Comment

Human development at last!

by Zafiris Tzannatos
written by Zafiris Tzannatos

Not many international meetings close in an optimistic mood.The phrases “failed to agree” or “agreed to meet again” are mentioned far too often at the conclusion of such events.But last month’s meeting of the World Economic Forum was a bit different.

Convened in Jordan, the Forum brought together an impressive list of international and regional leaders at a time of economic boom in the Middle East. Bolstered by oil wealth, the region is enjoying a surge of confidence that can lead to an unprecedented change.

But economic confidence alone is not enough. The Forum discussions recognized that, despite the ongoing regional conflicts, a business-led transformation is taking place, one that is hurtling the region into the globalization process. And it was in this light that investing in education and reorienting efforts towards the creation of aK (knowledge)-economy were singled out as two the big“positives” for which to strive.

This recognition of education as a key driver for the future of the Arab world received massive material support from HisHighness, Sheikh Mohammed bin Rashid Al Maktoum, vice-president and prime minister of the United ArabEmirates and ruler of Dubai. He announced, as a personal initiative, the establishment of the $10 billion “Mohammed bin Rashid Al Maktoum Foundation that will be based in theUAE and aim to build a knowledge-based society throughout the region.”

Despite recent – and commendable – advances, the education record of the region remains disappointing. This is only in part due to the neglect of female education. Another reason is that men may not be tempted to study beyond the point that is required for a public sector job. At universities in some GGC states, there is only one male student for every three female students.

Education alone will not solve the problems of unemployment nor will it necessarily accelerate the modernization of the regional economies. The 14% regional unemployment rates quoted at the Forum are not the result of lack of education or jobs – the presence of the many working expatriates attests. Quite simply education is not something that can bear fruit if there are no incentives or a vibrant economy.

Here is where the Foundation can make a difference, that is, in addition to its focus on education, to help clarify theK-economy vision for the region. In simplified terms, there are two polar approaches for the K-economy: the “enclave”approach that basically buys knowledge, technology and human skills from outside while the nationals work for government and have exclusive business licenses or hold work permits for expatriates.

A more dynamic, and more appropriate, approach is to go for an “innovative society”, a vision that would foster and rely more on local entrepreneurs and less on the government to act as the employer of the last resort or protector of monopolies. The innovative society vision encompasses a dynamic (not license holding) entrepreneurial environment, an efficient government, ability to use and capitalize on technological advances, attractive employment opportunities and a good work environment.

The Foundation’s objectives are in line with the creation of the more promising “innovative society” vision. In addition to education, the objectives include broader knowledge development, the establishment of research centers, support for scholars and intellectuals, and leadership programs for young people in government, non-governmental organizations and the private sector.

What needs to receive equal recognition and attention is that, compared to top-down approaches, the private sector has an important role to play in facilitating the evolution of Arab culture and promoting the role of the individual as an innovator and agent in the region’s development.

Within this context, education needs to be made more responsive to the needs of the modern global workplace. It should impart entrepreneurship, create a willingness to learn from failure and tolerate failure in others, as well as instill a sense of meritocracy and “mutual responsibility” between the state and its citizens (instead of the single responsibility of the state towards the citizen).

The Foundation’s endowment has been hailed as “the biggest in the Islamic world”. It therefore presents a unique opportunity to help define a dynamic vision for the region.It can contribute to the reinvention of the whole education system around the highest international standards, not just enclave international schools or changes in the curricula compared to the more challenging change of minds. It can help build a vibrant environment for businesses, offer rewards and, in turn, benefit from the productive employment to nationals as well as attract firms and people from allover the world.

Professor Zafiris Tzannatos is advisor to the World Bank and former Chair of the Economics Department at AUB. The views expressed are his own and don’t necessarily represent those of the World Bank.

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Labor of love for the UAE

by Norbert Schiller
written by Norbert Schiller

It was recently announced that beginning next year on May1, workers in the United Arab Emirates will be honored liketheir colleagues elsewhere in the world. For until now, theUAE has not recognized Labor Day and it is ironic that acountry so dependent on labor, particularly migrant labor,has never taken the time to thank those whose sweat and hardwork made this tiny patch of sand the economic success it istoday.

On May 1 this year, the UAE Minister of Labor Dr. Ali BinAbdullah Al Ka’abi, no doubt as a prelude to next year’svolte face, made a rare gesture of appreciation,congratulating “all those workers who through dedication andefforts contribute to the economic boom and growth of thiscountry … we aim to provide continuous support for theworkforce in the country by protecting their rights.”

Some would say, “It was about time!” However, let’s nothold our breath. In March 2006, the same ministry announcedthat it was creating a new law permitting the forming oflabor unions by the year’s end. Nothing has so far happened.

All this sudden talk of workers’ rights did not happenovernight by some magnificent epiphany experience by themonarchy. It has taken years of pressure by NGOs, the mostvocal of which has been Mafiwasta (www.mafiwasta.com), whichwants the UAE to sign and adopt the International LaborOrganization’s two core conventions: 87 and 98 “on freedomof association and collective bargaining” respectively,which allow workers to form trade unions and negotiatebetter terms of employment and working conditions.

Despite isolated incidents of industrial action, mainly byconstruction workers, little if anything has been done toadvance the cause of workers in the Emirates, wheretraditionally it has been the investor that the governmenthas pandered to. It has been far worse for domestic staff,many of whom have been physically abused, forced to workwithout pay and have had their identity documentsconfiscated.

And still migrant labor makes up 95% of the UAE work force,with most coming from poor developing countries across Asiaand Africa, and most recently, China to work on the hugeChinese projects. It was only a matter of time beforesomeone said “enough.” In March 2007, 200 workers werebanned from working in the UAE for life after theydemonstrated for better work conditions. The ruling washarsher than normal because the demonstrators were accusedof violence and destroying company property. The workers inquestion received monthly salaries of between $150 to $177,for which they worked upwards of 250 hours and lived incrowded and squalid conditions.

Yes, the shroud that always hid what was not supposed to beseen is being gradually lifted. Twenty years ago, when I wasbased Dubai primarily covering what was known as the “Tankerwar,” one of the conditions that I and other foreignjournalists had to live under was that we were not allowedto report on the royal family and labor unrest. Thenewspapers and television could not even use a Dubaidateline when reporting and instead had to use the vague“Persian Gulf.”

At that time, the UAE was beginning to plan its future anddidn’t need any bad publicity. If you wanted to reportsomething negative, you had to feed the information toanother bureau in another country. Even filming a yachtowned by the royal family from a helicopter (as I found tomy cost when it was grounded by a stern faced official)would lead to trouble with the authorities.

With all the attention paid to the various groundbreakingmarvels that have risen out of this desert and, morerecently, the move by many multinational corporations likeHalliburton to Dubai, it’s no surprise that with all thesuccess there is bound to be more awareness about thesuffering of those who build this magnificent emirate. Ifthe UAE truly wants the world to sit up and take note, it isimportant that government also address the welfare of itsworkers. Happily, it appears that things might be beginningto change.

Norbert Schiller is a photo editor and photographerat large with United Press International (UPI).

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Society

UAE banking executives On forecast for 2007

by Executive Staff
written by Executive Staff

Executive talked to Hani Hamid, Marketing Manager at the National Bank of Umm Al Qaiwain, and Yousef Padganeh, Head of the Basel II Project at Bank Saderat Iran in Dubai, about the outlook for the UAE banking sector this year.

E Is the UAE banking market as competitive as it could be? Specifically, do you expect greater competition this year on prices for core banking products?

NBUQ: Definitely. Prices on interest will vary from bank to bank, so the sector will become more competitive. The sector will become more competitive this year—there are now 52 banks in the UAE.

Bank Saderat: Yes, there is growing competition. The UAE market is highly competitive and will become more competitive because the people are trying to find new markets.

E Is the regulatory environment and enforcement of regulations fair and equitable for all banks in the UAE?

NBUQ: Yes, I think it is—but the UAE needs a credit bureau, which has been talked about for a long time.

Bank Saderat: Yes, it is fair.

E Will the UAE be able to defend its role as leading banking hub in the Gulf against the competition from Bahrain Financial Harbor and Qatar Financial Center? Does the function as banking hub benefit local banks or are there disadvantages?

NBUQ: I think the UAE is one of the strongest banking hubs, so then it will be able to compete. It is competing with the Middle East, not just the Gulf. Local banks compete differently from international banks—a different environment and customers—so they have the edge on international banks for local and Arabic-speaking customers.

Bank Saderat: Yes, if you compare it to a few years ago you will see more and more companies and organizations are coming to the UAE, to the DISE. If we look at the whole Gulf region, the market share will decrease as more banking come to Dubai. Local banks will benefit as we [international banks] are limited—we cannot have more than eight branches, but foreign banks will try to have more branches. Local branches will open more and be more active, so they will benefit.
 

E Should regulators modify their approach to the licensing of local and/or foreign banks in the UAE? 

NBUQ: It could be possible, as I think there are too many banks in the UAE, even foreign banks. UAE has an open market so anybody can come.

Bank Saderat: I am not aware of this. Regulators are supporting local banks more than international banks.

E Is the sector ripe for mergers? Should regulatory authorities do more to encourage consolidation?

NBUQ: I think it is the right time for some merging. With all the money banks made last year, and in 2005 due to the stock market, there was talk before then for mergers, but if the market stays the way it is, or there is a drop in the market, mergers could happen.

Bank Saderat: One thing I am seeing is that Emirates groups will merge. For example, we are seeing new banks, but state banks will not like mergers.

E Are UAE banks valued adequately in the Abu Dhabi and Dubai stock markets? Are 2006 earnings growth and performance reflected in recent share price developments?

NBUQ: In terms of profit it has affected them, but in terms of value at the right level. Looking at the market it is good and healthy. I think the stock exchange will grow this year.

Bank Saderat: The price of the banking stock depends on construction. I think it depends on that area rather than banking. For instance, if Emaar goes up, the National Bank of Dubai will go up.

E UAE banks have been looking east and west for cross-border expansion opportunities. Which markets are the most attractive for expansion in 2007?

NBUQ: I would say Iraq, but that’s not a good market right now. Africa is showing it is a competing market; Sudan and Libya have shown they are good markets. Egypt is also a good market, and there are some international banks are there. Qatar definitely a good market and competitive—

a lot of banks are trying to open there, and in Bahrain. Syria is good, but tere are too many rules and regulations.

Bank Saderat: UAE banks are opening branches in Pakistan and India, and want immediate customers living in Dubai. Some 55% of workers in the UAE are from Pakistan, India and Bangladesh, so there is demand, particularly for retail banking. The other factor is based on trading, where they have the most trade. Some of these investors are looking for property investment so that is why they are opening in Morocco and North Africa. Banks are also trying to get into Iran and Iraq.

E What obstacles do banks find most challenging when pursuing cross-border expansion, and are some of these obstacles higher for UAE banks than for international competitors in the same markets (e.g. regulatory requirements in other markets, competition with European banks in countries like Egypt, acquisition of skilled staff, integration of corporate cultures in takeovers)?

NBUQ: In Egypt, rules are the obstacle, along with money transfers and exchanges. Sudan and Libya are much more open, but politically Sudan is not stable. Libya is an open market.

Bank Saderat: The first problem is regulatory. We should know what the rules are—and then new competition in the market. I also think they should have a good idea of customer needs and wants as they will differ from the UAE. For instance, just now regulations for foreign banks requires UAE-employees, so recruiting can be a problem.

E Do staff shortages create problems for domestic growth of the bank?

NBUQ: It definitely affects a bank’s growth. All banks have been affected by stock markets, and I don’t think there is a problem, but staff exchanges between banks are a problem, which affects banks moving ahead.

Bank Saderat: Getting staff in the UAE is a problem as there aren’t enough people. We may find a few post-grads, but they have no experience. In the long term it should be better.

E Is the growth of Islamic banking the future of UAE banking?

NBUQ: I think it is the future of everywhere, even the UK and now the US. It is a trend they follow, like changing clothes. They have used credit cards, car loans, and now trying Islamic banking. We have already started that here.

Bank Saderat: Islamic bank is rising. HSBC started and others too, so there is a market.


E Do you expect shifts in the structure and importance of corporate banking? Where are the best options to expand and/or diversify financing portfolios for manufacturing ventures and corporate borrowers?

NBUQ: Banks are doing corporate banking but retail banking is a lot more profitable, but I think they should change their policies, as the commercial banking is moving fast and changing, and it is a good banking product.

Bank Saderat: Diversified portfolios will minimize risk, so there will be a shift. We have corporate banking and the target market is changing. Nowadays competition is high so we need to find new markets.

E What are the main challenges in retail operations? Given the rapid changes in costs of living and the scenarios in the housing market, what can banks do to keep their consumer loan portfolios profitable and lending growth sustainable?

NBUQ: In retailing, the most popular products are mortgages, and banks are looking into priority banking due to customers having more wealth. We have 40-50,000 millionaires in the UAE, out of a population of 4 million, so priority banking will make some growth for banks and they are looking at this. Mortgaging is also booming.

Bank Saderat: The main challenge here is that the cost of living is rising. If banks can provide home loans they will benefit, and then what will happen is that people will try and invest in houses. Second, credit card users are rising, so savings will decrease. Loans will increase and repayment times. High rates of loans will also increase. Banks are now offering Dh120,000 loans.

E Could the consumer lending and housing loan segments face problems from rising loan default levels in 2007? What mechanisms will banks use to avert the overheating of the retail lending market?

NBUQ: There have not been many defaults in the market—I have not heard of that many, more in cars than houses. It is a new loan through banks, so not many defaults, and people just sell out the deed. Definitely prices have hiked, and I think the surplus will drop. In three years, you might see more defaults.

Bank Saderat: Default will increase, particularly for homes. We should look at the political situation of the region, and consider that there has been an abnormal increase in property prices. There are also delays in construction times, and people still have to pay off loans. Salaries are also not increasing in relation to rising costs, with housing rising 100%. The onus should be on the government, as banks want profit. If the government increases salaries, that may help.

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Editorial

The Middle East roundtable

by Yasser Akkaoui
written by Yasser Akkaoui

The recent World Economic Forum was held under the banner“Putting Diversity to Work.” For in the Arab world,diversity is a tool for conflict. This was borne out inspades at one particular session at the WEF when two panels,one made up of a Saudi, an Iranian and another comprising aPalestinian, an Israeli and two Americans (one Republican,one Democrat) convened to debate that hoariest of Arabchestnuts: the Israeli-Palestinian conflict.

Prince Turki al Faisal al Saud argued that as the Kingdom ofSaudi Arabia was the home to the Kaaba and was thebirthplace of Prophet Mohammad, it was the most appropriatenation to propose an Arab peace settlement as it had done inBeirut years earlier. Not so, according to ManouchehrMottaki, the minister for foreign affairs of the IslamicRepublic of Iran, who argued that the Palestinian issue wasrather a Muslim issue and that Iran would champion the causeby continuing to support both Hamas in the PalestinianTerritories and Hizbullah in Lebanon, where it (Iran) hadbeen victorious in last summer’s war with Israel.

Next door, Saeb Erekat, the Palestinian delegate from Fatah,pleaded that his government and his 1.5 million fellowPalestinians were in a hopeless position, relying on EUrations while they were hemmed in by the Zionist state.Former Israeli Prime Minister Shimon Peres argued that aslong as the bombs fell on his country, his country wouldexercise its right to self defense. The Americans threw intheir lot by saying that as long as half the Palestiniangovernment was moonlighting as terrorists, the US was in noposition to talk to Abu Mazen’s people.

They all parroted a line and listened to no one. That,apparently, was putting diversity to work, the sad irony ofwhich was not lost on attendees, mindful of the theme ofthis year’s gathering.

The only real highlight of the WEF, was the announcement bySheikh Mohammed bin Rashid Al Maktoum, vice-president andprime minister of the United Arab Emirates and ruler ofDubai, that he would be establishing a $10 billion funddedicated to education and research, based in the UAE withthe aim of building a “knowledge-based society throughoutthe region.”

Here, amid the politics that overshadowed any economics, wasone man with one vision. It was a vision that had built astunning city state out of the sand and that was now seekingto create a generation of talent worthy of perpetuatingcultural and business life in that gleaming new city. Herewas a vision that understood that without education and theenlightenment it brings, the Arabs will never be able toembrace diversity and risk forever stagnating in the swampsof conflict and division.

Only then might diversity be put to work for the good.
 

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The after-neocon effect

by Lee Smith
written by Lee Smith

Now that Paul Wolfowitz has been driven from his position at the World Bank, insiders here in Washington concur thatAmerica’s neocon moment in the Middle East is officially over. So what does the future, and the 2008 presidential elections, hold for American policy in the Middle East?

Iraq. Recently, the Democratic-led Senate rejected a bill demanding the White House set a timetable for withdrawing troops from Iraq. The Dems’ two top presidential candidates,Hilary Clinton and Barack Obama, both senators, voted for the bill, understanding that it was doomed to fail regardless. In other words, they are having it both ways, and the same sort of indecision and half-measures that characterized the current White House will undoubtedly define a Democratic administration as well. Are the Republicans any more focused? Perhaps, but that is besides the point. As Al Hayat’s Hazem Saghieh has explained, the problem in Iraq is Iraq. There is no solution in Washington.

Iran. Recently, Iranian-American academic Haleh Esfandiariwas arrested in Tehran, where she was visiting her elderly mother. Her boss at the Wilson Center in Washington is none other than Lee Hamilton, the less famous half of theBaker-Hamilton Iraq Study Group that counseled engagement with the Islamic Republic. So, does this gross violation of human rights mean that Democratic officials who have chided the Bush administration for not delivering a Grand Bargainto Tehran will finally understand the nature of the IRI? Of course not. More than a quarter of a century ago, theIslamic revolution declared war against the US by taking dozens of its citizens hostage at the American embassy andWashington ignored the message. Republican contenders likeJohn McCain and Rudolph Giuliani acknowledge the seriousness of the Iranian threat, but whether they can do a better job than the Bush team in waking the international community is another matter.

Persian Gulf. Could the US lose hegemony over the world’s most strategically significant piece of real estate, or what is effectively America’s sixth and greatest lake? Recall that it was under another Democratic administration thatAyatollah Khomeini came to power thus smashing one of the pillars of the US’s Gulf security strategy. The two men most responsible for this catastrophic failure, former PresidentJimmy Carter and his gullible National Security Adviser Zbigniew Brzezinski, are now regarded as two of the wise olds ages of the American foreign policy establishment.

Palestine/ Israel. So what if Hamas and Fatah are at war,Mahmoud Abbas has less charisma than Farfur the muqawama mouse and Ehud Olmert has lower approval ratings than any leader in Israeli history? The only facts on the ground that matter to the Democrats is that they’ve been attacking Bush for seven years – for following Bill Clinton’s advice! ThePalestinian leadership is not now willing or able to make peace and trying to force the issue is a waste of American time, money and prestige. Why won’t that matter to theDemocrats, even if they’re led by Hilary Clinton? Well, keep in mind that no matter how ineffectual in solving the crisis, the peace process is primarily a jobs program forAmerican policymakers and officials. Too many otherwise unemployable experts have too much invested in the“process,” so ordinary Arab and Israeli citizens will pay the price for Washington hubris with their lives.

Egypt. When Gamal Mubarak visited the White House last year on personal business, the White House gave him an earful of abuse, which he dutifully relayed to his father, president of the Arab world’s most populous state. Stop imprisoning non-Islamist political figures, Washington said, like al-Ghad chief Ayman Nour – a contestant in the 2005presidential elections. But the only thing that matters to the Pharaoh is passing the dynasty on to Gamal. The US StateDepartment prizes stability – i.e., the devil it knows – and has consistently defended Mubarak against a White House that at the height of its powers sought to ram much-needed reform down Cairo’s throat. It seems that now both Cairo and FoggyBottom will have their way and the regime will endure, as is, as unchanging as the Pyramids.

Syria. Anyone who wants to know the future ofWashington-Damascus relations should pick up Barry Rubin’s newly published The Truth About Syria. Here, the former fellow at the Council on Foreign Relations details how craven Western officials and diplomats have attended the Assad regime on bended knee, ignoring its longstanding support for terrorism targeting its neighbors in Iraq, Turkey, Jordan, Israel, thePA and, of course, Lebanon. Washington has deceived itself about Damascus’ intentions for close to 40 years now, including both Republican and Democratic administrations, and will continue to do so at great peril to their regional allies. It was only the much-reviled neocons who saw throughSyria’s ruse – without ever doing much about it.

Lebanon. See all above.

LEE SMITH is a Hudson Institute visiting fellow and reporter on Middle East affairs.

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Consumer Society

GCC – New direction

by Executive Staff
written by Executive Staff

The Middle East is cash heavy and banks aspire to modifythis reality, by weaning more and more of their customersfrom carrying paper money. Electronic cash is bettermanageable and more profitable for financial institutionsand thus the credit card industry is expanding into cardswhich they hope will appeal to regional customers –including a new variety of sharia-compliant credit cards.

As with all Islamic banking products, plastic is relativelyrecent. A Malaysian bank, AmBank, started foraying intoelectronic payments around 2001 when it launched its AlTaslif card in December of that year.

Hot on the heels of their Malaysian counterparts, banksoffering sharia-compliant financing options in the Gulf havebeen rolling out “Islamic credit cards” at an increasingpace since 2002.

Prior to the unveiling of Bahrain-based ABC Islamic Bank’sAl Buraq card in 2002, plastic money adhering to shariaprinciples available in the GCC was limited to debit cards.The cards were designed for use when traveling and backed byfunds in customers’ current or savings accounts, settled atthe end of every month and not allowing for spending beyondthe amount of actual cash a customer had.

Debit still rules over credit

Although credit card companies laud the Middle East as theworld’s fastest growing market for payment cards, the creditcard penetration in the region is relatively low and in mostcountries, debit cards are the rule. The sole exception isthe UAE whose residents account for one-third of credit cardholders in the region comprising the Middle East andPakistan, a study by MasterCard said.

Sharia-compliant banks had to overcome a number of hurdlesin developing cards that would appeal to their clientele.Islamic jurists consider standard credit cards haraam(sinful) for a variety of reasons. Charging interest orpaying interest is forbidden because it treats money as acommodity instead of an essentially valueless means forexchange. So the card issuers cannot charge interest, orribah, payments on cards whose balance is not paid in fullat the end of the month.

Furthermore, conventional credit cards often come withvariable interest rates. The amount one has to pay canfluctuate so when signing a credit card contract, one isignorant of the exact amount one will have to pay in a givenmonth. This uncertainty, or gharar, is also forbidden.

Finally, insurance policies linked to standard creditcards are, along with all conventional insurance, generallyconsidered forbidden because the concept itself isconsidered a form of gambling, or maysir. One can eitherbenefit from insurance when it covers insured losses or loseall they money paid in premiums if the need to cash in neverarises.

In order to tap into the market of people who want thebenefits of a credit card while still observing religiouslaw, Gulf banks have employed a variety of sharia-compliant finance concepts to enter the credit card arena.By charging different fixed fees the banks are able to stillturn a profit.

Based on the concept of ijarah, or lease or servicecharge, the UAE’s Emirates Islamic Bank, or EIB, has cardsthat let customers spend beyond their total cash bytechnically purchasing the item for them. The bank explainson its website that the card falls under the principle ofijarah by charging a yearly fee for the service of lettingcustomers hold an outstanding balance on the card. The fees,which in one example amount to $325 for a card with a $2,200(AED8,000) limit, can be paid quarterly.

The basic repayment structure is the same among thedifferent cards. Like a conventional card, users purchasegoods with the card, receive a statement of what they owe atthe end of the month and can opt to pay it all or pay aportion. The minimum due monthly is either a percentage ofthe amount owed – usually between five and 10% – or a fixedamount (AED100 for the EIB card in our example).

New concept

Saudi Arabia’s Samba financial group, another strongregional bank that has taken the Islamic business to heart,introduced its Al Khair card in 2003 under the tawaroqconcept. Under this concept, a cardholder who does not wantto pay the full balance on the card at the end of the monthwill agree to a tawaroq transaction in which the bankpurchases an asset at the cardholder’s expense. The bankresells the asset to a third party and the cardholder paysthe bank in set monthly installments.

Typically with tawaroq transactions, “the asset purchasedand resold is managed by the bank’s core banking system,”said a report released in April on sharia-compliant creditcards by the financial services company BPC Group. The assetcosts more than the amount due.

It sounds complicated and financing of purchases throughsharia-compliant credit cards can probably not be consideredlow-cost, although no independent statistics on averagecosts and consumer satisfaction with the cards in the youngindustry have been published.

There are also no numbers on the actual size of theIslamic credit card industry yet, but a growing number ofbanks is venturing this year into this segment, includingnot only regional banks but also multinational ones.

After First Gulf Bank started offering a sharia-compliant credit card under the name, Makkah Card, thisspring, it said that it “recorded high demand” fromcustomers for the product, which the bank called theregion’s first standalone, unsecured Islamic credit card.

In April, London’s Standard Chartered Bank threw its hatinto the Islamic finance ring by launching sharia-compliant services under the name saadiq, or truthful –including a fee-based card.

This incarnation of the cash-less payment system relies onthe service fee concept of ujrah. Under this system, insteadof paying an annual fee for the card, users pay a fee forthe use of borrowed money.

If a customer does not pay the full amount owed at the endof a month, the remainder goes into an account the bankestablishes. The remaining money is paid back monthly with aminimum payment due each month. Standard Chartered turns aprofit by charging a monthly maintenance fee each monthprovided there is money in the account.

Adding a twist, Saudi Arabia’s National Commercial Bankjust launched the first Titanium Islamic MasterCard, whichcomes with a cash-back program, cannot be used forun-Islamic purchases, and, according to one newspaperreport, invests a customer’s unpaid balance in commoditieseach month, keeping the profit.

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By Invitation

Implementing Paris III: what it takes

by Mounir Rached
written by Mounir Rached

As part of Paris III, the Lebanese government has promisedto embark on a number of fiscal reforms addressing primarilythe revenue side “in view of the relatively limited scopefor further cuts in public spending.”

The objective of these reforms is set in paragraph 92 of theParis III reform agenda. It aims at minimizing distortionsand enhancing equity and fairness in the distribution of thetax system.

Can these reforms achieve their objective?

Lebanon’s revenue structure relies heavily on indirecttaxes. Taxes on income and profits constitute only 14.5% oftotal revenues and 3.3% of GDP; while indirect taxes (mostlyVAT and customs) contribute 46% of the total. In spite ofexemptions, indirect taxes are, as generally recognized,regressive.

To recall, the most important tax measure taken recently wasthe introduction of a one rate and one stage value added tax(VAT) in 2002 that resembles more a sales tax. This isregressive tax in spite of exempting basic items andservices. It was a step forward to shore up revenue anddiversify its base. Its impact was visible and raised taxrevenue to a record 15% of GDP. However, it magnified equitydistortions as it was not accompanied by other tax reformsto enhance equity. Customs top rate, for instance, remainsat 90%, and customs provide 25% of tax revenue.

Making adjustments

Will the proposed new measures, as part of Paris III,impact significantly on revenues and its structure? The taxadjustments include VAT increase to 12% in 2008 and to 15%in 2010, and the tax on interest income to 7% in 2008.

These two adjustments, assuming a neutral effect oncapital and on the consumption pattern, could raise taxrevenue by 1.5%, accruing mostly from VAT. Raising taxrevenue to GDP to the desired objective of 18% by 2011 hasto be generated by administrative measures. These include:activating the large tax payer’s office (LTO), fullystaffing the Tax Roll department – a data base department,expanding the withheld tax registration, and adopting a TaxProcedure Code. A Global Income Tax without rate change isplanned for 2008. These measures are expected to raiserevenue by another 1.5% of GDP.

Direct tax collection on income (enterprise and wagetaxes) will, after all, remain very low at 4% of GDP by 2011compared to an unweighted average statutory rate of 10%.This implies the presence of either extensive tax evasionand/ or ineffectiveness in collection. An endemic problem inLebanon, which is not being addressed genuinely by any ofthe proposed measures except in the enhancement of coverageby tax withholding.

The revenue structure will continue to remain nearlystagnant, and to rely heavily on indirect taxes (50% oftotal revenue) and non-tax revenue (32%); without enhancingequity. A comparison of before and after tax income (basedon the family income distribution study CDS, 1998) showedthe ineffectiveness of the pre-1999 structure (a moreprogressive tax) on equity enhancement. The after tax incomeshare of the tranche with the lowest income (6%) increasedto 1.12% compared to 1.09 % of the total before taxes. Forthe tranche with the largest income (3.1%), the after taxincome share dropped only to 15% from a 15.9% share beforetaxes.

These indicators point out to the need to further strengthenincome tax share to enhance equity; especially in the caseof Lebanon, where income distribution is highly skewed. TheOECD countries, for instance, have moved in their recent taxpolicy reform towards reducing marginal income tax rates andplacing more reliance on VAT and other indirect taxes.However, income taxes remained the largest portion of totaltax revenue in these countries (25%, compared to 3.3% inLebanon). Their reforms set priority on fairness andsimplicity, and were based on public support reflected inthe platform of political parties.

New measures needed

In Lebanon, a more effective collection of income tax evenat the current rate structure (five marginal rates) couldraise revenue by another 6% of GDP, thus closing most of thefiscal gap needed to reduce debt accumulation. Income is thelargest tax base that needs to be fully tapped. Currently,civil servants and wage earners are the most compliant. Somereforms are inevitable, however, such as treating financialand on-financial enterprises equally by raising the rate onthe former to 21% and applying this one rate on both.

The direction of reforms in Lebanon needs to be based onpublic choice rather on a centralized decision induced onlyby the objective of raising revenue. An open public debate(or even a referendum) on tax choices could guide thegovernment and garner support for its decision.

Dr. Mounir Rached is a senior IMF economist and a founding member of the Lebanese EconomicAssociation. The views in this article don’t represent those of the IMF. Dr. Ghassan Deeba is Associate Professor at the LAU.

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Lebanon

Looking Overseas – Banks eye lucrative markets

by Executive Staff
written by Executive Staff

Bullish is not a term many would use to describe Lebanon’seconomy in the current situation, or indeed Lebanon’sbanking sector on a domestic level, but when it comes toLebanese banks expanding beyond their own borders, bullishwould seem to be the right terminology.

All the Alpha banks, along with a good proportion of theBeta banks, are getting in on the act, putting Lebanon backon the regional banking map after largely disappearing fromview in the late 1970s when the sector lost out to Bahrainand the UAE as a Middle Eastern banking hub. In manyrespects, the roller coaster ride Lebanon has been on forthe past few years has actually been positive for thebanking sector, compelling banks to diversify away fromLebanon and mirror the movement of Lebanese white collarworkers that have gone to the Gulf and elsewhere in theMiddle East in search of more promising employment.

As Semaan Bassil, vice-chairman and general manager ofByblos Bank put it, “One positive thing of the [July] warwas putting pressure on Lebanon to find new markets outside.This is very healthy, as before the civil war, the marketwas outside.”

Changes to the regulatory environment in the MENA regionhave also been conducive to the banks expansionaryaspirations. Syria’s banking sector came in from the cold in2001, allowing foreign and private banks for the first timein over 30 years; Sudan, Algeria and Egypt have opened up,and Qatar has becoming an increasingly assertive financialmarket.

An additional factor is that the Lebanese market holds fewpossibilities for serious growth. “All banks have reached asaturation point and cannot compete for more market share.The main driving force is [that the banks are] not happy inLebanon,” said Shadi Karam, Chairman of BLC.

Equally, it has only been in the last few years that bankswere able to viably entertain the idea of expansion. “Onlynow have banks reached a certain size to allow them toexpand overseas – whether in total assets or equity,” saidSalim Sfeir, Chairman and General Manager of the Bank ofBeirut (BoB). Chasing the money

The Central Bank has been key to the expansion, relaxingcross border lending and dishing out approvals to encouragethe sector to charter new waters. Indeed, with bank lendingto the government gradually declining – although still thebedrock of the banking sector – the Central Bank, under thesound guiding hand of Governor Riad Salameh, is under nomisconceptions about the potential for cannibalism if bankswere not able to seek new markets.

Equally, with inter Arab trade estimated at $20 billion,Lebanon would be foolish not to go after a larger slice ofthat pie, given its geographical positioning and commercialas well as retail banking strength. Lebanese bankers alsohave an added advantage over their internationalcounterparts operating in the Middle East – namely, anunderstanding of the culture and language as well as theknow-how of turning a banking sector around, as was the casein Lebanon after the civil war. Lacking such insight, someBritish banks that recently entered Egypt have read themarket wrongly in terms of products and services. But forLebanese banks, such attributes have played into thebankers’ hands, particularly in Jordan and in Syria. Aftertwo and half years in Jordan, Audi “could reach $2.5 billionin assets,” said Freddie Baz, advisor to the chairman atBank Audi. While in Syria, after two years of operations,Audi Syria reached some $400 million in assets. BLOM andByblos have also fared well in Syria.

The fledgling Syrian market is attractive to other banks,with First National Bank (FNB) an 8% stake holder in thesoon to be launched Syria Gulf Bank, and Libano-Francaise,BoB and Fransabank waiting for licenses. The Lebanese-Canadian Bank (LCB) and CreditBank also plan to enter theSyrian market. “It’s a natural expansion into Syria, as itwill benefit the sector and help to converge the two marketsto a common denominator,” said Tarek Khalife,chairman-general manager of CreditBank.

For Libano-Francaise – with 10% to 15% of its business inLebanon consisting of corporate loans to Syria, and 90% oftheir Paris operation catering to Syrians – the bank was“following our clients,” explained Walid Raphael, deputygeneral manager. The bank had planned to enter Syriaearlier, but shareholders in France opposed the move.

Cairo and beyond

Jammal Trust Bank (JTB) is also in expansion mode, planningto rectify their position in the Egyptian market afterlosing their license in 2005. “When the late chairman passedaway two months before the [Egyptian] Central Bankrequirement to increase capital, I couldn’t raise anextraordinary session because the one who passed away held99% of the shares. I had to wind down operations, but nottotally liquefy,” said Anwar Jammal, Chairman and CEO of JTB.

√Meanwhile, JTB is looking to expand to West Africa. “Ithink there is huge potential, be it catering to Lebaneseexpatriates or the locals. We’re also hoping, at a laterstage, to move into the Gulf,” said Jammal.

Other banks are faring better in Egypt, which is proving tobe a lucrative market. Bank Audi bought Cairo Far East Bankwith $47 million in assets, and after nine months, had $1billion. BLOM bought Misr-Romania Bank at the end of 2005for $100 million, $60 million in net equity and $40 million“in good will.” “The first year generated profits of $11million. For the first three months this year, it was $6.3million, so by year’s end, it should reach $15 million,”said Saad Azhari, BLOM’s vice chairman and general manager.After a year of operations, BLOM Egypt had 40% growth inlending and 25% in deposits.

BLOM, Byblos and Audi are already in the Gulf, and otherbanks are also moving to have a slice of the boomingmarkets. CreditBank plans to open offices in the QatarFinancial Center (QFC) and the Dubai Financial Center, aswell as a representative office in Kuwait. BLC, which wasbought out by the Qatari Investment Authority in late 2005and is well established in the UAE, is planning to open inthe QFC.

Driving the move to the Gulf is the surging number ofLebanese expatriates working there, using correspondingbanks or the Lebanese bank equivalent to remit money home.For instance, in 2002 there were some 3,500 Lebanese inQatar, there are now 35,000, according to Khalife. Suchremittances are highly significant to the economy, withworldwide remittances to Lebanon recently estimated at $5.2billion or equivalent to 25% of national GDP.

As Khalife remarked, “The middle class has disappeared fromview, but not from the banks, they are [working] in theregional markets.”

Risky business

While Algeria is proving a promising market for BLOM,Fransabank and the Lebanese-Canadian Bank with its 60% stakein Trust Bank Algeria, banks are wary of the recentlyliberalized Libyan market for political and bureaucraticreasons. Indeed, one of the top five banks recounted how anemployee wasn’t able to visit Tripoli to prospect thebanking sector as he was unable to get a visa. Sudan is alsoseen as potentially risky given the ropy peace and thetroubles in Darfur, but Bank Byblos is already present, asare the Lebanese-Canadian Bank with a 3% stake in Al SalaamBank, Fransabank with a 20% stake in United Capital Bank,and just last month, Bank of Beirut acquired an 18% stake inthe Saudi-French Bank.

Bank Audi is also optimistic about its presence there.“Sudan could bring millions of dollars in assets, its on theright track to increase significantly,” said Baz. Some banksare equally bullish about Iraq, with Byblos andInternational Bank operating in Irbil in the Kurdish areaand FNB angling to get in on the action.

“We are looking very seriously to open in Irbil, probably in2008 with a license for all of Iraq,” said Yasser Mortada,deputy general manager of FNB.

Other banks are hesitant to enter the market until thesituation improves and clearer regulations are establishedconcerning Central Bank regulations, whether from Irbil tooperate in Northern Iraq or in Baghdad to operate in thewhole country. Such issues recently warded off Bank Audi,and as BLOM’S Azhari put it, “we look at countries more andnot less stable than Lebanon.” Given the current situationin Lebanon, that is probably sound advice.

Nonetheless, the benefits of expanding outside of Lebanonare manifold. BLOM and Audi are now among the top 20 banksin the region in assets and ratings, with both estimating50% of deposits will come from outside Lebanon in the nextfive years. Already some 40% of the deposits collected byLebanese banks abroad are by BLOM, said Azhari, while ByblosBank’s foreign operations account for 20% of profits anddeposits, slated to reach 40% in the next five years. “It’sa win-win situation for well established companies to useLebanon as a platform to export products and services,” saidBassil.

Whether Lebanese banks will go even further afield as theygrow larger, banks are reticent to say. Libano-Francaisehinted that they were not confining plans to the MENAregion, and Sfeir said that the Bank of Beirut was activelyseeking acquisitions to establish new branches in differentmarkets.

Further expansion of Lebanese banks in the region isassured, although the country’s most regionally prolificbank, Bank Audi, was keeping quiet about its expansionstrategies. “Currently in the pipeline are three to fourother markets we are working on, either for a license oracquisition. We will hopefully close the year with a minimumof two new expansions in the region,” said Baz.

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By Invitation

The dire need for acquisition financing

by Imad Ghandour
written by Imad Ghandour

Private equity in the region is like a limbering man: almostall acquisitions of this $20 billion industry are beingfinanced directly from the coffers of the private equityfunds. It is the good, old way of investing, but somethingthat has been abandoned a long time ago in other parts ofthe world.

What is missing from the private equity secret potion is thepower of leveraging: using less expensive debt to financeacquisitions instead of using the more expensive equity.Take an example: Suppose a company is acquired for $100million by equity only (ie all the $100 million came fromthe private equity fund) and is sold at $130 million in oneyear, then the IRR is 30%. However, if the same investmentis financed by $50 million bank loan at 10% interest rate,than the remaining $50 million invested directly from thefund own pocket will be returned as $75 million aftersettling the loan and the interest of $5 million, thusyielding an IRR of 50%. This is the power of leveraging!

With relatively low interest rates on the US dollar and thecarry trade from yen to other currencies, it became veryattractive to use debt to finance private equityacquisitions. Today, more than 80% of an acquisition isfinanced by different flavors of debt, and 20% is financedby the fund’s own money. With record global private equityvolume of $650 billion in 2006, the acquisition financemarket has ballooned to reach more than $400 billion.

Mezz & Co

In order to drive the maximum benefit out of leveraging,private equity players have perfected the art of leveragingnot only through traditional bank financing, but throughusing mezzanine financing as well.

A typical private equity deal will have several layers ofdebt put on top of each other in order to reach the maximumlevel of debt based on the companies operating cash flowswhile at the same time optimizing the interest and principalpayments. A typical deal will have two layers of senior bankdebt, one amortizing quickly and another one with back-endedpayments. On top of that, there will be several layers ofmore exotic debt: second lien debt, subordinate unsecureddebt, high yield bonds, mezz debt with equity kickers,preferred shares, etc.

Commercial banks are the typical suppliers of senior(secure) debt. The more exotic flavors are supplied from anincreasingly diversified group of financial institutions.Pension funds, insurance companies, and endowments will beseeking to have higher yield debt with long tenors in orderto meet their long term obligations. There are also aspecialized number of mezzanine funds, and hedge funds areone of the newest entrants, seeking complex structures thatwill yield even higher returns.

Middle East is still behind

Unfortunately, the debt providers in the region are stillbehind in this area Most PE transactions in the region arestill financed largely through equity due to the limitedavailability of proper debt financing, and less than 10% ofPE transactions are leveraged at the target company level.

The limitation of debt financing in the region is drivenby a limited understanding for the PE asset class by lendinginstitutions, shallow debt capital markets, andunsophisticated lending focused on balance sheet assets,collateral and personal or mother company guarantees. Thesefactors are leading PE firms to seek financing frominternational players while others are attempting to educatelocal lenders on the concept of cash flow based lending.

Given that it is expected that the private equity industrywill have $20 billion of assets under management in 2007,Arab banks simply cannot ignore the opportunity to financeacquisitions. International banks are starting to offerlocal PE players this product, and local banks have startedto take notice. Given the attractive margins on acquisitionfinance, local banks will sooner or later set up specializedunits targeting this niche. However, the more exotic formsof debt, like mezzanine, will probably take slightly longerbefore becoming readily available in the region.

Imad Ghandour is Principal – Gulf Capital andHead of Information & Statistics Committee –GVCA

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Lebanon

Alternative Strategies – Banks staying strong

by Executive Staff
written by Executive Staff

The Lebanese banking sector has always had an exceptionaldegree of resilience given Lebanon’s checkered politicalhistory. The current political crisis and economic malaiseis no exception, with Lebanese banks reporting stronggrowth, launching new products, and diversifying throughexpanding into new markets.

But challenges do lie ahead for the sector. The situation isaffecting banks’ overall strategies – driving externalgrowth in particular – and with the implementation of theBasel II Framework only six months off, the requirements arelikely to act as a catalyst for further consolidation of thecountry’s heavily banked sector.

“The major problem we banks face stems from the differencebetween risk and uncertainty. Risk is something measurable –there are tons of models to manage risk – but uncertainty issomething not measurable. By its very nature, its parametersare flimsy,” said Shadi Karam, Chairman of BLC.

“The situation is creating a huge question mark onfunctional decision making in institutions. If you havequestions about tactical moves, it affects strategicalmoves,” he added.

And as Walid Raphael, deputy general manager of BanqueLibano-Francaise pointed out, “most players are onwait-and-see mode. We still see new projects, but the paceof investments are lower than early last year.”

Nonetheless, due to the unique role of Lebanon’s bankingsector in the economy, the real economy might be in thedoldrums, but the monetary sector is not. The reasons forthis are manifold: the huge remittances from Lebaneseabroad, which brings in an estimated 25% of the country’sGDP; banks’ high capital ratios; interest on lending to thegovernment; and a buoyant real estate sector.

“The major driver is GDP not foreign investment,” saidFreddie Baz, advisor to the chairman at Bank Audi. “TheLebanese are still the most important trigger for aggregateddemand, so is therefore GDP growth. We are not borrowingfrom domestic income but national income, from inflows fromexpats. As long as this exists, inflows are unrelated to thesituation in Lebanon and the monetary sector is immune,” headded.

This was evidenced last year when the war dampened growth onthe real sector and monetary sector deposits increased in2006 by $6.5 billion.

The cumulative assets of Lebanese banks also reflect thesector’s strong position. At $78 billion, or 375% ofLebanon’s GDP, the sector is far and above the regionalaverage of 90% of GDP, 107% in emerging markets, and 132% indeveloped economies.

This is in large part due to profitability of financingLebanon’s public debt, which is currently at $41 billion.

“Most profit comes form the government and will take time todiversify away from that,” said Semaan Bassil, Byblos Bankvice-chairman general manager. “So as long as the governmentborrows and pays, and keeps costs under control, banks willmake money but can’t rely on that forever.”

After all, returns on investments have slid from highs of40% in the 1990s to less than 10% after the Paris II donorconference. BLOM Bank’s TBs and Eurobonds, for instance, nowaccount for 17% of its balance sheet versus 24% to 25% in2003.

Nonetheless, BLOM is managing a new Eurobond issue withCitibank to raise $400 million for the government.

Products and more products

With so many factors at play, banks are adopting twofoldstrategies – consolidate market share and expand regionally(see page 40). With one eye on the region and the other onthe domestic market, banks have spent millions in the lastfew years on infrastructure and upgrading services.

In such a highly competitive market where the top threebanks – Audi, Byblos and BLOM – have over 50% of the marketand the other 61 banks vie for the rest, banks are coming upwith innovative ways to sell products.

“Lebanese banks are making big efforts in advertising andmarketing to attract new segments of the population,” saidElie Azar, marketing manager at the Lebanese-Canadian Bank.“It’s harder to attract new customers than keep customers,”he added.

As a result, banks have repackaged personal loans with newnames to entice customers, from solar panels and dental careto computers and plastic surgery. First National Bank (FNB)has been at the forefront of such campaigns, offering thehighly publicized plastic surgery loan.

“We are number 14 in size, but in relation to our peergroup, we spend a lot more on publicity than ourcompetitors,” said Yasser Mortada, deputy general manager ofFNB. “We offer different products from the plain vanillaproducts on offer.”

But, such advertising splurges are not seen as overlysound, some bankers say, given the outlay in relation to thereturns.

“These advertising campaigns cost a huge amount of money andthe products are not profitable per se, they are better forimage building,” said Salim Sfeir, chairman-general managerof the Bank of Beirut.

For banks not in the top 10, brand building is essentialto attract more local customers, but given the economicconditions, this is proving difficult.

“This year, there will be no growth in the economy, maybe1%. We need stability to promote products and grant loans.You cannot have a prosperous banking sector if there is apoor economy, and vice versa,” said Azar.

As a result, most commercial banks are now focusing onprivate banking, wealth management and insurance todiversify their portfolios.

“We want to establish private banking and investment bankingas we believe markets are not accessible enough. This isstill lacking in the economy and something to be developed,”said Tarek Khalife, chairman-general manager of CreditBank.

FNB is also looking to expand its investment portfoliothrough its 60% ownership of the Middle East Capital Group.“The time is not good for investment banking services, butonce back to normal there will be plenty of opportunities,”said Mortada.

Credit and charge cards are also a growing segment forbanks, with the number of cards issued surging in the lastfew years as electronic payments become more widespread.

“Until three or four years ago people paid cash, but now useelectronic transfers. That has increased the bankingpopulation,” said Anwar Jammal, Chairman and CEO of JammalTrust Bank (JTB).

Banks have adopted the same strategy to market cards as inthe West, using point reward schemes, free insurance,mystery prizes, and by teaming up with mobile phoneproviders to offer free calls.

Banks are, however, essentially chasing a limited numberof economically viable clients, prompting some institutionsto cater to small- and medium-sized enterprises (SMEs) andlower income customers.

“The possibility for expansion within Lebanon is somewhatlimited if you just go by head count. How many of the fourmillion are bankable?” questioned Jammal. Indeed, with anestimated 60% of the country’s wealth in the hands of 6% ofthe population, serious increases in GDP per capita areneeded for the sector to take a closer interest in theoverall population.

JTB itself is focusing on the SME sector, which now accountsfor 85% of the bank’s clientele.

Personal vs. automated

There appear to be two schools of thought in Beirutbanking circles about how to expand and reach morecustomers. One school favors bricks and mortar, as Jammalput it, investing in new branches in the less banked areasof the country and in the capital.

“The aspect of face-to-face interaction with clientele isvery important. The click entity doesn’t work, you need abrick and mortar entity,” said Jammal, citing thedifficulties British banks had that went the solelyautomated route.

The other school has embraced a mix of automated andpersonal.

“A physical presence is important, but penetration of themarket is not necessarily through banks. In the developedworld, it is less important, and this is where we think theindustry is going,” said Mortada.

The number of FNB branches has soared from four to 18 inthe last six years, and more are planned.

“Having a physical presence helps but it’s not the only wayto have contact with prospective clients. Today, withelectronic banking and mass communications, you can attractclients by providing special customer services,” addedMortada.

BLOM, the Bank of Beirut and Banque Libano-Francaise areto open new branches in the coming months, with the majorityof banks also investing in online services.

Bank Audi plans to continue its expansion. “Every year wewill expand our network. The Lebanese banking market is seenas over banked, over banked in numbers, but explicitmeasures – accounts per household, banks per capita – youfind it’s not over-banked despite reaching a size large fora domestic economy,” said Baz.

From Basel I to II

The smaller banks that rely more on the personal bankingrelationship might suffer from the Central Bank requiredimplementation of Basel II by the beginning of next year.

The vast majority of banks are in the final stages ofimplementing the Bank of International Settlements’ RevisedInternational Capital Framework, drawn up in Basel,Switzerland last July to replace the 1988 Basel I Accords.

Basel II provides measures and minimum standards forcapital adequacy for banks to better handle risk, along withrequirements to implement compliance, under a three pillarconcept: i) minimum capital requirements; ii) supervisoryreview; and iii) market discipline to promote greaterstability in the financial system. The cost of implementingBasel II poses the main headache for the smaller banks.

“We expect more consolidation as a lot of banks cannotafford the system,” said Azhari.

Such costs will cut into profitability, and unless bankscan weather profit loss in the short-term, mergers or sellsout are likely for either regional Arab banks or the bigthree.

“We would like to consolidate further to leverage more outof our extensive branch network, and by increasing marketshare to 15% to 16%,” said Byblos’ Bassil.

Baz said that due to the high capitalization of Lebanesebanks, mergers and acquisitions will be kept to a minimum.“It won’t generate any systemic crisis in the banks. I don’tforesee any pressure at this level,” he said.

With banks nevertheless eyeing prospective targets, theCentral Bank should act pro-actively in anticipation ofpotential fallout from Basel II.

“The Central Bank and the authorities have a major role toplay now to revive law on mergers and encourage banks toundergo consolidation,” said Karam.

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