LevantUncategorized

Jordan Coming of age

by Executive Contributor
written by Executive Contributor

As Jordan’s financial services industry comes of age, the banking sector has been shaping itself into one of the major contributors to the country’s increasing economic power. The sector may also be experiencing what is equal to its Sturm und Drang period, brimming with ambitions, growth instincts, and sometimes conflicting impulses.

In recent reports, analysts credited increased purchasing power of consumers along with liberal attitudes towards personal debt with driving Jordan’s explosive banking sector growth. Deeper rooted drivers of development included increased investment from the GCC, improved regulations, and focus on the development of retail business.

A variable helping the sector sustain its growth is trade and banking services activities originating from neighboring Iraq, which has provided significant fee income for local and foreign banks. Observers also say that the sector appears to have benefited from the ongoing political instability in Lebanon where certain capital inflows make it to Jordan in search of a safer environment for investment.

Banking sector deposits, which last year reached $20.6 billion and equaled 1.4 times Jordan’s nominal GDP, have grown at a slightly faster rate than GDP – supporting the notion that the country’s financial culture has left its underbanked past firmly behind and that banks are reaching the customers. However, in spite of the highly competitive environment, the market remains concentrated, with the top three banks dominating the market.

Good asset

Jordan sports 13 local commercial banks plus eight foreign owned, two Islamic banks and five investment banks for a population of 5.9 million. There is no state ownership in the sector. But one of the significant features of Jordan’s banking sector is its high concentration. The leading bank is the Arab Bank, which holds approximately 60% of overall banking assets. Observers agree that size matters when it comes to the performance of banks and Arab Bank demonstrates the accuracy of this theory.

Research shows the strength of Arab Bank is such that the bank’s 40% increase in profits in 2006 reflected very positively on total sector results, which rose for all banks to $773 million (JD547.35 million; JD1 buys $1.41) in 2006 from JD 500.77 million in 2005, representing a 9.3% increase. According to research firm Amwal Invest, only Arab Bank and four other banks experienced growth in their bottom line in 2006. 

In any case, the sector’s 2006 growth is paltry when compared to the 80% increase in 2005. But nevertheless, experts say the sector’s prospects for 2007 are promising, specially the sector’s performance on the Amman Stock Exchange.

In 2006, the sector’s consolidated assets grew by 14.9% to reach JD 24.24 billion. Figures from the Central Bank of Jordan (CBJ) showed that 25.6% of the total assets at the end of 2006 comprise foreign assets, with balances held at foreign banks making up the bulk. The remainder represents local assets, with the lion’s share claimed by facilities given to the private sector, constituting 39.31% of total assets. The largest increase in assets in absolute terms was for the Arab Bank, which grew by JD1.624 billion.

The International Monetary Fund said it expects Jordan’s economy to keep growing at around 6% in 2007 on the back of 6.5% real GDP growth in 2006. Expecting a bumper year in 2007, a number of the local and foreign bankers are willing to expand their business in the kingdom.

The IMF encouraged the increasing role of the banking sector, but issued a warning on credit growth. “Particular care is required with new forms of lending, which carry greater risks, such as margin and non-collateralized loans that have been growing rapidly,” the international watchdog admonished, arguing that the profitability of banks and, implicitly, the health of loan portfolios have yet to withstand tests of a slowing economy. 

The stats

Figures by Amwal Invest show 2006 saw the consolidated credit facilities offered to the private sector grow by 26.1% to reach JD9.7 billion. “Facilities extended to public entities increased by 18% to JD423.2 million, while those to financial institutions declined by 63.4% from JD20.5 million in 2005 to JD7.5 million.”

Amwal did note two distinct changes in the sector between 2005 and 2006. “In 2006, net interest income made a more significant contribution to total operating income at almost 70%, pursuant to a refocusing on core operations, while gains from investments played a much smaller role, making up only 3%.” When compared to 2005, interest income contributed 55% to total operating revenue, and gains from investments around 13%. “The average increase of net income for all the banks was 27%, the most significant being Jordan Commercial Bank, rising by 62.9% from JD 9.66 million to JD 15.74 million,” Amwal’s report said.

Property financing increased to meet the expansion in the real estate sector in Amman and other tourist areas. Similarly, other kinds of financing, such as personal loans, holiday loans, marriage loans, car loans, and business loans also thrived. These developments trickled down to fee-income and thus, the bottom line.

Both the Arab Bank and the Housing Bank for Trade and Finance (HBTF) posted profit increases of over 20% in the first quarter of 2007. Arab Bank announced first quarter profits of $187 million after taxes and provisions, which was a year-on-year increase of 24.6%. HBTF reported even a better increase of 36% with profits standing at $51.7 million for the first quarter of 2007.  These robust results to a certain extent were also achieved by other banks with Jordan Kuwait Bank reporting profits of $15.7 million in the first quarter of 2007 or a 5% increase when compared to the same period in 2006.

Despite rapid growth and high levels of profitability, the banking sector still requires further development, including long-term strategies to diversify sources of income, innovations in product and service delivery, greater choices for customers and investing more on staff training.

Charging ahead

Experts agree that the upcoming three years hold considerable challenges for the banking sector, as well as for policy makers who determine aspects of the environment in which the sector operates. Banks will be looking for sources of growth and to maintain the high profit rates that they become accustomed to, while competition intensifies, and technological changes impact on the way that banking operations are carried out.

Banks must also introduce new strategies aimed at the most efficient utilization of capital in line with capital adequacy requirements. Large banks must accelerate efforts to penetrate new markets regionally and internationally. The CBJ must also encourage a consolidation phase in the next two years as the market is saturated. Consolidation should first start in acquisitions between local banks, especially smaller ones. This move would encourage the introduction of new products and services and enhance the quality of those already existing, allowing effective competition on a regional and international level.

Another challenge local banks must face is the entry of foreign banks. Foreign banks have many advantages over their local counterparts and could eat away at their profits if additional reforms and development of the sector fails to materialize.

Although experts warn of the potential shortfalls in the sector, the report by Amwal Invest acknowledges that most “Jordanian banks enjoy a higher capital adequacy requirement ratio than the 12% set by the CBJ, which is also higher than the 8% ratio set by Basel II Committee.” After the CBJ raised the minimum paid-up capital for Jordanian banks last year, “most banks went about increasing their capital through the distribution of stock dividends or through private placements. The step helped banks secure sufficient funds to seize investment opportunities locally, regionally and globally.”

In non-fiscal aspects, Jordan’s financial services industry has a number of governance and cultural issues to master. The sector’s evolution recently showed some large-scale employee migrations and shifts in personnel that seemed indicative of challenges in the management of highly skilled human banking resources, which are somewhat scarce in the country. In one recent banking conference in Amman, a sector critic asked the president of a smaller bank outright why his institution was lambasted by so many people for “loan sharking”. In other instances, industry insiders still frequently clam up when asked about the dominance of Arab Bank and its impact on the entire sector, virtually forcing further questions on transparency and the authenticity of all facets in the country’s banking picture.

Although the economy and leading sectors are showing consistent growth, the government in Amman is tasked to have strong strategies to mitigate potentially even higher oil prices, address unemployment and control inflation in order to remedy the country’s trade and current account deficits. As more foreign investment is flowing in and alternative financing means gain in popularity in the broadening financial industry, supervision of the Jordanian banking sector through the CBJ will be existential for the further sound development, believes the IMF. But, the government must also assist in establishing a central credit bureau to help banks make better risk assessment. And implementation of the Basel II accords by the end of 2007 is a move that cannot be avoided. Market forces will drive mature banks to excel – with a little helping hand from the regulator. 

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Lebanon

Foreign Banks Staying put

by Executive Contributor
written by Executive Contributor

Last spring Hani Houssami, General Manager of the Saudi National Commercial Bank (NCB) in Beirut, was gearing up for a busy summer season ahead. Tens of thousands of Saudis were expected to descend on Lebanon and some $4 billion was earmarked for investment.

“It was a dilemma for me to manage – a nightmare the number of people coming,” recalled Houssami.

The July war changed all those expectations, with Houssami left with a headache of a different kind – a glut in Saudis tourists and investors as Lebanon struggles to get back on its feet amid political instability and a sluggish economic environment.

But NCB, 79% owned by the Saudi government, has no plans to leave.

“We’ve been here 52 years so we’re not going to pack and go – it’s a country we believe will re-emerge,” said Houssami.

NCB’s decision to stay the course is not an exception to the other international banks and institutions operating in Lebanon. The majority have been in Lebanon for decades, weathering the country’s ups and downs, ever optimistic that the country will pick up and rise, as the cliché goes, like a phoenix from the flames once again.

Indicative of this belief is regional investment bank Shuaa Capital’s recent decision to open a branch in Beirut’s downtown in September, and rumors of BNPI’s talks with the Bank of Sharjah about a possible takeover.

Nonetheless, international banks are finding the political environment a constraint on their activities. “Every time we look to expand the number of branches, something happens,” said Charles Hall, Chief Executive Officer at HSBC.

“It is very difficult to plan meaningfully ahead. We tend to operate on a yearly plan in reference to our five year plan.”

HSBC, which has been in Lebanon since 1946, have nonetheless had a good year so far, registering 10% growth.  “There was a very conservative framework for this year, but ahead of internal forecasts and historical results, so unless [the situation] deteriorates further, we should make 20% to 30% compared to 2006,” said Hall.

Standard Chartered, which entered the market in 2000, also expects double digit growth this year, said Naji Mouaness, head of consumer banking. “Defaults have been normal, not abnormal, so this is a good sign,” he added.

NCB has also achieved growth, “but not hit the ground yet” and has no plans for new products. “We cannot anticipate the future. Some friends in other banks spent a fortune a few years ago on products they couldn’t use,” said Houssami.

The situation has not dampened Standard Chartered’s plans, diversifying into private banking for high net worth individuals. But instead of shelling out for new branches, the bank has introduced a payment mechanism through Liban Post, a 24-hour deposit service, and soon, internet banking services.

“The war  [last summer] didn’t affect our strategy for new products; we are going ahead with aggressive plans to grow our portfolio,” said Mouaness.

Driving growth for both HSBC and Standard Chartered are credit cards, with both banks in the top five in terms of issuance of plastic. HSBC has some 41,570 credit cards out of the 277,000 credit cards currently issued, according to a January statement by the Central Bank, while HSBC Visa cards account for 22,000 of the 97,000 visa cards nationwide.

HSBC are also looking to expand their presence when the time is ripe.

“We had one or two approaches for mergers, but the environment is not quite right,” said Hall.

Although Lebanon is well catered for in terms of banks, foreign and national, there is the possibility of more Arab banks entering the market.

“The big Saudi or Jordanian banks, the big three players, will establish a presence here. Bank Audi is present in their markets, so why not in ours?” said Tarek Khalife, Chairman-General Manager of CreditBank.

Expansion is not likely for NCB, however. “We are not investing in expansion, as we are not sure if tomorrow we can cross the street,” said Houssami. “One day we might move activities out of the country if the current situation continues.”

Hall also suggested that banks should exercise caution.

“International banks that want to enter should consider private and corporate banking, or takeover or acquisition. The cost of setting up in a heavily banked area is too expensive,” he said.

Equally, the country’s instability could also shy off potential investors that are not already committed. Remarking on the slated growth figures for this year, Hall added: “the major caveat is if the situation doesn’t deteriorate.” As NCB and other banks found out last year, projections for Lebanon can all too quickly go belly up.

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North Africa

Morocco: Need to build

by Executive Staff
written by Executive Staff

Although the Gulf has seen the majority of construction activity in the MENA area of late, Morocco too is beginning to emerge as a favorite for a variety of European and Gulf investors.

The Investment Commission, chaired by Prime Minister Driss Jettou, announced on June 13 the setting-up of three major cement factories at a total cost of Dh8.9 billion ($1.1 billion). These significant investments in the cement industry are designed to meet the increasing demand in the construction and real estate sector.

Although the cement industry still is dominated by foreign capital, two out of the three factories will be Moroccan-owned. The first one is initiated by the Ynna group and will be built in the Settat region. The second one, to be established by the Addoha group, will have two units, one in the region of Beni Mellal and the other one also in Settat.

The Ynna group is investing Dh3.3 billion ($400 million), creating 500 jobs. The Addoha group’s factory, also know as Ciments de l’Atlas, will require an investment of Dh3.6 billion ($430 million), with the creation of 1,000 jobs in its two units.

Spanish firm Lubasa, over the past 50 years specializing in construction, real estate development and environmental management, will set up the third cement factory. To complete this project in the region of Sidi Kacem, Lubasa will invest Dh1.9 billion ($228 million) and create 170 direct jobs and 300 indirect jobs.

The investment commission has also studied many other projects. In total, some Dh25 billion ($3 billion) and the creation of 5500 jobs are at stake.

Most developments are high end

Among others, the commission will soon assess the Loukos construction project, a city planned by Emirati firm Al Qudra and Moroccan firm Addoha. The investment for this new city amounts to Dh1.2 billion ($144 million) and will create 2024 jobs. The investment program includes the construction of apartments, houses, public facilities and shopping malls.

According to a study conducted by the Centre Marocain de Conjuncture (CMC) published in March 2007, the construction and real estate sectors make up 7% of national production for an added value of 5% of GDP. The latest statistics on employment reveal that the construction and public works sector employs around 700,000 people directly, representing 6.7% of the working population. The real estate sector generated Dh2.9 billion in foreign direct investment (FDI) in up to the end of September 2006, which represents 15% of all FDI flow.

“The real estate market is booming, as illustrated by domestic sales of cement at the end of September, which rose by 10% compared to the same period in 2005. The construction and public works sector also created 61,000 jobs by the end of September and the number of mortgages contracted by banks by the end of November rose by more than 25%,” said Leila Haddaoui, project director at CDG Development, a development and construction firm for large-scale urban projects.

In that sense, FDI development prospects in the real estate sector look very promising as illustrated by the real estate boom in high-end products: luxurious condominiums, office headquarters, five-star hotels, tourist resorts and port facilities.

Although there are many who bemoan the lack of maturity in Morocco’s real estate sector, notably the lack of reference prices, the lack of insurance tools and the threat of a speculative bubble, the construction sector continues to thrive.

The housing shortage, combined with the development of tourism projects and the emergence of a new type of professional real estate service industry all point to a promising future for Morocco.

However, while the market is in danger of becoming oversupplied with property for upper and middle income groups, the country is still suffering from an acute shortage of low-cost housing. Morocco’s cities are growing, as increasing numbers of migrants move in from rural areas. In 2000, 53% of Morocco’s population lived in urban areas, a figure that is predicted to rise to 65% by 2012.

While demand for residential property in Morocco is high, the market faces three principal challenges: affordability, limited financing options, and unclear laws regarding landownership and titling issues.

As foreign interest in Morocco continues to grow, the government needs to be careful to ensure that the all-too-common problem of “make it all luxury” is not repeated in a country that needs to house a rapidly growing population. With a housing shortfall estimated at anywhere form 500,000 to 1.5 million, social housing could well be more of a priority.

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Levant

Turkey: The market yawns

by Executive Staff
written by Executive Staff

Despite political uncertainty with the coming elections and setbacks in negotiations with the European Union, Turkey’s economic fundamentals remain strong. While there have been short-term wobbles due to recent events, and long-term issues such as inflation, the current account deficit (CAD) and poverty remain, the IMF and the market expect growth to continue, most likely under the current ruling party with a renewed mandate after July’s elections.

At the end of April, the Turkish stock market and the lira were hit by a statement by the military voicing support for secularism, which was seen as an attack on the ruling Justice and Development Party (AKP) government, with its roots in political Islam. The markets were also influenced by large demonstrations against AKP in Istanbul, Ankara and Izmir.

The demonstrations came in the wake of Prime Minster Recep Tayyip Erdogan’s decision to name Foreign Minister Abdullah Gül as candidate for president, a role elected by parliament. There had already been demonstrations against Erdogan when it was thought that he would stand for the presidency. The opposition boycotted the vote in parliament, so Gül failed to achieve the required two-thirds majority. The vote was annulled by the constitutional court, with the consequence that the AKP announced changes to the constitution allowing the president to be elected directly. These changes have been rejected by the court and secular President Ahmet Necdet Sezer, and will now be put to the electorate by referendum. Meanwhile, the legislative elections have been brought forward to July 22. Tensions are running high between the AKP and Turkey’s secularists, who accuse the party of trying to usher in elective dictatorship as a first step towards Islamic rule.

However, despite the shocks to stocks and currency, the response of the market as a whole appears to be “so what?” Turkey has in the past been vulnerable to capital flight, but business confidence in the country remains relatively unperturbed by political events for two main reasons. Firstly, the economy has been performing strongly enough, with sound enough fundamentals, for the political worries to have less effect than previously. Secondly, the AKP, which has presided over several years of growth, looks increasingly likely to be re-elected thanks to divisions in the secularist camp.

Difficult relations with the EU

Turkey’s strong and stable economic performance under the AKP administration has seen the party win friends in the domestic, business community, the EU and the IMF. The party came to power in 2003 with a majority in parliament, the first since the Motherland Party (ANAP) governments of the 1980s.

Under the AKP, economic reforms have continued, the economy has performed well and a historic milestone was reached when EU accession negotiations were opened. However, as elections drew closer, the privatization program has slowed, and the EU has suspended eight “chapters” (or policy areas) of negotiations due to Turkey’s intransigence on certain issues, including allowing ships and aircraft from the Republic of Cyprus to use its ports and airports.

However, the country’s economy is still in good shape. The budget deficit is 2% of GDP, considerably less than the maximum of 2% required by the EU; public debt, at 61%, is only a touch above the EU ceiling of 60%; and growth has averaged almost 8% over the past four years, taking the average per capita income at purchasing power parity (PPP) to $8,400 in 2006, from $6,700 in 2002, according to the Washington Institute for Near East Policy.

The growth has been boosted by high inflows of foreign direct investment (FDI), which has also been financing the current account deficit. Between 1980 (the year of the last military coup) and 2003, Turkey attracted $18 billion in FDI. However, in 2003, the country brought in $1.7 billion in FDI, and in 2006 $20 billion, a figure that could rise to $30 billion this year.

Turkey’s custom union with the EU has further contributed to country’s economic development. Turkey is one of only two non-member countries with such an agreement. Ulrike Hauer, the undersecretary of the EU Delegation of the European Commission to Turkey said that the EU and Turkey were enjoying good levels of trade and that this has helped Ankara decrease its trade deficit with the bloc. “Turkey’s trade deficit declined to 20% from 60% during its trade with the EU,” she declared.

Economic challenges remain. Inflows of money due to the appreciating lira and high interest rates are restraining corporate profits and exports. The current account deficit remains large and is growing, hitting 8% of GDP earlier this year. Inflation, for years the bugbear of the economy, is under control and decreasing, but still well off target at 9.6% in 2006, with the Economist Intelligence Unit forecasting a 6.5% rate by year end. Official unemployment stands at 9.9%, and poverty remains an issue.

Relations with the EU have been given a further setback by the election of Nicholas Sarkozy as French President, and the subsequent victory of the party backing him in parliamentary elections. Sarkozy’s election platform explicitly stated his opposition to Turkey’s membership of the EU as the country is in “Asia Minor.” A Turkish military incursion into northern Iraq (seen by many as a pawn in the AKP-military game) would also hit relations with both the EU and the US, though it is likely to be a brief operation. Business has been ambivalent about the potential for military action, divided between those benefiting from trade with northern Iraq and those supporting a stronger security focus following the Ankara bombing in late May.

Despite these important caveats, Turkey’s disciplined macroeconomic policies, strengthened economic institutions and structural results continue to bolster confidence. This is apparent from the latest IMF report on the nation’s economic outlook, part of the 2007 Article IV Consultation meetings.

“Turkey’s macroeconomic performance in recent years has been impressive, combining strong growth with a sustained reduction of inflation,” the IMF said in a statement. “Political stability, structural reforms and favorable external conditions have facilitated this good performance.”

According to the IMF, the primary drivers behind growth are private consumption and investment, declining real interest rates, surging capital inflows, rapid credit expansion and rising productivity, combined with falling inflation.

The statement concluded: “The goal should be to build on the economic success of the last five years to firmly entrench high growth, secure low inflation and make the economy more flexible and resilient to external shocks.”

The EIU, sharing the IMF’s confidence, forecasts continued growth, with 5.5% in 2008, 5.2% in 2009, 5.1% in 2010 and 5.2% in 2011.

A June report by ING, the Dutch banking group, pronounced the June EU summit as “a non-event for Turkey,” and said that a likely AKP victory would keep the economy on track, whereas its rivals may herald a return to instability. The report, part of ING’s Prophet series, says that, despite the election of Sarkozy, France is likely to hold off from lobbying to change the objectives of Turkey’s EU membership talks until December.

The report said that opinion polls showing 35-40% support for AKP indicates it is likely to win, “with positive implications for economic development… [and] good news for bonds.” The opposition secular Republican People’s Party (CHP), which is nominally social-democratic, is currently polling around 20%. ING says that the party program, which promises cuts in tax on income and fuel, higher subsidies for agriculture and industry and cheap student loans, “would be very worrying for the market if enacted … it harks back to the populist type policies that voters backed in the 1990s which led Turkey into three economic crises.” However, the report states that the stronger economic foundations existing now could prevent another crisis on the same scale.

The confidence of international institutions in Turkey remains resilient, considerably more so than in the past, despite political fireworks and a worsening in relations with the EU. Turkey seems likely to overcome these headaches and move forward, under an AKP government, albeit perhaps one with slightly clipped wings. However, with Turkish politics known for its volatility, the final outcome of the July elections is still a difficult call.

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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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Comment

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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