Executive Magazine

Making the best of a bottom dollar

by Philip Issa June 18, 2013

written by Philip Issa

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.

June 18, 2013 0 comments

The Buzz

Business briefing: 17 June 2013

by Executive Staff June 17, 2013

written by Executive Staff

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.

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Saudi Arabia has cut back the number of pilgrims that may perform Haj this year because of construction work aimed at expanding Mecca, said Bandar Hajjar, the Haj minister.

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Elsewhere in Saudi, export revenues fell almost 6 per cent in March compared with the same period a year ago as the cost of imports surged.

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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.

The hard sell

by Zak Brophy June 17, 2013

written by Zak Brophy

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.

June 17, 2013 0 comments

Comment

Building on the hope of Rouhani

by Gareth Smith June 17, 2013

written by Gareth Smith

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

June 17, 2013 0 comments

Economics & Policy

Death and destruction

by Sam Tarling June 15, 2013

written by Sam Tarling

The Abra neighborhood of Saida has been the scene of fierce fighting since Sunday, with supporters of radical Sheik Ahmed al-Assir clashing with members of the Lebanese army and reportedly armed groups allied with Hezbollah. [Photo: Sam Tarling/Executive]

The clashes have left much of the Abra area badly damaged. A resident surveys a barricade erected by Assir's forces, which was shelled by the army. [Photo: Sam Tarling/Executive]

A bullet-scarred building on the southern edge of Abra. [Photo: Sam Tarling/Executive]

An Abra resident takes a cellphone photo of a hole caused by gunfire after soldiers targeted Assir's forces nearby. [Photo: Sam Tarling/Executive]

This large round was found inside the house, seen here next to a .50 caliber casing for comparison. The presence of the casing suggests the house was used as a firing position. [Photo: Sam Tarling/Executive]

Ghada Kassab (second left) and her family survey the damage to their house. [Photo: Sam Tarling/Executive]

Many of her personal belongings have been destroyed. [Photo: Sam Tarling/Executive]

Abra residents survey a building that was set on fire during the fighting. [Photo: Sam Tarling/Executive]

This family were discussing whether to flee the city or stay and hope violence abates. [Photo: Sam Tarling/Executive]

An Abra resident looks out at her balcony, which was damaged by gunfire during the clashes. [Photo: Sam Tarling/Executive]

June 15, 2013 0 comments

Banking 2013: Looking for better horizons Finance

Banks fleeing the storm

by Maya Sioufi June 14, 2013

written by Maya Sioufi

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.

Related article: Credit cards yet to catch on in Lebanon

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.

June 14, 2013 0 comments

The Buzz

Business briefing: 14 June 2013

by Executive Staff June 14, 2013

written by Executive Staff

Economics and Policy

The World Bank has slashed its projection for Lebanon’s GDP growth in 2013 to 2 percent from 2.8 percent.

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Egypt’s central bank said it had suspended its Tuesday deposit auction and would hold a repurchase agreement (repo) auction in its place, a move bankers said was designed to give some banks access to more liquidity.

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The IMF has warned Dubai's companies over increased borrowing.

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Online advertising in the Middle East and North Africa region is growing at 37 per cent per year to hit $2.8 billion in 2016.

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Abu Dhabi's Aldar Properties and Sorouh Real Estate surged Thursday after the developers said no objections were raised by creditors of Sorouh to a state-backed merger of the two firms set for end of June.

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June 14, 2013 0 comments

Business

Giving up on the quick buck

by Joe Dyke June 13, 2013

written by Joe Dyke

Company: Ounousa.com

Country: Lebanon

Industry: Media

Founder: Elsa Aoun and Wassim Kari

Established in: 2008

Number of employees: 10

Capital raised: Self-financed so far, seeking potential capitalization

Back in 2008, it all seemed simple for Wassim Kari and Elsa Aoun. They were studying business in France, had begun dating and were considering what to do with their lives. Then they attended a talk about making money from the Internet that seemed to offer them a path.

Among the speakers was a French entrepreneur who had designed a website at the height of the 2000 dotcom bubble, ran it for a couple of years and sold her stake for millions of dollars. The largely Western-based bubble had made millionaires of hundreds of entrepreneurs and, the couple reasoned, it was only a matter of time before the Middle East had its own version — bringing with it the opportunity to make big profits in a short time.

“We were always discussing [whether to go] the safest way and do the [stable] career, or try something else. There were some indicators in the region here that were similar to the 2000 Internet bubble. For example, the internet penetration rate [was low but growing rapidly],” Kari said. “In 2008 we saw these ingredients happening in the region and we said ‘okay the bubble will not last long.’”

Seeking to capitalize on this, the couple founded Ounousa (feminine in Arabic), an Arabic-language website whose target clientele is women. Kari designed an initial website — complete, he admits with embarrassment, with “flashy pink colors” — and within a short period traffic was booming. Soon Ounousa had become among the leading spaces online for women’s fashion and lifestyles, with a huge Facebook following (which has now reached 1.3 million) to help drive traffic.

The couple have won a number of awards

Then, in August 2009, online giant Yahoo bought Internet services company Maktoob, leading to predictions of the “start of an era” for online mergers and acquisitions in the Middle East. Shortly after, Ounousa won a prestigious award to celebrate its growth. The company, it seemed, was ripe for a lucrative takeover.

Then, nothing. Three years on there has been no initial public offering, no acquisition. In fact the largest change in the couple’s lives is personal — they are married and now have a baby. But simply put, the dotcom bubble never really came to the Middle East, with venture capitalists reluctant to spend as the market was not liquid. “This is something we did not expect,” Kari admits. “When we started the venture we wanted to be like the [French] girl who sold everything, but this is not the case. There was no bubble in the sense of liquid [mergers and acquisitions].” Aoun is becoming less and less confident that the bubble is coming as, she reasons, the “market is getting mature.”

As such the couple have given up on making a quick buck and are reaching the conclusion that the company, which is still growing rapidly, will be theirs for the long haul. “We are moving from an out-sourcing to an in-sourcing model,” Kari says. “We started because we thought it was an equity game [so] the cash flow is unimportant; let's get a nice position on the market, get good numbers and exit from it. We outsourced everything to arrange it as a good shaped investment. When we saw that the market was not liquid we thought ‘maybe there are cashflows, online advertising is getting bigger by the day.’ So we in-sourced other functions.”

As such, Ounousa, recently selected among the top 500 fastest growing Arab companies, is shifting its strategy to regional dominance. The company has been profitable since 2011, but the couple is aware that the online advertising market saturation is coming in “two to three years,” Kari predicts.

As such, diversification of revenue streams is their next challenge. This, Aoun says, will include branching out into major new projects she is leading — chief among them incorporating e-commerce into the site.

“95 percent of [our] audience are women and a lot of them are interested in fashion, leisure [and] people news,” she says. “So we are planning to develop into e-commerce; especially, we are trying to do something where, for example, I see Kate Middleton wearing this amazing navy dress, and I want her look — so I want to buy the same. The idea is to make kind of a ‘shop the look’ [service]. So you can buy the same outfit or something comparable to it.”

They are well aware that this will put them in direct competition with regional retail giants that are investing online but are hoping the undeveloped nature of the market could enable them to capitalize.

Their already-established niche will certainly help. The website has over five million page views every month, most of which are channeled through their huge Facebook support. Likewise, the brand is now fully regional, with the majority of traffic coming from Saudi Arabia, Egypt and Morocco.

Perhaps the biggest challenge, then, for these two highly driven entrepreneurs is juggling married life with working together. The first tip they offer is to have completely separate spheres of responsibility — Aoun deals primarily with content, while Kari is responsible for traffic and technology.

But, as an hour-long conversation with them attests, they flit comfortably between business and personal conversations, from profit margins to prams. “The problem is we don’t make a distinction [between when we are working and when we are together personally]. We work, then we have a discussion about something else, then we go back to working,” Aoun says.

June 13, 2013 0 comments

Banking 2013: Looking for better horizons Finance

Bank to the future

by Executive Staff June 13, 2013

written by Executive Staff

Trying to achieve anything online in Lebanon can be a frustrating ordeal, so perhaps it’s no surprise that real growth of electronic banking has been late to emerge. According to several Lebanese banks surveyed by Executive, e-banking usage by their customers has increased in the past five years to between 25 and 30 percent, roughly on par with the global average as of April 2012 according to ComScore, a digital measuring and analytics firm. However, it is low compared to North America, which has a 40 percent to 50 percent usage rate.

Across the board, the banks told Executive that they offer basic e-banking services such as checking account balances, transferring between one’s own accounts at the same bank and executing standing orders, meaning online transfers to a person or entity which has been registered as a beneficiary through a onetime personal authorization at the bank branch.
The range of e-banking activities in Lebanon is far short of what one finds today in global online consumer banking. However, banks say they can and want to do much better.

“This is only the tip of the iceberg as far as what we can do and what can be done through this channel,” said a Bank of Beirut and the Arab Countries (BBAC) representative, adding, “E-banking will develop to involve new products and services that were not feasible in traditional banking, [such as] new payment methods, new ways of serving customers, etcetera.”

Anthony Ussher, deputy general manager for e-banking at Credit Libanais, shares the optimism. “E-banking in general, mobile and online, has a bright future because the Lebanese are early adopters,” he says. He points to the 1990s, when Lebanon had one of the highest internet rates and cell phone usages in the Middle East. “Lebanese are interested in nifty new technologies and they like the concept.”

While large banks are spearheading a range of innovative moves in online and mobile banking, it is also notable that mid-sized banks are pressing ahead to be among the Middle East’s earliest adopters of new technologies. For example CreditBank inaugurated this spring a mobile banking solution for Microsoft’s Windows 8 platform.

The innovation list of Bank Audi, Lebanon’s largest lender, includes a near field communications-enabled SIM card mobile payment application and an “eMall” platform which will allow participating merchants to offer their products and services online. Merchants will create their own virtual stores to attract domestic and international consumers. Bank Audi say the platform will be launched shortly.

Blom Bank, taking its own approach to what e-banking has to offer, has incorporated “eCash”, whereby a Blom customer can send money to anyone via online or mobile banking. The recipient doesn’t need to have a bank account or a card and is able to withdraw money at any Blom ATM by entering the eCash code, amount and currency.

But while one can argue that banks should put more resources toward building better, faster and smarter mobile applications, some local banks are clearly not yet enthusiastic about the e-banking proposition, possibly because of several barriers that have been restraining the market.

Part of the problem is that it is harder to attract the middle-age generation to take its financial activities and purchasing power online. According to Banque Libano-Francaise, 55 percent of its customers aged 35 years or younger are using e-banking, up from 30 percent three years ago. However, they add that acceptance and usage growth of e-banking by customers in higher age brackets is significantly lower.

Another challenge to increased usage of consumer e-banking is the lack of a law regarding electronic signatures. A draft law to officialize online signatures has been waiting for parliamentary approval since 2005 and is unlikely to be passed soon.

This is a problem felt by all banks. “There is a dire need to promulgate the e-transaction draft law because it would provide investment opportunities and help transform Lebanon into what we guess our country is best suited for: a knowledge economy,” says Joseph Nasr, assistant general manager and head of distribution network at Byblos Bank.

With the e-signature draft law having been stuck for years in the legislative pipeline, banks have found some practical fixes by relying on global standards and Visa and MasterCard rules and regulations. They are also applying standards accepted by Banque du Liban, Lebanon’s central bank.

Moreover, such problems can be seen as interesting challenges. The age component of online literacy is clearly a transitory issue as the young, e-banking-savvy Lebanese students and job starters of today will mature into middle and old-age e-banking clienteles with the associated purchasing power. At the same time, new, younger users will be eager to use their mobiles for their first banking transactions.

This leaves us with two remaining obstacles, namely the legislative issue and the notoriously insufficient infrastructure for both Internet and mobile communications and data.
Assuming for the moment that these very surmountable hurdles will be conquered by the powers that be, Lebanon is poised and ready to both develop and adopt a plethora of innovative e-banking services. “In three to five years, the sophistication of e-banking in Lebanon will be on par with developed countries,” argues Antoine Lawandos, Blom’s assistant general manager and chief information officer.

June 13, 2013 0 comments

Comment

Result through resolve

by Riad Al-Khouri June 13, 2013

written by Riad Al-Khouri

Away from the geostrategic dramas playing out in the Middle East these days, some Arab-Israelis are seeing quiet progress. The community’s latest success came in late April when Nazareth, Israel’s largest Arab city, opened its first industrial park. Set up by Israeli billionaire Stef Wertheimer — who has built several such projects elsewhere — and with help from the Nazareth municipality, the $22 million park was 12 years in the making because of “bureaucratic difficulties” — deliberate delays by Israeli officials to frustrate the country’s Arab community. Now completed, it aims to host 25 export-oriented companies that could provide 1,000 jobs within a decade.

That goal looks attainable. Three companies already operate in the park: an international telecom firm employing 100 workers; a project founded by a Nazareth couple that manufactures neurosurgery and neurology products; and another Arab-owned facility that provides outsourcing solutions for light manufacturing.

Job creation is a challenge for every growing demographic in the Middle East. For Arab-Israelis, a group of over 1.5 million that is sometimes ignored in debates over the future of the Palestinian people, the challenge is complicated by their economic context. Most are not well off. Although comprising roughly 20 percent of the Israeli population, their contribution to the country’s gross domestic product is only 8 percent. About half of Israel’s Arab families are considered poor by World Bank standards, compared to the national average of 20 percent.

Employment activity is also below par. Only 41 percent of Arab-Israelis participate in the Israeli labor market, compared to 60 percent of Jews. The labor force participation rate of Arab women is particularly low, stuck between 15 and 20 percent over the last four decades.
The Nazareth industrial park also aims to spur entrepreneurship in the Arab community, which suffers from a scarcity of university graduates. Only 70,000 Arab-Israelis have university degrees, less than five percent of the community. That is a vastly smaller ratio than the one for the state’s non-Arab population, 35 percent of which possess a university degree.
The lack of access to higher education impedes the advancement of Arab-Israelis. Only about 10 percent of students pursuing higher education in Israel are Arabs. In part, this is because most universities are located away from Arab population centers. There are other forms of discrimination, as well. Social prejudice continues to discourage Arabs from enrolling and graduating. In addition, less than 1 percent of academic staff in Israeli universities is Arab.

However, in a development that has not been highlighted regionally or otherwise, that bleak picture may now be starting to change. After a struggle over three decades long, Israel finally accredited the Nazareth Academic Institute (NAI) a few years ago as the first official academic institute in the Arab-Israeli sector since the establishment of the Jewish state. A university college with its first batch of students due to graduate soon, NAI is committed to providing equal access to higher education, especially for young, poor Arab men and women, in order to close the education and employment gaps between Arab and Jewish Israelis.
For Arab-Israelis, this is a great leap towards establishing the first full-fledged Arab university in the country. Until then, NAI will be providing Bachelor’s degree programs in chemistry and communication, and it is planning additions in computer science and organic agriculture, among other subjects. NAI is looking to found a medical science faculty, as well, in cooperation with United States-based Cornell University.

There are seven such colleges in the northern Israeli region of Galilee — six of them are in mainly Jewish areas and are state-funded. Only NAI does not receive such financial aid and must depend on private and municipal donations. Although seeking to support Arab areas such as Nazareth, NAI accepts non-Jewish and Jewish students alike.

Of course, NAI and other initiatives do not mean that economic discrimination against Israel’s Arab minority has suddenly disappeared. Peaceful coexistence of different groups within Israel’s 1948 borders will only come when Israeli Arabs and Jews have a similar standard of living derived from the provision of equal opportunity. That, and not separation walls or an Iron Dome, will be the basis of true security for the country and the rest of the region.

Riad al-Khouri id principal at DEA Inc in Washington, DC

June 13, 2013 0 comments