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Capitalist Culture

Lebanon – Wealth or war

by Michael Young July 1, 2008
written by Michael Young

This month Lebanon commemorates the second anniversary of the July-August 2006 war, and moreover, the dilemma it created for the country. Druze leader Walid Jumblatt defined that dilemma more than a decade ago as being a choice between Hanoi and Hong Kong; in other words, between Lebanon as a haven for open-ended resistance and militancy, or as a liberal economic system that would seek out peaceful transactions through free markets.

That dichotomy has been often repeated, to the extent that it has almost become a cliché. However, clichés often provide insight into reality, and it was noticeable that in a speech on May 26, the Hizbullah leader Hassan Nasrallah, returned to that dichotomy. He told his audience: “Some put the government and the resistance in front of two choices: Either Lebanon is Hong Kong or Lebanon is Hanoi. In other words either Lebanon is destroyed or it is the pearl of the East, yet with its land occupied, its sovereignty confiscated, its dignity trampled upon, and its security exposed to the Israelis.”

Wherever one falls in this debate, what is of particular interest is the way it has been formulated, so that capitalism, open markets, and striving for prosperity are antithetical to the idea of resistance — or rather of resistance defined mainly as the pursuit of armed struggle.

That approach is surprisingly narrow in this day and age, where power is not exclusively of the gun. The notion of “soft power,” in other words influencing others and shaping their behavior through persuasion and attraction, is now so widespread, so essential a product of globalization, that it too has become a cliché. And what kind of soft power does Lebanon have that might advance its “resistance” against Israel and liberate the Shebaa Farms?

Perhaps more than we know. Recent signs intone that the United States may push Israel to withdrawal from the Shebaa Farms. The US and the United Nations have an incentive to act on this front precisely because of the Hanoi-Hong Kong duality. If the Shebaa Farms can be neutralized, the reasoning goes, this may oblige Hizbullah to disarm, advancing a more attractive model for Lebanon. Their incentive is to react to, but also bolster, Lebanon’s soft power — to show why those things that make Lebanon appealing to outsiders are worth preserving. And if Lebanon offers beaches, good quality education, shopping, economic development, cosmopolitanism, and peaceful prosperity, then what better way to confirm that those attributes mean something in the world than for the UN, US or anyone else to show that it is a strategic priority for them to prevail in Lebanon?

In other words, Lebanon has soft power precisely because the influential in the world are willing to make its more liberal model triumph over the more martial alternative of perpetual resistance — aka Hanoi.

The problem with Hizbullah’s model is, simply, that it is rather grim. No one would deny that the party fought courageously until 2000, when the Israeli army was forced to withdraw from Lebanon. But after that the contradictions between Hong Kong and Hanoi sharpened. With most Lebanese expecting a de-escalation in Hizbullah’s activities, instead the opposite happened: the party accumulated more arms. From liberator of the south, it built up an arsenal suggesting it wanted to liberate Palestine itself. Here was a promise of endless Hanois.

The Hizbullah model is popular in the Arab world. After more than half a century of humiliation in confronting Israel, many see in Hizbullah a fighting force that works. But this lasts for as long as the fighting remains limited to Lebanon, where, not surprisingly, militancy is less popular, perhaps because the country is demolished every time serious shooting starts. Perhaps too because Hong Kong will always be much more appealing than Hanoi, since it offers an infinite number of possibilities and variations beyond the use of weaponry.

Hizbullah’s critics ought to define better how soft power can achieve the goals Hizbullah claims to be pursuing. They ought to show how being Hong Kong need not necessarily be a tale of land occupied, sovereignty confiscated, dignity trampled upon, and security exposed.

But on Hizbullah’s side, the party must really do better than simply dismiss the liberal capitalist model, Hong Kong, as a byword for perdition. Whatever Hizbullah does, the Lebanese, and we suspect most other Arabs, will always prefer an approach that promises more than open- ended conflict. With liberal capitalism you can be who you want, say what you want and make money if the opportunity allows. An ideology of war, in contrast, means what you build might soon be destroyed, what you want to be may be not be allowed and the opportunities you seek might disappear when the rockets fall.

Nasrallah is right. There are only two choices — and I suspect a majority of Lebanese have already chosen.

Michael Young

July 1, 2008 0 comments
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Financial Indicators

Global economic data

by Executive Staff June 22, 2008
written by Executive Staff

Interest rates on government borrowing (as a %)

Source: OECD

Interest rates are determined by three factors: the price that lenders charge for postponing consumption, the risk that the borrower may not repay the capital and the fall in the real value of the capital that the lender expects to occur because of inflation during the lifetime of the loan. The interest rates shown here refer to government borrowing and the risk factor is very low. To an important extent the interest rates in this table are driven by the expected rates of inflation. From 1993 long-term interest rates fell for a few years but edged upwards again in 1994/1995. Since then they have been falling steadily in most member countries, but have starting to rise again in 2006. For the 20 member countries in the table for which data are available for the full period from 1993 to 2006, long-term interest rates averaged 6.9% in 1993 but only 3.8% by 2006. For many countries the long-term interest rates recorded in 2005 were historically low. The most striking feature of the table is the reduction in the variance of interest rates among countries. The convergence of long-term interest rates is mostly explained by the increasing integration of financial markets — one aspect of globalization —  was particularly pronounced among members of the euro area. Japan and Switzerland are exceptions; their interest rates have remained low but are not converging to the OECD average.

Investment Rates (in gross fixed capital formation as % of GDP)

Source: OECD

The total investment rate now averages 21% for the OECD as a whole but rates are substantially higher than this in Korea, Spain, Iceland and Australia and well below 20% in Sweden, United Kingdom, Germany and Norway. For the OECD as a whole, total investment rates are largely unchanged compared to 1993-1995. Particularly sharp falls occurred in Korea, Turkey, Japan and Germany, although in Korea and Japan, investment rates remain well above the OECD average. Total investment rates are now much higher than at the beginning of the 1990s in Ireland, Iceland, Spain and Greece. Investment in machinery and equipment accounts for more than 30% of GFCF in most OECD countries, but investment rates tend to be higher than this in countries with a significant manufacturing base, such as Japan and Switzerland. Over the period shown, the machinery investment rates have fallen in most countries, with particularly sharp falls in Luxembourg, Korea, Ireland and the Netherlands, reflecting higher growth of service activities. Rates grew most in Greece and Iceland. Investment rates in dwellings were particularly high at both the beginning and the end of the period in Norway and Portugal. Ireland, Spain and the Slovak Republic recorded substantial increases over the period, but a number of countries recorded large falls: Turkey, Luxembourg, Germany, Japan and Austria. In the short term, rates of investment in dwellings are sensitive to the business cycle, but, over the long run, investment rates in dwellings reflect population growth rates either through natural growth or immigration, and rising affluence, as is evident for Ireland and Norway.

Migration (as net migration rate per 1,000 inhabitants, annual average 2000-06 or latest available period)

Source: OECD

Since 1993 Poland is the only OECD country among the countries shown in the table that has shown negative net migration on a systematic basis. Among countries showing significant increases in population (>0.5% per year) over the 1995-1999 period as a result of international migration are Australia, Canada, Spain, Ireland and Luxembourg. Since then Iceland, Italy and Switzerland have joined the list. Former emigration countries (Ireland, Italy, Portugal and Spain) thus figure prominently among high net migration countries, a trend which is likely to continue. There are nonetheless a number of countries where net migration is currently contributing less to population increase than was the case five to ten years ago. These include Greece, Denmark, the Netherlands and Germany. Those where it is contributing more are the four former emigration countries Ireland, Italy, Portugal and Spain as well as Austria and Switzerland. Indeed, all but eight OECD countries are showing a larger contribution to population growth from net migration in recent years. With the retirement of baby-boomers in the near future, to be replaced by smaller entering labour force cohorts, labour supply needs may well increase and OECD countries see a continuing rise in net migration.

Telephone access (as number of telecommunication access paths per 100 inhabitants in 2005)

Source: OECD

Access to communications networks continues to expand in all OECD

countries. At the end of 2005, the total number of fixed and mobile telecommunications paths had increased to more than 1.5 billion. This represented a 8.8% increase over 2004 and an average increase of more than 8.5% in each year since 1997. Growth was not occurring across all access paths. The number of cellular mobile communication subscribers continues to climb. An additional 97 million mobile subscribers were added in 2005. By way of contrast, some segments of the fixed connection market have begun to decrease. The number of fixed access lines decreased in both 2003, 2004 and 2005 and will most likely continue to do so over the coming years. By 2005, all but two OECD countries — Mexico and Turkey — had more than one telecommunications access path per inhabitant and seventeen countries reported more than one and a half per inhabitant, those being Spain, Aust-ria, Australia, Portugal, New Zealand, Germany, the Netherlands, Greece, Norway, Switzerland, Finland, United Kingdom, Denmark, Italy, Sweden, Iceland and Luxembourg.

Among the five non-OECD countries shown here, growth has been spectacular in China, which had less than one access path per 100 inhabitants in 1991 but 60 in 2005. The Russian Federation has now the highest number of paths per 100 inhabitants among these countries. In spite of steady growth over the period, there were only about 13 access paths per 100 inhabitants in India in 2005. A growing trend toward liberalization, and the consequent use of prepaid cards in competitive markets, has helped drive the growth of mobile communications in both OECD and non-OECD countries. In 2004 the total number of cellular mobile users in non-member countries overtook the total for the entire OECD area.

June 22, 2008 0 comments
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Financial Indicators

Regional equity markets

by Executive Staff June 22, 2008
written by Executive Staff

Beirut SE: Shuaa  (1 month)

Current Year High: 3,399.69  Current Year Low: 1,761.53

The Beirut Stock Exchange had a stellar awakening in May and the BSI closed at 1999.36 points on May 23. The shares of Solidere flew to highs unprecedented in the company’s history as soon as Lebanon’s conflicted political opponents reached an unexpected agreement on May 21 to elect a president and downtown Beirut was released from the stranglehold of an 18-month demonstration. Solidere moved limit up at 15% on the news and the three major banking stocks added between 8 and 10%. On May 22, the traded value of Solidere shares exceeded $50 million — way above the BSE’s average daily trading values in the past year — and the stock jumped another 15% to close at $35.70.

Amman SE  (1 month)

Current Year High: 9,330.70  Current Year Low: 5,560.56

Glad tidings also from the Amman Stock Exchange as a second straight month of gains pushed the ASE index above 9,000 points by May 7 and to a pinnacle of 9,330.70 points on May 14 before softening to 9,179.20 points by its May 22 close. The four sub-indices moved largely in step with the general index. Year to date, the ASE index gained 22.1%, driven by a phenomenal 79.3% climb of the industrial index. The ASE’s P/E ratio reached 26.73x, the second highest in MENA. Arab Bank reported 41% higher first-quarter profits and Q1 profits of Jordan Phosphate Mines soared 84% from a year ago. The Jordanian Securities Commission approved the planned initial public offering of what will become the Hashemite Kingdom’s first mortgage lending specialist.

Abu Dhabi SM  (1 month)

Current Year High: 5,054.35  Current Year Low: 3,327.86

The newly rebranded Abu Dhabi Securities Exchange (ADX) traded sideways in May. The general index closed at 4,961.14 points on May 22, compared with 4988.86 on Apr 30. Top sub-sector was the industrial index which added 12.7% over the period, followed by construction with 4.3%. The consumer and telecom sectors were notable underperformers, with losses of 7.5% and 3.9% on the month. Arkan Building materials made news by announcing a deal with Aldar Properties which made it a major supplier to Abu Dhabi’s biggest developer. The market authorities announced in early May that they converted the eight-year-old name of Abu Dhabi’s securities trading place from Market (ADSM) to Exchange to signal its willingness to offer increased sophistication and to attract more foreign listings.

Dubai FM  (1 month)

Current Year High: 6,291.87  Current Year Low: 3,968.09

The Dubai Financial Market slipped back in May as its positive momentum from the previous month fizzled out. On May 22, the general index closed at 5,696.61 points, down from 5,815.53 points on May 1. Sectors generally moved range bound with the overall index, except for the materials sub-index. Materials showed quite a bit of volatility throughout the month and closed 5.45% lower on May 22 when compared with the beginning of May. Year to date, the DFM lost 3.97% underperformed its peers in Abu Dhabi and elsewhere in the GCC with the exception of Saudi Arabia. Emaar Properties share prices again weakened slightly and closed at $3.13 on May 22. Fellow real estate firm Deyaar pulled out of a development deal in India, continuing to make negative headlines following an embezzlement case in April. Deyaar shares nonetheless traded in the general range of its sector and the overall market in May.

Kuwait SE  (1 month)

Current Year High: 15,057.70            Current Year Low: 11,348.60

The Kuwait Stock Exchange roared into May with a mini-rally that drove the index to a new historic peak of 15,057.70 points on May 7. The KSE closed a tad lower at 14,957.50 on May 22. Real estate and insurance were the bourse’s top gainers in May, adding 6.2% and 4.2%, respectively. The banking sector index dropped 4.4%. In terms of first quarter results, banks led KSE listed companies in terms of total earnings per sector with $1.1 billion, followed by investment firms with $1.06 billion. In year-on-year comparison, however, the highest-gaining sector was real estate with a 43.3% increase in profits. Banking sector profits were 26.7% higher than in Q1 2007 whereas profits in the investment and insurance sectors dropped by 52.3% and 41.6%. The KSE was closed during a three-day mourning period in mid May after the death of its former emir, Sheikh Saad Abdullah al-Sabah.

Saudi Arabia SE  (1 month)

Current Year High: 11,895.47            Current Year Low: 6,861.80

May was a moderately unfriendly month for numbers on the Saudi Stock Exchange, which continued to hold the red lantern for MENA stock market performance in 2008 to date. At its close on May 21, the TASI stood at 9,672.62 points, compared with 10,066.16 points at the end of April. On the year-to-date trajectory, the TASI’s loss of 13.45% to May 21 exceeded, by almost 10 percentage points, the loss of the DFM index, which was the period’s second worst performer among the region’s major exchanges. SSE trading volumes were unexciting as investors were said to put funds aside for the June trading debut of Inma Bank and for a rights issue by Riyad Bank. Another newcomer, Zain Saudi Arabia, achieved good trading volumes in its second month on SSE.

Muscat SM  (1 month)

Current Year High: 11,489.62            Current Year Low: 6,042.93

The ascent of Omani stocks slowed in May when compared with the Muscat Securities Market’s strong growth phases in February and April this year. Entering the month at 11,210 points, the MSM index nonetheless still had enough breath to inch up to a new year high of 11,471.56 points on May 22. With its 26.96% gain since January 1, the MSM leads the GCC bourses in this regard. While the banking sector trailed the market, the services index added 2.71% during May and outperformed the general index by almost 1 percentage point. Among services sector gainers was the Salah Port Services Company which climbed more than 19% to May 22 after announcing on April 30 that its first-quarter results were more than doubled from a year ago.

Bahrain SE  (1 month)

Current Year High: 2,889.22  Current Year Low: 2,295.98

The Bahrain Stock Exchange had a positive month on the balance. After losing some 34 points in the first week of May, the index came back and gained almost 80 points to close at 2885.09 points on May 22, a level very close to the year high of 2889.22 which it had reached in March. The banking sector did well and improved 7.41% in course of May. The hotels and tourism sector remained buoyant also above the general index’s performance whereas the sub-indices for insurance and for investment firms shed 1.33% and 1.88% respectively, underperforming the market. Among GCC bourses, the BSE showed some of the most attractive valuation ratios in May. It’s average price to earnings ratio stood at 11.83x on May 22, almost 5 percentage points lower than the GCC average of 16.67x  and 9 percentage points below the Doha bourse fairly expensive 20.99x.  

Doha SM: Qatar  (1 month)

Current Year High: 12,289.40            Current Year Low: 7,244.63

The Doha Securities Market took the trophy of being the best performing GCC bourse between May 1 and May 22. Its 6% net gain included a 2.6% drop on the last two days of the review period when profit taking caused the DSM general index to recede from its May 20 year high of 12,289.40 points. All four sub-indices stayed on positive ground and the banking sector led the market’s movement with a net gain of 7.2% while the industrial sector was its laggard with net gain of 2.2%. DSM heavyweight Industries Qatar got a buy nod from analysts on the strength of its $20 billion expansion program. After an 8-week uptrend in its share price, IQ traded at P/E ratio of 16.71x on May 22 but was still below the DSM P/E ratio of 20.99x which is the highest in the GCC and the third highest in MENA.

Tunis SE  (1 month)

Current Year High: 3,031.70  Current Year Low: 2,436.94

The Tunindex closed at 2,963.55 points on May 23, down 18.36 points from 2,981.91 on April 30. However, share price movements displayed some intra-month volatility with a 142-point slide from a year high of 3031.70 points on May 9. Of market heavyweights, beverage maker SFBT hovered in a range of $11.51 to $11.73 after announcing 2007 results of $38.2 million. Banque de Tunisie shed almost 17% in an intra-month decline but maintained its position as the market cap leader on the Tunisian Exchange, which it had taken over from SFBT in spring. BT appointed a new management team in mid May as part of corporate restructuring activities.

Casablanca SE All Shares  (1 month)

Current Year High: 14,925.99            Current Year Low: 11,271.35

Companies on the Casablanca Stock Exchange traded sideways in the review period as the index moved from 14,387.79 points at the end of April to 14,451.08 points on May 23. While this trading range was about 3% off index peaks reached earlier in 2008, the sheltered Moroccan stocks remained quite a bit dearer than stocks on other MENA bourses. At market ratios of 35.18x for price to earnings and 7.02x for price to book value, these CSE cost indicators are each more than double the regional average P/E and P/BV ratios. In company news, Morocco’s largest bank, Attijariwafa, expanded further into Africa by acquiring leading Senegalese bank, Compagnie bancaire de l’Afrique de l’Ouest (CBAO).

Cairo SE: Hermes  (1 month)

Current Year High: 103,313.60          Current Year Low: 67,011.50

Share values on the Cairo and Alexandria Exchanges contracted significantly in May 2008, as the close of the EFG Hermes Index at 92,331 points on May 22 represented a net loss of 9.8% when compared with the start of the month. While earlier downward fluctuations of CASE stocks were influenced by global markets, the negative movement last month was home made and incorporated the reactions of a surprised market to announced and rumored government action. Seeking to fund salary increases for cash-strapped public sector employees, the government revoked tax exemptions and fuel cost subsidies for energy-intensive corporations and started taxing profits from bonds and T-Bills. The stocks of large energy-intensive companies lost favor with investors due to the sudden loss of advantages; heavyweight Orascom Construction dropped 12.7% from May 1 to 22. The levy on bond returns sparked rumors that capital gains would also be taxed, to which investors responded by selling shares to take profits quickly. On the positive side, CASE authorities announced their intention to improve the bourse’s appeal by completing a campaign to banish hundreds of non-rule compliant companies before the end of 2008.

June 22, 2008 0 comments
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Banking & Finance

Money Matters by BLOMINVEST Bank

by Executive Staff June 22, 2008
written by Executive Staff

Regional stock market indices

Regional currency rates

Dubai to introduce 3-5% VAT in 2009

Dubai Customs Authorities (DCA) will be introducing a 3-5% Value Added Tax (VAT) in the first quarter of 2009. This will replace the existing 5% customs duty. A spokesman for the DCA dismissed reports by the IMF expecting 2% inflation as a result of the new measure, highlighting that real inflation will be around the acceptable 0.5% range. He further stressed the positive economic growth that other countries experienced as a result of adopting the VAT system. DCA predicts other Gulf Cooperation Council nations to follow suit after signing unilateral free zone trade agreements with the US.

GCC investing in $18B of iron ore processing factories

The Gulf Cooperation Council Countries (GCC) are investing $18 billion to build 46 iron ore processing factories. The move is seen as vital in meeting the excess demand for steel following the construction boom that Gulf countries are witnessing. This has caused a supply shortage over the past five years. Moreover, diverse industrial projects are driving the demand for iron products of all kinds. Saudi Arabia is spearheading the drive to build iron factories with 17 new plants, followed by the United Arab Emirates (UAE) at 16, Oman with 6, Bahrain at  4 and Qatar with 3. Out of the top ten industrial projects requiring iron derivatives, four are in Saudi Arabia, three in UAE, two in Qatar and one in Oman.

Yemen invests $1.34B in new oil field exploration

Yemeni oil companies increased oil exploration investments by 10% over the past year. The initiative is to countermeasure the aging oil fields that have caused a drop in oil production in 2007 compared to 2006. The oil exploration companies conducted hydrocarbon surveys on a surface of 3943sqm and drilled 138 new oil wells that increased daily production of oil and gas by 80,000 barrels and 77 million cubic ft respectively. Investment by foreign companies in oil exploration grew by 110% from 2006 to reach $189.6 million in 2007. Yemen produced 116.5 million barrels of oil in 2007 with an average daily production of 3,196 barrels, representing a drop of 12.5% from 133.3 million barrels in 2006. The Yemeni government’s share of oil production also decreased by 18% to 73.6 million barrels. Oil exports in 2007 accounted for 36.7 million barrels valued at $2.6 billion. This contrasts with 50.9 million barrels of oil exports in 2006 estimated at $3.2 billion. Nevertheless, oil reserves increased by 4.8% to 10.9 billion barrels in 2007 from 2006 and the static reserves increased 3.4% to 695 million barrels by the end of 2007. The government also finalized the tendering for the oil exploration of 25 regional areas including gas reserves in maritime fields.

June 22, 2008 0 comments
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Islamic Banking & Finance

First deposits

by Executive Staff June 22, 2008
written by Executive Staff

Syria’s embryonic Islamic banking sector is up and running. In late 2007 the country’s first two sharia-compliant banks opened to the public and a further five have received preliminary licenses and are in the process of setting up shop. All are hoping to tap the finances of a population increasingly keen to express its Muslim identity in the last country in the MENA region to liberalize its banking sector, and the early indicators suggest they will find much success.

Cham Bank became the country’s first Islamic financial institution in August 2007 when it opened its services to the public from its branch and headquarters in Damascus. The bank, a $108 million joint venture between a number of key investment firms from Kuwait, Saudi Arabia and Syria, reportedly took $100 million in the first six months of operations.

The Syrian International Islamic Bank, a $108 million venture between Syrian and Qatari investors, opened to the public in mid-September and was the only Islamic firm to have published audited figures by the time of this publication. At the end of 2007 — after two and a half months of operations — the bank recorded assets of $254 million and customer deposits of $84.1 million. The bank had a total investment portfolio of $31 million. As an Islamic institution, SIIB does not extend credit but shares the investment risk with its clients.

SIIB general manager Abdel Qader Dweik said the bank had taken $261 million in deposits from its two branches in Damascus and Aleppo at the end of March 2008, its first six months of operations. “The results have exceeded all expectations and we plan to expand considerably throughout 2008,” Dweik said. “We feel the country is ready for Islamic banking services.”

SIIB’s end of year figures provide the first indicator of the potential market size of Islamic banks in the Syrian market. The figures are impressive when compared to traditional banks such as the Syrian Gulf Bank which began operating around the same time and recorded deposits three times less than the SIIB at $26.5 million and loans of $12.4 million.

Untapped market

Independent analysts have predicted Islamic banks could eventually snare up to 50% of Syria’s banking market. “There is a gap in the market that can only be filled by Islamic institutions,” Abdul Kader Husrieh, general manager of Ernst & Young Syria, said. “That gap is large and has waiting to be filled for some time now.”

A further five Islamic banks have been licensed and several will commence operations this year. These include Bank of Baraka-Syria, a $108 million venture of the Bahrain-based Al Baraka Banking Group; Dubai Islamic Bank, a $216 million venture in partnership with the state-owned Real Estate Bank; Noor Financial Investment Company, a $216 million venture being backed by the Kuwait-based Noor Investment Group and the Pakistan-based Meezan Bank; Tadhamon International Islamic Bank, a $108 million affiliate of the Yemen-based Hayel Saeed Anam Group and the Global House Group of Bahrain which recently outlined plans to launch Syria’s largest Islamic bank with a capital of $540 million in partnership with a number of large financial institutions from the Gulf and several Syrian businessmen.

On paper, Islamic banks have a number of advantages. Unlike sharia-compliant institutions in other countries, Syrian firms are entering the market at the same time as their commercial rivals, allowing them to sidestep the challenge of having to promote a relatively new concept in competition against well established commercial firms — a challenge Islamic banks in neighboring Jordan and Lebanon have struggled to overcome. Syrian authorities have also granted Islamic banks a wider range of investment activities than their commercial rivals, including being able to enter as partners into trade, industrial or other ventures. Given the difficulties commercial firms have experienced in providing long term credit, being able to act as an investment partner opens up new lending opportunities commercial firms can not access.

Challenges to growth

Not that it is all smooth sailing. Like other Islamic financial institutions around the world, public awareness about Islamic products remains low. A lack of qualified staff also looms as a major hurdle for Syrian firms. To put in place a long term remedy, Cham Bank has approached a number of universities in Syria in a bid to see them add sharia-finance courses to their business and economic faculties.

The higher cost often associated with Islamic banking also looms as an obstacle. While the newest members of Syria’s private banking sector say they plan to unveil competitive products, the experience in other countries has been one where customers have had to pay a premium for banking services that are deemed legitimate under Islamic law. Whether price-sensitive Syrians will be willing to do so remains to be seen. “What part of the Syrian personality is more dominant,” Jihad Yazigi, editor of The Syria Report, asked. “Is it their religious side or is it their trading side?”

June 22, 2008 0 comments
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Islamic Banking & Finance

Dr. Ahmad Jachi – Q&A

by Executive Staff June 22, 2008
written by Executive Staff

With Islamic banking gaining momentum throughout the Middle East, questions about its regulatory framework are increasingly asked. Executive interviewed Dr. Ahmad Jachi, First Vice-Governor of the Central Bank of Lebanon and Chairman of the Islamic Banking Committee, about the issue.

E What is the view of the Central Bank on regulating Islamic banking in Lebanon?

The duty of the Central Bank is to safeguard the currency, economic stability and basic structure of the banking system as well as the development of the monetary and financial market. Therefore, the bank’s approach to the regulation process resides in creating a level playing field for a sound and stable Islamic financial system, one that is viable and well integrated in our financial system.

E What is the legislative framework for Islamic banks in Lebanon?

The promulgation of Law 575 in 2004 allowed the Central Bank’s Central Council to license Islamic Banks in Lebanon. The Central Bank started by establishing a special Islamic banking committee, chaired by its First Vice-Governor. This committee is in charge of defining the regulatory framework for Islamic banks. It outlined the banking, financial and other activities that were to be provided by Islamic institutions and set the ground rules for the protection of depositors and customers as well as the preservation of an adequate level of liquidity and capital. The commission examined the standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and reviewed the Islamic banking legislation and practices in several countries in order to gain from their experiences before setting proper practices in Lebanon. Commission members were in majority part of the Central Bank staff.

E What is the regulatory framework for Islamic banks in Lebanon?

In Lebanon, only fully fledged banks are allowed to operate in the field of Islamic finance, if they have a minimum capital of $20 million and a share value of $100. Islamic banks provide all banking, commercial and investment services and operations, including the establishment or participation in new or ongoing ventures. Deposits have a minimum term of six months and are protected by the deposit guarantee law. Investments and placements in Lebanon must account for at least for 50% of the bank’s total assets. The Central Bank has also stressed the establishment of a Corporate Governance Committee, whose primary responsibility is to safeguard stakeholders’ interests. Islamic banks will also be monitored by an independent sharia auditor and will have to publicly disclose their sharia board annual report. In addition, Islamic banks will have to feature monetary and special reserve requirements on deposits and investments.

E What is the role of the Sharia Supervisory Board (SSB) and what is the background of its members?

The Sharia Supervisory Board is usually comprised of scholars versed the interpretation of Islamic law and its application within Islamic financial institutions. The role of the SSB is to ensure and certify that all contracts and agreements related to the institution’s financial transactions are sharia-compliant. In Lebanon, each Islamic bank will have its own Sharia Supervisory Board, which usually consist of three scholars specialized in sharia who have deep knowledge of financial and banking operations. This consultative body reports to the respective board of directors and the general assembly.

E Do Arab central banks do oversight on sharia-compliant products?

There is no unified practice among the Arab central banks vis-à-vis the centralization of SSBs. Countries like Bahrain and Sudan have established centralized SSBs, which in turn supervise the SSBs of Islamic banks. Other countries, like Lebanon and the UAE, do not have a central SSB. Moreover, there is no standardization regarding the supervisory authority’s model. Some countries have created a separate supervisory authority drawn on the FSA model overseeing Islamic banks’ operations, such as in Lebanon, Bahrain and Sudan, while in others, like Saudi Arabia, the supervisory authority is still part of the central bank.

E How are Islamic products usually benchmarked? Is this done from a perspective of absolute returns or risk-adjusted returns?

Islamic financial instruments co-exist with conventional financial instruments in an open market structure governed by demand and supply. Although sharia-compliant finance is centered on return on investment rather than on interest rate, the competitive forces in an open market would eventually mediate between both systems to create a level playing field and hence comparable ‘rates of return’. Islamic banks are faced with the same classes of risk and risk exposure as their conventional counterpart. Credit risk, market risk, operational risk and legal risk are inherent to any financial operation regardless of its nature, whether conventional or Islamic. However, IFIs are faced with some additional types of risk such as reputation risk and sharia-compliance risk. Displacement risk — as a result of lower yields given by the Islamic banks as compared to the conventional ones — is also important for IFI stakeholders.

E How are the different Islamic funds structured to comply with sharia principles?

In order to be sharia-compliant, investments need to go through a set of conditions or filters. The main filters are related to the company’s business activity, whether or not it is in accordance with sharia requirements, the interest component of company revenues, whether the company borrows and lends frequently on interest basis and the leverage of debt to equity and whether the sale and purchase of shares is backed by debt.

The role of any fund’s Sharia Supervisory Board is to screen and accept asset classes underlying the investment vehicle, which is usually done twice a year. For instance, the SSB of the Dow Jones Islamic Fund has developed a two-step process whereby companies are subject to both an industry and a financial screening. The industry screening rejects companies dealing with non-sharia-compliant products and services such as alcohol, pork, defense, pornography, entertainment, insurance and conventional banking.

The financial screening excludes companies with unacceptable levels of debt or interest income and is subdivided in three applied filters. Companies excluded are those with a total debt divided by trailing 12-month average market capital greater than 33%. Investment is also prohibited in companies whose sum of cash and interest-bearing activities divided by trailing 12-month average market capital is greater than 33% or whose account receivables divided by total assets are greater than 33% .

E Doesn’t the prohibition of speculative behavior in Islamic finance contradict the basic principles of financial investment?

It is true that gharar, which is translated to ‘speculation’, is prohibited. However, the true meaning of gharar is any element of uncertainty in any business or contract. This is quite different from financial speculation as we know it. Therefore, I do not see any salient contradiction between financial speculation and sharia.

E What about prohibition of riba? Aren’t Islamic financial products usually more expensive than conventional ones?

In some cases, structuring new Islamic financial products entails relying on the expertise of lawyers or sharia scholars. This may account for the incremental fee faced by investors or depositors who pay the price of an added level of expertise.

E How is due diligence implemented on the different Islamic instruments?

Islamic financial instruments are in general asset-based or asset-backed. The intermediary role of an IFI is to ensure the financial prudence necessary to preserve its depositor’s investment. Due diligence for IFI is mainly done on utilizations and sources of funds. It takes into consideration the quality of the client and project at stake, its inherent risks and default probability, as well as, the liquidity and quality of the underlying asset. The IFI should inform its stakeholders of the placement target of their funds, the expected rate of return and tenure along with any change in the investment portfolio. Profit calculation, allocation and distribution schemes should be clearly disclosed, besides the SSB qualification of the investment scheme.

E Are there any special ratings for Islamic financial products and how accurate are they?

Some of the Islamic financial institutions as well as Islamic products such as sukuk are currently rated by Moody’s, S&P and Fitch. The different types of liabilities are being addressed by the different rating types. For instance, Moody’s bank ratings comprise the Bank Financial Strength Rating (BFSR), the baseline credit assessment, the local and foreign currency deposit ratings. Fitch and Moody’s do not believe, however, that a separate rating methodology or rating scale is needed as they deem their rating criteria and methodologies flexible enough to cover the specificities of sharia-compliant issuers and issues. It is worth noting that their analysis does not extend to whether or not a transaction, security or issuer is in compliance with the sharia. The Islamic International Rating Agency (IIRA) is the single institution that offers in addition to credit rating, sharia quality rating and corporate governance rating.

E Do you think that the Islamic financial market is at risk of facing a crisis comparable to the subprime one?

Investment share of the Islamic financial institutions in the structured products is very negligible; therefore their exposure to the current subprime crisis is very limited.

E What type of growth are you forecasting for Islamic products in the next year?

Fueled by the oil boom, the Islamic finance industry witnessed in the past decade a strong growth rate varying between 15 to 20%. While investors request liquidity, capital protection and profit on their investment, some investors are also seeking sharia compliance as well. The industry is currently driven by a high demand, exceeding the supply, and there are no signs that this trend will slow down as witnessed in the sukuk market boasting a compound annual growth rate of 121% from 2001 to 2007. Additionally, some 150 Islamic funds and funds of funds are available in the GCC and global market with a total capitalization of $10 billion as of 2005. All indicators seem to point to a faster expansion of the sector as through financial engineering, new contracts can be designed in compliance with gharar and riba prohibitions. Moreover, many Western banks and fund managers are entering this new field, relying on their financial acumen and the sharp know-how of strategic asset allocation.

June 22, 2008 0 comments
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Islamic Banking & Finance

Islamic banking in Sudan: a quick history

by Isam El Zein El Mahi June 22, 2008
written by Isam El Zein El Mahi

Until 1956 Sudan was a British colony, and its banking system was designed in the English style. The first foreign bank branch operated in Sudan was the National Bank of Egypt in the year 1903. Barclays Bank followed in 1913, the Ottoman Bank came in 1949, and Misr Bank and Credit Lyonnais arrived in 1953. The National Bank of Egypt branch had been carrying out the duties of a central bank in the Sudan up to independence. From 1956 to 1960 the Sudan Currency Board took over the responsibilities of local currency issuance. The central Bank of Sudan was established on February 1960. During the 1962-69 period, a series of national commercial and development banks were established. In 1970 the foreign bank branches and foreign companies in Sudan were nationalized. Three years later, some foreign bank branches were allowed to operate again in Sudan such as Abu Dhabi Bank in 1976 and City Bank in 1978.

That year also witnessed the establishment of the first Islamic bank in Sudan, Faisal Islamic Bank, which had been licensed under a special act. Then a series of Islamic banks started to emerge, such as Tadamon Islamic Bank, the Sudanese Islamic Bank, the Islamic Cooperative Development Bank and Albaraka Bank. In September 1983 Islamic sharia rule was applied on all transactions and this led to the banks’ Islamization program. In 1984 the general laws of transactions were amended, especially Article 110 prohibiting all receiving or paying of interest.

The previous conventional developments in the Sudanese banking system segued into pure Islamic banking. Islamic banking as a concept was developed as a result of the religious prohibition on the payment or receipt of interest. The conventional banking system was considered by Islamic sharia scholars as a type of usury.

Sudan’s Islamic banks apply all typical Islamic financial instruments. The relationship between the Sudanese Islamic banks and the international foreign banking systems is based on normal corresponding and agency arrangements. The strongest links are with the international Islamic banks, mainly in Bahrain, Malaysia, Jordan and the Gulf. The Sudanese Islamic banks do not mix the received interests from the international conventional banks with their budget accounts, but instead donate it to social needs within the country. The Sudanese Islamic banking system is applying Islamic bank ratios as dictated by AAOIFI and Basel 1 and 2 requirements.

Dr.Isam El Zein El Mahi is the General Manager of Khartoum Stock Exchange

June 22, 2008 0 comments
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Islamic Banking & Finance

Morocco’s mixed welcome for sharia financing

by Executive Staff June 22, 2008
written by Executive Staff

Launched with great pomp in Morocco in October 2007, Islamic banking and financial products have come to satisfy the increasing demand of some Muslim customers after Bank al-Maghrib, the country’s central bank, permitted the use of ijara and murabaha. Meanwhile, in the business sector musharaka was permitted to finance clients, while not posing a threat to their Islamic believes. The products currently offered in Morocco are similar to those offered as Islamic financial alternatives applied elsewhere in Africa, including Tunisia, Egypt, Senegal, and Sudan.

At the opening of the Moroccan banking system to these new products, Abdellatif Jouahri, governor of Bank Al-Maghrib, noted that “with the Professional Group of Moroccan Banks (GPBM), we have developed a variety of banking products that meet the characteristics and rules of sharia law,” in accordance with Moroccan regulations.

Commenting on this initiative, the Moroccan Association for the Protection and Guidance of the Consumer believes it is beneficial for the future banking climate of the country, “especially since the experience in other countries has been good.” In an interview with Executive, Bouazza Kherrati, the association’s president, explained that “with this partnership between the consumer and the bank, the customer is no longer used as a source of revenue because he participates in the development of society, while banks will not lose money because the system is based on partnership, investment, and profit sharing.”

According to Zoubeir Ben Terdeyet, CEO of the French firm Isla-Invest Consulting, “Morocco is one of the countries most familiar with Islamic products in the continent. Alternative products have been available for a few months already and the country offers great investment opportunities. In addition, Moroccan private banks are quite aggressive and the Casablanca Stock Exchange is very dynamic.”

With the recent buzz, promoting Islamic products in the Moroccan economy is likely to enter a new stage in the coming years. According to Zoubeir, “Islamic finance is one of the most dynamic sectors. Will Morocco’s central bank allow foreign banks to sell such products one day? If the Moroccan market remains closed to foreign banks, there is no concern. Banks will not exert a lot of effort unless they are threatened by a foreign competition, then a lot of things will be done.”

However, it is difficult to analyze the effects of Islamic products on the market since their launch in 2007 has yielded little credit and low demand. The evidence is found in the number of customers who chose these special products. According to a bank in the country, “there are only a dozen, at most. A number of them reported being discouraged by an offer they deem expensive.”

The Professional Association of Financial Companies (APSF) does not think the blur regarding the taxation of these products is likely to evaporate anytime soon. According to the APSF, “the alternative products are simply treated as conventional banking products.”

Khalid Aliou, CEO of Bank CIH, noted the results of the bank’s offerings, saying the low amount of interest in Islamic products is caused by “the stress of higher tax regulations, which make these new products more expensive than those offered by traditional banks.”

Many experts accuse the implementation of value-added taxes (VAT) as largely responsible for this situation. Indeed, in the minds of consumers, there remains a clear inconsistency between these products and those usually offered by banks. In the conventional sense, Islamic products do not produce any interest, only a negotiated profit margin is initially applied. The margin is, however, subject to VAT, making customers weary of these special products. According to a customer, “not only are they not Islamic because they include a profit margin, but they remain more expensive than conventional banking products.”

Moreover, the fiscal administration of sharia financial products treats these new products like any conventional banking service. For example, the Islamic ijara product, “which is the financing of a property on equity based on company credit, is treated by a tax on product leasing (LOA). It is therefore subject to a 20% VAT.”

Murabaha products offer another form of financing which, unlike conventional credit, allows the recipient to enjoy a good purchased by the finance company with a famously low profit. In the traditional model of credit, the finance company lends money to a customer who is himself in charge of acquiring the property.

For taxes, murabaha is considered a credit account and subjected to 10% VAT. Once the property is transferred to the borrower, the VAT dilemma will remain. The company offering murabaha credits will remain subjected to 10% VAT. Having the customer acquire the property will bring the total VAT to 20% and a sale on the basis of a 10% rate, necessitating a reimbursement of the difference. This includes repayment difficulties for VAT acquired through credit products.

In response to complaints through various media outlets over the past two months, Nourredine Bensouda, the Director-General of Taxes, highlighted the newness of these alternative products in Morocco as one explanation for all the discontent they have caused. According to him, “it is therefore the time to put in place appropriate taxation measures, like those of our predecessors in this area.”

Aware of the problems facing these banking products, the governor of Bank al-Maghrib said a study is underway to adjust the tax and standardize the cost of products.

June 22, 2008 0 comments
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Islamic Banking & Finance

Business Mecca

by Executive Staff June 22, 2008
written by Executive Staff

Islamic banking and finance has clearly found its home in the Gulf. The region leads the industry by housing two thirds of global assets, worth roughly $350 billion. Also, the world’s leading Islamic financial institutions are all headquartered in the Gulf states and they routinely export their business model to Asia, Europe and Africa. Ninety percent of incremental retail-banking production in Saudi Arabia is Islamic, but Bahrain acts as the regional hub for Islamic finance. This is largely because the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is based in Manama.

However, despite Bahrain’s role as a hub for Islamic finance, with 28 Islamic banks based in the island state, the market share for Islamic banks in the country is only 7%, according to a recent report by Moody’s. The other surprise in the study is that Oman is a Gulf state with no Islamic banks.

A closer examination of the regional sharia-compliant scene reveals that the largest Islamic commercial bank by total assets is Saudi Arabia’s Al Rajhi Bank, with more than $28 billion in assets. Second in line comes the historic Kuwait Finance House at $21.8 billion, followed by Dubai Islamic bank with $17.5 million.

Future Trends

It will be important to watch Noor Islamic Bank, based in Dubai. Started as a project of Sheikh Mohammed bin Rashid al Maktoum, Noor’s ultimate goal is to become the largest Islamic bank in the world. It only recently launched with ten branches in the UAE and intends to follow an Emirates Airlines model in order to solidify the market base, including a significant focus on customer service and innovative products.

When asked when Noor will break into the regional banking scene, a senior official at the bank remarked that this is confidential, but added: “I can say that whenever we are feeling very strong in the UAE, then we will look to the outside.” Considering who is backing the project, this will probably not take very long and one can expect an aggressive, regional Noor very soon.

Another bank to watch is the Abu Dhabi Islamic Bank, the second largest Islamic bank in the Emirates. ADIB recently entered the Egyptian market with the purchase of a 51% stake in Egypt’s National Bank for Development for $28 million. This was a bold move considering the poor reception Islamic banking is receiving in Egypt at the moment. Five years ago, a ruling by Mohammed al-Tantawi, one of Egypt’s highest-ranking Islamic scholars, essentially permitted earning a fixed amount of capital on an invested principle, largely seen as allowing interest. The move has been a large contributor to the crippled pace of development of Islamic finance in the country.

However, despite the current poor climate, the potential for Islamic banking in Egypt is huge, and one should expect more moves from Abu Dhabi Islamic Bank into Egypt, possibly in the form of a buyout.

A recent Middle East Business Intelligence report said it best, when it opined, “If Abu Dhabi Islamic Bank can make a success of offering Islamic products, the whole market will open up. We have already seen some of the local banks start to advertise their Islamic products in view of the competition for customers they see about to begin.”

Clearly Islamic banks in the Gulf are already anticipating the day when their home markets are saturated. And it appears that Egypt will be on the next front-line in the development of regional Islamic banking and finance.

June 22, 2008 0 comments
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Islamic Banking & Finance

Educating bankers in Islamic finance

by Executive Staff June 22, 2008
written by Executive Staff

The oil boom sending Arab financial markets into frenzy has generated worldwide interest in Islamic finance. But this relatively nascent segment is in much need of a new breed of financiers boasting financial skills, as well as in-depth knowledge of sharia. Universities have responded to the trend by offering Islamic financial specializations.

According to Hanudin Amin, Head of the Islamic Finance Program at the University of Malaysia Sabah-Labuan, Islamic specialization is a growing field in finance, one that has received the Malaysian government’s full support. “Islamic deposits and the market share of Islamic finance are estimated at 11-12%, a figure which should increase for both in the next few years. Many foreign countries have also shown interest in Islamic finance such as New Zealand, Japan and Hong Kong,” he explained.

Dr Humayon Dar, Senior Honorary Visiting Fellow in Islamic Finance at the London Cass Business School, which provides an executive MBA with an Islamic stream, believes that skill shortage in this particular area of finance is more profound than in other sectors, saying “With 15% consistent growth over the last decade, Islamic banking and finance poses new challenges to academic institutions and professional bodies since specialized personnel needs to be trained in sufficient numbers.”

And Lebanon is no stranger to the trend. The IFQ (Islamic Financial Qualification) was launched about a year ago as a joint venture between the British Securities and Investment Institute and the Ecole Supérieures des Affaires (ESA) in Beirut. Initiated by the Lebanon’s Central Bank with the support of Dr. Ahmad Jachi, first vice-governor of the bank, the qualification is available in the UK, Kuwait and Dubai, as well as in Beirut through ESA. “It is a global benchmark qualification that covers Islamic finance from both a technical and a sharia aspect,” explained Jan Schaaper, academic coordinator at ESA.

The qualification is aimed at those already working in Islamic finance or in the conventional banking industry and is preparation for key positions in the areas of Islamic finance and Islamic insurance. “No prerequisites are imposed on candidates who often have different professional backgrounds, such as law, consultancy and insurance,” according to Sandra Abboud, project coordinator at ESA.

At Cass, prerequisites for the executive MBA in Islamic finance are similar to other executive MBA programs. “However, we are particularly interested in candidates who have been previously exposed to Islamic banking and finance,” said Dar, underscoring the university’s Islamic specialization is similar to other specializations from an academic rigor point of view. In Malaysia, the Sabah-Labuan University accepts students with a diploma in any field related to finance, economics, business or management.

“With the IFQ, candidates will acquire practical insight into designing and setting up financial instruments such as murabaha, mudaraba, sukuk, musharakah, salam, istithna, Islamic funds and takaful,” Schaaper pointed out.

IFQ seems to be generating wide interest as Gulf nationals and EU specialists seek it out. “About 200 people sat for the qualification last year,” reckoned Abboud.

At the Sabah-Labuan University, students are mostly Malays from the country’s various provinces. According to Amine, some 50 students will be graduating this year in Islamic finance, a program that was introduced in 2004. Amine expects the program to grow to more than a hundred students graduating every year. “We started our campaign for the executive MBA in Islamic Finance late last year but were very happy to recruit about 30% of our Dubai students into the Islamic finance stream,” Dar said.

Schaaper explained that, given the qualification’s popularity, in October 2008 ESA will launch the Executive Master in Islamic Financial Management (XIFM) , in collaboration with the Rotterdam School of Management of Erasmus University. The XIFM will be focusing on the managerial aspect of Islamic finance using valuation, risk management and decision making, while allowing students to master Islamic finance techniques and to develop their strategic ability by identifying synergies between conventional and Islamic finance. The program targets managers of institutions operating in both the conventional and Islamic finance field. Schaaper pointed out that the new XIFM offered by ESA and the Rotterdam School of Management is solely dedicated to Islamic finance. “Our goal is to build a bridge between conventional and Islamic finance. The program aims at measuring and quantifying risks inherent in Islamic financial products, we therefore selected the best specialists in financial technique and Islamic sharia to help develop the program.”

On the other side of the globe, at Sabah-Lubuan University, students are exposed to a number of courses, such as Islamic accounting systems, Islamic fund management, Islamic banking practice, Islamic finance as well as microeconomics, accounting, basic finance, and business mathematics. “This program differs from other financial modules due to its intrinsic Islamic values, Islamic ethics and verses,” suggested Amin.

According to Dar, the Cass Business School EMA offers three specialised modules on Islamic economics, finance and law as well as a project.

“The Islamic financial MBA is an executive MBA with an Islamic focus,” he emphasized. “The main objective of this specialization is to produce a new breed of Islamic bankers who are well-equipped with the conventional banking and finance tools and have a firm understanding of Islamic banking and finance.”

June 22, 2008 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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