Finance

MENA stock tips, September 2012

by Maya Sioufi
written by Maya Sioufi

Last month’s market news was tainted with scandals yet again, most notably British bank Standard Chartered was accused of hiding some 60,000 transactions facilitated for Iran, worth approximately $250 billion.

Despite this and the unresolved European sovereign debt saga, markets generally still managed to edge higher, with the Dow Jones up 1 percent near the end of last month. For investment recommendations this month, Executive sat with Sami Akhrass, chief executive of Arab Finance Corporation, and Alex Moujaes, head of capital markets at Bank of Beirut.

Sami Akhrass
Bullish or bearish? Akhrass sees the markets remaining range bound till the end of the year with no dramatic moves on the upside or the downside. He would avoid sectors such as financials and insurance in stressed situations, and would favor the luxury and pharmaceutical sectors. Akhrass also stresses to be selective within the sectors as there are huge disparities, giving the example of Research in Motion, the company behind Blackberry, which saw its stock price drop around 55 percent year-to-date, as users consider a switch to iPhone with Apple’s stock price increasing by more than 60 percent year-to-date.
 

More bad news to come from Europe? For investors with a high tolerance for risk and a long investment horizon, Akhrass recommends investing in Spanish or Italian debt, highlighting that the yield on Spanish 10-year sovereign bonds is an “attractive” 7 percent.


Favorite asset classes? He favors fixed income in Europe, both corporate and sovereign, but also believes that there are very interesting opportunities in United States corporate as well. He would also look into US and European equities.

Investments in Middle East and North Africa region? Akhrass would wait for all the political changes and for the upheaval to play out before deploying capital into the MENA region.
 

Investments in Lebanon? He would stay clear of Lebanon’s sovereign bonds. As for equities, while the valuation and the dividend yields of banks are attractive, he is concerned about the lack of liquidity and visibility. As for Solidere, Lebanon’s mammoth real estate company, he sees the risk as limited at this point, so while “it is difficult to see the rewards”, at the current price of $14, “it is a good entry point.”


Top three ideas for a retirement fund? 1) Stocks in pharmaceutical companies in the US and Europe, such as Bayer in Germany and Amgen in the US; 2) European sovereign debts, such as from Spain, Italy and France; 3) Financial corporate bonds such as the ones offered by Societe Generale, BNP Paribas, Morgan Stanley and Goldman Sachs.

Alex Moujaes
Markets to end up or down by the end of the year? “Probably a slight rebound but it will be a very shy rally,” says Moujaes. He expects the markets to remain in a trading range and with a “complicated market to read”, and he favors defensive sectors such as consumer and utility.
 

Worst in Europe priced in?  We have seen much of the worst in Europe, according to Moujaes, but “there probably still is something to see [in terms of bad news]” and so he remains very cautious. As for Greece, he believes there are more chances to see it remain in Europe than exit.
 

Favorite asset classes? Bonds. He highlights bonds in the Gulf Cooperation Council such as Qatar and Abu Dhabi as they are stable countries, as well as bonds in Lebanon. He would stay clear of European sovereign bonds.
 

Favorite region to be exposed to? Moujaes likes Australia, an area Bank of Beirut made a huge bet on last year by investing $420 million and acquiring 85 percent of Australia’s Laiki Bank. He recommends exposure to the region through the equity or bond markets and also through direct investment. Besides Australia, Mouajes is concentrating more on Asia than on Europe and the US.

Thoughts on the MENA region? He is selective when it comes to the MENA region. He is looking at these countries with caution for now.

Thoughts on Lebanese securities? He would stay clear of Lebanese equities due to lack of liquidity but would invest in Lebanese Eurobonds.

Ideas for a retirement fund? 1) Deploy 45 percent of investment into money market vehicles that are very conservative and where you will be earning just an interest rate and preserving your capital; 2) deploy another 45 percent in the bond market and in fixed income funds, more specifically in Australia and Asia Pacific sovereign or high grade corporate bonds, and 3) deploy the remaining 10 percent in the equity markets to “get some peps”.
 

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Business

Beauty built one piece at a time

by Maya Sioufi
written by Maya Sioufi

When Oprah Winfrey ordered mosaics for her private villa in Miami last year, she chose Lebanon-based Mosaic Marble — and she must have been pleased as she placed an order for another project this year. The 260 different pieces of mosaic gracing the municipality of Rome are also the work of Mosaic Marble, a bid they won against an Italian counterpart. Offering more than 5,000 designs at starting prices of $330 per piece, the company is the leading mosaic producer in the Middle East.

Generating $1.5 million in revenues last year, it also provides custom-made orders with the option to choose from over 100 different colors, marbles and stones sourced from Italy, Spain, Turkey, China, Lebanon and Syria. Their customization offer was put to the test by the order of Saudi Oger, the Hariri family’s construction company, for a 200-square-meter work made up of 16 different pieces, chief executive Taline Assi’s “most exciting order”.

Set up in 2003 by Taline and her husband Antoine Assi, Mosaic Marble provides handmade mosaics sold through their website (available in 13 different languages), their showroom in Dora, several resellers scattered worldwide and eBay (where the company boasts of 3,687 positive and just one negative feedback mention). What is less rosy, though, is the location of their workshops, with 70 percent of the production conducted in Syria and the rest in Lebanon. “For the moment, we are not impacted,” says Assi, while also stating that the company is shifting the production from Syria to Lebanon next year partly because of the turmoil, but also for better quality control and in order to have the production in house and not outsourced; they are currently looking for a larger production facility in Lebanon.

Carving a taller order

Mosaic Marble is also looking to cater more to professional clients such as architects and construction companies of the likes of Saudi Oger, as they “are recurring and demand high-end products.” For now, most of the sales are driven by retail clients who acquire the mosaics for their private residences, with 60 percent of the orders coming from the US. With such a high exposure to the American market, the financial crisis took a heavy toll on the company’s sales: a 50 percent drop compelled Assi to look for new markets. She aims to target Middle Eastern markets, such as Saudi Arabia, Qatar and Kuwait, but also beyond the region, more specifically in Japan, Russia and Australia.

“We are looking to become a worldwide leader in handcut marbles,” says Assi. The largest global mosaic players are currently Italian companies Sicis and Bisazza Mosaico, and the gap is huge; these companies have sales of approximately $250 million, according to Endeavor, a non-profit nongovernmental organization that supports high-impact entrepreneurs in emerging markets and which has recently added Mosaic Marble to its network.

With the current setup the company has the capacity to process up to $5 million dollars in sales, but the owners are not resting on their laurels. Mosaic Marble is looking to raise $1 million next year in a first phase of financing in order to set up a showroom in California in 2014, hire a salesperson to target professional clients in the Middle East and for other expenses. They will be seeking investment from a strategic investor who can add value, “give something back to the company and who could be involved,” says Assi. In the medium-to-long term, the company aims to eventually raise up to $3 million. For now, the company has a long to-do list, including moving production away from Syria, focusing on professional clients and whetting the appetite for mosaics in new markets — thus, just like making mosaics themselves, a beautiful business is built one carefully placed piece at a time. 

 

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Finance

Settling out of court

by Nicole Purin
written by Nicole Purin

The development of an efficient, modern and systematic arbitration process is arguably a central tenet that accompanies a country’s economic development and progress. Among other marks of quality, growth-oriented countries and specifically financial centres that wish to remain at the front line of innovation are today measured by their ability to ensure that their international clientèle and business partners are effectively serviced when disputes emerge.

The Gulf region’s aspiring financial hubs Bahrain and Dubai International Financial Centre (DIFC) — ranked as the world’s fastest growing financial center — have provided regional examples by setting arbitration rules and favorable environments for dispute resolution, servicing businesses and the Gulf region as a whole.

Saudi Arabia, previously criticized for its lack of a comprehensive arbitration system, has recently passed legislation (the new Arbitration Law approved on April 16 this year) that is meant to pave the way to greater credibility in effectiveness of commercial dispute resolution in the country.

Pillars of arbitration

Arbitration is an increasingly popular method to resolve disputes, although some argue that widespread use of arbitration in international business disputes is still a recent development when compared with reliance on the court system. However, an increasing number of market participants (international companies and corporations) are now requesting the inclusion of arbitration clauses in their contractual documentation. This is also the case for smaller companies transacting with larger international companies.

One could argue that this trend is likely to continue as more and more businesses begin to appreciate its benefits as a means to resolve disputes, particularly in the context of banking and commercial disputes — which can be costly, public and very lengthy.

One of the main advantages of arbitration is that the entire process is usually maintained confidential. High profile companies and international businesses, as well as smaller corporations who want to avoid the stigma of litigation, find this very appealing as it enables them to control the dispute process by maintaining a reserved status, and also enables them to manage costs and the duration of the proceedings.

Dubai International Financial Centre – London Court of International Arbitration (DIFC-LCIA)

Arguably, the DIFC has the most sophisticated arbitration system in the GCC region. The Bahrain International Commercial Arbitration Centre and the Gulf Cooperation Council Commercial Arbitration Centre are also effectual centres that have been relied upon by parties. Yet, the United Arab Emirate’s political stability and steady economic growth make the facilities of the Dubai International Financial Centre – London Court of International Arbitration (DIFC-LCIA), which are provided under a partnership of the two institutions, a stronger option for parties wishing to arbitrate.

The DIFC Arbitration Law 2008 was the legislative springboard developed for dispute resolution. Its foundations lie on the UNCITRAL Model Law on International Commercial Arbitration which covers the arbitral process, agreement and recognition of arbitral awards. Hence, parties in the UAE have the option to arbitrate in the countries which are party to the 1958 New York Convention on Reciprocity and Enforcement of Arbitral Awards.

More and more parties are now selecting the seat of arbitration in DIFC and are using the DIFC-LCIA Arbitration Rules, which are modelled on the LCIA rules. The registrar department of the DIFC-LCIA has confirmed that the number of arbitration cases have increased by 30 percent in 2012. In addition, the DIFC-LCIA has been appointed as the registrar of the Financial Markets Tribunal created by DIFC Law No. 1 of 2004. These are considerable achievements that consolidate the status of the DIFC-LCIA as a primary centre for dispute resolution and a convincing alternative to other centres.

One of the main advantages of a DIFC-LCIA arbitral award that has been recognized and ratified by the DIFC Courts is that it may be enforced in Dubai, based on the Protocol of Jurisdiction between Dubai Courts and DIFC Courts and relevant corresponding Dubai Law on the Judicial Authority of the DIFC. Thus, the losing party cannot question the validity of the arbitral award under the UAE Civil Procedure Code (CPC). In Dubai, therefore, a DIFC-LCIA award should be enforced directly through the Dubai courts, without going through the ratification process. In 2011, the local Dubai Courts enforced a DIFC-LCIA award for the first time, confirming the practical enforceability of such awards and a significant advance for arbitration in the region.

Historically, there have been some limitations with respect to enforcing a New York Convention foreign arbitral award in the UAE: its enforcement is slow and expensive and it could be rejected by local courts as unenforceable because of non-conformity with the UAE Civil Procedure Code (“CPC”). Another recent important case involves the Dubai Court of Appeal, which upheld the judgement of the Court of First Instance, implementing that court’s findings on the application of the New York Convention under UAE law. This is a favorable result as it reinforces the UAE’s acceptance of its obligations under the New York Convention and another victory for the credibility of arbitration in the region.

Yet, as there is no doctrine of “binding precedent” in the UAE, the DFIC-LCIA arbitration route remains the most effectual. Finally, unlike other centres, the DIFC-LCIA charges costs on an hourly basis as opposed to the total amount of the dispute in question, which is beneficial from a costs perspective.

Saudi Arabia arbitration law

Saudi Arabia has been regarded as having the least sophisticated arbitration system in the region. Historically, businesses could refer disputes to local courts and the board of grievances, or refer disputes to domestic arbitration pursuant to the 1983 Arbitration Law, with highly uncertain results. The Saudi arbitration landscape has been transformed with the implementation of the New Arbitration Law. This is overall a remarkable development for the Gulf region as the previous law was not detailed enough to give commercial parties sufficient confidence in the system. Prior to the new Arbitration Law, domestic arbitration was not often chosen due to particular difficulties arising under the 1983 Arbitration Law (for example the enforcement of an arbitral award required ratification by the relevant court).

The limitation of the process was highlighted by the fact the supervising court could easily reconsider the merits of the dispute and there was a very high risk that the court would disregard the decision of the arbitral tribunal and emit its own prevailing decision. This undermined the arbitration process significantly. The new law, on the contrary, provides that the relevant court may not examine the subject matter and facts of the dispute in considering whether the award should be invalidated, and arbitral awards made under the new law acquire the force of res judicata and are enforceable (subject to the non violation of Sharia law and public order).

Looking ahead

The evolution of arbitration in the Gulf indicates that its role is progressive and more market players are favoring it to litigation. International companies clearly have a strong preference for arbitration, but it is also becoming a sound dispute resolution choice for local companies who realize its many benefits. In addition, the concrete trends in Dubai indicate that it is capable of offering certain international arbitration services which are as effective as London, Singapore and Hong Kong. It is expected that the anticipated UAE Federal Arbitration Law will only consolidate this status further.

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Companies & Strategies

An online outsourcing pioneer

by Thomas Schellen
written by Thomas Schellen

Samer Hanna is both a pioneer in Lebanon’s online economy and a leader in his niche, which, in simplistic terms, is the provision of outsourced information technology (IT). Hanna is chairman of two companies: Dubai-based Capital Banking Solutions (CBS), a banking software provider, and a holding that owns Beirut-based Capital Outsourcing (C-O), a specialist provider of IT and business-process outsourcing services.

C-O, which started in Beirut as a five-employee application service provider in 2000, today employs more than 75 people and hosts more than 800 active websites and applications on 200 servers in its datacenter. According to Hanna, “over 25,000 users access applications and websites in our cloud environment from different locations including, but not limited to, Lebanon, France, Qatar, Iraq, Bulgaria, Romania, Hungary, Jordan, United States, Syria, and the United Arab Emirates.”

From outsourcing and consulting activities alone, not accounting for the revenue of CBS, the group generated “over $7 million in revenue in 2011. We expect around 10 percent revenue growth in 2012,” Hanna tells Executive.

The market conditions for C-O’s corporate growth may indeed be solid given that, as Hanna says, “we thrive on recessions and on crises. People look to outsource when they don’t want to spend money. When there is a slowdown or crisis in the economy people think to improve on what they have so that they are ready when the economy picks up again. We provide them with ease to migrate to us at very low cost and when the economy picks up again, we help them scale up again very quickly.”

The C-O offering relates strictly to IT demand for data and application hosting, or providing disaster recovery services. The companies that avail of the service are, by Hanna’s description, typically medium sized, with 50 to 200 employees, and operate in sectors such as finance and retail.

Larger corporations, such as major banks, in Hanna’s experience are not top-tier candidates for becoming an outsourcing client, given their internal IT departments have vested interests in defending their turf against external providers — such as an application service provider (ASP).

Then till now

When Hanna set up his first IT company in 2000 under the name Trinec, it lay claim to being the region’s first ASP. At the time, ASPs were the latest fashion in computing services by remotely providing customers with specialized IT programs via a network, and cheaper to rent than buy. Today, ASPs are generally considered part of, or linked to, the cloud computing sphere, which operates under the same basic principle but has a wider scope.

As Hanna confirms, the business model of his venture has essentially remained the same but the company has developed in several ways, notably in the creation of the consulting arm, which has a lucrative market in providing expertise on Microsoft infrastructures to clients that include public sector entities and telecommunication corporations, companies such as Etisalat, Du, and Mobily.

C-O creates a career path for its IT experts; they are recruited as career starters and stay with the company after they build their skills and experience because the consulting activity offers them more interesting and financially rewarding work, with the company also using this diversification to substantial economic gain. “The consulting company contributes less than 30 percent to turnover but more than 50 percent to the bottom line,” Hanna says.

In terms of client base split, C-O serves mainly Lebanese clients with its data center and outsourcing expertise from Beirut, whereas the consulting arm, set up as a Lebanese offshore and staffed wholly by Middle Easterners, competes only for business from international clients.       

Along the path of change and growth, the group entered into business partnerships and mergers with several other IT players, including the alignment with the specialized banking software business through CBS. The business partners at one point migrated the group’s legal seat to the Dubai International Financial Center and added several international addresses to the group’s profile of office locations.  

Direction for the future

After an exercise in restructuring ownership in 2012, the two entities are currently refocusing their business lines. While C-O is anchored in Lebanon and looking at regional growth opportunities, CBS is serving banking customers in African markets through a Paris-based unit, in Caribbean and Latin American markets from a base in the United States, and caters to a sub-niche of private banking from an office in Monaco.

For C-O’s business growth, Hanna sees “still a lot of work in the Lebanese market to consolidate our position as leader in this industry here.” At the same time, he would hardly be an entrepreneur and business mind were he not to add that C-O has potential to “export our ‘knowhow’ on a partnership basis to people in countries around us.” These potential business partners are people that C-O is in contact with and who can benefit from C-O’s experience, knowhow and people, he adds.

One of the few persistent challenges that C-O appears to have come up against without too much prior success is the rather dull nature of doing corporate IT business. “We are not a sexy company and we are not a company with a service that is easy to understand for the layman,” Hanna admits, adding that the company recently launched its first advertising campaign in several years. Using an over-the-top image of whiny baby-esque employees, it was a disruptive campaign with the aim to first attract attention and second “we wanted to humanize the image of the IT service that we provide.”

Outsourced security

At a time when the Lebanese market has just gone through a shock of internet connectivity failures, and the scare of the hyper-sophisticated information theft virus, Flame and Gauss, which specifically struck Middle Eastern countries and were discovered only a few weeks earlier, the importance of data security and disaster recovery are certainly areas where the ground should be fertile.

As Hanna observes, the attitude of companies in the Middle East to the issue of data security has changed in his favor when compared with the beginnings of ASP services in the region. While company owners 10 years ago were afraid for safety of the data they were going to outsource, today they outsource because of fear for the safety of their data if they are kept online in their own systems, he explains.

A security breach at C-O “at some point in time would be very harmful for us,” Hanna admits, but says that the company’s exact expertise resides in anticipating and averting IT problems. “The potential of a security breach is a challenge for us and we take it very seriously but it is not a threat,” he claims.

Virtually defining IT as “full of problems and when you have a problem you need someone at the other end of the line who can solve your problem immediately,” the chairman of C-O approaches IT troubles perhaps in the way that a professional animal wrangler would consider his gators or lionesses.

That leaves one professional longing of note that Hanna hopes to see realized after many years of waiting. “I think we need competition. Competition will open up our market and help our market grow and help us educate the market,” he says. “I have been hearing for the last 10 years about companies that wanted to enter the market and do the same [thing] we are doing and haven’t see anybody coming in. I want competition. “You only get better if there is competition.”

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Economics & Policy

Recalibrating for Ramadan

by Zak Brophy
written by Zak Brophy

The holy month of Ramadan affects every aspect of a practicing Muslim’s personal and communal life. Business is no exception. And yet while companies and employers clearly need to adapt to accommodate the spiritual needs and obligations of their Muslim workforce, does this necessarily have to amount to a decrease in productivity?

“Maintaining productivity during Ramadan really is the main challenge facing companies and employers,” asserts Ramez Shehadi, vice principal and partner at business Booz & Co. Indeed a 2011 report found that the economies of Muslim majority countries — the 57 members of the Organization of Islamic Conference — suffer approximately a 4 percent decrease in monthly gross domestic product for every hour deducted from the working day during the holy month. Shehadi highlights that a more fatigued workforce and a reduced overlap with global working days further compound this.

The same report, however, also found that 77 percent of respondents said they try to maintain the same level of productivity during Ramadan and feel that work should continue uninterrupted. The question is how to adapt to the changes experienced during Ramadan and to minimize the disruptions to business. According to one of the report’s authors, Mohammed Faris, founder and chief executive officer of ProductiveMuslim.com, “Unfortunately many employees enter Ramadan with a mindset that hinders productivity instead of trying to see how best to manage their energy levels in order to be productive.”

State regulation of the holy month

In most countries throughout the Gulf Cooperation Council (GCC), the governments’ involvement is limited to regulating changes in the hours of the working day. “There is a sort of freedom within structure,” Shehadi explains. “Government tends to establish the broad brush strokes that outline the parameters in which organization and people are expected to operate.”

Most of the region’s labor laws dictate that during Ramadan, the working hours of all employees shall be 36 hours per week, six hours per day. However in many cases there are carved out clauses that exempt people in managerial positions of authority. The laws also vary from country to country as to whether they apply to all employees or just Muslims who are fasting.

Rafi-Uddin Shikoh, chief executive  and managing director of consultants DinarStandard and co-author of the aforementioned report, notes that in comparison to other Muslim majority countries, the GCC region tends to experience a greater reduction in actual work times than is necessary. “In the Gulf, while they want to make sure that the spiritual obligations of the employees are being met, we found that the approach is in many ways counterproductive by accommodating too much,” he says. “In some of the countries the work hours are effectively reduced to five hours a day.”

Work-arounds

With regards to changes in the work hours there are numerous methods to circumvent or overcome disruptions to business. In an increasingly connected and mobile world many staff can work remotely to manage their workload around their religious obligations. “People are also taking work home more now during Ramadan,” says Shehadi, “which is easier in this increasingly connected and digitized world.”

Good communication, management and coordination are also key to keeping business on track. A large proportion of the GCC workforce is expatriate and non-Muslim, and their flexibility during Ramadan can smooth over some of the disruptions to the work flow. It is often understood that employees who are not fasting should not take annual leave during Ramadan and if necessary be present during times such as iftar, the breaking of the fast, or taraweeh (the evening prayers). If employed creatively this does not necessarily amount to an increased workload for them.

While working around the changes in work hours, employers also need to enable their employees to partake in religious activities, such as increased reading of the Koran, the breaking of the fast and extended and additional prayer times. However, there are a number of different methods that can, and often are, employed to minimize or even eliminate the impact on productivity throughout Ramadan.

Mixing business and religion

The iftar is the focal point of every day in Ramadan. While life pretty much comes to a standstill so those that have been fasting can congregate and feast together, this can in many ways be seen as an opportunity to do business. “There are more business iftars and suhoors [the early morning feast] happening where people come together to celebrate and do business,” says Booz’s Shehadi. “Because these are extended meals that go on much longer than a traditional half hour or hour lunch they are suitable for business discussions and for making business decisions.”

What’s more, by encouraging staff to break the fast together the iftar can increase camaraderie and bolster the sense of community in the workplace. Inviting non-Muslim members of the workforce to the iftar can also foster greater understanding and cohesion, which in turn facilitates a more productive work environment. 

The charitable and communal atmosphere that is encouraged during Ramadan can be harnessed to develop the socio-economic contribution from companies. This is beneficial for both the morale of the workforce and the image and standing of the company within society. For example, many companies employ charity drives during Ramadan to make the most of the spirituality of the season. “Many of the good employers out there get their teams involved in the Ramadan tents for the breaking of the fast,” says Farrukh Kidwai, CEO and partner at the global research and consultancy Great Place to Work Institute. “This is a great way to build camaraderie and it really gives everyone a very good feeling.”

As well as managing the workforce employers can also manage, to their benefit, the workflow during the month of Ramadan. “Another area of added productivity is to push and front-load a lot of decisions, deliverables, workload and commitments to before, or just after, Ramadan,” says Shehadi. “This means there is a shuffling of expectations before and after to stop Ramadan becoming a bottleneck.”

Keeping connected globally

Working in the global village means that employers need not only think about managing a predominantly Muslim workforce during Ramadan, but also their working relations with partners, customers and clients in foreign, predominantly non-Muslim, countries. Again, communication is the key. 

It is important to inform partners, colleagues and customers abroad as to the potential impact on business and to take into consideration Ramadan when planning projects, deliverables and business trips. Most people are sensitive and accommodating to the changing work environment during the holy month but that does not mean they are aware and informed.

Clear lines of communication, forewarning and even festive goodwill gestures go a long way to minimizing the risk of communication breakdown and all the hiccups that can ensue. “For professional Muslim employees, they should try their best to project a positive image about Ramadan and not use it as an excuse for unproductivity and non-delivery of service,” says ProductiveMuslim’s Faris.

Ramadan inevitably impacts on the work environment. And so it should. But if managed properly this impact need not be deleterious. Indeed, to the contrary, it can boost morale, productivity and enthusiasm within the workforce.

“Ramadan can be used as a platform to introduce Islamic work concept that are ingrained in the religion such as trustworthiness, honesty and stress management,” says Firas, “to both Muslim and non-Muslim employees.”

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Economics & Policy

Ramadan’s undocumented potentials

by Thomas Schellen
written by Thomas Schellen

Ramadan and Eid al Fitr 2012, being smack in the middle of summer, generated a curious lot of anecdotal business news across the media. In Kano, home to Nigeria’s largest Muslim community, roadside traders reported demand for block ice spiking to new heights. In Jeddah, Saudi Arabia, traffic in cafes doubled and turnover increased by half due to massive night-time narguileh consumption, according to Arab News. And in Turkey, makers of television soap operas were in commercial heaven due to exploding Arab appetite for their products, while Istanbul’s Ataturk Airport announced a new record in flight traffic on the last day of Ramadan.

It is an absolute no-brainer that the Islamic Holy Month impacts Muslim-majority economies in many ways. A big theme is productivity. Fasting daytimes throughout a full lunar month does much to curb one’s appetite for work. The pressure on human capital management is only one aspect of the Ramadan economy, however. Business opportunities account for the other side of the equation.

Presenting themselves on levels from time-honored to recent to impending, Ramadan-related economic opportunities share two commonalities: they are expanding and they contain vastly under-used strategic business potentials.

The fundamental drivers for business growth in the Holy Month are increased consumption and the gift economy. First and foremost, consumption during Ramadan means  food. Family meals and gatherings with friends and relatives during the non-fasting periods from sunset into the night are established cultural priorities. These social factors generate increased food demand, while psychological cravings also polish up appetites for traditional and contemporary delicacies; this increased demand naturally does its part in pulling up prices and is the main feature of food retail during Ramadan.

With high-in-demand items ranging from staples to exclusive foodstuffs, consumer complaints about surging food costs have again this year abounded in many Muslim-majority countries and in Muslim population centers from Cairo to Jakarta. Exceptions applied in some Gulf countries, where authorities have, in recent years, increasingly imposed price controls to stabilize living costs during the Holy Month. 

Authorities in the United Arab Emirates told media ahead of the 2012 fasting period that they issued price bindings for 1,600 products, up 50 percent from the number of items monitored in Ramadan 2011. Control measures were highly publicized and large UAE retailers generally put on a good face for the measures, which are flanked by government incentives such as expedited customs procession for compliant traders. In Tunisia, on the other hand, where price controls were also in place, traders complained that they had to sell below cost.  

If one looks for a single food item that represents both the culture of Ramadan meals and the regional potential for food exports, the choice has to be dates. Consumption of the wholesome fruit during Ramadan is buoyed by the fact that Prophet Mohammed regularly broke his fast by eating dates. Production of dates is moreover concentrated in Muslim-majority countries, with the top five producing nations situated in the Middle East and North Africa region.

But while the prominent displays of the fruit in every supermarket in the region provide visual evidence for soaring date sales during Ramadan, the fruit appears to have no central lobbying organization and the world seems short on published data on dates, let alone data that would allow the royal date to act as a proxy for the changing food consumption patterns in Muslim communities in the fasting month.

A new white paper on potentials for marketing to Muslims globally, published this July by United States-based Public Relations agency Fleishman-Hillard, cites the halal food market as being worth at least $650 billion globally, without offering an estimate on the Holy Month’s share. However, the period’s moving timeline and diversity of locations and products, plus the absence of research into Ramadan-specific markets and Ramadan-specific demand, prohibit any macro assessment of global demand for Ramadan foodstuffs.

The global market growth potential for Ramadan foods correlates with some obviousness to population growth. The share of Muslims in the world population has grown from 1.1 billion persons in 1990 to about 1.6 billion individuals, or 23.4 percent of global population, in 2010 and will continue to grow at twice the rate of non-Muslims to reach 26.4 percent of projected world population by 2030, according to research by US-based Pew Research Center’s Forum on Religion & Public Life.

As it was already in the past quarter century, population rise, demographic profiles and socioeconomic developments of Muslim-majority countries will nourish growth of demand for food items associated with the Holy Month in the next 25 years, (which is when Ramadan will next take place in the middle of summer).

 

From business to CSR and back

Just as germane to Ramadan as family meals, and an established corporate custom in Islamic culture, is charitable giving. For local companies in the Gulf, this tradition of charity has been increasingly affixed with the label of corporate social responsibility (CSR) and it is equally integrated in their corporate citizenship practices; the same goes for foreign companies that have installed major units in Dubai or elsewhere in the Middle East.

Dubai-based Mashreq bank, among the leaders in the retail market, finalized its list of Ramadan CSR activities just before the start of the Holy Month this year. Its CSR lineup included a fund-raising drive among employees, with their total matched by the bank’s management, for a food collection and distribution partnership with a local NGO, the collection of toys for needy children, and the organization of an iftar, or meal to break the fast, for 300 laborers.

To give an example for a large multinational’s adoption of the practice, PepsiCo Asia, Middle East & Africa regionally announced its CSR engagement as including Ramadan meals — iftars and sohours, late evening or pre-dawn meals before the new fasting day — that served, from corporate perspective, a double function. Organized for employees, their family members, business friends and media, the events fulfill a social function of building and strengthening relationships with internal and external stakeholders in the company. Organized as charitable activity for the poor, sponsoring an iftar provides the company with the satisfaction of giving socially, coupled with reputational benefits. Another pillar is the distribution of Ramadan care packets, boxes with goods for daily sustenance to workers living in the many housing projects for manual laborers. 

Emirates National Oil Company (ENOC), the state-owned operator of gas stations and fuel distributor, said its 2012 Ramadan campaign was designed to be the company’s biggest ever. ENOC highlighted that it would promote Islamic virtues on posters, provide value-centric lectures to employees, hand out dates-and-water boxes to motorists ahead of iftar time and participate in distributing 5,000 care packages to residents in labor housing projects. 

Sharjah Media Corporation (SMC) reported that its CSR lineup for the Holy Month included the sponsoring of Ramadan tents providing daily fast-breaking meals to upward of 3,500 believers in Sharjah. The holding company for the northern emirate’s communications enterprises said some AED 1.15 million ($313,000) in donations for the tents were generated by the listeners to SMC’s Sharjah Radio and Television even before Ramadan started.

Describing the company’s humanitarian efforts as part of its “uncompromising commitment to corporate social responsibility,” the manager of SMC’s Sharjah Radio and TV, Khalid al-Midfa, told Executive, “SMC has been proactively leveraging the power of media to initiate CSR-driven programs that have a concrete impact on the lives of different people in our community. Our partnership with Shrajah Charity International demonstrates the huge potential of the media as a tool for social reforms as we have generated more than AED 1 million ($272,000) for Ramadan tents put up in different locations across the emirate.”

The pattern is also applied with gusto by multinational PepsiCo Asia, Middle East & Africa, which in 2012 organized Ramadan activities in the UAE benefiting more than 5,000 recipients, mainly laborers but also orphans. In Saudi Arabia, a PepsiCo campaign donated SAR 1 million ($267,000) to two charitable organizations caring for orphans.

Omnicom Media Group Middle East and North Africa (OMG Mena) quantified its Ramadan activities as a percentage of its total CSR budget, disclosing that it would be allocating 42 percent of the year’s CSR budget to Ramadan.

Addressing the fasting month’s contribution to the internal cohesion in OMG Mena’s workforce, chief executive Elie Khouri said the company’s engagement is “not about the amount, it is about the message; it is a time of giving and sharing and togetherness which is why we provide things like the iftars and sohours so that we can pass them together with the employees, and it also is very much a time of flexibility that we can provide as we recognize that the employees have obligations with work and family.” 

The personal satisfaction of being involved in a CSR activity as part of a corporate effort is great, said Fadle Saad, enterprise sales manager, oil and gas, for the UAE and Oman at information technology giant HP. “We volunteer to prepare packages with food and other things and the company organizes that they are distributed to the laborers in the camps. For me, it is a highlight of Ramadan to participate in this effort.”

As more and more corporate CSR departments around the region integrate the Holy Month in their annual planning, one waits for more strategic and diversified approaches with multi-year planning to be introduced and for the first Ramadan CSR reports to be published in order to assess how the huge corporate citizenship potential of this outstanding religious and cultural occasion can be harnessed to greater socioeconomic significance.  

The marketing floodgates

The third modern Ramadan reality is that the period provides an opportunity to open the marketing floodgates for commerce that can be not at all, tenuously, or directly related to the period’s Islamic content. 

Durable consumer goods from home furnishings to consumer electronics, cars, clothing, financial products, and telecommunications services offering religious instructions and prayer schedules, are all marketed with great intensity and success during the Holy Month. 

Seasonal promotions typically bait consumers with discounts or extras, examples from the automotive business being an offer for car buyers in Al Ain and Abu Dhabi to get a new BMW with a deferred payment schedule, reduced interest, and free registration. Suzuki fans in Muscat could pick up new wheels with insurance, service package, registration and an X-Box thrown in for free.

Based on expected discounts, consumers in Arab countries have moved to defer purchase decisions until they see Ramadan offers, resulting in retail turnover concentrations during the Holy Month that can be 30 and more percent higher than during other months, with unconfirmed reports from some manufacturers and markets putting Ramadan turnover as high as 50 or 60 percent of annual sales for large consumer electronics.

In 2012, Ramadan-specific travel packages to luxury hotels outside of the region were also on the list of seasonal promotions, underscoring that Muslim tourism, worth an estimated $126.1 billion in 2011, “may very well be the largest untapped niche market of the tourism industry,” according to a new study by US-based and Muslim-specialized marketing research firm DinarStandard. 

Fasting people’s behavior patterns shift during the period and this reflects on media consumption habits. A study of television viewing patterns in Egypt, Saudi Arabia and the UAE in Ramadan 2011 showed that average viewing time per person increased by 13 percent in Egypt and 6 percent in Saudi Arabia but dropped slightly in the UAE when compared with the average monthly TV consumption. During the month, advertisers concentrate on TV commercials and the medium jumps from 62 to 74 percent share in advertising spending in the GCC and from 66 percent to 92 percent in Egypt. According to the OMG study advertisers allocated between 70 percent (GCC) and 440 percent (Egypt) more funds to airing commercials during the fasting month than in each month directly before and after.

Digital marketing potential is also higher during Ramadan, suggests research into tweet frequencies by The Online Project (TOP), an Amman-Dubai-based social media agency. The agency released a study in July saying it found increases in twitter activity in the UAE, Egypt, Jordan and Kuwait ranging from 35 percent in the UAE to 395 percent in Kuwait. With the average volume of Ramadan tweets more than double that of comparison periods in three of the four countries and with activity peaking in the evening hours, the agency recommended that companies can use the Holy Month particularly well to engage with their customers via social media.

What all three realms of Ramadan activities with relevance for business have in common is that they are even more under-researched than Muslim markets in general for their growing geo-economic role and implications for new business. As the Fleishman-Hillard paper put in a catchy phrase, “The Muslim market is large, lucrative and under-served.”

OMG noted that “from a marketing perspective, Ramadan is a month of frenzy and hyperbole, leading to concerns about its commercialization.” As such, the period has been compared with the Christmas season, and concerns over balance of mind and body during the Islamic Holy Month are as valid as concerns over consumerism and excessive commercialization of life’s every aspect are at any time.

However, while in the religious context of Christmas any commercialization of believers’ sentiments is often criticized and frequently even abhorred by adherents to the faith, the view of Ramadan as time of blessing, charity to needy, and gift giving and generosity allows for a rather inclusive view on religious tradition and business.

“People should be active during Ramadan whether it is through charitable work or spreading God’s word or through business or by making other people happy. It is the best period in the year for everything,” opined Hamdi Murad, a scholar and university professor of Islamic studies based in Amman.

The caveat, of course, is that the products and services marketed during Ramadan have to be acceptable from a religious perspective; but next to the tantalizing economic outlook provided by the demographics of the world’s Muslims, this bit of religious news may be the most appealing information for marketers who aim for responsible growth.

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Business

Behind the app

by Maya Sioufi
written by Maya Sioufi

Instagram, Angry Birds and Shazam were created by tech savvy developers. The brains behind these amusing mobile experiences had to build two types of codes to provide their app: one deployed on the mobile device for the functionality and user experience — dubbed the “front-end” code and the reason for our choice of one app over another — and one deployed on a server infrastructure for the database, security, social network integration, etcetera — dubbed the “back-end” code. While the front-end code is usually particular to each app, the back-end code is mostly identical among apps. 

 

A startup to help startups

To simplify the “back end”, data centers started offering hosting, or space on a server, to app developers. Developers’ lives got even simpler in 2006 when Amazon introduced “utility computing”, allowing them to rent new machines on-demand and be charged by the hour like other utilities, such as electricity. There was no longer a need to buy hardware for capacity, as space could be rented online. That’s when Lebanese serial entrepreneur Rabih Nassar saw an opportunity. Writing the back-end code used to be the developer’s job, but sites like Amazon removed this burden. “The whole capacity issue is gone; it was a paradigm shift in software,” says Nassar. 

 

Under the name Apstrata, Nassar pioneered and started offering “back-end as a service” (BaaS) in 2009 to developers who would be able to cut their development team by half and save anywhere from 15 to 90 percent of the total cost of implementing and supporting an app over its entire lifespan. This allowed developers to focus on the front-end code. A ‘freemium’ service, Apstrata does not charge developers until their user base exceeds 500 users, “making it extremely suitable for startups and young entrepreneurs testing new ideas,” says Nassar. 

 

ElementN, the Lebanon-based company he founded in 2003, which until then was offering software for mobile operators, is now focusing on Apstrata. Making up just 4 percent of the $2 million in revenues generated by ElementN last year, Apstrata is expected to take on a larger share and generate 10 to 15 percent of revenues this year — with ElementN bringing in $3 million in the first six months of 2012 — and more than 30 percent next year. 

 

Building on his experience in the tech sector in Silicon Valley and in Europe, Nassar built a solid team composed of 60 highly qualified employees, but starting in Lebanon is something he seems to regret. “I was a bit naïve to assume I can build technology out of Lebanon and attract United States investors; this proved to be a nightmare scenario,” he explains. While Nassar tried to approach investors in the Gulf, there was no interest in investing in the software space. “It will take the fund manager in the Gulf more effort to understand my company than a $200 million petrochemical investment. So why bother?” he says. 

 

It wasn’t until 2010 that ElementN received its first round of financing, securing $1.2 million from Lebanon-based venture capital (VC) fund Berytech for an undisclosed stake. “That delayed us,” says Nassar. Other US-based companies did not take too long to follow in Nassar’s footsteps in providing BaaS, securing relatively large amounts of financing from VC firms. Stackmob and Parse, both American providers of BaaS, received $7.5 million and $5.5 million, respectively, in financing last year, which makes him edgy, since he pioneered BaaS, and he should be the one receiving the financing. Nassar is not too worried though, as his competitors are using the financing to invest in research and development; he has already built the R&D maturity by investing $5.5 million through self-financing between 2003 and 2010, as well as using Berytech funding.

 

To secure investments from US-specialized VCs, Nassar needs to move his team across the Atlantic, as “all the huge software companies are US-based; if you want to make it in software, you go there,” he says, adding that he is looking for financing to transplant his company to America. The immediate need is for $2 million with investors — read ‘high net worth individuals’ — already lined up. Once the company is in a better condition and of a bigger size, he will then go for another round of financing, up to $7 million, from VC firms. 

 

For now, he is hoping that his mistake of starting off in Lebanon will not cost him too much, and that he will be among the successful software companies in the US giving a boost for tech companies back home.

 

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InsuranceSpecial Report

Q&A – Issam Hitti

by Thomas Schellen
written by Thomas Schellen

Insurance broking is a business of consulting and risk advisory that historically bears the onus of being the “middle man”, with all the common questions of what value this function brings with it. Executive sat down with Issam Hitti, the president of the Lebanese Insurance Brokers Syndicate (LIBS) to find out how the brokers are contributing to the nation’s insuredness.

What can you tell us about the performance of Lebanese insurance intermediaries?

We just finished this study regarding the sector’s performance in 2011 and thus for the first time have a clear view on the sector, about how many people are working in it and how written premiums are divided by line and also by distribution channel. We have divided the channels of distribution according to three categories: the direct and exclusive agents, the bancassurance and the independent brokers.

How many people make their living as insurance intermediaries today?

We have found that we have 258 brokerage companies and 121 individual brokers, which gives us a total of 379 independent legal and licensed brokers. Besides the shareholders, we have about 1,790 active employees [at independent brokers]. There are also 1,023 exclusive agents in the market, including 812 agents working with insurance companies and 167 agents working in bancassurance. All in all, the total number of active persons in this field is 3,708. Counting four members per family we think that the number of people benefiting from the insurance intermediary industry is about 15,000 persons.

How big is the pie that these insurance intermediaries and their families live on?

From the reports of the Association des Compagnies d’Assurances au Liban (ACAL), we know that the insurance companies have about $1.22 billion written premiums in 2011. Regarding the channels of distribution, we have analyzed the reports by the Insurance Control Commission (ICC) at the Ministry of Economy and by ACAL and we have also issued our own study on the portfolio profiles of LIBS member companies. We found that bancassurance accounts for about 24 percent of overall production of written premiums, 33 percent for direct and exclusive agents and 43 percent for independent brokers. This means we are sure that independent brokers were producing about $528 million in written premiums in 2011.

So when compared with direct agents and the bancassurance channel, independent brokers are supplying the largest chunk of insurance premiums that are written each year?

Yes.

But do we know how this breakdown of insurance business by distribution channel has evolved over recent years?

No, this is the first year that this study was done.

And how do their shares in the underwriting of total premiums translate into revenues for the intermediaries?

We expect that the total remuneration paid to insurance intermediaries in 2011 is about $200 million, with 23 percent for the bancassurance distribution channel, 31 percent for exclusive agents and 46 percent for independent brokers.

So total cost of sales for insurance premiums across all distribution channels is approaching $200 million, and independent brokers take 46 percent, meaning your industry turnover of independent brokers and your employees came to about $92 million in 2011?

Yes.

Do you have projections how these numbers look for 2012?

No. We have only the first quarter and second quarter figures so we have to monitor and hope to get the real figures at the end of the year.

But from the perspective of brokerage business, do you see trends or significant points of strength or weakness in 2012 when compared with last year?

I think we are at the same level as 2011. There is no boom in the business; the main issue now is to maintain your business and do a good renewal business. Unfortunately, there is no big volume in new business, there are no projects. Nevertheless, because of premium increases related to inflation and higher loss ratios, etc., we think there will be an increase of about 12 to 15 percent in the market.

Before inflation?

Exactly.

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InsuranceSpecial Report

Orange scheme crashes

by Thomas Schellen
written by Thomas Schellen

It ain’t broken, but the economy underlying one of the Lebanese motor insurance industry’s specialities has vanished. While the Orange Card system for cross-border liability insurance protection of Arab motorists is functionally fine, commercially speaking, Lebanese administrators tell Executive that business has fallen precipitously – premiums have roughly halved and sales are almost non-existent.

Data from the Association des Compagnies d’Assurances (ACAL), which administers the Orange Card system on the Lebanese end, reveal a massive drop in premiums between the first and second half of last year. Between July and December 2011, premiums slowed to $889,000, down from $1.53 million in the first half of 2011. In the first half of 2012, insurance premiums issued in Lebanon under the Orange Card system amounted to merely $947,000, down almost half when compared with $1.85 million in the first six months in 2010.

In a way this is not surprising but more a clarification of reality. The Orange Card is a short-term liability policy that all Lebanese private and commercial vehicles need to have in order to travel from here to Syria, Jordan, Iraq, and other Arab countries. The slowdown in premiums reflects in frightening crispness how travel between Lebanon and other Arab countries has been impacted by the situation in Syria. 

“If you want to travel through two or three Arab countries, you buy a small booklet where the pages are stamped in accordance with which countries you pass through. If you go from Lebanon, you buy from Lebanon a stamp for Syria and Jordan. If you travel from Qatar, you buy it there,” explains Fateh Bekdache, the head of Lebanon’s National Bureau for Compulsory Motor Insurance (and general manager of insurance company Arope).

If an insured vehicle is involved in a claims case in an Arab country, either the country’s national insurance association or a designated insurance company handles the settlement. The involved parties then balance the claims accounts between each other, Bekdache adds.

Stalled sales

In 2012, sales of Orange Card booklets to Lebanese insurance companies amounted to a paltry 2,151 cards in the first six months of the year; in April and May not a single card was sold. Given that 40 to 60 percent of cards sold to insurance companies lead to issuance of a cross-border policy, the number of issued policies hardly exceeded 1,000 in the first half of this year, according to Jamil Harb, secretary general of ACAL.

Before the unrest in Syria started unfolding last year, sales of Orange Cards were in the tens of thousands. In 2010, sales reached 60,750 cards in the full year and insurers reported issuance of some 30,000 policies.

The much larger drop in the number of cards sold, relative to the contraction in premiums from the issued policies, suggests that cross-border travel of passenger cars and private motorists has dwindled to the absolute essential.

Under the Orange Card fee structure, private motorists can purchase cards with durations from one month to one year, while commercial vehicles – taxis, buses, and trucks — can purchase cards lasting from three months to one year. Commercial vehicles not only pay two to three times higher premium rates than private vehicles, they will also tend to be active year-round and avail themselves of the discounts for longer lasting policies. The discounts offered for the longer-duration cards are significant, a taxi operator will have to pay $40 per month on a three-month validity but only $23.30 per month when buying for the full year. Similar discounts apply to buses and trucks.

The Orange Card scheme, which is under the authority of the Cairo-based General Arab Insurance Federation, doesn’t publish system-wide performance figures but the Lebanese data shows that people here have stopped relying on road travel for their summer vacations or shopping trips across the border.

For ACAL it means that the revenues from card sales, which are its main source of income, are so low that the association is for the first time in a situation where it is not breaking even. “We have to come up with new ways to finance the work of ACAL,” says Harb.

For the national economy, the numbers scream of the suffering tourism and trade activities between Lebanon and Arab countries.

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InsuranceSpecial Report

Weathering the rainy days

by Thomas Schellen
written by Thomas Schellen

It has been said with some justification that the global economy could be saved from recession if enough people collectively started believing that the end of the world was upon us. Pre-apocalyptic consumer spending would skyrocket and blow the lid off all current growth restraints. But it is questionable if people would think to spend any money on insurance at the end of times.

Coming out of 2012 summer vacation, Lebanese insurance sure could use a boost, though. Collapse of economic confidence, shrinking payment morale, untrustworthy policy making and regional upheaval — all the things that are bad for business in Lebanon this year are especially bad for insurance.

Insurance premiums achieved fair growth of 9 percent year-on-year to $681 million by June 30. The growth rate after the second quarter is up from 4 percent in the first quarter, according to the Statistical Quarterly published by the Association des Compagnies d’Assurances au Liban (ACAL). However, the growth figure, which is not fully audited, does not account for inflation and also may still see a bit of correction — in 2011, the nine-month nominal growth was reported at 14 percent while full-year rates came out lower, at 12 percent. Furthermore, the indicators for the total number of insurance contracts (down 5 percent year-to-date) and motor insurance premiums, which have contracted for the first time in years and are down by one percent year-on-year, spell a worrisome slowdown in activity and could imply real trouble for some insurers.

A more collective, transparent industry

Probably the best things that can be said regarding the advancement of insurance in Lebanon to date in 2012 are that insurance stakeholders have started to sit more often at the same table and that transparency of the industry is making further advancements. Divergent positions of interest and mutual misunderstandings between regulators, insurers and intermediaries seemed to smolder unremittingly in earlier years behind a thin façade of cordiality; the last few years have seen a positive climate change to more genuine communication. Recent interaction between representatives of all sides in the National Insurance Board offers hope that, through greater collaboration between these and other participants in the collective insurance game, Lebanon’s insurance needs on a socioeconomic level will be better safeguarded.

On account of transparency, the availability of real insurance sector performance data has made great strides from being virtually inaccessible five years ago. The  first annual report by the Insurance Control Commission at the Ministry of Economy and Trade, which covered 2007, was issued after a several year lag. This delay has shrunk dramatically, with reports providing audited information now issued much more promptly. The Quarterly Reports by ACAL, issued since beginning of 2011, are augmenting this and starting from this year will be expanded further by an annual report of the association.

The picture is further sharpened by the Lebanese Insurance Brokers Syndicate (LIBS), which in July presented its first-ever study on the contribution of intermediaries in the insurance economy.

On the negative side, it appears that insurers in Lebanon this year can do little more than put a good face to a period that has been both tough and uneventful.

“For me personally, the time since the beginning of this year was the slowest and most boring period since I first became manager in an insurance company 16 years ago,” sighed an insurance leader in conversation with Executive, asking that he not be quoted by name.

2011 performance in the global context

The stage for insurance in 2012 was set by Lebanese insurers’ performance numbers in 2011, which were mellow, but proved better than many in the industry had anticipated. At the end of 2011, Lebanese insurance premiums stood at $1.2 billion, up from $1.1 billion in 2010.

Small as the gain was, it looked pretty good against the backdrop of worldwide insurance premiums contracting in 2011, by 1.1 percent in advanced markets and by 0.8 globally (inflation adjusted). The comfort of this “outperformance” is, of course, not exactly gargantuan when one notes that Lebanon has a 0.03 percent share of world insurance premiums of $4.597 trillion (nominal) according to the Sigma research unit of reinsurance giant Swiss Re.

Taking the dialectic to the next step, the national insurance performance again deserves respect when considering that insurers here faced not only the local impacts of European economic problems, and global financial jitters but also harder financial conditions in the insurance market because of humongous natural catastrophes of 2011 — the disaster tally came financially to $380 billion in total economic damage and $105 billion in insured economic losses, according to reinsurer Munich Re.

On top of being exposed to all that global trouble, local insurers also had to deal with severe regional political developments that drove the discipline of Lebanese risk management into the wall of Syria’s realities.

Costs rise, excitement lags

In regional comparison, Lebanon today is still ranked at the top for the percentage of gross domestic product spent annually on insurance. This ratio, known as insurance penetration, is seen to indicate if a country has sufficient strength of protection or if it is underinsured.

With 2.9 percent insurance penetration, Lebanon ranks ahead of the emerging markets average of 2.7 percent and more than a full percentage point ahead of most other Arab markets.

However, while the robust GDP growth of Arab oil exporting countries explains why insurance growth in those markets has not been reflected as higher insurance penetration, stagnant insurance penetration rates in the slower growing Lebanese market over the past five years give reason to ask if the country and its relatively well-developed insurance industry need to do more to keep protection adequate.

Life insurance is a segment that, because of its facilitation of clients’ long-term savings and contribution to financial preparedness in old age, should be a growth market. Some years ago, when the country was starting to come back from the depressed economic mood that had ruled between 1998 and 2002, insurance industry optimists would speculate that collective life premiums should be worth a billion dollars, or more, today.

In reality, life premiums came to about $350 million in 2011 and have seen growth rates varying from 10 percent last year to 23 percent in the first half of 2012, according to ACAL.

Fluctuating between 25 and 30 percent of the national premiums volume, life insurance is by regional standards healthy, but long-term growth rates and levels of life premiums are substantially below where they would need to be if private savings, by way of insurance, are to help relieve Lebanon’s stressed social networks.

Life insurance volumes also don’t look all that promising when the business of coerced life policies in consumer borrowing is taken into account. The requirement by all banks that loan customers have to buy life insurance with coverage for the loan amount — to indemnify the lender if the borrower cannot fulfil her or his obligations due to death or permanent disability — is a staple source of premiums income for bank-owned or affiliated insurance providers.

However, while the practice offers insurers good risks and fine premiums at very little work, and is a factor in making life insurance by far the most profitable line in Lebanon (according to data by the ICC), there are no indications supporting an assumption, frequently voiced by managers of bank-owned insurers, that the forceful practice helps in increasing awareness of the benefits of life insurance among Lebanese consumers.

According to the new LIBS study, the total number of life insurance contracts sold in 2011 via ‘bancassurance’, the distribution channel where people buy insurance from an agent situated in a bank, was equivalent to 46 percent of all life contracts.

“People don’t go to the bank to buy insurance. They go to the bank to get a loan,” commented LIBS President Issam Hitti.

If term-life, protection-only contracts sold via bancassurance are overwhelmingly tied to lending agreements, it ought to be a much more significant concern for the entire Lebanese insurance industry how to improve genuine demand for both savings and protection-only life insurance contracts.

In the property and liability insurance business, the best perspective is for growth in property premiums from corporate clients, led by industrial companies which are newly required to contract a basic fire insurance package.

Medical insurance — which alongside motor-related business constitutes the bread and butter of Lebanese and regional non-life insurance — has seen profitability resurge in 2009 and 2010 when compared with previous years, according to the ICC. However, members of the industry attributed growth of medical premiums in the past two years largely to premium hikes imposed to balance rising hospitalization costs. Recent trends in medical insurance showed negative developments in the number of issued contracts and growth of premiums by only 4 percent in the first half of 2012, 11 percentage points below the full-year growth shown in the ACAL Quarterly Report for Q4 2011.

The outlook for medical is further shaded by insider observations that corporate group clients are going down the road of cost cutting, reducing the scope of employee health insurance purchases or making employees pay for their dependents.

Retail clients of medical insurance have limited recourses when faced with rising policy costs, except for complaining to the provider — and insurance managers are hearing a lot of complaints this year.

Motor insurance quagmire

Motor insurance has a questionable outlook this year. Not only did premiums contract by one percent in the first half of the year and speciality coverage for cross-border travel slump because of the Syrian situation, but the combination of rising claims costs and shrinking premiums makes it likely that 2012 will see the bottom-line of motor insurance further in the red, after already incurring losses in previous years.

Given that falling demand for comprehensive or no-fault insurance of motor vehicles was behind the contraction of motor premiums, compulsory third-party liability (TPL) motor insurance is where the market can grow in months and perhaps years going forward.

For almost a decade Lebanon has had mandatory motor insurance. But the coverage, which represents 17.1 percent of all motor premiums, so far only indemnifies injury or death of accident victims. Now, clauses in a new traffic law propose that mandatory insurance will soon apply to both bodily injury and material damages, while the National Insurance Board is deliberating on how to best implement the new coverage.

The expansion of mandatory insurance protection to material damages caused by motorists will bring relief to society, as it will moderate the risks of suffering financial losses just from driving in Lebanese traffic. For insurance providers, the introduction of the wider mandatory cover is a mixed bag. An impending problem of mandatory motor liability insurance against material damage is abuse. Different to accidents with personal injury, deliberately staging an accident with some material damage to another car is an easy ploy in Lebanon’s environment of lousy roads and inconsistent enforcement of traffic discipline.

The combination of having a large number of competing car insurance companies and no system for identifying high-risk drivers means that Lebanon has the potential to become an Eldorado for automotive accident scams as soon as a compulsory, inexpensive TPL coverage for material damages is in the market.

A central issue for providing society with the advantages of full TPL motor insurance will therefore be the empowerment of a motor risk database with full participation by the industry. A motor risk center (MRC) has been under development where insurance companies supply accident and claims data on voluntary basis; it has undergone test runs but scepticism that the MRC will function as needed has been prevailing from the ranks of insurance managers right to the top people-in-the-know in motor insurance.

As noted by the head of the National Bureau for Mandatory Motor Insurance, Fateh Bekdache: “If it is not compulsory, I personally don’t believe it will work.”

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