas Schellen
written by Thomas Schellen

A new layer in the entrepreneurship ecosystem is taking shape through the increasing institutional presence of academic bodies, including both top-tier and less prominent universities in Lebanon. Universities have been linked locally to entrepreneurship in the past, but this link was often feeble and limited to teaching a few courses or having an occasional conference. Now, the bond between academia and the ecosystem seems bound to become tighter and take on the structure of intense and mutual interaction as described by American University of Beirut professor and entrepreneurship expert Salim Chahine. “Entrepreneurship as an ecosystem requires a triple helix where you have close interaction between the government, industry and the universities,” he says.

Two Beirut-based universities with advanced plans for rolling out their entrepreneurship centers are AUB, which has a project to inaugurate an innovation park by early next year at the latest, and the École Supérieure des Affaires (ESA), which already has established – in preliminary form – an entrepreneurship center under the name of SMART ESA. SMART ESA was created in Spring 2016 and is currently based in two rooms of ESA’s main building.

“The education and business environments have been changing for the past four years but they are not yet designed in a way to cater to a young person to go out and engage in entrepreneurship,” says Omar Habib, the new head of SMART ESA. ESA’s goal of institutionalizing entrepreneurship within the school has led it to embark on a year-long planning process that will develop an old building on ESA’s grounds into a permanent entrepreneurship center.

The new entrepreneurship center building is part of the historic French embassy compound and will be named after former Lebanese Prime Minister Rafic Hariri. A cornerstone laying ceremony for the center was held in May and excavation works for creating a new building inside the shell of the old one are scheduled for December or January, Habib says. According to him, the building already has a nickname: the SMART building.

The AUB Innovation Park will incorporate as a separate entity from the university and look to find a permanent location off campus. However, in the early stages of its existence, it will use AUB campus facilities for its activities, which will include acceleration programs. The park will seek to utilize AUB’s strong network with industry to build a competitive edge. “All accelerators are working on streaming and supporting, training and mentoring, helping ideas becoming startups. We will do the same thing and we will try to help them grow faster with our corporate network,” says Chahine, who is slated to be the director of the AUB Innovation Park.

Coy on details

When asked about details of SMART ESA activities, Habib coyly suggests waiting until the BDL Accelerate event in early November, when the entrepreneurship center is scheduled to announce its programs and open registration for startups. He disclosed that SMART ESA will seek to incorporate as a business because it wants to tap into funding under Circular 331 and that it has recently signed partnership agreements with a French specialist operator of accelerators and incubators.

“We will have an ideation level program, with sublevels, an incubation level program, an acceleration level program, and an a la carte offer of programs that are according to needs, because startups do not get all that they want from preset programs. Where we want to shine is in helping startups learn something and helping them to meet people,” Habib says.

Shahine and Habib are not ready to discuss numbers and budgets, but both university projects will likely run up millions of dollars in investments. What makes the projects of SMART ESA, the AUB Innovation Park, and plans related to entrepreneurship by other universities noteworthy, however, is the shared desire of higher education institutions to contribute to the entrepreneurship culture in Lebanon.

According to Habib, many families are still ruled by the paradigm of favoring a secure job for their children of university age, and entrepreneurship presents inherent risks for fresh graduates. However, this is not fully timely anymore. The hunger for Lebanese talent by countries in the Gulf is no longer what it once was, and the local market for jobs has been very restricted for several years now.

[pullquote]Entrepreneurship is something that every student can learn, as opposed to a talent which only a few people are born with[/pullquote]

Entrepreneurial activity is the only path that is open to many graduates if they don’t want to accept working for years as interns with a pittance of decisionmaking power and even less remuneration, says Ralph Khairallah, who is an entrepreneurship instructor at the Université Saint-Esprit de Kaslik (USEK). Khairallah teaches his students that if a country is going through a depressed economic phase, this is the best moment to start entrepreneurial activities. He says that through his teaching, he has validated his thesis that entrepreneurship is something that every student can learn, as opposed to a talent which only a few people are born with. His motto is that one can “make the world a better place – one entrepreneur at a time.”

USEK plans to open an entrepreneurship center in Kaslik, with the university being close to launching something that will provide entrepreneurship hosting options as an alternative to venues at universities in Beirut. “We want to own entrepreneurship,” Khairallah says proudly.

There is no single answer to fostering entrepreneurship, but Lebanese universities are keen to try approaches that will offer better opportunities for their students, says Hiba Othman, who coordinates the entrepreneurship project at the American University of Science and Technology (AUST). The university is pursuing a new initiative to introduce students to entrepreneurship through a learning-by-doing approach, and this year it embarked on a program that it wants to develop into a tradition for future semesters.   

“The rationale behind this entrepreneurship program is that we want to build this culture for our students and encourage them to build their own companies, because the job market nowadays is very small and people cannot find jobs as they used to. The youth have a lot of ideas, more than we have, and given the right tools, they can start their own projects, and these can be successful projects,” Othman elaborates.

Student teams are formed and mentored by senior faculty members, but the mentorship does exclude commenting on the students’ business plans or pointing out design errors. The teams, whose only requirement by the university is to be multi-disciplinary, are equipped with $2,500 in seed money and tasked with preparing products that will be presented at a business plan competition later this year. The university focuses this program entirely on its students and does not look to faculty members to offer ideas or present their own entrepreneurial plans.

Another university with plans to establish an incubator in the near future is the Modern University for Business and Science (MUBS). Like AUST, it is a university that was founded recently with the eventual goal of competing with the major universities in Lebanon: AUB, the Lebanese American University and  Université Saint Joseph (USJ).

MUBS first acquired experience with entrepreneurship activity through Tempus, a European Union program supporting modernization in partner countries, which ran from 2010 until 2013 at the university. The program illustrated that there was great interest in entrepreneurship among the students, says Latifa Attieh, chair of marketing and management. “The first thing that comes to the mind of most of our graduates is building their own enterprise. From this, we got the idea that it is essential to embed entrepreneurship education in higher education and also in schools; we have to start from an early age, because entrepreneurship is a culture,” she explains.

According to the dean of the International School of Business at MUBS, Guitta Abou Khalil, the university administration is working on the creation of an incubator at a training facility, which MUBS operates in Jal El Dib. This project is currently in the planning stage and details will be announced later. “MUBS has plans to roll out an incubator by the start of 2017. It will be before the next startup competition, which will take place in February,” she says.   

Many iterations of academic entrepreneurship

The first steps into entrepreneurship taken by Lebanese universities date to the 1990s, when the Lebanese American University inaugurated the Institute for Family and Entrepreneurial Business at its Byblos campus and USJ set up the Berytech Technopole adjacent to its science and technology campus overlooking Beirut in Mar Roukos. This was followed by courses, conferences and competitions on startup ideas and entrepreneurship at AUB and other universities. However, the outcome was not strong in terms of students and fresh graduates jumping straight from university into launching their own companies, many experts on the entrepreneurship ecosystem tell Executive, including Chahine and Nicolas Rouhana, who was director of business incubation at Berytech and is today general manager of the IM Fund.

This time around, however, the iteration of the idea of linking academia more effectively with business and entrepreneurship looks to be better positioned, as the entrepreneurship ecosystem has been nurtured for some years now from the financial, industrial acceleration and incubation angles. The angles under which financial and corporate players view entrepreneurship are viable, but differ substantially from the long-term, community-centric approach taken by universities like AUB. As Chahine points out, AUB will foster entrepreneurship under a time-honored educational and societal mission. “AUB’s goal has always been to impact the community; we will be a good collaborator with other entities in the ecosystem. That is our mission,” he says.

[pullquote]The interaction between academia and national interests also has the potential to address another towering need in the Arab region: research and development[/pullquote]

The proof of the value of interaction between academia and entrepreneurship dates back to the 1950s and to the place that still today is hailed as the global symbol of tech entrepreneurship: the area around Palo Alto, California. It stands to reason that the tech industry hub known as Silicon Valley had to emerge somewhere because the new tech industry of the postwar era needed to find its location. But a factor that was instrumental in pulling it into Northern California was the combination of entrepreneurship, venture capital, research and academia that was created when Stanford University established an industrial park and encouraged close interaction between professors (who could take on corporate work as consultants) and young companies that took up residency in the park (some of which could send qualified employees to take classes at the university). The magic of Silicon Valley has proven resilient to attempts of decoding or copying its successful formula, but one can surmise that the intense interaction between academia and industry was a part of the recipe.

The interaction between academia and national interests also has the potential to address another towering need in the Arab region: research and development (known as R&D). R&D was fostered by Stanford through the creation of a research park, and it played a key role in the development of Silicon Valley. For Lebanon’s future, it will be vital to develop R&D with the participation of academic institutions and with infusion of substantial funds, says USEK’s Khairallah. “[Facilitation of loan guarantees under] Kafalat was the big bang for hospitality and tourism ventures in Lebanon; [funding under] Circular 331 is the big bang for the tech startup ecosystem. We need a big bang for research,” he tells Executive.

According to him, R&D will create returns for the country and Lebanon could develop a triangle between entrepreneurship, academic excellence and research. “We have good entrepreneurs, we have the academic institutions, but we do not have the resources to do research and development. We need to create an ecosystem for research,” Khairallah says, noting that large research universities in the developed world have huge endowments or funds that are sustaining their R&D.

Being more involved with the entrepreneurship ecosystem will also have an impact on the universities. The next generation of young students could differ greatly from the past. “It will be a challenge for universities to adapt and that is why it is important for an entrepreneurship center to be its own entity. That also means that it needs to be a partner to the entire university, from top to bottom [of the administration and faculty], not just with the students,” he observes.

Changes are evident for Chahine in the Arab region, including increasing education levels and new realities at the workplace. He sees the way forward in terms of collaboration with other Lebanese and Arab universities. “Lebanese are not having the same space [to move into regional employment] as they had in the past, but AUB still has its presence in the region and we are still a leading research entity in the Arab world. We hope that we can collaborate with other Arab universities on initiatives such as acceleration programs that will create more and more entrepreneurship; all of us can be entrepreneurs,” he says.

When one broadens the view beyond the budding entrepreneurship ecosystems in Lebanon and the Arab region, the question that concerns academia is how to design entrepreneurship centers and programs to nurture talent so that these centers and programs will survive beyond the current period, which is characterized by an economy-wide infatuation with tech entrepreneurship.

[pullquote]Circular 331 is the big bang for the tech startup ecosystem. We need a big bang for research.[/pullquote]

This concern is driven by the cyclicality of education. Popular areas of study are becoming saturated within a few semesters, producing more graduates than the market can absorb. This problem is potentially exacerbated by globalization of education, which is reflected in a glut of popular programs that lead to supply bulges in several countries simultaneously. Internationally, entrepreneurship may be a candidate for such an unwelcome development. It has already been speculated that entrepreneurship degrees are what MBAs were 20 years ago: degrees in which scores of people invest in vain because they hope that they will secure their future.

The danger for this in the Middle East may be remote and could be overlooked when one only focuses on the difference between local universities and those in markets where institutions of higher education have had entrepreneurship programs for years. Judging by the university rankings for entrepreneurship programs compiled by the French higher education consultancy Eduniversal, these markets are the United States and Western Europe.

Entrepreneurship is one of 17 masters programs for which Eduniversal has put together a global ranking containing either top 50 or top 100 programs. According to the methodology described on the consultancy’s best-masters.com website, ranks are based primarily on three equally weighted factors: reputation among recruiters, starting salaries of graduates and satisfaction of graduating students. The reputation and satisfaction scores are survey based.

According to the Eduniversal list, the US is home to a quarter of the top 100 entrepreneurship masters and another quarter of schools are based in Western Europe. The Middle East has three programs on the list, if one includes the country to Lebanon’s south. The program at the University of Tel Aviv is highest ranked in 25th place and another program at Ben-Gurion University of the Negev is ranked 88th. The sole program from an Arab country is Beirut-based USJ’s Professional Masters in Entrepreneurship and Technologies in 73rd place, which is one of five professional masters offered by USJ’s business department. 

While global trends should be paramount on the minds of Lebanese university administrators and entrepreneurship program managers when they are thinking a few generations ahead, it is positive for the near future of our ecosystem that the odds for institutionalization of entrepreneurship in Lebanon’s academic realm are increasing and entrepreneurship is being enriched by institutions like SMART ESA which, as Habib says, “want to develop programs that are flexible and will answer the needs of people who don’t even know yet what their needs are.”

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Entrepreneurship

Taking stock of the entrepreneurial ecosystem

by Thomas Schellen & Matt Nash
written by Thomas Schellen & Matt Nash

The month of November is often the most pleasant month to live in Lebanon. The weather is nice, the mood is relaxed (with no holiday shopping stress yet), prices are in low-season mode to invite visitors and National Day is around the corner. It is the perfect month to celebrate entrepreneurship as the most promising new force in our economy. One could even say that we are witnessing the early years in a new Lebanese history, which began with the birth of the entrepreneurship ecosystem four or five years ago. This era, which was born in stages with events such as the opening of the Beirut Digital District in September 2012 and with the all-important issuing of Banque du Liban’s Circular 331 in August 2013, is now progressing from infancy into childhood. We are already in year five of a new calendar, and as with every growing child it is good to make a new pencil mark on the door to see how much the ecosystem has grown in the past few months.   

One way to measure this development is to take stock of activities and physical facilities. In the case of the ecosystem, this is a bit tricky because centers of entrepreneurship do not just form at one place but rather anywhere and everywhere. Still, it is worth noting that the BDD has added two new buildings and a plan for an ambitious new real estate project in 2016, bringing the existing building stock from one office tower with 3,200 meters of floor space – in the middle of what was an urban area of derelict properties with no connectivity at the time – to six office buildings (made up of restored and newly constructed buildings) by this autumn.

[pullquote]The most telling measure of the ecosystem’s health is the growth of startups in financial terms[/pullquote]

In terms of activities, the Lebanese talent for partying and socializing is reflected in events, dinners and fundraisers that are increasingly crowding the entrepreneurship calendars. One event, the first Lebanese Entrepreneurship Summit, was held at the end of September. It was followed by anniversary events and dinner celebrations with hundreds of guests by organizations such as Endeavor (a mentoring network) and Torch (a coding initiative). To wrap up the year, the largest new annual gathering for entrepreneurship, BDL Accelerate, is on the schedule for November, as is Global Entrepreneurship Week Beirut.

The most telling measure of the ecosystem’s health is the growth of startups in financial terms. Here, although the valuations are still confidential, Executive has heard of the first companies that have reached serious numbers, growing near to or even breaking the $100 million mark in their valuation by venture capital firms and investors. New, specialized funds are stepping up, such as Phoenician Fund I in fintech, health care and e-government and the Azure fund in fashion. Other funds, such as IM, are seeking to close gaps in financing that we observed in previous years, in particular a lack of funding in the angel investor range.

The names in the fund industry that established themselves in earlier years – such as Middle East Venture Partners, Bader, Berytech Fund and Leap – remain highly active and it is clear that lack of funding is not a problem for the ecosystem in the current peak phase of Circular 331’s life cycle. Risks of inflation in startup valuations always remain, but the ecosystem’s financial stakeholders say these risks have so far been managed. Still, on the downside of the financing environment, greed has crept into the ecosystem, says Walid Hanna, the CEO of stalwart Lebanese VC MEVP.   

The slow creep of wasta as a vice often associated with anything Lebanese is being discussed, but it has not been observed by ecosystem stakeholders that Executive talked to this autumn. Complaints about poor and expensive internet service still abound, but more astute observers note that the status quo is much improved when compared with five years ago and does not pose an insurmountable barrier to business for startups.

This leaves the absence of a legal infrastructure as perhaps the ecosystem’s main impediment to healthy and balanced growth (see story here). On the plus side, Lebanon’s academic bodies are moving to institutionalize entrepreneurship in universities and close this gap in the fabric of the ecosystem (see story here).

It would be in line with common business development if the ecosystem’s sometimes chaotic growth in the past five years turns into growth that is better monitored and more thoughtfully structured. Signs of maturity are beginning to show, such as a waning of megalomaniac and overblown marketing activity for the young ecosystem. With these encouraging signs of improvement, it seems that the growth of entrepreneurship in Lebanon will not level off in the near future.

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BusinessCapital Markets Authority

A view from the other side

by Thomas Schellen
written by Thomas Schellen

Law 161 was passed five years ago to create a financial regulatory agency and structure capital markets in Lebanon. Some market players are becoming restive and others are criticizing omissions in the law’s implementation and aspects of the CMA’s methods. To understand how things look from the CMA’s perspective, Executive sat down with CMA Executive Board Member Firas Safieddine for an exhaustive conversation.   

E   How do you measure the performance of the Capital Markets Authority since the adoption of Law 161 in August 2011?

We can measure ourselves on many scales and have only been here for four years. First, we had to hire the people. Before that, it took us a year to get funding from the government. It was approved, but it took us seven months before we got the money. [In that time] we could not hire because we could not pay salaries. When the money came in, we started hiring but had no location. We were [operating] as a startup from here or there, like being in a tent. We had to hire people, train them and hand over responsibility to them.

E   So what is your situation as of today?

Today, we are fully established in terms of human resources, and we are adding staff as we go because the market is big enough to add more people. We have around 45 team members, including all the staff. There are 18 employees in the financial control unit, which is the heart of the CMA.

In terms of regulatory work, the first step was to transfer regulations from Banque du Liban (BDL) to the CMA to prevent having a gap in the market, and we worked under the same regulations that were issued by the central bank in relation to capital markets. Obviously those regulations needed major upgrades so that they would be in accordance with best practices and international standards.

We collaborated with the World Bank in order to create a supervisory body that would advise if we were on the right track and we followed the principle of engaging the stakeholders in writing the regulatory framework. We wrote and made changes several times until the market was comfortable with the regulations that we were writing.

E   How many regulations are we talking about?

There are six major regulations that we are working on. Three have been issued and two will be launched in the next few weeks regarding licensing of institutions and registration of individuals. The regulation for collective investment schemes was the last to be discussed [with stakeholders] in June 2016. We take the input, rewrite it in English and then translate it into Arabic, because the law is in Arabic.

E   What are your key performance indicators or KPIs for the Capital Markets Authority?

We entered the market without understanding the landscape. We had to shift eight or nine financial intermediaries [to our supervision] and create files for every financial institution that has activity related to capital markets. We looked at their processes and corporate governance and audited each one of them. So far, we have covered 40 or 50 percent of the market. It is about people and time – it takes time to audit these institutions.

E   Do you have to issue a certain amount of fines as part of those KPIs?

Issuing fines falls under the authority of the sanctioning committee. We audit and write our report on a given financial institution, and based on that report, if we find that a financial institution is at fault, the sanctioning committee assesses the fines. The law gives independence [to the sanctioning committee] in order to avoid conflicts of interest, such as the CMA spending collected fines on salaries. The independence of the sanctioning committee is why the International Organization for Securities Commissions (IOSCO) has given us its blessing as to the structure of the law.

E   What does it mean for you to become a member of the IOSCO?

The IOSCO is recognized as one of the world’s key international standard-setting bodies. More than 180 countries are members of IOSCO and we are proud to be a member of such a highly esteemed organization.

To become a member of IOSCO, you have to comply with a rigorous set of principles. The IOSCO has identified 38 principles of securities regulation which are based on three objectives: one, protecting the investor; two, ensuring that the markets are fair, efficient and transparent; and three, reducing systemic risk. These objectives are also at the core of Law 161.

Being part of the IOSCO today means that the CMA in Lebanon has organized itself and has written a regulatory framework for the capital markets in Lebanon to the highest international standards.

E   So you are an associate member today and aiming to become a full member?

As an associate member, you cannot be part of the executive committees, but you can participate in all meetings and in other committees. To become an ordinary member is a matter of time and it does not take too long. We are hoping to become ordinary members within a year. And we achieved a record by going from being non-existent as a regulatory body to becoming an associate member within four years. It is one of our KPIs that we have become a member of IOSCO.

E   Are you planning to invite IOSCO to hold their general meeting in Beirut at some point?

We hosted a meeting of the Francophone regulatory bodies, Institut Francophone de la Regulation Financiere (IFREFI), in Beirut this June and Lebanon is very well equipped to host the IOSCO annual conference at some point.

E   One of your responsibilities is the review of fund products that are intended for sale in the Lebanese market. How many funds have you seen?

In the past year, more than 100 funds were approved. But we have not reached 100 percent of our capacity. Our capacity is not an indication of the number of funds. The market decides how many funds need to be approved. We have not delayed any funds and we have not been a hindrance to the market.

E   What kind of process does it entail to review and approve funds?

We have received fund prospectuses for approval that had 400 and 500 pages. We are careful to read them page by page, and we ask the financial institution to make the necessary changes in order to not undermine our three core regulatory principles.

The quality of the funds has already changed. We have created a system of approving funds or offerings in which we say that if you don’t hear from us within 14 days with any remarks, you can start selling. However, if we find something that needs to be changed, the process is extended until the change is finalized.

E   But you expect that your capacity to evaluate and approve funds will continue developing?

It is an efficient process.

E   At some point in time, you will have accomplished issuing high level regulations. Do you have any KPIs for your operations beyond that point, for example regarding the speed with which all funds that have to be approved will be evaluated?

Going back, there was a department in BDL that was servicing capital markets activities of the Lebanese market. When the CMA was created, we had to go back and change the approach. The market needed to be convinced that there was a new sheriff in town, an expert that knows what they are talking about and will go through each and every fund and do the necessary changes in order to preserve our three major objectives of protecting the investor, assuring that the market is fair and reducing systemic risk.

E  Do you have a target figure regarding the number of funds and what you expect from the market? How many funds do you expect from the market to be submitted every year?

This is part of the development activity. We need all stakeholders – the regulators and the associations like the banking association, the financial institutions’ association and BDL to put their heads together and start working on the development plan. We are creating a master plan for development of the Lebanese [capital] market today which will hopefully be ready within the next six months. Part of this plan is investor education. It is not the thing that will develop the market [by itself] but it is one of several ingredients that will come together and form a development strategy.

[pullquote]The market needed to be convinced that there was a new sheriff in town, an expert that knows what they’re talking about[/pullquote]

E   But we still lack implementation of three key elements.

Right. We still lack the tribunal, the sanctions committee and the stock exchange is still hanging between privatization and a government institution.

E   What is the timeline outlook for the creation of a tribunal, a sanctioning committee and privatization of the BSE?

Is this an interview on politics? You might as well ask me when we will have a president.

Well, people in the market ask when the tribunal will be established, because they want to have an institution to turn to if there is a dispute with a CMA decision.

We have not faced such an issue and I think that the people who are saying that the absence of a tribunal is hindering capital markets should worry more about the Beirut Stock Exchange, because the BSE will drive dynamism in the market. Privatizing the BSE and creating an electronic trading platform within the stock exchange will create a major shift in the market.

We have done our job and from the CMA’s point of view we are ready. The privatization will be a two-step process of turning it into a joint-stock company and of privatizing it. We have lobbied government officials, and we have given our recommendation on how the structure of the BSE should be for one year, and what the activity of the board of the stock exchange should be to prepare the BSE for privatization.

If the cabinet meets today and decides that they want to go ahead with converting the stock exchange from a government institution into a joint-stock company, we will have a privatized BSE and probably an electronic trading platform within six to twelve months.   

E   But this is contingent on “if”.

However, the “if” is not a technical if; it is a political if, which I would not like to elaborate more on. What I will say is just that the CMA is sitting in the same boat as all the stakeholders when it comes to these three challenges.

E   You have shown confidence against the odds for a considerable period already, saying all the time that something would be revealed “very soon”.

It is only confidence and hope that can keep us going. In the matter of BSE privatization, it is only one decision by cabinet that would get the ball rolling.

E   And the same is true for the tribunal and for the sanctions committee?

The tribunal and the sanctions committee can be set in motion with one appointment decision. We have space to house the sanctions committee immediately. We have money to pay their salaries. We are all set. They just need to give us the five names.

E   But you would agree with the people in the market who say that not having a sanctions committee in place will pose an obstacle to them?

It is an obstacle to us before it is an obstacle to them. We believe that [the absence of a sanctions committee] is an obstacle to the CMA before it is an obstacle to the market. However, we are not leaving the market in a void. We are doing our job to the end.

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BusinessCapital Markets Authority

A desire to monopolize the Lebanese forex market?

by Thomas Schellen
written by Thomas Schellen

One issue has emerged as a stumbling block in the relations between the Capital Markets Authority (CMA) and parts of the financial industry in recent months. The concerned sub-sector of the financial industry is a group of companies specializing in digital currency trade, also known as forex platforms or, fx companies.

The Lebanese problem with currency trading is based on a new regulation limiting CMA-regulated traders from opening small accounts of $1,000 and on requirements for minimum margins to be boosted from two or five percent to 20 percent, thus reducing leverage possibilities from 20 or 50 times to five times the amount held in an investor’s account with the fx company. 

These two regulatory hurdles from the CMA have caused outrage among fx companies in Beirut, which claimed that a requirement for a 20 percent margin would drive their customers away and ruin their business. Letters of complaint were written to the shareholders in fx companies, street protests outside the CMA headquarters were discussed and claims of cold-blooded business murder were leveled at the CMA and its financial control unit, which set the end of September as the deadline by which fx companies would have to comply or run into danger of losing their licenses.

According to Executive’s investigations of the mood among financial institutions, however, the outrage was concentrated among the directly affected companies.

Microeconomic and macroeconomic considerations

Currency trading, while a financial markets activity, represented a small segment of this market in Lebanon. Exactly how small is a matter of debate since this segment of the financial industry consists of companies that do not have to publish annual reports. But judging from their office locations in pricey downtown Beirut areas, local currency platforms have not done badly. One private account manager affiliated with Trust Capital told Executive that the firm has increased its revenue for each year, year on year, since opening for business in 2010. However, he said he could not disclose the compound annual growth rate (CAGR) of the business achieved since the company’s founding.

On the other hand, the macroeconomic role of fx trading as component of the Lebanese market has been described as not at all significant. BlomInvest head Fadi Osserian said that according to his recollection of meetings with the central bank governor about the subject of margin requirements, Governor Riad Salameh was adamant in insisting on the protection of financial markets investors as a priority.

[pullquote]“We are finding an alternative for these companies and investors to work under [a system] that is controlled by us”[/pullquote]

CMA officials depicted claims as excessive that 500 families were dependent on work in the fx companies, and argued that even if several hundred people were working in this industry, one should consider first how many families would be saved from losing their money in speculative trading thanks to the strict regulation.

It is a matter of one’s overall viewpoint if one considers companies such as forex platforms as negligible contributors to the economy and as vital as an appendix for financial markets, or regards them as necessary for the functioning and development of financial markets and is concerned that the risk of driving these companies out of business or into moving into foreign jurisdictions would damage the prospects of building a vibrant capital markets environment in Beirut.

No fundamental CMA prohibition of forex

According to the CMA’s Firas Safieddine, however, it is not the CMA’s intention at all to stifle forex trading in Lebanon. “When we [started operating as the CMA], we realized that these forex service providers were allowing investors to go [into trading the fx markets] with $1,000 accounts. That is very little in currency trading; you might as well go to the casino. We said, it is not allowed to have accounts with $1,000, you can open an account with a minimum of $10,000. To make it clear; I am not saying that the whole forex section is a casino. We classify, however, that opening $1,000 accounts for 1000 clients, is a casino,” he explained.

According to him, even if the amount might not be very high, it would signify a high systemic risk if 1000 clients were to appeal to the CMA, each saying they lost their $1,000 because of the trading platform having experienced a collapse. Safieddine said that the sudden policy change by the Swiss National Bank (SNB) in early 2015 was an event that triggered large currency fluctuations and led to a platform’s breakdown in Lebanon. Thus the SNB’s entirely unexpected lifting of the exchange rate cap resulted in market shocks, which created losses for currency traders around the world, including Lebanon, whereby the CMA’s reckoning some private clients had engaged in positions that caused them to run up huge exposures which until today require the CMA to mediate between investors and the financial operators.

He reiterated that the CMA would not seek to eradicate forex activity from the Lebanese market. “We just said that we are going to temporarily lock in on the risks behind the forex and we are finding an alternative for these companies and investors to work under [a system] that is controlled by us,” he said, referring to the Electronic Trading Platform (ETP) that is supposed to be introduced after the transformation of the Beirut Stock Exchange. Such a statement reveals what was known but so far unproved: the CMA is seeking to monopolise the fx market.

The requirement for 20 percent margins could be eased and restored to the single digits once the ETP is in place and platforms are supervised by Lebanese authorities instead of operating by proxy, thus guaranteeing that accounts have to be topped up or shut down automatically if they drop below a minimum.

[pullquote]There is a global specter of volatility and even trade wars among countries or currency wars engulfing some of the most actively traded currencies[/pullquote]

Forex companies appear to have dialed down the intensity of their protests against the 20 percent margin requirement, at least for the moment. While there were reports of some layoffs at fx companies in September, traders said off the record that these dismissals were the result of regular employee performance reviews, not because of issues related to regulation. The fx industry does not yet speak with a consolidated voice through an association or syndicate, said the private account manager working in affiliation with Trust Capital, by his claims the largest forex specialist operator in Lebanon.

The impression created for this reporter by forex companies speaking off the record or communicating via an independent associate instead of senior management was that the companies are seeking to tread with care and play for time by emphasizing their national commitment. “The margin requirements might not fit Lebanese traders but we have no doubt that it will be for the good of this business. We will treat these requirements as a positive and we will conduct ourselves according to the requirements until further notice,” the account manager said.

He conceded that the CMA’s increased margin and account size requirements were reflected in client departures but said these were so far manageable at rates of “under 20 percent” of customers being lost and proclaimed that while some forex companies shifted offices to Cyprus, “we believe in Lebanon and will stay in Lebanon as long as we can make our balance sheets [break even]. We will obey the CMA regulations until further notice.”

The global perspective

When one reviews the situation of currency trading in Lebanon from the angle of the global economic perspectives in the fourth quarter of 2016, it seems not to be paranoid behavior for an economy like Lebanon to be wary of all trading platforms for currencies that the Lebanese might get involved in but that the national authorities do not have under control. Times are volatile and filled with uncertainties, as the recent experience with the Swiss franc proves. The franc is very actively traded, much more than the size of the Swiss economy would explain. And as far as currency shocks in 2016, one can add to the Swiss moment the – albeit in contingency planning better prepared – experience of the pound sterling’s sudden weakening in response to the pro-Brexit vote this year.

These lessons from the recent past are reinforcing concerns over Black Swans, or wholly unpredicted future events, and efforts to turn these into “Gray Swans,” or extreme events that are also not predictable but which we somewhat can take into account. The expectation of such events is nurtured by general fears – highlighted once again this autumn at the annual meeting of the International Monetary Fund – about radical uncertainty relating to the markets.

One such fear is that general volatility, which was worryingly high in the first quarter of 2016, will rise again toward the end of the year and possibly beyond. Another fear is about waning commitments of leading economies to globalization and integration; a fear fueled by worries over upcoming political elections and a possible increase of isolationist/populist behavior by the United States and centrifugal political forces strengthening in the EU and even in Euro-land.

Monetary easing will be more difficult to keep doing as central banks run lower on options, and thus there is a global specter of volatility and even trade wars among countries or currency wars engulfing some of the most actively traded currencies. Also, there is the fearful potential of flash crashes, short-term inexplicable trade events connected to algorithmic trading that can bring wild swings to the currency markets, as was the case with the sudden drop by the pound sterling in thin trading on the morning of October 7. Considering all these factors, the instinct of seeking control over currency trading in Lebanon seems quite reasonable.

As currency traders themselves admit, large currency positions in the hundreds of millions of dollars are maintained by local investors and those can be quick to turn to ruin in unpredictable and volatile environments, something which currency markets are by definition in “normal” times – and even more so nowadays.   

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BusinessCapital Markets Authority

To be or when to be

by Thomas Schellen
written by Thomas Schellen

On the face of it, the story of financial markets and their regulator, the Capital Markets Authority (CMA), looks like just another manifestation of Lebanese chaos. Institutions and measures that were prescribed by law in context of the CMA’s creation (in this case, Law 161 of 2011) are overdue in their implementation. Not just in one regard but in the form of three delays: the privatization of the Beirut Stock Exchange (BSE), the creation of a tribunal or court that is specialized in financial matters, along with an independent committee that has the sole authority to mete out sanctions.

This compendium of delays is no detraction from the necessity to have an institution that regulates financial markets, however. Also, ranking stakeholders in banking and finance express their satisfaction with the CMA and its regulatory work. Jean Riachi, chairman of FFA Private Bank and chair of the financial markets committee at the Association of Banks in Lebanon (ABL), gives the CMA a good evaluation in his initial comments to Executive. “The CMA regulation is one of the main topics that we address in the [financial markets] committee. I see the performance of the CMA so far as very positive from the standpoint of regulation. It was necessary to have a body that puts regulation and also controls their implementation,” he enthuses.

A generally supportive but somewhat cautious view of the CMA is presented by Anwar Jammal, the chairman of Jammal Trust Bank (JTB). He tells Executive: “I believe that the creation of the CMA was essential and I hope it will continue to maintain its independence from the political process, and not be subject to abuse as is the case with everything else. CMA independence, as one of the ‘arms’ of financial regulations, is crucial.”

Fadi Osseiran, the head of Blominvest, opines: “What the CMA has been doing is emphasizing control and business conduct to make sure that local institutions deal properly with their clients, whether they deal on local or international markets. And I think they have been doing a good job.”

However, beneath the official comments that bankers and financial intermediaries give for the record, the debate on the CMA has a darker underbelly. Gossip purported from among the ranks of stakeholders like banks, currency traders and other private sector financial institutions betrays the existence of a schizophrenic combination of behaviors where complacency with the status quo is mixed with contradictory views and attitudes.

Some persons are complaining about the CMA’s performance and its staff, while lamenting at the same time that the financial markets tribunal and the independent sanctions committee are institutional components they are urgently waiting for. When the microphones are switched off, other voices from the market make it evident that the CMA has been a topic for conspiracy theorists. There are allegations that there were political or sectarian aspects in the regulatory organization’s three-year history. Then there are opinions, always presented strictly “off record,” that target specific CMA members, complaining about their personalities, their style of communication and even their competence.

Meanwhile, people in finance seem to be doing business as they know how. That means they are busier dealing with international financial hubs (on behalf of their local clients) than with financial markets in Beirut, and are hardly holding their breath in anticipation of the BSE’s purported new lease of life, including the addition of an electronic junior market. All the while, the Lebanese capital market in its entirety looks destined to emerge – in the best case scenario of all missing components being deployed before mid-2017 – with a delay of more than a decade, given that the need for this market had been determined back when the millennium was in its infancy.

Political delays

What is at stake? Only the heart of our economy. Or more precisely, the non-banking half of the financial engine that should power the Lebanese economy, is missing.

Some issues in this saga are easier to fathom than others. In the first item of discussion about the CMA performance, it is convenient (from a viewpoint of defenders of the CMA) that Lebanon has a dysfunctional government. The blame for the delays in the implementation of law 161 and the procrastination in privatizing the BSE, appointing judges to the tribunal and empowering a sanctions committee can be put squarely at political doors. No one can dispute the CMA’s claim that they are only waiting for decisions by cabinet, parliament or ministers, and that they have been doing all they could in the meantime (see interview with CMA Executive Board Member Firas Safieddine here).

[pullquote]There are allegations that there were political or sectarian aspects in the regulatory organization’s three-year history[/pullquote]

Also compelling is the age card with its trump of inexperience. With not even four years of operational existence under its belt it is difficult to fault the CMA for their lack of experience or their incomplete market knowledge and still fledgling familiarity with all companies that are constituents of the Lebanese financial markets. The youth argument still works for the institution, for example, when it comes to rebutting allegations that there is not enough progress with capital markets on the development side when compared with the regulation side. Or even when Safieddine denies the existence of a problem in the lack of a tribunal with the argument that no dispute has happened yet which would require judicial settlement.

Plausible explanations are finally hard to dismiss when it comes to minor but ultimately annoying practical flaws, like the problem that CMA officials can sometimes be hard to catch at their desks. When one tries to reach the CMA, one has a chock-full of phone numbers to call – at least two per staff member. But an observer calling any number may get the impression that this institution must be located on some moon circling a faraway planet like Saturn or Jupiter, judging from the many attempts when phones are simply ringing off their hooks. According to the CMA, improving this situation (which already existed for at least one year) is a work in progress and a simple matter of renewing the phone system.

Where things get complicated

However, the dilemmas surrounding our still non-existent capital markets have aspects that are more complicated. These include issues of a technical nature, as well as fundamental questions over control and freedoms in financial markets. One example of major technical concern for market participants is the matter of “exempted offers” for funds or financial products. According to FFA’s Riachi, the CMA addresses the exempt offers in a restrictive and unusual way. “Elsewhere, if it is an exempt offer, it does not need any prior approval. In Lebanon, it needs prior approval even if it is called an exempt offer,” he says.

Even though admitting that the CMA works very fast in responding to applications for selling funds and although an application is considered as approved if the CMA does not issue a comment on it within two weeks, Riachi says that the required approval process is too burdensome on companies which want to offer funds to a handful of professional investor clients, especially when the originator of this product is based in a jurisdiction outside of Lebanon. “In most countries, an exempted offer is defined by the limited number of persons you can market it to and the need for these persons to be qualified,” he specifies and adds that as a financial intermediary in Beirut, “you still have to go to CMA when you have a product that you want to offer to a handful of clients”.

[pullquote]“We are new to the market and we need to get to know it and need to understand its offerings”[/pullquote]

For the CMA, Safieddine counters, “exempt is not translated as something that doesn’t need approval”. He argues that the exemption of an offer must necessarily be based on criteria which are set by the regulator. Complicated products, even if they are offered to only a handful of clients, must be reviewed in his opinion and he says that the demand to have each and every securities offer or funds product be submitted for approval is “for their own protection” of market participants. Beyond that, he downplays the argument over exempt offers to mainly just being a sign that the two parties still lack familiarity with one another. “The mentality that the market exhibits is only proof that we need to get to know each other. We are new to the market and we need to get to know it and need to understand its offerings,” he proclaims.

Then there is the matter of currency trading platforms. This is a complex, technical issue involving leverage margins and minimum account sizes that raises questions of how much control is healthy, what limits should be imposed on market participants, and how important specialized operations like forex trading are for a marketplace that aims at becoming internationally successful (see story here).   

An exchange with a future?

Next there is the legacy issue of the Beirut Stock Exchange. It has taken on two dimensions: the first question is how to invigorate the BSE after more than a decade of disappointing performance and the second question is whether the addition of a junior market will provide a satisfactory return. Since the BSE was reopened 20 years ago, it could not live up to expectations in the number of new listings. Nor could it impress in recent years due to the low number of trades and abysmally weak turnover, the tendency of market capitalization to stagnate and the resultant dwindling of a market cap as a ratio of GDP, a benchmark by which Lebanon lags behind the Middle East and North Africa, not to mention other world regions. 

JTB’s Jammal describes an Electronic Trading Platform as making “great sense” but raises questions about the viability of such undertaking: “I wouldn’t know how much it would cost to develop the platform, but I doubt the trade volume will ever be large enough to justify the investment. A prerequisite for such a costly endeavor is that laws have to be changed and others introduced to encourage companies to go public and enlist on the Beirut Stock Exchange,” he says, pointing (as an example for a not necessarily rewarding expenditure) to an advanced recording system that automatically tracks phone conversations a banker has with dealers. According to him, the system’s installation was required under CMA regulations and rightly admonished this when the institution visited JTB, but the $ 30,000 investment into a dealer recording system is hardly viable by the amount of business related to it.

Jammal says he would enthusiastically welcome a boost to the BSE through listing of the state-owned telecoms operators MIC 1 and MIC 2 (known in the market as Alfa and Touch) or by having a percentage of shares in every single Lebanese bank traded on the BSE. But, as he sees things, he neither expects a lot of movement on an electronic trading platform (ETP) nor does he regard it as the CMA’s role to get actively involved in this matter.

[pullquote]We need to shift the dynamics of the market toward an investment mentality. This is where the capital markets need to come in.[/pullquote]

“The role of the CMA is not as much to promote stock market activities per se as it is to promote transparency and secure stability of the financial markets leading to a greater participation by businesses. I think the essence of the role of the CMA is the development of the stock/financial markets in line with best practices,” he says.

FFA’s Riachi also expresses doubts about the viability of an ETP. “I am not a big fan of the idea [of an electronic trading platform],” he declares, adding: “I might be wrong, but for me, an electronic exchange does not increase liquidity. What increases liquidity in small markets like Lebanon are market makers. We therefore should find ways to encourage the emergence of market makers. Electronic exchanges don’t usually work, especially when talking about small and medium-sized enterprises (SMEs). It is about marketing, discussing with your broker, not technical what SMEs need, plus we already have an electronic exchange in place with the BSE. It is totally electronic.”

The development challenge

In the broader question of how much regulation is necessary and when regulation turns into an obstacle for development, many private sector stakeholders naturally gravitate toward prioritizing development. The CMA agrees that market development is crucial but has a predilection to issue regulations. “Regulation alone does not lead to development. I think we need much more effort, much more creativity and more […] incentives, and this has to do not only with the CMA but also with the fiscal policies. But the point is that we need a champion for this. This champion should be the CMA and we have not seen it yet materialize,” says BlomInvest’s Osseiran.

In his view it is easier to regulate than to develop because one can adopt regulations that exist in the United States, Europe or the Arab world. Not so in building a market. “For developing, you need to have imagination, creativity, and that is not an easy thing,” he reasons, but adds that the private stakeholders are in communication about this issue with the CMA “and they are promising that they will do something about it”.

Overregulation is also a concern for Riachi, who also sees a deficiency in development. “We are not making enough progress in developing capital markets in Lebanon, which is the other mandate of the CMA. I think that we are overdoing the regulation part and this will be a handicap for the other part of their job,” he says. Financial forms and requirements for being listed or offering securities might deter some issuers and firms from Lebanese capital markets, he says, advising: “We should be realistic and not have regulations that are too tight.”

Entwined with the development question is perhaps the systemic relation of necessary institutional support and concealed dependencies in CMA decision making. The CMA’s Safieddine emphasizes that the entity is “not a subsidiary of the central bank” – but it seems that certain decisions, even something as trivial as taking a picture or disclosing a biography of a CMA official, require approval by Central Bank Governor Riad Salameh.

At the same time, the acknowledgement of the CMA’s importance and its empowerment by parliament and other political institutions must be considered as imperfect, seeing that the CMA has been waiting for a long time for political decisions to create entities such as the financial markets tribunal and the sanctions committee. 

An additional new symptom of the excessive weight of banking in the economic fabric, at the expense of capital markets, may be reflected in the emphasis on the Association of Banks’ recently presented draft for a national strategy on financial education and literacy (see comment piece here). The CMA is not indicated as a top stakeholder in the creation of a higher council for financial literacy, although Safieddine points out to Executive that: “The national financial education strategy is at the core of our mandate.”

The draft document does not include the term ‘investment,’ as far as Safieddine has seen, and he emphasizes that this omission indicates a flaw. “The Lebanese consumer should [be made to] understand that investment is not just buying a car or a house. We believe that we as the CMA can give much more lucrative ideas about investment and create a national virtual investment competition. We can show them what investment is. We need to shift the dynamics of the market toward an investment mentality. This is where the capital markets need to come in. Today the banks’ association is talking about where money grows in terms of deposits; we need to show that investments generate money growth as well and perhaps at a larger pace than the growth coming from deposits and their compounded interest.”

Gnawing at the roots of the nation

It is undeniable that the Lebanese government has not been doing its job in many regards. There is an avalanche of pressing concerns, such as the government’s inability to provide basic services (water, electricity, solid waste management) and social safety nets (medical care, welfare, pensions). This has been to the detriment of the economically vital system of financial markets. This makes it all the more difficult to draw public concern to an issue such as financial markets, which is both obscure and complicated for Joe and Jill Beiruti. As Osseiran points out: “From a citizen’s perspective, the garbage problem is much more important.” On top of that, it’s not even sure that the capital markets topic gets the attention it deserves from all economic actors, even though the opportunity cost of not boosting the capital markets could be reaching proportions of double-digit percentages in lost GDP (at the very least cumulative over several years).

Last but not at all least on the minds of market participants is the issue of transparency in appointments of key personnel. Whispers (or even screams) heard by Executive contained decidedly unfriendly terms such as “pompous,” “behavior unbecoming of the position,” and “ignorant and unwilling to learn”. The perception of a “difficult character” was among the most benign descriptions, which were generally directed at one person: the head of the CMA’s control unit, Khalil Ghalayini.

However, the only market participant who would comment on record about Ghalayini was BlomInvest’s Osseiran. He explained apparent dislikes with the control unit’s mandate and gave a shining endorsement of Ghalayini’s competence, saying: “The hardest person in a bank is the auditor or the compliance officer. What do you expect? [Ghalayini] is a sheriff and has to implement his responsibility. About the way in which he is doing his job, you might say he could be nicer, but I don’t think that this is really important. The regulation is new, and somebody is enforcing it, and you feel of course a bit uncomfortable with that, so you blame it on the person. I think he is doing a great job. I commend him publicly and [behind closed doors]. I am not saying he is easy with us. He never treated us in favor; we might agree and we might disagree with him, but we never felt that he is not doing a professional job.”

[pullquote]The problem for our country is the enormous opportunity cost arising from the delay in building capital markets and trade platforms that will power the domestic economy[/pullquote]

Ghalayini was not available for an interview. Safieddine would not speak on behalf of the CMA to the issue of personality of an official but confirms on the record that “the audit process is approved by the board and every single report and every single audit is overseen by the board. We stand behind the financial control unit in terms of implementing proper supervision of the market”.

In the sum total, the emergence of Lebanese capital markets is progressing at a rate that combines the unpredictable with the reliable. It looks to be on track, but ever so slowly, with nothing easy or certain about the timing. London’s role as the world’s premier financial hub in a European time zone may be up for grabs in a post-Brexit world, but traders in Paris and bankers in Frankfurt by all appearances don’t need to worry that Beirut would be a viable contender, even for a regional role.

The problem for the Lebanese economy is not the loss of this opportunity to ascend to an international hub (which would have required more energy than even a Rafic Hariri in his heyday could have exerted, given the Lebanese political mess). The problem for our country is the enormous opportunity cost arising from the delay in building capital markets and trade platforms that will power the domestic economy.

This development of financial markets would not only help Lebanon to have something resembling a true economic resilience and diversify itself out of dependence on debt markets and the banks that control so much of our fortune. From Safieddine’s vantage point, functioning capital markets would also be crucial for the success of all the efforts that are currently being poured into the entrepreneurship ecosystem. He says that CMA participation in a delegation visiting San Francisco and Silicon Valley in September functioned as a fact-finding mission which only confirmed their view that functional capital markets are important to move the ecosystem toward bearing financial fruit. The CMA board member enthused: “San Francisco was a major example how developed capital markets would reflect on [the] growth of SMEs, middle class and startups.”     

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LeadersOpinion

A small matter of perspective

by Executive Editors
written by Executive Editors

From the position of Lebanon’s Capital Markets Authority, the world is a garden of well-tended and super-fragrant roses, especially in regard to its own achievements. Thanks to the CMA’s regulatory progress, financial markets should finally start growing to the benefit of Lebanon if all stakeholders would just close ranks and stand shoulder to shoulder with one another. Problems according to this view are only political and all that the CMA has done in the past few years was “send very positive signals of trust to both the stakeholders and the investors” – so the CMA thinks.

This can be seen quite differently, however. There is no argument over the CMA’s regulatory function or the need to have a “new sheriff in town”. But when it comes to the issues of market control and the thorny problem of preserving free markets in Lebanon’s clientilistic environment, the CMA’s self-image of being a pristine agent that only serves the nation gets shaken.

Executive takes exception to the idea that Lebanese investors have to be protected from every conceivable risk. We have more faith in the Lebanese investor, not actually in the individuals but in their freedom to take moderate amounts of risk. Because risk is the defining ingredient of an economy where it is possible to achieve honest gains.

From Executive’s vantage point, it plainly does not convince us that a regulator is justified in removing the freedom of currency traders to offer leverage at the same level practiced in leading international financial environments, namely offering 50 to 1 leverage ratios for deals in major currencies (as prescribed since 2010 by the Securities and Exchange Commission in the United States).

The CMA has directed Lebanese traders to bring leverage down to only five times (see story here), and has done so, say market insiders, at the behest of the chairman. Not the financial market regulator of Cyprus or of England, which could conceivably see an advantage for their financial markets if Lebanese traders would migrate their business to either of these lands. No, the hyper-protectiveness of the CMA seems to be behind the stiff restriction on leverage ratios in the Lebanese market. The fact that critique of the decision was only voiced behind closed doors and the fact that all Lebanese CMA decisions are presented by its dependents (essentially every actor in Lebanese financial markets) as infallible dogma and beyond question even when competitiveness is obstructed, these two facts worry us.

Executive believes that a measure such as restricting leverage to – for currency trading – ridiculously low levels will not help with the growth of local capital markets, nor serve Lebanese investors who have built their reputation as skilled traders by calculating risks, not by avoiding them. Sure, this involved some painful lessons, but such is capitalism. The real essence of capitalism is not money, but the ability to learn from your financial mistakes and economic errors.

Or should there be another rationale behind the restriction of leverage to a level that is unsustainable for currency traders? We have received word that the plan is to ease leverage restrictions, once the pet project of an Electronic Trading Platform (ETP) at the Lebanese level becomes operational. Does this mean that some people in high places are inclined to consider the “casino” of currency trading to morph from an ethical liability to an asset once it is “our casino”? Does that mean that it will stop being considered a “casino” when the Lebanese capital markets become welcoming harbors and comfy havens for currency traders, when a monopoly of market control would guarantee that shares of revenues from currency trading fees and commissions would flow to the entity running the local ETP? (as the CMA’s Safieddine clearly revealed to Executive, see here).     

The narrative of the ETP has, in different iterations, been bandied around for more than two years, but has never answered all the questions regarding its feasibility or value added. We call for more clarity about the process of producing its prospectus and the alleged pre-selection of parties that would be prone to benefit financially from operating the ETP. We further call on the authorities to respect the freedom to take risks, which is integral to the formation of Lebanese capital markets. We also call for a declaration that any measure in the regulation or structuring of capital markets will guarantee the preservation of competition and will include safeguards against any monopolistic practice or imposition of a monopoly operation that would favor any private entity. The Lebanese have suffered more than enough repercussions from monopolies. We finally call for stakeholders in financial markets to be brave enough to call a spade a spade and openly and honestly voice their concerns over decisions from the top of the financial regulator. 

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EditorialOpinion

It’s time for some serious changes

by Yasser Akkaoui
written by Yasser Akkaoui

After two and a half years, Lebanon has a president. We don’t care. For the thirteenth time in our history, our head of state was imposed from outside. We don’t care. Our lawmakers – serving a second term they illegally gave themselves – are jokers, casting ballots for Myriam Klink and Zorba the Greek. We don’t care.

We do, however, care that this news will no doubt make our country’s economic pulse quicken. But we must take this as an opportunity to begin moving our economy out of an up-and-down cycle tied to local and geo-politics as closely as GCC economies are tethered to oil prices.

Central bank circular 331 – which freed up some $600 million in investment capital to boost our knowledge economy – is a perfect tool to help break this cycle, but three years since it was approved, I fear it’s not being used to its full potential. The circular has undeniably had a positive impact, but I worry about the fact that only one or two of my students at the American University of Beirut have heard of it. And even they don’t completely understand the circular. If the country’s top university isn’t entirely clued in, I’m certain the situation is worse in the further flung parts of Lebanon. A real knowledge economy must be nationwide, not confined to the outskirts of the capital city’s Downtown. We care about national economic development.

More than that, without fully developed capital markets, we’re fighting to build a knowledge economy with one hand tied behind our back. In the three years since board members were appointed, the Capital Markets Authority has learned a lot on the job. The only reason the market accepts the new regulator is the seal of approval the CMA enjoys from Banque du Liban Governor Riad Salameh (arguably the country’s most powerful decision maker). The CMA needs to start delivering and soon. Regulation is needed, but the more important part of the CMA’s mandate (actually developing the country’s capital markets) is being completely ignored. We care about a well-rounded and fully functioning economy. Now is the time for action to implement it.

The diversification of functioning capital markets and a vibrant, national knowledge economy can help us break our dependence on political events both here and abroad. After all, the end goal of law and regulation is to promote a healthy environment for growth and not to restrain and punish.

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