Comment

Wolfowitz at the exit door?

by Claude Salhani
written by Claude Salhani

So far this has not been a good year for President Bush.First, his plan to pacify Iraq by “surging” more Americantroops appears to have backfired. Since the surge beganIraqis have been dying in far greater numbers than everbefore, and terrorist bombings are claiming nearly 120 livesa day. And, U.S. casualties are increasing, adding pressurein Washington for an early troop pullout.

But if Bush faces a tough time on his handling of foreignpolicies, he now has serious problems at home as well. Afterloosing the majority in both houses of Congress to theDemocrats last November, the president has had anotherawkward moment vis a vis Paul Wolfowitz his choice to runthe World Bank.

Wolfowitz was supposed to fight corruption and alleviatepoverty. To make the task easier, “Wolfie,” as he is know tothose who like him, as well as to those who don’t, was givena yearly salary of $400,000—tax free—and an expense accountto match the status of the job.

As World Bank president, Wolfowitz oversees some 10,000employees around the world. Among them was, ratherawkwardly, his girlfriend, Shaha Riza. Wolfowitz, appearedto be playing by the book. In order to avoid a conflict ofinterest, when he took up his new job it was decidedinternally that she be moved to the US State Department,along with a promotion and a hefty pay rise—due to the factshe was being professionally inconvenienced by the move asit derailed her World Bank career path.

Appointed to the job by President George W. Bush in the formof a golden parachute after leaving the Rumsfeld Pentagon,Wolfowitz, a neoconservative who played a major role inconvincing the Bush administration to go to war in Iraq,stated he would apply a zero tolerance policy regardingcorruption. Now he was being accused of finding ahigh-paying job for his girlfriend.

To make matters worse, the scandal reached a climax as theBank was holding its yearly spring session in Washingtonwith the participation of finance and foreign ministers,central bank directors and financial gurus from around theworld. As the scandal gathered steam, the World Bank’s 24-member board said that the situation regarding the fate ofthe former US deputy defense chief should be dealt with,"urgently, effectively and in an orderly manner."

Calls for Wolfowitz’s resignation began to trickle in withsome finance ministers saying he should step downimmediately. But the US, which appoints the bank’s head,said it still supports Wolfowitz, who they claim had nothingto do with her new appointment. Riza, they argue, wasappointed by a World Bank ethics committee (Wolfie hadpreviously excused himself from all matters pertaining tohis companion). When she was transferred to the StateDepartment she was given the mid-range salary for her newlevel was based on the bank’s existing pay scales.

Dana Perino, a White House spokeswoman, said that PresidentGeorge W. Bush "has confidence in Paul Wolfowitz." Wolfowitzmeanwhile was booed at a meeting with World Bank staff.

By mid April Wolfowitz was told directly by one of his twodeputies, Graeme Wheeler from New Zealand, to step down at asession attended by senior staff members, according to somenews reports. The Bank’s executive board, the Bank’sgovernor as well as a number of European shareholders becameeager to see him go. Senior managers within the bank seemedsplit however, some backing Wolfowitz, others calling forhis resignation.

One of the bank’s main functions is to fight poverty aroundthe world. Yet by the Bank’s own admission, there are stillmore than 1 billion people living on less than $1 a day, and2.5 billion, or 40 percent of the world population,subsisting on less than $2 a day. Wolfowitz’s critics—ofwhich he has many—say that since assuming his new functionsat the Bank he has run the institution “much like a Chicagoward boss or mayor.” He has been said to resort to employ“patronage and intimidation” tactics.

When he moved to the World Bank from the Department ofDefense Wolfowitz took along his political acolytes,upsetting scores of long-time bank senior personnel.

Now there is growing fear in the Republican Party that adragged out “Wolfie-gate” will not help the GOP at a timewhen a vital presidential election is looming just off thehorizon. Many are beginning to echo what World Bankemployees have been saying: it is time for Wolfowitz to go.

Claude Salhani is an international editor and political analyst at United Press International (UPI)

 

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Talking To

Inside Intel‘s brain: A talk with the boss

by Executive Staff
written by Executive Staff

As part of Intel’s efforts to promote the use oftechnology with communities around the world and as arepresentative of the “Partnership for Lebanon,” IntelChairman Craig Barrett visited Lebanon last month. He alsospoke to Executive

How does the American Lebanese partnership andthe Berytech fund you contributed to, fit into the UnitedNations’ Global alliance for ICT you currently chair?

The UN Global Alliance has the same objectives as thePartnership for Lebanon, which aims to improve education,healthcare, economic development and the interaction betweengovernments and citizens. The partnership is obviouslyinvolved in Lebanon because of the destruction that resultedlast year from the conflict between Israel and Hizbullah. Weare not taking any sides on this issue, our concern is onlyfor the individual Lebanese citizen with the aim ofimproving his situation. On a much larger scale, the UNAlliance oversees what can be done to advance the status ofcitizens from emerging countries around the world. Theglobal goal is very similar to the Partnership’s one. As forthe Berytech fund, the issue of economic development is alsopart of the Partnership’s objectives and the UN GlobalAlliance. Economic development can come in various flavors:foreign investment, organic growth, economy, orentrepreneurial activity, in this last regard, Lebanonoffers a long cultural and societal history. The Berytechactivity aims to stimulate and promote economic growth,using education and potential young entrepreneurs. Berytechis unique in the sense that it is in an incubator: it takesideas, before they’re formed into business plans and givesthem a chance to grow and nurture. The investment inBerytech, a purely Intel venture, is totally consistent withthe partnership’s goals.

You’ve declared to the American congress that UScompetitiveness can only improve through education and R&D.Where do you see America standing in the economicenvironment in a few years, especially now that emergingcountries are slowly growing and siphoning off jobs?

The challenge the USA faces lies in the worldwidecompetition for educated workers and new ideas. It is thereason why so many of us lobby our own government for moreR&D and progress in education, especially in the areas ofmath and science. We are very concerned by the fact that ifthe US continue on their current course, it would faceserious problems in the future from a competitivestandpoint. We have proposed various efforts such as theincrease in research investment and improving the fields ofmath and science, which are both incredibly critical to thefuture of competitiveness.

You’ve said that “companies can’t save their wayout of a recession or even prosperity. Instead, they have toinvest in innovative products and technologies.” What isIntel doing in this respect?

If you look at our business at the beginning and the endof any year, separated only by a twelve-month period, about90% of our revenue in December is generated by products thatwere not available on the market in January. Unless you havea development machine that can create new products, androutinely achieve technology leadership, you cannot besuccessful. So when I say “you cannot save your way out of arecession,” it means that if you slow down the developmentmachine, trying to improve financial performance by onlycutting back on investments, you ultimately fail. If youlook at Intel’s general trend over its entire history, R&Dspending always tends to increase. We spend from $5.5 to $6billion every year on research and development, which is afairly large amount, larger by any country’s means.

E In a world where networking, computing andcommunications are converging even more, how is thisaffecting Intel’s overall vision and strategy?

The convergence of computing and communications is verycompatible with Intel’s philosophy and direction. Ascomputing, communication and rich content come together,more computing power to handle data is required. The trendis consistent with Intel’s generic approach, focusing onmicroprocessor power, on Moore’s law, continually improvingcomputing, generation after generation after generation. Idon’t see any disconnection between such a convergence andIntel’s direction.

As the economic environment evolves, Intel faceslower margins and increased competition from countries suchas China or India. How do you see the trend going and whatsteps is Intel taking to rise up to the challenge?

It is a rather interesting fact that people have beenwriting about Intel facing lower margins for years andyears. However, I am not sure the proposition is accurate.We have just announced, two or three days ago, that weexpect margins to increase for the second half of the year.For the past twenty years, margins have fluctuated betweenthe low and high fifty percent range. I also believe our CFOforecasted this year’s margins for the mid-fifties. Oursuccess is based on our leadership technology in the marketplace, providing us with a higher return on investment and ahigher margin on product. The challenge is to maintain ourmarket leadership position, which determines what marginswill look like. There is no question that the averageselling price for microprocessors has decreased over theyears, while our production machine is getting moreefficient, thus taking the cost down. As costs follow thefall in product prices, margin levels stay roughly constant.

How long will it take before we see seriouscompetition from countries like China and India in themicroprocessor industry? How does this affect Intel’s futureplans?

Intel has faced competition in the micro-processing area,from Europe, US, Japanese as well as Chinese companies.Competition is not something new to us, we respond to it byavoiding standstill, moving the technology forward instead,at a very rapid pace. This requires a very large investmentin R&D, which companies need to match if they want tocompete with us in the next generation of products. It isnot about figuring out how to make last generation productsat cheaper prices, but rather how to produce next generationtechnologies, which is what people in the market place want.I suspect we will continue to face competition in the nexttwenty years like we’ve done before, but the challenge forus remains the same.

Intel has long thrived by concentrating on PCmicroprocessors. Now Intel is trying to play the same rolein various fields such as consumer electronics, wirelesscommunications, and health care. What prompted the decisionto diversify your product base and which direction do yousee Intel taking?

The healthcare industry has not made very effective use ofcomputing technologies. It is a very large market withimportant opportunities for the sorts of products Intelmanufactures. In consumer electronics, the opportunityresides again in the convergence of computing,communications and content. The fact that computers havebeen built historically using Intel architecture, as digitalcontent becomes more important, consumer electronics, alsofocused on content, will become more computer-like. There isa definite opportunity to move our architecture intoconsumer electronics applications. This convergence ofcomputing, communications and content allows us to grow fromcomputers to consumer electronics devices.

How does this diversification affect the waychips are produced? Is it affecting collaboration withincompany teams as well as alliances with other marketplayers?

It actually expands the spectrum of companies you need todeal with. Historically, Intel always dealt with thecomputer industry, with large companies such as Dell,Packard and others. But as the convergence of computing,communication and content further increases, we end updealing more and more with consumer electronics and contentcompanies, we previously, were not much involved with. Weare still engaged in our standard computer business, towhich wireless communication capability and content are alsointegrated. These three elements coming together imply thatour products look less and less like standard computingplatforms, assimilating communication and contentinitiatives.

How difficult is it to brand an “ingredientproduct” such as Intel and convince customers to requireit?

You hire some very clever marketing people who create abrand like the “Intel Inside” branding campaign, the mostsuccessful “ingredient branding” campaign the world has everseen. We’ve been able to achieve this because of ourleadership position in the marketplace and used it toexpress the importance of our technology through aningredient branding campaign. If we had lacked leadershipposition from a technology standpoint, it would be verydifficult for us to convince anyone of the “ingredient’s”value. We were thus able to engineer a brand around ourpreeminent position in technology. Today, people are awarethat microprocessors are the PCs brains; everyone wants thesmartest brain and they want Intel. You need therefore bothgood technology and a very smart marketing person whosename, by the way, is Dennis Carter, to recognize this andconvince others to pursue it.

What is your view on the evolution of theinformation technology in the Arab world where, in somecountries, infrastructure is still nascent and monopoliesrun high?

There are excellent opportunities in the Arabic-speakingworld in this regard. Countries recognize the need for smartpeople and smart ideas as well as good infrastructure, andpart of this infrastructure relies on computing andcommunication. Many economies have weak communication orinefficient and extremely expensive infrastructures, such asin Lebanon, because of government control or actions on thesector. Ultimately those infrastructures need to become morecompetitive. There is great opportunity for investment,creativity and technology, which is what companies likeIntel are all about.

How do you picture the technology world in 15 years?

Fifteen years is such a long time in our industry, itmakes it very difficult to tell. The internet was born andgrew dramatically in the space of ten years. Digital camerasappeared, music also became digital, its delivery movingfrom a CD form to an internet feed. However, what is easy toproject is that there will be definitely huge changes andcompanies which are flexible and adaptable will be mostsuccessful in such a time frame. As an example, if you wereoperating like Microsoft in the software business ten yearsago, you could never have forecasted Google posing such abig challenge in the future. Google was born ten years agoin a university; it was not a product, not a business, butonly an idea. The beauty of our industry, its excitement,springs from the fact that concepts, often created by oneperson, can change the face of the whole sector. This meansthat any company wanting to be successful needs to keep itseyes wide opened continually for new ideas. This reasoningmotivates Intel’s involvement in so many joint researchprojects with universities and venture capital—the fundingof startup companies—and allows it to stay close to whatgoes on in the basic research and product worlds. As my bossAndy Grove used to say, only the paranoid survive,otherwise, one runs the risk of being defeated by newtechnologies.

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Capitalist Culture

Like everywhere, Money talks in Lebanon

by Michael Young
written by Michael Young

Four months into the opposition’s descent on the Soliderearea in protest, it is increasingly plain that the effortwas a remarkable success. No, the Seniora government is notabout to fall, nor has the Hariri tribunal been permanentlyderailed; rather, the opposition has scored a dazzlingvictory against businesses in the downtown area. Most havebeen knocked out cold financially, while the rest arepreparing to throw in the towel.

This may seem a tendentious reading. Opposition supporterswould respond that neither Hizbullah nor the Aounistmovement ever really intended to push the Solidere merchantsand restaurants into the street. Most businesses are indeedthe victims of a political confrontation that shows no signsof abating. However, one thing is undeniable: oppositionparties have a much tougher climb than the majority does inproving that they are truly concerned about Lebanon’seconomic well-being; or even that they have a cohesive planto address the country’s financial woes. Three episodes inparticular illustrate the opposition’s problems.

In one episode, Solidere businesses not long ago askedMichel Aoun to take measures to lower the pressure on theirlivelihoods. This would have involved removing tents fromsome parts of the downtown area, to free up access to theirbusinesses. Aoun did not reject the idea. However, severalweeks later nothing has been done. This has only showed thatthe opposition remains reluctant to lose face by reducingits presence in Solidere, even though it couldadvantageously sell a downgrading of its tent city as proofof its interest in the fate of those closing down.

The second episode was the opposition’s decision on January23 to block roads throughout Lebanon, but more particularlyto block the airport road and prevent Prime Minister Fuadal-Seniora from traveling to the Paris-III economicconference. While the opposition parties publicly declaredtheir support for what the conference was trying to achieve,they also understood it would give the government greatcredibility at a time when they were trying to force Senioraout of office. That’s why the expressions of support endedup sounding hollow, as opposition parties placed partisanpolitics before that of trying to create an impression ofunity at home that would have enhanced Lebanon’s chances ofgetting funds.

A third episode was the speech of Hizbullah’s secretarygeneral, Hassan Nasrallah, on April 8. In his address,Nasrallah wondered where the Paris-III pledges of some $7billion were, and lamented that donors had imposedconditions to loan Lebanon money. “Even the economy has beeninternationalized,” Nasrallah observed. He went on to pointout that Hizbullah would be willing to let the situationremain as is for another two years, until Parliament’smandate expired. While he admitted that the opposition wasnot happy with the situation, it was better than civil war.

Nasrallah, even if he is sincere in wanting to avoid a newwar between the Lebanese, will have hardly convinced anyonethat his strategy shows concern for economic realities. Twomore years of stalemate may not only devastate economicconfidence, it would make much more unlikely the release ofmoney pledged in Paris. The Hizbullah leader askedironically where the Paris money had gone, but he leftunmentioned that the dispute between the majority and theopposition—a dispute for which Hizbullah and the Aounistsare partly responsible—is the cause for the reluctance amongsome countries to pay up. Nor will Nasrallah have reassuredeconomists that his criticism was legitimate when hecomplained of the conditions set by foreign donors to helpthe Lebanese economy. Not all aid money can be delivered insuitcases, and for Lebanon to first meet internationalconditions in order to earn the right to receive foreignloans seems so obvious as to be a moot point.

Each of these examples was significant in that theopposition has failed to convincingly show it has aneconomic program that would allow it to take power alone,without March 14. The parliamentary majority, for all itsshortcoming, retains international financial confidence,while the opposition simply does not. Just as important, themajority seems more or less united around the Senioragovernment’s economic program (even if it is open tocriticism), while there are fundamental differences betweenthe economic preferences of the Aounists and those of Hizbullah.

Forgetting politics for the moment, the existential fightbeing waged by both sides in Lebanon today detracts from thefact that when it comes to economics, their continueddivisions can only lead to collective suicide. The majoritycannot pass its economic program without a dialogue with the opposition; but the opposition needs to clarify its own economic views before any sort of dialogue has a realistic chance of succeeding.

Michael Young

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Banking & FinanceBy Invitation

GCC governments hope to boost stock listings

by Imad Ghandour
written by Imad Ghandour

The number of listed securities in the GCC is a flaw that the local governments have been trying to correct. Hence, there is a general consensus amongst regulators that getting more companies into the public market is a “good thing.” Their end goal is creating deeper markets with more securities and better diversification, ensuring lower market volatility, decreasing valuations to more reasonable levels, and spreading the wealth generated from economic growth and privatization to the general population.

Thus, GCC regulators have allowed more than $16 billion worth of IPOs to take place since 2004, and are examining the applications of an additional 90 companies. Of course, timing has been an issue, and some regulators have opted to delay some IPOs so as not to exacerbate the downward pressures already in play.

However, GCC investors (both retail and institutional) are becoming more discerning. Today, the IPO story has to be solid, and has to be one of growth and strategic focus. Management track record is essential for investors to buy into the future. Size is also an issue, as small IPOs may have difficulty in registering on the radar screen of investors and regulators alike.

Initially, the role of private equity funds was limited to acquiring minority equity stakes in companies just before going public. As part of circumventing the legal restrictions in the outdated listing process, funds would finance the establishment of a green field company that will acquire the operating company at a price closer to its true value, thus evade using the book value approach adopted by many regulators.

It became quickly apparent that funds can assume a bigger role in the preparation for the listing. Investors were more comfortable with a fund entering and ensuring that everything is in order and transparent. Funds would enter at a discount, and put their seal of approval that the company is ready for an IPO.

Nowadays, companies aspiring to be listed are faced with even a bigger challenge, and investors have raised the bar even further. In addition to ensuring proper corporate governance and proper financial accounting, private equity players are sought after as a strategic active investors that may propel the company to the next level by investing “smart” money. Strategic advise, business development, and financial restructuring are few of the services expected from the private equity funds. Top tier funds go as far as providing IT, HR, and operational consultancy. The latest research by KPMG has confirmed that “active” private equity funds have been rewarded with higher return on their investment.

As a result, PE-backed companies are proving to attract significant interest from investors. Maritime Industrial Services, the leading contractor for off-shore rigs, has been backed by Gulf Capital and two other PE funds, and is now preparing to go public on the Oslo Stock Exchange. The PE firms have brought institutionalization to MIS, and prepared its management to deal with the requirements for going public by first dealing with a limited number of active investors. Moreover, Gulf Capital has actively worked with MIS management on several strategic initiatives that have significantly improved the operation of the company.

This trend is set to continue as private equity increases its role in the M&A activity in the region. Whether it is the floatation of a privatized state utilities or a family business, the active involvement of PE funds pre-IPO will better prepare companies to deal with public equity market.

IMAD GHANDOUR, Principal-Gulf Capital. Head of Information & Statistics Committee-GVCA

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Banking & Finance

Long in the shadow of Islamic banking, Islamic trade finance plan start to grow

by Executive Staff
written by Executive Staff

Although still small in comparison to the conventional global banking sector, Islamic Banking (IB) has nevertheless grown so impressively in recent years that it now seems more like a critical driver for the industry as a whole than a niche market reserved only for a small slice of the map.


Indeed, as the General Council for Islamic Banks and Financial Institutions reported in early 2007, world-wide assets for IBs and Islamic Financial Institutions (IFI) now stand at over $260 billion, with financial investments totaling more than $400 billion. Year on year growth rates for the sector over the past seven years have averaged almost 15% helping to bring the total number of IBs and IFIs (IBFIs) to 267 in 2006, up from 176 in 1997. Islamic equity funds also now exceed $300 billion in value (growing an average of 25% annually over the past seven years), while Islamic sovereign and corporate sukuks (instruments similar to conventional bonds) have reached $50 billion.

One recent Standard & Poor’s (S&P) review, though, has provided particular fodder for market watchers eager to claim new markets: the overall sector could be worth as much as $4 trillion if it were fully exploited. In fact, according to one prominent IB, Al Baraka Bank, the Islamic share of banking activities specifically in the next decade is expected to rise to half of all bank activities in the Arab world. That’s largely because, according to one recent conference presentation by Nasser Saidi, chief economist of the Dubai International Financial Center, only about 20% of the Muslim population in the oil-rich Gulf Cooperation Council (GCC) countries buy shariah-compliant financial products currently.

According to S&P, the figure is even less, just 10%, if one includes the banking practices of the entire worldwide Muslim population. Which is to say nothing of the percentage of companies and wealthy individuals in the Middle East and Southeast Asia who rely on conventional banking and finance instruments. Or the fact that two-thirds of all IB users in  Malaysia, the main hub of the sector, are not even Muslim.

Islamic Trade Finance

As far as Islamic Trade Finance (ITF) is concerned, its share of global Trade Finance activity and IBFI activity overall is of an even smaller order, although no consensus estimate exists.

In fact, partially because the major Western players have seen the boundary-pushing Islamic Project Finance (IPF) arena as both more profitable and higher-profile (involving the use of options and derivatives in several recent cases), some institutions which nevertheless engage in substantial ITF activity tend not to want to highlight such activities.

As one major German-based financial institution put it,“We only take a reactive approach to such [trade-based] transactions as opposed to a proactive one.”

In other words, if a trade deal comes, then we might just take it. But we don’t go out looking for them.

Do such responses mean that some of the majors might be missing the boat when it comes to the ITF market?

Perhaps. But for IBFIs that are through-and-through shariah-compliant—i.e., not just with an Islamic window or a segregated branch—ITF is critically important, and should be even more so in the future.

“There is a massive amount of short term liquidity in Islamic institutions that needs to be invested in something,” explained Michael Gassner, managing director of Michael Gassner Consultancy. “It is either trade or [project finance] in companies. Trade finance, by its short terms nature, meets this need perfectly. It involves real assets not nominal ones [one key for being shariah-compliant] so this can really be done well.”

ITF Instruments

Doing shariah-compliant trade finance well, however,

generally involves costs and operations above and beyond

traditional trade finance, which means that ITF is both more

complicated and potentially less profitable.

Thus, although many of the risk mitigation tools used in

both structured trade and project finance have strong

similarities with various tools that have evolved in Islamic

finance, the supply side, or the instruments made available

by IBFIs, tend to be supported more by a desire on the part

of institutions to propose Islamic financing to

clients—a move that can then translate into a

competitive edge overall.

On the demand side, according to one 2006 UN Trade and

Development report, “those that are able to tap into

Islamic financing markets can obtain relatively low-cost

capital.” Of course, this is not always true. But more

than a relative cost saving, a growing number of clients

simply want to ensure a shariah-compliant transaction.

In that case, several instruments are available for

structuring trade deals. All must, however, fall in line

with a number of basic Islamic precepts that fundamentally

revolve around the necessity of taking and sharing risk

through the possession of real assets.

Although interest taking is therefore prohibited first and

foremost in favor of asset-backed, partnership arrangements,

this particular element is not the only one that makes a

deal shariah-compliant.

Islam also prohibits trading excessive financial risk

(gharar), with such activities regarded as gambling.

Additionally shariah prohibits investing in businesses that

are considered haram—those that sell alcohol or pork,

or businesses that are engaged in gambling or produce

un-Islamic media.

As a result, it is generally accepted (generally, because

there is no single interpretation of what is permitted, and,

in any case, each IBFI has its own shariah board), that

deals are only undertaken with a business whose interest

income is less than 9% of total income and/or who holds a

ratio of debt to total assets lower than 33% of total

assets.

With these prohibitions and benchmarks as a basic

foundation, four instruments for financing trade are

employed in the Islamic market: murabaha, bai al salaam,

musharaka and istisna. According to the recent book,

“An Introduction to Islamic Finance: Theory and

Practice” by World Bank official Zamir Iqbal and IMF

Executive Director Abbas Mirakhor, close to 90% of all

Islamic trade financing is currently based on murabaha, with

more than half of the assets of some Islamic banks invested

in murabaha transactions.

Challenges and Horizons

All four instruments pose unique challenges to both IBFIs

as well as conventional BFIs who wish to enter the Islamic

Trade Finance marketplace. As Sayyed Alwi bin Mohamed

Sultan, senior financial analyst at the Accounting &

Auditing Organization for Islamic Financial Institutions,

said: “There are lots of risks. Market risks, credit

risks, operational risks. The same risks any conventional

bank or financial institution may face and over and above

that [you also face] shariah compliance which is another

risk that Islamic banks have to address.”

One particular problem native to all four instruments is

that the mere presence of sufficient collateral is not

sufficient for a transaction. In contrast, an extensive

evaluation of a borrower’s business is required,

which, as the UN report points out, “can slow down

financing decisions, and disqualify borrowers without much

of a track record, thereby stifling economic growth.”

Added to this is the problem of how to give the

flexibility of variable interest rates, since financing is

generally made on a basis equivalent to fixed interest

rates. As one industry report recently said: “It is

not clear whether borrowers can swap out of such a position,

but if not, fixed interest rates (in an environment where

most companies have the possibility to actively influence

the rates they are paying) may seem at times somewhat

unattractive.”

Nevertheless, “Islamic trade finance is our bread

and butter,” said Yakub Bobat, global head of

commercial banking at HSBC Amanah. “It is an efficient

contributor to our overall Islamic finance activities and it

is a key driver of the Islamic banking pie as a

whole.”

While that appears to be the general sentiment among those

involved in ITF, the truth is that the sector will only

become an indispensable driver of growth if it is matched up

with the far more ambitious tools now being pioneered by

Islamic project finance.

“Frankly, the industry needs to move away from

commodity murabaha,” added Bobat. “Historically

there has been a lack of a comprehensive product suite, but

this is fast developing [and now] you have rollouts across

markets.

“You will see,” he predicted, with apparent

enthusiasm. “The industry gaining critical

mass.”

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Comment

The so-called ‘peace process’

by Lee Smith
written by Lee Smith

Here in Washington, the winners of the 2006 mid-termelections had just started to enjoy their spoils when the2008 presidential campaign already started to heat up. Nosooner had Nancy Pelosi finished her tour of the Hamadeyasouq than the Clinton campaign decided to make Syria part ofthe campaign platform.

See, former President Bill Clinton used to say that themajor impediment he faced in solving the Israeli-Arabdispute was Yasser Arafat. But now with Hilary on thecampaign trail, that’s all in the past. Peace in the MiddleEast is easy, as long as you have the right person in theWhite House—and a proper knowledge of history. Clinton saysthe peace process was derailed for one reason alone—thebullet that killed Yitzhak Rabin.

“The assassination of Rabin killed the whole process,”Clinton told the London-based pan-Arab daily, Ash-SharqAl-Awsat. “This one bullet not only killed Yitzhak Rabin butthe whole process that we were working on.”

That’s right—it was a Jewish extremist who ruined Oslo.Never mind the second intifada and Hamas’s genocidalcampaign against Jews. And Chairman Arafat had nothing to dowith sabotaging the peace process. If it weren’t for thatone Jewish bullet we even would have had peace betweenIsrael and Syria. And we still can—“It will take 35 minutesto resolve the problem between Israel and Syria,” saysClinton. 35 minutes! Wow—I wonder which Americanpresidential candidate could pull that stunt off?

Ah, peace. It is true that the “P word” is certain to strikea Pavlovian chord among the Americans, who are particularlyprone to Middle Eastern fantasies, but it’s not just WhiteHouse hopefuls putting a tired Middle Eastern nag throughher pointless paces. Consider the curious case of Ibrahim“Abe” Suleiman, a Syrian-born naturalized American citizenfor close to half a century now. In April, Suleiman traveledto the Knesset to explain how an Israeli-Syrian peace dealwas possible within six months. Ok, that time frame isconsiderably longer than a half hour and change, but giventhat the Israelis and Syrians both think Suleiman’s talkingout of his hat, six months is nothing short of miraculous.

The US press has followed the case with interest, albeitconfusedly so. For instance, there’s the New York Times,which for well over half a year now has waged a relentlesscampaign demanding the Bush administration “engage”Damascus. The space they’ve devoted to l’affair Suleiman hasbeen for all practical purposes to explain that Syria’sspecial envoy seems to represent no official position inDamascus and has found no confidence in Jerusalem. In otherwords, it is a story about a non-story.

On the other hand, the anti-Syrian Kuwaiti daily al-Siyassahhas reported that Suleiman is the brother of former regimeaffiliate Bajhat Suleiman, once believed to be involved inthe assassination of Rafiq al-Hariri—a fact that wouldsuggest that “Abe” is indeed well connected in Damascus.

However, much more troubling than any genuine relationshipSuleiman may have to the Asad regime is the prospect thathis role as mediator will generate its own momentum andcause chaos throughout the region.

We have already discussed why Washington is apt to embraceeven the most dubious prophet of peace and concord, butother regional interests have their own reasons as well.

Israeli officials are no doubt looking a little more than ayear into the future and wondering whether a possibleDemocrat in the White House will demand concessions fromJerusalem that the Bush administration did not. In thatcase, it would be wise for Israel to keep an apparentlysincere fool like Suleiman close at hand rather than sufferthe vicious Arabist inanities of, say, Walid Moallem orFarouq al-Shara. And even if the new White House is asfriendly to Israel as the present one, the Jewish state hasits own internal politics to worry about. However improbablepeace may seem, Olmert or Netanyahu or whoever winds up inthe running for Prime Minister is going to need some sort ofroad map or peace process to keep voters interested. Whoknows but that the Syria track may seem more appealing thana deal with the Hamas-controlled PA.

Damascus of course would like nothing more than to be tiedup in a peace process—while it also threatens war againstIsrael to liberate the Golan, a prospect even more fantasticthan Clinton’s 35 minutes to peace. The Asad regime isterrified of the international tribunal charged with handingdown indictments in the Hariri murder. So far, Damascus hasallegedly assassinated Lebanese citizens and backed a waragainst Israel in its attempts to forestall the tribunal,but the train is steadily and surely approaching thestation. With so much riding on a “peace process,” no matterhow phony, who would dare punish Damascus for the blood ithas shed not just in Lebanon, but throughout the region? Andafter all, isn’t that how the regime has been selling itscase to the international community for some time now? See,we don’t really want to kill people. We want to be part ofthe rest of the world, we want to come in from the cold, wewant a deal. And isn’t it a shame that until we get what wewant we will have to keep killing people—and just so wedon’t have to keep killing people?

Lee Smith is a Hudson Institute visiting fellow and reporter on Middle East affairs.

 

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Inter Arab Trade” no longer a joke

by Riad Al-Khouri
written by Riad Al-Khouri

Arab political unity, from being a mantra in the 1950s,has turned into a joke, and today the Arab world’s 22″sister” countries regularly bicker in an endless politicaltragic-comedy. Politically, fragmentation of the Arab worldis clear, but what about economics? The same lack ofintegration had been true in the late 20th century of Arabeconomies as it was of states themselves, but couldintra-Arab business now be reversing that? It used to be thecase that Arab states traded little with each other, butthat is starting to change, thanks in part to the Arab FreeTrade Area (AFTA). AFTA was launched in 1997, and seventeencountries are now part of it (with Mauritania, Djibouti,Somalia, the Comoros, and Algeria still outside) accountingfor 96% of the total intra-Arab trade. The agreement aims toabolish tariffs and other barriers to intra-Arab commerce,and the goal of duty-free merchandise trade among members isnow close.

Partly thanks to AFTA, trade among Arab states has risen:in 2001, 7.2% of Arab merchandise exports went to other Arabstates; by 2005, the figure was 8.1%; with the comparablenumbers for imports moving from 10.2% to 12.4% over the sameperiod. This is not a spectacular jump, and is still farfrom the percentages for intra- EU or North Americancommerce; but the trend is clear, with partial figures for2006 indicating a further rise and the outlook for 2007 evenbetter. The same is true for non-merchandise trade, asbusiness in sectors such as banking, transport, and tourismbooms among Arab countries.

Going beyond AFTA, Egypt, Morocco, Tunisia, and Jordanentered in 2004 into the Agadir Agreement, which seeks toestablish an Arab-Mediterranean free trade zone by 2010.(Lebanon and Syria have also expressed interest in joiningAgadir, and other serious potential adherents are Algeria,Libya, Mauritania, and Palestine.) Encouraged by the highlysuccessful Israeli-Jordanian-American Qualifying IndustrialZone (QIZ) model, which has seen Jordan selling billions ofdollars worth of goods to America in the past decade, Agadirseeks to boost exports to Europe through accumulation ofvalue added among Arab and European producers. To do thisfirst requires unifying “rules of origin” (i.e. the way thatcountries determine where and how goods are transformed intofinished products) to allow member exports to benefit from duty-free entry into the EU market. The principle is simple: forthe manufactures of one country to enter another at a low orno tariff charge under a free trade agreement, a certainamount of local value added has to occur. Agadir aims to dosomething similar to QIZ, but vis-à-vis Europe, adding valuefrom there and from Arab signatories to export to theEuropeans duty-free.

While not a panacea for economic fragmentation, AFTA andthe more ambitious Agadir accord are quietly drawing Arabcountries closer. As the rest of the world integrateseconomically, the Arabs will have little choice but to dothe same. To help thing along, the likes of the Arab TradeFinancing Program (ATFP) is bankrolling intra-Arab tradedeals. One of several schemes of this type, the ATFP, aspecialized Arab financial institution with a mission tocontribute to development of regional trade, was started in1989 by Arab shareholders including regional funds, centralbanks, and a number of private financial institutions. Oneof its latest deals came this year when four Lebanese bankssigned agreement for USD82 m in lines of credit from theprogram. The money is part of a pledge made by the ATFP atthe January Paris III donor conference to give Lebanesebanks USD90 m in soft loans, and the program has nowprovided more than USD930 m to Lebanon since the ATFPstarted operations.

Finally, and related to this trend, intra-Arab investment isalso rising strongly, partly as a result of capitalrepatriation from the West after 911. Jordan is a case inpoint: investments recorded during the first quarter of thisyear by the state Jordan Investment Board (JIB) totaledUSD1.357 b, 212% higher than the USD435 m made during thefirst three months of 2006, with most of the non-Jordanianinflow from the Gulf region. (Actual investments are evenhigher, but these numbers are for projects benefiting fromJIB exemptions.) To spur this process, JIB investmentpromotion offices will open in Kuwait, Qatar and Abu Dhabithis year. You have only to remember the early 90s, whensuch a move would have been unthinkable, to realize how farArab economies have moved together in the past decade and ahalf. Driven increasingly by the private sector, this trendshould continue no.

Riad al Khouri is Director of MEBA wll, Amman andSenior Associate of BNI Inc, New York
 

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Lessons of a hostage crisis

by Gareth Smith
written by Gareth Smith

The United States’ cold war with Iran has taken aseries of sinister turns in recent weeks. Hopes of regionalco-operation over Iraq’s future are just one victim ofWashington’s drive to apply the thumbscrews.

The good news was Tehran’s release of 15 British sailors andmarines, and the freeing in Baghdad of Jalal Sharafi, secondsecretary in Iran’s embassy, after his kidnap two months agoapparently by Iraqi special forces.

But the bad news was weightier. Washington has now allegedTehran has supplied lethal weaponry not just to insurgentsin Iraq but to the resurgent Taliban in Afghanistan.

In turn, there is increasing anger in Tehran over thedetention since January of five Iranians seized by US forcesfrom a consulate building in Arbil, northern Iraq. The case,which began shortly after George Bush announced a ‘new Iraqstrategy’ that basically consisted of countering Iran, isfor Tehran a disturbing sign of hostile US intentions.

Rumors of tit-for-tat seizures were encouraged by thedisappearance of a former FBI agent, Robert Levinson, inIran’s Kish island in early March, with mystery surroundinghis motives for the trip and what happened to him after hemet a black American who fled to Iran in 1980 afterassassinating a former diplomat under the Shah.

Meanwhile, Ali-Reza Asgari, the former deputy Iraniandefense minister, is still missing after disappearing inTurkey either in December or February. Political opinion inTehran divides between thinking he defected and thinking hewas kidnapped by the US or Israelis.

While Iranian officials continue to emphasize their opennessto “serious” talks over their nuclear program, Tehran haspressed ahead with uranium enrichment at its Natanz plant,despite two UN security council resolutions demanding itsuspend all atomic activities barring the preparation of theRussian-built reactor at Bushehr.

The most tangible pressure on Iran is Washington’s militarybuild-up in the region’s waters, especially with the arrivalin early May of a additional aircraft carrier, the Nimitzalong with its strike fleet.

Given the wider picture, the case of the 15 Britons wasalmost light relief. The world watched a theatrical 13 daysof televised “confessions,” tub-thumping from British primeminister Tony Blair, and president Mahmoud Ahmadinejadannouncing their release as a gesture of Islamicmagnanimity.

Iran, Britain and the US all deny any links between the fateof the 15 and the ‘Arbil five’ or Sharafi. But many saw morethan coincidence in the timing of Sharafi’s release.

Nonetheless, the freeing of the 15 Britons did follow quietcontact between Blair’s office and Ali Larijani, Iran’s topsecurity official, who apparently co-ordinated Iran’shandling of the crisis. It is unclear what Britain promised,if anything, although Ahmadinejad said a letter [fromforeign secretary Margaret Beckett] has said there would be“no repetition” of the incident. Iran gave no indicationBritain has accepted its demand for an apology andAhmadinejad noted that “the British government was not evenbrave enough to tell their people the truth.”

The release also came only after London toned down itsrhetoric. Tehran-based diplomats, led by ambassador GeoffreyAdams, had argued from the beginning that a “softly, softly”approach was more likely to lead to an early release.

And despite all the speculation outside Iran about conflictswithin the political elite over the crisis, there was aremarkable level of agreement. Indeed, the crisis over theBritish sailors and marines encouraged a closing of ranksafter heated arguments in recent months over the economicmanagement of Mr Ahmadinejad and aspects of nuclear policy.

Both conservative and reformist newspapers, which act partlyas mouthpieces of political currents in the absence ofeffective parties, were united in their support for Iran’sposition in the stand-off over the detained Britons.

Etemad-e Melli, a reformist paper critical of Ahmadinejad,accused Britain of pushing a “crisis scenario” to preparewider confrontation with Iran and relieve the pressure on MrBlair over the situation in Iraq. Officials close to AkbarHashemi Rafsanjani, former president and still influentialconservative pragmatist, said they feared the crisis was apretext for a US and UK military attack.

However confusing the details, the direction is clear. TheUS administration believes that increasing pressure withthrough sanctions and a military build-up will lead to splitin Iran’s political elite and force the leadership toreverse nuclear policy and abandon Iran’s relationship withIraqi Shia groups, Hizbollah and Palestinian groups.

It is a dangerous strategy based on assumptions thatunderestimate Iranian nationalism and the commitment of itspolitical class. Iranian military commanders who as youngmen fought in the trenches of the 1980-88 war with Saddam’sIraq will not have been cowered by British forces makingtelevised confessions after a few days’ captivity and laterselling their spiced-up stories to the highest bidder.

But, at bottom, the Bush administration believes the 1979Revolution as boil that can still be lanced. And if onlyIran can be changed, then the wider region will belatedlyenter the new American century.

Gareth Smyth is The Financial Times Tehran correspondent

 

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Dubai and Halliburton hardly an ideal match, business is business

by Thomas Schellen
written by Thomas Schellen

When US oil services behemoth Halliburton said this springit was moving its corporate headquarters to Dubai, exudationof praises ensued at full throttle. Maestro developerMohammed Alabbar of Emaar grandeur for example recentlycited the move as proof that a global city is underconstruction in Dubai with no real estate bubble about toburst.

Local and regional commentators from academia and media usedthe occasion to hail Dubai’s new international appeal andits welcoming attitude to foreign businesses, especiallywhen compared with the, at best, lukewarm US reception ofUAE-based companies to American shores. Even the soberFinancial Times called it the emirate’s biggest marketingcoup yet, even if it did allude to Halliburton’s reputationfor untoward corporate behavior.

As a romantic fling, the affair between the US corporateanimal and the overachieving emirate would be worth chasingby gossip columnists and paparazzi—were it not for onemissing element: emotion. It is more a marriage ofconvenience and a dubious one at that. It is a questionableunion and one that will not advance the corporate culturefor which Dubai wants to be known.

Halliburton knows Dubai because it has maintained an officethere since 1991. Having a single executive holding thepositions of chairman, president, and CEO, Halliburton alsohas at least one corporate culture aspect in common with agood number of companies in the GCC. But when thetri-functional David Lesar in March announced his migrationfrom steamy, hot Houston to steamier, hotter Dubai, he spokeentirely the lingo of more business growth, better customerrelations in the “Eastern Hemisphere”, and bringinginnovative “rotary steerable tools” to the company’scustomers in the oil and gas business.

There was not a single hint from Mr. Lesar of any emotionalattachment to the city of Dubai of the sort that top MiddleEastern corporate heads often freely profess, and definitelyno signal that Halliburton wants to be a model for goodgovernance, aspiring to widen the ranks of multinational andlocal companies questing to make Dubai a regional center ofsocially responsible corporations.

In fact if the truth be told, American perception actuallypointed in the opposite direction. Upon hearing the news, USpoliticians and watchdog organizations flooded the publicforums with allegations that Halliburton might try to cutits tax burden through the relocation, shift jobs abroad,avoid scrutiny of its supposedly Un-American activities inIran, or even escape from scathing inquiries into its pastsins of corruption and allegations that is was ripping offthe US army in Iraq via its subsidiary, KBR.

The company immediately acted to deny those accusations,emphasizing that it would remain registered in Delaware, payits taxes, and hire more employees in the US. It alsocompleted its separation from KBR last month and announcedthat it will end its involvement in Iran, which Halliburtonhad managed through a subsidiary registered in the CaymanIslands and working from, yes, Dubai.

But distrust of Halliburton looms large in the US, whereself-appointed watchdog groups included the firm in lists ofthe ten worst corporate criminals of the 1990s and as one ofthe ten worst companies in 2004 and 2005. ConfirmedHalliburton haters also pointed out that Dubai has noextradition treaty with the US.

Part of the over-enthusiasm in cheering Halliburton’s officemove may be rooted in the fact that Dubai is a regionalbigwig but by no means a global contender yet. This showsfrom its position on many of the global, from the WorldBank’s Doing Business ratings (77th) to the World EconomicForum’s Competitiveness Index, where it ranked 29th amongthe 40 most developed economies. Even though it was theindex’s top Arab country, it was still near the top of thebottom third for competitiveness in the high-income peergroup. It also doesn’t help Dubai’s cause to be rated—fairlyor unfairly—as 74th and only just “moderately free”in theHeritage Foundation’s ranking of 153 countries for theireconomic freedom.

Dubai has taken many good steps and it is at a point whereit needs to implement some corrections rather than gettingexcited about another corporate addition to its overcrowdedspace. There are already more than enough companies whoopened shop in Dubai and its various free zones with motivesthat have little to do with a vision of building acosmopolitan center for business and leisure and more to dowith being somewhere that a foreign company can avoidquestions or chase money. Dubai should refocus on the bestpractices and honest aims it set out to pursue not so long ago.

Thomas Schellen is business editor for Zawya Dow Jones in Beirut

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Chapter 7 and the tribunal

by Nicholas Blanford
written by Nicholas Blanford

Despite the hesitation of the United Nations secretariat andthe warnings of the Lebanese opposition, the adoption of theInternational Tribunal under a Chapter 7 mandate appearsalmost certain.

The government and its supporters have stepped up efforts tohave the tribunal adopted under Chapter 7, believing thatonce it becomes a fait accompli it will break the politicaldeadlock with the opposition.

There is much uncertainty over the powers and legalparameters of the tribunal which has only helped exacerbatethe tensions surrounding its formation. Hizbullah says it isworried that the US—the main external driving force behindthe tribunal—will use it as a political weapon to settle oldscores, such as reopening “files” dating back to the suicidebombings and kidnappings of the 1980s. Those fears are notwholly without foundation. One senior Christian politiciantold me that was exactly what he hoped would happen once thetribunal is formed so as to undermine Hizbullah’s oppositionrole. Former Prime Minister Omar Karami has suggested thatthe tribunal’s powers be expanded to include the murder ofhis brother, Rashid. If Rashid Karami’s death is included,then there is no end to the number of assassinations,massacres and killings that could end up before thetribunal.

UN officials, however, have said that the tribunal willlimit its work to the series of murders, attempted murdersand bombings that began in October 2004.

International tribunals are a relatively recent phenomenonin international law, a result of greater cooperation amongglobal powers after the polarization of the Cold War came toan end. The first since the Nuremburg and Tokyo tribunals in1945 and 1946 was the tribunal for the former Yugoslavia in1993. Since then numerous ad hoc tribunals have been formedto deal with international war crimes such as those forSierra Leone, Cambodia and Rwanda among others. Critics ofthese tribunals claim they are politically motivated and aform of victor’s justice. Certainly, there can be littledoubt that Lebanon’s tribunal owes its imminent existence tothe exigencies of United States policy toward Syria ratherthan an impartial attempt to discover and prosecute thekillers of Rafik Hariri and his companions.

Much of the ambiguity surrounding the Lebanese version isthat it is a hybrid of several other international tribunalsrather than a direct copy and will be treading new legalground. For example, the tribunals for the former Yugoslaviaand Rwanda were adopted under Chapter 7 from the beginning.There were no local judges sitting on the tribunal andinternational law was adopted for both. The tribunal forSierra Leone included a token local presence and was heldin-country although international law was adopted again. Themixed Lebanese International Tribunal will have equalparticipation of local and foreign judges and will sit underLebanese law (with the exception of the death penalty).Unlike its Sierra Leonean counterpart, however, the Lebanesetribunal will not sit in Lebanon.

Furthermore, the original intention was to establish thetribunal under a bilateral treaty between Beirut and theUnited Nations. The recourse to Chapter 7 only arose whenthe passage of the treaty through parliament became blocked.

Nicolas Michel, the UN’s top legal adviser, has suggestedthat even if the Security Council approves the tribunalunder Chapter 7, it will not be put together until the UNcommission concludes its investigation. That statement wasintended to reassure critics of a Chapter 7 tribunal, buttheoretically the tribunal can begin operating as soon as itis approved by the Security Council, a location chosen andthe judges selected. For example, the tribunal could begintrials of the four generals presently languishing withoutcharge in Roumieh prison. They were detained nearly twoyears ago on the advice of Detlev Mehlis, the then head ofthe UN investigation commission. While, their detention waslegally permissible, their indefinite incarceration withoutcharge nor arraignment in a court of law is not.

In normal circumstances, there should be no need for thetribunal to have recourse to the raft of coercive measuresat the disposal of the UN Security Council under Chapter 7.Indictments issued by the tribunal are legally binding underinternational law irrespective of Chapter 7.

However, Chapter 7 could be applied if any party refused tohand over individuals indicted by the tribunal. AlthoughArticle 42 of Chapter 7 permits the use of military force toimplement Security Council decisions, the UN could opt forthe softer measures contained in Article 41 such as economicsanctions and the severance of diplomatic relations. Even ifthe Security Council was unable to forge a consensus onusing military force, the indicted persons would be unableto travel internationally and could face a freeze of theirinternational assets. However, the down side is that thewhole legal process could grind to a halt, the prosecutionspending, until those indicted are turned over or handthemselves in.

Such is the case with Ratko Mladic and Radovan Karadzic whohave been under indictment by the tribunal for the formerYugoslavia since 1995. The Serbian authorities agreed toturn them over, but both men remain at large, apparently inSerbia, and their prosecution consequently pending.

Nicholas Blanford is a Beirut-based reporter and author of Killing Mr Lebanon: The Assassination of Rafik Hariri andits Impact on the Middle East.

 

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