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Banking & Finance

Riad Salameh

by Executive Editors June 3, 2010
written by Executive Editors

With Lebanon’s bank deposits representing four times the country’s gross domestic product, Executive sat down with Riad Salameh, the governor of Banque du Liban, Lebanon’s central bank, to find out which way Lebanon’s backbone will be leaning next.

  • Lending to the real estate sector is expanding. Is this trend threatening to create a bubble?

We constantly run surveys on the relationship between credit and the real estate sector. Our surveys are showing that we have no bubble; [the growth] is based on real demand because the activity in real estate has not been fueled by credit from the banks.

The total credit to the whole construction sector represents around 18 percent of the total loans of the country. If you want to take it as a percentage of the total balance sheets of the banks, it doesn’t go over 15 percent. Housing loans represent around 8 percent of the total balance sheets of the banks… so we don’t have a bubble.

A few years ago, there were circulars from the central bank capping the credit that a bank could give on a real estate project at 60 percent, so 40 percent had to be pure equity. Now for housing loans, the banks are assessing the risk by themselves, but they do require deposits of around 20 percent according to what we hear… I don’t think we have a bubble situation here.

  • How do you ensure that there is no speculation in the market?

Speculation exists, we cannot prevent it, but it is not being fueled by credit, because of the circular limiting the level of credit to 60 percent of any real estate project.

Effectively, the bubbles [elsewhere in the world] were created by excessive credits related to real estate, which is not the case here.

  • What can you tell us about consolidation in the sector? What is your opinion?

We have reinforced the law that allows mergers among banks and the possibility for the central bank to fund the cost of these mergers and [allow] the legal simplification of the formalities for that.

We think that in the future there will be a few mergers. But our position has been stated clearly that we will not accept mergers among the country’s top 11 banks because we think, for competition’s sake and risk diversification, it is a better structure to have this spread over many groups.

We do think that below the first 11, there is an interest for banks [to merge] and there is a decrease of the risks and the costs for the country if there is consolidation through mergers. This can be done among middle-and-small banks or it can be done by having the big banks acquire the middle-sized or small-sized banks.

But we will never force banks to merge. We will only let them agree on it, and then we interfere if these banks are not in compliance with the requirements of the central bank.

  • Oversaturation in the market is currently forcing you to encourage banks to expand  abroad — will the allowance of mergers quell this trend?

Expansion abroad is a strategy that we agreed upon with the banks a few years ago. Today Lebanese banks are present in almost every Arab country and they are also present in Africa and other continents.

[Those with a foreign presence] are deriving around 20 percent of their revenues…from their external activities. So we believe that this can increase.

Our objective here is to decrease the sensitivity of Lebanese banks to the Lebanese sovereign rating and also to have a sector that would enrich our balance of payments and provide opportunities for employment, because the Lebanese have skills in financial services and banking and you can see them working everywhere in the world.

The banks also have the possibility to invest abroad without being physically present abroad and we have limited that to 50 percent of their own funds.

  • Can international expansion really improve banks’ credit ratings?

When more than 50 percent is derived from [abroad], when they get to this level, then the rating agencies will have to look at not only the Lebanese risk, but to the overall picture. And that will improve their ratings.

  • Can the lira ever be a lending currency?

We have seen that there is sensitivity between loans in Lebanese pounds and the interest rates. These circulars have proven that if interest rates are low or not very far from what is charged on debtors’ accounts in dollars, then people don’t mind having their loans in Lebanese pounds. The return of the Lebanese pound on the credit market has been successful because we are seeing now that three of every four loans are given in Lebanese pounds. Although we have, from previous activities, a large stock of loans in dollars in the banking sector, new Lebanese pound loans are progressing quickly.

We were able to succeed because the balance sheet of the central bank is rich now in foreign currency and therefore we don’t mind seeing, or we are not scared to see, loans in pounds that ultimately get turned into US dollars.

There is the demand and supply between Lebanese pounds working smoothly and there are everyday excesses in US dollars that we are buying. So, if the interest rate structure on the Lebanese pound remains low, the Lebanese pound is going to gain more and more steam in the credit market.

This is good for the economy because the expansion in credit can be more aggressive by banks because it is in Lebanese pounds and they know that the central bank, as a last resort, can provide them liquidity when they need it. Also, it reallocates a role to the central bank in the economy because now by changing the interest rates, we will have influence on the credit market in the country.

  • Regarding the public-private partnership (PPP) and build-operate-transfer (BOT) deals being discussed, are these kinds of plans something that you would advise and how would you make sure that they are soundly structured?

Lebanon has engaged in the application of the criteria of Basel II and the level of solvency has been determined to be 8 percent, and today we are on average at 10 percent. Mismatching, which can be created by this type of credit, is also weighted in Basel II. So as long as the banks can provide the long-term credit and at the same time maintain the acceptable solvency, it is normal business for them. It is exactly as housing loans have been done for the last 17 years. So we will look at this aspect. We are going to monitor that the solvency ratios of banks are still respected and it’s up to them to do it or not.

Another way to do it is that the banks have the right to put up funds, which can issue shares that can be bought by banks’ clients. This method can fund projects related to PPP or BOT.

What has to be very clear is that we will always continue to take a prudent approach concerning credit because it is very important and because we follow these solvency ratios. The banks will use their judgment to see what they can operate as direct credit and what should be funded through other types of products directly by their clients.

  • Do you think that these products are a realistic goal for the near future?

I think that there is an opportunity for Lebanon today to develop various sectors that could improve the quality of life of the Lebanese. These projects are from different sectors, from infrastructure, environment, energy, education and transportation – we need these projects. And we need to do it without increasing the public debt and there is enough confidence today to do that.

Personally, I hope that the different political parties in the country will agree on such a scenario, but of course I cannot know how fast they are going to move on this.

“The returun of the Lebanese pound on the credit market has been successful [as currently] we are seeing that every three or four loans are given in Lebanese currency”

June 3, 2010 0 comments
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Banking & Finance

For your information

by Executive Editors June 3, 2010
written by Executive Editors

BLOM launches Egyptian investment fund

BLOM Bank’s investment arm, Blominvest, is to launch and manage an investment fund in Egypt called the BLOM Pyramids Balanced Fund. The new fund will invest in the burgeoning Egyptian market, where gross domestic product is forecast to grow beyond $200 billion in the next few years. 

The fund is to invest a minimum of 50 percent in Egyptian debt instruments and a maximum of 50 percent in equities. Subscription and redemption in the fund is conducted on a weekly basis with a starting unit price of $5,000.

Checking on the up

Lebanon saw a 38.7 percent rise in check clearing activity in the first quarter of 2010. According to figures released by the Association of Banks in Lebanon, total cleared checks came to $16.9 billion. The increase was attributed to a 43.1 percent surge in foreign currency denominated checks, 22.7 percent higher than in local currency.

Activity peaked in March, up by 56.6 percent on the same month last year, and 17.4 percent and 32.6 percent higher than January and February, respectively. The rise in foreign currency denominated checks has led to an increase in dollarization to some 80 percent in the first quarter versus 78.4 percent over the same period in 2009.

Credit handout boosts inter-Arab trade

Credit Libanais, Fransabank and Banque Libano-Francaise (BLF) signed $50 million worth of new agreements in May with the Arab Trade Financing Program (ATFP). The program, a joint Arab financial institution that promotes trade between Arab countries, has to-date provided credit lines worth $7.6 billion, out of which $1.4 billion went to Lebanon.

Credit Libanais inked a new credit line with the ATFP worth $20 million to finance trade transactions between Lebanon and other Arab countries, bringing agreements signed between the two parties to $170 million.

Fransabank signed a $15 million, two-year agreement to boost inter-Arab trade, bringing its total credit with the AFTP to $105 million.

BLF signed a $15 million agreement to fund external trade and enhance Lebanese product competitiveness internationally.

BLC joins World Bank as an issuing institution

The private sector arm of the United States-based World Bank, the International Finance Corporation (IFC), added BLC Bank as an issuing bank to its Global Trade Finance Program (GTFP) last month. The $1 billion global finance program facilitates trade by providing  guarantees to support both import and pre-export financing to cover the payment risk in trade transactions with local banks in emerging markets. “BLC Bank will use the facility to increase trade finance offerings to expand their trade finance transactions within an extensive network of countries and banks thus supporting their clients, including small and medium enterprises that help drive job creation,” the bank said in a statement.

BLC is the fourth Lebanese bank to join the program following Banque Libano-Francaise, Bank of Beirut, and Fransabank. In January, the IFC acquired 8 percent of Byblos Bank shares, paying $100 million for common shares in Byblos Invest Luxembourg. BLF was the first bank in the Middle East, and second in the world to join the GTFP program, since expanding its ties with the IFC through becoming a confirming bank.

The IFC has provided trade guarantees worth more than $482 million to Lebanese banks since the finance program started in Lebanon in 2006, while last year committing over $184 million in trade finance to the banking sector. Worldwide, the GTFP has issued over $6.5 billion in guarantees to 177 issuing banks in 80 countries since 2005.

Lebanon weathers the euro crisis

Central Bank Governor Riad Salameh said during his monthly meeting with the Association of Banks in Lebanon that the Lebanese economy and banking sector has not been affected by the Eurozone crisis, which has forced the European Union and the International Monetary Fund to provide close to $1 trillion to bail out Greece and other flailing economies. The governor said that Lebanon was spared from the negative effects of the crisis, and that the deterioration of the euro against the United States dollar is not expected to yield negative repercussions, due to deposits in foreign currency other than the dollar not exceeding 10 percent of total deposits.

Salameh added that Lebanese banks operating abroad have also not been affected.

Saudi banks still hungry for foreign investment

With domestic credit slowing in Saudi Arabia, the country’s banks have continued to focus on foreign investments, according to the central bank, the Saudi Arabian Monetary Agency.

Last year, Saudi banks invested an unprecedented $12.8 billion into foreign markets, bringing combined foreign investment by the country’s 12 commercial banks to $29.9 billion. Foreign outflows slowed in the first month of 2010, but continued to rise in the rest of the first quarter, gaining $1.6 billion to reach $31.5 billion at the end of March. Total foreign assets are marginally down from $56 billion at the end of 2009 to $52.2 billion as of March, attributed to a fall in bank dues from foreign banks and branches.

Lebanon ranked 5th in region for access to capital 

Lebanon was ranked fifth out of 12 countries in the Middle East and North Africa region in the United States-based Milken Institute’s Capital Access Index 2009. The index, which measures how countries support economic activity by providing companies with access to capital, reported that Lebanon’s regional and global ranking has remained unchanged since 2008, but remained 10.5 percent higher than its 2007 rating.

Lebanon performed well in the macro-economic sub-index, which assesses a country’s conduciveness to business, coming second in the MENA region after the United Arab Emirates. In the financial and banking sub-index, Lebanon came fifth regionally, and ninth in equity market development. In terms of international funding, Lebanon placed second. In overall MENA rankings, the UAE took the top score, followed by Kuwait, Oman and Saudi Arabia. Iran, Yemen and Syria had the lowest rankings.

Popularity of plastic payments sees surge

The number of credit and debit cards issued in the first two months of the year rose 3.4 percent on the same period in 2009 to reach 1.6 million, according to figures released by the central bank. Point of sale (POS) purchases with cards have been on an upward trend over the past decade, with average monthly domestic payments amounting to $67 million in the first two months of 2010, up 28 percent on last year. In 2007, $34 million in POS purchases were reported in the same period, and in 2008, $44 million. Debit cards account for the majority of plastic payments in Lebanon, at 63.6 percent, followed by credit cards at 20.7 percent, and charge cards at 10.3 percent. The number of ATMs increased 6.8 percent this year on the first quarter 2009.

June 3, 2010 0 comments
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Special Feature

Partnership for prosperity

by Lara Alameh June 3, 2010
written by Lara Alameh

American President Barack Obama’s administration has been seeking ways to strengthen ties with Muslim majority countries.  In April, he made true on his June 2009 Cairo speech promise and hosted a presidential summit on entrepreneurship, which was intended to serve as a catalyst for expanded entrepreneurial cooperation, as well as economic growth in Muslim nations.

The summit brought together more than 275 participants from 50 countries to discuss the ways in which they can work together to galvanize entrepreneurialism in their respective industries and states. But it is the product of the summit, rather than the rhetoric, that will determine how the Middle East can capitalize on this initiative.

What is needed are tools which empower the private sector to pressure governments in the region to strengthen the legal and economic structures necessary to support a healthy business climate. However, even if these tools are created, their successful implementation will not be sustainable in the absence of an environment of peace and stability. Despite Obama’s best intentions, no amount of entrepreneurial success can replace the urgency of a comprehensive Middle East peace, which is fundamental to the region’s economic development.

There are many divides to be bridged and obstacles to be surmounted. Competing national visions, inherited conflicts and misconceptions, and large disparities in standards of living stand in the way of development.

Even among the friendliest neighboring countries, economic integration has been stalled, except for a few isolated attempts. Reforms have been in demand for decades, yet delivery has been cosmetic at best. As a result, the gap has been widening between the countries of the region, within those countries and, most alarmingly, between their citizens and leaders. The levels of unemployment, real growth and poverty in a region endowed with so much wealth and so many resources makes clear that the current system is not working, and strengthens the case for the kind of leadership and solidarity seen at the summit.

Governments in the region, with the support of the international community, should take a proactive stance in working to support the private sector via institutions that will ensure competition in national economies. Existing governments need to recognize the value of human resources in the region. The wealth of Arab countries lays not in the export of their natural resources, but instead in the opportunities and capabilities that are afforded to their people.

An institutional framework is needed that will breakdown clientalist structures, reform education to meet the demands of national economies and strengthen regional infrastructure projects. 

In his remarks at Cairo University, Obama articulated the need to deal with our problems through partnership. The United States has a central role to fulfill in that partnership, and is the only party that has the influence to bring peace to the region. The US should regain its leadership role in fostering this or any other fair peace initiative to avert further deterioration of security in the region or a potential war. In the end, expanded economic success and the democratic imperative in the region can only be sustained by peace. 

The Middle East has traditionally been a meeting place, a crossroad of civilizations. Trade routes passed through ancient Arabia for centuries with prosperity, tolerance and mutual benefit. The region cannot be allowed to slide into a whirlwind of conflicts, polarization and violence.

 This can only be avoided by the foundation and empowerment of political and economic institutions that will provide the mechanisms to support sustainable development, participation, accountability and peaceful interaction among the various components that make up Middle Eastern societies.

Through the establishment of peace, barriers that prohibit the creation of these institutions will be reduced and incentives for politicians seeking a new legitimacy in a post-conflict region will be gained through the investment allotted to their citizens.

LARA ALAMEH is the executive director of the Safadi Foundation USA

June 3, 2010 0 comments
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Special Feature

Kenneth Morse

by Executive Editors June 3, 2010
written by Executive Editors

Kenneth Morse is the co-founder of 3Com Corporation, Aspen Technology Inc. and a number of other startup companies. He is also the former managing director of the Massachusetts Institute of Technology’s Entrepreneurship Center and currently holds the chair of Entrepreneurship, Innovation and Competitiveness at Delft University of Technology. Executive caught up with the business guru during a tour of the region promoting entrepreneurship to gather his insight on how governments and young business leaders can spur the creation of new and innovative enterprises.

  • What steps should governments in the region take to promote entrepreneurship in their respective countries?

They need to become good customers, meaning that they quickly make decisions to buy, and then pay on time. Governments have a tough time making quick decisions because they are rewarded more for not making mistakes than for doing the right thing — and because the press love to jump on mistakes.

This makes them risk averse. In the Middle East, the worst thing about governments is that they don’t pay their suppliers on time. It is easy to kill start-up companies by being slow customers who pay late.

  • But what about e-procurement models that we have seen some governments adopt in the region?

Do you think that is really happening? Every small company that I have found tells me that it is impossible to sell to governments. And the corruption problem compounds the challenge. They take a long time, then they want a bribe; you have to pay somebody off, so your profit is all lost in the bribe. Or, hopefully, the small company says it will not pay the bribe. Compare that with North America and parts of Northern Europe where governments like to buy from start-ups because they are more innovative. Of course, corporations need innovation and they love to buy from start-ups.

  • The bureaucratic processes that are part and parcel of governments in this region don’t give new businesses that luxury and facilitate corruption inside of government itself. Have you seen any progress on this front?

I have seen both some very exciting start-up companies here and some sincere commitment to start-ups.

  • In terms of public policy?

The leaders in the United Arab Emirates, Jordan and Lebanon know that the public sector has reached its limit in terms of its ability to create meaningful jobs. So they have turned to the private sector. Large companies in the private sector are growing and are so the small companies. It’s simple Aristotelian logic.

  • We have seen an increase in the amount of aid being supplied to the region by the United States since President Barack Obama’s 2009 speech in Cairo. Could there really be a paradigm shift in the US’s strategic policy for the region, or is it more likely that this is a public relations stunt?

There is a paradigm shift in thinking for sure. For example, one of the proposals in [Obama’s] speech in Cairo on America’s relations with the Muslim world was to have a conference on entrepreneurship in Muslim Majority Countries.

  • But these are just conferences. They may look good on paper but they don’t necessarily have effects on the ground.

Entrepreneurship is still a good thing for America to export to the world. It’s not controversial. However, I’m not sure how well implemented the new policy is.

  • Why are you not sure of the implementation?

Well, not if they work it through the United States Agency for International Development (USAID). USAID is reluctant to pay any of their consultants more than $565 a day, and I don’t think [they] are going to be able to attract fantastic entrepreneurs at those rates. 

  • So you think there needs to be more funding? 

The funding is there but they won’t spend the money because they are not willing to face up to the fact that [$565 a day] is a low sum.

  • But does it have to be done through USAID? 

There are competing forces in Washington but USAID claims that [the funds] should go through them — and they are brain-dead. Still, entrepreneurship is a message of hope and an export from the US, and there is plenty of interest in importing entrepreneurship.

  • So where do we go from here?   

There is a program that builds on all the current initiatives. It’s called the ‘10 by 20 program’ where each year 10 companies form a paragon [of companies] and commit to achieving $20 million in annual revenues within 5 years. This is an ambitions target; if you are not ambitious you need not apply.

The firms involved are given training and helped to access markets through the diaspora and other means. You were also talking about another model: public private partnership. The public sector could provide the money — it could be through the central bank — and the private sector would administer it because they [are more efficient], and then those companies that were in the program could take off like a rocket.

  • But many governments are in debt and may not be willing to put up the capital.

The payback on the [similar] Quebec program took one year; after that it was tax revenue. It’s about job creation — you take people off unemployment and onto the payroll.

  • When do you think young entrepreneurs should take the dive and start their own businesses?

The ambitious small and medium-sized enterprises of today are the big companies of tomorrow. I am not in favor of having kids start companies right out of school. They don’t know enough to achieve sustainable growth.

I am more a fan of having young people participate in business plan competitions to taste what entrepreneurship is about and then work for well managed, rapidly growing companies, where they learn how to sell, get a purchase order, how to move though an organization and how business processes work, and then start a company with a large team and a critical mass.

  • Where do you see the greatest growth potential in the Middle East?

Women. Female entrepreneurs in the Middle East are [proportionally] the highest percentage in the world. I teach at Delft University (in Holland), where only one in 112 CEOs that I have taught during my tenure [are women]. In the Middle East it is 25 to 30 percent.

This is because entrepreneurship does not suffer from a ‘glass ceiling’. When there is no glass ceiling, you start your own company, you are the president and you are all set.

Women entrepreneurs in the Middle East are doing well for other reasons. They work harder, they are more dependable and the men tend to be lazier.

Who would you rather buy from? Someone with hustle, or someone who is complacent?

  • Do you think this is a long-term trend?

I have observed it for seven years; I don’t know what you think long term is. It doesn’t seem to show any signs of letting up.

  • If you could speak to policy makers in the region about entrepreneurship, what do you think would you say?

Promote ambition. Fix the bankruptcy laws. Become good customers.

June 3, 2010 0 comments
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Feature

A new American intervention

by Executive Editors June 3, 2010
written by Executive Editors

The policy of aggressive democracy promotion in the Middle East, a hallmark of former United States President George W. Bush’s administration, seems to have been sidelined by his successor in favor of a softer approach to international relations. While not renouncing the democracy campaign altogether, Barack Obama’s government has refocused its methods toward State Department projects that target economic advancement, education and job creation in the region.

This shift was exemplified by the Presidential Entrepreneurship Summit on April 26 and 27, where more than 250 delegates from 50 Muslim majority countries (MMCs), as well as Secretary of State Hilary Clinton, Secretary of Commerce Gary Locke and several members of Congress, gathered in Washington, DC to discuss methods to foster entrepreneurship as a means of spurring economic growth and community development.

The summit signals a wider move in the administration to position the Middle East as part of a worldwide religious community, rather than the home of the ‘axis of evil’, as America reformulates its role in the region. The US’s long history of involvement in the Middle East, however, begs the question of whether this new initiative is a genuine policy shift or whether the White House has simply entered another phase of the decades-old strategy of quietly promoting civil society development while maintaining relations with heads of state.

On the surface, the White House appears eager to trumpet its departure from previous US policy. At April’s summit, Secretary of State Clinton cited Obama’s June 2009 “New Beginning” address at Cairo University as the administration’s “new approach to foreign policy.”

In a press statement, the Chief of Media and Cultural Affairs at the US Embassy in Lebanon, Ryan Gliha, said he considered changing the way the US administration was seen in the region as the “crux of the point” for the event.

Many of the new programs differ in that they favor local expertise over imposing an external agenda for development or aid. Yet their details remain largely unknown, and citizens’ suspicions of American intervention lingers.

A new beginning

Former Secretary of State Madeleine Albright will partner with Walter Isaacson, president of the leadership-oriented Aspen Institute, and Muhtar Kent, the Turkish-American chief executive officer of the Coca-Cola Company, in launching the “Partners for a New Beginning” program — part of the State Department’s push for innovation. Described as “a team of eminent Americans from across sectors and industries who will lead an effort to engage the US private sector in carrying out our vision for a new beginning with Muslims,” little additional explanation was given as to the program’s specific plans.

Two other initiatives, the Silicon Valley-based Global Technology and Innovation Partners and the Innovators Fund, have already been set up by venture capitalists following Obama’s Cairo speech and aim to “support innovation” in Egypt, Jordan, Lebanon, Turkey and Malaysia.

Having already reached out to Jordanian venture capitalists Oasis 500 and several American firms, the Innovators Fund plans to expand.

Secretary Clinton also mentioned the e-Mentor Corps, a project that will allow entrepreneurs seeking advice to access mentors on-line from Intel, Ernst & Young, the Kauffman Foundation, TechWadi, the Young Presidents’ Organization, Babson College and Endeavor.

While many of the schemes sounded well intentioned if vague, Clinton delved into greater detail regarding the Global Entrepreneurship Program (GEP), which is set to begin in MMCs and grow from there. Clinton said that the private sector will partner with civil society groups to “help create successful entrepreneurial environments” by providing access to capital, business education from US business schools, mentoring programs and by identifying promising ideas. Launched in Egypt in April, the GEP pilot  will soon start in Indonesia, the countries with the largest Arabic speaking and Muslim populations, respectively.

Egypt exemplar

Egypt’s GEP was launched under the auspices of the US-Egypt Business Leaders Forum, the latest manifestation of a decades-long collaboration between wealthy Egyptian and American businessmen, such as Taher Helmy, co-founder of Hamza, Helmy & Partners Law Firm, and Steven Farris, chief executive officer of the Apache Petroleum company, Egypt’s largest US investor. Helmy and Farris, co-chairs of the Forum, explained that after years of economic and financial reform, Egypt is ready to receive support for entrepreneurship.

“Reforms [have been] substantially successful, the private sector controls over 75 percent of the Egyptian economy…our primary focus has shifted to entrepreneurship and education,” Helmy told The Daily News Egypt.

Egypt’s willingness to undertake controversial reforms won it recognition with the GEP pilot program, and Clinton urged other nations to follow suit: “We need to encourage your governments to make the legal and commercial reforms needed to encourage trade, allow for the free flow of ideas [and] lower the barriers to launching new businesses,” she said in her speech.

Endeavour sets the pace

Although the efficacy of the State Department and its affiliates in promoting innovation in MMCs remains untested, Endeavor is an independent organization already active in the region. Initially focused in Latin America, the non-governmental organization began giving entrepreneurs access to mentors and angel investors in Morocco, Turkey and Egypt in recent years and is contemplating a Beirut office.

Endeavor’s method — identifying successful small businesses and helping them grow to scale, becoming role models for other entrepreneurs — represents what Elmira Bayrasli, policy and outreach coordinator for Endeavor Global, refers to as a “paradigm shift” — offering support to successful local initiatives rather than descending with a list of externally-generated goals.

“We don’t apply a cookie-cutter model. We have a framework that is driven by finding local business leaders and local networks that will then define how their own framework is built,” she said at Endeavor’s International Selection Panel in Cairo in March. “It’s really up to them to drive it forward in the vision they feel is best suited to that country.”

The event brought Endeavor Board Chairman Edgar Bronfman to Egypt to advise small business owners hoping to partner with the group. Bronfman, the CEO of Warner Music Group and heir to one of the wealthiest families in Canada, explained his commitment to facilitating entrepreneurship, particularly in the Middle East: “I’ve always believed that the more people that have jobs, the greater the opportunities for peace and the fewer opportunities for anger and frustration,” he said. “This is true everywhere, but especially important in the Middle East.”

His statements echo those made by Clinton, who listed a strong economic foundation and a stable middle class as “essential” to good governance and the rule of law. While the words “democracy” and “US security” enter the vocabulary of the Obama administration with less frequency than that of his predecessor, its policies represent the unspoken understanding that Bush had the right agenda but the wrong methods.

As a congressman, Obama’s record for democracy promotion included co-sponsorship of the Advance Democracy Act, while in 2005 he introduced the Democratic Republic of Congo Relief, Security and Democracy Promotion Act. Monetary support for democracy in the Middle East may re-emerge after trust has been re-established by the US’s respect for sovereignty and international rule of law.

America comes first

In the meantime, civil society groups in Egypt, Jordan and other countries have watched funding disappear. United States Agency for International Development told the Associated Press that cuts resulted from a drawing down of military aid, especially to Egypt.

The DC-based Project on Mideast Democracy reported that funding in Egypt fell from $10 million in 2008 to $2.6 million in 2010, and that only groups registered with the Egyptian government may receive funding, a hindrance for those attempting to monitor the upcoming presidential election in 2011, for example. Perhaps in an attempt to counterbalance this loss of civil society funding, the Obama administration has sponsored social entrepreneurship in the region.

Ultimately, the Presidential Entrepreneurship Summit’s role as a catalyst may be more important than the event itself. For example, it inspired the recent Arab World Social Innovation Forum in Cairo, hosted by international social entrepreneurship NGO Ashoka and attended by representatives from Microsoft, Price Waterhouse Coopers, the Arab League and USAID, among others.

However, this one summit should not be taken as a sure sign of fundamental change in US policy in the Middle East. Although the White House may seem to have changed its methods, it will undoubtedly continue to pursue policies to promote what it considers best, both for the region and for its own interests.

June 3, 2010 0 comments
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Feature

Bred to kill

by Executive Editors June 3, 2010
written by Executive Editors

For the aficionados, dog fighting is more than a sport — it is a platform to play God with the violence of Darwin’s natural selection.

“I have Hitler’s mentality,” says 35-year-old Mike Kennel, a pseudonym he chose to maintain anonymity. “I aim for humans to advance, just like I am allowing these dogs to advance — I only let the most intelligent marry each other and the strongest marry each other.”

On the outskirts of Beirut down a winding road off the Hadath highway, an iron gate opens onto a secluded path bordered by agricultural land. Yet the organically grown plots, the picturesque greenery and the peaceful ambiance camouflage a farm of another kind: This is doggie boot camp.

A seemingly abandoned building at the end of the path houses dogs enrolled in a rigorous training regimen, and on the other side of the clearing, leafy fichus trees shade a square fighting arena, in which they are trained to tear each other apart.

Apart from fulfilling his competitive lust, Kennel claims he stages fights to test for specific traits to ensure the preservation of the species.

“I check for the dog with the stronger jaw, the strongest mind and the longest breath, and I use it for the selection I breed. To test it, I need to put it in the ring,” says Kennel. “We believe in the rule of the jungle. We believe in the survival of the fittest, because the fittest will make stronger offspring, and prevent the extinction of the animal.”

When these canine “ultimate fighters” are in the ring, the faceoff is brutal. American pit bull terriers (APBT) have been bred for their capacity to fight and inflict maximum damage. It is also their “gameness,” or ability to attack regardless of their physical condition, that is one of their most appealing attributes for their masters.

APBTs have a predisposition to tolerate pain through anesthetizing compounds that their bodies naturally secrete. The selection and genetic make-up, rather than the use of any drugs, says Kennel, have allowed the development of strong, feisty pit bulls that are born with a predator’s instinct to hurt other dogs.

What started for Kennel as a fascination with animal competitions at age 12 led him, by 16, to become a professional dog-fighter, trainer, breeder, trader, handler and referee; in other words — a dogman. Today he says it is also a lucrative business, but one that he declined to quantify to avoid litigation by auditors from the Ministry of Finance.

Kennel owns 75 dogs that he trains and breeds; 25 are APBTs, which are the only species he raises for fighting purposes. Kennel’s work in breeding and training has earned him a region-wide reputation: in his workshop he builds self-powered treadmills that he sells for $600 around the Middle East to improve the cardiovascular fitness of the dogs without exhausting them.

Dogs also wear weighted collars, usually four kilograms, to increase upper body strength, and their biting power is improved by having them chomp on a hanging rope from which they are suspended for extended periods. Kennel has also developed strict nutrition regimes complete with vitamins and minerals to complement dogs’ training.

A puppy is trained until the age of two before entering the ring for the first time. Formal matches are usually arranged two months in advance to give time for training, with the details — such as the wager of each owner and the weight class of the dogs — drafted into a contract for the competing parties to sign.

Lord of the ring

Just before formal matches dogs are weighed to ensure they adhere to the agreed weight category, and if not, the party in breech of the contract pays a penalty, usually half the value of the bet, or an average of $2,000, to cover the cost of the training. The opponent can then also choose to cancel the bout.

After passing the weigh-in, the dogs are washed to remove any possible poison hidden in their fur. Handlers then bring the animals into the pit, or “ring” — a four meters by four meters square with walls up to 75 centimeters high. They hold the dogs by their hips behind “scratch lines” in opposing corners as the dogs prepare to attack.

The referee stands in the middle of the ring, ready with a wooden or plastic “breaking stick,” which is the only way to pry open a pit bull’s locked jaws. At the signal of the referee, handlers release the dogs for the first “scratch” — dog fighting terminology for an attack — and the animals leap at each other in a fever of bloodlust. 

“We don’t tell the dogs ‘Go’,” said Kennel. “The dog has an instinct to go on its own. If we have to invite the dog to the fight, we don’t want it.”

At the fight Executive attended last month, the dogs became entangled in a “dance of death” standing on their hind legs, then took turns mauling each other, quietly encouraged by their respective handlers with words the dogs were conditioned to hear when striking opponents.

During the first scratch, the dog that locked its jaws on its opponent first won a point. The dogs were then pried apart with the breaking sticks — no one flinched as blood oozed from the wounded animal.

At this point in the match the owners and the referee will check for the dog’s gameness.

“Even if the dog gets wiped, if it still has gameness then it is selected for breeding,” said Kennel.

At the second scratch, the dog that lost the first round will be released to attack his opponent. If after a 10 second count by the referee the dog still has not attacked, then the other dog must scratch and secure a lock on its opponent. If the second dog fails to attack as well, then the dogs are even and the match is over.

“Both dogs will go bye-bye,” explained Kennel with a hint of sarcasm. “They can’t be sold, there is no breeding, and their value will be zero even if they cost $10,000.”

When a dog loses, it gets a loss added to its title record, and if it does not display gameness it will never be bred or enter a ring again.

After each fight, Kennel injects the dogs with antibiotics to speed their healing. He confirms though that unless it’s a finishing game, where a dog has to be kept in the fight until its last breath, no owner would let his dog die in the ring. 

“No one kills a dog worth $4,000,” he said, though Kennel admitted that dogs often die the day after a fight due to injuries.

As a result, medical care for the dogs before and after the fight is essential in preserving their value and improving its performance.

Gambling on gore

With the blood sport underway in the ring, betting outside goes into full swing, with 10 percent of all bets going to the referee and ring, which usually go together. Kennel says there are three rings in Lebanon for professional fights.

“There are no limits for bets,” he explained. In Gulf countries, bets can reach up to $30,000, and can include automobiles and property.

Kennel says that in Lebanon,  the bets don’t go beyond $5,000, and the big betting is usually limited to a handful of insiders. The dog-fighting circle is secretive and clandestine, with heavy emphasis put on the anonymity of participants given the involvement of some of the country’s prominent businessmen, according to sources that also declined to be identified.

The price of a gladiator

As a fully-fledged dogman, Kennel takes a lot of pride in his lineage breeding. The price of a puppy ranges from $500 to $1,500. After that, prices increase with the level of training, the titles a dog earns and the owner’s emotional attachment to the animal.

With each match victory, a dog’s value normally doubles; three wins earns a dog a champion’s title, and five wins earn it the title of grand champion, which can elevate the price to as much as $50,000 in Lebanon.

Kennel’s endeavors have evolved into a highly disciplined enterprise compared to “street level” dog fighting. Sources, which asked for anonymity because they have received threats from dog fighters in these other circles, describe them as being associated with criminal networks, with bouts staged in secret locations that are only revealed to the participants shortly beforehand via SMS mobile messages. Dogs fighting in these settings tend to be subjected to extreme abuse, often deprived of food and forced to live in darkness to increase their aggressiveness.

Kennel, who sees himself as a professional, abides by the “Cajun rules,” a detailed list of guidelines related to dog fighting created in the 1950s in the United States. He argues that street dog fighters are amateurs and ignorant of important information pertaining to adequate dog training, such as the fact that darkness weakens the eyesight of a dog and makes him aggressive towards people in daylight.

“A dog that is aggressive towards humans is not allowed in [our] ring,” he says.

In fact, Kennel now recruits amateur dog fighters to join his training camp, teaching them how to be professional handlers and trainers in the creation of true canine predators.

“I recommend that anyone who has a pit bull, go to a professional to learn… the value and the love of the dog,” said Kennel.

There are currently no laws in Lebanon that pertain to dog fighting. Kennel says he believes that dog fighting should be regulated, and that those who fail to ensure a safe and secure environment for their dogs should be penalized. Inspection and regulation should be the job of the government, he says, and not that of animal rights activists who don’t understand the emotional and financial value of game dogs and want to “castrate” them.

“Why don’t we castrate Mohammad Ali? Or all the people who like boxing?” says Kennel.

“We don’t have to be enemies with animal rights activists, we can work together,” he said. “Instead of stifling those who are addicted to this sport, we can teach them to do things right. This is a dangerous sport and safety procedures have to be respected.”

June 3, 2010 0 comments
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Deadly dithering in Yemen

by Abigail Fielding-Smith June 3, 2010
written by Abigail Fielding-Smith

If your knowledge of Yemen was gained entirely from donor briefings and government statements, you might think it was a politically troubled, developmentally challenged country, like Egypt on a bad day.

When the international community was spurred to ‘do something’ about Yemen, following the attempt to take down a United States-bound airliner by a would-be suicide bomber — who apparently trained there — the impulse was not to send over emergency relief, like Ethiopia in 1984, but to set up working groups to investigate Yemen’s complex developmental challenges.  

But as donors deliberate the best way to boost the country’s long-term institutional capacity, increasing numbers of its citizens are living on the margins of survival. In the capital, Sanaa, when your car slows down even for a few seconds, thin fingers will inevitably begin tapping on the window begging for money. Poverty and privation is even worse in the countryside.

On a trip to Al Mazraq refugee camp last year, I saw people who had fled the war in the northern province of Saada shouting angrily into the sandy wind that they had nothing — no means of ensuring their own survival. Their situation has since become much worse.

Yemen may superficially be a part of the Middle East — a “middle income” region — but its statistics are in a different league. Child malnutrition rates are second only to Afghanistan, and a recent shortfall in funding to the World Food Program (WFP) means that, quite simply, more children will die this year as their plates go empty.

“We are expecting the moderately malnourished children to fall into a severe malnutrition state, and those who are already severely malnourished will sustain life-long implications,” said Wisam al-Timimi, a nutrition specialist with UNICEF in Yemen. “Their survival will be jeopardized.”

According to the WFP, one in three Yemenis, some 7.2 million people, suffer from chronic hunger and 1.7 million people will become unable to meet their basic nutritional requirements with seasonal food price rises this summer. Lack of funding will force the WFP to withdraw assistance from 80,000 beneficiaries in July, and it has already almost run out of food for the 270,000 internal refugees from the northern conflict — between Houthi insurgents and government forces — who are completely dependent on aid handouts. As of last month, the agency began distributing half rations to trickle out the supply longer. 

“Anyone arguing this is a nightmare scenario wouldn’t be wrong,” said one humanitarian expert I spoke to.

Its not just the WFP that is suffering a funding crisis — an appeal for $177 million in humanitarian assistance for Yemen launched by a coalition of international agencies last year has only received around 30 percent of this target. 

“It’s puzzling,” said Gian Carlo Cirri, head of the WFP in Yemen. “There’s lots of talk about helping Yemen, but very little money.”

Some speculate that the Haiti earthquake has caused donor fatigue. Yemeni political analyst Abdul-Ghani al-Iryani blamed the government in Sanaa — which disputes the WFP’s findings — for not making food security a high profile issue due to the potential political embarrassment. 

“The callous position of the government on the issue of hunger is costing each year more lives than all the wars that Yemen has seen since its founding,” said Iryani. “The most vulnerable group is too powerless to protest.”

Another theory is that humanitarian aid has become the victim of development aid policy concerns . 

“Expectations that Western donors would give more money have not materialized,” said the Deputy Finance Minister Hisham Sharaf. Western delegates at a conference held in London after December’s failed bombing attempt didn’t pledge new funds to the country, but instead vowed to direct $5 billion donated following a 2006 conference, much of which remains untouched.

Donor desire to implement a considered development strategy that avoids propping up a system notorious for its corruption and inefficiency is understandable, but the country’s immediate humanitarian needs are too acute to be held hostage by such concerns. This is not only a moral issue, but a strategic one as well.

Protests have already begun in Saada after the announcement of half-rations for internal refugees, and there are fears the $35 million WFP funding shortfall for food supplies to feed these people could destabilize the situation in the north, where a fragile ceasefire is holding.

After all, $35 million is, as Cian Carlo Cirri keeps telling reporters, a relatively cheap price for stability.

ABIGAIL FIELDING-SMITH  reports on the Middle East for the Financial Times

June 3, 2010 0 comments
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Editorial

Tomorrow’s zeal

by Yasser Akkaoui June 3, 2010
written by Yasser Akkaoui

Last fall, I was teaching a business ethics course at the American University of Beirut and explaining the ‘double bottom line,’ the concept that in modern business, a healthy bottom line must also include a firm commitment to corporate social responsibility and corporate governance. Two of my students, Omar Touma and Linda Sawaya, asked me how Executive could call itself a responsible company, and presumably claim to have a double bottom line, when it prints 25,000 copies of a magazine every month.

They had a point. So much so that Executive immediately set about improving its green profile. We started by only sourcing paper made from wood grown in sustained forests, while internally we began recycling. But it still wasn’t enough. We still felt we were falling short of being on good terms with our carbon footprint.

It was only back in the classroom this spring, this time teaching strategic management, that the final piece of the jigsaw fell into place. Another group of students suggested that for every magazine we distribute, we should make a commitment to collect up to three more, of any publication, for recycling.

We are empowered and inspired by the enthusiasm, awareness and talent shown by our young business leaders. What is all the more remarkable is that they have demonstrated such maturity in the face of a society that has dragged its heels in embracing the ethics, not only of the modern business community, but the wider world. That they have done so is a testament to the power of the media to cross borders and positively affect us all.

I am telling you this, not only because I am proud of the way Executive has reacted in its own small way to embrace best practice, but because the solutions came from our youth, our future leaders. It is the duty of our generation to ensure that they, and the generations that will follow as they mature, have a world worth inheriting.

Finally, it was with profound sadness that Executive learned of the sudden death of Melhem Karam, who for 50 years was head of the Lebanese Journalists’ Union. He was 78.

As a journalist and writer, he penned many works including ‘The Storm,’ ‘A Thousand and One Nights’ and ‘The Secrets.’ Karam also founded the Arabic weekly Al-Hawadeth, the daily Al-Bayraq and the magazines La Revue du Liban and Monday Morning.

He will be missed.

June 3, 2010 0 comments
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Economics & Policy

Tightening inflows

by Executive Staff June 3, 2010
written by Executive Staff

Total net private financial inflows to the Middle East and North Africa are projected to be $12.9 billion in 2010, a decrease of 23 percent from 2009’s $16.8 billion, according to the International Monetary Fund.

The estimate accounts for 6.1 percent of global inflows to emerging and developing economies, projected at $210 billion. By comparison, Latin and Central America are slated to be the largest recipients of net private inflows in 2010 with $80 billion, or 38 percent of the total. The IMF’s predications, however, vastly differ from those of the Institute of International Finance, which forecasts inflows of $709 billion globally.

The IMF forecast net private direct investment to the MENA region at $71.7 billion this year and $77.8 billion in 2011, up from $70 billion in 2009. The body also estimated foreign currency reserves to increase by $60 billion in 2010 and $71 billion in 2011.

June 3, 2010 0 comments
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Economics & Policy

Eastern expansion

by Andrew Horncastle & Georges Haines June 1, 2010
written by Andrew Horncastle & Georges Haines

As their North American and European competitors recover from the economic crisis, Middle Eastern chemical companies are facing new opportunities and new challenges.

They are continuing to build on their cost advantage in basic petrochemicals, which has made them formidable challengers in the global industry. They are also beginning to invest in more specialized chemicals to further strengthen their overall position and create more industrialized, diversified economies in their countries. However, as they expand into new chemicals, their cost advantage diminishes and they will have to be selective about their approaches to growth and develop new capabilities to compete successfully.

Cashing in on the crisis

As the global chemicals industry begins to pick up the pieces and recover, it is finding itself in a post-crisis landscape that looks significantly alien. Middle Eastern companies have capitalized on a cost advantage of 30 percent to 90 percent in natural gas-based feedstock — the raw material necessary for producing basic petrochemicals. As a result, regional companies will nearly double their share of global capacity from 2008 to 2013 (from 11 percent to 19 percent for ethylene and 7 percent to 14 percent for polypropylene). Additionally, Middle East chemical companies are well positioned logistically to serve Asian markets, which are currently growing faster than those in North America and Europe.

With these advantages, chemical companies in the Middle East are expected to emerge from the crisis in good shape, despite the fact that global demand for chemicals has dropped while supply has expanded.

To date, companies in the region have focused on basic commodity chemicals based on natural gas feedstock, such as fertilizers and plastics; these are relatively straightforward to manage and highly profitable. Indeed, Middle East firms have such a strong cost advantage in manufacturing these products that Western companies, including Borealis, ExxonMobil Chemicals and Dow, have partnered with regional forms in order to benefit from these advantages.

But with the gap between demand for gas and available supply widening in the region and pressure from governments to diversify economies and create jobs, chemical companies are investigating the possibility of expanding into a broader product portfolio that encompasses oil-based (e.g., naphtha) feedstock.

However, the cost advantage that Middle East companies enjoy with natural gas reduces significantly when moving to naphtha feedstock.

In addition, these products are more complex to manufacture, require greater interaction with customers to provide the necessary technical and applications support, and demand new capabilities for Middle Eastern companies to manage the diversified portfolios and complicated supply chains. 

To determine their path forward, Middle East chemical companies need to look at two elements: the competition and their own capabilities.

In terms of competition, North American and European companies are likely to be more aggressive in defending their territory in specialty chemicals — where their innovation capacity is a strong source of competitive advantage — than in basic chemicals. However, a lot of specialty segments are commoditizing rapidly and Middle Eastern companies are finding opportunities to put down stakes — particularly as Western companies divest businesses to clean up their balance sheets or adjust to their growth strategies and, in doing so, seek to sell or establish joint ventures for their businesses that could significantly benefit from integration with Middle Eastern players.

Earning and learning

In these cases, it will fall to the Middle Eastern firms to make sure that they truly capture knowledge from these partnerships, thus building their own capacity to develop a high-value and diversified product portfolio, rather than simply acting as the purveyors of inexpensive feedstock. In particular, regional companies should consider where else they might be able to build a competitive advantage, such as using their regional proximity to Asia and Europe to better serve those markets.

Saudi Arabia and the United Arab Emirates have both started to move into new chemical products and are making significant investments in integrated petrochemical and specialty chemical projects.

But the move is not without challenges. They must carefully choose those products that meet their profitability targets, yet at the same time balance government requirements for diversification and job creation in order to receive the feedstock they require. In addition, they need to further develop their technology and management capabilities to handle the diverse array of products. Marketing these products will also be more complex, as companies will need to work much more closely with customers to meet their needs; this requires them to place supporting infrastructure directly in Asia and Europe, where there is a demand for these products.

In order to overcome these challenges, Middle Eastern companies should focus first on just a small number of new products to allow for a learning curve, then build a sustainable, competitive position. They should continue to use acquisitions and joint ventures with Western and Asian companies to make use of existing technology, market access and management experience, as well as capabilities, in order to be competitive. In doing so, it is important for Middle Eastern chemical firms to have a clear strategic intent toward acquisitions or joint ventures and vital that they capture the integration benefits of such arrangements.

Forging the future

As the crisis recedes, companies in the Middle East will continue to shape the chemical industry by further increasing their footprint across products and regions, as they build on their relative advantages. As a result, they will be a main driver in the transformation of the chemicals industry by actively pursuing acquisitions and forging new alliances.

June 1, 2010 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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