Finance

Banking Voices – Size still matters

by Executive Staff
written by Executive Staff

Georges Abou Jawdeh: President, Lebanese Canadian Bank

E: After encouraging developments on the interest rate front, Banque du Liban has once again adjusted the rates upwards. In such an environment, how can the banking sector develop a more efficient corporate and retail lending culture?

Following the Paris II meeting for donor countries to Lebanon and the Lebanese banks’ contribution of $4 billion at 0%, interest rates on credit accounts in Lebanon dropped. And as of January 2004, the banks started to revise their interest rates on debtor accounts, to be more competitive, particularly on the regional market, where interest rates are lower. It is imperative for us now to revise the costs of funds again: in order to encourage lending, banks must reduce the price of lending. At present, we are at a significant disadvantage, internationally speaking.

Just to give you an example, banks are paying between 2.5% to 4.5% interest rates on US dollar credit accounts. Abroad, the rates are at 0.5%, so the difference is significant. Banks need to reduce interest rates to reach between 6% and 9% on commercial loans in US dollars. For deposits in Lebanese pounds, banks are paying between 6% and 8.5%, thereby landing loans in Lebanese pounds at interest rates between 11% and 14%. This is why we need to reduce the cost of funds. If banks are paying a high credit interest, they will be forced to lend at a high interest rate.

The solution to this problem lies first and foremost in the hands of the government. The Lebanese government must decrease its debt, so as to enable it to borrow at a lower cost. As long as the public debt remains as high as it is now, and keeps on growing, the perceived risk will stay high, and the government will keep borrowing at a high interest rate. This in turn affects the cost of lending for corporations and individuals alike – it is a cycle.

By reducing the debt, interest rates will go down, the credit and the debtor interest rate will fall and the business cycle will regain momentum. Looking ahead, what we need in 2005 is political stability – in the region, but even more so in the country, so that the Lebanese central bank does not need to intervene on a daily basis to maintain the price of the Lebanese pound to the US dollar.

At present, the central bank has $12 billion in foreign reserves, which puts us in a good position, but is not enough to ensure long term stability. Political stability would help generate domestic and foreign investments, which could inject fresh capital into the economy, beyond merely the real estate sector. What the banks need to focus on in order to promote healthy lending and credit underwriting is how to encourage small and medium enterprises, so as to gain new clients. In a small country such as Lebanon, where big enterprises are few, the economy stagnating and the number of loans issued dropping, this is the only strategy to pursue.

Shadi A. Karam: Chairman and General Manager, BLC Bank

E: Is there any danger that the current trend of regional expansion by Lebanese banks could lead to overextension, thereby damaging either the bank itself, the sector or the economy?

The regional expansion that some of the leading Lebanese banks have engaged in over the past two years has primarily been motivated by the high level of competition and a quasi saturation of the local market. An insufficient national growth pattern, political uncertainties and the need to reshuffle balance sheets laden with Treasury bills have also been driving factors. Expectations are that a regional expansion would help diversify sources of revenue and smooth out potential fluctuations caused by domestic contingencies. Theoretically, this is a sound strategy.

A closer look reveals that the branching out has occurred in neighboring, relatively familiar markets – Cyprus, Syria and Jordan – which mitigates the risks of expatriation.

Banks such as BEMO, BLOM, Audi and Société Générale are on familiar territory and have established anchor points going back to decades of client networking. This represents an advantage, if only from the sheer risk assessment, “local knowledge” viewpoint.

Naturally, one may deplore that money invested abroad is money not invested in the Lebanese economy, which is in dire need of fresh capital. However, it may be similarly argued that the stronger our banks become and the wider their regional reach is, the higher their added value to our national wealth is. As for the potential dangers this move may represent for the institutions themselves, it boils down to their equity “cushioning” capacity. It so happens that, at least in some cases, there is a satisfactory capital base and financially sound shareholders.

There remains the issue of latent sectorial and systemic risks should this experience turn into a debacle. Obviously one has to acknowledge the risk of local ripple effects should a major bankruptcy in a foreign subsidiary occur. This has happened in the past, and could have far reaching implications. However, given the amounts of capital engaged as a proportion of the banks’ total equity base and assets, the reputation of all concerned institutions for prudent management and their risk-averse track records, I believe the peril to be negligible.

As in every strategic decision management has to make, weighing the alternatives intelligently is half the answer: is it better to stand still and let leaner and meaner banks gradually nibble on your market share or take a measured risk that insures cross-fertilization opportunities and a further reinforcement of your dominant position?

Last but by no means least, a new business opportunity presents itself to banks with a regional presence: the possibility to participate in sizable deals region-wide with clients much larger than what the local market can offer and that could prove to be well “worth the candle” as the French would say.

Gerard Charvet: Advisor to Credit Bank

E: Do you fear any repercussions from political wrangling on the banking sector in 2005? How could this manifest itself and can the banks do anything to limit any unfavorable impact to the sector?

The instability created by the latest changes on the domestic political scene as well as the 1559 UN Resolution have created DE FACTO some degree of volatility in the monetary market. The US dollar has therefore become very much in demand as a result of this instability. The current political environment could over the medium to long-term have a negative influence on depositor behavior during 2005.

The local banks could react to such a situation by raising interest rates on deposits in Lebanese pounds and hence support the local currency for a while. However, such a policy emanating from the banks can only have an impact if the monetary authorities provide their full support. Local banks have no longer the financial capabilities to carry out such an initiative on their own. The local banking environment has become, during the last few years, increasingly competitive and deposit margins have moved downwards from 3.5% to less than 2% in the last five years. In this context of uncertainty, decreasing profitability and preparation for the new Basel II capital regulations, 2005 and 2006 are hence expected to witness a step up in the consolidation process of the banking sector. It is, therefore, desirable that the banking merger law is revived in order to support the much needed consolidation process and, as a consequence, help tackle the social aspect that might derive from such a process.

Nadim Moujais: Chief Strategist at SGBL

E: 2004 saw a classic merger at the top of the industry. What can we expect in 2005, especially among the medium–sized and smaller banks as well as within the Alpha group?

The rule regarding the pursuing of bank mergers in Lebanon cannot be different, although the number of banks per capita is still high. Theoretically, as long as a bank is achieving profits and a return on equity and its risk is well covered, it can continue on a solo trajectory. However, several factors have put pressure on Lebanese banks, irrespective of their size, to move towards the mergers and acquisitions. They include the Basle II capital adequacy, solvency and other requirements; the impact of the new IAS (international accounting Standards) rules and the central bank’s inclination to fortify sound banking practice, counting, in addition to its normal regulatory role, on a bank’s proven capability of management and achieved track record, to enlarge such practice through mergers and acquisitions.

Finally there is the ever-present issue of size, in which size still effectively matters, particularly in terms of capital base and balance sheet size. Whether it is for global asset/liability management (both on and off balance sheet items), or for regional expansion, major Lebanese-based banks have used Lebanon as the cornerstone of their regional development, where the comparison is imposed with some of the regions’ large-scale capital-based banks with their diversified assets composition. Hence, the quest for mergers and acquisitions will still be real in 2005 for banks with vision in Lebanon, CETIRUS PARIBUS on the political level. The real encounter depends of course on the political developments in Lebanon and in the region.

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Finance

Q&A: Jean Riachi

by Executive Staff
written by Executive Staff

E: What is the core requirement for a financial company to be successful in Beirut?

In general, for a financial company to be successful, it has to be focused on its lines of business and on its friends. When you are in Beirut, you need to compete with local competition but also with foreign competition. You have to stress your advantages and the most obvious advantage that you can have is that we are closer to our clients, so it’s easier for them to reach us. But this does not mean that you don’t have to be competitive with other aspects – competitive in terms of prices. You need to have good execution and a team of professionals with a good knowledge of financial markets and high ethical standards. It is also very important to have up-to-date technology.

E: By your own scale, how successful are you at this point, and how much more successful do you think you can be?

We have worked hard on technology. We have people who know their business and are fair to their clients. So, we believe this is how we can achieve being a successful company as measured by the number of new clients that we get almost every day and the increase in the money we manage and we deal with. This is it. We don’t pretend to compete in fields where there is nothing for us to compete in. We will never be an international money manager; we will never be the place where people put very large amounts of their wealth, but we might very well be a competitive broker for people who would like to deal on stocks or futures or currencies, online or offline. I believe we compare very well with the foreign competition as well as the local competition.

E: Does this perspective hint to growth limits on the financial industry?

We have been and are still in difficult markets where for example equity trading has almost disappeared. Something that used to represent 90% of our revenue is today almost non-existent, because people don’t trade actively on stocks anymore. That doesn’t mean that you don’t have people who buy and sell stocks but they are not very active. We are also in a very difficult environment because we still don’t have a local market. We have a very good market share but in a market, which is very small. In a local market, our business would flourish very much because we would be one of the big players and a natural flow of business would come to us. The two problems we face are first that equity trading goes towards zero and second that there is no local market. We have to struggle in other areas where things are more difficult.

E: In which areas are your best competencies and success stories today?

We offer online trading and our online systems compare well to any system in the world; I mean they are the best in the world. This is something that we are going to market more aggressively. We have a client base in the areas of commodities trading and currencies trading. We also try to attract new customers by offering them interesting investment products that fit well into their investment needs. Here we are not talking active traders who take risks; we are talking conservative people who would like to improve their yields. We have been successful in offering new products to these kinds of investors. Finally, we have set up a team in the real estate area. We have done one project, Foch 94, with other projects in the pipeline. So we are trying to diversify.

E: How do you see the financial culture in Beirut today?

Generally speaking, there is no financial culture, although you find educated people who understand what investing is. We still need a broader understanding within for example the state administration, because they don’t understand what a financial company is, what financial markets are. Something needs to be done on this level, because it is very difficult for us to work something that is new, modern, in an environment that does not understand it. It leads to a lot of problems. There is a whole education to do.

E: How long have you been active as finance professional in Beirut?

Ten years, and I spent ten years before that working in Europe.

E: Can you in any way compare the financial market place here to Europe?

No, it is nothing comparable. But this was what I expected. When I started ten years ago, this was fine, because it was new. Something has failed and because of those political changes in the country, we have not modernized our system in terms of legislation, in terms of arbitration courts etc, to fit with the needs of capital markets. The best proof for that is that we have no capital markets. I would have expected that something would have happened with new rules and new ways of doing business, and nothing has happened.

E: If you were to compare the last ten years to preceding periods in Lebanon, which period would be best or worst for doing financial business here?

Before you had the war and before the war, financial markets all over the world were not so important. What happened during the 80s was a switch from commercial banking to financial markets, meaning that investment banking became much more important than commercial banking to finance the economy in mature markets. At that time, we had the war in Lebanon, so we had the excuse. Now, we don’t have an excuse. We are ten years and more after the beginning of the new era and nothing has happened. Okay, the banking system is fine and up-to-date, legislation is up-to-date, use and habits are up-to-date. But in terms of financial markets, you don’t have people who understand the importance of reengineering the whole system in Lebanon. We need something to be done and nobody takes care. Law proposals are sitting in some drawers in some ministries but nothing has come out yet.

E: What is the contribution that a financial firm such as yours can make to the national economy and life in Lebanon?

We are a company that has paid hundreds of thousands of dollars in income taxes and other kinds of taxes. We are a company that is the source of living for 30 families plus all the people who work around us, accountants, lawyers, etc. Out of our 30 employees, 25 have university degrees, which means that we contribute to keep people with university degrees in Lebanon. Believe me, that’s important. This is one side. The other side is that we contribute to attract capital to Lebanon. A big part of our clients are foreigners and we even have Lebanese expatriates who live abroad and who have accounts with us while they could have accounts with foreign firms in the countries they live in. In a way, we contribute to repatriate some of this activity to Lebanon.

E: With this, you appear to postulate a mandate for the need of financial firms?

We don’t pretend to be the savior of the Lebanese economy, but if financial institutions in general had a higher rate of growth and were bigger, you would have two advantages. First they would help develop financial markets, which are a good way to finance the economy; second they would contribute to the economy because they would generate added value. It’s important to have financial institutions.

E: Some depict a financial trader as the type of person who drives a flashy sports car, a Maserati or Ferrari. How important are such symbols of success to you?

We are not this kind of company. People here are all low-profile. They are well paid but they are not making millions and they do their job anyway despite that.

E: So is there no suitable stereotype to describe the financial trader here?

It is a stereotype that does not apply to Lebanon anyway, because in Lebanon, you don’t have the kind of income for those financial advisors and consultants that you have outside. Here, they cannot drive luxury cars.

E: What is the dream that motivates someone for a career in financial markets

It might be very simple. He might love the financial markets. A lot of people who work here as financial consultants like what they are doing. It is not specially that they want to make lots of money. Maybe they are making high average incomes but it is not a fortune that they are making.

E: What gave you personally the idea of thinking, ‘I want to be in financial markets?’

My dream was never to be a millionaire. It is only a way for me to do something I know and to live happily in my country. There is nothing else I am looking for.

E: What is your outlook for 2005 and 2006, in terms of your sector, your company, and the country?

I am not very optimistic about 2005. I’ll only be optimistic about my company. People like us do exist in Lebanon and they can exist somewhere else and we all compete all together. We can stay like we are for years but we won’t see a real boom in our business until we do have local markets. But the competition in local markets cannot come from abroad. We need local markets. Here, we have a competitive edge and we are the first in the waiting line and we know how to grab and take profit out of new IPOs, volumes, new ideas. If we don’t have local markets, we are going to be struggling to have decent revenues and profits. However, things cannot be worse than they have been in the last three years. They can only be better but I don’t see a boom before we have a real financial market in Lebanon. And I see nothing in 2005, because politically, it is a period of confusion.

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Finance

Finance Voices – Where’s the regulation?

by Executive Staff
written by Executive Staff

Ziad Maalouf: Senior Vice President of MENA Capital SAL

E: Would the Lebanese financial industry benefit from a more stringent regulatory environment? Do you see any realistic opportunities for a more advanced regulatory framework that would contribute to greater investor confidence in 2005?

The Lebanese financial sector is in a dismal state today. Investor confidence is very low and even though there are some regulations under the auspices of the central bank, in my view this is inadequate because the central bank should only take care of regulating commercial banks and setting monetary policies. There has to be an independent regulator that takes sole care of the financial markets. If we position Lebanon on the map of international investors today, I would say that we are not even a pre-emerging market. In my view it is a regressing market. In the Middle East, Lebanon is considered to have the weakest financial market because of this lack of regulation.

So we need to set an independent regulator quickly and model it after the SEC in the USA. Legislation has to be modern so as to encourage investors to invest in Lebanon. You have to also encourage the Lebanese businesses and mostly the family owned businesses to start looking at capital markets as a viable tool to raise capital. Companies are now loaning money from banks and banks are charging high interest rates. A proper regulation would start encouraging family owned business to tap capital markets for financing and this by itself is an encouraging factor for the entire economy.

Unfortunately, the political inefficiency and corruption is at the root at our failures in the financial industry overall and for this reason I don’t see any new regulatory framework being set in 2005. However, I say to the leaders of this country that they need to realize that the pace of change in the region – on the economic and political fronts – has never been so rapid, and any wrong turns at this stage have become nearly impossible to correct.

Walid Musallam: President and CEO if MECG

E: Is enough being done to woo foreign investors to Lebanon? If not, why not? What can the finance industry do improve the appeal of Lebanon as a genuine investment hub?

When one assesses the desirability of a country to investors two factors come to mind. First, investors look at the intrinsic attributes of a country like geography, culture, weather and availability of skilled labor. On all of these counts Lebanon favors very well. Investors also assess the political, legal and economic systems. In other words, does the political system function well, is the economy stable, can investor rights be protected and does the country offer the right incentives. Here Lebanon faces problems, the root cause of which is undoubtedly poor and corrupt governance.

As a matter of fact, one can argue that corruption is at the center of a public debt gone amok, weak performance of the judicial system, complicated and outdated laws and a bloated bureaucracy. Essential services like electricity and telecommunications are unreliable and among the most expensive in the world. My family and I moved recently back to Lebanon. When I refused to comply with the traditions for clearing shipment through customs, I was rewarded with delays and thorough searches that resulted in significant damage to many items. It took more than three weeks to clear our household shipment through customs and another two weeks to clear CDs and books.

Despite limitations, the financial sector has been a positive story for Lebanon. It continues to be buoyant and able to attract deposits from outside the country. More can be done. Implementation of reforms including Basel II is necessary and would allow the sector to provide long term financing and compete regionally. Lebanon has the elements to become a hub for private wealth management in the region.

Fadi Osseiran: General Manager of BLOM Invest

E: What are your expectations for the evolution of foreign and local investment flows for 2005? What do you think will be the key areas?

The factors behind the Lebanese economic growth in 2004 were mainly led by the tourism and real estate sectors. This latter, which is mostly driven by investments from Arabs and the Lebanese diaspora, is expected to continue to be beneficial. Actually, the Lebanese real estate market benefited from low international interest rates on cash, the international war on terrorism and soaring oil prices in 2004. Should similar conditions persist in 2005, resulting in increased income levels and high liquidity in the GCC countries, then the prospects for continued growth in these sectors are high. Such investments will mostly locate in vicinities like the Solidere area in Beirut, Aley, Bhamdoun and other attractive neighborhoods in Mount Lebanon as they are the most appealing destinations for shopping malls, housing projects and hospitality and tourist ventures. Local investment flows will expectedly follow in a similar path while additionally providing a boost to the construction sector catering to the appetite of incoming flows. This type of investment traditionally endows local and foreign investors with hedge against risks arising from macroeconomic instabilities like unexpected inflation or currency devaluation. In view of that, Lebanon’s tourism sector will also adhere to the historical trend it has experienced over the past few years.

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Society

Insurers reassured by more visibility

by Thomas Schellen
written by Thomas Schellen

For the Lebanese insurance industry, 2004 was a year of measured improvement accentuated by several highpoints. Visibility and transparency, regional interaction and regional opportunities, the legislative framework, and a healthier solution for social security constituted the portfolio of notable developments or prospects for the nation’s insurance companies.

These matters of domestic importance were embedded in an environment of calming international trends where the recovery from the shocks of 2001 and 2002 continued in 2004 and experts expressed a positive mood also for 2005. Sector concerns in the international insurance scene shifted from the tremors of financial markets and the dangers of terrorism back towards the vast disruptions originating from natural or less evidently man-induced disasters, such as hurricanes and floods. Announcing their global insurance outlook in early December 2004, leading international reinsurance firm Swiss Re expected the sector to operate with profits for 2005 and 2006.

As a small industry with a pronounced dependence on their contracts with international reinsurers, the rate and profitability developments in global markets are very important for the welfare of Lebanese insurers whose rate policies are greatly influenced by interaction with their partners abroad. But independently from those global trends, the local market has to deal with a range of internal issues and homegrown afflictions. One among numerous undisputed truths for the Lebanese insurance sector is that growth hinges on the ability of providers to gain the trust of consumers to larger degrees. The sector is still haunted by image problems stemming from shady practices during the conflict years, and from unsound pricing and bankruptcies occurring up into the second half of the nineties.

Much of those harmful practices have been halted, but even today, insurance managers are concerned that the growth sector motor insurance could again be hit by insolvencies of companies. The low minimum rate that insurers are allowed to sell motor liability insurance for increases the risk of defaults. This danger applies even more so to firms that sell policies below the minimum rates without considering the growing compensation amounts, which courts have begun awarding to accident victims since the introduction of compulsory motor insurance in mid 2003.

An important avenue for credibility growth of Lebanese insurers is increased scrutiny of sector players. Major steps towards a better transparency of insurance companies came in spring 2004 with the arrival of the results of the sector’s first field audits, carried out by independent audit firms on behalf of the Insurance Control Commission (ICC) at the ministry of economy and trade. The field audits allowed the supervisory authority for the first time to assess the operational financial soundness of insurers in reasonable time nearness, instead of gaining access to company results only several years after the end of the financial year. This improvement in supervisory oversight of the sector came in continuation of the measures of the 1999 revised insurance law, which over the past five years gradually increased the soundness of insurance operators and pushed the least solid firms to withdraw from the market. Based on the audits, the ICC could affirm that the remaining sector companies meet the capital and solvency requirements under the law, although consolidation of the over 50-company strong sector remains a need.

For their visibility, 2004 was a much better than average year for Lebanese insurance companies, who generally have few tools for interaction with consumers and experts available – apart from commercial advertisements and the sector’s scarce press coverage through a few specialized supplements and a small range of business magazines. After being aided early in the year through the publication of a first sector profile by a reputed financial firm, the insurance industry could bask in the light of national and regional attention in May when Lebanon hosted the 25th conference of the General Arab Insurance Federation (GAIF).

The bi-annual event’s convening in Beirut was extraordinary in that it attracted insurance managers and experts from the Arab world and beyond in larger-than-usual numbers. Representatives of the Lebanese insurance sector also noted with satisfaction that Beirut and the Lebanese insurance association ACAL was the first host to have been given the privilege of staging the event twice within 12 years.

In its presentations and discussions, the GAIF conference illustrated amply how large a gap still separates the populations of Arab countries from the ratio of “insuredness” accomplished in developed economies. The per capita expenditure on insurance premiums (insurance density) and percentage of GDP invested in insurance (insurance penetration) are only a fraction of the values reached in the highly industrialized countries where global insurance power is concentrated to over 80%.

Although Lebanon regionally ranks in the leading group for both insurance density and penetration, it achieved in recent years not more than 33% of the global average for insurance penetration and 28% for insurance density. The Arab world gap in insurance coverage is especially pronounced in the area of life insurance. Due to the interest gain component in the wealth creation model of conventional life insurance and because of other conceptual differences in regarding life coverage, the acceptance of this insurance in Muslim societies had traditionally been very low. In a development to remedy the lack of financial protection for emergencies and old age, the emergence of TAKAFUL, or Islamic life insurance models, has drawn attention from international providers and was discussed at the GAIF conference.

The 25th GAIF conference drew some criticism for what observers perceived as an intellectually anemic line-up of presentations in some of its sessions. Questions also linger over the lasting potency of the anniversary event for reshaping and focusing the Arab insurance providers towards much needed further improvements in professionalism and performance. However, besides granting opportunities to meet with international partners and the region’s insurance elite, or gain knowledge in a consecutive conference on priorities in engineering an insurance merger or acquisition, the GAIF conference also highlighted many new opportunities that are surfacing across Arab countries due to opening of markets such as Saudi Arabia and Bahrain to regional players.

Starting with market leaders MedGulf, a good number of Lebanese insurance companies are increasingly active in regional markets, especially in Gulf countries. Local insurance experts see the skill level and skill reservoir in the Lebanese market as advanced in comparison to most of the region. Lebanese insurance providers in 2004 increased their efforts to leverage this advantage in expanding their reach in the Gulf as well as in Levant countries where the emerging Syrian market is regarded as most promising.

Although disadvantageous taxes levied on premiums and life insurance payouts remained obstacles to insurance growth related to public sector fiscal policy, Lebanese authorities in 2004 took new steps towards improvement of the national insurance regime. In April, under the leadership of then minister of economy and trade, Marwan Hamadeh, an entire new draft law for regulating the insurance sector was presented to stakeholders in the sector.

The new law had been drawn up by international experts. Its protagonists, with Insurance Control Commission head Walid Genadry in the forefront, hailed the draft as an epochal chance for Lebanon to pass insurance legislation that could serve as a model for many developing economies. Even as insurance legislation here had undergone significant progress in the 1999 revision of the national insurance laws, experts and members of the industry generally agree that the revised law is not enough to address all issues important for modern insurance administration. However, Lebanon is not known for high speed processing of insurance legislation and in the second half of the year, industry leaders, including ACAL president Abraham Matossian, commented on aspects of the draft law in ways that increased doubts over the prospects of it being adopted very quickly.

Another legislative initiative of very high relevance for insurance came in the third quarter of 2004 through introduction of a national pension scheme proposal. After having kept the proposal under wraps for several months, representatives of the Hariri cabinet and president Lahoud confessed public agreement over the need to revamp the system of retirement payments, currently managed by the National Social Security Funds.

With its restrictions to one-time payments and limits on funds management, the NSSF is widely understood to be in need of substitution with a new system, which would partly involve private sector operators. Although implementation of a pension scheme also is contingent on – habitually complex – political decision making processes and rapid legislative adoption of the project thus seems overoptimistic, being able to enter the realm of compulsory pension plans for individuals and groups could open many opportunities for commercial insurers. Through life plans, local insurance companies have been active in the area of retirement provisions for years, affirming life insurance as the leading prospect for sector growth.

With annual premium volume in the range of $500 million, the Lebanese insurance sector is looking for growth in every respect. While estimated numbers for the development of insurance premiums in Lebanon in 2004 are not available before late in the first quarter of 2005, industry managers said that growth in 2004 was good by the market’s standards and prospects for insurance sales through agents, brokers and banks (bancassurance) are up for 2005.

The new draft law

Developed between September 2003 and April 2004, the new draft for a Lebanese insurance law was prepared under leadership of Canadian insurance experts and with funding support from the World Bank. The proposal stipulates a further increase of capital requirements over several stages, from today’s $1.5 million to $3.5 million. Among other regulatory innovations, it provides for a strict separation of life and general insurance business and specific audit standards. The draft also foresees an insurance control commission that is run by a board of directors and an insurance commissioner with more direct authority and accountability, making the oversight body more autonomous from potentially political decisions at the ministry of economy and trade.

As they described the draft law as complying with advanced insurance developments in international markets while being comprehensive and adapted to the needs of an emerging insurance market in a small nation, supporters of the draft pointed to the need for its quick acceptance into law. More discussion and eventual modification of the draft was urged by industry representatives who pointed to the need for making the draft more compatible to the local insurance culture and legal tradition.

The pension scheme

An actuarial plan for a scheme of continuous pension payments for Lebanese retirees was drawn up by pension and insurance advisors, Muhanna Group. The plan envisions a mandatory membership in the national pension scheme for all employees newly entering work life as well as employees born after 1969 who are currently registered with the NSSF. Optional membership is available to employees born until 1969 on condition that they did not already withdraw their end-of-service indemnities and will have at least 20 years of insured employment at their retirement.

For all members in the scheme, the minimum period of employment to qualify for a pension would be 20 years, according to the plan. Salary contributions would be collected from both employer (7.25%) and employee (5%), for a total pension contribution of 12.25% of an insured’s salary, up to a ceiling of LL 5 million ($3,340). Additionally, employers would be mandated to pay a contribution equivalent to 5% of the salary into an employee’s retirement health insurance. Under the plan, the minimum monthly pension for a retiree would be set at $120, or 60% of the salary based on steadily earning a minimum salary of $200 over 20 years of service. After 40 years of employment, the pension would reach 80% of the minimum salary. Exemplary calculations of pensions reached under the scheme allow future members to see projections of replacement rates – i.e., the share of the final salary that a pension would amount to – under a number of possible salary growth scenarios.

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Society

Q&A: Fateh Bekdache

by Executive Staff
written by Executive Staff

E: Is insurance awareness growing in Lebanon?

Definitely; for several reasons. The first boost was the introduction of compulsory insurance for expatriates working in Lebanon. Before, there had been many stories about foreign workers having problems. The introduction of this insurance requirement helped not only the ministry and eliminated problems with embassies, but it also helped the consumer in seeing the benefits. Then there was the introduction of motor insurance, which has become more and more accepted over the past one-and-a-half years. Lately, we hear a lot that people do not only want bodily injury coverage but also say it is time to have liability cover for property damage. The most important factor in increasing insurance awareness has come from the banks. In giving retail loans, banks required the proper insurance, such as life, motor or home insurance, from their clients whether it was for a $1,000 consumer loan or a $100,000 loan to buy a house. We experience today that when the loan is paid off, people keep the insurance. We can really feel that awareness has grown and also that people have become sophisticated when it comes to insurance. We noted for example at the Beirut Motor Show that people have become very picky and want to know the terms of a policy. If one bank gives better terms on insurance, they choose this bank instead of going with one that has lower rates on the loan.

E: How do you explain the importance of insurance to Lebanon?

If you look at the whole activity of economy, the insurance sector is not contributing what it is contributing in developed countries. It may be better than most of the countries in the Arab world but it should constitute much more than that. One important role that our sector can play is that once we have started getting involved in the pension program we can give the Lebanese people the incentive to secure their future. We can also give people the incentive to buy Lebanese, if all the extra taxes can be removed for instance on the marine business. It makes no sense that you have to pay nine percent on marine cargo insurance here in Lebanon while you can go next door and don’t pay any taxes. Instead of making people go and buy from offshore companies, I think it is better to remove these barriers. These are major factors that will make the insurance sector a major player in the economy.

E: Arope is affiliated with leading bank, BLOM. Does that translate into a role of leader in the sector?

Definitely. When BLOM started Arope back in 1974, they had bancassurance in mind. Bancassurance, or selling insurance through the banking channel, started to move in Europe in the 80s. I believe it was the first time that a major reinsurance firm – the largest French reinsurer, SCOR, which still is today shareholders with us – a major bank and at that time, a British insurance company entered a partnership. It was a real blend of banking with insurance and reinsurance. I think these partners had really a vision but because of the war, we had to put the brakes. The British then left but the French stayed with us and you can see today what we did and that it is paying off for a lot of people. We are helping many in getting their loans. In the retail loan business, thousands of people are buying their cars and getting loans for their house, all these are done together between Arope and BLOM. We secure that the customer has the best deal in banking as well as insurance. So we always try to accommodate the bank’s customer and get him the best deal possible. If he is not satisfied, he can ask for an upgrade and most of the time he can get better conditions. Indirectly, we are really improving the economy.

E: How is bancassurance going?

It is going very well.

E: Do you mean for Arope alone or sector wide?

I believe it is good sector wide. However, the problem with our insurance sector is that it is not transparent. We don’t have any ways of getting any figures. We suffer a lot from that just as you press people also suffer because you cannot really get any figures on the sector. It is certain that the companies working in bancassurance have shown the strongest growth rates in 2003 and the trend may continue in 2004 because bancassurance is going well. I don’t think any of the providers is complaining. It is a good marriage, a win-win situation.

E: How do you assess 2004 overall in terms of your performance?

For Arope, figures show that 2004 was a good year. With a lot of hard work from our team and the support from our mother company and board and the trust that our customers gave us, we were able to finish the year better than the last. It was our 30th anniversary; we celebrated these 30 years of growth and hard work and are very confident about the future of Arope and are here to stay.

E: What was the most encouraging and what the most challenging experience in the 30 years of Arope?

The most rewarding thing was that we were able to benchmark ourselves as one of the leaders. As you know, we are not one of the leaders in terms of premium income, because we are not after size but after solidity and profit and being well run. We were able to do that.

In terms of challenges over 30 years, we went through a lot. There was the war and changing the head office from one place to the. After the years of war, it was chaos in the insurance sector. The insurance control commission and the insurance department at the ministry of economy and trade were not functioning. The laws were obsolete and almost inexistent. In the last six, seven years, we saw a lot of progress. The 1999 insurance law was a turnaround, even though this revised law was not modern enough. It didn’t cover all aspects of insurance and doesn’t go with the pace of our insurance companies and worldwide trends in the industry but at least we know that there is a law that we can count on.

E: In 2004 a different, entirely new draft for a Lebanese insurance law was introduced to the sector stakeholders. What do you think about the new proposal?

The new proposal is a very modern, very interesting project. I personally found many positive aspects in it, but at the same time, this draft will not go with the laws that we use every day. The old and new cannot synchronize, because all our laws are founded on the French legal code and this new law would not mesh with this. I say this not from the perspective of an insurance man but from the legal perspective. The legal advisors whose point of view we heard, including the vice-president of the National Insurance Council, Dr. Albert Serhal, and our own legal counsel all found that we have to define a lot of things to make this law function.

E: How do you motivate your team of agents and employees to keep a long-term outlook of customer relations and follow your vision and ethics?

All our agents are employees. We don’t have freelance people that come for a quick dollar and go. In Europe it often is seen as better that people move around and corporations think that it is bad for executives and employees stay in a company for a long time, we were keen to create a nice family ambience. For us, it is a plus that we have people who have been with Arope since inception of the company. We try to think globally and see what is happening abroad but when we want to implement here, we act locally.

E: How important are employee incentives in making the company grow?

Bonus is a major part of our structure. Everyone is rewarded at the end of the year based on many criteria. And every job well done is rewarded; sometimes we don’t wait till the end of the year to award employees. If an employee shows something good, he is rewarded on the spot. We give very good incentives and we like to give the encouraging pat on the shoulder. This is something that people appreciate. We emphasize teamwork. We don’t like lone rangers.

E: What was the greatest crisis that you ever had to manage as an insurance executive?

It was back eight years ago in a sector-related crisis. Two companies were established at that time and started by taking a lot of employees and portfolios from brokers and insurers, including us. One of these firms closed down in the meantime and the other went through a restructuring and reshuffling of shareholders. This mass migration of employees and portfolios hit us overnight as a major crisis but it was a good challenge, a very good lesson to learn from. It was not nice to go through a storm like this and it would be nice not to repeat it, but we learned a lot from it.

E: What makes working in insurance exciting for you personally?

Everyday is a different day, every case is different, every claim, every policy is different from the other, so it is really exciting. I think it is the only industry where you work with clients and third parties. We don’t work only with the customers, so you can expect any time to have a claim for a third party coming to you, maybe somebody you know, and maybe somebody you don’t know. We have no two claims that are alike. You meet all kinds of people every day, that’s nice, and the work is diversified in its legal aspect and the technical aspect. The technical aspect is very wide and complex, so everyday I learn something new. I love the interaction.

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Society

Insurance Voices – Taking the pulse

by Executive Staff
written by Executive Staff

Walid Genadry: Head of the ministry of economy & trade’s Insurance Control Commission (ICC)

E: The supervision of sector companies and implementation of a fair regulatory framework are crucial for the sector and for your mandate as head of the ICC. What are your expectations as far as further improving sector compliance with supervisory requirements in 2005 is concerned? What will be the main focus of ICC activities in the coming year? Do you have hopes that the new insurance draft law can be adopted within the next 12 months?

We must consolidate the process begun two-and-a-half years ago including the introduction of new supervisory forms that will increase the transparency of reporting. These will have to be enforced seriously this year. We must also work on the enforcement of the new reserves and corresponding investment approaches. We have to continue growing in numbers and developing our competence. We are about to conclude an agreement with the Spanish authorities on a roughly two-year ‘twinning’ process, within the framework of the EU-Lebanon agreement. We are also being helped by the French supervisory authority and a contract with the World Bank for issues related to on-site inspection. We will also continue to have support from the auditors Price Waterhouse Coopers and Ernst &Young, because we will need for a while external support to get results. Among the fronts we will continue working on together is the improvement of the new project law. Some people are worried a new law may cause the closure of many companies. This is not the objective of a law that aims at improving the sector’s financial health, market conduct and credibility. There are also favorable opinions, both local and foreign. In fact the law will put us up to international supervision standards. As to when it will be passed, it is difficult to speculate. All one can say is that work is continuing on it.

Fadi Chammas: General manager at Arabia Insurance

E: The life insurance market in Lebanon has seen good percentage growth but has yet to evolve to become more significant in both social and economic terms. Where do you see the life business going in 2005, what are the most promising product types and distribution channels? Do you believe that the industry will be able to make a concerted effort towards increasing the population’s general awareness of life insurance needs?

The life insurance market in Lebanon has seen good percentage growth but has yet to evolve, to become more significant in both social and economic terms. Arabia’s sales – in terms of total life insurance production growth – grew by 51% in 2001, compared to 2000. In 2002, they grew by 25%, in 2003 by 38.3% and in 2004 by 12.3%.

The most promising life insurance product types are: 1) educational plans that allow policyholders to secure the education of their children through periodical contributions, without having to worry about unexpected hazards; 2) unit-linked saving plans that allow policyholders to guarantee a retirement fund by contributing to renowned international funds, while securing their dependents through a variety of insurance coverage schemes; 3) term insurance (the most common), which provides a fixed death cover for a chosen period of time.

The most promising distribution channels are banks and consultants. Banks offer the greatest distribution potential for readymade products since people trust their banks and the services they offer. Consultants constitute the best distribution channel for custom-made products tailored to suit individual needs. They play the role of advisors.

Consultants are constantly trying to increase general awareness by explaining to prospective clients the positive social impact it will have on their lives. Governments also have a big role to play in improving the general perception of life insurance products by, for example, reducing tax on income used to settle life insurance premiums; joining forces with insurance companies to bolster public awareness; and drawing up more flexible laws that encourage insurance companies to give higher returns on life insurance-related investments.

Elie Ziadeh: President of the Lebanese Insurance Brokers’ Syndicate (LIBS)

E: Many experts see insurance sector consolidation as a necessity and a process that has a long way to go before it is completed. How much importance do you attribute to consolidation activities for 2005, a) among insurance companies and b) for brokerage firms? What factors could drive mergers and what incentives would help the private sector in increasing the speed of consolidation?

International insurance industry developments over the last few years have led players, including those in Lebanon, to refocus on basics. I don’t, therefore, really see a need for brokers and insurers to acquire or merge. We can stick to core business and use the existing business model to win new clients. This is how we can be successful in the long term. But there is a serious risk for small brokers because they won’t be able to compete if they don’t upgrade their technical knowledge and software etc. In such circumstances, insurance brokers need to consolidate because a broker needs a minimum income to be competitive. The market and the customers are demanding and the broker needs a certain size that allows him to maintain and expand by investing in training, technology, and market awareness. For insurance companies, I hope the consolidation and re-capitalization of the last few years will continue. Re-capitalization will allow insurers to concentrate on the core business of underwriting risk and paying claims. This will help a portion of the insurance companies to avoid acting as hidden brokers, which can be detrimental to the insured.

The fundamentals of the insurance industry are now being reinforced. Consumers are much more aware of the risks than they were before. There is a need for brokers to take a real in-depth look at finding a scientific scenario for two brokers to merge, the fundamentals of which could be confidence, global vision, and long-term thinking. The government and regulator could help by examining the capitalization requirements for two brokers to merge, what money they might need and how their re-capitalization might be supported.

Rizk Khoury: President & CEO Cumberland Insurance

E: Medical cover and hospitalization insurance is a leading activity for the Lebanese insurance industry. Do you consider the health insurance market mature in terms of the achievement of sufficient profitability, professionalism and transparency? Where do you see the greatest potential for the development of new products and other ways of expanding the market?

Medical insurance in Lebanon constitutes approximately 60% of the premium income of the whole sector. This segment of the insurance market is dominated by a few insurance companies that have established their know-how and experience in this relatively new line of business over the past 15 years. The Lebanese medical insurance market is very developed in comparison to other countries in the Middle East and even North Africa, in terms of product design, claims management, administration of managed health care schemes, and information technology. Insurance companies that administer programs efficiently achieve profitability. However, with the rising cost of healthcare around the world and the underlying economic problems Lebanon faces our margins have been squeezed. In terms of transparency and professionalism, the companies that control the market understand that unless they deal professionally with clients, health care providers and the general public they will be cast out and lose their market share.

Capitalizing on the successes achieved in the Lebanese market, focused companies can expand the local market and leap into new markets. The consumer in Lebanon realizes that medical insurance is a necessity and is willing to buy it but purchasing power varies. People are looking for the cover their money can buy. So flexibility in product design is very important if those consumers who want to buy private medical insurance but ‘think’ they can’t afford it are to be reached. The Gulf medical insurance market is growing at an unbelievable rate. It is only natural for leading Lebanese insurance companies to capitalize on their know-how, experience, and IT systems and expand into such markets.

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Economics & Policy

Q&A: Jacques Sarraf

by Executive Staff
written by Executive Staff

E: The Malia Group reached a milestone with 50 years of industrial production of cosmetics. Where were the challenges you encountered in building an enterprise in the Lebanese environment?

Within 50 years, we have undergone three different ages as a group: from 1950 until 1975, from 1975 until 1990, from 1990 until 2004. Each phase had a different mission. The most difficult period was between 1975 and 1990, the 15 years of war. Despite that, it was the most successful as we turned a negative situation positive and the mission of surviving during the war into a mission of not only enduring but diversifying our business and investing. From 1972 until 1985, we moved from two companies in one sector, health and beauty, to what is today a multi-sector business of 12 companies.

E: Was this then the decisive period in the evolution of the enterprise?

It was high risk but we said at the time, high risk is high profit. Let’s export. And this became our culture of always going to countries where high risks exist and where others are afraid to go. This allowed us to support ourselves, knowing that we have the expertise and the flexibility. In our thinking, we have the expertise to manage the effects of September 11.

E: What do you mean by ‘managing September 11’?

Until I saw it myself on television, I didn’t believe what I had been told. But since that moment, my philosophy is to believe that September 11 can happen every day. What are the contingency plans? What is the security that we have? We used to say, ‘think that an accident could happen.’ Today we think, ‘it is going to happen, so what are the contingency plans?’ What are the plans, in case one of us will be kidnapped in Iraq? And we act based on this. It’s normal to have difficulties. Otherwise we are not performing. This is strength.

E: Does this corporate philosophy explain why you are so active in Iraq?

I mentioned Iraq because today, Iraq is high risk. I like Libya too. I like Sudan. I remember how I said in 1992, ‘let’s send a delegation to Sudan.’ People sitting with me were saying, ‘Mr. Sarraf, let’s go to a country where we will have opportunities.’ I said, what I believe personally is that in such countries there are opportunities because we will be alone. Can I compete in France, or in the United States, or in China? There is a lot of opportunity there, but do I have the size to exist? Can we survive? The story of success of any Lebanese is the opportunity that others overlooked. Lebanon is a beautiful hub, but a hub to live in and do business out of.

E: But isn’t industry here facing exceptional obstacles?

Not within our sector. Some of the industrial sectors have problems, but not all the sectors. Yes, we have some constraints but our cost is not based on electricity, and our cost is not based on labor. Basically, if I compare our pharmaceutical industry to the European or international industry, we can be cheaper by 35%.

E: Would that apply to other industries as well?

No, because you have to select the sectors where you don’t have the cost problems. In labor and energy costs, Lebanon is very expensive compared to others. But within our industry, research and development is a main task, and we have the capacity. In the country’s pharmaceutical industry, the salaries we pay pharmacists are six times higher than what we pay in Syria or Iraq; but when we compare that to Europe, we are 100% cheaper.

E: How do you translate that into a manufacturing advantage?

With brand equity. ‘Made in Lebanon’ has strength within the region. It’s one of the most select tags, along the same lines as that of Saudi Arabia today. It cannot be compared to other Arab places. The know-how we have is the strength of our human resources, marketing, and our creativity.

E: You seem to be one of the few local entrepreneurs who see research and development as a priority. How big is your research capacity?

Today, we are extending our lab. We used to have a 300m2 of lab space. Now we are going to expand to 750m2 just to have the capability to do more research and development.

E: How much in percentage of your annual turnover do you allocate to R&D?

Frankly speaking, when we feel that it is needed, we invest. If we have to calculate as a first step, we cannot survive. Our budget has no limit for such things. We don’t allocate; it’s always over budget anyway.

E: When you market your own pharmaceutical products, how do you ensure their safety and their compliance with international standards? Do you export medical products?

Lebanon has a 2000 law and we are applying it. We are exporting to Syria, Iraq, Jordan, and we are in Sudan, in Russia, everywhere. We don’t have any problems. We are fulfilling all the requirements for exports within the health and medication service. Otherwise, the health ministry will not give you a document to release your exports.

E: How do you fulfill the requirements for clinical testing of medical products? Does the Lebanese law regulate this?

We are doing it by our own standards. We do our own bio equivalence with Lebanese university hospitals. We are not obliged by Lebanese law, but by what we call self-control. The government doesn’t give us any support with this, and we are not asking for their support because we believe this is a private business and we are surviving by ourselves.

E: Is it correct that you recently have taken steps to diversify your activities?

Before 1995, we used to distribute food products, chocolate, biscuits and a lot of other businesses. In 1995, we said let’s be dedicated only to health and beauty. It took us five years, and we were implementing all our plans to be strong in health and beauty, through the pharmaceuticals and through the cosmetics. But in 2000/2001, we faced the problem of new diversification, asking how we shall expand our business. [Since then] we have been diversifying from cosmetics and pharmaceuticals to the cigarette business, to SIM cards, prepaid cards, to the clothes and retail business, because we feel that as a group we have the strength to do it.

E: So you were first deciding to concentrate on health and beauty and then reversing that path in a shift to new diversification?

You said a shift; I said a new vision. In 2000-2005, our vision has changed completely. Today our vision is consolidation. Now we have diversified, let’s consolidate.

E: Is that a model that other Lebanese industries, whether groups or single players, could follow?

I prefer to talk only about the Malia Group. Not the others. This is their choice. I cannot Xerox myself. It’s a culture and a history. The vision that I can give you is one of preparing ourselves for the next five years. Today, we have a direct presence in Lebanon, Syria, and Iraq. We want to explore our opportunities around the world. For this reason, we have invested in a new plant for cosmetics and we are investing in a new plant for pharmaceuticals. Development is needed. I have to run our business like the multinationals, with the hope that in the year 2010, we will be a small multinational.

E: And you are working to export your cosmetics lines to Europe?

Yes, we are exporting to Russia, to Cyprus, to Greece, and we are now developing our export team to go further into Europe. We are working contracts in Belgium and we are in discussions with Brussels and with Paris.

E: Is your competitive advantage now so strong that you can go into these markets?

Yes, we can be competitive with the norms and standards to which we are producing. Secondly, we are more advantaged than the Europeans and thirdly don’t forget about what is happening with the euro today. We are dollarized and that means we can be really competitive with the euro. It is a strong export advantage. For this reason, a lot of multinationals are contacting us to contract their products in Lebanon.

E: How many employees do you have today?

400 in the group.

E: Are you satisfied with the average productivity you have achieved?

I have to say yes, although I am not convinced. We can do better.

E: How many shareholders do you have?

Malia Group is a holding but it is not yet on the market. We have a plan for 2007 to go to the market. Today it is purely Lebanese, owned by the Sarraf family. We have companies with whom we have partnerships.

E: How were the last five years in terms of profit?

We made a lot of investments between 2000 and 2004. It wasn’t as profitable as it used to be, because we have been developing a lot and we have to move with this expansion, otherwise we will not to be able to develop the whole group. Profitability wise, the ratio was better before the year 2000.

This year [2004] is one of the most difficult years due to the ratio of the euro. We import 60% to 70% of our products from Europe in euro but all our exports and all our local sales are in dollar. We haven’t been in a position to increase our prices. This fluctuation decreased our profitability compared to last year and the year before.

E: Wasn’t also the oil price going against you in 2004?

Yes, it affected our chemical products a lot. The raw material for our plastics industry has increased a lot and a lot of industries that are complementary to our industry have increased their price due to the high euro. Transportation costs were also affected by this situation. I didn’t mention these points but at the end, we are feeling the results of these effects. Thus, we are not looking today at the profit. We are looking at how to develop and maintain our market position. For this reason, we have set our sights on going public in 2007.

E: In your regional and international corporate future, where would you anticipate revenue streams to originate in five years between Europe, Africa, Middle East, Lebanon?

We would basically be happy if the Middle East would be 50% of our business and 50% would be in other regions. This is to say that we aim for 50% from the Middle East where we today generate 80% of our revenues in the region.

E: In this scenario, at what level would Lebanon figure in the long term?

Our main objective in Lebanon is to just cover our expenses.

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Society

Visitors to Lebanon, what do they want?

by Thomas Schellen
written by Thomas Schellen

Lebanon’s inbound tourism in 2004 kept or exceeded virtually every promise and expectation. After ten months of the year, the ministry of tourism could announce that over 1.12 million visitors had arrived in the country, reaffirming mid-year expectations that this would be the best figures in 30 years and a stepping stone towards future growth.

Stakeholders all around the sector confirmed that the year had been memorable. With the exception of a lower than anticipated turnout during EID AL FITR, hotels reported excellent occupancy rates throughout the year. Tour operators spoke of their best year ever; some were up by 50% or more in 2004 business and already received enough advance bookings for 2005 to foresee continuation of the trend. Tour guides said that even until the middle of November, they were flooded with work showing European groups around the standard sites of interest.

The year had started with some doubts about the sustainability of tourism growth: the summer season alone had proven too short to keep the sector afloat, the composition of visitor flows was uneven, and the funds available for the promotion of Lebanon abroad were far too few. Tourism experts reported from London that the country lagged heavily behind other Middle Eastern destinations in both marketing and bookings.

As the year unfolded, however, things quickly looked up. A series of commercials were produced in collaboration with CNN and shown on the ubiquitous news channel. The spring season surprisingly saw a near doubling of arrivals from Europe, and one of the old world’s leading travel companies, Thomas Cook, returned to Beirut after a long absence. Arab tourism was also in full swing, with Aley and Bhamdoun overflowing with visitors, while new resorts opened along the coast. The nation’s tourism officials enthused about reaching a visitor count of four million persons by the year 2010.


With its progress on all tourism fronts, the year 2004 is also an opportune moment to look at the composition of visitor flows and make efforts to understand their habits, preferences and evolving demands. This seems especially appropriate since the promotion of Lebanon in 2004 was still in its infancy and many operators detected only very limited contributions of the new marketing efforts on CNN to the increase in business. As promotion of Lebanon as a “destination” is still in its infancy and must be accepted as a long-term project in order to bring results, analysis and planning become tasks of vastly heightened importance for the national tourism development.

A thought-provoking statistical exercise on Lebanese tourism trends in 2004 is the comparison of total visitor increases to the number of persons who make the journey to the nation’s classic tourism sites. These comprise the 10 sites where entrance fees and access statistics are collected by the ministry of tourism as well as the Jeita Grotto, which is operated under government contract. From January through September 2004, the most highly frequented cultural sites were the ruins at Baalbek and the Beiteddine Palace, followed at some distance by Byblos and the National Museum. Baalbeck and Beiteddine attracted almost 89,000 and 79,000 visitors, respectively; 49,000 explored Byblos and just under 40,000 found their way to the National Museum.

In terms of increases in visitor numbers when compared to the first nine months of 2003, the four sites saw increases in visits of 32% for the Museum, around 60% for Beiteddine and Baalbeck, and more than 130% for Byblos. This notwithstanding, the four leading historic sites combined this year (again) drew in fewer visitors than the Jeita caves, which counted 321,551 admissions in the first three quarters of 2004. While all five sites, and the other attractions managed by the ministry of tourism, including the Saida and Tripoli crusader castles, Tyre, Anjar, Fakra, and Niha are highly deserving of visitor interest, Jeita can safely be regarded as the one site leading in popularity with regional tourists.

Interestingly, the visitor numbers to Jeita increased not only by 33% in the first nine months of 2004 over the same period in 2003, but also showed a whole-year increase of 10.4% from 2002 to 2003. By contrast, nine out of the ten sites under administration by the ministry had recorded drops in visitor numbers from 2002 to 2003, and only the archeological district in Tyre deviated from the trend by recording a small increase. Therefore, Jeita achieved the most consistent growth of all sites over recent years and could increase its appeal to wider audiences despite its relatively substantial entrance fees. This suggests that the private sector management has succeeded in upgrading the marketability of the caves through augmenting their natural magnetism by integrating a cable car and other sidebar attractions into the concept.

The Jeita approach may be worth a consideration under perspectives of enhancing tourism at other locations. The archeological sites in Baalbeck and Byblos have benefited greatly from the addition of museum facilities but those may not have added all that much for making the sites appeal to audiences who aren’t already interested in antiquities. Experts on promotion of equitable development in Lebanon lament that the community of Baalbek participates only in minimal form in the revenue flow created through Baalbek tourism. This is often associated to some degree with the demographics of the local community. However, the lack of strategic concepts for creating synergies between site and immediate surroundings seems to apply to numerous communities with historic treasures, including Beiteddine and Tyre.

Certainly, one will want to avoid turning revered historic treasures into theme park environments – but at the same time, a strategically integrated development of surrounding areas to offer compatible attractions could enhance both the economic value of sites and their ability to rise in the appreciation of visitors. As urban or communal planning is not practically implemented in many municipalities, a tourism infrastructure development approach could also constitute a novel path towards inducing balanced growth.

For the time being, it can only be said that despite the overall increases in visitor arrivals to Lebanon over the past three years, numbers for admissions to several key historic sites in much of 2004 have only returned to levels similar to those recorded in 2001. For sure, when viewed against the pulling power of the world’s big museums and a whole arrear of moderately famous historic sites – some of which have much less to offer in archeological or cultural terms than Lebanese sites – the current flows to any of the country’s core guidebook attractions account per month to no more than what many other locations rate per week or even day. At least this could be a huge advantage temporarily. In emerging from nothing to becoming a destination, Lebanon has the opportunity to portray itself as a country where visitors can visit world class culture sites without waiting in long lines or dealing with large crowds. Such is a rarity.

The image can even mash with another limited-time opportunity that emerged in autumn of 2004 in terms of exploring new trails in tourism that have been hitherto neglected but may soon enough be part of the beaten path (see box). The project of promoting Lebanon to the resident Lebanese as a treasure cove of uncharted domestic attractions in nature, culinary and religious tourism is a major step towards diversifying the sector in the long term. For 30 years, tourism has been the utopia of Lebanon’s economy – a promised state of being able to attract millions of revelers to the country that perceives itself as the pearl of the Mediterranean.

Like all utopias, the hope looked to be out of reach and went unquestioned as long as it was a theory. In 2004, the utopia stepped towards reality. With it, many an economic vision can grow and at the same time, new questions are to be answered. Elementary management knowledge shows that rapid growth is one of the most challenging periods for any enterprise. Tourists of the 21st century have different expectations from their hosts. They have been alerted to social and environmental issues. They look for authentic experiences. They are great consumers of hospitality. As contributors to the global economy, today’s leisure travelers spend more money on their journeys than ever, but in turn they have high demands and are often fickle and even litigious customers. With such high aspirations for the long and sustained growth of its tourism sector, Lebanon and its hospitality stakeholders have a lot to live up to.

Discover Lebanon

A white-topped peak looms in the distance over hills lined with houses, which from a distance look supremely peaceful. The city awakens to its business exercises, with well attired managers dropped off at their place of work. Overhead, a blue sky and to top it all off, a cruise liner slowly glides into the picture from the left. Date: December 4, 2004. It is 8am and we are a small group that is setting out to take a day-trip to the southern Lebanese town of Hasbaya, where we want to discover the region’s ancient religious heritage.

As the bus drives into a catalogue-perfect day, past banana and olive groves, it carries us through a landscape that, in spite of desertification and erosion, has a mythical ring of clarity. Inside, we hear of the source of the river that is the main tributary of the river Jordan that we are going to visit, of the tombs of Biblical prophets, and of a village where people flock to a stone purported to bear the hoof marks of St. Georges’ horse.

Discover Lebanon is the theme of not only this excursion but an entire program. It is a new and growing branch of tourism aiming firstly at giving Lebanese domestic tourists a new taste for the proverbial variety of the country’s charms, exploring them from cedar forests to tobacco plantations. Activities of the program’s 34 excursions include light hiking and moonlight fishing as well as trying one’s hands at olive picking or one’s tongue in wine tasting, but more daring minds can also opt for (carefully supervised) paragliding and speleological adventures. The program was developed by local tour operators in collaboration with US development consultants SRI with the aims of promoting economic growth for rural Lebanon and opening new avenues for tourism in areas that are attractive but have been bypassed by the tours to the traditional attractions. After a positive response from the first phase in autumn 2004, its second stage trip offering was expanded to more than 70 trips in a winter/spring 2005 catalogue.

Tour operators participating in the program found the experience encouraging. “It is positive to have local tours for the Lebanese, because they often don’t really know about Lebanon,” said Tania Amm, inbound tourism manager at operator Wild Discovery. The company decided to increase their participation in the second stage of the project from two to five tours, she said.

“This project enhanced and supported my business,” said Pascal Abdallah, manager of operator Cyclamen, who devised the trip to Hasbaya. Through his participation, he found access to domestic customers and even entered a project partnership with another operator.

Of course, not everything in the new tours goes picture perfect. The weather is not always providing blue skies with winter sun and some trips in 2004 had to be cancelled for falling short of minimum attendance. The tour of Bekaa vineyards, organized by Wild Discovery, showed that the idea of a Lebanese TOUR DE VIN could benefit from better coordination among wine producers in creating presentations that compliment each other. As for Hasbaya, the emphasis was a bit stronger on visiting a mosque, a church and a Druze mausoleum than on learning about the respective religious heritages. But such imperfections account for part of the enticement; they remind you that these tours are not routine yet. BOX II: Resorts

With regards resorts, the year 2004 started with a thunderclap in January when developers As Salam presented their project for transforming the back slopes of Mount Sannine into Sannine Zenith, a resort of in the country previously unheard of proportions. Residential villages, hotels, ski slopes, golf courses and all the trimmings of recreation and relaxation were outlined in the Sannine Zenith brochures.

With the tremendous scope of the project – despite declarations of some downsizing after stirrups over its alleged sellout of one percent of the nation’s territory, the plans aim for inclusion of about 100 million square meters of land – it could be premature to consider Sannine Zenith a done deal. But with the announcement of Sannine Zenith, the perspective of Lebanon resort tourism got widened in a single instant. The mountain resort was such vast a project that it clearly needed to appeal to more than a small clientele of the very wealthy. It showed that for an economically sound future, new Lebanese resorts would have to provide class at affordable cost.

Already in the preceding years, people with resort ideas had elevated the pastime of a relaxing day on the beach to a new level of recreational quality – without making the pleasure contingent on long-term club membership or expensive shareholding. From Oceana to La Voile Bleu, quality beach resorts became synonymous with customer satisfaction. Resorts following this philosophy in 2004 achieved good profits. The evolution pointed also at the potential of good beach resorts to become all-round centers of enjoyment. Expanding their range into nighttime activities was slow for some but others, like Edde Sands, reported that about one third of their customers and their revenue in 2004 came from special events and evenings. Well-designed beach and après-swim resorts have every potential for contributing to the further blooming of domestic and inbound tourism.

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Society

Q&A: Elie Nakhal

by Executive Staff
written by Executive Staff

E: How many non-Arab tourists are coming to Lebanon?

Lebanon has passed through several stages with respect to non-Arab tourists. We had a period of unfortunate events from 1975 to 1990. After that, we tried hard to get non-Arab tourists to come here. Our efforts were not always successful, despite the fact that we invited a lot of Western journalists and tour operators here, and offered one-day trips to Lebanon for tourists in Syria, in an effort to acquaint them with Lebanon. We had a good period, from about 1994 till 1997 or 1998, during which a trend began to emerge in which Western tourists were heading for Lebanon, mainly for cultural tours, not for leisure. But then we had the problems in the South, the Israeli attack. At that time, we had 150 to 155 Western tourist groups booked for March, April and May, which was fabulous. They all cancelled. A year later, we sensed a chance to recover, but then the INTIFADA began in Palestine and the whole region began to suffer from a lack of tourists. Now, we feel a new trend has begun again. Western tourists are interested in coming to Lebanon again, from Germany, France and Italy, but also from Russia, Hungary, and Spain – new markets for Lebanon. Lebanon’s normal Western tourism market is France, Italy and Germany.

E: You say there is a new trend, but what percentage of total tourist arrivals do Western tourists currently account for annually overall?

A very small percentage – something like 5%, not more than that. But during some periods of the year, they account for a greater portion than Gulf Arabs because most Arabs visit Lebanon only during the high season – the Muslim feast and the height of summer. The Westerners come mainly in the spring and autumn. And they come for seminars and conferences.

E: Can conference goers be classified as tourists?

A conference trip and a tourist trip are almost the same. They spend three hours in the morning at the conference and the rest of the day is for tourism, gastronomical pursuits and fun. Conference visitors represent significant tourist numbers for us in March, April and May.

E: What attractions can we offer the non-Arab tourist?

Most don’t come to visit only Lebanon. Their visit here is part of a trip to Lebanon and Syria, or Lebanon, Syria and Jordan. Most of those who come only to Lebanon are here for seminars. The Western tourists are here for cultural tourism; they visit Baalbek, Tyre, Sidon and Byblos. Until recently, they weren’t coming for leisure tourism. But in the new trend, Russian and Hungarian visitors in particular come here for leisure. We are trying to nurture this interest by offering leisure programs. We believe Lebanon has everything: beaches, sun, nightlife, and culture. We can be both a leisure and a cultural destination. That’s the image we are now trying to promote.

E: A fair number of tourism professionals say it is pointless wasting time trying to attract Western tourists because they constitute such a small percentage of the market and their numbers are unlikely to rise significantly in the near future. Is this a wise tactic?

This is not a good strategy at all. The Arabs come during the high season only. Why not aim for 100% occupancy in April, May and June by attracting Non-Arab tourists too? Why keep the rooms and beaches empty, and tourism employees out of work? Non-Arab tourists could even be enticed here in February. We have to promote Lebanon to non-Arab tourists. I hope the misguided policy of focusing only on Arab tourists will change. I am doing everything I can to get Non-Arab tourists to come here. I am being helped by the newly-created charter jet company MenaJet. In a joint venture with MenaJet, there will be, as of mid-December, a weekly flight to Beirut on Wednesday from Brussels, and another from Berlin. There will be twice-weekly flights as of 16 December from Bahrain, to bring people here for weekend holidays, from Thursdays until Sundays. These visitors will be Pakistanis, Indians and British. We will also be bringing Arabs here as of 23 December from Aleppo. We hope to have a contract for one flight a week from Moscow, hopefully from the beginning of January. And we plan to bring people here on flights from the Swedish capital, Stockholm, starting in April.

E: How much would such a roundtrip from Brussels cost?

That is in the hands of the people over there. But I think it will be around €300 (about $390).

E: How are you generating business abroad?

We have created a six-person team traveling all the time to generate business. We are promoting Lebanon as a leisure destination, not as a cultural one, because leisure tourists make up a much higher percentage of tourists overall than cultural ones. There is one cultural tourist for every 100 leisure ones.

E: Those tourism professionals who have written off European tourists would say you are being unrealistic, that you won’t be able to increase numbers in any meaningful way. A reasonable assessment?

We have to try to make our dream come true. Until recently I would have said I agree 100% with them, but as I said, we are identifying a new trend, a new interest in Lebanon. Western tourists, especially from Russia and Hungary, want to come here. We can feel it through our tour operators, through our contacts. This was not the case a few months ago. We must take advantage of this new trend. We have the power to do so with the help of MenaJet.

E: How do you explain this sudden surge in interest?

I can’t.

E: What more can be done to bring in Non-Arab tourists?

The government must advertise more. They have to distribute posters, and use radio and television advertisements in a big advertising campaign. It is pointless inviting any more journalists and tour operators. We have invited hundreds. It was helpful at a certain time, but not anymore. The government doesn’t want to see this though. They want to focus only on the Gulf Arabs who come only for short periods. Why not bring in Western tourists for the rest of the year – ten months.

E: What more should the private sector be doing?

The private sector has already done a lot, within its means. That’s it. Finished. Now the government has to take over. We have invited tour operators and journalists to come, covering all expenses. We have traveled a lot to establish contacts – and traveling is not cheap. We have participated in six or seven tourism fairs a year, each of which costs a lot of money. We can’t do more. The government can.

E: The ministry of tourism says its hands are tied by budgetary restrictions. Is this a fair excuse?

Don’t tell me the government doesn’t have money. They have the money to build roads and bridges. They have the money to spend on the electricity sector – in which they’ve invested huge sums. They could have invested $500 million, $300 million in the tourism sector. I appreciate that they’ve made it possible for tourists to get visas upon arrival, but they need to reduce airport tax too. Some tourist operators create programs using Damascus as a hub simply to avoid the high airport tax at Beirut airport. Here they pay $40. In Damascus they pay $4.

E: What are the difficulties involved in selling Lebanon to non-Arab tourists?

The security situation and the negative connotations generated by 15 years of civil war.

E: Is the country’s infrastructure a handicap?

Electricity shortages are a big problem – which should not exist. And we still have water problems, although they’re not as bad as the electricity ones.

E: You also organize trips abroad for Lebanese. What are postwar Lebanese tourists looking for? Where do they go?

As with tourists elsewhere, leisure is the main interest. Of Lebanese going abroad, 5% are looking for culture and 95% are looking for leisure. They want to combine beach, shopping and nightlife. Most are looking to go somewhere in the region – Greece, Egypt, Turkey. In Europe, they want Italy, France and Spain. But Europe is becoming very expensive because of the weak dollar. So now the most popular destinations are Turkey in the summer and Egypt in the winter.

E: What have you learned from the tourism industry outside Lebanon?

If a few years ago you had told me we would have Arab charter flights in and out of Lebanon, I would have said you were crazy. But things change. Tourism is changing rapidly. It is part of the process of globalization. I have learned that we should focus on the leisure market. And we need to start building resorts, not just hotels. Our clients are looking for holiday clubs, not just regular hotels. We need to take greater advantage of the country’s sandy beaches. But we’ll have to overcome the negative security connotations of the South. Also, investors won’t invest the kind of money you need to create a resort unless they see more foreign tourists coming here. Building a resort that is used for only two months in the summer is by any small calculation crazy. They won’t do it. We need to generate business for at least nine months a year – and we can do it, because the Russians, Hungarians and Poles travel in the winter.

E: Tourism accounts for roughly 10% of GDP. Given that relatively low figure, can we really say that Lebanon is a major tourist destination?

The government isn’t exploiting the tourism sector properly yet. When they do, they will make a lot of money out of it.

E: Lebanon has been branded by some observers as a place where Gulf Arabs come for sex and alcohol. Is that an accurate observation?

That is one reason single Gulf Arabs come here. But there are also a lot of families. And as usual, people stress only one aspect – which is single young people coming here for prostitutes. But the majority of Gulf Arabs are not here for that.

E: Is there a place for ecotourism in Lebanon?

We try to show visitors Lebanon’s beautiful environment. On tours, we use secondary roads, which in the mountains are very beautiful. We take visitors to restaurants with beautiful views, in the heart of nature. We could create a one-day trekking tour.

E: How do you envision the sector a year from now?

Expanding. I’m not expecting the government to help, though. I’m an optimist and a realist at the same time.

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Society

Tourism Voices – High flying times

by Executive Staff
written by Executive Staff

Pierre Achkar: President of the Lebanese Hotel Association and owner of the Printania Palace Hotel in Broummana

E: How many hotel rooms will Lebanon be able to offer its visitors by the end of 2005? How many should it be able to offer? What are the requirements for healthy and sustainable hotel industry development in 2005? What can the public sector do better in supervising and assisting hotels?

We now have around 16,000 rooms. A further 3,000 are under construction. We might have between 1,500 and 2,000 additional rooms by the end of 2005. With the current growth of tourist arrivals, we don’t need more than 1,000 additional hotel rooms a year. If the situation changes and there is a peace process in the region, we could need as many as 5,000 more rooms a year. We’d be on the international tourism map and the Europeans would be coming. For the moment, though, we’re not a big destination for the Europeans. Potentially, they are a big asset. I hope the political situation remains stable. We have some problems with the United Nations because of Resolution 1559. I hope this does not lead to more serious problems. If there is political destabilization here, we will find it difficult to continue attracting Gulf Arabs and to attract more European tourists. When Europe and the United States talk about Hizbullah as a terrorist organization it affects tourism here. European and American officials and media are giving our country a false image.

We must implement a new rating system for hotels. Some hotels have had four stars since 1948, even though they are now only worth one star. We came up with a new rating system in 2002, in an initiative sponsored by USAID. But so far no one in the ministry of tourism has started implementing it because they don’t have the professional manpower to do so.

Nada Sardouk: Director general at the ministry of tourism

E: Despite the fact that the ministry of tourism has been promoting Lebanon on a shoestring budget, improvements in the sector in 2004 have been highly encouraging. How important is the ministry’s role in attracting more tourists to Lebanon and what are your priorities and overall aims – including private sector partnership and fiscal funding – for 2005. What is the role of the public sector in nurturing tourism in Lebanon?

The ministry assumes a number of important roles, among them two major ones.First, the ministry promotes Lebanon outside the country through exhibitions, fairs and promotional campaigns, marketing Lebanon as a historical, cultural, tourist and business center in the Middle East. Second, the ministry is encouraging and backing the private sector so as to attract investment and develop services in the accommodation sector, by simplifying regulations, tightening control and holding training sessions.

The program adhered to by the ministry since 2002 has been one of encouragement and intensification of promotional trips to Lebanon, especially from Europe and the Arab world. The ministry has hosted more than 1,000 travel and tourism agents and around 300 journalists in an effort to put Lebanon on the international tourist map.

We hope in 2005 to enhance the partnership between the ministry, the private sector and NGOs in order to create a task force that is able to complete the projects we have already begun undertaking. Our priority is to enhance sustainable tourism in order to promote economically and socially the different regions of Lebanon all year round.

The role of the public sector is to plan a strategy for the development of the tourism sector – including policies for different domains such as visas, fiscal laws, legislation etc. The public sector should be trying to open new tourism horizons while improving public services. This in turn will bolster the private sector, something that will have a public benefit.

Marwan Iskander: economist and Managing Director of MI Associates

E: What can the growth in tourism contribute to domestic job creation in 2005, in quantitative and qualitative terms? What, percentage-wise, can employment in the tourism sector contribute to the national employment market and to GDP as a whole? What can be done to accelerate the creation of sustainable, permanent jobs in the sector?

The contribution to employment is difficult to assess except in terms of the increase in expenditure associated with the growing number of tourists. This year we had an increase of about 30%. I think we can hope for a further 20% increase. It’s interesting that visitors from Arab countries do not, primarily, account for the increase. The Europeans, especially during the winter months, account for the majority of visitors. By my estimate the roughly 1,400,000 visitors this year spent around $1.5 billion. If we assume that we can reach 1,700,000 and we assume a 5% increase in the expenditure of each visitor then we are talking about $1.8 billion of revenue next year. This translates into an increase of $300 million, which in turn could translate into better job opportunities for around 5,000 people.

In 1974, tourism sector employment constituted 22% of GDP. Today it’s around 9%. So we have a long way to go. Tourism sector employment does not even constitute 9% of the total workforce because people in services such as hotels – although these are labour intensive – are more productive than people in industry. I think that if in the coming five years tourism sector employment reaches around 15% of GDP, then it will constitute around 12% of the national workforce. We need to make of Lebanon a destination for both leisure and historical tourism, on the international level – something we had before. This will require quite a bit of expenditure and investment in promoting Lebanon abroad – which so far has not been done. For example, Jordan spends $50 million on tourism advertising, whereas we spend maybe less than a million. This cannot continue. This year, there has been an increased awareness about the importance of tourism.

Wassim Rizk: Grey Mena Regional Development Director for the Middle East & North Africa

E: Can you gauge the contribution of marketing campaigns such as the CNN Lebanon commercials to the increase of tourist numbers in 2004? Roughly how long, realistically, will it take Lebanon to establish a new image as a top tourist destination in key markets? How should the private and public sectors proceed in 2005, to improve the perception of Lebanon in Arab, Western and Far Eastern markets?

The marketing campaigns, while difficult to gauge in terms of impact, have placed Lebanon on the map, created awareness and communicated a different face of Lebanon. However, you cannot simply erase 20 years of war images from people’s minds in a short period. Any timeline for such a process depends first and foremost, on establishing Lebanon as a brand. What is the country? What does it stand for? What makes it different and special? What does it offer and to whom? It is a similar challenge to that faced by post-Apartheid South Africa. But they had a firm and strategic commitment from their leadership. Imagine how long the process would have taken if that commitment had not been there. The private and public sectors should begin by ending the current madness involved in different bodies running their own programs – the Ministry of Economy is running a campaign, the Ministry of Tourism is running another, Beirut is running a third; the Traders’ Association a fourth; and so on. All the resources and efforts could be pooled and centralized, to bring economies of scale to bear and to deliver a constant and coherent message. Secondly, priority markets must be identified. Which ones offer the most potential? The West? Far East? It is impossible to reach all these regions unless you have a commitment of millions of dollars, like Egypt and Dubai.

Roger Eddé: developer, lawyer and owner of Eddé Sands resort

E: How large is the contribution of tourist resorts to the Lebanese economy today and how large do you expect it to be in 2005 and in the longer term? What are your expectations as resort operator for turnover developments in 2005 and what could be done to define and improve nationwide quality standards for tourist resorts? The success of Eddé Sands (we were able to make over $3,000,000 in revenues for July/August and we will double our capacity in 2005) has confirmed that a luxurious beach resort is a powerful magnet for regional elites as well as Lebanese expatriates nostalgic for Lebanon and yet who demand a level of entertainment and leisure similar to what they are used to in Florida, California, or the European Riviera.

This Lebanese tourist industry is what will make it the destination of choice on the Eastern Mediterranean. We are marketing the Byblos Riviera in the same way Indonesia is marketing Bali in order to disassociate it from another name that brings to mind recent unfortunate events.

The tourism sector should be looked at and valued as a major component of the Lebanese economy, not only because of the sector’s direct and indirect contribution to the economy, something close to 10% of GDP in Lebanon, but because year-round resorts are crucial in creating the so-called PLAQUE TOURNANTE effect. This is where business is launched to neighboring regions in all four directions, enabling the resident and non resident Lebanese international community, as well as emerging regional businessmen, to use Lebanon as the ideal meeting place to combine both work and play and where hopefully, as we aim to do at Eddé Sands, we can offer the widely popular preventive medicine and healing treatments.

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