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Brand VoiceBusiness

Introducing the next-level virtual credit cards from Monty Mobile

by Monty Mobile June 3, 2021
written by Monty Mobile

In a global climate of patterns’ shifts towards digitization, Mountasser Hachem, chief executive officer and founder of Monty Mobile, entered the world of FinTech on solid grounds through innovative products revolutionizing financial concepts to introduce them into the Telecom industry and accompany modern high-tech trends.

Hassan Mansour, general manager at Monty Mobile gives the rundown on the company’s latest portfolio.

How is Monty Mobile revolutionizing mobile payments in the telecom industry?

Following Monty Mobile’s active role and commitment to integrate a wide community into the financial world through various aspects, we launched Monty Virtual Credit Card (MVCC). We are moving forward to implement virtual credit cards’ perception to the Telecom industry. Virtual cards are witnessing growing demands worldwide and are broadly recognized by numerous suppliers that accept any form of physical cards. With our MVCC, mobile operators can now provide their subscriber base with a virtual and digital service to make instantaneous online and electronic payments.

The economic environment today requires businesses and individuals to evolve and adopt technologies that contribute to increased efficiency and a better management of their daily lives, save time and streamline procedures. From now on, visiting traditional banks’ sites will not be a prerequisite anymore to access the MVCC.

What are the fundamental trends characterizing Monty Virtual Credit Card (MVCC) issuance compared to traditional virtual cards?

Virtual credit cards are not a new concept. However, the modernization stands at shifting and implementing this technology to Mobile Operators who will be managing and offering their subscribers this new line of product, thus conveying an original experience at their users’ hands. It is a new opportunity for the telecom industry to expand and strengthen its activity in FinTech services.

The MVCC   follows very simple issuance procedures easing the long norms and requirements imposed by any traditional bank. The process is transformed to a fully digitized chain. Based on a progressive subscribers’ statistics and behaviors analysis, MVCC is offered to eligible users based on an advanced credit scoring. Qualified clients are then embarked through a mobile application to fill a quick KYC form which is automatically redirected to a local bank for a full background scan and profile verification approval before access to our virtual card. This simplifies an entire old-fashioned course of visiting banks, opening numerous accounts, filling tons of forms and many endless procedures before receiving any credit facility.

What are the key features offered by Monty Virtual

Credit Card (MVCC)?

As a modern payment alternative, MVCC has many innovative features creating a secure, simple and straightforward experience. It allows users to complete their purchases from their smartphones instead of using physical cards. It can save the stress of carrying a wallet around. Fully digitized and stored in users’ devices, MVCC reduces risks of fraudulent crimes and thefts. It could even be locked from users’ devices in case they are concerned that their accounts have been compromised.

In addition, it could be complemented to any existing and new financial services or loyalty programs that operators intend to offer, thus aiming at creating improved incentive and better experience for their subscribers.

Why did Monty Mobile choose to enter the FinTech industry?

Today, FinTech is a sector experiencing exponential growth and witnessing exceptional flow of interests influencing many businesses from diverse industries and backgrounds. The future lies in this sector which complements many industries in their day-to-day operations. Fintech solutions are generating increased awareness by end-users and are becoming an inseparable part of their daily routines.

It is a challenge for us to seize this trend and create a bridge that links our industry as well as mobile operators’ needs to customize consumer needs. Thus, paving the way for development of new pioneering products and new market reach.  Even though mobile operators and FintTech originate from different environments, they complete each other to deliver new facilities for their clients and to expand the industry towards better prospects.

The banking sector is taking a new path worldwide. Given the population’s structural behavior change, a younger population is driving the demand for new approaches to tackle financial needs that go beyond traditional banking concepts. And this will not stop at this point. Rising initiatives for digital transformation of financial needs and the extensive use of smartphones are key factors to accelerate use of FinTech products.

Endless evolution and the desire to exceed our clients’ expectations shaped our foundation of sustained growth. With a resilient talented team, we cannot but expect outstanding outcomes.

June 3, 2021 0 comments
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Economics & PolicyHealthcare

Novel Science Addresses Novel Virus

by Fadi Makki June 1, 2021
written by Fadi Makki

Applying behavioral strategies that utilize insights from psychology and behavioral economics while maintaining freedom of choice -otherwise known as ‘nudges’- have the potential to gently steer people towards greater adherence with COVID-19 lockdown measures. The overreliance on classical policy levers such as rewards and penalties has yielded suboptimal compliance rates because it assumes that people are rational. However, with limited success in enforcing lockdown measures, the pandemic has revealed deep behavioral roots underlying the lack of compliance which requires alternative policy tools.

A regional study that looked at the policy responses of 13 Middle Eastern countries in order to assess the effectiveness of stringency measures in managing the spread of the virus found risk perceptions to play a central role in compliance. The study used the stringency index from the Oxford COVID-19 Government Response Tracker, which is an aggregate of eight indicators on specific government responses, and the number of cases per day, which was used to measure each country’s enforcement capacity and the compliance of the public.  

It was recorded that in Lebanon there were significantly more violations by the end of May 2020, despite a lower stringency index, than in the beginning of May. The increase in violations began just as the government announced a reimposition of preventative measures following a resurgence of cases. However, the number of daily cases went up even more drastically after the period of renewed stringency which highlights the behavioral challenges to lockdown measures.

Behavioral economics challenges human “rationality” to help design interventions based on realistic understandings of human behavior and the behavioral barriers they face during COVID-19 lockdown measures. Several cognitive biases – systematic errors in judgements – prevent people from complying with rules mandating people not to leave their homes.

In the presence of such biases, risk perceptions can falter and change over time, which diminishes compliance with lockdown measures. Travel restrictions and enforced penalties do not address these cognitive shortcomings nor do they address inter-temporal risk perceptions which can influence adherence to stay-at-home orders. In addition, while conventional communication campaigns may be informative, they only add to the noise and do little to change behaviors.

These biases include “present bias”, whereby individuals place greater value on the “today,” but less so on the distant future.  This leads people to miss out on lucrative long-term benefits as they focus on myopic short-term ones which put them at risk. Individuals who do not adhere to strict lockdown measures focus on the immediate benefits of visiting families and friends while not appreciating the long-term health benefits of staying at home.

Another bias is “optimism bias” where individuals underestimate the probability of a negative event happening to them in the future. For example, people not adhering to lockdown measures may be aware of the risks of contracting COVID-19 but will underestimate the probability of being exposed to it.

In addition, human beings have “limited cognitive bandwidth” which affects their ability to objectively assess risks, particularly in high stress environments. Individuals who are experiencing financial hardships for example will be prioritizing food security and employment, leaving little mental bandwidth to assess the risks of not complying. In addition, the information overload people are bombarded with daily via social media and news outlets can have an additional strain on risk perceptions and decision making.

Integrating behavioral tools to counter the systematic errors in judgment is a viable alternative to the standard command and control regulations, which fail to address many of the cognitive barriers. Over the past few years, an increasing number of behavioral insights initiatives, also known as “Nudge Units”, were launched around the Middle East and have been employing behavioral techniques or “nudges” with astounding success.

Results from the stringency study indicate that people with higher risk perceptions tend to have a higher likelihood to comply with preventive behaviors, which suggests the importance of having individuals properly assess the risks of contracting COVID-19. This highlights the need to address the limited cognitive bandwidth people experience by finding ways to properly communicate these risks through behaviorally informed messages.

The study also found that people become less compliant the longer they spend undertaking compliance behaviors, which demonstrates the role of present bias and optimism bias as compliance measures drag on, and as behavioral fatigue sets in. 

In addition, a pilot survey that measured respondents’ rate of compliance over time and relative to their risk perceptions on COVID-19 found that participants were more compliant when their risk perceptions were higher. However, participants were less compliant the longer they spent undertaking these behaviors. These results suggest that people are less likely to comply to restrictions such as leaving their house and having access to public spaces. Data from Lebanon shows that cases can rise, even during lockdowns, the longer people are required to comply and get habituated to the disease which may also diminish risk perceptions.(Makki et al., 2020)

Thus stringency measures are more effective in lowering the number of daily infections if imposed for shorter periods. This is especially problematic overtime as people are less likely to comply the longer lockdown measures are enforced. Thus, quick and hard-line government lockdown measures are more effective in lowering the number of daily recorded cases, compared to more delayed, gradual responses.

So what are nudges that can work to overcome the cognitive biases inherent in people and improve risk perceptions in order to increase compliance?

A pilot study in Lebanon designed to increase self-reported compliance measures randomized participants into a control group, which received a generic survey, and a treatment group which included additional behaviorally informed survey messages. Participants in the treatment group received a nudge text in the survey describing how adhering to strict social distancing would help save the economy, which decreased the amount of times they left their homes by 41 percent compared to the control group. There are several reasons why this intervention had an impact on compliance rates which include the appeal of economic benefits for those who report higher self-interest and because it encourages feelings of collaboration, which can equally prompt individuals to adhere to lockdown restrictions.

Other nudges have also been employed during a large study which sampled UK and US participants to measure their impact on compliance and preventive behaviors in order to reduce the spread of COVID-19. Since these nudges worked for a specific demographic, they would have to be adapted and tested to see if they work in the Lebanese context. A letter condition was delivered to participants asking them to think about a person vulnerable to COVID-19 they know and who means a lot to them, and to write a letter to that person explaining that they will do everything that is necessary to stop the spread of the virus and to ensure this person survives the crisis. This nudge decreased the number of hours participants spent outside by 12.6 percent compared to the control condition. This nudge demonstrates that having individuals engage in an immersive exercise to think about a loved one, and inducing greater empathy and concern for others can change behavior.

An additional informational nudge presented hypothetical scenarios on violations with behavioral recommendations to prevent the spread of COVID-19, after which participants had to assess the appropriateness of the hypothetical violations and were then immediately provided with feedback on the accuracy of their answers to debunk some of the misconceptions they had regarding COVID-19. This informational nudge made participants less likely to allow their family members, friends or other people to visit them, which was statistically significant. Underlying the success of this nudge is inoculation theory that postulates an individual’s beliefs can be ‘psychologically vaccinated’ against persuasion or influence by exposing them to misinformation that is subsequently refuted. Thus the feedback participants received regarding the accuracy of their answers helped them develop the ability to debunk some of the misconceptions regarding the virus. An additional reason why this intervention may have been effective was because it helped mitigate optimism bias which reduces risk perceptions. 

Consistent with previous findings, these nudges are effective for people who start practicing social distancing recently and make them go outside less, however, they can have undesirable effects for those that have been complying for longer periods. This underscores the fact that a blanket approach to implementing behavioral interventions in a situation where many people already comply may not be meaningful and that delivering targeted nudges to subgroups of individuals, particularly to those that have only recently started to comply may have the greatest impact.

With many behavioral challenges underlying this pandemic, behavioral insights can bring small but measurable improvements to lockdown measures. This is particularly important given the diminishing authority of the state and their incapacity to enforce rules and regulations. With limited institutional capacity, additional nudges and behavioral policy levers will be required to address the cognitive biases affecting citizens to nudge them towards greater adherence. As the political crisis drags on and the country struggles to encourage citizens to get vaccinated, nudging can be particularly useful in addressing some of the cognitive biases and their overall hesitancy to get inoculated.

June 1, 2021 0 comments
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Economics & PolicyReal estate

A house “divided” can bring profits

by Habib Chammas May 28, 2021
written by Habib Chammas

The current Lebanese financial and currency crises could be an opportunity for everyone to pool their fresh dollar funds and access real estate through crowdfunding. Not only will investors benefit from the drop of property prices in fresh dollars, but they will also put their money to work for them and earn both short term income and medium term capital gains.

The odd marriage of crowdfunding technology and the oldest form of investing appears to be getting along quite nicely and allowing investors to leverage investments in the global real estate market, diversify their portfolios to mitigate risk, and earn much better returns than stashing their money in saving accounts. The idea of making real estate transactions online had its doubts, but as more investors have been embracing the business model the real estate crowdfunding market value reached $8.3 billion in 2020, with the United States and Canada serving as the leading players (CrowdCrux).

In the current economic situation, real estate acquisition could attract more players from the Lebanese diaspora and those with access to fresh USD who are now able to buy goods, services, and assets (specifically real estate) at low price tags with their fresh dollars. With the threat of losing their savings in the banks, many Lebanese rallied towards the purchase of property using their lollars, which were accepted by those developers owing loans to the banks. This has pushed the property prices in lollars (USD bankers checks) irrationally high, while on the other hand, due to the devaluation of the value of the lollar as compared to the dollar, property prices dropped by 50 – 65 percent in fresh USD term, depending on the location and the property type. This represented a buying opportunity for vulture funds and anyone who has enough fresh dollars to afford to buy a property on their own.

Built-in protection for all parties

The global real estate crowdfunding market is on the rise. According to a publication by Facts & Factors (Dec 2020), the global market size will exceed $869 billion by 2027. That’s more than 100 times the size of the global market size of 2020, which translates to a compound annual growth rate (CAGR) of 18.96 percent. Using crowdfunding as a vehicle to invest in real estate, many of the platforms allow investors to start with as little as $500 without the need for a down payment of at least 20 percent of the property price, which is the practice with conventional real estate investing. This provides an opportunity for investors to diversify their investments and reduce their risk while earning good returns on their investments. It allows investors to be a part of deals that were previously unattainable to them. Residential properties are the primary source of real estate crowdfunding investments. These properties currently account for more than 50 percent of all crowdfunded real estate investments. Experts predict, however, that the growing commercial sector is likely to play a larger role in years to come. This could mean lucrative future gains for investors ready to support this particular high-risk, high reward play.

Real estate crowdfunding has come a long way since Fundrise launched its first project in 2012 in America and raised $350,000 from 175 people. With investors earning their dividend checks, more confidence was gained in the business model and the platform grew exponentially four years later with closing one project a week and raising more than half a million dollars a day, according to co-founder Ben Miller (CNBC). Eight years later in 2020, Fundrise has more than 150K active investors and has crowdfunded over $5.1 billion in real estate projects with more than $100 million net dividends earned by its investors. The industry is now full of success stories like these, with many platforms experiencing rapid growth. From their launch in March 2013 to October 2013, Realty Mogul’s cumulative investments rose from under $2 million to $8.07 million, with 23 properties under their belt. Two years later, they have now financed over 265 properties valued at over $600 million. Other platforms like Ground Breaker, Patch of Land, and Crowd Street among many others have their share of similar success stories.

The legal side of real estate crowdfunding is simple to set up and comes with built-in protection for all parties. Investors can invest small amounts of money in either the equity or debt of a real estate project to realize income. This can happen through a combination of rent, lease, or debt repayment, as well as from capital gains when the property is sold when its price appreciates over time.  The sponsor will propose an exit strategy at which the property will be sold at a profit and, which is usually within an estimated period of time, referred to as a term. But, if the target exit date so happens to be in the middle of a bear market, it may be prudent to keep holding and collecting rent until the cycle turns. Investors effectively become limited partners in the investment. Acquired properties are usually owned by a Limited Liability Company or a Limited Partnership with the sponsor participating as the General Partner or Manager and the investors participating as limited partners or passive members.

Governments leveraging real estate crowdfunding

Because of the integral role that real estate plays in the economy, major economies across the world have started looking for solutions to facilitate investing in real estate. As an investment model, real estate crowdfunding started in the US in 2012, and the Securities and Exchange Commission passed several regulations under the Jumpstart Our Business Startups (JOBS) Act that now allow both accredited and unaccredited investors an unprecedented opportunity to take part in online equity and debt investments, including investing in real estate in their own neighborhood and beyond. The European countries and Latin America followed suit and made real estate investment-based crowdfunding increasingly accessible to investors and project developers to boost this major pillar of their economies. From the investor’s point of view, it is not necessary to spend a large amount of money, thus assuming a little risk and allowing the investment to be diversified.

When it comes to the MENA region, this business model is rarely heard of, except in Dubai. While its legal system was not ready for real estate crowdfunding in 2016, Dubai’s real estate authority started working on a system that allows the issuance of “partial title deeds” that will give assurance to investors to engage in such schemes. The government has facilitated the registration of the acquired properties in the names of Special Purpose Vehicles (SPVs), which are legal entities that list the investors who crowdfunded the relevant projects as shareholders in the fund. SPVs benefit from a less complex application process, reduced registration and licensing fees, and are allowed to use their existing companies as the registered office of the SPV. An SPV also offers a range of advantages, including tax neutrality, no restrictions to foreign ownership, limited liability to the amount of the shareholders’ commitment to the company’s share capital, and a robust regulatory and legal system.

Founded in 2017, SmartCrowd became the UAE’s first real estate crowdfunding platform with an entry ticket of $1,400 per investor, thereby reducing barriers to an investable asset class that is out of reach for many. One year later, the company has completed approximately $1.5 million in transactions with individual investments ranging from $1,400 to $34,000). With the company outperforming the UAE’s real estate market returns by paying out multiple dividends with annual net returns ranging from 6.5% to 8%, it kept attracting more investors and it has completed more than $6 million in transactions in 2020, at a time when the real estate market dropped in the UAE as the pandemic was impacting the whole economy. The successful market entry of SmartCrowd opened the doors to other platforms, such as Ellington Properties and Stake, which launched in 2020 and started offering opportunities to invest in the UAE’s real estate market and take advantage of the attractive lower prices (35% lower than their 2014 peak values).

Fresh USD into the Lebanese economy?

If the purchase of real estate is made accessible to the Lebanese diaspora (specifically those who cannot afford to purchase property with their own funds) with crowdfunding, it will help the remittance of fresh dollars to the economy, which can help in mitigating the short supply of fresh dollars and the further devaluation of the Lebanese pound. Real estate crowdfunding allows all those transactions to take place online and through bank transfers, which provides transparency to the amount of fresh dollars being exchanged for the purchase of the real estate. As a side note, it would not make too much sense for lollar holders to convert them into fresh dollars and lose more than two-thirds of their lollars to purchase property in dollars. The recommended practice for lollar holders and who wish to purchase property is to look for rare buying opportunities (distressed deals) where the asking price in lollar is not inflated compared to 2019 prices.

The current Lebanese legal framework is a hurdle for real estate crowdfunding platforms to make property investing accessible to almost anyone. This limitation makes investing in real estate reserved to those who have the capital to scoop properties and benefit from opportunities.

Without a doubt, Lebanon’s real estate laws are outdated, as they were promulgated 90 years ago with no real updates or modifications that make the property registration process seamless, transparent and proof from being manipulated by corrupt front-end clerks. With great proven models from the west and the UAE, such reforms could (and should) be rolled out quickly by just “borrowing with pride.” At the same time, the outdated rental laws froze down thousands of properties since their promulgations and caused many buildings to deteriorate with time with no maintenance whatsoever since the landlords of such non-performing assets do not have any incentive to do that.

The business legal framework is also outdated and is not welcoming enough to entrepreneurs, both nationals or foreigners, to conduct business with minimum cost and setup hassle. Recent modifications were drafted, but the hurdles and obstacles for crowdfunding startups were not eliminated, but on the contrary, exacerbated, thus making it only accessible to large capitalists and financial institutions that can afford a capital of more than 1 billion Lebanese pounds. This drafted crowdfunding law applies to small and medium enterprises (SME) or startup companies aiming to get funded for their operations and traction by the general public with investments ranging from $500 to $10,000 in return for ownership of equities or shares in these companies.

In the absence of a law specifically drafted for real estate crowdfunding, the Capital Markets Authority (CMA) is treating Real Estate Crowdfunding (REC) startups as if they wish to get funded as a company by the general public, whereas the REC business model is about crowdfunding a portfolio of properties. This process is never-ending, when listed properties get funded, new ones will get listed on the crowdfunding platform to be made available for investors to pitch in. This gets more complicated the legal entities that will own a handful of properties to protect the investors’ ownerships are factored in. This will entail a capital of 1 billion Lebanese pounds for each legal entity that owns a small portfolio of properties. This is a hurdle for the REC business model. The fact the property will be owned by a legal entity, in which the investors own their respective shares, is a solid enough protection for investors.

There is a large potential for an influx of fresh dollars through fractional real estate ownership through crowdfunding. Although the capital flow will go through the banking system but it will eventually get parked in tangible real estate assets.

Habib Chammas

Founder of CasaBayt

May 28, 2021 0 comments
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Brand VoiceBusiness

Is the future of tobacco smoke-free?

by Philip Morris Lebanon May 24, 2021
written by Philip Morris Lebanon

The strategy adopted by Philip Morris International (PMI) over the past decade certainly bears closer scrutiny, not least as a case study in how vision and perseverance sometimes pays off in the face of what seemed, at a shallow reading, overwhelming odds. While the company’s line of heated tobacco products, including the IQOS, hasn’t yet replaced conventional tobacco products, the new leadership, helmed by Jacek Olczak who was appointed chief executive officer on May 5, 2021, is determined to maintain its leading position and accelerate the company’s transformation to what it considers to be a less harmful risk-reduced – but not risk-free, it is worth underlining – alternative to traditional tobacco products, and, in his own words, to a “smoke-free future.”

PMI demonstrated how a company can manage through a combination of innovation and responsible commercialization to not only stay in business but also thrive in a highly competitive global market, and a challenging one to boot, where consumption of tobacco products is widely banned in indoor public spaces – as well as in an increasing number of outdoor venues – and access to advertising and sponsorship opportunities is virtually completely sealed off. Over the past decade, PMI has recognized the growing trend of vaping and other alternative smoking products, and has invested heavily in research and development in order to develop a portfolio of reduced-risk products for adult smokers. In an open letter on the occasion of his appointment, Olczak writes, “When I consider how PMI can contribute to this better future, one action stands above all others: Replace cigarettes as soon as possible with better alternatives for women and men who would otherwise continue to smoke.” The company’s ambitions encompass a future where smoke-free products would ultimately replace cigarettes products, improving the health quality of life for adults who would otherwise continue to smoke, society, the company and its shareholders.

Looking at figures, it seems that PMI’s decision to place its bets on smoke-free products, with the introduction of the IQOS in Nagoya, Japan, in 2014, was a judicious one after all. The IQOS has been approved for marketing in the US by the Food and Drug Administration (FDA) as a Modified Risk Tobacco Product (MRTP), finding that an exposure modification order for these products is appropriate to promote the public health. As at March 31, 2021, the geographical coverage of PMI’s smoke-free products, has extended to 66 markets worldwide, accounting for 28 percent of the company’s net revenues. Olczak played a significant role in this short span, leading PMI’s transformation from a primarily business-to-business company to an increasingly business-to-consumer company.

In February 2020, Beirut joined the string of cities in PMI’s expanding markets for smoke-free products when the IQOS was introduced in the country just prior to the COVID-19 pandemic. In a recent press release, Taylan Suer, PMI country manager for Lebanon, said: “Jacek has been driving PMI’s smoke-free transformation internationally, and his skills and expertise portend an exciting new chapter for PMI. In line with this vision, we introduced IQOS in Lebanon in February 2020. After 1 year of the launch, it is encouraging to see adult Lebanese smokers making the step towards leaving smoke behind and embracing a scientifically substantiated better alternative than continued smoking.” Lebanon has arguably long constituted an attractive market, albeit small in size, for various tobacco products in general, a legacy that endures despite rampant hyperinflation and a ban on smoking in indoor public spaces that came into effect in September 2011 – only a short six years after ratifying the Framework Convention on Tobacco Control (FCTC) that came into effect in 2005 – followed a year later by a national ban on all forms of advertising and sponsorship of tobacco products.

While PMI is confident that it is off to a good start and an equally good succession with its new leadership, it is still early to determine whether its ambition to widely commercialize smoke-free reduced-risk products and establish its domination over alternatives to conventional tobacco products is risk-free or certain. It is important to remember that a number of factors should be considered, not least of which are health concerns relating to the use of tobacco and other nicotine-containing products. Another significant risk, by PMI’s own admission and from its viewpoint, is a potentially diminished ability to convert adult smokers to smoke-free products. Narrowing the focus down to the Lebanese market once more, continued hyperinflation could delay more widespread adoption of PMI’s IQOS and smoke-free products, restricting it to a small number of consumers, although this would apply to other alternatives as well, and even consumers of conventional tobacco products – although attachment and addiction to cigarettes and the quasi-ubiquitous nargileh would contribute to preserving the market.

If the past decade or so of product innovation and disruption has taught the discerning observer anything, it is to reserve passing judgment until more user-generated data becomes available – and, in the case of smoking, until extensive medical studies are conducted – that would allow for product improvement and fine-tuning. With this in mind, Olczak writes: “Our greatest task is to always bring new thinking forward. To demonstrate through action, transparency, and verifiable proof points the integrity of our promises. And to work ceaselessly to forge partnerships with those who can accelerate the change we seek.”

Brand voice is the paid window that Executive provides to our corporate partners and the business community for sharing their views, insights and messages. Brand voice content has to comply with Executive’s content guidelines but is not under the magazine’s editorial responsibility or control.

This article is brought to you by Philip Morris Lebanon.

May 24, 2021 0 comments
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EconomyOpinionSpecial Report

Lebanese industry: from productivity to prosperity

by Josiane Fahed-Sreih May 13, 2021
written by Josiane Fahed-Sreih

The Industrial sector in Lebanon is a major contributor to the Lebanese economy by employing a large number of workers, and by being the largest source of hard currency to the country especially after the major economic collapse and the scarcity of the dollar that started in 2019. The Industrial sector in Lebanon is becoming more and more innovative and sophisticated just like its counterparts in innovative countries, and will become one of the major sectors that will witness increasing investments. With the development of oil and gas and the reconstruction of Beirut after the August 4, 2020 explosion, the industrial sector is set to become more competitive and serve the needs of the country.


In 2018, the sector accounted for around 8 percent of GDP ($4.2 billion) and employed 20 percent of the local labor force (around 318,000 employees). There are over 4,700 industrial firms in Lebanon the largest
portion of which is in agro-food production (26 percent or 1,245 firms), followed by construction materials (12 percent) and chemical products (8 percent). Industrial exports stood at $3.5 billion in 2019, accounting for 95 percent of total Lebanese exports. The top five Lebanese industrial exports in 2019 were pearls and precious stones (41 percent), mechanical machinery (6 percent), electrical machinery and equipment (5 percent), plastics (4 percent), and essential oils and cosmetics (4 percent). Key export destinations in 2019 included Switzerland (30 percent), the United Arab Emirates (12 percent), Saudi Arabia (6 percent), Syria (5 percent), and Iraq (4 percent). The share of medium and high-tech manufactured exports of total manufactured exports had reached 21 percent in 2017, indicating promising technological capabilities in the sector, knowing that industrial permits increased by 16 percent from 375 in 2011 to 1,086 in 2018.

Knowing that Lebanon is part of several multilateral agreements, most notably the EU-Lebanon Association Agreement, the Taysir agreement, The European Free Trade Association (EFTA), the Greater Arab Free Trade Area (GAFTA), the US-Generalized System of Preferences (GSP) and others, this by itself is a trigger for open market competitiveness and for the sales of the locally produced products. The industrial sector will become more competitive if some of these measures can be taken. Therefore, I recommend the following:
1- Encouraging private-public sectors partnerships.
2- Encouraging cooperation with academia by developing programs that can position Lebanon at the forefront of innovation, such as green industries
3- Encouraging and supporting SME creation that would create jobs and position Lebanon as a pioneer in enterprise creation knowing that Lebanon’s workforce is highly educated and savvy, compared to other Middle Eastern and gulf countries.
4- Offering technical support through the development of programs that encourage manufacturing.
5- Providing tax incentives to encourage people to invest in manufacturing.
6- Lowering the cost of manufacturing on all fronts from energy to land costs.
7- Creating industrial zones where the cost of land and other costs are low.
8- Advancing the transition towards a green economy while reducing the numerous environmental risks lying
ahead and accelerating the shift away from carbon-intensive industrial production to more sustainable models.
9- Offering incentives to move to a green economy as per European circular economy developmental goals.

May 13, 2021 0 comments
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CommentEducationLaborSpecial Report

Fates hinging on international funding

by Elie Gholam May 7, 2021
written by Elie Gholam

In Lebanon, the non-governmental sector has been booming since 2011 from the year the Syrian refugees influx started. This sector is employing Lebanese staff and paying them in real US dollar currency, enabling them to support their families and benefit the surrounding local economy. However, employees of international non-governmental organizations (INGOs) on fixed-term or consultancy contracts do not enjoy currently enough job security and so the trickle-down effects of their salaries are lost. In 2020 alone, the Lebanese economy lost 220,000 jobs and among those jobs were INGO employees working on fixed-term contracts and consultants. That fact has a high negative impact on the local economy. Helping the INGO employees and consultants retain their jobs enhances the local micro economy, and retains their talents in the country. Hence, the article discusses the potential increase of job security and stability for the INGO employees on fixed-term contracts and consultants. Non-governmental organizations (NGOs) working in Lebanon are classified into local NGOs, United Nations-based NGOs, and international INGOs. The current article discusses only the jobs of INGO employees since most of them pay the salaries of their employees in US dollar banknotes (“fresh” dollars) they can use to purchase goods priced in US dollar currency or exchange at the daily black market rates, which, as at end-August 2021, hovers between 18,000 and 20,000 Lebanese pounds to the dollar, compared to the bank rate of 3,900 Lebanese pounds to the dollar (the “lollar” rate). There are around 60 INGOs in Lebanon who employ people based on three types of contracts: fixed-term contracts, open-ended contracts, and consultancy contracts. Almost 100 percent of these INGO employees start on a fixed-term contract for the first two years, and less than 5 percent of the total number of employees are hired as consultants. INGOs activities in Lebanon started to spread out rapidly with the significant increase in the influx of Syrian refugees as of 2012. The mandate of those INGOs is based on humanitarian objectives where their role is to implement social, nutritional, hygiene, and educational programs targeting mostly Syrian refugees and host communities in underserved areas. In addition, with the emerging economic crisis, their role started to encompass social programs targeting the hosting communities within the Lebanese society in order to help them surpass the crisis. After the August 4, 2020 explosion, the INGOs increased their support to the hosting communities within the Lebanese society through the local NGOs.


ON FUNDING AND JOB INSECURITY


INGOs pay the contractual agreements of their employees and consultants out of funds allocated by donors that include general donors such as the World Bank and European Union, UN-based donors (UNHCR, UNDP, UNICEF, OCHA, etc.), state-let donors such as the USAID, BPRM, LAFD, WPA, BMZ, Australian Aid, NORAID-SIDA (Swedish) and CIDA (Canadian), as well as individuals and corporations. Contractual agreements between the INGOs and their employees and consultants last as long as there are funds. Those funds granted to the INGOs working in Lebanon, were on an increasing slope until 2017. After 2017, the INGO funds started decreasing drastically and got diverted into surrounding countries having also a Syrian refugee influx, mainly Jordan and Turkey. Whenever there is a shortage in funds due to a decrease in donations, consultancy agreements and fixed-term contracts will not be extended after reaching their deadline. In addition, employees on open-ended contracts will be subject to article 50 of the Lebanese Labor Law, which allows for a massive employee downsizing in case of lack of funds. Thus, the INGOs employees who are on open-ended contract are notified at least a month ahead that their contractual agreement is ending. The INGOs operating in Lebanon are compensating their employees and consultants in real US dollars. This compensation enhances the micro Lebanese economy where it has a role in decreasing the inflation through making US dollar banknotes more available. In addition, it increases the purchasing power of the INGOs employees and consultants. Since some of this monetary compensation is spent in the local market, third parties (suppliers, service providers, currency dealers) are also benefiting from this inflow of US dollar banknotes. Compensation costs for INGOs’ employees and consultants represent 20 percent to 25 percent of the total allocated funds, with the remainder going towards program implementation and logistics. The majority of this compensation includes the basic salary, bonuses, NSSF subscriptions, benefits, and cost of transportation. Whenever there is a lack of funds, it drastically affects employees and consultants where their contractual agreement comes to an end. Thus, that fact affects negatively the local micro economy since less US dollar banknotes would be available for the local market. Stopping the contractual agreements of the employees and the consultants impacts also the remaining ones where this increases their level of job insecurity and reduces their motivation.


AMENDING THE LABOR LAW


Helping INGO employees and consultants maintain their jobs and income in real US dollars provides a boost to the local micro economy. This help comes in the form of improving the legal framework and legal clauses that ensure enhanced job contractual agreement security. As matter of fact, the Lebanese Labor Law dates back to 1946 and few improvements have been incorporated since then. Moreover, legal clauses within the
Labor Law related to employees and consultants are left to various unclear interpretations. The following are points that can be factored in the current Lebanese Labor Law in order to strengthen the job contractual agreements conditions of the employees and consultants working at the INGOs:

  1. Encouraging INGOs to establish a common union or association, which would represent the interests and welfare of the employees and consultants working with the INGO. Here, each INGO can elect one or several employees on an open-ended contract to represent the welfare of the remaining INGO employees within the union or the association. This election
    of the representatives is considered official. The union board itself is elected by the representatives of the INGOs employees and the decision of the board is binding for the member of this union or association. Actually, there is currently a similar association in Lebanon. It is called the Lebanese Humanitarian INGO Forum (LHIF). LHIF currently counts 60 INGOs member, where they meet regularly in order to share information and knowledge and for each member there is an annual fee. However, the objectives of LHIF are to discuss financial and strategic perspectives. Thus, the objectives of LHIF are not oriented towards the welfare of the employees. Moreover, the decision of LHIF are not binding to its members. 2.
  2. Currently, the compensation and benefits scheme is standardized among the employees working under open-ended contracts and fixed term contracts within the INGOs, however, the former enjoy more job security and longevity than their colleagues on fixed-term contracts. To counterbalance that fact, there is a need to restructure that compensation scheme as per the below points: -Restructuring the fixed-term contract agreements to include more benefits, such as better health insurance schemes and higher transportation refunds. Restructuring the benefits of the staff on fixed-term contracts to turn them into monthly cash benefits such as end-of-service indemnities and yearly bonuses. Restructuring the compensation scheme for fixed term contract employees in order to increase their salary since they are subject to a higher risk of unemployment that employees on open-ended contracts.
  3. Including a clause in the Lebanese Labor Law to standardize fixed-term contracts with a minimal duration of, for example, six months, secures a longer employment period for the INGOs employees. All the employees at the INGOs start with a fixed-term contract before it is turned into an open-ended one after two years of employment with the same INGO. These fixed-term contracts have frequently a duration of less than six months.
  4. In order to provide a higher sense of job security to the INGOs’ national employees, the Lebanese Labor Law could include a binding clause mentioning clearly the percentage of foreigners each private organization and INGO can hire. The current Lebanese Labor Law does not stipulate a certain mandatory percentage of foreign employees working within the private organizations and INGOs. What practically happens, upon hiring a foreigner on a local employment contract, the Ministry of Labor requests a list of the employees’ names and nationalities. This list is requested for issuing work permits. Here, it is left to the discretion of the ministry to assess how high is the percentage of the foreigners working at the organization before issuing the work permit.
  5. As per the International Labor Organization (ILO), in 2017 the foreign workers ratio was 7.6 percent worldwide and 17 percent in the US. Ideally, this percentage in Lebanon should be 10 percent out of the total number of employees. The current Lebanese Labor Law, specifically article 50 stipulating how to rehire employees who were laid off due to downsizing resulting from a lack of funding, needs to be amended. Article 50 mentions that the employer is obliged to grant the priority of rehiring these employees within a year whenever funds are available again. That article mentions also that the employer is obliged to give a one-month notice before the discharge from work.Moreover, article 50 stipulates certain criteria upon which employees are chosen to be downsized.Those criteria are generalized, similar at each situation, and it is unclear how they are chosen. Several steps in article 50 can be incorporated in order to increase the job security and motivation for the employees in general and at the INGOs in particular: Providing the employees to be laid off for lack of funding with a notice period longer than one month. Ensuring the criteria upon which the employees to be laid off are chosen are situational and not standardized. In addition, the employer has to show more transparency and clarity of how those criteria are chosen. Ensuring the rehiring process of downsized employees is clear and transparent. Moreover, giving the priority to rehire the downsized employees has to be based on two conditions: a) employee good performance; and b) acceptance of both parties: the employer and the INGO employee.
May 7, 2021 0 comments
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BankingSpecial Report

A tale of two audits

by Nabil Makari May 7, 2021
written by Nabil Makari

With the current financial crisis, and foreign currency gap at the central bank of Lebanon Banque du Liban (BDL), the demand for an auditing of the Lebanese State and state-related institutions such as the BDL. ministries, regional funds and others, has been a key demand of many reformist agendas and some political parties, including lately the President of the Lebanese republic, as well as various foreign countries and international institutions.
The Lebanese government, in the past, had requested the assistance of financial services firm Kroll in order to conduct a forensic audit of the BDL, before difficulties resulted in the hiring of Alvarez & Marsal, a New York based restructuring consultancy, to conduct said audit. The BDL, nevertheless, submitted approximately only 43 percent of requested documents to the latter firm, due to the limitations imposed by the Banking Secrecy Law of 1956, which resulted in a public spat with the Ministry of Justice.

FORENSIC VS. FINANCIAL AUDIT


This key demand for an auditing of the BDL requires an understanding as to the differences between a “typical” financial audit and a forensic audit. Financial audit: In general, a typical financial audit is an audit of the financial statements of a firm or institution, conducted by professionals, in order to make sure that the financial records are an accurate reflection of the financial position and situation of the institution. Companies usually submit. a yearly audit of the financial statements: their balance sheet, their income statement and their cash flow statement. Such auditing is conducted either by an external auditing firm, or by internal auditing teams. External audits enable the verification of the soundness of the firm’s financial position, and the identification of any financial misstatements in the financial records. Such external auditors usually issue opinions to provide financial statement users with confidence that the financials are both accurate and complete. Internal auditors, on the other hand, are employed by the company or organization for which they are performing an audit, and the resulting audit report is given directly
to management and the board of directors. Unlike external auditors, they only follow the company’s standards while auditing, whereas external auditors follow more generally applied principles, such as the Generally Accepted Auditing Standards (GAAS).

Forensic auditing: A forensic audit, on the other hand, refers to an investigative audit in which accountants, specialized in both accounting and investigation, seek to uncover frauds, missing money and negligence. In this case, the auditor is not only concerned with assessing the financial situation of a company or institution, but also with uncovering fraud. This audit is usually carried during legal procedures and trials, in order to determine the responsibility of parties, should illegal transactions have taken place. A forensic audit would
then seek to uncover such transactions by checking if compliance standards were applied, and who the beneficiaries of these transactions were. In cases where the BDL had engaged in specific transactions with a counter party, a forensic audit would not only determine the date and amount of the transaction, but also whether it was in conformity with laws, whether due diligence was applied, and whether it was in conformity with the Code of Money and Credit. A forensic audit would also seek to determine the official and “real” beneficiaries of transactions, and whether such transactions violated any laws.


SCHEDULING THE AUDIT


The forensic audit has been a key demand of the International Monetary Fund, the French initiative
and foreign institutions, and also of some Lebanese political parties. Other parties, such as the Future
Movement, have asked that all ministries and public institutions be audited. In addition, the government had previously hired Alvarez & Marsal to conduct a financial audit. The firm pulled out in November 2020, stating that it had not received the information it required. Back in July, the government had hired the financial firm Kroll, though it did not receive the political backing to do so. On April 6, 2021, the BDL issued a statement highlighting it was ready to discuss such forensic audit with Alvarez & Marsal, following Parliament’s decision last December to lift the banking secrecy for one year. By late December, Lebanon decided to
contact Alvarez & Marsal once again to conduct an audit of the BDL.
As of June 2021, there is no clear view yet as to whether this forensic audit, or any audit, will take place. At this stage, a forensic audit is much needed, as it would allow not only to establish a clear and transparent balance sheet of the BDL, to evaluate its assets and liabilities, but also to establish if any corrupt and/or negligent practices have taken place, and who its beneficiaries were, hopefully leading to some accountability. This audit is also considered a prerequisite for any financial aid that would come from international institutions, including the “French Initiative,” noting that such aid is increasingly needed in in light of the acute economic crisis Lebanon is still struggling with.

May 7, 2021 0 comments
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BusinessEconomy

The good, the merged, and the bad

by Executive Editors May 3, 2021
written by Executive Editors

One year into Lebanon’s economic crisis, country total net losses are estimated at more than 44 billion dollars by the World Bank’s recent report as of early Q2 2020 and as mentioned in the Government reform plan of April 2020 (at a foreign exchange rate estimated at 3,500 Lebanese pounds to the dollar). This results from losses at the Lebanon central bank (BDL), losses in the banking sector, and losses at the government level mainly from the Eurobonds default. In this regard, the banking sector needs a deep restructuring to reorganize its assets and build back the needed trust from its internal and external clients.  

The BDL has started preparing the way to such restructuring, mainly in its Circular 154, where it required banks to achieve a capital increase of 20 percent, as well as securing 3 percent of banks’ deposits in “fresh dollars” by February 28, 2021. Banks have to comply with such requirements as a minimum recapitalization while ensuring liquidity with their correspondent banks. This presupposes that banks who fail to meet those requirements, the BDL will start classifying the banking sector in readiness for its restructuring.

Nevertheless, to date, the means to ensure such restructuring of the banking sector have rarely, if ever, been publicly addressed. In order to absorb such losses, bank mergers have been contemplated by economists and banking sector experts. Another possible solution would be to restructure the banking sector into “good” and “bad” banks, the latter of which would absorb the losses and take them out of the balance sheets of the banks to recreate a new banking sector, smaller but stronger to drive the Lebanese economy recovery’s in the next few years.

Knowing that the capital of banks pre-crisis was estimated at 20 billion dollars (part of it also being in Lebanese pounds), it seems unlikely, in view of the huge losses in this sector, that banks’ equity will be able to absorb such massive losses, in spite of the requirement to raise their capital by 20 percent.

Losses across the banking sector

Losses across the banking sector can be divided into three different types.

The first is the losses due to Non-Performing Loans (NPLs), which were estimated in April of 2020 at around 18 percent of a portfolio of 40 billion dollars of loans given by Lebanese commercial banks. Today, 18 months later, and according to Nicolas Chikhani, former chief executive officer at Arab Bank Switzerland, this NPL ratio is” higher in view of the increase in the unemployment rate and is estimated at circa 25 percent.” However, it should be noted that the NPL ratio did not grow further because some of the loans are secured (hence collateralized) and others are held by non-residents, which are less impacted by the economic crisis. Knowing that the level of total loans has gone down during the past year from 40 billion dollars to 35.5 billion dollars, due to early settlements, it is estimated that losses in this portfolio could reach 8.9 billion dollars applying Basel III provisions’ requirements.

The second is the losses from the Eurobonds government default on March 9, 2020. Ever since the default on foreign currency denominated debt, of which 9 to 10 billion are held by Lebanese banks as of April 2021, Eurobonds have been trading on average at 15 cents to the dollar, and therefore at an 85 percent trading loss. Overall, at such a discount, such losses can be estimated to be around 8 billion dollars if banks apply international accounting standards.

The third is the underlying loss incurred from the exposure of the banks on the BDL’s balance sheet mainly in the form of certificates of deposits (CDs). In summary, banks have deposited money (in CDs and in term deposits) at the BDL, in amounts estimated at around 60 billion dollars, at a 20 year tenure average, while clients deposits at the banks were at a lower tenure, creating a maturity mismatch risk, which has resulted in a liquidity problem across all the banking sector, as highlighted by Chikhani.

This is also subject to controversy as it resulted in an exposure for local banks of around three times their capital in foreign currency to a single entity, something labeled as an issue called “single borrower exposure breach.” According to International Financial Reporting Standards (IFRS9), such an exposure to BDL should be provisioned to a minimum of 25 percent as per standard practice while BDL required banks to take only 1.89 percent. Hence, in reality, banks should take an estimated additional 14 billion dollars of provisions.

With banks’ equity, being valued today at 24 billion dollars after application of BDL circular 154, banks still need to raise around 31 billion dollars in provisions (while their capital is of 24 billion) to ensure solvency and rebuild the trust with local and international stakeholders.

The road ahead: good and bad banks

The bank restructuring will require a process called “good bank bad bank”, as defended by Chikhani. In summary a “bad bank” is a bank that holds low-quality and high-risk assets, which will be isolated from the initial bank’s balance sheet. A “good bank” would only contain the remaining “good” assets of the initial banks’ balance sheet.

A working paper by international consulting firm McKinsey & Company, published in July 2009, “Bad banks: finding the right exit from the financial crisis,” highlighted the four different scenarios that would allow the segregation of these assets from one another:

The first is an on-balance sheet guarantee, by which the bank protects part of its portfolio against losses, usually with an implicit guarantee from the central government. In this scenario, the “bad” assets remain on the balance sheet of the banks but are guaranteed by the government and therefore no losses are recognized.

The second is through what is called an internal restructuring unit. In this scheme, the bank would centralize the restructuring of the “bad” assets in a separate unit, with its own board of directors and management, which allows for focus and effective management. Though this solution does not transfer risks efficiently, it does increase transparency of the core bank’s performance, according to the McKinsey & Company study.

The third is that of an off-balance sheet Special Purpose Vehicle (SPV). In this solution, part of the bank’s portfolio is offloaded to a separate entity, usually with government sponsorship, with said SPV being removed from the bank’s balance sheet but still related to it.

The fourth, and most effective way, is the “bad bank” spin-off, by which the assets are segregated and disposed into a fully legally separate SPV. Such an external “bad bank,” according to the study, ensures maximum risk transfer and increases the core bank’s strategic flexibility, which allows it to attract foreign investors.

Business Case: Lebanon

In the case of Lebanon, given the sizable losses on banks’ balance sheets, and due to the need to restore confidence both at the international level (with correspondent banks) and also at the local level (with Lebanese depositors), the fourth solution seems to be the most reasonable and effective one. It would allow for maximum transfer of risks off the banks’ balance sheets and therefore for more flexibility afforded to banks.

A Quality Asset Review (QAR) handled through the BDL would first have to be conducted in order to determine the losses incurred by each bank, and in order to assess the strengths and weaknesses of the balance sheets. Once this happens, banks with very high exposure to Eurobonds, NPLs and CDs would probably have those assets transferred to specially created SPVs that will be used for the restructuring of the same assets.

The good banks, which would contain the remaining “good” assets, will have to be bailed in and bailed out to be capitalized and make them solvent and trusted by the international banking system. In a bail-in approach, depositors would be offered the choice to exchange part of their deposits in favor of becoming shareholders of the bank. In a bail-out approach, the rescue of the bank will be operated by increasing its capital through external financial institutions, foreign banks, the capital market, or private equity funds. This will result in injections of fresh money to reconstitute the needed capital of the bank.

In the case of a bail-in, as was the case in Cyprus in 2013, depositors become shareholders in banks to the proportion of the value of their individual deposits to the full amounts of deposits that were deemed high risks. In the Lebanese case, this would make the depositors and creditors, whose deposits were transferred to an SPV, shareholders in the latter, a situation akin to the one of Bank Intra in 1966.

As a result, the surviving banks’ balance sheets will shrink heavily, but will be less exposed to high risks assets and will therefore be able to raise their equity later on without being heavily diluted because they will be financially sound. This is what happened in the early 1990s with the French Credit Lyonnais, where an SPV called Consortium de réalisation “CDR” was created to restructure the bad assets of the bank.

The SPV will have to engage in a restructuring process with the objective to reorganize its “bad” assets with the ultimate aim in Lebanon’s case to reimburse depositors. In this matter, the help of the International Finance Corporation (IFC), a division of the World Bank group, could be requested, as the IFC has a well-known expertise in the restructuring of bad loans.

According to Chikhani, it is estimated that after this process, “some Lebanese banks may cease to exist, others will be merged, and some will survive, and therefore the number of banks post-restructuring may be much lower and their new capital will reflect better the new GDP of the country that has decreased by circa 70% over the last two years.”

Governance reform in the new “good” banking sector

Should these reforms be implemented, and the good bank/bad bank scenario become a reality, “this would not be without serious governance reform in the banking sector and a reshuffling of the current supervision system of the banking and financial sectors in Lebanon,” according to Chikhani.

This scenario requires a full independence of the Banking Control Commission (BCC), as well as of the Special Investigation Commission (SIC) and of the Capital Market Authority (CMA) in Lebanon, as it is common practice in other trusted financial jurisdictions (for example, the Securities and Exchange Commission in the USA, Autorité des marchés financiers in France, Capital Markets Authority in Kuwait).

In addition, commercial banks will have to increase their number of independent board members and ensure that no accumulating of roles between chief executive officers and chairmen of the boards, all to ensure full independence and authority of the board with no conflict of interest ever with the executives.

In addition to that, a stronger internal control unit should be set up across all banks to ensure the application of processes and procedures in line with the “good governance standards.” This would ensure a reduction of potential conflict of interests, a proper monitoring of risks and a better auditing process. Also, Politically Exposed Persons (PEPs) would have their participation in the financial sector capped to avoid systemic and chronic conflicts of interest between the political and financial spheres.

Had these practices been put in place before, it is possible to say that a better monitoring of activities could have yielded more positive results with regards to banks’ single borrower exposure, but also to the maturity mismatch which has resulted in the liquidity crisis in the banking system with regards to assets, as well as a better highlight of risks by external auditors.

Overall, the road ahead is far from easy, and will require a political decision, with a government eager to implement reforms and a parliament ready to legislate on the necessary laws, as well as the BDL agreeing on the needed reforms to ensure independence of monitoring authorities. The solutions are available in order to restore financial soundness and salvage the banking sector, to make it functional again. Lebanon is not the first country to go through a banking crisis, and won’t be the last. But past experience has shown that the same solutions that have been put in place in other countries could be applied to Lebanon to save its economy, should there be a will to do so.

May 3, 2021 0 comments
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BusinessHospitality & Tourism

Check-up or check-in?

by Samer Elhajjar & Laurent Yacoub April 20, 2021
written by Samer Elhajjar & Laurent Yacoub

Before October 17, 2019, most 4- and 5-star hotels in Beirut reported annual average room occupancy rates of 75 to 80 percent before the first coronavirus case in Lebanon was reported on February 21, 2020. This occupancy rate had been the norm since 2009 and most hotels expected that in 2019, they would exceed that rate and set a record year. According to Ernst & Young Middle East hotel benchmark survey, the occupancy rate in Beirut’s 4- and 5-star hotels slipped to an all-time low of 16 percent by November 2020, down from the previous year’s recorded 69 percent during the same period. In details, we can attribute the low hotel occupancy rate to several reasons. Starting with the global COVID-19 pandemic that has affected the world, followed by the blast that hit Beirut port on August 4, 2020, ending with the worsening financial crisis and political deadlock in Lebanon. As a result, the number of arrivals to Beirut airport recorded a 72.22 percent drop by November 2020, compared to the same period in the previous year, which affected the hospitality sector negatively.

Almost all world economies are at a standstill because of the COVID-19 pandemic, and tourism in particular is one of the hardest-hit sectors. In 2019 alone, travel and tourism accounted for $2.9 trillion in direct contribution to the global domestic product (GDP), which is the highest contribution by sector. Unfortunately, the United Nations asserts that the spread of the virus has cost the global tourism sector $1.3 trillion in lost revenue in 2020. This predicament escalates to the potential jobs lost, which are estimated at 38 million, a figure that represents 70 percent of the industry workforce. A recent Roundtable Discussion organized by Executive Magazine in partnership with the United States Development (USAID) Lebanon Enterprise Development (LED) project shed light on the many issues that hotels and hospitality venues are facing.

Researchers have embarked on studies to ascertain the impact of the COVID-19 pandemic on the Lebanese hospitality industry. A prime study is one that two Lebanese University researchers commenced in June 2020. A survey questionnaire posted on social media platforms, including LinkedIn, Instagram, and Facebook, was used for data collection. 404 filled questionnaires were obtained, with 348 valid responses from both Lebanese citizens and foreigners residing in the country. Findings from the study indicate that people’s purchasing power had declined by about 40 percent compared to 2019. When this is the case, many are unwilling to spend their hard-earned money on the allegedly luxurious items in life, including hospitality bills. One could also cite the long-standing Lebanon economic crisis as a complementary factor. Also, 36 percent were unwilling to pay more than 40,000 Lebanese pounds ($26.47 at the official exchange rate) on related transportation, meals, and associated activities.

First line of defense

Hotels’ administrations never imagined that such a pandemic would occur and cause the industry to perform in such an unprofitable manner. Lebanese hotels often face national calamities that the managements are ready for and set mitigating measures to face, and such activities threaten their operations. Most remedial actions from Lebanese hotels are predicated on cutting operational costs and concentrating their business activities in the capital as the rest of the places are rift with political and geopolitical crises. According to our research, despite managers’ training on various crises strategically, the COVID-19 pandemic presented a different type of challenge that executive teams did not consider when planning.

The results of our research show that Lebanese hotels faced business drop and revenues losses; the pandemic’s effects crippled all operations including bookings, meal preps, occupancies, and conferences causing the industry to function in survival mode. Although the Ministry of Tourism is yet to issue a precise figure on the revenues lost, the International Labour Organization (ILO) asserts that approximately 25,000 of the total estimated 69,000 workers employed in the hospitality industry were dismissed from their jobs. This data correlates to the period between September 2019 and February 2020. Monthly occupancy rates at 4- and 5-star hotels in Beirut had decreased from 79 percent in March 2019 to 10 percent in March 2020, forcing many hotels to cut jobs and/or reduce wages amid the economic slowdown of the COVID-19 outbreak.  Hotels cancelled investments in renovations, and the focus was on pressing costs that facilitate the company’s survival. Since 2019, 150,000 workers in the tourism sector lost their jobs. Foreign staff members returned to their respective countries. Others were laid off as many hotels shut down their operations to minimize expenses as the pandemic caused revenues to drop to negatives. On a relatively positive note, the average room rate increased by 156 percent from November 2019 to November 2020, leading to a RevPAR growth rate of 132.6 percent during the same period.

As mentioned earlier, with the decline in revenues (including booking cancellations), hotels have had to be ruthless in reducing their operational costs. The most evident strategy is the downsizing of staff. On the other hand, many were compelled to take their annual vacation days while the remaining had to adhere to reduced and alternate days of arriving to work. Further, workers’ wages and working times were reduced while the administrations froze their bonuses and incentives.

Nonetheless, the country and other stakeholders, including corporations and the public, have facilitated lockdown measures, allowing for the reopening of various firms in multiple sectors. Today, it is typical of guests and employees entering these establishments to have their body temperature measured. Moreover, specialized hygiene and cleaning audits have been instituted. Suppliers are expected to adhere to the set protocols when delivering supplies. To this end, there have been impressive comebacks of the Lebanese hospitality sector where people have begun showing to these facilities frequently.

Opening for business?

The Lebanese context appears to be more complicated than possibly elsewhere. Firstly because the country faces the ramifications of geopolitical crises from its immediate neighbours such as the Syrian War and Arab Uprising. Therefore, it is likely we will experience optimal economic recovery when the current political challenges are over, as it is difficult for tourism to thrive in such circumstances. However, the second complication is that the failure of reforms has led to a state of internal maintenance, which, compared to international hyper-competitive countries, constitutes a considerable setback in the county’s development. It will take the government a reasonable period to sell itself as a great tourism destination, far from the current imagery state of a country marred by significant levels of political instability. These steps will be paramount in revitalizing the hospitality industry. More importantly, they will be more ruthless when coupled with the world’s complete healing from the current COVID-19 pandemic.

In the meantime, companies in this industry must continue upholding safety measures in their operations. The future remains optimistic, given that companies such as AstraZeneca have already manufactured a credible vaccine. Positive news offers much-needed hope to all stakeholders. Partially open hotels must ensure social distancing to curb the spread of the virus. Besides, they will witness a lower impact than individual and family-owned business units because travellers will prefer chain hotels to commit to sanitation and hygiene standards. Moreover, the government has chosen such organizations to quarantine international visitors. Lastly, let everyone anticipate a new ‘normal’ where masks could be mandatory, and employees expected to maintain stricter safety and hygiene procedures.

April 20, 2021 0 comments
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Economics & PolicyHealthcare

Year one AC (After Covid)

by Thomas Schellen April 16, 2021
written by Thomas Schellen

After a year of living face to face with SARS-CoV-2, it is high time to recognize the relationship existentially and give credit where credit is due. The coronavirus is confronting our species with questions and challenges that we never have consciously dealt with. For starters, humankind has not really inquired in the past if a virus had equal existential standing to us or might be superior to us in any way. We furthermore neglected to discuss if such an organism must be respected as a being with inherent inhuman qualities, dignity, rights and feelings. 

This quagmire about a virus’s dignity arises in tandem with the bigger existential questions about viral intelligence, cognition, and existential validity when comparing the individual coronavirus to the average human or the collective coronavirus population on planet earth – notably, of the coronavirus population we know neither the exact number nor the approximate strength – to that of humanity as a whole. 

This means we have to address the question if this virus might actually be superior to the human species not only by its short-term success but also in evolutionary validity and intelligence. Are we, who for the longest time have viewed ourselves as the smartest species, prepared to acknowledge that this humble virus has outwitted us? 


This evaluation of the smartest species by the way is not about who can cause more havoc on planet earth or do more to impact its ability to sustain life. Notwithstanding that humankind may be the most invasive species on the planet, the jury is still a long way from determining if we are, in terms of irreversible impacts, the most destructive types ever to walk, crawl, flutter, slither, bounce around or somehow move on earth. But if we are not existentially more successful than the virus, it is time to relinquish the claim of being the only civilization-building and smartphone constructing species, and step back from the illusion that we ever were number one because of our perceived genetic greatness.

For someone or something coming out of obscurity – it may never be solved whether this virus has its direct ancestral ties to those purported Asian bats or to carnivorous geneticists sitting in secret labs – SARS-CoV-2 has not only survived the ignominy of being named by human scientists according to the strange aesthetics that characterize intellectual human convention in this age but also thrived. 

There are some hard numbers that speak to the virus’s success – the obvious one being that SARS-CoV-2 in 2020 has infected a documented headcount of 100 million humans (of which 70 million infections have been completed under a total 97 percent plus recovery rate). In return, we are totally in the dark as to how many viruses we have infected. Further thinking in terms of satire – and shockingly for those humans who consider themselves the best of the best, meaning all local politicians, journalists, intellectuals, and other crowd pleasers – it has taken less than one year for the little critter to take over the global conversation. 

In this sense, the pandemic has delivered the final evidence of our existential insufficiency. Even the staunchest defender of reason as the winning attribute of the human being has to acknowledge it: we do not uniquely stand out as the top species in terms of collective intelligence or cognitive capacity. In the category of species intelligence, the galactic race for the 2021 Nobel prize (I use the anthropocentric term for lack of a better synonym of the cosmic maker’s reward for the most irritating creations) is already run, and the virus has won. 

The effectiveness of viral nudging

Moreover, we humans have to admit that the coronavirus has changed our lives in myriad ways, including in the war we waged against it. The virus, on the other hand, has apparently been thriving and mutating to its heart’s delight but at the same time has not killed so many of us that it is in danger of running out of victims. The message: not killing its host bodies to any larger percentages (as most of us wrongly expected) has become the first demonstration of how smart this virus really is.

Furthermore, from the two competing organisms’ social survival perspective, the 2020 count of global infections (never mind how accurate the tallying has been) obliges us also to recognize that the virus has changed human behavior incomparably more than the other way around. (It is even dubitable if human behavior played a causal role in the virus’s mutation process).

Virus-induced human behavior changes by contrast are unmistakable. On the level of everyday occupations and distractions, people have stopped indulging in almost everything previously considered part of a fun life: they are no longer traveling, socializing, going to sports games and movies, or shooting off fireworks as much as they did before 2020. Indeed, the very definition of what constitutes the key factor in the capitalist human existence – that we all live to work and deserve to feel miserable if we don’t have a job – has been put in question.

On a higher plane of social and emotional involvement, the viral nudge to human behavior change is even more existential. This is despite the fact that excess mortality related to the coronavirus has been assessed as noticeable only in an age group (septuagenarians and older) that accounted, less than half a century ago, for a much smaller part of humanity than today and despite the relative statistical insignificance of the total Covid-19 mortality in comparison to the global population from the perspective of humankind’s survival (the global population at end of 2020 was higher than a year earlier, and in the opinion of the United Nations (UN) there is no sign that the long trend of increase in the global population will flatten or reverse until very late in the 21st century). These statistical facts notwithstanding, the experience with the rise in Covid-19 fatalities has shed harsh light on the finality of death, and by illuminating death, also on the preciousness of life at any age as well as on eventual infirmity that precludes productive economic activity. 

Without taking away from the prospectively beneficial change impulses to contemporary human behavior that could arise from a lasting post-pandemic appreciation of human dignity, social appreciation of the aged, and awareness of life’s important aspects in the population strata that are psychologically co-shaped by the experience of the pandemic, it has on the other hand to be acknowledged that countless peoples’ lives have been thrown over the last nine or ten months into an illogical economic and social rhythm of lockdown and infection, whereby increased infections translate into politically determined economic lockdowns. Medical outcomes of lockdowns, which are being regularly declared as successes by the politico-medical cabals, are with the same regular irregularity followed by the counter tides of existential depression and economic misery that the same lockdown-enforcing politicians and medical experts fail to address adequately in social or economic terms. 

At the end of January, the International Monetary Fund’s (IMF) press briefing on the world economic outlook update at the beginning of 2021, for example, gave an estimate that projected global growth for 2021 at 5.5 percent, partly attributing this slightly improved prediction to fiscal measures in rich countries. However, at the same time the IMF predicted that in 150 of the world’s economies, per capita incomes in 2021 will be realized “that are below their 2019 levels” – with implications for the life experiences and opportunities of the affected millions that are very far from being adequately assessed. 

Noting that “there is a great deal of uncertainty” about the fund’s world economic forecasts, IMF chief economist Gita Gopinath as late as January 2021 could only confirm “that the crisis in 2020 still remains the worst peacetime global contraction since the Great Depression” along with a projected cumulative loss in global output of USD 22 trillion over the 2020 to 2025 period.

Other IMF observations at the end of January added for good measure that the level of average public debt worldwide, fueled by USD 14 trillion in global fiscal support by end of 2020, approached 98 percent of GDP by end of last year, a 14 percentage point expansion over what had been predicted for the same point in time before the pandemic entered the picture. Again, the impact of the new and old debt mountains on the social reality of the next several generations appears to be shrouded in foggy but predictably life-altering uncertainties.  

What all this means in terms of economic outlooks on macro and micro levels – is simply that the people of the world can be no surer than their academic luminaries and economic augurs about how their lives will have to change individually or collectively from the lasting economic disruptions in the post-pandemic world on company, social group, sub-national, national, regional corporate, or wider levels.

One thing that is clear from the human economy perspective is that global risk perceptions have been fundamentally altered in the course of the past 12 months and are still being reshaped. Thus, the outlook of the 2021 risk report by the World Economic Forum (WEF) reflects the changed perceptions of economic leaders and policy decision makers by describing the report’s thrust as the convergence of societal fractures, from rising unemployment and youth disillusionment to pandemic risks and geopolitical fragmentation, with climate and environmental risk factors as existential threats to humanity. 

In short, the WEF latest risk report’s implication of the 2020 geo-economic experiences with a contagion of pandemics and recessions is that, while long-term external and environmental risks are overlapping with short-term societal fractures, societal cohesion is more important than ever for future risk trajectories. 

This increasingly clear big picture is not satisfactorily integrated with the short-term perspectives that the governments of G7 countries or multilateral agencies are able to present at this juncture of pandemic-related economic uncertainty in early 2021. Unfortunately, the evidence that harsh lockdown measures are more beneficial for reducing mortality rates, or more precisely either excess mortality among populations at large or excess mortality in economically active population groups, is so far absent. As example, a story by the editor of the Mises Wire (Mises Institute), focusing on the efficacy of lockdowns with focus on the Western hemisphere, noted last month that “the overall trend of infection and death appears to be remarkably similar across many jurisdictions regardless of what non-pharmaceutical interventions (NPIs) [such as lockdowns] are implemented by policy makers.” 

Recent think tank studies, such as one published in by the Sydney-based Covey Institute which ranked countries in terms of their effective ability to limit impacts of the coronavirus or Covid-19, are suggesting that the responses of the past year have had greater or lesser effectiveness in terms of reducing mortality and case numbers, but also indicate that despite great variations in pandemic responses, there is no uniform distance between countries. Different factors such as political organization or economic development level do in no way translate into foolproof methods of success in dealing with the coronavirus. 

Additionally, current narratives such as the study by Covey do not actually reveal either the causal connection or even the correlation between harsh measures and long-term positive health outcomes. This uncertainty is blatant even without pointing out that those new surveys and behavioral studies are still failing in assessing quality-of-life repercussions or predicting medium-and long-term negative outcomes of lockdowns and economic weakening in most countries as far as mental health, longevity, poverty alleviation, social justice, and creation of job opportunities are concerned.  

Rhetoric, from the global to the local level since March of last year, has been talking haplessly about the need for an economically functional society to be built on human health but, repetitions and slogans notwithstanding, this politically tainted global rhetoric is insufficient to politically or scientifically explain either the lockdown logic or the real medical and socioeconomic implications of varying lockdown implementations. The IMF, the UN and World Health Organization, and hosts of institutions and governments have been vacillating between pro-lockdown speeches on the importance of human health and warnings about the economic repercussions of those lockdowns and disruptions of global trade. All they have proven is the existence of uncertainty and entrenched glaring contradictions with regard to health and economy. 

However, what seems truly unfortunate is how this rhetoric mutates while on its path down from top-tier multilateral institutions and developed countries and becomes tainted with increasing populism, ideological trash, and expressions of autocratic state behaviors. In the context of Lebanon’s patriarchal attitude of administrative powers, the ignoring of measured arguments and honest expert discussions along with long-standing deficiency in honestly conducting democratic public debates has recently reached extremely painful and disrespectful peaks of poor governmental communication.

Summing up the state of global pandemic affairs by the first month of 2021, medical science does not supply enough hard data and rationales for either hard or soft approaches in fighting the pandemic holistically and behaviorally; nor do either economic studies or medical research provide a full image of the human costs and benefits of lockdowns in their medical and social contexts versus their macro-social and economic risks and repercussions. All that remains to be repeated is that economies around the world have entered cycles of pandemic stop-and-go, with incalculable impacts of those cycles on human lives, physical well-being, happiness, and mental health. 

But in turn, we don’t even know up to this day if all our lockdowns and quarantines have caused a single specimen of SARS-CoV-2 to stop interacting with singing, speaking, and breathing humans. From what we can deduct by having been the global laboratory specimen in experimental political and medical coronavirus responses by a handful of self-appointed virus czars and their economic serfs, all that has been achieved through one year of epic competition between the virus and mankind is that, from the virus’s perspective, there seems to be a practically inexhaustible supply of future hosts (approximately 80 times more humans could have been infected than are documented to have been exposed to it in the first year of market presence). But what is even more impressive: the viral reality of being talked about universally, of being a bug that controls human behavior politically, economically, and socially without having even a political platform, or a PR consultant.  

Learning more from the virus

We can learn from the virus a great number of lessons. First among them is perhaps that human wisdom is no less elusive and fears are today no less irrational and no more existentially resilient today than they were four or five centuries ago. Our fears rule us much more than we cozily embedded intellectuals have noticed in the past 60 to 70 years that had been characterized by receding hunger and increased life expectancy. 

The second lesson is medical: For humans, the competition with the virus will in the long and medium term be medically rewarding, with the urgent adversity of the virus boosting medical innovation far beyond what would have been possible even a year ago. Winning the Nobel prize of medicine (at some point) will be a shoo-in for the immunologists that create vaccines against the coronavirus. In the longer run, the new research into vaccines will be beneficial because it will faster open the vaccination doors against many types of cancers and infectious diseases. 

The third and highly challenging lesson of dealing with the pandemic is economic. From the perspective of having attempted to build an economic science since well over a century of studies, observations, models, and theories, we have to concede that in economic life, there is still more between heaven and earth than our b-school wisdom lets us realize… 

Our constructs and models – dubbed mistakenly as economic science – are only as good as the variables they incorporate. With much of the story of economic responses to the coronavirus appearing destined for the textbooks highlighting human foolishness, a long period of better research and understanding should pass before anyone should be deservedly awarded a pandemic-impact-related Nobel Memorial Prize in Economic Sciences. But over this time, fundamental rethinks of economic safety and well-being – rethinks perhaps best historically comparable to the way in which the shock of the Great Depression reshaped its host country of the United States and how improvement of the developed world’s economic reality had been attempted through the Bretton Woods system – are going to be inevitable. 

A large fourth set of virus lessons relates to human systems or societal organization and to valid principles of leadership or the lack thereof. The point zero of these SARS-CoV-2 aided realizations is that the ability to dominate the global conversation in this age of social media communications is no indicator of brains or value. Point one, if a political figure wants to guide their polity through an unprecedented crisis, whether war, famine, monetary dissolution, or other destruction of certainty, this political figure needs to have a strong basic trust in people. Point two, sudden crises will not be soluble by the old recipes and previous certainties or propaganda spiels. Point three, the systemic ability to deal with a crisis cannot be predicted on the basis of ideology and governance theorems. Point four, any crisis to be met in a democratic context requires tireless extra effort at achieving solutions by truly democratic and respectful opinion and decision making processes, however uncomfortable the democratic disagreements that they may involve. No democracy, however old and well instituted, will be sustainable if it fails to embrace the common good from diverse perspectives. Point five, any politician or leader in a crisis such as this pandemic – irrespective of coming from democratic, oligarchic, autocratic, or dynastic background – needs more than a ruling position. They should better be equipped with past achievements that build a bond of common determination between the polity and the leader. 

April 16, 2021 0 comments
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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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