Economics & Policy

The Survival Industry

by James Reddick
written by James Reddick

It is five years to the month since the 2006 war with Israel ended. The aftermath saw more than 1,100 Lebanese dead, infrastructure in disrepair and entire villages and urban neighborhoods flattened. Since, economists and the media have marveled at the miraculous resurgence of the economy, driven primarily by the reconstruction boom and an influx of foreign cash. But while the economy recovered (for a time at least), the owners of industrial enterprises bombed during the war were for the most part left with their livelihoods in doubt, massive debt and little to no assistance from the central government to get their businesses back on track. In this Special Report, Executive examines the story of Lebanese industrialists and their struggle since 2006 to build back the businesses that support both them and their communities. 

A devastating toll

The scope of the destruction was devastating; in all, 192manufacturing facilities were damaged, with 114 experiencing what the Association of Lebanese Industrialists (ALI) classified as “total damage”. Owners estimated in November 2006 the value of damage to industrial production at $245 million, a number excluding any loss of stock, contract losses and work stoppages. The size of the firms hit ran the gamut, from the Bekaa’s dairy heavyweight Liban Lait, to the more modest Tricot Starlet clothing factory in Beirut’s southern suburbs. Along with these two firms, whose factories were completely leveled, Executive spoke with affected industrialists from around the country, and while a good portion received aid of some kind, all expressed disillusionment with the often misleading response of the government, whose initial pledges never materialized. Many were back in business and upbeat about their commercial prospects, but others, five years later, were emotional about their hardships and the uphill struggle still before them.

The immediate aftermath

Immediately following the end of the 2006 war, the Ministry of Industry and ALI began to collect information on the scope of the damage to factory owners. At the time, hopes were high that direct assistance would flow into the sector.

In late August, the Stockholm Conference brought together donors from around the world, resulting in approximately $900 million in pledges to assist the country, and then at the beginning of 2007, the Paris III conference followed with more than $7 billion in additional contributions. Much of this went towards rebuilding basic infrastructure and damaged hospitals, schools and residential areas. Within this package, two soft loans, one from the Arab Fund for Economic and Social Development (AFESD) and the other from the European Investment Bank (EIB), were pledged to directly assist enterprises damaged in the war, totaling $86 million and $140 million, respectively, but these required ratification by parliament.

According to an unnamed representative of the Council for Development and Reconstruction (CDR) responding to questions by fax: “After three years of signature and due to political constraints, the parliament did not ratify those loans. By the end of 2010, the EIB decided to cancel this facility, the AFESD loan [is] still at the parliament awaiting ratification. Therefore the damaged industrial plants did not get the chance to benefit from these credits.”

In a phone interview, another CDR representative who also requested anonymity said, “at the time when SMEs [small-to-medium enterprises] were in need of this assistance, parliament wasn’t functioning and no decisions were being made.”

One chunk of funding did make it out of the Stockholm Conference and was applied as originally intended — a $4.5 million grant for the United Nations Industrial Development Organization (UNIDO), in partnership with the Ministry of Industry. According to UNIDO National Project Coordinator Nada Barakat, 85 damaged industries have received assistance. But the modest budget is reflective of the endemic lack of support for industry in Lebanon. Out of a total of $45 million from European donors funneled into the United Nations Development Program-managed Lebanon Recovery Fund, just 10 percent was allocated for industrial recovery. Because of this, only small to medium-sized factories with modest needs were targeted, as each allocation had a total limit of approximately $50,000. Nonetheless, UNIDO’s contributions have been critical for the recovery of many business owners.

One such owner, Jihad Sadaka, whose pastry and sweets factory was damaged in the war when the buildings on each side of his shop in Beirut’s southern suburbs were leveled, received a UNIDO equipment donation of a generator and water sanitation system. Sadaka also took part in the organization’s “capacity building” exercises, thereby improving his workplace standards and food safety. With the framed ISO (International Organization for Standardization) certification prominently displayed on his new desk, Sadaka said, “if someone wants to come into the factory now, I’m really proud to show them. Believe me, this was the best thing of my life.”

But most of the stories from recovering industrialists have not been so bright. For companies with losses too substantial for UNIDO assistance, their only potential recourse has been through loan assistance from Banque du Liban (BDL), Lebanon’s central bank. In the midst of political paralysis, the BDL issued two circulars, in May and September of 2007,establishing mechanisms to channel loan assistance through local private banks. According to Mazen Halawi, head of division in BDL’s financing unit, to qualify “clients were required to be unable to continue work without a loan and unable to service their debts from before July 31, 2006.” Both the client’s bank and the BDL would audit the level of damage. Once a value was agreed on the BDL would effectively cover 60 percent (funneled through private banks) via a loan that was forgiven once conditions were met; company owners would have to provide at least 20 percent through their private equity and the BDL also stipulated conditions for a soft loan arrangement to meet the remaining 20percent.

However, in extensive interviews with industrialists, the loan scheme was repeatedly described as unfavorable. Ali Ismael, co-owner of Tricot Starlet, and Sadaka each said it would have required them to mortgage their homes. Furthermore, according to Recovery Lebanon’s August 2008 “Progress and Challenges” report: “The impact of this compensation mechanism has been insignificant. Banks have not shown any interest in supporting enterprises… mainly because of the pay-back period of the granted money.” The central bank could not provide details as to the number of recipients, but Abbas Safieddine of plastics company PlastiMed (who did acquire a loan) speculated that it was “only four or five large companies”.

Political payments

Then there was reconstruction funding from Hezbollah, for which the party is well known. While their donations appear to have been fairly widespread throughout their geographic heartlands, the sums hardly softened the blows to industrialists. Sadaka received a $15,000 sum and Tricot Starlet’s Ismael $100,000 — nothing to scoff at but not nearly enough to rebuild a business.

“My understanding is that they directly assisted in rebuilding or at least compensating for small merchants and supermarkets who were ‘their people’. The losses for the [biggest] companies were too big for them to compensate,” Safieddine said. “At the end it’s politics. Most of the big industries that got hit were in no way affiliated or even close politically to Hezbollah. So there was no push from this side, no push from that side; we are in limbo.”

Despite operating in an economic climate that, in the best of times, is riddled with infrastructural deficiencies and a lack of protection from imports, and in the worst of times threatens to leave family businesses in piles of rubble with little hope of help from the government, industrialists have proved resilient in their efforts to rebuild. When asked if they were concerned about the possibility of a future war, the standard response was to leave it in God’s hands. But some of the responsibility lies with the government, not with The Maker. Despite the best efforts of organizations like UNIDO, what little funding was procured for the industrial sector was squandered by political squabbling in the post-2006 years.

Oussama Halbawi, president of the Association of Industrialists for the Southern Suburbs and the owner of a mattress, fabric and textiles factory that was completely destroyed, expressed his indignation. “In case of war, it’s the government’s responsibility to help out the victims. I was paying taxes so I expect something in return.”

For a micro-economic assessment of the impact of the 2006 war on Lebanese manufacturing, Executive presents the case studies of four factories that were completely destroyed, and documents the unique challenges faced by each as they rebuilt their business from out of the rubble.

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Jordan’s assault on journalism

by Christoph Wilcke
written by Christoph Wilcke

Character assassination is a hot topic in Jordan these days as thousands of demonstrators, riding the winds of the ‘Arab Spring’, call for reform and accuse government officials and business leaders of abuse of power and corruption. Asking judges to put critical journalists behind bars is also popular among a ruling class that feels threatened by the sudden surge in revelations pouring out on the street and from the media.

The government of Prime Minister Marouf al-Bikhit is doing its bit to stifle free speech in the name of fighting corruption. A draft amendment to a law setting up an anti-corruption agency would punish people who spread “unjustified” rumors about corruption that “lead to insulting the reputation or infringing upon the dignity” of another person, with at least six months in prison. Taher Odwan, the government spokesperson, resigned over the proposed amendment on June 21.

Rather than add new provisions criminalizing defamation, Jordan should cancel those already in its penal code that send peaceful critics to jail for “insulting” the king or government institutions. In May, Secretary General of the Political Development Ministry Malek Twal promised that a new media strategy would reform those provisions. The government adopted the strategy in June, but it strangely remains unpublished. Instead, Bikhit said he would refer alleged character assassins to the courts.

Bikhit made good on his promise in late May by yanking a criminal defamation case against a journalist, Alaa al-Fazza, from a civilian court and referring it to the military-dominated State Security Court (SSC). The SSC prosecutor promptly detained Fazza for “working to change the constitution by unlawful means,” an offense punishable by death, based on an article he published about a Facebook group that supports the reinstatement of former Crown Prince Hamza, King Abdullah’s half-brother, whom Abdullah replaced with his own son Hussein. Allegedly among its members were 10 members of parliament and two former ministers, including Nabil al-Sharif, the former information minister who had brought the complaint against Fazza. Unlike Fazza, Sharif was not detained or investigated for suspected unconstitutional activities. Fazza is out on bail, but the case continues.

Fazza also incurred the wrath of police chief Huseinal-Majali over an article that blamed him and the interior minister for allowing Khalid Shahin, a business tycoon convicted on corruption charges, to leave prison and the country for medical treatment abroad, never to return. The scandal cost the health and justice ministers their positions, and Majali filed a criminal complaint against Fazza for “spreading false rumors”. Fazza was spared in a general amnesty, but Majali in July filed a civil suit seeking10,000 dinars [$14,100] in damages for harming the police department’s reputation.

Yahya Sa’ud, a member of parliament with roots in the town of Tafileh, was so upset over a June 13 Agence France-Presse (AFP) report that Tafileh residents attacked the king’s convoy on a visit there that he led protests seeking to have AFP Amman bureau chief, Randa Habib, referred to the SSC; two days later, a mob ransacked the AFP offices, and witnesses put Sa’ud at the scene. A police car stationed nearby to protect Al Jazeera’s offices did not intervene.

Al Jazeera correspondents have also been the victims of physical and verbal attacks. Two correspondents’ cars were smashed in March, and a policeman assaulted the bureau chief, Yasir Abu Hilala, while he was covering a demonstration in Amman on July 15. An internal police report on the incident, in which police beat 10 journalists and some protesters, stated that policemen “did not differentiate between protester and journalist” in their beatings “because of the angry commotion that took hold” of them following previous protests on March 25 in Amman and April 15 in Zarqa’, in which numerous policemen were injured.

The police report recommended referring the heavyhanded policemen to court, but Jordan has a dismal record in holding officials to account for violence. When police stood by while a pro-government gang attacked demonstrators in February, there was no investigation, a police spokesperson told Human Rights Watch. And police who failed to stop similar attacks on March 25 and then attacked protesters themselves also faced no charges. Sa’ud faces no charges and is free to launch new attacks on AFP.

Jordan is attacking free speech, both by pursuing journalists under draconian laws and by failing to hold police accountable when they stand by doing nothing — or even join in — when journalists are attacked.

CHRISTOPH WILCKE is a senior Middle East researcher for Human Rights Watch

 

 

 

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Paying for the revolution

by Paul Cochrane
written by Paul Cochrane

“Freedom ain’t free” is a commonly used idiom in the United States. Somewhat jingoistic and trite it may be — certainly when used to justify a militaristic US foreign policy — there is still much truth to the expression.

The uprisings in the Arab world this year have certainly not come gratis. Many have paid the ultimate price — death — and the economic losses have been staggering. In post-revolutionary countries, economics has become a major focal point and it was arguably lop-sided economic development as much as political repression that sparked the uprisings in the first place, from Tunisia to Egypt and Bahrain, to Yemen and Syria.  One of the economic factors that contributed to the uprisings and is a cause of much inequality throughout the developing world is capital flight, and while governments may have, to varying degrees, limited ability to stop legitimate investors from pulling up stakes,an area of enforcement where regional authorities have been lax is in stymieing the illicit flow of capital out of their countries. Between 2000 and 2008, according to Global Financial Integrity (GFI) research published this year, illegal capital outflows from the Middle East and North Africa (MENA) grew 24.3 percent, far ahead of any other region on earth.

Illicit capital flight refers to funds derived from corruption, money laundering, commercial tax avoidance and trade mispricing, where deals are made for transactions to end up in offshore havens to avoid being taxed. As a result, cash that could have stayed in the country of origin ends up elsewhere, leaving less capital to finance development.  From 1970 to 2008, some $70.5 billion flowed out of Egypt, $25 billion out of Morocco and $25.7 billion out of Algeria. In Egypt, GFI estimates an average of $2.54 billion flowed out of the country each year through illicit trade mis-pricing alone. Tack on corruption and crime, and the figure is a whopping $6.36 billion a year that was not available to the Egyptian financial system and economy. Notably, as Egypt’s gross domestic product spiked and the economy grew in the late 2000s, illicit outflows increased by leaps and bounds, meaning real economic growth was essentially two steps forward, one step back. In 2006, illicit outflows reached $13 billion, $13.6 billion in 2007, and as the global financial crisis hit in 2008, $7.4 billion. Ousted President Hosni Mubarak and his family siphoned off billions from the Egyptian economy, but Egyptian financial elites also helped to hobble the country’s development through illicit outflows. 

Addressing illicit capital flight is a concern for which revolutionaries should fight if the people are to improve their economic future. The problem right now, however, is that with the instability in the MENA, legitimate investors are also pulling their capital out of the region at worrying rates. Jordanian Finance Minister Mohammad Abu Hammour recently said at a meeting of the Union of Arab Bankers that capital flight in the Arab world is estimated at some $500 million a week. Unless such outflows are curbed, the capital needed to invest in post-revolutionary countries will be wanting.

Desperate for cash, these countries will either have to be beholden to donors, or to the conditionalities imposed by global financial institutions such as the World Bank and International Monetary Fund to stay afloat. In Egypt, with the government’s hard currency reserves reportedly plunging from $36 billion in February to $25 billion in May, some analysts warned that the country could be as bankrupt as Greece by the end of the year.

How to tackle this is tricky. Capital is transferred at the click of a button. Some $1 trillion in illicit inflows enters the Western financial system every year — with an estimated 20 percent to the US — and billions go to offshore havens. Tough withdrawal measures by post-revolution countries may help, but this is both heavy-handed and against the principles offree trade. With an estimated 65 percent of illicit outflows in the form of commercial tax avoidance, ensuring greater transparency by companies and elites in paying tax is a more feasible solution.

In tallying the expense of what it has taken for the MENA region to reach this turning point in history, what must not be overlooked is that those who have a responsibility to help cover the costs should be made to do just that.  After all, democracy must be paid for.

PAUL COCHRANE is the Middle East correspondent for International News Services

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Tempest broils across the Gulf

by Gareth Smith
written by Gareth Smith

Saudi Arabia overtook Israel as Washington’s largest purchaser of arms in 2009 and their demand shows little sign of abating. Riyadh-Tehran relations are at their worst since the Saudis were funding Saddam Hussein’s legions to mow down Iranian infantry in the 1980s.

The more recent escalation in tensions can be traced back to the election of Mahmoud Ahmadinejad in 2005, which tilted Tehran away from the pragmatic foreign policy of presidents Akbar Hashemi Rafsanjani and Mohammad Khatami. President Ahmadinejad’s notion of an assertive Iran, and his trenchant criticism of Israel and the United States, struck an unsettling chord around much of the Islamic world and his invocations of the 12th Imam projected an evangelical Shia’ism which the Saudis detested.

But even if Iran’s supreme leader, Ayatollah Ali Khamenei, continues in his efforts to restrict the president it is unlikely there will be any kind of rapprochement with Riyadh any time soon. The leader’s disquiet with Ahmadinejad derives more from his management of government and choice of advisors than from his role in foreign policy.

Saudi-Iranian tensions were further strained by the 2003 US-led invasion of Iraq, which replaced a Sunni-led regime with one whose leaders are Shia and allies of Tehran. Iraq’s drift into communal strife further enflamed Saudi’s sectarian sensibilities.

For years, pragmatic heads prevailed. Following the 2005 assassination of Rafik Hariri and even Hezbollah’s military assertion of power over Beirut in 2008, mediation efforts led by Qatar and Turkey were met with a shared sense in Riyadh and Tehran that escalating violence in Lebanon was in neither’s interests.

But a stalemate in international talks over Iran’s nuclear program fueled Saudi belligerence. By April 2008, according to US diplomatic cables released by Wikileaks, the Saudi ambassador in Washington relayed a plea from King Abdullah that America “cut off the head of the snake”, and last summer The Times newspaper in London reported the Saudis had practiced standing down their air defenses in a test-run for giving Israeli war planes a clear path to Iran’s nuclear facilities. And then came the Arab Spring, whose fires of revolt reached Bahrain, prompting Saudi intervention in February to defend a Sunni monarchy from a Shia majority.

In Syria at least the Saudis see favorable currents in the maelstrom of reform. Change in Damascus could upset relations with Tehran, severing its main logistical link to Hezbollah. Suddenly, there is the prospect of a Sunni-led Syria to counterbalance the Shia dominion in Baghdad.

Prince Turki al-Faisal, the former Saudi intelligence chief and ambassador, revealed in June a clear, if deniable, outline of the ruling family’s thinking when he said Iran was “very vulnerable in the oil sector”, while “more could be done to squeeze the current government”, as a reduction in oil revenues would cripple Tehran’s finances. He  also spoke of Saudi Arabia developing nuclear weapons should Iran do so.

To Saudi chagrin, Iraq has sided with Iran at the Organization of Petroleum Exporting Countries, resisting Riyadh’s efforts to agree to higher quotas to lower prices. Riyadh has also reportedly discussed with Washington increasing its crude supplies to China as a way to lure Beijing into reducing its investment in Iran’s energy sector. It is a high risk strategy and may enflame the situation with no tangible benefit.

Despite increased sanctions the International Monetary Fund reported economic growth in Iran at 3.5 percent in 2009/10 (up from an earlier estimate of 0.1 percent). Further, according to the British Petroleum “Statistical Review of World Energy”, Iran increased production of oil and natural gas in 2010 by 0.9 percent and 5.6 percent, respectively, despite sanctions targeting investment in Iranian energy.

Iran remains resilient and has seen some improvements in its relations with Pakistan and Afghanistan, where US influence is waning. In June Iran’s military commanders declared themselves pleased with the tests of new, medium-range missiles — and the growing Saudi weapons arsenal will no doub tincite Tehran to further reenforce its armament program.

Gareth Smyth has reported from around the Middle East for almost two decades and was formerly the Financial Times correspondent in Tehran

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Israel’s eroding democracy

by Peter Speetjens
written by Peter Speetjens

One of the inherent ironies of a proper democracy is that a parliamentary majority can vote to temper or even topple the tenets upon which a country’s democratic qualities are founded. In that sense, no one can disagree that Israel is a true democracy.

On July 11, the Knesset passed a Boycott Law, which penalizes any Israeli citizen who dares call for or endorse an economic, cultural or academic boycott of the country as a whole or “areas under its control.” Approved by a 47-to-38 vote, the law allows companies and institutions targeted by such a call or endorsement to seek damages. It furthermore stipulates that an individual or company calling for a boycott will no longer be eligible to bid in government tenders. It remains to be seen if the law will stand when applied in court, as it has been protested as a violation of Israel’s constitutional right of free speech. It seems the law will face such a legal test sooner rather than later, as Aryeh Eldad of the National Union party has already filed a complaint against Dror Morag and other members of the left-leaning Meretz party, after they called for the labeling of products made in Israeli settlements.

The law has come under intense scrutiny in Israel and abroad, including in the United States. The New York Times slammed the law as “not befitting a democracy.” Even the Anti-Defamation League, one of the pillars of the Israeli Lobby, which has always proudly opposed any calls for a boycott of Israel, defined the law as “an unnecessary impingement of Israelis’ basic democratic right to freedom of speech.”

Ironically, the US itself in 1977 passed legislation in response to the Arab Boycott of Israel, which prohibits American taxpayers from taking action in support of an unsanctioned foreign boycott against a friendly state. When in recent years a potential boycott of Israel was discussed at American university campuses, pro-Israel elements keenly reminded people of the existence of the little known “Office of Anti-boycott Compliance” within the Department of Commerce.

Meanwhile, Israel’s ruling coalition of right-wing nationalist and religious parties happily ignored the wave of criticism and perceived the passing of the law as a green light to revive an older and equally controversial initiative: The launch of a parliamentary inquiry into the foreign funding of Israeli human rights organizations. Pushed by Foreign Minister Avigdor Lieberman and Likud Member of Parliament (MP) Danny Danon, it aims to tackle Israeli organizations that, according to them, work against the interests of the country.

Initiatives such as these illustrate not only Israel’s increasing schism with its own democratic principles, but also a shift away from the prospect of a negotiated peace with the Palestinians and Arab states. On the right there is the growing number of Jewish fundamentalists who, with a metaphorical Torah in one hand and an Uzi in the other, claim that the West Bank is an integral part of Israel, as God once upon a very long time ago gave Judea and Samaria to the Jews. On the left there are the secular, liberal segments of Israeli society, willing to comply with international law and cede the occupied territories in exchange for a peace deal, but they have largely been cowed into obscurity over the last decade or so as the right and far right have seized the initiative, dominated Israeli politics and set the social agenda, and this momentum shows no signs of slowing.

In an interview with Robert Fisk, the late Yeshayahu Leibowitz (1903-1994), one of Israel’s greatest 20th century thinkers, sketched a doom scenario for the country if the occupation of the West Bank were allowed to continue. “Two consequences are unavoidable,” he said. “Internally, the state of Israel will become a full-fledged fascist state with concentration camps not only for Arabs but even for Jews like me. Externally, we will have a war till the finish against the Arabs, with the sympathy of the entire world on the Arab side. This catastrophe can be avoided only by partition.”  At that time, his words were hardly taken seriously. Yet today, seeing the actions of the religious right and extremist hotheads such as Lieberman, one must wonder if we are not peering over the precipice of a very slippery slope.

PETER SPEETJENS is a Beirut-based journalist

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Finance

Funding the summer’s frivolities

by Vanessa Khalil
written by Vanessa Khalil

Eager to turn the page on money laundering scandals and rumors that hounded the industry at the beginning of 2011, Lebanese banks have gone on a summer retail advertising binge. From the refurbished and repackaged classic loans to the downright quirky new ones, Lebanon’s summer banking products are certainly putting on display the country’s on-credit conspicuous consumption.

Loan innovation

In 2004, Byblos Bank made the first move away from classic retail loans [housing, car and personal loans] when it introduced both wedding and travel loans. “The big wedding trend took off in 2000, and people started spending more on event planners, large venues, caterers and such. They were in need of huge budgets,” says Georgina Eid Dinar, head of group consumer loans at Byblos Bank. The bank’s $15,000 wedding loan ceiling far from covers lavish ceremonies, but Dinar says accompanying benefits, such as zero percent file and insurance fees outside the monthly installments, a three-month grace period and a slightly discounted interest rate — around 1 percent less than the regular personal loan — add value to an otherwise common personal loan.

Ronald Zirka, head of marketing and retail divisions at Banque Libano-Francaise (BLF), says the bank’s wedding package is the newest addition to an extensive retail product line, part of BLF’s somewhat recent strategy to divest from corporate banking and go into more consumer lending. “In 2009, we decided we wanted to dig into retail because we wanted to diversify the risk. We wanted equilibrium between corporate, small-to-medium enterprises and consumer loans,” he says. BLF’s wedding package offers a preferential interest rate of 9.99 percent on the wedding loan, compared to 13 percent for the usual personal loan, with the installments spread over a range of 18 to 24 months. Zirka says the package offers instant cash collateral to the bank. “We usually advise the customer to place the wedding list against the loan. That way no money will be spent nor lost. And if they do that they can go up to five years [for the reimbursement period], because we will have secured our guarantee.”

For Dinar, plush honeymoons that followed big weddings called for having a travel loan on the side. “At the time [2004], trip organizers and travel agencies started arranging for cruises and small trips. We went through the travel agencies and came up with packages for the [travel loan],” she says. There are currently seven banks that offer a travel loan in Lebanon, most of which allow for some sort of grace period and generally restrict the repayment time frame to a year. The rationale behind these terms and conditions, according to BLF’s Zirka, is that customers who take out a travel loan will usually want to settle it over a period of nine to twelvemonths, but need some breathing time first.

“It will be two to three weeks of vacation, and when they come back they will have spent a considerable sum of money. All in all, that is around a month and a half of no productivity. So we gave them a two-month grace period,” he says. Interest rates on these loans, however, are either generally the same as those on classic personal loans or cleverly embedded in extra charges. “The travel loan is at a zero percent interest rate and it is a true zero percent,” says Byblos’ Dinar, adding that customers are only charged a file fee, which adds up to 5 percent of the total loan amount.

With the exception of a one-year repayment period, Bank of Beirut’s “Safar” [travel] loan is no different from the bank’s personal loan, ranging between $500 and $15,000, and offering around a 7 percent interest rate on the total amount. 

Outside impetus

Mira Raham, head of sales and marketing units at Credit Bank, says the push for travel loans was initiated some 15 years ago by travel agencies and cruise organizers to facilitate deals with their own customers. “The travel agency cannot install to the customer because after all, it’s not a bank,” she says.

BLF’s Zirka agrees that targeted retail products have helped bring suppliers and banks closer together to service both sides’ clients, which particularly benefited home appliance and electronics retailers. It was back in1999 that Bank Audi launched the first ever personal computer (PC) loan in Lebanon. Soon after, others followed. “We implemented our consumer/PC loans about three years ago. We have the lion’s share in this market,” says George Aouad, head of the retail banking division at Bank of Beirut. While the bank’s consumer/PC loan doesn’t diverge a great deal from their personal loan in settlement terms, Aouad says the interest rate on such a loan can fluctuate depending on the risk associated with certain appliance and high-tech retailers and distributors. “When I have the personal guarantee of the retailer the rate could be lower. That’s why we apply sometimes between 5.5 and 6 percent[interest rate]. But it’s usually 7 percent,” he says.

Credit Bank’s Raham says that it is the bank’s own clients that have paved the way for loans such as those for furniture and home appliances. “Many of our clients own galleries, furniture and home appliance stores. So we capitalize on that and try to cross-sell the banks’ products with those of our client-suppliers,” she says. BLF is slated to add an appliance loan to its current retail portfolio, but had previously introduced an iPad loan for a limited time in the summer of 2010, and plans to repeat this for theiPad2 soon. “We went into the iPad loan because it was a partnership with L’Orient Le Jour. The customer got a two-year print and iPad application subscription to L’Orient Le Jour along with the tablet itself,” says Zirka.

Home sweet home

But while travel, wedding and appliance loans could well be considered marketing ploys and gadgetized versions of the personal loan, it is summer housing loans, particularly those that target Lebanese expatriates, that largely prop up the season’s lending activity. “Housing loans are most demanded in summer because the expats come to Lebanon during that time, apply [for loans] and do their paperwork,” says Dinar, adding that Byblos Bank’s expat housing loan offers vary from the regular housing loan in services and conditions rather than in payment terms. “There is no difference in amounts, or down payments. The focus is the service [of availability] because some banks do not lend to non-residents,” she says.

But Zirka says that expatriates bring in higher incomes as well as more risk, both of which should be taken into account when lending to this particular segment. BLF’s expat housing loan requires a minimum 25 percent down payment of the house’s total value, compared to 15 percent asked of residents. “Expats make and spend much more money [than residents], especially during summer time. Every time they come to Lebanon they spend most of the money they put aside,” he says. “That’s why we finance a little bit less in terms of percentage out of the loan amount requested. The down payment is a bit greater than the one requested of residents,” says Aouad. 

What’s in a name?

When asked about the need for banking products that can be easily replaced by the classic personal loan, Byblos’ Dinar says it is the way these targeted loans are packaged as on-the-shelf products that attracts a bigger customer base. “At the end, whether the interest is 12 or 7 percent, customers are only interested in how much they have to pay at the end of each month,” she says. But Zirka says that loans such as those for home appliances and electronics are necessary to facilitate consumers’ on-the-spot big purchases. “It saves the hassle for a customer who, let’s say, wants to purchase from Khoury Home. It makes the purchase a one-stage transaction instead of two,” he explains.   

But some banks have taken niche marketing to extremes, introducing products that are borderline gimmicks. Both Bank of Beirut and the Arab Countries (BBAC) and Credit Bank offer a jewelry loan, with Credit Bank’s “Bijou” loan imposing a 20 to 62-years-old age bracket for beneficiaries who can borrow up to $10,000, and settle the amount over a maximum of two years. “It’s mainly young ladies or men who would like to offer [jewelry to] their wives; usually the young generation,” says Credit Bank’s Raham, who admits that the “Bijou” loan falls under the bank’s marketing, rather than product strategy.

“[Summer loans] all fall under the umbrella of a personal loan. You can make up an infinite list of products, but it goes to the same place [on the balance sheet]. It’s good marketing though, to address certain segments for a specific purpose,” says Bank of Beirut’s Aouad. But Zirka is cautious about bombarding clients with too many products. “First National Bank has a plastic surgery loan and a fertility loan. It’s a normal consumer loan but repackaged. It’s not wrong what they’re doing. We want to offer targeted products but still respect the banking image,” he says.

On managing credit risk that comes with tailoring loans on which people can easily default — Banque du Liban’s Centrale des Risques, the entity that assesses loan applicants’ eligibility, only requires such a process for personal loans above $5,000 — Zirka says that some of the targeted products offer relief for the banks. “What we are concerned about normally when we give out a personal loan is: Is the customer using the money for gambling? As an example. But someone who is getting married has priorities,” he says in reference to BLF’s wedding package. 

For Aouad, adding some preventive conditions and terms to these products is key. Bank of Beirut’s taxi car loan, which Aouad says is a best seller during summer time, finances either taxi cars’ red license plates, which can cost $18,000 to $20,000, or the new and used cars themselves.

“Taxi cars are most prone to accidents so we included total loss insurance. The interest rate was also put in a logical way [around 5percent on new cars and 6.5 percent on used ones, compared to 3.9 percent and 4percent for the regular car loan], because we know that the car will depreciate very quickly,” explains Aouad.

Still, banks find comfort in setting low ceilings for these targeted loans. “We could adopt a no-limit policy with loans, but this is not good neither for them [the customers] nor us,” says Byblos’ Dinar. Aouad says customers could drown in debt if they take on more than what they can handle. “But it’s only risky if the bank’s lending policy is loose,” says Credit Bank’s Raham.

 

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The generals’s last stand

by Sean Cox
written by Sean Cox

The rift between Turkey’s Justice and Development Party (AKP) and the Turkish military reached a critical breaking point with the resignation of the military’s top command staff. The resignations of four of the country’s five top generals is perhaps the most poignant protest in Turkey’s history, with those stepping down including the chief of staff and the leading commanders of the Army, Navy and Air Force.

For years, journalists and analysts have been concerned that the rising power of the AKP was a sign of increasing Islamic bent within a staunchly secular NATO ally. Throughout the history of the Turkish Republic, the military has been widely regarded as the defender of both secular and democratic civilian leadership, and in its history the military has unseated governments that pushed the bounds of their electoral mandates — whether secular or Islamist.

However, since a coup in 1980 established a military regime and rewrote the Turkish constitution, popular resentment against the military/secular establishment has intensified, with a significant portion of the more religious Muslim population feeling disenfranchised. The terms ‘secular’ and ‘democracy’ have often been espoused as synonymous in Turkey, leaving little room for Islamist currents in the political process.

This looked set to change in 1996, when the leader of Turkey’s Welfare Party (RP), Necmettin Erbakan, was elected prime minister. However, this Islamist foray into the upper echelons of Turkish politics was short lived, when less than a year later Erbakan stepped down at the behest of the military establishment.

Since coming to power in 2002 the AKP has wielded its strong electoral mandate to address this historical inability of the Muslim majority to gain, and maintain, representation at a national level; in no small part by steadily weakening the power of the military and its independence from civilian leadership.

Armed with loose terrorism legislation that enables the imprisonment of accused parties for 10 years without trial, and aided by the popular memories of military oppression the AKP has managed to steadily curtail the power of the military establishment.

Indeed, it is the pervasive public perception of the military’s involvement in extrajudicial torture and killing — whether against leftists, the militant Kurdistan Workers’ Party (PKK), or the Turkish far right— that has overrode a rational investigation of charges against military personnel. The so-called ‘Ergenekon Case’ has attempted to pin many of the county’s best-known scandals and terrorist activities on a clandestine kemalist ultra-nationalist group, with purported links to the military. Spanning the past decade the Ergenekon case has provided the legal basis for the imprisonment of nearly 200 military personnel — none of whom have yet been convicted (though they remain either in jail or under house arrest).

While the military must take responsibility for past transgressions, the Ergenekon Case is widely regarded as a farce. As Gareth Jenkins, of the Central Asia-Caucus Studies Institute’s Silk Road Studies Program, said in 2009: “The fear is that [the case] represents a major step not— as its proponents maintain — towards the consolidation of pluralistic democracy in Turkey, but towards an authoritarian one-party state.”

On Friday, July 29, the highest-ranking members of the chain of command attempted to make a final stand against this effort.

A meeting that morning between Chief of Staff Isik Kosaner, Prime Minister Recep Tayyip Erdogan and President Abdullah Gul preceded the indictments by a Turkish court of 22 military generals and officers. In response to the charges the chief of staff and the commanding officers of every arm of the military, except the Jandarma (the gendarmerie), announced their retirement.

In the scramble following the resignations, the PM promoted General Necdet Ozel from Jandarma general commander to the position of land forces commander, just hours before appointing him chief of staff. This enabled Ozel to co-chair the meeting the following Monday of the Supreme Military Council (YAS). Over the course of the four-day meeting, it was expected that YAS would decide on the promotions of Turkey’s next commanding officer class, with the PM having the final say in the highest appointments.

For the first time in Turkish history, a civilian and Islamist government has the opportunity to change the military’s essential role in the country — first established by Kemal Ataturk with the modern Turkish state nearly a century ago.

Further resignations are yet expected.

SEAN COX is an Istanbul-based researcher and political analyst

 

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Special Report

The coveted steps to perfection

by Executive Editors
written by Executive Editors

Underground, down a dark driveway and below a nondescript building in the back streets of the Beirut neighborhood, Tabaris, is a small, unmarked door. Behind this secret portal a bounty of diamonds, sapphires, rubies, gold, platinum, pearls and other precious gems lies in wait. Here, a treasure trove of wishes is carefully and painstakingly molded, filed and polished by the finest expert craftsmen into symbols of luxury and cherished personal items that will eventually adorn fingers, ears, necklines and wrists.

Before it ends up on the velvet pillows of the Mouzannar showroom to be gawked at and drooled over, the giant aquamarine and diamond-encrusted platinum ring passes through many hands. Under the watchful eyes of more than 20 security cameras [1], the jewellers use age-old techniques, with the help of some modern technology, to perform their transformation of raw materials into glorious ostentation.

When the order for the ring comes in to the jeweller, the first step is selecting the stone. Then, using architectural software [2], the cast setting is digitally drawn in three dimensions. At this stage, the ring is moulded in wax [3], before the pure platinum is melted and poured into the setting. Emerging rough and unfinished [4,5], the ring is cleaned and weighed for value before being polished and filed; each tiny precious filing is collected on stainless steel trays for a later date. The giant piece of aquamarine, meanwhile, is weighed and examined in detail for quality, clarity and shape. The same treatment is given to the diamonds that will form the stone’s bed. Dozens of white diamonds pour from plastic zip-lock freezer bags [6] stored in rows in filing cabinets according to size and gem.

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Once the gems are selected and prepared, they are ready to be set in the cast. The diamonds are laid out in tiny magnificent rows along the diameter, the aquamarine carefully fitted in its platinum jaw. Now, close to ready, the polishing [7,8] begins again — a process the jeweller explains will file away at least 10 percent of the original weight of the metal. At cleaning stage, the ring is plunged into a bucket of warm soapy water [9] using ordinary dishwashing liquid, then blasted with steam to remove any invisible scratches.

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Finally the ring is submerged in salted water and exposed to an electric current to remove any lasting grease before getting a last bath and puff of steam. Still exhibiting golden tones, the ring is lastly dipped in rhodium [10], from which the metal emerges gleaming white. Dried with a hairdryer [11], the ring is ready to leave its humble home [12]. After a process that has taken three days, the ring is taken to the showroom for pricing and exhibition [13].

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Real estate

For your information

by Executive Editors
written by Executive Editors

Dubai’s cedar shoreline

By the fourth quarter of this year, the island of “Lebanon” will be home to the first commercially operating project within The World, the 300-island man-made archipelago off the coast of Dubai developed by Nakheel. The island is fully owned by Indian entrepreneur Wakil Admed Azmi, who has spent approximately $16.3 million [AED 60 million] on the construction of a beach club and facilities, in addition to the initial cost of the island. Reza Sinnen, operations manager at the World Island Beach Club (which is being developed on the island), told the United Arab Emirates (UAE) daily Arabian Business in a June 15 article that another $2.17 million [AED 8 million] would have to be invested to complete the commercial resort, which includes a restaurant, lounge, entertainment venue and cabanas, with facilities that allow yachts of up to 80 feet to be docked. The resort aims to sell club memberships that cost up to AED 40,000 [$10,889] per year. Sinnen said problems with the delivery of water, electricity and on-island services mounted as Nakheel’s credit burdens grew, but that the owner cut construction costs by nearly 70 percent and managed the project himself in order to complete it on time. “We are about four months away. We are tying up with partners, yacht operators, travel agents, the Road and Transport Authority, Sealink…there is a lot to do,” Sinnen said. While 70 percent of the 300 islands are sold, according to Nakheel, none of the other owners have begun construction, except Kleindienst Group, which is developing resorts on the six islands it owns, which together are known as the Heart of Europe Project.

A greener prospect

A new environmental initiative that rates the green credentials of buildings in Lebanon was launched in June. The scheme was announced on the closing day of the 16th Project Lebanon, the international trade exhibition for construction and environmental technology that saw around 500 contractors and construction companies from 26 countries set up shop at Beirut International Exhibition and Leisure Center (BIEL) for the week. The ARZ Building Rating System is the first of its kind in the Middle East to classify the environmental performance of existing commercial buildings. The system takes into account Lebanon’s water and electricity shortages, and includes renovation conditions to reduce greenhouse gases. Building owners can invest between $100,000 and $4.9 million, based on building size and condition, to save between $35,000 and $890,000 in costs per year, according to Lebanese Council for Green Buildings President Samir Traboulsi.

From Damascus to Mayfair

A June 20 article in British daily The Telegraph reported that former Syrian Vice President Rifaat al-Assad bought a 10.3 million pound [$16 million] Mayfair townhouse in 2007 by signing a 110-year lease from the Grosvenor Estate, with funds paid by an offshore company based in the British Virgin Islands. Given the current unrest in Syria and the possibility of several Syrian officials facing international investigation, the properties could be confiscated in the event of a criminal investigation against Rifaat al-Assad for “crimes against humanity,” as he is blamed for ordering the massacre in the Syrian town of Hama in 1982 that killed tens of thousands. The article added that the 73-year-old uncle of current Syrian President Bashar al-Assad did not live in the residence until more than a year ago, but has been residing mostly in France and Spain. In 2008, Hafez al-Assad also bought a lease on the adjacent property, but Land Registry documents did not reveal the amount of the contract. In related news, Rami Makhlouf, the maternal cousin of the president, appeared in a rare televised appearance on state television on June 17 and pledged to relinquish all his real estate in Syria to the state and give up any business ventures that bring him personal gain, such as his stake in Syria’s monopolistic telecommunications company Syriatel.

Tourism takes the cake

Of the 35 business developments launched with the help of the Investment Development Authority of Lebanon (IDAL) between 2003 and 2010, tourism projects accounted for 79 percent ($860 million) of the $1.1 billion total mobilized investment. IDAL indicated that the bulk of tourism projects were the construction of luxury hotels and resorts, generating nearly 3,300 jobs over the same time period. The industrial sector was the second largest recipient of IDAL-supported investment between 2003 and 2010, receiving $131 million. IDAL mobilized investments accounted for some 4,760 new jobs over the seven-year period.

Solidere trumps 2010

Due to a surge in operating profits, Lebanese real estate firm Solidere was able to increase net profits by 7.8 percent in 2010 to reach $196.5 million, according to a June 15 statement by the firm. Sales of land plots and increasing revenues from rental units expanded Solidere’s operating profits to $272.2 million last year, a yearly increase of 16.5 percent. Based on its market capitalization of $3.1 billion at the end of 2010, the company was ranked 61st in Al Iktissad Wal Aamal magazine’s annual survey of the Top 100 publicly-traded Arab firms in the region, down from 45th place in the previous survey. As the largest property developer in Lebanon, its total assets are estimated to be worth around $10 billion today, while unsold property is valued at $7.5 billion.

Noor International’s dodgy dealings exposed

Beirut-based developer Noor International, founded by Mohammed Saleh, has not completed more than 5 percent of its residential projects sold off-plan, according to a June 1 article in Lebanese daily Al Akhbar.  It further claims that Saleh fled to Saudi Arabia in May after scamming investors of around $10 million. Noor International first gained notoriety (or infamy, depending on one’s perspective) in 2006 when Saleh sought to raise $1 billion from investors to build “Cedar Island”, a dredging and construction development that would have seen the creation of a 3.3-square-kilometer island off the Lebanese coast in the shape of a cedar tree. To the relief of many, this project was among the 95 percent of Noor’s development ideas never to see the light of day.

Gloom and dividends

Property transactions contracted 21.3 percent year-on-year by the end of April, while the value of the sales dipped 16 percent over the year, according to BLOM Bank. Further indicating a slow-down in construction activity this year, the major supply indicator, cement deliveries, fell 3.5 percent as of the end of April in comparison to the same time last year, according to the Order of Engineers of Beirut and Tripoli, and Byblos Bank. Holcim Liban, one of the major cement producers in Lebanon, will pay $30.25 million in dividends to shareholders starting June 27, at a dividend ratio (dividend payout as a ratio of 2010 net income) of 80.8 percent. Société Libanaise des Ciments Blancs, another major local producer, will also distribute dividends based on last year’s profits on the same day.

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