Executive Magazine

ACID pushes forward in a stumbling market

by Jeremy Arbid August 26, 2015

written by Jeremy Arbid

If wayfinding alone were any indication of architectural and industrial design prowess, then Karim Chaya would definitely top the list of Lebanon’s finest. Navigating Lebanon’s chaotic thoroughfares often requires steely resolve, and the signs guiding hapless drivers to Chaya’s Debayeh factory do more than just provide direction. They offer a first clue to his design philosophy – sophisticated simplicity, creative spontaneity, precise design, and, as Chaya puts it, consistency in the pursuit of quality.

“The most important thing that we offer is the service. From that stems design quality and our main goal to constantly deliver very high quality,” says Chaya – the managing partner and cofounder of Abillama Chaya Industrial Design (ACID), a local firm that custom builds products for a niche clientele. The firm designs and manufactures everything from furniture to staircases. You name it, ACID can make it, all in Lebanon.

The company today employs 180 people, 30 of whom are architects, engineers and designers. 10 are administrators, and the rest are technical workers splitting duties between the factory floor and onsite installation. Chaya spends much of his time as a consultant to other designers. “A lot of architects and designers come to us to study the feasibility of their design – we’re very specialized in what we do. We assemble all the knowhow that they might need under one roof.”

While the company’s financial performance remains robust, Fouad Matta, managing director of ACID, told Executive that exports over the past few years have suffered. This is largely due to regional and global trends – the fluctuation in the strength of the Euro against the US Dollar has diminished profits in the European market, their main export destination. Likewise, uncertainty surrounding Lebanon’s security situation in light of the spillover from the war in Syria has dissuaded some new potential clients, who fear the company might not be able to deliver, from contracting ACID. Syria’s civil war has also disrupted traditional trade routes, forcing ACID to turn to the sea, where shipping to the GCC markets can take a month compared to a week overland. Matta points out that this substantial increase in delivery time has cost ACID several contracts in Dubai.

Founding partner Raed Abillama has stepped back from ACID to set up his own architecture firm, Raed Abillama Architects, leaving Chaya to oversee the company by himself. Formally he is the head of sales at ACID, but he is also an accomplished furniture designer and artist. This range of experience enables him to take on the dual role of ensuring quality within the firm and engaging with clients.

But the creative vision instilled by Chaya and Abillama is still what guides the company – and the factory itself is a testament to this. From the grass covered rooftop picnic area that doubles as an open air corridor to the can of Spam, an American brand of canned meat, decorating Chaya’s office, every aspect of the company is cultivated. Chaya’s philosophy is truly reflected in the culture of the company; industrial design is architecture for objects, and seeing that unabbreviated approach applied to the physical layout of the facility could very well be the metaphorical bucket used to draw from the well of creative inspiration.

August 26, 2015 0 comments

Amatoury’s Design for the Future

by Jeremy Arbid August 21, 2015

written by Jeremy Arbid

Zig zagging through the gentrified neighborhood of Furn el Hayek under a glaring Beirut sun, Executive found itself on a quest for furniture design nirvana, and maybe a cold glass of water. Searching out the gallery of Georges Amatoury was the mission of the day and, after sneaking a peek at his collection of furniture from past decades, we met Amatoury in his showroom.

“By collecting, refurbishing, buying and selling iconic pieces from the 20th century, my DNA has been transformed and fashioned by these famous styles. I decided to start my [furniture] line to pay tributes to these aesthetics, but with contemporary techniques and knowhow,” said Amatoury, describing his design philosophy to Executive.

Amatoury is amongst a talented class of Lebanese designers that proud compatriots point to when asked for examples of local innovators. In his own words he is a second generation designer – his father being a professional architect. During Amatoury’s formative years, the family collected art deco pieces – a decorative art style from the 1920’s – and this mixed influence of architecture and art collection dominates his approach to design.

In many instances Amatoury’s furniture is driven by the ideas of his clients who commission him to design furniture for their villas, penthouses and modern offices. Pieces from past collections now furnish the Qasr al Sanawbar, the French ambassador’s residence at the Beirut hippodrome. Amatoury is also the exclusive producer of Hugues Chevalier – a French furniture designer – in Lebanon.

Producing his furniture is not a one man show – he employs between 8 and 12 workmen, depending on the amount of projects, at his artisanal workshop in Adonis, with two designers contributing to the creative vision for each piece. He also delegates management of his Achrafieh gallery, freeing himself from the more tedious administrative tasks. All told, Amatoury employs 15 full time and contractual employees in Lebanon to design, produce and sell his furniture.

As with most Lebanese businesses, the past several years have been challenging for Amatoury. “When we can end up with a 20 percent net profit we are happy but that’s not always the case. If the market is performing well we’re doing 20-plus [percent] net margin. But if the market is slow and overhead is almost the same, then we drop to between 5 and 10 percent.” According to him, previous years had seen record highs in requests before a more recent lull in commissions – “2008 through 2011 were just perfect [but] for us the two bad years were 2013 and 2014,” in which Amatoury says his revenues declined, with 2012 being only an average year. He says the slowdown of the past few years came at a somewhat convenient time as it refocused his attention on designing new furniture for his current collection, which was introduced at the end of 2013. In addition to showing this collection in his Beirut galleries, Amatoury’s pieces are shown in Dubai and Paris, with plans to showcase his collection in London and New York in the next year.

August 21, 2015 0 comments

Design Special Report

Turning a passion into a business

by Jeremy Arbid August 21, 2015

written by Jeremy Arbid

Beirutis often think that Gemmayze is solely a place to relax or catch a late night drink after a long day at the office. But if revellers walked around this affluent Achrafieh residential district during daylight hours, they would find one of Lebanon’s finest custom furniture designers tucked away in the back streets of the neighborhood.

It seems everybody in the furniture business today is mixing contemporary features with styles from past eras, but Karina Sukar does it differently. Her approach to designing luxury furniture is defined by features that are less abstract than they are precise. Sukar’s personality is that of a perfectionist with a strict eye for detail, qualities she may have picked up as a student of interior architecture. She acknowledges these attributes as core elements of her design approach – “I try to confine my ideas and designs to something that I can execute very well with perfect detail and a perfect finish,” she says – as Sukar’s showroom manager unabashedly nods in agreement.

Her gallery, Karina Sukar’s Store, is meticulously organized with furniture dotting the showroom floor. At a first glance, this all seems strictly prearranged. But as she describes why a certain divan fits in a certain place under complementary lighting, it implies a flexibility that allows her to improvise with the arrangement of pieces from her collection to fit a client’s taste.

Over the last few years business has not been bad, but Sukar says that the country’s deteriorating economy and the regional turmoil have had an impact on her bottom line. “If we were in a better situation in Lebanon, my profits would have been better,” she says. Having featured her designs abroad in galleries in New York, Ibiza and Dubai, Sukar’s visibility is rising and driving more commissions and sales her way, but she says she has no near-term plans to open her own gallery outside of Lebanon. “It costs a lot and I don’t want to overstep my financial capabilities. And honestly I don’t want the hassle – you have to be everywhere.” Scaling up would tie her down with all the tedious administrative duties that are demanded by an expanding business. She prefers, for the time being, to focus on the creative aspects of the business.

Sukar’s main occupation is leading her other company, Karina Sukar Interior Architecture & Design. She maintains that designing furniture is only a hobby and passion – one that she has been able to transform into a business. “I only look at the bottom line at the end of the year. I know I’m not losing money, but I am also not designing to become rich.”

August 21, 2015 0 comments

Design Special Report

The Jewelry design for the 21st century

by Executive Editors August 19, 2015

written by Executive Editors

Tucked away in one of the many narrow alleyways in Bourj Hammoud is Ralph Rizk’s jewelry prototype 3D printing store. While the 3D Matrix and Diamond office space appears small and unimpressive, the technological work that gets done there cuts the jewelry manufacturing time by more than half and increases the precision in the end result immensely, according to Rizk.

Rizk says he started learning about the jewelry making business at the young age of seven as both his father and grandfather were jewelry designers. Gradually he began finding ways to modernize the business, moving from purely handmade to incorporating more technology and opening his own jewelry prototype making business in 1997 with no partners or other investors.

Rizk experimented with various technologies, including laser cutting, to increase the efficiency of his prototyping. He hit the jackpot with his purchase of Matrix, a 3D computer program and printer for wax prototypes, in 2004. Rizk says the cost of the machine starts at $54,788 – going up according to size – aside from the taxes and transportation fees of bringing it to Lebanon; its operational costs reach up to $30,000 to $40,000 annually depending on the volume of work.

Rizk explains that he essentially takes any design, be it hand drawn or photographed, runs it through a series of Matrix’s computer programs where he sets the stone dimensions, draws other details and checks for errors before finally printing the prototype. The whole process takes a maximum of seven hours, whereas the manual designing of the same prototype would take up to four days and would be much less precise and detailed.

While Rizk taught himself to use Matrix, today he offers a series of twelve courses for $1,500, where he teaches the basic techniques of using the 3D printer, leaving the design, sense and style up to the individual designer. Still, Rizk says there are only a handful of designers who have the same machine as him in Lebanon.

When the situation in the region was stable, Rizk sold his prototypes to jewelry factories, ateliers and stores in Lebanon and several other countries in the region, such as Syria, Saudi Arabia, Egypt, Qatar, UAE, Jordan, as well as countries such as Australia and France, who he says prefer Lebanese prototypes because they are cheaper.

Today, he says business is down by 80 percent, and his plans to expand his business into Syria, where the majority of his non-Lebanese clients used to come from, have been shelved until better days.

August 19, 2015 0 comments

Business Finance

Number crunching the first quarter

by Thomas Schellen August 18, 2015

written by Thomas Schellen

At a time when the observation of global banking remains as interesting as ever, the first quarter of 2015 has seen Lebanese banks stay their course, at least as far as growth of profits of the country’s six publicly listed banks, which between them reported over $279 million in net profits for the period that ended March 31, 2015.

Leader in unaudited Q1 profits was Bank Audi whose round $100 million figure put Blom Bank’s $91.2 million into second place. Audi claimed not only the top share of almost 36 percent in the group’s cumulative net income, but also led the pack in terms of profit growth at 17 percent when compared with the first quarter in 2014.

Audi and Blom, Lebanon’s top banking pair, accounted for $191.2 million in net profits, or nearly 70 percent of the reported cumulative amount. Each bank’s results exceeded the combined profits of the other four reporting banks, which together achieved $88 million during Q1.

Quarterly reporting, a standard behavior in responsible banking operations, is to date not an established practice by commercial banks in Lebanon. Only the six banks with listed shares on the Beirut Stock Exchange have been publishing quarterly financial updates for the past few years. The vast majority of banks, including most of the 28 institutes in the top tier (alpha and beta groups) that represent over 90 percent of the Lebanese banking market in terms of deposits, have so far not adopted the quarterly reporting habit, thereby limiting the information value on economic health that the publication of banking sector results can provide to the public.

Profit growth rates at listed banks stretched from Audi’s 17 percent to 2.49 percent at BLC Bank. The combined results of the six banks improved 9.6 percent year on year, said the Credit Libanais Economic Research Unit in a compilation of results.

Divergence drives profits

Drilling into the next layer of information, the six banks showed continued divergences in terms of where they generated their profits. In the split between interest and non-interest sources of profits, net interest incomes’ contributions to total operating incomes were crucial quarterly profit drivers at Bank of Beirut (BoB) and Byblos, but this growth was juxtaposed with contractions in net fees and commissions incomes at either bank.

BoB’s 16.5 percent growth in net interest income was opposed by a 6.9 percent contraction in net fees and commissions income; the respective year-on-year changes at Byblos were 12.8 percent up on net interest income and 13.1 percent down on net fees and commissions income. At 18.1 percent BEMO reported particularly strong growth in its net fees and commissions income and a minor expansion of 3 percent in its net interest income. BLC achieved 5.1 percent growth in net fees and commissions income, but inversely to the other reporting banks showed a 5 percent contraction in net interest income.

On the P&L sheets of Blom and Audi, net interest incomes and net fees and commissions incomes both improved, and the growth in the former at both banks outpaced the latter. The numbers are 6.2 percent and 3.5 percent for Blom, and 18.6 percent and 13.7 percent for Audi.

When it comes to first quarter net gains on financial instruments as contributors to total operating income, quarterly performance numbers represented year-on-year improvements of 25.2 percent at Audi, 22.1 percent at Bank of Beirut, and 6 percent at Byblos, but a 16.9 percent contraction at Blom.

In the assessment of the $14.2 million jump in Audi group’s profits, constituting about 58 percent of the combined profit growth of the six listed banks, the bank pointed to consolidation of its positioning in the three main countries where it is present: Lebanon, Turkey and Egypt. More distinctly, the bank noted that 52 percent of its Q1 profits were generated by “entities outside Lebanon.”

As analysts tracking the bank at FFA Private Bank clarified in a research note, “Bank Audi’s Q1/15 financials still show a significant increase in revenues (+ 19 percent) translating into stronger net profits (+17 percent), driven by the positive contribution of Odeabank to consolidated results vs. losses in Q1/14.” Whereas Odeabank, Audi’s Turkish unit, was still slightly in the debit column in Q1 2014, it reported $11 million in net profits for Q1 2015.

FFA pointed to currency pressures in Egypt (Blom and Audi) and Turkey (Audi) as negative factors weighing on these banks’ consolidated balance sheets, in addition to a quarter-on-quarter “tepid performance” at Blom for assets, deposits and loans. With Byblos, the analysts described balance sheet developments as disappointing for the second consecutive quarter and, as with Blom, cited subdued growth in the domestic banking sector as the likely culprit. bank2

With regard to the operating environment for the Lebanese banking sector, the FFA research notes said that for each of the top three Lebanese banks under coverage the prevailing low interest rate environment in the country limits both the banks’ potential to improve yields on earning assets and their capability to reduce costs of funds.

Room for improvement

According to the central bank, the consolidated balance sheet of commercial banks in Lebanon edged up 0.7 percent from yearend 2014, to $177 billion at the end of March. Private sector deposits reached $145.5 billion, likewise representing a 0.7 percent expansion. Loans to the private sector saw an even lower rate of increase of 0.5 percent and stood at $51.1 billion at the end of March.

According to Byblos Research this QoQ lending growth rate was by far the lowest for any first quarter since 2010. Bank Audi’s research team opined that within the banking sector’s “modest” activity growth in the first quarter, its deposit growth remained favorable because it was better than in the same quarter of 2014, but also took note that lending was “quite weak.”

This, albeit somewhat grudging, attention to short-term reality deserves to be correlated with the latest opinion and advice which the International Monetary Fund offered to Lebanon in the 2015 Article IV Mission’s concluding statement, published after the IMF staff visit last month. While the statement acknowledged the country’s historic ability to attract sizable deposit inflows, which have in turn helped fund large budget and current account deficits, the Mission cautioned that the growth rates of deposits is slowing. It advised that Lebanon needs a decisive change in policies and an overall more balanced policy mix in order to strengthen confidence. “Lebanon’s economic model rests on confidence,” the Mission said, in a statement dripping with more or less veiled appeals for urgent action on long-known problems.

When taking in the larger picture of first quarter banking numbers around the pretty patch of flowering profits at the six reporting banks, the pale developments of sector assets, deposits and loans, in combination with the diplomatically screaming advices of global multilateral institutions, should perhaps be reason for financial policy makers in Parliament to don those thinking caps. But one suspects they will not make haste.

In the meantime, several top banks have announced how they will take care of their shareholder needs through dividends. For the top three banks, total gross dividends for 2014 amounted to $190.1 million at Audi, $153.6 million at Blom and $107.2 million at Byblos as approved by the respective general assemblies in April and May. According to calculations by Byblos Bank’s economic research department, gross dividend yields on common shares were 3.2 percent at Bank of Beirut, 5.1 percent at BLC, 6.7 percent at Audi, 7.5 percent at Blom and 8.3 percent at Byblos itself.

August 18, 2015 0 comments

Design Special Report

Family heirlooms

by Executive Editors August 18, 2015

written by Executive Editors

Jewelry making has long been an artisanal tradition in Beirut’s working class suburb of Bourj Hammoud. Clustered together near the Beirut River, many of these businesses stretch back generations.

After mingling with gallerists and shopkeepers dotted around the bustling Armenian neighbourhood of Bourj Hammoud – and taking a quick detour for a shawarma sujuk, a local delicacy – Executive came across Hadidian Jewelry, a neighborhood cornerstone. The family owned business was established in the mid-1940s, says Levon Hadidian, a junior family member working in the business.

Their gallery is a fixture on Armenia Street – the main thoroughfare connecting Bourj Hammoud to Beirut’s Mar Mikhael neighborhood – where shoppers can peruse the jewelry displays in search of the perfect bling. Just a few blocks away from the showroom is where Hadidian’s jewelry is designed and manufactured.

Hadidian is a full scale jewelry manufacturer doing everything from designing to setting rare stones and diamonds. On the factory floor, technicians use computer software to design new jewelry concepts and create wax prototypes using 3D printers. Lasers cut the materials – often gold or silver, but also precious stones – to specific sizes before they are engraved and polished.

Their main clients, Hadidian tells Executive, come from the wholesale side of the business. The jewelry maker sells his pieces to many local clients including other showrooms concentrated in Bourj Hammoud as well as other parts of the capital. He also exports his designs, primarily to Gulf countries.

August 18, 2015 0 comments

Banking 2015 Business Finance

Working with and against financial sanctions

by Thomas Schellen August 17, 2015

written by Thomas Schellen

It has never been easier to be branded a financial pariah. You wake up one morning and when you check your correspondence you find that you have been given the ominous title of “specially designated national” (SDN) by the Office of Foreign Assets Control (OFAC) at the United States Department of the Treasury.

This designation means that, according to “evidence” which can range from classified information of US intelligence services to reports in your local newspaper, you have been found to be a perpetrator of terror, narcotics, weapons of mass destruction or other threats to the national security, foreign policy or economy of the United States. As of this moment, you are a financial outcast with whom no US citizen or corporation with American interests will do any business. If you have assets in the US, these will be frozen.

International criminals, but also people with ties to organizations such as Hezbollah and persons doing business with sanctioned countries such as Iran and previously Cuba, are frequently added to the SDN list without much public attention, except for rare cases when big names in business are concerned. In one such recent case, Lebanese magnate Kassem Hejeij (Middle East and Africa Bank) was listed by OFAC on the grounds of “direct ties to Hezbollah organizational elements”. His alleged misdeeds also included investing “in infrastructure that Hezbollah uses in both Lebanon and Iraq.”

The worst thing for economically active people hit by the SDN hammer is that their businesses are just as ostracized as they themselves are. This was the implication for Hejeij when he was placed on the SDN list in early June. His business interests, most importantly the Middle East and Africa Bank (MEAB) under his chairmanship and majority ownership were in acute danger of being crippled. Hejeij, despite protesting and declaring his determination to fight the SDN label foisted upon him, eventually stepped down from his position, sold his shareholdings in MEAB, and overnight became a thoroughly private individual as far as business is concerned. Within one month, MEAB had presented a new management team, gotten busy on new business plans and started communicating its intended future.

Is there a defense?

The good news about the case of Kassem Hejeij and MEAB is that it cannot be compared to the notorious dismantling of the Lebanese Canadian Bank on the basis of money laundering allegations by the US treasury more than four years ago, says Paul Morcos, a Beirut-based lawyer and consultant specialized in banking. “It is not realistic to compare the two cases of LCB and Kassem Hejeij since the [Middle East and Africa] bank was not listed on OFAC but rather the name of the chairman,” he explains.

In the LCB case, the bank was sold and its identity dissolved to control the damage. According to Morcos if MEAB itself had been accused, it would also in the Hejeij case have led to “catastrophic results” beginning with a total shutdown of all correspondent banking relationships. “This distinction is to differentiate between listing the juristic person of the bank, which was not the case, versus listing the natural person. This is why I think that there was a chance to handle the situation differently than other cases when banks are listed,” he says.

Being based, as Beirut observers are, far outside the Beltway, it would be idle speculation to wonder why the treasury department’s officials chose this particular time to target Hejeij, or why the department’s top man in the Office for Terrorism and Financial Intelligence, acting (and according to President Obama to be fully appointed) under-secretary Adam Szubin, would last month issue a fiery press release specifically attacking Hezbollah and declaring that his office would “pursue all of Hezbollah’s revenue sources, whether charitable fundraising, criminal proceeds, or state sponsorship.”

Hopeful news from the de-risking front

The good news is that de-risking and other impacts of greater compliance pressures are perceived as manageable by banks across the Arab world. A recently released joint study by the Union of Arab Banks and the International Monetary Fund shows that the region’s bankers noted increased costs related to correspondent banking due to stricter AML/CFT enforcement. However, “wholesale de-risking by global banks does not appear to have taken place so far,” the report said. On the other hand, regional banks did not indicate that they had taken several measures to improve their immunity to ML/FT risks.

The study was conducted in spring 2015 via a survey sent to 471 banks in 20 MENA countries. The response rate of about 25 percent was not very high and further research is warranted according to the study’s authors, but the exercise provided useful indications on the business impacts of AML/CFT measures, Foreign Account Tax Compliance Act (FATCA) and Basel 3.

The highest impact was perceived in the area of correspondent banking where 40 percent of responding banks indicated that these relationships were becoming “more demanding, more time-consuming, more complex, and expensive to maintain.” Impacts on remittance flows were seen as minor, and so were business impediments related to FATCA and Basel 3.

Impacts were more pronounced for banks in countries classified by the Financial Action Task Force (FATF) as having strategic deficiencies in AML/CFT regimes that are however in the process of being addressed under “high-level political commitment”. In the four MENA countries in this category – Iraq, Sudan, Syria and Yemen – banks’ responses indicated higher negative impacts on business due to the introduction of FATCA and significantly higher impediments of remittances but lower cost impacts due to the stricter AML/CFT regimes.

When compared with banks in the non FATF designated countries, banks in the four designated countries showed significantly less eagerness to take measures that would reduce ML/FT risks or to enhance their FATCA compliance. The study pointed to a possible reason for this underwhelming implementation of new compliance measures – a paltry 3 percent of banks in sanctioned countries enhanced their customer due diligence to lower ML/FT risks versus 33 percent in the other countries – in the fact that their nation’s inclusion on the sanction list nullified any individual efforts for achieving greater compliance. Over one third of the banks that responded to the survey – 41 out of 117 – were based in sanctioned countries.

Also a counter-intuitive result of the study was the situation of regional de-risking. Whilst the study did not directly identify the countries whose banks undertook regional de-risking, it said that about 10 percent of the survey respondents had closed some correspondent banking relationships with banks in sanctioned countries and/or weak AML/CFT policies – meaning that “de-risking of regional correspondent banking relations by MENA banks”, as the study termed it, is a subject which warrants attention.

Statements of this sort are well-worn in the American repertoire, as was the name of Hezbollah’s Mustafa Badreddine who was highlighted in the July 21 dispatch. In past scenarios, such sanctions messages were interpreted to be warnings, or threats, demanding good behavior from Lebanon.

Whatever the hidden sticks-and-carrots in the current American strategy may be, it remains possible that the last word has not yet been spoken on whether the potential threat to MEAB has been solved with the intra-familial transfer of chairmanship at the bank. In more general terms, however, all signals suggest that Lebanese and Arab banks cannot relax their attention when it comes to compliance with the US agenda.

One problem, Morcos says, is the American insistence on publicly confronting alleged financial facilitators of terrorism without giving these entities a chance to cooperate. He recalls how Arab participants in a 2006 workshop with officials from the Federal Reserve Bank of New York were asking the US entities not to expose Arab banks in public statements immediately after having discovered a concern, but first to employ information channels such as the financial intelligence units that exist in all countries of the region.

As Morcos remembers, this request was brushed aside by the official in question, with a reference to the victims of the 9/11 Twin Towers attack who had been murdered without any consideration. The single-minded US desire to fight terrorism finance in the sharpest way possible has kept relationships problematic since that time, Morcos says, and argues, “Now is another occasion to reemphasize that any subpoena and any suspicion should be channeled through official channels, i.e. the financial investigative units and through the central bank of Lebanon, especially since it works efficiently. Why not adhere to this channel instead of spreading the word as news, which has a dramatic impact on depositors’ interests and even on the sector here?”

No alternative to compliance

Financial institutions need to abide by anti money-laundering (AML) and combating the finance of terrorism (CFT) rules, and have had to learn their lessons in this regard as even top international banks changed their processes only after being hit with multi-billion dollar fines for having facilitated financial transactions with sanctioned countries such as Sudan, Iran, and Cuba, says the secretary general of the Union of Arab Banks (UAB), Wissam Fattouh.

“In my opinion, penalties for non-compliance with AML and CFT or also with [Foreign Account Tax Compliance Act] regulations are very good. Banks need to behave and this is not only about issues related to AML and CFT but also about corporate governance and violations of rules such as exchange rate manipulations,” he says.

While the strengthening of international regulations and enforcement of penalties against rule-breaking banks comes with general questions about the proportionality and effectiveness of such penalties, Arab banks in Fattouh’s view struggle with a different set of challenges that are grounded in the presence of economically powerful terror organizations, namely ISIS.

In order to deny these organizations an increase in power because of their ability to provide jobs, populations in ISIS-affected countries need to be offered economic opportunities and better jobs. In this context, Arab banks have a major role in developing employment structures through the financing of small and micro businesses.

[pullquote]“Advancing financial inclusion and job creation are priorities…in the war against the sources of terrorism.”[/pullquote]

“Advancing financial inclusion and job creation are priorities where banks play a role in the war against the sources of terrorism, [namely] the economic distresses that enable terror groups. It is my opinion that banks have to play a large role in economic growth through SME finance, housing and real estate finance, infrastructure lending, etc,” Fattouh tells Executive.

However, this is exactly where the emphasis on AML and CFT compliance clashes with the banks’ responsibility to expand their national economies. As Fattouh points out, micro entrepreneurs and small business owners more often than not run ventures where compliance checks on their customers are nearly impossible to enforce and financing of SMEs with a dedicated lending program may turn out to be too risky for banks purely from a compliance perspective.

Risks of fixation on AML-CFT

Extreme AML-CFT compliance pressure is counterproductive to the overall global targets of achieving greater financial inclusion and universal access to finance, which have been highlighted most recently in the United Nations’ Addis Ababa Action Agenda, which was globally adopted by UN member states last month at the Third International Conference on Financing for Development in the Ethiopian capital. The agenda noted [in article 38] without being more specific that “some risk-mitigating measures” in finance could create barriers against access to formal financial services by micro, small and medium enterprises.

Risk mitigation, or rather risk deflection, is another AML-CFT induced challenge for the relationships between Arab banks and international banks, as well as among Arab banks themselves. This is because of a temptation for banks to sever correspondent banking ties when compliance requirements make these relationships too cumbersome. Called de-risking, the practice potentially impedes international finance for smaller partners and according to Fattouh is generally ill-advised and not the intention of US stakeholders. “From the point of view of the regulator and the treasury, banks have to continue to understand risk and manage it, not talk about de-risking, and I agree with them. But we are witnessing some international banks cutting their relationships with Arab banks,” Fattouh explains.

De-risking is an economy 101 decision; banks compare the rewards of doing business with individuals and institutions with the cost of compliance attached to having those relationships. This positively implies that decisions on correspondent banking are non-ideological for the vast majority of commercial banks and financial institutions, supporting the assumption that current occurrences of de-risking are a temporary phenomena and will not impede global financial structures in the longer term.

However, Fattouh is concerned that the region’s bankers could lose something much more precious than correspondent banking relations or even licenses: their risk cultures. “My impression is that law enforcement is changing the hearts and minds of bankers, which is very dangerous,” he says. “Banks are by themselves conservative. When they feel the pressure of law enforcement upon them, it changes the spirit and this is my worry, as it could impact the role of banking negatively.”

Practical tools for making the burdens of AML-CFT compliance less costly for Arab banks could include an authoritative regional entity empowered to carry out compliance checking as intermediary for all banks in the region, Fattouh suggests, noting that such an initiative is not currently feasible for the UAB and could be initiated perhaps by the Arab Monetary Fund acting as the secretariat of Arab central banks. However, to facilitate dialog between Arab and international bankers the UAB will expand its private sector dialog program on combating the financing of terrorism from a US-MENA dialog to a EU-MENA dialog, which will be inaugurated on September 3 in Brussels.

[pullquote]“My impression is that law enforcement is changing the hearts and minds of bankers, which is very dangerous.”[/pullquote]

To help Arab banks with the cost and behavior challenges of the many sanctioned waters they have to operate in, UAB is currently working on compiling a code of ethics which, according to Fattouh, will guide banks in their approach to four central points, namely a) rules and regulations, b) corporate governance, c) financial inclusion and universal financial access and d) financing of the economy. The parameters for the project have been assembled and he hopes for publication of the Code of Ethics as guidebook for Arab banks by November, Fattouh says.

In the meanwhile, the American crusade against the financing of terrorism will continue and implicated persons will have to struggle if they want to contest their pariah status. Comments shared by US law firms suggest that even proving one’s innocence has not been the most successful approach for removal from the SDN list – delisting was more often achieved by offenders for admissions of guilt rather than protestations of innocence.

Another option of interest to the region and of great potential business value for Lebanese banks, although not in any way likely to benefit people accused of Hezbollah affiliations, is the change of US political views. As Cuba was finally allowed to hoist its flag over its recently reopened embassy in Washington D.C., it was no surprise that a single OFAC update had already announced the deletion of more than 50 Cuba-related names from the SDN list. What the US calls “sanctions relief” vis-à-vis Iran will take at least several more months to gain momentum, but the prospects for new opportunities from the Iran deal are infinitely more promising than making any attempt to change minds across the Atlantic about the status of people who act as open bank accounts for alleged Hezbollah operatives or invest in mysterious infrastructures that can be used by the organization.

August 17, 2015 0 comments

Design Special Report

Saving money one sunbeam at a time

by Matt Nash August 17, 2015

written by Matt Nash

The problem could not have been more standard: how can ABC’s department store in Ashrafieh reduce overhead to maximize profits? In 2012, the company began doing some research on electricity consumption with an energy audit. A solution soon followed: use that glowing orb which gives us life. In June, the department store went solar – partly.

Mohammad Abou Rich, the mall’s technical director, told Executive that a system consisting of 4,000 square meters of photovoltaic panels on the mall’s roof will supply 21 percent of the department store’s yearly energy needs, saving ABC $100,000 per year in dual energy bills. While the amount paid to design and build the system is “confidential,” Abou Rich explains that because of the way the panel layout was designed – with the sun-suckers oriented east-west instead of north-south, as many of the other contractors who bid for the project proposed – the investment will be recouped in only five years because of the extra power supplied. Panel orientation east-west (in line with the path of the moving sun, for the astrophysically challenged) means the system produces “10 to 15 percent” more electricity than a north-south orientation, he says.

August 17, 2015 1 comment

Design Special Report

The evolving role of ‘design’ in the world of today

by Executive Editors August 17, 2015

written by Executive Editors

For many years, the term ‘design’ in the world of business referred mainly to the aesthetics of a product. Today, ‘design’ has become a concept which represents much more than just a drawing; it has come to reflect the outline of the brand identity, which understands every aspect of a company and its interaction with its customers.

A brand worth remembering is a brand with a unique personality. This is why design has evolved into a holistic blueprint transcending the product itself to encompass all other elements revolving around it.

Executive interviewed several designers to understand the role that this evolved concept of ‘design’ plays in their companies and products, and the resulting effect of employing design on their brand.

Nabil Kettaneh – Chairman & CEO of Kettaneh Group

“German car manufacturer Audi AG considers itself a global design patron and a responsible employer. At Audi, conventional ways of seeing and thinking are continually challenged in order to advance the company and play an active role in shaping the mobility of the future. An Audi cannot, and should not, be purely fashionable, particularly since trends are not set in stone. Rather, it must be timelessly modern. Audi is a company which considers commitment to design as part of its DNA.

As a progressive car manufacturer, Audi is constantly developing its design philosophy with each new generation of models. Audi’s refined language and philosophy of design focuses on a strong link between technology and design. The Audi models of today are intended to be tomorrow’s icons. Every Audi has the same genetic code: distinctiveness with the aim of striking an exciting compromise between emotion and reason, aesthetics and efficiency, as well as sportiness, progressiveness and sophistication.

Audi designs seek inspiration globally. Ideas might arise from observing an innovative house, a classic piece of furniture or a sensational dress. The Audi designers have to have their fingers on the pulse of the times and are guided by a variety of influences – be it from nature, architecture, art or film. The overriding goal is to give the product the characteristics of the brand with the four rings.”

George Bou Jaoude – Marketing Manager of Infiniti at RYMCO

“Being automotive agents, designing the actual models is not in our scope of work. We work on designing ambiances and campaigns that fit the brand and the target audience. The design of the car is a major source of attraction and one of the most important factors for customers, as one first needs to like a car before proceeding to the next stages of the purchasing behavior.

However, ‘design’ extends beyond just the aesthetic or features of the car, as a good design in general also includes a suitable price tag. This delicate balance between quality and price is a considerable part of what constitutes good ‘design’. Our brands are attentive to that balance and are always seeking innovative designs that cater to customers’ needs and expectations across the different areas that they examine.”

Michel Trad – Chairman of Saad & Trad SAL

“Today, design has become increasingly important. It is the main factor that reflects the image of the brand identity. When it comes to design, people tend to notice what they can relate to, and it is key to cutting through the clutter. This is why companies are investing in design more than ever, putting in place design centers that meticulously shape the personality of the brand, its corporate identity. Anything relating in any way to the brand is closely examined so as to echo the same message.

Whether the brand stands for modernity, performance, luxury, creativity or any other value, it is supposed to be reflected in the showroom, interior design, staff appearance and attitude, pre-and-post sale services, as well as in marketing activities such as ad campaigns and partnerships with other brands. Almost everything is taken into consideration since ‘design’ serves a purpose beyond simply the product’s visual appeal.”

Reem Acra – Fashion designer

“The design is not just a product that is for sale, it is a way of thinking – a message. The Reem Acra label is represented by that design and how it is presented and packaged.

[pullquote]“DESIGN IS NOT JUST A PRODUCT…IT IS A WAY OF THINKING.”[/pullquote]

It is very important that there is one message in the design that evokes an emotion as well as the experience. The Reem Acra brand has depth with an emotional message-it is a brand that started with wedding dresses and brought a new kind of luxury to the table. The company as a whole represents the brand, all of our employees speak the same language so as to represent the same message that translates to the experience of a lifetime for the customer.”

Sabine Mazloum – Pearl Specialist, Jewelry Designer, Creator & Owner of the Sabine Mazloum brand

“Design is who you are, your fingerprint, and the creativity which pours from your soul to make something unique. And this is your identity which makes you stand out from the crowd. However, the relationship between the design and the product itself is complementary.

Since I am a pearl specialist, the main material I work with is pearls. Each gem is unique by nature, and, depending on the characteristics of each pearl, I harmonise the design of my pieces. It is so important to keep the value of the pearl and at the same time to add my own touch of creativity. To start creating a design you have to have a foundation and you have to know where to start from.

[pullquote]“DESIGN IS WHO YOU ARE, YOUR FINGERPRINT”[/pullquote]

Each individual picks a design that is close to their taste, which often represents their inner personality or what they want people to think of them. If the customer is comfortable with the piece they choose, it will fulfill the required desire and the right image they are trying to project to others. It will also give them the confidence to express themselves more.”

Mia Karam – Brand Manager at Luxury Clothing Company sal

“Design defines a product. Without it, it simply wouldn’t exist.

In fashion, the creation of a product starts with an inspiration, a mood board, a story. This turns into a sketch, which explodes into an infinite choice of fabrics, weights, colors, and volumes. It finally turns into a sample that is later perfected to become a sellable item.

This item will then be placed in the right environment and will attract a customer who will most likely fall in love with it and want to make it their own. After purchasing it, the item is given a new purpose and function each time it’s worn or carried.

Design greatly impacts a customer’s experience. Brands worldwide are investing first and foremost in innovative shop concepts in order to convey the brands’ identity, and have the customers immersed in the brands’ universe. It’s not just a matter of having an attractive and relaxing store environment or a clear display anymore. Brands are competing on a whole other level with the design of their flagships, going to leading architects to create state-of-the-art concepts for their targeted clientele. Design and fashion are inseparable today, and form a winning team.

The same goes for a working environment. Designing an office with specific codes that resemble the company’s identity will help the employees understand and thus convey better what the company’s values and missions are.”

August 17, 2015 0 comments

Banking 2015 Business Finance

MEAB injects a bit of youth to its boardroom

by Thomas Schellen August 14, 2015

written by Thomas Schellen

Their corporate narrative is what Wikipedia might call “a stub”, or an article in need of expansion. But when Middle East and Africa Bank (MEAB) implement an interactive timeline in the history section of its online identity, the months of June and July 2015 will carry pivotal content.

Within the space of 10 days starting June 15, the mid-sized bank, which holds $1.5 billion in deposits and ranks 15th in the Lebanese banking sector in that category (2014 figures), welcomed a young new chairman who is also the bank’s new majority shareholder and a seasoned Lebanese banker with 30 years of experience as a general manager. The new leadership duo, Chairman Ali Hejeij and GM Nabih Haddad, lost no time embarking on a review of the bank’s business plan and strategy that was in full swing by end of June. While doing so, MEAB management lit the boosters on a new image building effort and proactive communications approach with a July 15 dinner for Lebanese media bigwigs. In between, the bank’s new leaders even found time to open a new retail branch, MEAB’s 21st, on Beirut’s Corniche Mazra.

The intense frenzy of the period was to a very significant (but not fully quantifiable) degree involuntary. It had been triggered in early June by a measure originating in the United States’ treasury’s Office of Foreign Assets Control, or OFAC, under which Lebanese citizen Kassem Hejeij – Ali Hejeij’s father and then chairman of MEAB – was put on a list of persons alleged to be involved in financing of terrorism. In Kassem’s case, the accusation was consorting with Hezbollah.

MEAB and other companies under Hejeij family ownership were excluded from American action and thus it was prudent to protect the economic assets from being sanctioned by association. Advised by legal experts and central bankers, Kassem Hejeij immediately decided to step down and fully divest his shares in the bank he had founded in the early 1990s.

MEAB growth spurt

Ergo, the transfer of ownership to Ali Hejeij who, according to an MEAB statement, was already a board member and shareholder with a non-specified stake in the bank. With the rapid transaction in an ownership sphere valued above $100 million, his majority expanded to “about 85 percent”, Hejeij told Executive.

Including himself, MEAB has five board members, Hejeij said, and none of the other board members owns more than five percent in the bank. Not yet 35 years of age, the new chairman had been working in the management of construction companies in Gabon and Equatorial Guinea for most of the past ten years, after he had acquired a degree in banking and finance from a university in Lebanon. The construction companies are affiliated with the Hejeij family, which built a fortune in Africa from the 1970s onward.

Growth of MEAB in recent years had been quiet but brisk. “Growth from 2012 to 2013 and from 2013 to 2014 was about six percent [year on year] in terms of both assets and deposits and our net profit of 2013 was approximately $18 million,” Hejeij said in the interview with Executive. According to figures cited by him, the bank’s increase in deposits between 2013 and 2014 amounted to about $100 million. His declared growth target for the bank is to surpass $2 billion in deposits, from the current $1.6 billion implied by the cited growth in 2014.

According to the Liban Banque’s yearbooks for 2010 and 2014, MEAB climbed from a 0.4 percent market share in banking sector deposits in 2009 to 1.1 percent in 2013, which was reflected in an 11-spot gain in its sector position in that category over the four-year period. Another growth marker was branch expansion where MEAB almost doubled its network between 2010 and July 2015, consisting of the additions of seven domestic branches and two branches in the Iraqi cities of Baghdad and Basra.

Future strategy

The bank’s growth in recent years is being analyzed under the business assessment and plan that Hejeij and MEAB management are currently carrying out, Haddad explained. “The bank grew very fast in a very short period of time. To assure this growth we should go back to the roots and make sure that everything else will follow,” he said.

The process will include strategic decisions on how to further develop the electronic banking services at MEAB, training of the young workforce in the branch network, and investments in corporate governance structures, Haddad added.

For Hejeij, fast aggressive moves and efforts to disrupt the complacent Lebanese banking sector are not on the MEAB agenda in the near future. “My first priority is to concentrate on my institution, which needs time for the new team and to make my recommendations. We are walking forward now, but slowly. Five to six months later, we can move faster. My next target, after finishing the interior [process] is to reach the alpha group [size of banks with over $2 billion in deposits],” he said.

Not much more can be said about the bank’s plans and strategy at this point. Haddad declined to comment as yet on MEAB’s views and intentions in corporate banking and services for businesses. Africa is not currently a specific focus or expansion target for the bank according to Hejeij.

As MEAB is generally seeking to grow its exposure outside of Lebanon, management, according to Haddad, is looking at the situation in Iraq and assessing the bank’s exposure there from angles such as human resources and security. “If we decide to continue in Iraq, we will expand,” Hejeij said.

In the first weeks after the change at the top, which saw Ali Hejeij becoming both the youngest current chairman of any bank in Lebanon and the youngest person to ascend to the role in decades, his message in interviews and media statements followed the same line. He repeatedly emphasised MEAB’s compliance with Lebanese and international financial rules and the bank’s firm alignment with standards on anti-money laundering and combating of financing of terrorism. In measures which sought to make international markets more comfortable with MEAB, Hejeij says he wants to achieve diversification in the bank’s ownership by bringing in either institutions or individual investors with high reputation. But this, he says, “is in the long term and [should] not be expected to happen within the next few years.”

August 14, 2015 0 comments