Economics and Policy
Syria is to draw on a $1 billion credit line from Iran in order to stabilize the pound after it plummeted to a record low against the dollar this week
All of Lebanon’s 10 demarcated offshore blocks were nominated as areas of interest by oil and gas firms participating in the initial licensing round, the Energy Minister said.
Syria’s ongoing destruction has impacted the Lebanese economy in various ways, but its eventual reconstruction could bring rich opportunities to its smaller neighbor.
The first two years of the Syrian conflict have seen a massive influx of refugees who have added to the large, existing Syrian workforce. According to Lebanese government estimates, more than 1 million Syrians resided in the country at the beginning of 2013 (both refugees and non-refugees) — the equivalent of a staggering 25 percent of the Lebanese population — while estimates from the United Nations High Commissioner for Refugees have documented 486,000 refugees as of May 22, both registered and waiting to be registered.
This flow has had, and will continue to have, a significant impact on the weak Lebanese state and its physical infrastructure. The number of Syrian children that will require schooling in Lebanese state institutions in September 2013 is expected to rise significantly, with some analysts forecasting their enrollment to be on par with the current number of Lebanese pupils. The water and electricity networks will not be spared, particularly during the summer, while traffic congestion is already on the increase.
Negative effects have also been felt by Lebanese businesses. The conflict in Syria has frightened off tourists and dipped confidence in the economy. Demand from Lebanese households has declined and so has investment, according to Banque du Liban, Lebanon’s central bank. The conflict has also significantly increased the cost to insure and transport exports to Lebanon’s traditional trade partners, such as Iraq and the Gulf. Meanwhile, Lebanese investors in Syria, particularly those in the financial services industry, have taken major losses.
This is not, however, the full picture. In the summer of 2012, the expansion of violence to Syria’s two largest cities, Damascus and Aleppo, drove thousands of urban dwellers from the Syrian middle class and business community to Lebanon. This led to a surge in demand for rented housing across the country and to a rise in consumption. The presence of Syrian patrons at restaurants in Beirut’s Hamra district and beyond is ample proof of that. Investment is still lagging, though by the spring of 2013 an increasing number of Syrian investors were reportedly starting to establish offices or set up shop in and around Beirut.
More relevant to the longer term, however, is the effect of the war and of the Syrian economy’s disintegration on the often-complicated relations between Lebanon and Syria
Already, the decline in Syria’s economic output has improved Lebanon’s trade balance with its eastern neighbor. According to Lebanese customs, Lebanese exports stood at $296 million in the first four months of 2013 — more than the total of 2012, which reached $294 million. While this is partly due to transit trade of energy products to the sanctions-hit Syrian government, there is also evidence that this is the consequence of a massive decline in Syria’s output, especially in the farming sector, creating intense demand for essential goods and commodities from abroad. This represents a reversal of a historic trend; Syria’s more competitive agricultural products used to regularly flood Lebanese markets.
Even if the conflict were to end today, the Syrian economy would need years before it recovers. Replacing destroyed infrastructure and housing alone is expected to cost tens of billions of dollars. The UN’s Economic and Social Commission for Western Asia forecasts, for instance, that when reconstruction begins, demand for cement in Syria will be at some 30 million tons per annum, or three times the level of demand prior to the conflict — a rise in demand that will benefit the Lebanese building materials industry.
After a decade during which Lebanese financial sector capital and know-how benefited from Syria’s economic liberalization, it’s now likely that the country’s smaller industrial and agricultural sectors will find strong new opportunities in post-conflict Syria.
It is still too early to make a comprehensive assessment of the impact of the war on bilateral relations, but there is little doubt that Lebanese investors, across all business sectors, are going to be major beneficiaries of Syria’s reconstruction effort. This will be a strong incentive for solid ties between the two countries, but whether politicians have a grasp of the importance of nurturing these ties is, obviously, a different story.
Jihad Yazigi is editor-in-chief of The Syria Report
Want to take out a loan to open a small workshop in your village? Without owning a piece of land that could be used as collateral, banks would pass on that; they’d also decline the $200 loan request for a woman who wanted to invest in a sewing machine as the starting point for a small business and economic self-sufficiency.
Despite Lebanon’s high bank saturation, the poor here have long lacked access to financial services. Only six years ago, the International Finance Corporation found that Lebanon’s microfinance sector comprised just 11 providers, with a total outstanding loan portfolio of $33 million.
Related article: Every little helps
Photogallery: The people benefitting from microloans
Microfinance is considered an entry point for those in the lowest income brackets to penetrate the formal economy. Al Majmoua, the largest Lebanese microfinance institution (MFI) according to publicly available data, offers group loans — making up 26 percent of their clientele — to women in which the borrowers mutually guarantee each other.
The practice serves as a screening mechanism, as borrowers will naturally exclude non-trustworthy partners. Importantly, it eliminates the need for collateral.
Vitas, the second-largest Lebanese MFI, told Executive that a third of its portfolio was lent to micro-entrepreneurs in the retail sector, followed by 24 percent in the services sector. Less than 9 percent of its loans were for personal use.
The Association for the Development of Rural Capacities (ADR) reported that 79 percent of its outstanding loans were for business, with the remaining 21 percent personal.
Today, the number of providers has passed 20 and the publicly available audited loan portfolios of five of the top MFIs have a combined worth of $62 million. Officials at major MFIs told Executive that they estimate the total cumulative portfolio of all providers at between $120 million and $150 million.
The proliferation of local providers is creating a financial industry that serves people on the margins of the national economy. These clients stand to gain much from the sector’s growth. But a lot will depend on whether MFIs can remain faithful to the social mission of microfinance: to help poor clients smooth their incomes, mitigate financial risk and invest in their futures.
An Opaque Expansion
If industry estimates are correct, then the size of the microfinance sector has quintupled since 2007, as measured by total outstanding loan portfolio. But verifiable data is hard to come by.
Five institutions (see chart) publish audited data on the MIX Market, a non-profit microfinance data site founded and sponsored by a World Bank research center. Three of these institutions — Al Majmoua, Emkan and Vitas — are operationally self-sufficient, meaning they are able to cover all of their expenses from revenues. These three still accept grants and loans from local and international organizations, but they do not depend on them.
Operational sustainability is complementary to the social mission of microfinance. An MFI that operates below the threshold of sustainability relies on subsidized funding, indicating that it may be making overly risky loans that fail to pay off — casting doubt on the efficiency of such lending.
However, there is no requirement to list on MIX Market and there is no central registry of Lebanese MFIs. Thus, the exact number of microcredit providers is unknown, as is their financial viability.
Industry executives agree that the largest provider of microloans in Lebanon is one such unlisted institution: Al Qard Al Hassan (AQAH). As a non-profit, it is registered with the Ministry of the Interior, but it does not have to follow the lending regulations incumbent upon financial institutions registered with Banque du Liban (BDL), Lebanon’s central bank.
According to AQAH’s website, the organization disbursed $208 million in loans in 2012 alone, but the figure does not subtract repayments; the outstanding portfolio is therefore assumed to be smaller.
That a microlender of such a scale can operate in such opacity highlights the need for data disclosure and sector-wide cooperation. Unusual among MFIs, AQAH will sometimes require physical collateral, such as jewelry, gold or a deed to make a loan. The organization has not submitted to operational audits that would verify that such practices do not overburden financially-illiterate borrowers.
Lacking financial history, stable income, collateral and access to financial guidance, microborrowers are particularly vulnerable to unscrupulous lending practices. MFIs often guard themselves against such accusations by submitting to social performance audits conducted by internationally-recognized microfinance organizations, such as Planet Rating and Kiva.
These audits not only gauge transparency and client-protection practices; they also recognize social accomplishments, such as lending to women-owned enterprises or non-lending services, and employing women at all management and staff levels. Principally, the audits seek evidence that an MFI’s services measurably improve the welfare of its clients’ families.
Planet Rating and Kiva have evaluated only two MFIs in Lebanon to date: Vitas and Al Majmoua. Planet Rating, in 2010, found that both institutions demonstrated a “clear commitment to social goals”. It added that Al Majmoua was likely to achieve a positive social impact, but Vitas was yet to measure its impact and refine its practices.
The USAID-funded Lebanon Investment in Microfinance (LIM) program requires social performance data from its partners and conducts field audits of its own. Although the audit results are not public, the program’s director Mohammed el-Zrein told Executive that LIM has not found evidence of questionable practices among its partners (ADR, Al Majmoua, Vitas, Emkan, Cooperative for Lebanese Development, AEP, EDF and Makhzoumi).
Not all Lebanese MFIs have received social performance ratings. Some, such as Ibdaa, which began its operations in July 2012, do not have enough data available for an audit. Others simply may not have a business or regulatory interest in acceding to a public audit. There are no BDL or government requirements to publicly disclose data that can be used to protect micro-borrowers against unsavory lending practices.
Cross-lending roulette
The proliferation of unregulated microcredit in Lebanon has led to serious concerns about cross-lending, wherein clients borrow from multiple institutions without disclosing their level of indebtedness to each. “This should be a red alert,” said Ali Hejazi, microfinance operations manager for ADR.
Some information on over-burdened debtors can be obtained from the Central Office of Credit Risk at BDL, but access to this data is reserved to registered financial institutions. Najib Choucair, head of the Banking Department at BDL, told Executive that Parliament will have to amend the Code of Money and Credit by law in order to allow non-profit MFIs access.
In the meantime, MFIs are doing what they can to reduce default risks in an information-poor environment. Vitas and Al Majmoua told Executive that their loan officers check with officers of other institutions to see whether they share clients, but this practice is informal and undocumented.
Financing microfinance
“Usually, we [MFIs] are supposed to be dealing in a non-profit manner,” said Hejazi. Indeed, there is a pervading expectation that microcredit providers do not make money off of the backs of the poor — to do otherwise would seem contrary to the social mission.
But Lebanese MFIs are moving towards registering as for-profit, financial institutions. Partly, this is to access BDL’s Central Office of Credit Risk. There are cost motivations, as well.
Vitas — formerly Ameen — pioneered the MFI financial institution model in Lebanon. The organization, established in 1999, shed its non-profit status in 2003 and registered as a financial institution in 2007. It is now the second-largest MFI in Lebanon, serving 15,500 borrowers. Emkan, which also began operations as a non-profit, followed suit in 2011. Its lending portfolio is spread across 5,493 clients.
Ibdaa started as a non-bank financial institution registered with BDL. Its managers had decided from the start not to pursue a non-profit status, Chief Executive Bachar Kouwatly told Executive.
By registering as a financial institution, Ibdaa can demonstrate regulatory compliance and attract otherwise hesitant, profit-minded investors to upscale its operations.
“Being a financial institution gives you certain credibility with third parties, investors, donors and even clients,” said Dalia Farouki, deputy general manager of Vitas.
Al Majmoua confirmed to Executive that it, too, is considering registration, but in a deliberative manner. “We are concerned about mission drift,” said Executive Director Youssef Fawaz. “Our average loan amount is lower than our competitors. We go more down market. [Financial institutions] may focus on a segment that is slightly more profitable.”
Farouki, however, is convinced that Vitas’ status as a financial institution is fully compatible with its commitment to poverty reduction.
“True, we are a financial institution, but we have a social mission as well,” she said. “We’ve never lost sight of our mission.”
Tangled regulations
“We believe there is room for microfinance in the country, and some people can benefit from it,” BDL’s Choucair told Executive. “But it is not a very large sector, and we do not believe there is much money to be made from it,” he said, adding that BDL is not very concerned about the ramifications of a cross-lending bubble among micro-borrowers.
Even so, BDL last year revised its Basic Circular 93 to cheapen the cost of commercial lending to MFIs in the interest of expanding credit access. Under Circular 93, bank loans to MFIs do not need to be offset by a BDL reserve deposit. In fact, the loan can be made directly from the bank’s BDL deposit account, cheapening the cost of the capital and therefore allowing lower interest rates for repayment.
ADR has been able to obtain capital at 4 to 5 percent interest through its partnerships with Bank Audi and BLC Bank, according to ADR President Youssef el-Khalil.
Khalil, who is also the director of BDL’s Financial Operations Department, credits the regulation for reducing the costs of ADR’s borrowing. He said that his position at BDL had no impact on the regulator’s decision to allow Bank Audi and BLC to lend to ADR from reserves.
But while ADR has been able to obtain low-cost, Lebanese commercial bank investment for its operations, Ibdaa and Al Majmoua complained that they have not.
“There is a reserve exemption, but it is not [specifically] for MSE [micro- and small- enterprise] lending. It is for unserved markets. Banks saw micro as overly risky, and most lending went to housing,” said Ibdaa’s Kouwatly.
“We went through a road show; we knocked on the doors of many banks,” said Fawaz. “The [commercial banking] sector is simply not interested, in spite of our [portfolio-at-risk] rate.” Those banks that did consider lending to Al Majmoua, according to Fawaz, offered interest rates between 9 and 11 percent, more burdensome than rates the institution can obtain from abroad.
Moreover, BDL regulations effectively prohibit MFIs from accepting deposits, severely constraining the sector’s ability to offer other services. Only banks in Lebanon may accept deposits, not non-profits, nor non-bank financial institutions.
“That’s why we initially wanted to [register as] a bank — we wanted to bring something new to the industry,” Kouwatly said of Ibdaa. He did not comment on why Ibdaa’s application for a banking license fell short, but industry executives agree that the reserve requirements are too onerous for microbanking.
Regulatory and operational restraints and cost barriers on funding should be expected to stay with the microfinance industry for the foreseeable future.
Nevertheless, facing the pressing financial needs of Lebanon’s poor, Lebanon’s MFIs are showing promising signs of evolution. The USAID-funded LIM program expects to establish the first ever Lebanese microfinance network this year.
LIM’s Zrein, the program director, said, “The network will provide a unified voice for the sector, lobby for the sector and promote the sector.”
But even more important than speaking with one voice — which will not be an easy task in the mosaic of Lebanese communal identities — is the need for this maturing industry to innovate.
To date, the Lebanese microfinance sector offers lending services and business development support, but little else. “What the poor need are a vast array of services, not the least of which are savings, insurance and financial education,” said Al Majmoua’s Fawaz.
Every day in the Philippines, select clients of CARD Bank receive a visit from their savings officers who collect as little as half a dollar from each and deposit it in their clients’ bank accounts. The micro-savings initiative, which CARD runs in partnership with the Grameen Foundation, helps people develop financial discipline. Mariner Apdo, a fishmonger, told Grameen, “If I have money at my house, it’s easy to spend it. Yet, if it’s in my savings account, I’m able to save it.”
People like Mariner live in Lebanon. An estimated 63 percent of Lebanese adults do not have a bank account, according to the World Bank, and this in itself makes it a challenge for them to save. And insurance experts say there is a vast lack of awareness on ways in which the poor can access insurance for financial protection against disasters and disability.
Related articles: Microfinance rising in Lebanon
Photogallery: The people benefitting from microloans
For the past two decades, Lebanon’s microfinance institutions (MFIs) have fixed their ambitions on expanding credit access to the country’s poor. By expanding horizontally into micro-savings and micro-insurance, Lebanese MFIs will take a major step toward realizing their social mission to provide the poor with the financial tools necessary to achieve economic stability and growth.
Elsewhere in the world, poor households depend on savings and insurance to finance their livelihoods, according to a comprehensive review published by the World Bank’s microfinance policy and research center, CGAP. “[Poor households] use credit and savings to pay school fees, they save to invest in business, and they use health and crop insurance, when available, to stave off risk.”
Although the Lebanese regulatory environment makes it difficult for MFIs to offer low-balance accounts and micro-insurance, the task is not impossible. MFIs can partner with commercial banks to provide savings services to their clients. They need only look to Vitas, an MFI serving 15,468 clients.
Vitas has negotiated an agreement with one of its partnering banks to allow its clients to open savings accounts with a minimum deposit of $50. Because Vitas is a financial institution, its clients build credit histories logged at Banque du Liban (BDL), Lebanon’s central bank, Central Office of Credit Risk, facilitating their transition to the formal banking sector.
The ability to facilitate this transition should be reason enough for other MFIs to rush to BDL to register as financial institutions. Al Qard Al Hassan and Al Majmoua, the country’s two largest MFIs, are both non-profits and cannot access the Central Office of Credit Risk. It is a disservice to their clients, who currently cannot build credit histories off of their legitimate lending and repayment activity.
The Vitas model needs improvement, however. Vitas says that it encourages its clients to open savings accounts, but their scheme is promoted through word-of-mouth alone. More aggressive marketing would yield a better uptake and better social outcomes.
In Malawi, a controlled experiment found that farmers who were offered savings accounts with commitment devices — accounts from which they could not withdraw until a pre-selected date, such as immediately before the planting season — changed their investment and expenditure patterns, and the value of their croup output increased by 22 percent.
If such yield improvements can be attained in the Lebanese agricultural sector, banks and investors will surely notice. This is an opportunity for MFIs to show to the commercial sector that it is not only moral to adopt a social mission, but profitable as well. Farmers and financiers both will win.
Insurance should also be considered a vital component of an overarching microfinance strategy. Youssef el-Khalil, president of the Association for the Development of Rural Capacities (ADR), told Executive that his institution is working to roll out its own micro-insurance product. Khalil said such services could be extended through partnerships with commercial institutions, thus circumventing restrictive regulations on MFIs.
Other MFIs would do well to follow ADR’s example, or to look to the new memorandum of understanding between AXA, the global insurance giant, and Grameen-Jameel, a Dubai-based microfinance joint venture with stakeholders in nine Arab countries, including Al Majmoua in Lebanon. The memorandum, signed seven months ago, proposes to sell micro-insurance through Grameen-Jameel’s network in the Middle East.
Lebanese MFIs should not wait for regulations to change to offer innovative services to their clients. The microfinance and commercial sectors can partner to provide savings and insurance products tailored for the country’s financially marginalized population — an opportunity that is both cost-effective and ethical.
Philip Issa is a former fellow at Kiva, a non-profit organization that connects leaders to MFIs worldwide
Economics and Policy
Shoring up the Lebanese industrial sector is key for restoring economic stability, said officials who celebrated the “Lebanese Industry Day” on Monday.
Iran’s newly elected president, Hassan Rouhani, has pledged to follow a “path of moderation” and promised greater openness over the country’s nuclear programme.
Le Bristol, one of Lebanon’s most famous hotels, is investing up to $30 million in renovations.
Economics and Policy
Iran's newly elected reformist-backed president said Sunday that the country's dire economic problems cannot be solved "overnight," as he took his first steps in consulting with members of the clerically dominated establishment on his new policies.
Companies and Business
Capital inflows into markets in the Middle East and North Africa (MENA) reached $655m during May, according to date from Deutsche Bank, marking the biggest monthly flow of capital into the region in five years.
Lebanon’s industrialists have a cordial, even respectful, relationship with the nation’s bankers, but they could never be considered bosom buddies. Not only have trade, tourism and real estate had an easier task in courting the favor of the financiers, but the very fabric of the country is intertwined in a way that hobbles those entrepreneurs who have been prepared to get their hands greasy in the workshop.
“The relationship between the industrialists and the commercial banks in Lebanon did not start on a good foot as they always preferred to do business with the traders,” explains Nazareth Sabounjian, owner and general manager of Georgi Sabounjian sarl and treasurer of the Association of Lebanese Industrialists (ALI).
The Sabounjian business started as a two-room workshop making jewelry boxes in the late 1960s and it is now a modern plant of 12,000 square meters (sqm) with more than 200 staff. A plethora of products from jewelry store stands to ring cases are produced in the Mount Lebanon-based factory for both Lebanese and international markets. Nazareth Sabounjian is the second generation at the helm of the company as well as being the longest serving member of ALI.
“Unlike the commercial traders, in the past, if an industrialist went to the banks he would find it hard to get credit. Industrialists need to buy land, build the factory and bring the machinery, and this all takes time and the commercial banks don’t like this,” says Sabounjian.
In recent years, Banque du Liban (BDL), Lebanon’s central bank, has introduced a number of initiatives to stimulate lending to the productive sectors. Industry accounted for 11.5 percent of the commercial banks’ lending portfolio in 2012, which according to the latest data roughly corresponds to the sector’s contribution to the economy.
“At the end of the day we are not really an industrial country,” explains Ibrahim Salibi, assistant general manager and head of corporate and commercial banking at Bank Audi.
The competitiveness of Lebanon’s industrial base has ebbed away in recent decades. The steadily rising price of non-tradeable goods and services has put upward pressure on the costs of industrial production. Consider this in light of the almost complete abolition early in the last decade of previously significant protective tariffs and you can understand why Lebanon’s industrialists have had such a rough ride of late.
But the steep rise in the costs of production, and hence the falling competitiveness of the productive sectors, is largely due to the huge inflows of capital to Lebanon’s banking sector that have been used to finance the gargantuan lending to both the government and the private sector. “Everything that is tradable has become incredibly uncompetitive for the Lebanese exporter and extremely competitive for the Lebanese importers, and this translates very easily into the size of the balance of trade deficit,” explains Charbel Nahhas, ex-minister of labor and widely published economist.
Not only is the persistent inflow of deposits to the banking sector hurting industrialists by driving up prices for non-tradable goods and services in Lebanon, such as land, but the high rates of interest used to attract this capital are also discouraging investments in the sector. “Potential investors in Lebanon made their studies and found that their expected returns hardly ever exceeded the cost of borrowing and that is why industries in Lebanon collapsed,” reasons Ellie Yachoui, professor and dean of the Faculty of Business Administration and Economics at Notre Dame University-Louaizé.
Financial aid
With a commercial banking sector more inclined towards trade, real estate and tourism and a manufacturing base fighting an uphill battle, it is little wonder why lending to industrialists has been lackluster. In such a climate, it has been BDL that has stepped in to grease the cogs of finance between Lebanon’s manufacturers and bankers.
Lebanon's industrial sector is relatively small
“The central bank did an essential thing for industrialists when they started doing soft loans. If they were not to have these programs, it would be much harder for us industrialists to get credit,” says Sabounjian.
The expansion and upgrade of the Sabounjian factory from 3,000 sqm to its impressive 12,000 sqm replacement in the Mount Lebanon region several kilometers inland from Jbeil was enabled by a $3.5 million loan in 2002 subsidized to 1.5 percent interest by the central bank.
Since 1997, government subsidized loans from commercial banks, investment banks and leasing companies have been made available for the industrial, tourism and agriculture sectors. “For years we have been using the exemption on reserve requirements to allow banks to lend to specific sectors, whether it is housing or the small and medium-sized enterprises (SMEs),” explains Wael Hamdan, executive director and head of BDL’s financing unit. “Over the past 15 years we have subsidized close to $5 billion dollars in loans: 60 percent for industry, 30 percent for tourism and 10 percent for agriculture.”
BDL has been instrumental in developing a number of different products that carry different conditions and incentives, targeting different sized operations. One such product, the Kafalat scheme, aims to encourage investment by decreasing the cost of medium and long-term financing extended to SMEs in the productive sectors that are unable to provide the guarantee necessary for the loan. A standard Kafalat loan can be up to $200,000 whereas the “Kafalat Plus” can extend up to $400,000. The guarantee ranges from 75 percent for a basic loan to 85 percent for Kafalat Plus.
For larger operations, BDL manages state-subsidized loans for which no commission needs to be paid to cover the guarantee, as is the case with the Kafalat loans. The total outstanding balance of subsidized loans granted to one institution or one economic group should not exceed LL15 billion ($10 million) and BDL applies a flat subsidy rate of 4.5 percent on all of the loans.
The commercial banks are required to reserve 15 percent of their foreign deposits and 25 percent of their domestic lira deposits at the central bank, and these reserves have been the tool by which BDL has encouraged the banks to offer such reduced rate loans. “We gave the banks some exemptions from the reserve requirement to make it more attractive for them to lend into these programs. The banks are encouraged because their clients have [a] better cash flow if the interest rate is subsidized by the government, and they are also exempted to a degree from their exemption requirements,” explains BDL’s Hamdan.
However, according to Hamdan, as the banks were being exempted from their reserve requirements in return for offering the reduced rate loans, these very reserves of the commercial banks started to deplete. What is more, the increased dollarization of the banks’ balance sheets meant that they had less local currency in their reserves, compounding the situation. Consequently, cheap loans on the market started to dry up, as this was the only sweetener BDL had to entice the commercial banks to offer these products.
This compelled BDL to offer the banks loans totaling LL2.2 trillion ($1.46 billion) at 1 percent interest, with a time limit ending December 31 2013, that would enable the banks to keep on putting the products on the market but without having to resort to taking exemptions on their reserves. This initiative, which was launched on January 14 by Circular 318, is what was popularly referred to as the “stimulus package”.
“From that 1 percent, we don’t want to see it translated in the rate the banks give to the customer so they have to keep on pricing the same way they had been as if taken from their reserve,” says Hamdan. Under the previous arrangement of reduced rate loans being enabled by the reserve exemption mechanism, BDL had not stipulated to which sectors the banks should grant the loans. However, with the stimulus package, the amounts that can be lent to different beneficiaries are clearly defined.
The majority of the money has targeted real estate in the belief that this is the most effective driving force for growth in the economy. The productive sectors got a marginal share. The BDL-stipulated credit ceiling for productive sectors under the interest rate subsidy (not including loans granted with a guarantee from Kafalat) was LL140 billion ($93.3 million), or 6 percent of the total. Conversely, housing received LL1 trillion ($666 million).
However, the 15 percent exemption taken against these loans translated the LL140 billion made available from the BDL for the industrial, agricultural and tourism sectors into LL934 billion ($622.6 million) in total loans granted by the banks.
“So if [they] can afford LL140 billion, the banks can lend against them LL934 billion as LL140 billion is 15 percent of LL934 billion,” says Hamdan.
Can more be done?
The demand for the loans to the productive sectors outstripped supply. Saad el Zein, head of corporate banking at BankMed, explains, “Everything that was allocated to the productive sectors [within the stimulus package], was consumed and what remains today mostly pertains to the housing loans sector and environmentally friendly businesses.”
Perhaps, if their hand were forced to deal with the more cumbersome productive sectors, the bankers would find that there is indeed greater demand in the market for their services.
Zein from BankMed and Salibi at Bank Audi both say their banks are willing and able to lend to manufacturers to finance expansion and diversification. There is, after all, opportunity in adversity and both referred to the fact that the proportion of their lending portfolios for the industrial sector was around 20 percent and thus higher than the national average.
However, the balance of the most recent stimulus package shows that manufacturing and other productive sectors, such as agriculture, remain on the fringes of policy makers’ agendas. Add to this the huge amounts of money being pumped into non-tradable goods and services, such as real estate, and it is understandable why Lebanon’s industries are less competitive and coming to represent a smaller portion of the economy.
The central bank’s incentive schemes may keep Lebanon’s industrialists at the table, but they will have to continue the fight to maintain their cut of the pie.
When I interviewed Hassan Rouhani in Tehran back in 2005, the toughness underneath the white turban was evident. It seems glib now for Iran’s president-elect to be called a ‘moderate’ but he is certainly more pragmatic than the officials that have dominated Mahmoud Ahmadinejad’s presidency.
Probably, the turning point in the 2013 presidential election came in the third televised debate when Ali Akbar Velayati lambasted the lack of flexibility shown by Saeed Jalili in his conduct during talks over the nuclear program since 2007. “You have not gone forward even one step, and the pressure of sanctions still exists,” said Velayati, a long-time senior advisor to Ayatollah Ali Khamenei, the supreme leader.
Related article: Rouhani, the man who could bring peace
Suddenly gone was the consensus that the nuclear program was not an election issue, as Velayati bluntly addressed the realities understood by Iranian voters: that tightening United States-led sanctions over the past year, due to Iran’s disputed nuclear ambitions, have badly squeezed the economy, and that such difficult times require a more measured and informed hand on the diplomatic tiller.
Hassan Rouhani did little to propose specific economic policies, much less any kind of clear plan, but his stress on the importance of a more conciliatory international approach and a more relaxed domestic political atmosphere contrasted sharply with those candidates – especially Jalili – who recited a mantra of “resistance” as the answer to all problems.
The scale of Rouhani’s victory – with over 50 percent on a first ballot with six candidates in the field – was emphatic, as was a voter turnout of around 75 percent, much higher than expected.
Rouhani won the votes of millions of people who backed Mahmoud Ahmadinejad in 2005 and 2009, and this should finally bury the notion beloved by many foreign analysts that voters fit into categories like ‘reformist’ or ‘conservative’. Voters attracted in 2005 by Ahmadinejad’s campaign against corruption and promise to “put the oil money on the sofreh [the square carpet on which poorer Iranians eat meals]” turned away from the follies of populist economics.
Arguably, Ahmadinejad’s replacement of the state subsidies of every day items such as bread and gasoline with cash payments to most Iranians did reduce inequalities. But prices jumped 40 percent last year on official figures, and unemployment has reached 15 percent, with around 30 percent of young people jobless. Many medicines have been in short supply, and the Iranian rial has lost half of its international value in a year.
Whatever steps the Iranian authorities have taken to boost domestic growth have been swamped by reckless economic management and by the effect of tightening sanctions that since early 2012 have halved oil exports to around 1.1 million barrels a day.
Hassan Rouhani’s international credentials are clear. In handling negotiations with the Europeans over the nuclear program back in 2003-2005 as secretary of the Supreme National Security Council (SNSC), he brought Iran closer to a substantial diplomatic agreement with the West than at any time since the 1979 Islamic Revolution.
But the simple fact that Rouhani failed — the 2003 agreement with the European Union broke down — illustrates the mighty challenges he now faces as president in reaching out for understandings, perhaps even a deal, that can reduce international tensions around the nuclear program and around the regional rivalries now centered on Syria.
Firstly, Rouhani was undermined then by domestic critics who asserted he was “selling out” Iran’s interests by suspending uranium enrichment as a “goodwill gesture” during the talks with the Europeans. Interestingly, Rouhani defended himself against such charges in the recent presidential election by saying he successfully gave time for Iran to improve its technology while also avoiding, at that stage, Iran’s referral to the United Nations Security Council.
But Rouhani will again face such criticisms if he reaches out towards Europe and the United States. His electoral mandate will strengthen his hand and we should not forget his close relationship with Ayatollah Khamenei, who appointed him to the SNSC and who personally entrusted him with negotiating with Europe.
Secondly, Rouhani will need to deliver, and this means he will need someone to negotiate with. He will need a United States that recognizes Iran, like any country, has national interests and concerns. As he said when we met in 2005, “a country which expresses interest to hold talks at the same time cannot be working for regime change … so the US must clearly announce its strategy towards my country.” Regionally, Rouhani will need a Saudi Arabia that understands that Shia-Sunni tensions are leading the region ever deeper into battles with no victors.
Rouhani is thick-skinned and intelligent. But just as important will be the “hope” and “prudence” that were the watchwords of his campaign; hope and prudence in Iran, and hope and prudence elsewhere.
Gareth Smyth has reported from around the Middle East for nearly two decades and is the former Financial Times correspondent in Tehran
Lebanese bankers are sailing off to foreign shores to generate growth in profits as turbulence rattles their home country and cripples their neighbours next door.
The blood being spilled in Syria is rising daily with no end in sight. The repercussions on government-less Lebanon go beyond an economic suffocation as violent clashes have again taken hold of the northern city of Tripoli. Amid this, Lebanon’s indebted public sector is under pressure and along with it the banking sector — a heavyweight in the country’s economy indeed.
The $40 billion Lebanese economy grew by just 2 percent last year, according to the International Monetary Fund, and is expected to grow by a slightly higher rate of 2.5 percent for 2013, an estimate that seems likely to be reduced if the current situation does not improve. The number of tourists visiting the country in the first quarter was down 12.5 percent on last year and they are unlikely to flock to Lebanon this summer. The United Arab Emirates renewed its travel warning to Lebanon for its citizens last month.
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Why E-Banking is struggling in Lebanon
Despite being almost four times the size of the economy, the banking sector is feeling the pinch. The sector’s size grew by just over 2 percent in the first quarter of the year to stand at $155 billion, 14 percent lower than the growth witnessed in the same period of 2012, a year also marked with significant regional instability. Deposits, on the other hand, were up more than 2 percent to stand at $128 billion, outgrowing last year’s rate by 24 percent with the majority of the growth coming from local residents. This leaves us wondering whether consumers are reducing their spending as they wait and see if darker days lie ahead.
Banks also seem to be cautious to flex their lending muscle, with a three percent growth in loans to consumers in the first quarter of the year, 23 percent lower than the growth witnessed in the same period of last year. Consumers’ debt to the banking sector amounts to $45 billion.
Still funding the government’s coffers
The highly indebted sovereign, $58 billion in debt as of January 2013, continues to knock on bank doors for help in refinancing the country’s debt. And banks are continuing to hand over the cash, most recently subscribing to the $1.1 billion Eurobond issued in April of this year. Banks carry just over 50 percent of the country’s debt as of March 2013, up 1 percent year-on-year, despite the continuous reluctance of senior management of the top banks to increase their sovereign exposure — a sentiment they have expressed to Executive on numerous occasions. With low interest rates on international markets, the lack of lucrative revenue growth opportunities internally and the desperate need for the government to recharge its finances, banks don’t seem to have that much of a choice.
This exposure has led rating agency Moody’s to change its outlook from stable to negative on the deposit ratings of the country’s three biggest banks — Bank Audi, Blom Bank and Byblos Bank — after similarly downgrading their outlook on government bonds. The agency is losing confidence in the government’s ability to fulfill its debt obligations. Are Moody’s concerns reasonable? Yes. The banks are still highly exposed to Lebanon, with domestic assets accounting for more than 80 percent of their total assests and with profits generated from Lebanon amounting to a significant 84 percent of their total profits, according to Bankdata financial services. If the economy’s growth rate stagnates — a highly likely scenario — and if the government is unable to finance its hefty debt at favorable interest rates — another highly likely scenario — then the banks’ exposure to the debt will become even more burdensome.
Foreign activities in trouble
A major part of the assets located outside of the country are in jeopardy too. The chief concern lies in neighboring Syria, a dominant trading partner where six Lebanese banks have established branches. While the banks’ portfolio in Syria stood at $3.7 billion as of the end of 2012, down from $5.4 billion a year earlier, the repercussions on the economy continue to be felt and along with it the backlash on the banking sector. Disorder in Egypt, where several banks have also established branches, continues, with the IMF cutting its 2013 growth forecast for the country to 2 percent.
Cyprus’ request for a bailout from the European Union came at a shocking price: tapping into depositors’ money. While the combined deposit base of the nine Lebanese banks operating in Cyprus account for less than 3 percent of the sector’s total deposits, according to the Association of Banks in Lebanon, these banks had an extra issue to worry about: the Cypriot government tapping into their deposit base.
Aiming to cater to the banking needs of the Lebanese diaspora, banks’ reach abroad is extending, with 16 percent of the alpha banks’ profits coming from offshore lands in 2012, up from 11 percent in 2011. In Iraq, several Lebanese banks have already set up shop and others such as Bank Audi are following this year. Bank Audi and BankMed are eyeing growth in Turkey. In Africa, Lebanese banks are looking at Nigeria, Congo and Sudan, where Byblos Bank has an established presence, and Libya where Byblos plans to expand this year. Further afield in Australia, Bank of Beirut is set up under the recently rebranded Bank of Sydney.
Lebanon’s history is full of instability and chaos, and the banking sector has persevered throughout. With the ongoing turmoil and instability shaking the country’s economy and its banking sector, banks are doing what they do best, wrestling to survive. This time they are betting on far reaching lands to reap higher profits. Whether their bets will bring fruits or not remains to be seen.