Executive Magazine

New media mandates a new school system

by Michele Azrak, Zeina Loutfi & Ramsay G. Najjar May 28, 2014

written by Michele Azrak, Zeina Loutfi & Ramsay G. Najjar

The digital revolution and the ubiquitous presence of the internet, social media and new communication technologies has profoundly altered traditional forms of education and is undeniably shaping a new educational landscape. The conventional schooling system now needs to reinvent itself in order to adapt to a situation where students have instant access to news, information and ideas.

Whether locally or on a global scale, the formal education system is facing the universal challenge of remaining reliable and effective in this continuously changing environment. It needs to adapt to serve the needs of 21st century students.

Teacher and Student Dynamics

Students have largely been passive listeners or readers, placed in a closed environment and set to listen to a single holder of knowledge: their teacher. As the ultimate authority and reference figure, the teacher was the key to the successful functioning of the school system.

Today, the dynamics between teachers and students have changed. With the internet at their fingertips, students now take an active role in the search of information based on which they can question the teacher and build their own knowledge.

Tools and Resources

The digital age has yielded access to a vibrant, interactive and vast world of information compared to the static and rigidly defined nature of books, which remain the main teaching resource. However, students flooded by massive amounts of data poses yet another challenge for the education system, which now has to guide them through a confusing and cluttered informational landscape, teach them to discern between information and misinformation, differentiate between what is news and what is propaganda, and distinguish between scientific facts and uncorroborated claims.

Social media tools and resources present yet another challenge. Many would argue that it is only a recreational tool that can have a negative influence on students’ development, and therefore its use at schools should be restricted. But if properly leveraged, social media can play a vital role in providing students peer-to-peer support. Notably, thousands of Facebook groups are created by students for this or that course, or even groups that rally a whole grade, class or promotion.

Additionally, with these technological tools and resources so widely available and easily used, schools are now challenged to keep up and effectively use them to connect with parents and involve them in their children’s work, something which many local schools have been doing for quite some time. While this parent-teacher communication had been limited so far to generic channels such as emails, newsletters or blogs, it is now evolving in a more personalized manner to fit the lifestyle of busy parents. Indeed, an increasing number of teachers are taking advantage of free online and mobile apps to communicate and collaborate with parents, allowing them to easily track on a daily basis what is happening at school as well as their children’s performance.

This inclusive approach is also adapted to teachers: Social media is being extensively used by teachers across the globe and specialized online platforms and communities are enabling educators to connect with each other to share ideas, materials, teaching strategies and more.

Desired & Undesired Influences

By using new media, students today are learning from a wider, broader and more cosmopolitan circle than the one comprised of their immediate peers, parents and teachers. They are exposed to a new world of influences — both positive and negative — which the educational system must help them navigate safely.

From online privacy to access to explicit and strong-worded music videos, visually disturbing pictures of war and violence, dysfunctional perceptions of sexual relationships brought on by pornography and many more, the online world adds a layer of risk for children, which should be dealt with through education at school. Even cyber-bullying, an obscure concept only a few years ago, has become a major issue leading to suicide in extreme cases and even surfacing in our society with several cases brought to light and covered by the media lately.

Role of Students

Traditionally, teachers were used to monopolizing talking time in class. However, now that students are used to a culture where they can voice their opinions in the open through the internet and social media, they are no longer content with being receivers of information. And this attitude is spilling onto the education system in which the conventional relationship between teacher and student is being challenged.

Additionally, in the media world we live in, this new generation of “digital natives” is constantly juggling between different forms of media and always multitasking: talking on the phone, texting and surfing online and watching TV all at the same time. Another challenge in this “culture of now” is for teachers to hold the attention of their students, get them to concentrate on one subject at a time, and retain what they have learned.

More Questions than Answers

In view of all of these challenges, we ask ourselves many questions about what our schools are doing to cope with the changes. What is being done on the level of training teachers or reforming the curricula of teaching diplomas? What is being done to safeguard the main success factors of the educational system? With the internet being dubbed as the 5th wall of the classroom, how can schools and teachers capitalize on it to keep students engaged and interested?

Certainly, the educational system needs to take action in order to adapt to the changing landscape and reconcile itself with the current world we live in. But what is even more certain is that while massive amounts of information can be accessed through the internet, the ability to deal with all the above dangers cannot be learned digitally, nor can social skills or cultural integration. Technology does not do away with the traditional role of school and teachers, but amplifies it. The goal is to build a certain complementarity between the ‘real’ and the ‘virtual’ and understand the limits of each. The ‘virtual’ facilitates access to information, interactivity and the rapid and effective access to real time information. On the other hand, the ‘real’ encourages conviviality, social ties, sensitivity, emotion and the exercise of the intellect, which are things that cannot be replaced by the online world and media. While the ‘real’ and ‘virtual’ ought to go together in a certain balance, the educational system should bank more on the ‘real’ aspect — this is where its added value lies.

May 28, 2014 0 comments

Defending the banks’ bottom line

by Thomas Schellen May 28, 2014

written by Thomas Schellen

The Association of Banks in Lebanon (ABL) is the nerve center of what is the sole highly developed part of the country’s financial sector. It is also the main lobbying organization for banking interests, responding harshly to proposals for higher taxation of banks and calling such moves “illegitimate” and discriminatory. Executive sat down to talk banking with Makram Sader, the ABL secretary general.

When the Parliament in April began debating proposals for new taxation on banks to fund the salary scale for teachers and public servants, ABL quickly rejected these concepts. The public discussions of the proposals and ABL’s position have been intense since then. Has the association changed its position in any way?

We said that it is unfair to impose double taxation on the banking industry, penalizing this industry because we are very transparent and publish all statements of P&L [profit and loss] and all our accounts under international accounting standards as we are obliged to do. For us [the proposed tax on net revenues from treasury bills] is double taxation because you are taxing the same income twice, at the level of P&L and on the bottom line via corporate tax on profits.

Did you undertake any studies on the question of how a general increase in corporate taxation would affect banks and everyone in the economy?

No. We don’t want to publish anything on this question. The Economic Committees [a lobbying coalition for the private sector] published a very clear statement on this issue and we are part of the Economic Committees.

But your first objection to the tax increases is the issue of double taxation?

For us as the banking industry, yes.

Would you consider a different form of tax increase fair?

It is not our business to tell the government where to raise or not raise taxes. We don’t want to enter this game but all we can say is that there is a lot of money to save. There are a lot of [revenue] leaks at Électricité du Liban, at Beirut Port [and] at Beirut Airport. Before putting taxes on any sector or industry, they have to collect all the taxes that can be collected.

We as banks are making about 7 to 10 percent of the profit that the private sector is making in the country, so why are we paying 37 percent of the corporate taxes? There is a lot of money to be collected as long as there is a good administration and an efficient tax collection system.

We are also saying that it is not right to add new taxes on an economy that is not growing. Economically speaking, that is not right. When you don’t have economic growth, you inject money.

But if we look at the allocation of the taxes that the government is aiming to collect, there is basically a transfer from one side, namely corporate profits, to another side, the public sector salaries. Could one not from a supply side perspective consider this salary scale as an injection of money that could generate private sector growth by stimulating higher consumption?

That is a Keynesian theoretical approach. People who speak about this are right if you are in an economic situation with unused production capacity, in an economy without dramatic deficits on the tax income side and on the balance of payments side. But the reality is different; you cannot apply a theoretical economic formula and equation to a very bad economic, political and security situation like in Lebanon.

In your view, how should the government proceed from this point? Do you have a position or proposal for a revenue formula?

Do you think the government does not know how to proceed, that the government and the Ministry of Finance don’t know what to do? But they are always going to facilitate solutions where it is easy for them to take the money from where it is. If you look at the proposed table of receipts [for financing the salary scale increase] you will not find any economic policy behind it. You cannot find any social policy or any public servant policy or any incentives for reform. They were shopping for LL 1,742 billion [$1.15 billion] and they tried to take the money from anywhere they could, without any policy. And while they are trying to increase the tax revenues, they are forgetting completely that we already have a huge public deficit. When you have a public deficit of $4.2 billion, you have to at least give an impression of seriousness to the banking industry and to all the people watching us, such as [international ratings agencies] S&P and Moody’s and the donor countries.

A parliamentary committee produced a revised salary scale proposal with lower funding needs but without mentioning a new strategy or fundamental policy reforms. From your perspective of emphasizing the need for fundamental reforms and activation of tax collections, are you then saying that it is not the main issue to redefine the scale of the financing need?

I am not saying that. From an economic point of view it is much better to go for [roughly] LL 1,800 billion [$1.19 billion] than for LL 3,200 billion [$2.11 billion]. They are reducing the initial proposal by [MP Ibrahim] Kanaan and the financial committee by 47 percent and this is much better.

So from your perspective, this is a positive development?

For sure. I also want to say that I think the public servants deserve a restructuring of their salary scale but at the same time, [the public sector needs] a restructuring of their human resources [such as] restructuring of job descriptions and introduction of job evaluations.

It seems undeniable that demands of public sector employees and teachers for fair remuneration of their work have to be met. Does ABL have a proposal how the current shortfall in state funding can be overcome and what banks could provide at this particular moment?

We are against any specific or mandatory contribution to be imposed on the banking sector just because we are making and publishing profit. It is not fair at all. We are already paying our taxes and we want the others to pay theirs.

How do you see the economic outlook for Lebanon and the banking industry?

The outlook is stable. Like the ratings agencies say, it is sometimes negative and sometimes stable and the B minus ratings [for rated Lebanese banks] are because of the sovereign ceiling. We are living with [these ratings] and they are perhaps obliging us to increase our capital base, which is good for us in the long run. We are now at $14.4 or $14.6 billion in capital funds and this helps us to comply with [international banking regulatory agreement] Basel III.

If you look at the performance of the Lebanese banking sector, there seems to be something like a concerted approach by the banking industry to emphasize return on average equity [RoAE] instead of highlighting other parameters such as net profits. Why is there so much focus on RoAE?

[Lebanese banks] today have a lot of shareholders: resident Lebanese investors, non-resident Lebanese investors and some Arab investors. The investors like to have dividends. When you have opened up your capital, you have to be transparent and the return on average assets and the return on average equity are very important indicators, making it easy to follow and compare with performances from other industries and countries.

Are these return ratios better indicators than other indicators such as the rates of increase in bank deposits?

I think so. I don’t like this size approach to banking because we saw huge banks [fall] in international markets. The size is not the [main issue]. In Lebanon we have two main variables to look at. The first one for me is the ratio of liquid assets in foreign currency, because it is very important to cover the unstable Lebanese environment. Whenever there is a war or internal fighting you have to have large international liquid assets to be able to satisfy your clients if they ask to transfer their money outside.

We have therefore always maintained huge liquid assets in foreign currency. It is a huge cost for us because we are keeping this liquidity with international banks and are getting 0.2, 0.3, 0.5, or 0.8 [percent interest] while we are paying on average 2.9 [percent] on the funds. So the liquidity is really a losing business for us; we are losing maybe $400 million or $500 million a year. It is costing us a lot of money during normal periods but it is protecting us in times of crisis.

The other thing is to have good net returns on assets. That means net of our non-performing loans. We don’t have huge ratios of non-performing loans but we have them. You have to make money — we are in the private sector and our aim is to grow our business and create returns for our shareholders.

May 28, 2014 0 comments

Credit Bank's competitive edge resides in its risk culture.

Banking 2014: Looming taxes Finance

On the lending prowl

by Thomas Schellen May 27, 2014

written by Thomas Schellen

The latest newcomer to the top ‘alpha group’ category of banks — those with more than $2 billion in deposits — is Creditbank, a player that aims to be the lender of first resort to Lebanon’s private sector enterprises. The bank achieved 20 percent growth in deposits in 2013 to reach $2.3 billion at year-end. This not only facilitated the leap into the alpha group but also put it at the top of the growth charts among the now 14 alpha group banks.

Compared with the peer group’s growth of deposits, Creditbank expanded at more than twice the average percentage rate in 2013, and it also reported the highest growth in assets in percentage terms. The bank’s growth was above 19 percent on both, but it had a head start on percentages because it rose from the lowest absolute figures in the peer group.

Creditbank’s overall shares in alpha group deposits and assets were 1.42 percent and 1.39 percent at the end of 2012 and 1.55 percent and 1.50 percent at year-end 2013. The ‘super alpha’ dogs Audi, Blom, and Byblos controlled around 21, 15, and 10 percent of deposits and assets at the end of last year.

In absolute terms of deposits, Creditbank’s addition of $380,000 in 2013 surpassed the deposits gained by each of the banks in positions 9 to 13 but lagged significantly behind each of the eight largest banks according to sector information compiler Bankdata. But growth of deposits for the sake of greater bragging rights was not on Creditbank’s mind, claims the bank’s chair, Tarek Khalife. Instead, the bank was vying to achieve growth by catering to private sector credit demand.

Lending was the bank’s raison d’être since its founding as Crédit Bancaire in 1981, and implementing an intelligent strategic culture in pursuit of this objective over the past ten years made for “an interesting and rewarding challenge,” says Khalife. He adds that since 2004, Creditbank rose through the banking sector size rankings by 9 or 10 places to its current spot in position 14.

The fruits of this long-term strategy are evidenced in the fact that Creditbank, now for several years running, has the Lebanese market’s highest loans to deposits ratio, at 57 percent at year-end 2013 versus a sector average of less than 40 percent. According to Bankdata, Creditbank’s loans to deposits ratio is more than 10 points above any other alpha group bank. Khalife sees his bank as one of the keenest in accepting private sector risk, mainly competing with two larger but not ‘super alpha’ banks — names he declines to give explicitly.

“Nobody is more risk friendly than us in Lebanon. I would say there are two other banks that are as risk friendly as Creditbank. Everybody else is fighting on another front because they either don’t know how to take the risk or because they can afford not to,” he says.

The second part of his statement refers to the historic pattern of the past 20 years by which many large Lebanese banks focused their attention on financing the needs of the public sector. Describing the approach of most local banks as taking deposits and placing these funds in sovereign instruments such as treasury bills, Khalife says the resulting gap in supply of finance awarded Creditbank its opportunity for expansion: “The private sector was thirsting for a bank that was willing to focus on the financing of the private sector.”

Growth, not profits

With its emphasis on the virtuousness of lending so highly pronounced, Creditbank has at times maintained a lower ratio for primary liquidity to assets than many of its peers. In 2011 it was below 20 percent for this ratio. However, the bank focused on increasing the ratio in 2012 and 2013 and by end of last year it showed 30.12 percent primary liquidity to assets, close to the peer group average of about 31 percent.

Creditbank’s growth strategy prioritized the implementation of technologies in anticipation of customer demands and the creation of an institutional culture that was at times more capacious than warranted by the size of operations. “We have been managing the bank as an institutional player for more than 20 years. We were very small and yet acting as an institutional player,” says Khalife.

During those years, investments into capabilities were top priority and short-term profitability was not a major target, he adds. “We have done a lot to subscribe to consistency and length of vision. Creditbank could have made greater profits, but we would have lost perception of the client and would have lost our branding culture and our capability to grow.”

In practical terms, the bank invested in automated teller machines at a time when it had just a handful of branches and this expenditure on ATMs ate up almost half of that year’s profits. On the side of ownership, the emphasis on the long term meant that the bank parted ways with shareholders who were not willing to forego quick returns.

In the two decades since Khalife has joined the bank that was cofounded by his father, his shareholding first underwent a massive, phased increase from 8 percent in 1992 to 95 percent in 2004. In the past ten years, however, the trajectory reversed. New shareholders came on board and Khalife reduced his stake by more than 30 percentage points to a current majority of just over 50 percent.

The bank’s structural milestones entailed an acquisition, in 2001, of the Lebanese branch of French bank Crédit Lyonnais, and a 2002 name adjustment to Creditbank from the original Crédit Bancaire. According to Khalife, the reasons for the adjustment were legal consolidation under a single name and a tightening of the bank’s appearance. A complete rebranding has been implemented over the past year and is nearing completion, with measures such as furnishing branches for one-to-one customer interactions instead of counter-based traffic.

Beyond the glass ceiling

Creditbank is not currently pursuing new international growth. It scaled up its shareholding in an Armenian entity, Anelik Bank, to full ownership in 2013 from 51 percent acquired four years ago. It also owns a unit in Russia, Anelik RU, which is specialized in the money transfer business.

“I don’t think growth abroad is in our dictionary today,” Khalife says, adding that he sees no attraction in markets with many advanced players, such as Turkey or the Gulf region. However, he seems amenable to someday contemplating opportunities in less developed markets in Central Asia.

Khalife sees Creditbank’s competitive edge in the current economy as residing in its risk culture. He reasons that the experience of extending credit to the private sector gives it an advantage over banks which are switching from a profit culture to a risk culture and thus may have to pay a price for aggressively pushing loans on customers they don’t know well enough.

The bank has been investing in its staff, which includes 15 women among the 38 persons in the top layers of management, and into tech-driven delivery channels, such as mobile banking. The strength of the domestic workforce has reached about 500 persons and an internal training academy is on the agenda, as is a new communications apparatus. All in all, the bank is at a stage in which Khalife regards further growth as a must. “I have to grow the bank because our culture is not one for small entities. It is made and built to be a big bank,” he says.

The perspective correlates well with the Creditbank’s head office location in the Sin El Fil district of greater Beirut — the surrounding streets smack of new commercial developments.

When Khalife leans back in his chair, his eyes can roam high. His office in the top floor of a commercial tower has a glass ceiling and above it is nothing other than the — mostly blue — Lebanese sky. He says Creditbank will increase its growth beyond all previous measure in the next 24 months and he has a very clear view of his position then.

“I have to bring in new capital,” he says. In the process Khalife readily agrees that the future will see dilution of his direct control. “I still have the majority, but I am not going to hold it for long. I can guarantee that the bank will at least double in assets over the course of the next two years and of course I will no longer be the majority holder.”

May 27, 2014 0 comments

Banking 2014: Looming taxes Comment

Should our banks pay more? No.

by Nassib Ghobril May 27, 2014

written by Nassib Ghobril

The proposed salary scale introduces an increase in spending of roughly $1.4 billion in public sector salaries. These funds will come from various taxation schemes, one of the most controversial being an increase in taxes on banks. The proposed bill would firstly increase the tax on depositors’ interest income from 5 to 7 percent. Secondly, it would increase the tax on banks’ interest revenues from various government securities from 5 to 7 percent and disallow deducting these sums from the banks’ income tax bills. Finally, banks would pay 17 percent income tax instead of the current 15 percent. The proposed bill has caused much controversy not only in the ranks of Parliament, but also among economists and members of civil society. Executive invited Ghassan Dibah and Nassib Ghobril to argue opposing sides in this debate.

Here is Nassib Ghobril’s take on this issue.

First, contrary to the prevailing cliché, the Lebanese banking sector does not live on an island in isolation from its operating environment. In fact, any banking sector in the world is the most affected sector by the deterioration in its operating environment, as banks lend to all segments of the economy. Given that Lebanese banks have lent heavily to the private sector, they have felt directly the impact of the economic stagnation as reflected by the steady rise in non-performing loans from 3.7 percent of total loans in 2011 to 3.8 percent in 2012 and to 4 percent in 2013. Indeed, private sector loans totaled $47.5 billion at the end of March 2014, which is equivalent to about 104 percent of GDP, more than twice the 49.5 percent of GDP ratio for the Emerging Europe, Middle East and Africa region. More specifically, Lebanese banks extended $20 billion in loans to Lebanese corporates, small and medium enterprises and households between 2008 and 2013, which has contributed to the social and economic wellbeing of citizens.

Second, contrary to another cliché, the Lebanese banking sector is not constantly generating astronomical profits. In fact, the prevailing economic stagnation since 2011 has hurt banks’ profits and profitability, as the return on average assets of the top 14 banks in the country has regressed from 1.14 percent in 2011 to 1.1 percent in 2012 and to 1 percent in 2013, which is a low return by both regional and emerging markets standards. Also, the top 14 banks’ return on average equity, a key measure to attract new investors and retain existing shareholders, regressed from 13.2 percent in 2011 to 12.9 percent in 2012 and 11.8 percent in 2013. Other factors that have increasingly affected banks’ income include the reduced number of lending opportunities due to the prevailing domestic and regional uncertainties, as well as the rising cost of compliance. It would be very inappropriate to raise taxes in this unfavorable environment.

Third, the proposed measures include a tax increase from 5 percent to 7 percent on the interest that accrues on deposits. This tax would punish thousands of Lebanese senior citizens and retirees whose sole source of income is the interest revenues that their lifetime savings generate. The tax increase may consist of two percentage points, but it is effectively a 40 percent increase in the tax rate. As a result, the tax hike will reduce retirees’ income, while the increase in the cost of living has already reduced their purchasing power. The multiplier effect of this tax increase will result in lower consumption and, therefore, reduced VAT receipts to the treasury. Another potential impact of this tax hike is a slowdown in deposit growth.

Fourth, the other taxes on the banking sector include an increase of the tax rate on the banks’ interest revenues from several categories of government securities from 5 percent to 7 percent and an increase of the banks’ income tax from 15 percent to 17 percent, in addition to the elimination of the deductible component of the tax on interest rate deposits. These tax hikes may look like simple increases of two percentage points each, but the banks’ real income tax rate would jump to 33.4 percent given the effect of the double taxation of revenues and profits. This would reduce overnight the net income of banks and, therefore, the level of dividends they distribute to shareholders. In turn, this would force banks to look for aggressive cost cutting measures that could include freezing recruitment, laying off employees, reducing bonuses and limiting salary raises, among others. It could also compel banks to raise interest rates on loans of all kinds, which would hurt companies, consumers, households and the economy overall.

Fifth, beyond the direct impact on the banking sector, the misdirected decision to target a successful sector with arbitrary taxes can only backfire on the entire economy and on the country’s brand image. The tax hikes on the banking sector are bound to reduce investor interest, discourage entrepreneurship and risk taking, and divest projects to economies with a more stable and transparent tax system. They would also raise legitimate questions by investors and businesses: Would the politicians’ insatiable appetite to continue spending make them target another successful sector of the economy with punitive taxes? If the instinctive approach to public policymaking consists of indiscriminate tax hikes, is there any serious political will to improve the country’s investment climate and its business environment? Would the calls to stop wasteful spending, fight tax evasion and tackle corruption remain lip service for political expediency? In short, this haphazard approach to taxation is a gratuitous favor by Lebanese politicians to competing banking sectors and economies in the Arab world and in emerging markets.

May 27, 2014 0 comments

Banking 2014: Looming taxes Comment

Should our banks pay more? Yes.

by Ghassan Dibah May 27, 2014

written by Ghassan Dibah

Here is Ghassan Dibah’s take on the issue.

Even if banks do not make super profits, their activities do not represent a significant enough contribution to the Lebanese economy to warrant the low tax rates that they enjoy today. Tax rates should be higher for economic activities that do not contribute to increases in productivity and to the rise of standards of living in the long run.

The economic function of commercial banks and financial markets was elegantly described by Alan Greenspan, the former chairman of the US Federal Reserve: “The purpose of finance is to direct the scarce savings of society … plus borrowed savings from abroad, if any, to our most potentially productive intellectual and physical investments.” In this respect, it is important to analyze what Lebanese commercial banks do, the nature and the source of their profits and the historical evolution of banks’ profits in the past two decades.

Lebanese banks in the postwar period found three captured customers: the government that sustained persistent budget deficits since 1993, the central bank who desperately found itself increasingly in need of maintaining foreign currency reserves in order to defend the Lebanese currency, and middle income consumers wanting to keep up with the consumerism of the upper classes. This led the assets of the banking system to be split between government T-bills and bonds, deposits with the central bank in the form of certificates of deposits, private sector loans (with significant proportions going to consumption and real estate loans) in addition to foreign assets. None of these destinations of local and borrowed savings from abroad (leading external debt to reach around 170 percent of GDP according to the IMF report on Lebanon in 2012) represent “productive physical and intellectual destinations.”

The financing of public debt deserves special attention. Joseph Stiglitz, the former chief economist of the World Bank and Nobel Prize winner in economics, argued that when banks exploit interest rate spreads by investing in government debt instruments they make profits out of nothing. He specifically said, “If a bank can borrow at close to zero and buy a long-term government bond yielding, say, 3 percent, it makes a nifty 3 percent profit for doing nothing.” The Lebanese banks’ subscription in government debt instrument and central bank CDs is an example of this activity.

From 1993 onward, subscriptions in high interest T-bills by commercial banks became their main source of profits. Excess returns on short-term T-bills were estimated in the mid 1990’s at being around 16 percent and the cumulative excess premiums over foreign returns were 54 percent between 1993 and 1996. Such excess returns were instrumental in propping up banks’ profits and led to very high return on equity ratios (RoEs) of Lebanese banks compared even with Middle Eastern and emerging markets banks (reaching around 33 percent in 1996 and 24 percent in 1998). The accumulation of profits from excess returns can be considered as an ‘industrial policy’ by the central bank aiming at augmenting the capital of banks, which increased from $140 million in 1993 to around $14 billion in 2013 — a 100 fold increase! The claim today that commercial banks do not make excess profits over the normal levels in the world (currently RoE around 14 percent), does not address the fact that high rents were accumulated in the postwar period especially between 1993 and 2000. Moreover, banks’ profits in 2013 remain at 4 percent of GDP while in the US they are around 1 percent of GDP.

A significant proportion of their income is a transfer from the taxpayers making the Lebanese economic structure ‘the backbone of banks’ and not the other way around as claimed by banks. In a recent study it was shown that tax rates in advanced economies can reach top marginal rates of 70 percent without sacrificing efficiency as incomes on the top reflect mainly rents. It is then only fair (in addition to ensuring efficiency) that tax rates on commercial banks in Lebanon rise even to higher rates than those proposed today as the majority of their income is generated from rents and do not reflect their actual contribution to the economy.

May 27, 2014 0 comments

Finance

Election fever grips Egypt’s stock market

by Thomas Schellen May 26, 2014

written by Thomas Schellen

With the Egyptian Exchange continuing to rally ahead of almost guaranteed presidential election outcomes, only one securities market in the Middle East and North Africa moved unmistakably higher in the year’s 21st week.

Overall, two benchmark indices rose, three were flat and seven fell. All markets in the Gulf Coordination Council dropped, save the Omani bourse which was flat. Excluding the GCC and Egypt, there were no signs of any strong market direction in the remainder of MENA.

As to the year-to-date picture, the Dubai market is still the solid ‘el supremo’ in terms of percentage gains but its rate of improvement receded to 47.5 percent by end of the week, followed by the Qatar Exchange at almost 31 percent and the EGX 30, which also leapt beyond 30 percent when compared with the start of 2014.

Clueless in the Gulf

Even as the actual inclusion of the selected stocks in Qatar and the United Arab Emirates in the MSCI Emerging Markets Index is yet to become effective, a first round of opportunistic selling and booking of gains in the markets of Dubai, Abu Dhabi and Doha cannot surprise.

The QE Index ended the week after the announcement of its ten MSCI EM joiners with a net drop of just 0.8 percent, but the index moved below the 13,000 points line on three of the week’s five trading days before ending the period with a 250 point uptick. The ADX’s corresponding ride drove the index south for three sessions before a partial recovery.

Abu Dhabi’s weekly net loss was 1.9 percent, which still looks benign when compared with the Dubai market. The DFM Index got slammed down a solid 10 percent by fast sellers in the first three sessions of the week before regaining 200 points and closing week 21 a bit better at −6.1 percent.

Accounting for about two thirds of activity on the DFM, real estate and construction stocks drove the market in Dubai, with financial stocks accounting for most of the remaining activity. Emaar, Arabtec, Union Properties, and Dubai Islamic Bank were among the most pressured. Banking and real estate companies were key contributors to activity on the ADX as well, where banks NBAD and FGB fell by 3.9 percent and 5.3 percent in week 21; real estate stock Aldar dropped 7.6 percent in the same period.

In property and banking and on both UAE exchanges, the attention was firmly focused on stocks that were most affected by the MSCI EM announcements at the end of week 20, either because they were included or had been expected to and failed to make the cut.

As their markets danced the volatility quickstep, newspaper interviews with equity analysts in Dubai and Abu Dhabi pointed to a firm consensus of uncertainty on near-term market developments and possibilities of a correction after the strong gains seen since the start of 2013.

In Qatar, the MSCI EM joiners in banking and manufacturing were more interesting to watch than real estate joiner Barwa; Qatar National Bank and Industries Qatar dropped in the four percent range and Commercial Bank of Qatar by almost three percent during the week as Barwa moved down less than one percent.

The Saudi and Bahraini markets, positioned at the opposing poles of the GCC size spectrum, each moved through the week in general alignment with the drop and partial recovery path of the aforementioned bourses. The markets in Kuwait and Oman inversely exhibited more optimism in the middle of the week and recorded index drops towards the end of the week.

There was something of an update from the policy front as the Kuwait Capital Market Authority released a statement about plans by the Gulf Cooperation Council’s heads of capital markets, which convened in Kuwait for a regular committee meeting to discuss collaboration of GCC stock exchanges.

“The [capital markets] committee approved the [disclosure and governance] committee’s suggestions for single stock disclosure rules and uniform corporate governance principles,” said Kuwait’s state news agency, KUNA, after the meeting concluded on May 19. Appeals for greater integration of GCC stock markets are a recurrent theme in the six states’ attempts to power up their capital markets beyond the current fragmented scenario.

Whiffs of election fever?

Stock exchanges react vigorously to innovative shocks and duly so because the predictable market valuation of a cart maker, for example, will be changed after the invention of a better transportation device such as a bicycle. But events with unpredictable outcomes — such as political elections — sometimes seem to get bigger responses than warranted.

A recent example for hyped market expectations from political elections came from India where the Sensex index of the Bombay Stock Exchange rallied 9.7 percent between the beginning of May and last Friday. This rise, taking place in parallel with the national elections and reacting to the win of the opposition Bharatiya Janata Party, is a bet on a stronger economic future based on a political change. Yet due to India’s complex development process, one must ask if the bet isn’t larger than what can be reasonably predicted.

A similar scenario seems to be playing out in Egypt where the stock market’s EGX 30 index concluded a 1,000-point rise over the past seven weeks with a 1.1 percent gain on the last day before the presidential elections, taking place today and tomorrow. According to Cairo’s Ahram Online, investors were buoyed by candidate Abdel Fattah al-Sisi’s 94.5 percent approval rate by the country’s early overseas voters.

Also in the run up to the elections, Egypt’s first initial public offering since 2010 — of materials producer Arabian Cement — resulted in proportionally huge demand as the $110 million offering of close to 25 million shares was subscribed nearly 18.5 times, according to a disclosure note on the Egyptian bourse. Market participants and IPO facilitators widely expect that the country is going to see more IPOs despite observations that the outlook for the Egyptian economy is far from solid.

These scenarios contrast interestingly with another big election event that played out between May 22 and 25. Observers of European markets said that investors there seem to have directed their attention not on the voting for the European Parliament but more on the mood at the European Central Bank — even as the political air was loaded with concerns that extremists were taking big share of the vote.

The calm of the developed European markets in face of the continent-wide elections might make the irreverent observer wonder if the Lebanese are onto something when it comes to the importance of elections to stock markets. This is simply because the Beirut Stock Exchange remained in total calm in week 21 and index movements expressed not a trace of panic even as it became clear that Lebanon’s presidential elections were failing for the umpteenth time and would leave the country with a crucial vacancy at the top.

On the other hand, a panic would of course have been a sign of life.

May 26, 2014 0 comments

Lebanese President Michel Sleiman reviews the honor guard as he leaves the presidential palace in Baabda on May 24, 2014

Leaders

Let the people decide

by Executive Editors May 26, 2014

written by Executive Editors

In 1811, French philosopher Joseph de Maistre wrote that “every nation gets the government it deserves.” Clearly, our nation deserves better than what it has at the moment. Parliament has yet again failed the Lebanese people by not electing a president before the expiration of Michel Sleiman’s term. One role of MPs is to deliberate, nominate proper candidates and vote for the right person to lead the country. They have to date had six sessions to elect the president, the majority of which were canceled for lack of quorum. They have proven once more that they favor their personal gains and cannot get over their political bickering to represent the people’s will.

This is the second presidential election in a row in which parliamentarians have proved incapable of electing a head of state. Indeed, it took the parliament no less than six months to find a replacement to Emile Lahoud — whose presidency ended on November 23, 2007 — because the two political blocs were unable to agree on a candidate. The vacuum only ended after violent armed clashes led the country’s leaders to finally compromise, finding an agreement in Doha at the end of May 2008 that paved the way for Michel Sleiman’s election.

And here we are, six years later, facing the same deadlock. The current system is clearly not working for the Lebanese people. However, it appears to work perfectly well for the politicians holding the country hostage. This is why choosing the president should no longer be left to them. The system requires a complete overhaul.

Direct presidential elections would be better for Lebanon for four reasons. First, potential candidates would have to make their candidacy official to the wider public. The contenders would need to convince the voters that they are the best candidate for the job — and answer tough questions in public fora. They would need to present legitimate platforms as well. Boasting about their family lineage and closeting wartime records would no longer be enough.

Second, one person would count for one vote. The president is the Lebanese people’s lead representative. Even though a Maronite currently fills this position, the president should not represent only their sect but the whole of the people.

Third, electing a president by direct suffrage would give more legitimacy to the person elected. And finally — and most importantly — the people could hold their president more accountable for his actions. Taking part in the election process will change people’s behavior by making them stakeholders in the process, hopefully more concerned with the head of state’s triumphs and blunders. The Lebanese people would finally be the masters of their own fate.

What would the worst case scenario be if Lebanon held popular presidential elections? Not having a president? Deadlock? Sectarianism? Violence? These are already reliable byproducts of the current system.

We can no longer accept national paralysis every six years. Temporary solutions through backroom deals do nothing to fix this dysfunctional system. It is time to end the system entirely. If not, we will still be facing the same problems in 2020.

Lebanon deserves better.

May 26, 2014 0 comments

Banking 2014: Looming taxes Business

Lebanon’s payment gateway curse

by Livia Murray May 26, 2014

written by Livia Murray

Typically, when a customer buys a product online through a payment gateway, the cardholder’s information goes through a long chain of servers and processors that link the cardholder, the merchant and the payment association before arriving to the credit card’s issuing bank. The bank then does an automated check before it gives its authorization, which is sent down in reverse order until it reaches the merchant and cardholder. The entire process takes approximately 2–3 seconds.

While the technical dimension is quite complex, from a merchant perspective either the payment goes through, or it doesn’t. Unfortunately for Lebanese merchants, the local payment gateways have a high refusal rate on foreign cards. Karim Saikali, a veteran of Lebanese e-commerce who founded BuyLebanese.com explains that many American banks will routinely block transactions that are done on a Middle Eastern payment gateway for “security reasons.”

Such blocking is a huge hindrance to Lebanese online businesses who depend greatly on international sales. With PayPal reneging on its promise to come to Lebanon, local businesses have had to make do with alternatives to the largest and most trusted payment gateway globally. PayPal is widely cited among Lebanese entrepreneurs to be a better functioning, faster online payment system than the alternatives. Many merchants have opted for a combination of both smaller foreign gateways and local gateways. However, neither of these perfectly fits their needs.

Good enough for Lebanon

For Lebanese companies which exclusively do business inside Lebanon, local payment gateways such as Bank Audi’s E-payment gateway and Netcommerce, supported by Crédit Libanais and Fransabank, are not bad options. The local payment gateways have merits in terms of proximity, convenience and merchant support, as well as avoiding the fees that would be incurred on money transfers from a foreign bank account. Fadi Sabbagha, CEO of new media design and consultancy company Born Interactive says he always encourages his customers who only do business in Lebanon to use a local payment gateway. Unfortunately, Lebanese online businesses that only sell inside the country are quite rare due to the slow adoption of e-commerce among the Lebanese population.

These payment gateways have other drawbacks. Lebanese entrepreneurs have complained that the Lebanese payment gateways are cursed with long setup times. In Lebanon, to be able to sell through the payment gateways requires a lengthy approval process from the banks. “As a merchant, to start being able to accept cards is not an overnight thing. You need to get approval first,” says Sabbagha. According to Piotr Yordanov, founder of social network organizer Beepl, setting up online payment is a large time and resource commitment, as a company would “have to spend a whole week having a full-time CTO working on it.” Half-jokingly, he adds, “I even considered [virtual currency] Bitcoin” as an alternative, where the setup would only take a couple of hours.

Crowdfunding

In addition, Lebanese payment gateways are not specialized to cater to every business need. With the multitude of businesses possible through the online realm, some are too unconventional for Lebanese payment gateways’ expertise. Abdallah Absi, founder of online crowdfunding platform Zoomaal, was forced to resort to a US payment gateway when he first realized that local payment gateways had no experience in carrying out the due diligence on third parties to verify the credibility of those raising funds. “They didn’t know what kind of process needs to be put in place, and neither did we,” he says.

Foreign payment gateways, however, are not a perfect solution, and fail to meet the specific needs of Lebanese businesses. Zoomaal faced obstacles with these gateways’ reluctance to deploy the money raised for certain projects in Lebanon even after Zoomaal had already raised the funds. “And we want these kind of projects,” says Absi. Now that they are armed with the know-how to do due diligence themselves, they are incorporating a Lebanese payment gateway into their system, in addition to several foreign ones they will continue to use. “We hope they will give us that freedom,” he says.

The use of multiple payment gateways provides a temporary fix to Lebanese merchants. But until a payment gateway that targets their technical and specific needs presents itself, Lebanese entrepreneurs will continue to spend time and money disproportionately trying to figure out a service that many businesses around the world take for granted.

May 26, 2014 2 comments

The Buzz

It’s all smiles until I lose

by Thomas Schellen May 23, 2014

written by Thomas Schellen

On Wednesday, pollster Gallup unveiled its third Positive Experience Index (PEI) — meant to measure general happiness on a country-by-country basis. By happenstance, the Swiss business school IMD released its annual World Competitiveness Yearbook (WCY) the following day, providing an ad hoc opportunity for a comparison across two fundamentally different rankings: happiness and competitiveness.

The PEI’s headline finding was that a majority of adults worldwide are experiencing positive emotions despite the fact that conflicts and unrest dominate much of the news. And while the results from 138 countries show, according to Gallup, that higher incomes contribute to people’s positive emotions, the researchers said that this correlation weakens above certain income levels, such as $75,000 per year in the United States. One would thus expect the PEI to roughly line up with the WCY, which is dominated by rich nations.

And this happened in certain cases: some countries ranked rather high for their positive emotions as well as their competitiveness. Examples include Denmark, the UAE, Canada and Austria. Several Eastern European, central Asian and African countries — but also Egypt and Lebanon — ranked in the lower 20 percent for positive feelings (Lebanon placed 126 of 138 countries) but the majority of these apparent nations-of-malcontents were not included in the WCY’s 60 economies.

But most notably, quite a few countries showed up at the opposing ends of the scales for positive emotions and economic competitiveness. Venezuela — dead last in competitiveness — was tied with El Salvador and Honduras for the ninth-highest ranking in positive emotions, while Luxembourg, one of the consistent high performers on competitiveness, was alongside South Korea — deep in the lowest third of countries when measured for positive emotions.

If anything, the never-ending race for competitiveness and the equally persistent search for places with the happiest vibes appear to have much room for convergence. One fact, however, emerged as more than clear from the Gallup survey. In case anyone would have had doubts, a civil war is the fastest way to devastate your nation’s emotions. Between 2008 and 2011, Syria ranked at around 60 points. By 2013, it was at 36 points, 16 points below any other nation and at “an all-time low for any country Gallup has measured.”

May 23, 2014 0 comments

Russian Deputy Foreign Minister Sergei Ryabkov

Comment

Easing the pressure on Iran nuclear talks

by Gareth Smith May 23, 2014

written by Gareth Smith

Sergei Ryabkov, deputy Russian foreign minister, spoke in early May of the potential for agreement between Iran and world powers on “elements of a coordinated text and details of a general text” in the latest round of negotiations that concluded last Friday. The fragile confidence in a substantial deal superseding November’s interim Geneva accord, due to expire in July, means politicians and officials are already contemplating its impact on the region.

Abbas Araghchi, deputy Iranian foreign minister and lead negotiator, has been muttering about “dark forces on all sides,” a barely veiled reference to growing criticisms from hardliners in Iran who smell surrender. But Farideh Farhi, of Hawaii University, who closely follows Iran’s domestic debates over talks with the ‘Great Satan’, recently said she thought the leadership had sufficient support, provided US President Barack Obama overcomes congressional opposition to easing sanctions.

Israel’s concerns also remain important because of its undue influence in Washington. However, Keith Weissman, former analyst for the American Israel Public Affairs Committee, says that while the Israeli leadership had their heels dug in against an agreement, he thought that qualms over use of force “especially in the military, renders an actual attack unlikely,” at least “for now.”

The International Atomic Energy Agency (IAEA) has verified Iran’s compliance to date with the terms of Geneva, particularly in diluting 20 percent enriched uranium, while Tehran is preparing a document explaining past research with alleged military dimensions. True, the recent senior IAEA visit did not include Parchin, a site dogged with allegations of nuclear related military work, but Iran’s new proposal to redesign the Arak heavy water reactor, until now a sticking point because it opens a potential path to a plutonium based bomb, has been well received.

An agreement would limit Iran’s nuclear program to 5 percent enrichment and introduce more intrusive IAEA inspections. Iran is unlikely to close Ferdo, the fortified site near Qom the Israelis want mothballed, but the toughest negotiations are probably over centrifuges used for enriching uranium. Ali Akbar Salehi, head of Iran’s Atomic Energy Organization, has spoken of keeping the current 20,000 — under half of which are active — for “four or five years,” whereas the Americans are pressing for 4,000.

It is less clear which sanctions would go in return, and how quickly. Iran wants to recoup funds frozen abroad, and an end to US and EU banking and oil sanctions that have halved crude exports to around 1.1 million barrels per day since 2012.

Presumably a deal would lift some sanctions now and schedule further easing as Iran abides by terms of the agreement. It is important for Tehran, beyond the short term, to end US actions that have curbed its development of gas reserves, which at 33.6 trillion cubic meters are the world’s largest. The stifling of Iran’s gas sector predates the 2012 sanctions and resulted from often informal US pressure on non-US oil majors to abandon joint ventures that would transfer to Iran the technology to develop liquified natural gas infrastructure, which is highly preferable to pipelines.

What would a deal mean for the region? Analysis differs. Sir Richard Dalton, former British ambassador to Tehran, argues that the US and Iran would stay “fundamentally opposed to each other on more significant issues, such as Syria.” In contrast, Yezid Sayigh, senior associate at the Carnegie Middle East Center in Beirut, said last December that Syria was a “sideshow” in which Saudi Arabia had turned on President Assad to fight back against Iran over its nuclear program and growing influence in Iraq. With a nuclear agreement, the Syrian stalemate might incline regional powers to at least downplay support for competing factions.

On becoming president last year, Hassan Rouhani identified improving relations with Saudi Arabia as a priority. Even if Saudi Arabia and other Gulf Cooperation Council states continue to increase arms spending after a nuclear deal, a diplomatic thaw might cool the Iran–Saudi Arabia tension level from being enemies to merely being rivals.

Growing international trade with Iran would surely be a boom for Dubai as many like dealing with Iran through Dubai as a hub with free trade zones and a developed financial sector. Iran also needs overseas capital, long deterred by US sanctions, as it cannot domestically meet investment needs of $60–80 billion annually.

All of this could help Rouhani in his stated aim of fostering a vibrant private sector, which would have a profound effect on Iran’s economy, politics and society. Is it wildly speculative, then, to suggest that the greatest consequence of a nuclear agreement could be a reformed Iran enmeshed economically with the wider world?

May 23, 2014 0 comments