Consumer Society

High-end watches prove time is money

by Executive Staff
written by Executive Staff

The actor Daniel Craig made one of the most shamelessproduct plugs in the history of cinema when he flashed andthen further name-checked his Omega Seamaster mid-waythrough his debut as the new James Bond in Casino Royale.The Omega has been the standard issue timepiece for thelatter-day Bonds (though in the early films, and in the IanFleming novels on which the 007 film franchise is based,Bond never wore an Omega but rather a Rolex Oyster Perpetualor a Rolex Submariner). Still, whatever the watch, themessage remains the same—nothing bespeaks style and statuslike a wrist thrust from beneath a cuff to flash a majorpiece of high-end Swiss precision.

Watches dominate luxury goods sales

The wannabe Bonds of the world—and in the current globaleconomic climate there are many, both aspirers and oldmoney—are likely to start with the tailored suit and endwith the Aston Martin. But in between they will have toshell out for the watch. Perhaps as a result, within thegreater luxury goods market, the watches and jewelrycategory is surging, particularly in emerging markets suchas Russia, China, India and the Middle East.

“We have witnessed huge growth in the market for luxurytimepieces in the last three years, and it is clearlyshowing in Swiss exports to the region,” says George Becharaof Zenith, the high-end and venerable watchmaker now ownedby LVMH (Louis Vuitton Moet Hennessy) and which arrived inthe Middle East market early in 2004.

Regionally, says Bechara, who is based in the booming UAE,“Dubai is our … biggest market in terms of presence. Thegrowth in Dubai in units between 2005 and 2006 was up 78%,and in terms of turnover it was up 33%.”

Zenith’s parent company, LVMH, is widely considered theindustry leader in the global market for luxury goods. Withscores of brands under its name, LVMH holds a diverseportfolio that ranges from wines and spirits (Moet Chandon,Veuve Clicquot) to high-end fashion (Louis Vuitton, MarcJacobs) to fragrances and cosmetics (Christian Dior,Guerlain) to watches and jewelry (Zenith, Tag Heuer,Chaumet).

In 2000, watches and jewelry contributed only 5% of LVMH’soverall sales. By 2006, however, the category trumped allothers in terms of growth as sales increased 26% on theprevious year. A joint venture between LVMH and De Beers,the largest diamond supplier in the world, has no doubtcontributed to the category’s newfound muscle. Notcoincidentally, De Beers opened its first boutique in Dubailast year.

The market for luxury watches—defined as timepieces thatretail for upwards of $2,000—moved into the Gulf en massearound 2002. That year, Dubai imported some 700,000premium-quality Swiss watches, which at the time was roughlyequivalent to the size of the city’s population.

All major players make it to Dubai ontime

All the major players in the luxury watch market are nowpresent in Dubai—Rolex, Cartier, Chopard, Omega, Cartier,Patek Philippe and the Richemont Group—another global luxurygoods powerhouse, with its regional headquarters in theHazel W. S. Wong-designed Emirates Towers. Richemontincludes IWC, Piaget, Jaeger-LeCoultre, A. Lange & Sohne,Vacheron Constantin, Officine Panerai, and Baume & Mercier.

Dubai’s phenomenal growth is certainly fueling the market.According to a recent—and notably critical—article on Dubaiin the German newspaper Der Spiegel, there were just fourcompanies operating in Dubai 20 years ago. Now there are6,300 from more than 100 countries. The ruling Maktoumfamily expects the local population to grow from two millionto 10 million, and wants 20 million tourists to pass throughDubai every year. Given the potential for triggeringconspicuous consumption, it’s no wonder watchmakers havebeen flooding money into establishing headquarters andboutiques for themselves in Dubai, and then embarking uponan aggressive ad campaign.

“The growth of Dubai [has been] tremendous and crucial inbenefiting Zenith’s business,” says Bechara. “The hugeinvestments that are taking place here, the most importantcompanies setting [up] their regional offices here, the fuelprices, the attraction of tourists throughout the year—allthis brought us good business.”

Regionally speaking, the market for luxury timepiecesremains strongest in Saudi Arabia and the United ArabEmirates, though Kuwait, Qatar, Bahrain and the Levant offersizable room to grow. Rolex still leads the pack in terms ofmarket share (with 15% of the Saudi market alone). But whenit comes to the highest of high-end watches, market successisn’t always a matter of volume. Often it is a matter ofvalue.

Ziad Annan of Rolex in Lebanon says sales figures have beenimpacted by the political situation in the country, whetherthe war with Israel in the summer of 2006 or the oppositiondemonstrations that have, for four months and counting, madea ghost town of Beirut’s central district, where the upscaleRolex boutique is located.

Despite such extenuating circumstances, Annan notes that twonew Rolex timepieces have been particularly successful oflate—a Rolex Rolesor that was fashionable in the 1970s andre-launched last year and a new Rolex GMT Master II. Bothproducts have proven remarkably popular in the Lebanesemarket.

So where will the sector for exquisite watches—and bejeweledmobile phones—go from here? After five years of surginggrowth and breakneck expansion fueled by the outrageous paceof development in Dubai, it seems likely that the majorplayers in the region will turn their attention toconsolidating brand loyalties.

In 2006, says Zenith’s George Bechara, “we had a huge yearin terms of launching new products. This year we are morefocused on strengthening the existing collections, with somenovelties that will give a push to the brand.”

One factor that may contribute favorably to a period ofmarket consolidation is the arrival in the UAE of theauction houses Christie’s and Sotheby’s. Certainly much inkhas been spilled over the sales of international modern andcontemporary art staged by Christie’s in May 2006 andFebruary 2007. But it is worth noting that on Jan. 31,Christie’s held a major auction of jewels and watches in theEmirates Towers Hotel, a sale that trounced the totals ofboth art auctions by raking in $11.8 million. They were nomillion-dollar paintings on the bloc, but a marquise-cutdiamond ring by Van Cleef & Arpels went under the hammer for$1.2 million. The sale also featured watches by PatekPhilippe, Rolex, Cartier, Piaget, Chopard, and a limitededition Corum in 18-carat white gold, 20 jewels, and a whitedial with verses from “The Thousand and One Nights” in blackenameled Arabic script.

According to Michael Jeha, managing director of Christie’sDubai, there are 45 to 50 people working on the Dubai marketfor Christie’s. All the watches and jewels to be sold attwice yearly auctions will, for the time being, be sourcedfrom Europe to keep the material fresh. As a result, theauction houses could either edify Dubai-based enthusiasts ofluxury timepieces—or snag competition away from thetraditional watchmakers themselves.

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Jordan-US QIZ could be better

by Riad Al-Khouri
written by Riad Al-Khouri

The Jordanian economy has done pretty well recently, boasting high growth rates, attracting attention from regional investors, and enjoying increasing exports.Regarding the latter, the kingdom chalked up close to $4.1billion in national merchandise exports last year, up by almost 13% on 2005. Traditional Jordanian production such as fertilizers (the country’s second most important good sold abroad) still accounted for almost 8% of exports in 2006, with potash, another mainstay of the old Jordan economy, constituting over 6%. However, other products with a higher value added have become more prominent in the past few years. These include pharmaceuticals, currently the country’s third most important export, with a share of over7% last year, and most notably clothing, which has been number one for much of the present decade. Growing steadily from a very modest share in the late 90s, the clothing industry was responsible in 2006 for just over 30% of totalJordanian merchandise exports, a proportion roughly maintained since 2003, with the value of Jordanian clothing exported last year expanding by 18% compared to a rise of just over 5% in 2005.

So where are all these clothes sold? You’d think that shoppers in Lebanon, Iraq, or the GCC countries, traditional outlets for Jordan’s products, would see Jordanian garments in their local stores, but that is rarely the case.Actually, you would have to go to New York or LA to find most of these clothes. Is that a bizarre situation? Not at all, if you consider the importance of Middle East diplomacy to Jordan’s economy. In fact, Jordan’s success in this business rests on a break it got over a decade ago from its favorite uncle, a person with a red, white and blue top hat called Sam, with so-called Qualifying Industrial Zones(QIZs).

In the Zone

Under the QIZ—blatantly designed to reward Jordan for its pro-American stance and nudge the kingdom even closer toIsrael—a product with 11.7% added value from Jordanian, 7-8%from Israeli, and the balance of 35% from either country, the US or Palestine, enjoys duty-free entry into theAmerican market. For example, if a skirt costing $10 is imported into Jordan from India and dyed in Amman to raiseits value to $11.17, it cannot by such a transformation alone enter the US market free of duty under currentJordanian-American trade rules. However, if that same garment also gets, for example, Israeli zippers worth $0.80and American trim costing $1.53, then the finished product has added the necessary amount of value (in this case stipulated at a minimum of 35%) in the correct proportions to qualify for duty- free entry into the US market.

The roaring success of this arrangement has left the US as the main importer of Jordanian products last year, buying more than 31% of the kingdom’s exports, up from a derisory amount in the mid-90s. For various reasons, clothing has turned out to be the major exported QIZ item, with garments(most of which are produced in QIZs) amounting to almost 91%of Jordanian sales to the US in 2006.

Not that the QIZ deal has done that much for Jordan’s economy: for a start, most of the capital and many of the workers at QIZ factories are not Jordanian—as a lot of profits and wages are sent home outside the kingdom, Jordan gets that much less benefit. The other problem is that UncleSam in December 2004 also “rewarded” Egypt with a QIZ deal; as the Egyptians can more cost-effectively produce garments(and for that matter, other products) wanted by US consumers, Jordan QIZs had better watch out. Under theAmerican policy of “competitive liberalization” grantingQIZs to both neighbors seeks to make them more competitive, which is probably a good thing—if the Jordanians are up to it.

QIZ helps plug trade gap

Meanwhile, QIZ has helped Jordan to strengthen what would otherwise be anemic exports of goods, partially plugging a massive trade gap. In 2005, exports of Jordanian goods covered a mere 41% of the kingdom’s merchandise imports, but higher sales abroad from Jordan’s QIZs last year helped bring up the coverage to a little over 45%. The shortfall is partly made up by better figures in Jordan’s services trade balance, but in the end the kingdom regularly consumes more from abroad than it sells to the outside world, with the gap being made up by foreign largesse.

RIAD AL KHOURI is an economist, and Director MEBA Ltd Amman/Senior Associate BNI Inc New York; He can be contacted at [email protected]

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Consumer Society

Dubai asks the question, Yes, but is it art?

by Executive Staff
written by Executive Staff

Until recently, Dubai seemed content with its reputationas a booming former backwater, flush with oil revenues andripe for investment, but absent of any culture saveconspicuous consumption.

Having firmly established its identity as a tax-freecommercial oasis in a politically volatile region, in 2005,the UAE’s second largest emirate decided to accelerate thediversification of its economy away from oil revenues andattract a new breed of foreign capital—artworks.

Riding the wave of skyrocketing international contemporarysales, and underpinned by an emergent class of buyers fromRussia, China, and India, Dubai would position itself as aglobal hub linking hungry, if undiscerning collectors inburgeoning non-Western markets with their more establishedcounterparts in London and New York.

To this effect, Christie’s Auction House opened regionaloffices in Dubai in 2005, and has held three auctions sincethen in which, according to Michael Jeha, Christie’s Dubaimanaging director, 90% of the lots were sold, even if cynicspoint out that between Christie’s twin inaugural auctionsheld last February, jewelry accounted for almost 60% of the$20.5 million revenue. Meanwhile, Christie’s equallyvenerable competitor Sotheby’s has also announced plans toset up shop in Dubai, and sponsored a local educationinitiative for Emirati collectors, artists and galleryowners.

Ambitious art fair

On March 8, the Dubai International Financial Center(DIFC) sponsored the inaugural DIFC Art Fair, moving theemirate one step closer to its goal of becoming what formerBritish galleriste and fair director John Martin calls “acenter of art commerce.”

Nothing if not ambitious, fair organizers expect Dubai’sart market to mimic its rapid commercial growth, and“strategic partner” DIFC reckons the event will become oneof the top five art fairs in the world within three years,rivaling the reigning international triumvirate of Art Baselin Miami, the Armory in New York and Frieze in London.

Given the absence of a thriving gallery scene, anup-and-coming group of local artists and collectors, or arenowned art institute in the deserts of the GCC, the claimmight be dismissed as unrealistic at best and bombastic atworst. But if Dubai has learned anything during its rapidrise to become the Las Vegas of the Arab world, it is how tosell. And once stripped of its cultural pretensions, what isan art fair if not an aesthetically pleasing market?

While, the jury may still be out on both the DIFC fair andDubai’s ability to cut it culturally, its first outing wasnonetheless a good start. The three-day event (andconcurrent global art forum) brought cult galleries togetherwith the marquee names of the art world. Some were drawn bycuriosity, others by the promise of a new class of spender,spawned by a $500 billion oil boom, and others by what werevariously referred to by Ben Floyd the fair’s financedirector as the “incentives,” “bursaries,” and “smallsubsidies” given to a handful of galleries “that we reallywanted on board.”

The 40 exhibitors assembled in the Arena of the MedinatJumeirah resort included Hoxton Square-heavyweight WhiteCube and its slightly less cutting-edge, yet prominentMayfair counterpart Albion; Chelsea mainstay Max Lang andSeoul’s Gallery Hundai. Over $100 million worth of art wasassembled in the chinzy hotel conference center, butgalleries and fair organizers alike declined to reveal thetotal value sold.

“There are different ways to measure success,” Jeha saidwhen asked the total volume of sales. “The attendance andcontent was good, and I know a lot of Indian and Arab artsold, but I don’t know the tallies from western galleries.”

However, based on reports, it seems unlikely thatpetro-dollars, an all-star roster, and a media blitztranslated into bumper sales this time around. “There havebeen a lot of conversations and we’ve sold a few things, butit’s not like the usual levels we see at art fairs like theArmory or Basel where we sell millions,” explained GrahamSteele of White Cube early on the first public day of thefair, who admitted that the customers lacked knowledge.

“They didn’t prepare collectors and there is a lot ofexplaining. People don’t know that this is an iconic DamienHirst,” he says gesturing to an installation of a medicinecabinet stocked with pills. “Or they don’t understand whythis costs £850,000,” he says referring to another signatureHirst butterfly piece hanging nearby. Indeed, none ofHirst’s work—including the most expensive piece at the fair,his “Spot Mini” car owned by British collector CharlesSaatchi and insured for $2 million—sold. White Cube, like Albion, tailored its display toperceived demand, leaving the racy Tracy Emins at home, infavor of more “universal” pieces like a colorful painting ofthe Luis Vuitton symbol.

By Saturday afternoon, 12 of the 30 pieces Albion shippedto Dubai—including eight edition pieces from the Campagnabrothers—chairs covered in a furry orgy of stuffed animalspecies and sold for $18,000 each—had been snapped up, “andnot just by expatriate residents of Dubai,” said stafferMatt Langton, “but by locals too.”

Wide range of interests, but few sales

Elsewhere, interest in a photograph of Yasser Arafat and avideo installation of oil being spilled over a pile of sugarcubes by French-Algerian artist Kader Attia, both selectedbecause they were thought to be “appropriate to the area,”was muted, while at a booth shared by Max Lang, Malca FineArt and Enrico Navara, where pieces ranged from $25,000 to$2 million, reaction was “mixed.”

“We’ve had offers from European, Russian, and Indiancollectors but haven’t closed anything yet,” reported adecidedly unimpressed Lang, adding that Andy Warhol’s iconicdollar sign has had a lot of interest. Navara said localswere remarkably curious about contemporary art, and the“clueless were willing to find out why.” He plans to attendin 2008, and reap the rewards of the education dispensedthis year. Indeed, it was this level of phlegm that was theorder of the day as exhibitors, who forked out between$20,000 to $50,000 for a stand, took the lackluster sales instride. One gallery owner who huffily declared that he had“never lost so much money at a fair” in his career,grudgingly said he would return.

That smaller, regional galleries like Third Line, thefair’s sole Emirati exhibitioner, outperformed theirwestern counterparts (it sold at least half of its 23 works)bodes well for the sustainability of the fair, and theMiddle Eastern art market in general, according to AndréeSfeir Semler, the grand dame of Beirut’s fledgling galleryscene. “Its easy to attract international galleries thefirst year, and maybe the second, but most of them won’texhibit the third year unless the fair offers somethingdifferent from the others,” she explained. “Basel getsstronger every year because it has an identity. They’vestarted nicely here because they have Indian, Persian,Turkish galleries, and we’re from Beirut. And having theinternational galleries attend raises the standard of theevent, but no one is going to come to Dubai to see theWarhols. Regional artists have to draw on their own cultureto make a name from themselves and stop trying to imitatethe west,” she says.

The intersection of globalization and Islam threadedtogether the art on view, including a “Militant Snoopy”action figure wielding a beard and a gun, a $25,000gem-encrusted “Nation of Islam Knuckle Duster” with the wordAllah inscribed in Arabic, and “Diamond Head,” FarhadMoshiri’s glittery gold and black eagle painting, thatfetched $70,000 within two minutes of the fair opening.

John Martin said it is not unusual for new buyers toinitially invest in art from their country of origin, but astheir collection and awareness grow, the focus on aparticular geographic region melts away. “Most of the bigWestern pieces were bought by expats living in Dubai, justas Indian collectors bought most of the Indian work. But asfair gets bigger, Asian collectors will shift towardsWestern art, and vice-versa. We hope to position it as asandbar between the two cultures,” he added.

Most western galleries in attendance were not expecting bigsales, Marin insisted, but came to make connections in anart market with huge potential. Though he expects privatecollectors to be the engine of Dubai’s art market in thefuture, corporations setting up offices in the emirate areanother promising customer-base.

Art is a new staple of investmentportfolios

“Banks invest in contemporary art, not least because youcan hang it on your wall. Banks court wealthy clients, a lotof whom are private collectors, by setting up separate artconsulting branches. Art is becoming a staple of moderninvestment portfolios,” he said.

One needs to look no further than the growing number ofart investment funds for evidence of the growing appetitefor art as an investment vehicle. While the trend is by nomeans new, venture capital funds and financial institutionshave only recently begun to turn their gaze outwards toemerging markets. The question is whether the Middle Eastwill be next, and if Dubai will be able to assume a role asthe “third leg”—a title one gallery owner bestowed on HongKong—of the contemporary art market.

Much like Dubai itself, it is difficult to disengage thehype surrounding the fair from the reality, but Tim Harrisonof HSBC does not think the emirate’s potential as an artmarket has been inflated.

“If you look at the fair next to Christie’s successfulsales and the Louvre (to be built in Abu Dhabi), we areseeing a notable move towards investment in art,” Harrisonsays.

“There is a lot of art being produced in the Arab world,which will find more obvious channels for sale in theregion, and we have Indian collectors coming through. Dubaiis well positioned to be a trading hub for South-Asian,Middle Eastern, and Indian art.”

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Iran‘s home-grown auto market

by Gareth Smith
written by Gareth Smith

It’s an ill wind that blows someone some good. Tehran’s infamous traffic congestion may clog its roads and the lungs of its 12 million inhabitants, but it means big business forIran’s car makers.

Total production of new vehicles reached nearly 1 million for the Iranian year ending March 20, according to Ali RezaTahmasbi, the minister of industries and mines, makingIran’s output higher than Australia and three times that ofIndonesia.

The sector accounts for about 4% of GDP and 500,000 jobs, giving it a pressing importance for Iran’s rulers, while facing an unemployment rate officially at 11% and the prospect of further international sanctions over the country’s controversial nuclear and missile programs.

The strength of Iran’s car industry results not from a vibrant competitiveness geared to a tough world market, but rather from a mixture of high import tariffs, state ownership and petrol subsidized to the knock-down pump price of around 9 cents a liter (rising to 11 cents in May).

The government is keen for Iran to become a regional if nota world-wide auto manufacturer, and so Saipa and IranKhodro, the main domestic companies, are expanding business through exports, setting up overseas production lines and enticing foreign partners into joint ventures at home.

Renault returned to Iran in March after a 20-year absence, investing $150 million in a 51-49% partnership with Saipaand Khodro to make the Tondar-90, a version of the Logan, as mall family car first made by Renault’s Romanian subsidiaryDacia.

The car will have 60% local parts, rising in time to 80%,and Renault and its partners aim to make 300,000 units over three years. As the car went on pre-sale in March, with three models ranging from 82 million rials ($8,870) to 108million rials, Khodro claimed to be registering 22 buyers every minute. Business at the Khodro’s Tehran sales offices was certainly brisk, with customers relying more on memories of Renault’s past reputation in Iran than any detailed information on the new car.

The move is a clear challenge to Peugeot—the biggest foreign car manufacturer in Iran, assembling 400,000 cars a year in partnership with Khodro—and Renault has also decided to produce 15,000 Meganes, another small family car, in 2008, rather than importing the model from Turkey.

Renault’s decision raised eyebrows in Washington, where officials are trying to discourage international investment in Iran. But such was the French company’s commitment to the deal, first signed in principle in 2004, that it agreed to the Iranian demand that 20% of the 300,000 cars could be sold for export.

For the Iranians, such deals bring access to European technology, helping Iran in its aim to boost its non-oil exports.

Parviz Davoudi, Iran’s first vice-president, inaugurated a factory in Syria in March as a $60 million joint venture with Al-Sultan to make the Samands, Khodro’s budget family car, which will be re-branded as the Sham. Target production is 10,000 a year, a useful boost for the Samand, Iran’s only entirely indigenous model since production stopped in 2005of the Paykan, the model famously based on the UK’s HillmanHunter.

Iran also signed three auto making contracts valued at more than $1 billion with Russia and China during the Iranian calendar year ending March 20. Khodro agreed to export 6,000 Samand cars to Russia every year and to produce 30,000 inChina. Iran Khodro Diesel is to assemble 12,000 of a version of the Gazelle van, made by the Russian GAZ (GorkovskyAvtomobilny Zavod) company, beginning with importedCompletely Built-up Units (CBU) and gradually switching to50% of parts from domestic production.

Although the basic strength of the Iranian manufacturers remains a protected home market, there has been some easingof restrictions on imports.

Iran did lower slightly tariffs on imported vehicles in2006-7, allowing an increase from 10,000 to 26,000 andleading top-range manufacturers such as BMW and Mercedes-Benz to step up their limited efforts.

And domestic manufacturers have also brought in some models from their overseas partners Renault, Citroen and Hyundai.Khodro plans to add the Peugeot 407 to its sales line-up in2007-8, and will import a total of 2,000 Peugeots, with each priced at 300-400 million rials ($32,500-$43,500).

In another sign of improved fortunes for importers, Hyundai signed a contract to supply 13,450 CBUs worth about $227million to Iranian government agencies and official taxi operators, a move that came as a blow to Kerman Motors, which manufactures Hyundai models.

The relaxation of restrictions seems to have resulted from widespread public, media and even parliamentary criticism ofthe quality of Iranian-made cars.

But there is no sign of any serious challenge to the basic development model based on restricting imports. Parliamentdecided in February to keep a hefty 90% tariff in place for the coming year, ending March 2008.

Hence the cars clogging Tehran’s streets will likely for the foreseeable future, continue to be Iranian-made, even ifsome of the parts and a growing part of the technology that makes them are imported.

GARETH SMYTH is the Financial Times Tehran correspondent

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Executive Tools

Why equity capital is good for you

by Nagy Rizk
written by Nagy Rizk

You are owner of a small or medium (Lebanese)enterprise (SME) and you are facing one or more of the following situations:

• What you sell (products or services) have high potential but you have limited resources to grow (both human and financial);

• You are doing fine, but cannot afford the extra efforts needed;

• You have used all your capacity to raise debt and you are looking for alternative financing options;

• You need to open to new distribution channels on the local or regional/international market;

• You need to build a solid infrastructure to maintain and protect your edge;

• You want to grow but are concerned with the risk implications.

Your bank/friends/colleagues have recommended you to bring in investors in order to move forward. But the search is hard. You have checked around and some (distant)connection is offering to bring in investors on board to check out your business:

• But you have either to make the trip to meet with them, probably in the Gulf nowadays (taking expenses from more urgent or relevant items) or stay on hold, waiting for their next visit to Lebanon.

• The timing may be wrong: Lebanese SMEs could be a hard sell with the current market conditions on uncertainty and instability. Buyers assume you are desperate and ask for a bargain. You are tempted to wait.

• But the feeling of urgency is clear: unless you move immediately, you may lose a unique opportunity. The market is growing and you do not want to miss the train.

• You do not know what to expect and how to deal with the“mighty investor.” A savior, a foe or just a partner? You are in for a long ride: long wait, long process, and uncertain outcome.

You are also concerned about loss of control of your business to the new investor, the reporting constraints, and the loss of independence. You are already missing your comfortable space, not having to report to anyone. Why would you want to bring in strangers?

Many questions are crossing and clashing into your mind.You are tempted to put things on hold, then to do something,then to wait and see. You are turning in circles. You wish you could have a clearer picture; you wish you could makethe wise choices at low cost; you wish you could be lucky and find the perfect fit.

You have a very heavy responsibility: You want to take your company to the next phase, efficiently and cost effectively. But the tasks ahead are too tedious and tricky.

Private equity funds for development are the pools of capital invested by private equity firms. The fund obtains capital commitments from certain qualified investors such as financial institutions and wealthy individuals to invest a specified amount in the equity of existing businesses.Private equity funds buy in equity against stakes in the business. They check out the business, they evaluate the business during the due diligence exercise, draw a road map on how to invest in the business, set the development objectives, and how to exit within a limited period. Along the way they make sure their investment is well-treated and they get returns that live up to the promises.

The Lebanese market may not be too familiar with equity capital funding for historical and structural reasons. But recently, there have been many success stories and positive experiences of value-creation and mutually beneficial partnerships. Of course, there have also been reports of some horror stories and bad experiences.

So, should you consider equity funding for your business?Is equity funding right for you?

10 good reasons to consider equity capital funding:

1- Risk sharing is a good tradeoff

Loans for business—especially the subsidized ones currently offered on the Lebanese market—are very attractive. You probably have used your limit. And when you take a loan, no one shares the risk with you. You have to pay it all back yourself, whatever the circumstances. You are on your own, dealing with risks of uncertainty, instability, and market downturn. The equity capital investor is aware of all the painful realities of the business life. He has integrated them in his analysis andvaluation. He is sharing the risks with you. And he will be doing his best to minimize and mitigate them. It is good to have a partner.

2- Dealing with the professionals always pays off

You are dealing with professionals all the way: their valuation of your company is rational, documented and integrating all the relevant factors. Negotiations are clear and streamlined. You will not be wasting time and resources dealing with amateurs or unsophisticated potential partners.The professional equity fund managers have very clearly defined rules and organizational structure. You are pretty safe.

3- Clearly defined process

Whenever you reach an agreement, all the important issues will be addressed and clarified. Many scenarios will be anticipated. No improvisation or rule-bending along the way.No bad surprises around the corner.

4- You are not losing control of your business

Your new partners want you to succeed. They want you to continue doing what you are best at doing. When necessary, they are willing to bring in the missing skills for a healthy growth. They would not mind minimizing their intervention. They are not into micro-management (unless necessary). They invest in people and your ability to deliver.

5- Credibility for your business

When the professional equity investors get in, they examine your business. If they like it, they let you know it. They see a potential for growth and value creation. They show faith in you. They give you a validation stamp.Credibility is fundamental to accelerate your entry into anew market, reduce your sales cycle, recruit new talents, and negotiate better funding terms and business deals. Youhave already won a solid vote. Your business is bankable.

6- Articulated strategy for your business

Professional equity investors look at your business, ask questions, and articulate all the necessary details including strategy for positioning, development, and growth.They share with you their vision, perspective, and experience. Your equity partner sees the value in your business and its potential, and gives you a fair assessment, and like the other board members will look at the big picture and thinking outside the box. You see the road ahead clearly. You know where you are going and how far and how fast you should get there. Motivation and clear objectives are good drivers.

7- Monetization of your business

You used to run the business, and whenever you needed loans or funds, you would have to offer personal guarantees or start a painful seduction dance to prove the value of your business. Once an equity fund has invested in your business, it is an easier sell to convince the market at large of the starting valuation. More leverage possibilities for the business or for your own shares for a second round.Well done.

8- One Agenda, clear objectives

The equity fund will get on board with the clear objective of creating value—aggressively if possible—build an attractive item, sell it out, make profits, and move on. The equity fund investor does not target to take over your business or to run it indefinitely. The rules of the game are clearly defined from the beginning. No change in the agenda along the way. No need to watch your back. You can focus on your business.

9- Your business is on the map

The equity capital professionals have come on board. They have created value. Time for them to move out. They offer their shares to potential buyers (insiders or outsiders).The buyers take notice of your value, your competitive edge, and your potential in their own portfolio. You are more visible. And that is good for business.

10- Bottom line

If every thing goes right on track, if you succeed in attracting a professional equity investor to your business, you will benefit from a very good learning experience, get help creating value for your business, and build a more sustainable business. Your future has improved, significantly.

If you feel you can make the cut and get an equity investor to take notice, prepare yourself thoroughly.Increasingly, many players are will be looking for opportunities on the Lebanese equity market. They say there is a lot of untapped value and high potential.

Having said all that, there will be situations where you will not need equity financing: If your business has very low risk, is not facing challenges for growth and survival or if you do not need to sell out for cash, then you do not need to share your benefits with outsiders with limited potential for added value. Just keep on doing what you have been doing, the good old-fashioned way.

Nagy Rizk Fund Manager The Building Block Equity fund [email protected]

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Financial Indicators

Global economic data

by Executive Staff
written by Executive Staff

Prison population

Convicted adults admitted to prisons

Number per 100,000 population

Since the 1970s, OECD countries have experienced steady increases in prison population, with the exception of Finland where the rate has continued to decline. Over the last 10 years, Portugal has recorded one of the largest increases together with Spain among European countries. However, levels in both countries remain far below the United States, where the prison population has witnessed a huge jump that bears no historical comparison, with a population in 2000 four times as high as in the early 1970s. Differences across countries have, surprisingly, only little to do with the prevalence and development of crimes but more likely to do with political factors and responses to the increasing belief in certain countries that prison is preferable to other alternatives. When comparing prison populations in 2000, the United States again stands far above the norm with an incarceration rate five times as high as the OECD average and three times larger than the Czech Republic, ranking second. More than 1.2 million convicted American adults are in jail (a little less than 2 million when pre-trial and non-guilty offenders are included), and this may have a significant distorting role on the labor market for young males. Rising prison populations, unless fully resourced, generally reduce the effectiveness of criminal re-education. Upward trends can pull down the staff-prisoner ratio, a key component for achieving effective prevention of re-offending and promoting reintegration in the community. Moreover, prison overcrowding tends to exacerbate already high levels of tensions and violence, raising the risks of self-injury, suicide and sexually transmitted diseases including HIV/AIDS. Overcrowded prisons are also more likely to act as “universities of crime.”

Migration of the highly educated

Foreign-born persons with tertiary education

As a percentage of all residents with tertiary education

In the total OECD area, about 4% of persons with tertiary education are immigrants from other OECD countries. Those from non-OECD countries account for about 6% of all current residents with tertiary attainment. Net stocks of foreign-born persons with tertiary attainment are highest in the traditional “settlement” countries of Australia, Canada and the United States, but also in Luxembourg and Switzerland. Other countries with a large excess of foreign-born persons with tertiary attainment relative to their nationals living in other OECD countries include Sweden and France (8-9%). On the other hand, countries having a large percentage of tertiary-educated former residents living in other OECD countries include Ireland and New Zealand (at close to 25%); Austria, Switzerland, the United Kingdom, Luxembourg, Poland, Portugal and the Slovak Republic (all at more than 10%); and the Czech Republic, Germany and the Netherlands (at close to 9%).

Long-term unemployment

Persons unemployed for 12 months or more as a percentage of total unemployed, 2004*

In 2004, rates of long-term unemployment varied from 10% or less in Canada, Korea, Mexico and Norway to 50% or more in the Czech Republic, Germany, Greece and the Slovak Republic. Lower rates of long-term unemployment are generally found in countries that have enjoyed relatively high rates of economic growth in recent years. There appears to be a two-way causal relationship here. On the one hand, jobs are easier to find in a fast growing economy and, on the other, economies may grow faster by making unemployment an unattractive proposition. Over the period shown in the table, long-term unemployment rates have been relatively stable for the OECD as a whole, but there have been some sharp rises in several countries and equally sharp falls in others. Rates of long-term unemployment have more than doubled in the Czech Republic, Hungary, Finland and the United States (albeit from low levels) and have also risen sharply in Iceland (although from very low levels), Japan and Switzerland. On the other hand, there have been large falls in the long-term unemployment rates in Belgium, Ireland, Italy, Luxembourg, Netherlands and Spain. It is noticeable that, since 1990, the share of long-term unemployed has halved in Korea, Norway, Luxembourg, Ireland and New Zealand.

*Latest available figures

Languages on the Web

Top 10 languages used in the Web

( Number of internet users by language )

There are 87,253,448 Spanish speaking people using the internet, representing 8.0% of all the Internet users in the world. Out of the estimated 512,036,778 world population that speaks Spanish, only 17.0 % use the internet. The number of Spanish speaking internet users has grown 253.4 % in the last six years (2000-2007). Arabic speakers saw the largest growth—930.2%—although they still has the fewest speakers online (2.6%) and least penetration among speakers (8.4%).

Employment rates by gender

Employment rates: total

Average annual growth in percentage, 1991-2004 or latest available year

Employment rates: men

Average annual growth in percentage, 1991-2004 or latest available year

Employment rates: women

Average annual growth in percentage, 1991-2004 or latest available year

All OECD countries use the ILO Guidelines for measuring employment, but the operational definitions used in national labor force surveys vary slightly in Iceland, Mexico and Turkey. Employment levels are also likely to be affected by changes in the survey design and/or the survey conduct, but employment rates are likely to be fairly consistent over time. For the denominators—the population in each age group—the data are taken from labor force surveys. Over the period shown in the tables, total employment rates (men and women) have fallen in 13 countries and risen in 17. Particularly large falls were recorded in Turkey, Poland, Sweden, Czech Republic and Slovak Republic and particularly large increases occurred in Ireland, Spain and the Netherlands. Growth in employment rates was very different for men and women. Employment rates for men decreased in 19 countries during the period with an annual fall of more than 0.5% in Poland, Turkey, Sweden and Germany. For women, on the other hand, employment rates grew in 23 countries with increases of 1% per year or more recorded for Ireland, Spain, Netherlands, Greece, Italy, Belgium, Mexico, Luxembourg and New Zealand. Clearly, these differences in the growth of employment rates are leading to convergence in the rates for women and men although differences remain large in many countries.

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Financial Indicators

Regional equity markets

by Executive Staff
written by Executive Staff

Beirut SE: Blom  (1 month)

Current Year High: 1,713.79  Current Year Low: 1,168.85

The BSE short seems inauspicious to inspire trading volumes these days, but the Beirut Stock Exchange undercut the Bahraini bourse in matters of confidence last month. After no more then a hiccup of an improvement to 1,208.57 points on January 26, the day after Lebanon was promised $7.6 billion in international funding, the Blom Stock Index went lower and lower to close at 1,171.47 on February 23. Solidere slumbered in the troughs while BLOM Bank did a bit better than its sector peers. Traders said they did not want to be quoted with comments on the whole market performance, because “nothing is happening, it is the same shit every day.”

Amman SE  (1 month)

Current Year High: 7,584.32  Current Year Low: 5,267.27

The Amman Stock Exchange continued a surprisingly strong show of growth to close at 6,467.63 points on February 25, representing a 17.2% improvement in the index for the year-to-date in the best two-month performance for any regional market at the start of 2007. On the month, the ASE index climbed by around 480 points since January 28. Top market power Arab Bank was strong in volume and share price development to JOD 27.50; it is now up by JOD 6.20 since the start of 2007. Select real estate stocks saw good volume, including Taameer Jordan and Arab East for Real Estate Investment. The share price of the latter advanced by 25% in the course of one month. Upstart Jordanian television station ATV said it wants to become the first station in the region to go on the bourse. 

Abu Dhabi SM  (1 month)

Current Year High: 4,648.80  Current Year Low: 2,925.03

The Abu Dhabi Securities Market had a U-shaped trajectory in February, with a hanging chad at the end. Starting at 3040.50 points on January 28, the ADSM index fell by over 90 points by February 1. It remained below the 3,000 line until it jumped to 3,035.12 points on the 20th of the month but retreated again to a close of 3,004.03 on February 25. Energy sector company Dana Gas saw strong trading volume and one of the interesting movers was oil sector company Aabar Petroleum, with a 44% rise to AED 2.21 in the latter part of the month. Some market traders thought that the rise was initiated by a case of mistaken identity, because a Kuwaiti company with similar call sign had been awarded a government contract in Kuwait. However, Aabar also had news of its own, with a new contract and production increases in Thailand.

Dubai FM  (1 month)

Current Year High: 6,731.63  Current Year Low: 3,997.29

The Dubai Financial Market moved with no clear direction in the range between 4,314 and 4,120 points. The start of the month saw the index drop by nearly 200 points but after some up and down, the market closed at 4.207.51 points on February 25. Earnings seasons added some spice to a not overly exciting month. After announcing 35% year-on-year higher net profits for 2006, market heavyweight Emaar Properties saw a spike in volume but the stock never moved far from AED 13 throughout the month. Investment bank Shuaa Capital share prices pointed downward in February, but the stock did not appear to suffer heavily from allegations by magazine Trends Arabies that the company had manipulated a Kuwaiti stock deal in 2005. Shuaa denied the allegations.

Kuwait SE  (1 month)

Current Year High: 11,542.90            Current Year Low: 9,164.30

The Kuwait Stock Exchange was one of three GCC bourses that traded lower in the fourth week of February than at the start of the year, with Bahrain and Qatar being the other two. The KSE rebounded from a month-low of 9,584.5 points on February 10 but closed not higher than 9,726.40 points on February 21. One of the market’s gainers was telecoms firm MTC, which released strong results on February 19. With most gains before the results announcement, MTC’s stock appreciated by 17% between the start of the month and February 21. Holding firm Kipco made news by saying late in the month that it is leading a consortium tasked with selling 51% of telecoms firm Wataniya. Share prices of Kipco and Wataniya are expected to benefit from the move.  

Saudi Arabia SE  (1 month)

Current Year High: 19,502.65            Current Year Low: 6,916.85

The Saudi Stock Exchange gently traversed the entire 7,000 points realm in February and reported in at 8,385.45 points on February 25. Dipping only slightly on profit taking early in the month, the Tadawul index over the period improved by 21% from 6,916.85 points on January 29. The big thing in the market for this month, and probably a few more times in the coming months, is insurance. Initial public offerings of insurers Medgulf and Malath were oversubscribed by healthy margins. Being the first two insurance IPOs in a lineup of recently licensed providers, the flotations will be followed by others and add a new dimension to the SSE.

Muscat SM  (1 month)

Current Year High: 5,956.46  Current Year Low: 4,657.16

The Muscat Securities Market closed at 5,780.39 points on February 25, up some 11 points when compared with January 28. Sailing southward in the first half of the month, the index turned back north after February 11. Flag carrier Oman Air was suspended from trading for most of February pending a capital restructuring. The sultanate’s government plans to infuse new capital into the firm, which would increase the government’s stake from 33 to 84%. Brokers on the MSM said that the shareholding of GCC investors in Omani listed companies at the end of January 2007 was substantially higher than a year earlier. GCC investors owned a total of 14% of MSM-listed stocks, up from 10% in January 2006. Shareholding by non-GCC investors remained basically unchanged at 6.5%.

Bahrain SE  (1 month)

Current Year High: 2,265.58  Current Year Low: 1,996.68

The Bahrain Stock Exchange closed February 25 at 2,160.65 points, down some 21 points compared with its close on January 28. Gulf Finance House, Nass Corporation, and Ahli United Bank were among the most active stocks in the muted market. Gulf Finance House announced a mixed cash and shares dividend of 75% after its 2006 results came with a 51% higher net profit of $212 million. The stock’s price dropped by $0.20 in the days after the announcement and closed at $2.03 on February 25. The BSE board issued a warning to one and a reprimand to another listed company for violating guidelines against insider trading and not following disclosure standards.

Doha SM: Qatar  (1 month)

Current Year High: 9,878.10  Current Year Low: 5,825.80

The Doha Securities Market had the roughest ride of all GCC markets last month, closing at 6,237.51 points on February 25, down from 6,781.08 points on January 28 and more than 12.5% down since the start of 2007. Industries Qatar climbed in the second half of the month and saw high trading volume on announcing a 50% cash dividend. Shipping company Nakilat with its capital call was also among the most active stocks; the company also announced new construction orders for six LNG vessels. In the second half of the month, government and central bank officials tried talking confidence into the market by highlighting the strong growth of the Qatari economy in 2006 and the good performance of the banking sector.

Tunis SE  (1 month)

Current Year High: 2,712.33  Current Year Low: 1,732.72

Like its colleague in Casablanca, the Tunindex conquered a new historic pinnacle in February, reaching 2,712.33 points on February 9. It slipped back by a bit over 100 points in the following week but then returned to growth, closing at 2,646.75 on February 23. The bourse is 13.54% up since the start of 2007; its market capitalization is closing in on the $5 billion mark but on our record date of February 23 it is not quite there yet, reporting $4.907 billion. The new market cap leader is drinks maker SFBT after a steep rise in its share price between the start of 2007 and mid February. Its market cap was $575 million on February 23, compared with $569.5 million for Banque de Tunisie whose stock in February retreated from historic highs in the TND 104 range and closed at TND 99.20 on February 23. 

Casablanca SE All Shares  (1 month)

Current Year High: 11,207.82            Current Year Low: 6,563.27

The Casablanca All Shares Index went up by 1,000 points in the first part of February, to scale a new record of 11,201.82 points on February 19. From that peak, however, it retreated back to 10,518.13 points at its close on February 23. It is too early to say if the market is turning. It is still up by more than 10% since the start of the year, but one reminisces about the experience of the Saudi market exactly 12 months ago. On February 23, the Casablanca Exchange saw 23 stocks go up and 29 stocks go down, with 4 unchanged.

Cairo SE: Hermes  (1 month)

Current Year High: 64,978.48            Current Year Low: 41,965.37

In the measurement of the Hermes Index, the Cairo and Alexandria Exchanges moved up nicely from 57,013.49 points on January 29 to 64,655.63 on February 25. Viewed together with the uptrend of the Saudi Stock Exchange, the 13% rise of CASE made February a gainful month for the region’s leading bourses by market size and by number of listed companies. Orascom Telecom Holding (OTH) and its chairman Naguib Sawiris were the Egyptian market’s international newsmakers last month, as OTH bid for Saudi Arabia’s third mobile license and as Sawiris-owned Weather Investments bought Greek operator TIM Hellas. The OTH share price chased new records in February and closed 19% higher at EGP 440 on February 25 when compared with its quotation on January 28.

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Banking & Finance

Money Matters by BLOMINVEST Bank

by Executive Staff
written by Executive Staff

Regional stock market indices

Regional currency rates

Doha Bank opens representative office in japan

Doha Bank, established in Qatar in 1979, opened a representative office in Tokyo, Japan as part of the bank’s implementation of its globalization plan. Doha Bank, with 32 branches in Qatar as well as branches and representative offices in Dubai, New York, Japan, Turkey and Singapore posted net profits of QAR744m ($204m) in 2006 up down 5.81% year-on-year. The bank’s total assets rose 42.45% for the same period to reach QAR22 billion ($6 billion) in 2006.

UAE’s Etisalat 2006 net profits reached $1.6 billion

Etisalat, the sixth largest telecommunication corporation in the Middle East, declared a rise of 37.7% in 2006 net profits to reach AED5.9 billion ($1.6 billion) and a 91% rise in its 2006 total assets to reach AED45.9 billion ($12.5 billion). This rise in assets is mainly attributed to the company’s international expansion, through the acquisition of a 51% stake in Pakistan Telecommunication Company Ltd, in addition to negotiations with the Afghan government for the country’s third mobile license and the purchase of Egypt’s third mobile network license. The UAE government currently owns 60% of Etisalat while the public owns the remaining 40%.

Country profile: Saudi Arabia

Global Investment House (GIH) issued a report estimating Saudi Arabia’s nominal GDP growth at 12.4% in 2006 to SR1.30 trillion ($346.9 billion). In turn, real GDP grew 4.2% to SR799.9 billion ($213.3 billion) The Compounded Annual Growth Rate (CAGR) of Saudi Arabia’s nominal GDP growth for the period 2002-2006 was at 16.5%. According to GIH’s report, the Saudi Arabian private sector grew by 7.9% in nominal terms in 2006, while the oil sector registered a nominal growth of 16% for the same period. According to the Ministry of Finance 2007 budget report, the Kingdom’s public debt is estimated to drop by 23% to SR366 ($97.6m) in 2006, some 28% of GDP. The expansion in Saudi Arabia’s economy was not affected by the correction in the stock market as all indicators show an “exceptionally sound and robust” 2006 performance.  Standard & Poor’s Rating Services recently upgraded Saudi Arabia’s long term foreign currency credit rating to “A+” from “A” and affirmed the county’s long term local currency rating at A+ and short term sovereign credit rating at A-1, all with a stable outlook. Saudi Arabia is the largest oil producer among the Gulf Cooperation Council countries, producing around 10% of the world’s oil.

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Regional BankingSpecial Report

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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Regional BankingSpecial Report

Banking sector in UAE expanded in 2006

by Executive Staff
written by Executive Staff

Fast growth, cultural specialization, and segmentation are all to be found in the banking sector of the United Arab Emirates, whose results in 2006 reverberated with the dual themes of core banking growth and volatile stock markets.

Although the banking sector is large in proportion to the resident population, its 46 banks (plus 2 specialized banks and some 50 foreign rep offices) are fragmented by both territorial and topical categories. The territorial divisions are result of the fact that the seven emirates have local banks, often with ties to the respective governments or ruling families.

In topical differentiation, the sector’s strongest group by market share are listed commercial banks, followed by foreign banks, and then by Islamic and unlisted banks. Local commercial banks account for the lion’s share of retail branches, while foreign banks are restricted to eight branches each. In sheer operator numbers, however, the 25 registered foreign banks in the realm outnumber the 21 UAE-headquartered banks. By 2005 numbers, the asset distribution between Emirati and foreign banks was about four to one of total sector assets ($174 billion).  

As the listed banks have reported their 2006 preliminary results, the National Bank of Abu Dhabi (NBAD) took the crown of exceeding AED 100 billion ($27.2 billion) in assets with 19% growth reported for last year. Customer deposits increased at equal rate to reach AED 71 billion. NBAD, the largest bank in the UAE, reported its net profits as 18.4% lower, at AED 2.1 billion, compared with 2005 profits.

Profits contraction

The bank attributed the profits contraction to lower investment income and shrunken fee income from brokerage and asset management activities—earnings contraction themes that also drove profit developments at Mashreqbank, Union National Bank (UNB) and Commercial Bank International (CBI) into negative numbers for the year.

In 2005, the management of initial public offerings and the provision of equity market services along with gains from own GCC stock and investment portfolios were the big income boosters for UAE banks—which made it predictable latest by middle of last year that the correction year of 2006 would not offer the same profits harvest.

CBI reported the most extreme shrinkage, with a drop in net income from AED 239.7 million in 2005 to a paltry AED 8.7 million in 2006, because of revaluation of its investments portfolio. CBI, which is one of the smaller local players, on the other hand reported 41% growth in assets to AED 7.38 billion in 2006.     

Different to NBAD, other top banks kept the contraction dogs at bay at least to the point of maintaining profit increases. Top Dubai player Emirates Bank International (EBI) succeeded in 9% net profits growth to AED 1.9 billion on total revenues of AED 2.9 billion, the latter being a 29% improvement from 2005. However, also for EBI the growth in total assets and deposits outstripped profits growth. The bank reported assets of AED 95.6 billion and deposits of AED 40.9 billion—up by 69 and 39%, respectively. 

The runners up in Abu Dhabi and Dubai presented divergent result figures. Abu Dhabi Commercial Bank (ADCB) entered 2007 with assets of AED 81.1 billion, a gain of 41% when compared with 2005. ADCB upped its profits by 12% to AED 2.1 billion. Mashreqbank, headquartered in Dubai, reported its assets at year-end 2006 as AED 56.7 billion and customer deposits as AED 33.9 billion, 13% higher than in the previous year. The bank said its contraction in net profits, which were down 10% on the year at AED 1.6 billion, stemmed from the lower investment income of its subsidiary Oman Insurance.

Next in the sector are National Bank of Dubai (NBD) and the Abu Dhabi-based First Gulf Bank (FGB) and Union National Bank (UNB). NBD edged up 1% in net profits to AED 1.11 billion, improving its net interest income, however, by 17% to AED 1.2 billion. The bank’s assets grew 35%, to AED 51.4 billion and with AED 45.4 billion at the end of 2006, its customer deposits were 22% higher than a year earlier.

Achieving 45% improved net profits of AED 1.5 billion, First Gulf Bank stood out with reporting the highest growth in net profits among the larger conventional UAE banks for 2006. The bank, which has ambitious plans to expand its retail network beyond the 15 branches currently shown on its website, increased its assets last year by 82% to AED 47.7 billion and doubled its deposits to AED 34.4 billion. Net interest income and other income improved at rates of 37 and 56%, respectively, and other income represented 41% of total income.

Union National Bank improved its net interest income by 29% to AED 889 million but could only partially offset a 35.3% drop it incurred in investment income, resulting in a 12% contraction of UNB’s net profits to AED 1 billion. The bank, the only one in the UAE in which both the emirate of Abu Dhabi (40%) and the emirate of Dubai (10%) are direct shareholders, achieved 19% asset growth to AED 41.6 billion and a 17% increase in customer deposits to AED 30 billion.

FGB and UNB are favorites of regional stock market analysts. Investment houses Shuaa Capital, Global Investment House, and Prime Securities recently recommended UNB as buy or strong buy while Shuaa, Global, and EFG Hermes gave their nods to FGB.

Other stock picks of regional investment advisors in the UAE banking sector are fairly diverse, based on price to earnings ratios. Global Investment House, which issued an extensive report on UAE banks in January, liked—besides UNB and FGB—NBAD and NBD. Global also recommended buys on two Islamic banks, Abu Dhabi Islamic Bank and Sharjah Islamic Bank.

Shuaa Capital reviewed only Abu Dhabi based banks in August of 2006 and recommended NBAD, ADCB, and UNB. From EFG Hermes, recommendations came in December for NBD and Commercial Bank of Dubai (CBD). CBD is one of the sector’s smaller banks, with net profit of AED 601 million (up 9%) in 2006 on assets that grew 22% to AED 18.7 billion. 

Islamic banking growing the most

While conventional banks are far ahead overall, the UAE banking sector segment with the highest growth figures in 2006 was Islamic banking. Although the first fascination with Islamic banking seems to have diminished a bit last year in some Gulf countries, the UAE Islamic banks have made strides on their way of catching up with the GCC’s center for the specialty, Bahrain. Abu Dhabi Islamic Bank (ADIB) and Dubai Islamic Bank (DIB) both increased their stature greatly, amassing net profit growth of 66% and 47%.

Between the two, DIB showed the higher absolute figures with assets of AED 64.5 billion (up 50%), customer deposits of AED 47.7 billion (up 43.5%), and net profits of AED 1.56 billion.

The bank, which is the oldest shariah-compliant bank in the GCC, is still on a pronounced expansion course and in 2007 wants to add another dozen branches to its network, which it has multiplied in the past five years to 40 branches. ADIB, on its part, had the stronger relative asset growth as well as the stronger profits growth last year, reaching AED 36 billion in assets (up 63%) and net profits of AED 571 million. ADIB’s customer deposit base rose 33% to AED 24 billion.

Another bank to look out for in the Islamic field is Dubai Bank, a daughter of big real estate player Emaar Properties and government-owned Dubai Investment Group. Having received approval for tripling its capital to AED 1.5 billion, Dubai Bank aims to grow aggressively at home and abroad.

Such jumps in capitalization and deposits are hard to envision without the factor that has driven everything up in the GCC over the past two year—hydrocarbon revenues. Banks have been a natural beneficiary of the overspill in oil money and its accompanying economic effects, such as epidemic consumer demand growth, the construction boom, and stock markets craze.

While the story of UAE banking is numbers-driven, a side issue of some interest could be the evolution of corporate identities and marketing profiles. The sector, embedded in a GCC frame of corporate name selection where similarities create no apparent concerns, is (at least in English) a bland alphabet soup of location-laden and easy-to-confuse abbreviations.   

Regional expansion is another theme with some enticing questions. Based on their growing strength and the UAE’s far-flung trade ties, Emirati banks have been charting cross-border growth potentials in the MENA region but also in Sudan, Pakistan, India and even China.

It will be worth watching how UAE banks will sharpen the profiles and names they communicate and how they will navigate the challenges of expanding their corporate cultures into new markets and overcoming human capital restraints that are reflected already in the sector’s great need for skilled bankers and experts in Islamic finance, where almost every sizeable UAE bank is building its presence.

Looking forward, UAE banks are forecasting strong earnings forecasts based on the country’s rosy economic outlook. Analysts see core banking activities offering much space for development, from deposits and retail and mortgage lending to financing of the services sector, industrial projects and public sector spending. Funding gaps are being addressed through medium term note programs and the low risks attached to the UAE economy and its banking sector mean that the sector’s prospects are sound.  

At the top of the sector, where the three largest banks in the UAE control about half of the market segment covered by the top 10 banks, analysts do not expect tremendous changes. Foreign banks face hurdles through taxation and limits on their branch networks. In the market at large, retail network growth targets of domestic and Islamic banks are massive throughout.

But although the UAE is well-reputed as the competitive center of the GCC, competition in the banking sector may yet have to approach another dimension. Banks have intermingled ownership structures where governments, government-owned institutions, and state-dominant families play such a large role that the sector by default gives out an oligopolistic scent. With new trade agreements and changing market conditions, UAE banks will be tasked to transcend existing barriers.

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