It all seemed to be going so well for Lebanese wine. Once the sole preserve of Musar, Ksara and Kefraya, the sector has, since the late 90s, seen the emergence of new wineries, producing exciting wines in eye-catching bottles. The UVL (Union Vinicole du Liban), established in 1997, showed it could function as a genuine association. It was serious about establishing a regulatory national wine institute and there was even a spirited initiative to sell Lebanon as a wine tourism destination. Its members even demonstrated rare ESPRIT DE CORPS by exhibiting on the same stand at the two major international wine fairs in London and Bordeaux in 2003. Lebanese wine was moving.

This momentum had been inspired by the knowledge that Lebanon was hosting the annual OIV (OFFICE INTERNATIONAL DE LA VIGNE ET DU VIN) congress in Beirut in June 2005. The event would enhance the country’s brand equity, strengthening its export potential and boosting its quality to price ratio. It would create a new image of Lebanon, one driven by wine and culture, rather than war and mayhem. Finally, UVL president, Serge Hochar, co-owner of Chateau Musar and for so long the darling of the wine world, the man who risked life and limb to make wine during the dark days of the war, would welcome the OIV to his country. It was to be a truly vintage year for Lebanese wine. And then, last month came the awkward admission from UVL members that the OIV had changed its mind. So far no official explanation has been given by the OIV for the seemingly sudden VOLTE-FACE and at the time of going to print, Frederico Castelluci, director general of the OIV has not replied to EXECUTIVE’s requests for clarification. “It is a huge loss to Lebanon,” said Charles Ghostine, managing director of Ksara, Lebanon’s biggest producer. “We have not yet received official notification; this will be sent to the Lebanese government. However, I do not hold much hope of the congress being held in Beirut next year.” Ghostine has more reason to be disappointed than most. In June of last year, he gave a speech at the OIV congress in Paris, in which he outlined Lebanon’s plans for 2005. “All 45 countries, including Israel, gave me a standing ovation,” he said. “We were meant to go to Vienna this summer to present our final itinerary. Then I get the call from Frederico Castelluci, telling me that there was a change of plan.”

Ghostine said Castelluci had told him that the reason for the change of venue stemmed from the organization’s doubt that Lebanon had the “technical ability” to manage some of the more scientific and linguistic aspects of the congress. “They need translators in five languages. This is not a problem. We can translate in six,” said Ghostine. Privately, wine producers believe pressure from the Israeli delegation was the main driving force behind the decision. “The OIV is a non-political body and therefore they cannot cite a non-political reason,” said one. “What can we do? We need them more than they need us.”

Ghostine’s frustration is evident when he talks of missed opportunities, especially in the export markets. “The recognition the congress would have bestowed upon us would have been priceless. To be honest we are still not fully established as a wine making force even though we have be doing it for 6,000 years,” he said. “The congress would have given up priceless exposure. Export markets are very important to us. Lebanon is exporting 40% of its wine.” UVL president, Serge Hochar was equally uncomfortable with the turn of events. “Until we have an official notification from the OIV, I prefer not to comment.” The demise of Beirut 2005 came as a surprise to many of those who had worked hard within the government to ensure it happened. “It’s the first I have heard of it,” said Basil Fuleihan, ex-economy minister and now the chairman of the Parliamentary Committee on Economic Affairs, Trade, Industry and Planning. “Quite frankly if it turns out to be true, it is very disappointing news for Lebanon and Lebanese wine.” While in office, Fuleihan lobbied hard for the congress and is a firm believer in the potential of the sector. “Lebanese wine needs to be supported. It is good for general prosperity; it’s good for exports and it’s good for the image of Lebanon.”

Teething problems

The news came at a time when the UVL has been experiencing delayed teething problems. In January, Massaya, one of the most energetic of the new generation of wine producers, resigned after it claimed the association was dragging its heels on an initiative to establish a wine marketing board and launch a national advertising campaign. A statement issued by Massaya, which had vigorously lobbied for the move, said that it was obvious that the interests of Massaya and the UVL were irreconcilable and that the winery had no option but to go it alone.

Elsewhere plans to establish a national wine institute (to be responsible for implementing the 2000 wine law and oversee and regulate all areas of grape growing and wine production) seem to be caught in a bureaucratic bottleneck. “We have prepared our draft constitution,” said Ghostine. “Now we are just waiting for government approval. We are confident our file is in order.” According to Hochar, its establishment is crucial to the evolutionary progress of the sector. Speaking in November of last year he announced: “We have joined the OIV and we have passed a wine law. Now we just need an institute to implement it,” he said. “We cannot move forward without it.” UVL members are energetic exhibition-goers, although last month only three producers – Musar, Ksara and Kefraya – made it to the London Wine Fair. The energy of 2003 appears to have waned. “The reason we all went to London last year was that we got money from the EU,” explained Massaya’s Ramzi Ghosn. “All this needs intensive lobbying on behalf of the UVL and this in turn requires time and effort. Nothing will come of nothing.”

Still, Lebanon’s $26 million wine industry is essentially filled with promise. The good news is that exports have doubled in six years and producers continue to consolidate proven international markets, while seeking out new ones. Ksara alone has doubled its exports and is consolidating its position in the UK, a market pioneered by Chateau Musar in the 70s and one that also proved successful for Kefraya, Massaya and Clos St Thomas. The future

The good news is there is room for further growth. “There is huge potential. Any collaboration with the wine growers has been done with the best interests of the sector at heart. I have not sensed any official reluctance,” said Fuleihan, stressing the government’s faith in the industry. “All the grievances have been addressed such as tariffs and taxation. Yes, the government has not yet developed a viable agro or industrial strategy but we cannot satisfy the entire spectrum of demands because of the existing financial constraint.”

What is certain is that the land is there for further planting, although many within the industry prefer to exercise caution. “We just cannot plant without a strategy,” said Paulette Chlela, Ksara’s Chef de Culture. “We have already seen grape prices drop by 10% in the last year because of a dip in demand.”

But the overriding belief is one of an opportunity that needs to be seized. “Wine is the only hope for the Bekaa,” believes Ghosn. “In some areas this reality is taking shape while in others it will take a bit more time. New grape plantations have changed the lives of many of the Bekaa’s struggling farmers, who have been forced to grow illegal hashish and opium, or produce that was severely undercut by those from neighboring countries. The landscape of many towns is changing as the demand for good TERROIR increases.”

Ghosn also believes that to best demonstrate the value-added Lebanon has to offer the wine world, more producers should improve viticulture methods, moving away from high to lower, more concentrated yields and use better quality grapes. “To do this, there will have to be significant replanting or restructuring of existing vineyards, the adoption of more up-to-date working methods, and new vineyards. This will mean further exploration of Lebanon’s different regions and TERROIR, including a formal study of the various soil types and viticultural potential.” However, as the sector grows, the incidence of malpractice will undoubtedly increase. The UVL must snuff out those producers tempted to push the ethical envelope and clamp down on the importation of foreign wine in bulk quantities, over-harvesting, medal sticker abuse, diluting and misrepresentation. “It has already started,” shrugged Dargham Touma, owner of the Heritage winery, alluding the increasing number of Syrian-made “Lebanese” wines that are reportedly finding their way into Lebanese and North African restaurants in France. The national institute cannot come soon enough.

Nor can a national marketing campaign, one that would emphasize the quality of Lebanese wine as well as educating the drinker on the health benefits of drinking and stress the economic importance of buying Lebanese. Already, the wines are facing an epic struggle in an evolved and viciously competitive drinks sector. “Whisky and Vodka are king,” exclaimed Touma. “External budgets are dictating consumer budgets. They are telling people what to drink and what not to drink.” Given many of the mediocre brands that are being pushed in the local market, it is sad that many of Lebanon’s best wines are unknown to local drinkers, who in a misguided exercise in snobbery often perceive foreign wines as better. Oz Clarke, the English wine guru has rated Clos St Thomas’ “Chateau” as “stunning”, while only last month Jancis Robinson, arguably an even bigger hitter than Clarke, raved about Massaya at a tasting in London.

Tell that to the OIV.
 

If you think that soldiers of fortune went out with Frederick Forsythe and the last colonial war in Africa, think again. The dogs of war are back big time, compliments of the US occupation of Iraq. Except in our more politically correct world, the word “mercenary” has been dropped from our vocabulary and replaced with the more acceptable term: “civilian contractor.” It is difficult to say exactly how much their presence is netting the US private sector – the firms employing them are mum – but it is safe to assume that the US government is saving a great deal on costs that would otherwise be incurred if they used regular troops.

The brutal slaying of four unfortunate Americans in Fallujah made front-page news the world over, as did the prisoner abuse in the Abu Ghraib prison, where civilian guards were said to be involved. But just who are these mysterious “contractors,” what exactly do they do, why are they there, and who are they answerable to? Let’s start at the beginning. Ever since there were wars, there have been men – and sometimes women – who tag along with the military to carry out chores that soldiers do not want to do. For logistical reasons the military high command finds it easier, better, cheaper, and less complicated to have civilians do those odd jobs instead. But like everything else, there are both advantages and disadvantages in hiring outside help.

But to understand the current phenomenon that has drawn anywhere from 20,000 to 40,000 civilian contractors to Iraq, making them the second-largest military force in the country after the US, we need to understand first why such a large number of civilians has been “drafted” into a war zone.

Under the leadership of Donald Rumsfeld, and against the better judgment of some of his generals, the American secretary of defense took the decision to reduce the size of the US military around the world. The Cold War was over, and Rumsfled argued, there were no pressing needs to maintain large numbers of troops and bases around the world. Rumsfeld believed that modern warfare could be fought effectively with superior air power, good, solid intelligence – mostly electronic – and far fewer “boots on the ground.”

His rationale was proven during the Afghanistan war, which started shortly after the attacks of September 2001. The US quite simply dominated the skies with its air force and precise computer-guided missiles. American spy satellites could spot enemy movement from outer space and direct elite troops on the ground to take appropriate action as needed. They could listen to enemy communications and preempt their moves. Unmanned drones could spy on enemy troop movements and relay live data, including television images to frontline commanders for quick reaction by Special Forces.

The invasion of Afghanistan to oust the Taliban and attempt to capture Osama bin Laden required limited troops on the ground. Smaller tactical units of Special Forces, Army Rangers, Green Berets and Navy Seals supported from the air, indeed proved to be most effective. Rumsfeld’s idea of a smaller, leaner, military seemed to have worked; in theory, at least.

In Iraq a very different battle plan was needed with the generals calling for at least 350,000 troops in order to do the job properly. Certainly the United States could blitzkrieg, as it did, in record time, taking barely three weeks to occupy the entire country. Maintaining the occupation has been harder.

Rumsfeld insisted the occupation of Iraq could be properly maintained with roughly 130,000 troops. But what he did not tell the American people was that to sustain those troop numbers, he would need the support of another 40,000 civilians to back up the military.

Enter the civilian contractors, who can be broken down into two distinct categories. The first is the genuine civilians, such as truck drivers, cooks, cleaners, mechanics and builders. They drive supply trucks, repair tanks and provide housing for the troops. Their pay is significantly superior roughly ten time what they would make in the US, given the discomfort of living in a war zone and the dangers involved. Of those, there are roughly 20,000 working in Iraq today. Or at least there were, until Westerners became the target of kidnappers and many took fright and left.

The second group of civilian contractors – of which there were also about 20,000 – is armed. Some even use helicopters with mounted guns for protection. These are mainly former military Special Forces types, who enlist their services in exchange for money, much as a mercenary would. They provide security to government buildings where American employees work and live.

Almost all US agencies – the State Department and the US Agency for International Development, the Commerce Department, the Defense Department and the US army – all have contractors working for them, or are administering contracts that have contractors working for them. They are also tasked to provide security for the civilian contractors and to protect their convoys or their work and housing sites. The four contractors who were brutally killed and had their body parts hung over a bridge in Fallujah, were former US Navy Seals on irresistible contracts.

Some of these contractors have been involved in firefights with Iraqi insurgents, and others had to fight their way out of tense situations. But more stunning was the recent discovery, when the Abu Ghraib prisoner abuse scandal broke last month, that civilian contractors were used in the interrogation of prisoners, tactics previously unheard of in military annals.
It is important to note that we are not talking about civilians in the employment of the government, such as the CIA or FBI, but of truly just civilians, hired specifically for that purpose.

A number of US companies, such as Virginia-based CACI, have advertised for interrogators, among other positions that require US government security clearance. As a rule, those are usually people with prior experience in their field – like former intelligence officers who worked for the CIA, DIA or the FBI. Still, it remains highly unusual to bring in civilians to perform such tasks as interrogating prisoner.

Why is this happening? Well, in the case of the first category, the civilian-civilian contractors, as mentioned above, the US military has been reduced in size. To make up the deficit in manpower, the defense department is forced to turn to outside help. To enlist more troops would not solve the problem, as it’s also a matter of economics. It’s the bottom line that Rumsfeld is watching for.

In simple terms: it’s true that a civilian hired to drive a truck loaded with gas, ammunition or MREs (meals ready to eat) from Basra to Baghdad will on average earn 10 times more than a soldier doing the same job. However, consider this: the contractor gets a lump sum of money and that’s the end of the story. There is no insurance for the government to pay. If he gets hit, there are no medical costs involved. Most likely his employer, the one that contracted him, would cover insurance costs, or he would do so himself.

A wounded soldier, besides costing the government medical expenses, necessitates the support of doctors, nurses, medical technicians and staff. It takes an entire team to care for every wounded GI. All this requires resources and costs money.

Additionally, if the soldier is disabled, the government will have to pay him compensation and cover long-term hospitalization, if required, and the military would then have to replace him in the field. Not so with a contractor; he gets hit, he leaves, the government hires another one. End of story. Total savings for Uncle Sam are roughly in the thousands of dollars per man, while it remains difficult to pin down exact numbers, because no study was released by the Pentagon on this subject.

Another advantage is if contractors get killed. They don’t figure in the “official” US death toll. No one really knows how many contractors have been killed in Iraq. Nor, for that matter, does anyone really know how many are operating in Iraq. Not even the Pentagon has figures for them. The closest one gets is an estimate of “about 20,000.”

The second category, the armed civilian contractors, are more aptly described as ‘mercenaries.’ They are ready to kill and even be killed, not for God and country, but for financial reward.

Again, there are no published figures, nor casualty reports concerning armed contractors. The Pentagon only reports military dead and wounded and offers no insight into losses – if any – from the ranks of armed contractors. And their employers, usually firms who try to avoid publicity, tend to shy away from the press.

One frightening fact to emerge from the Iraqi prisoners abuse scandal was that no one was able to identify a proper chain of command concerning civilian contractors involved in the interrogations. The US military commanders in charge of the Abu Ghraib prison did not know who the civilian interrogators in the jail reported to, and who answered for them.

Strange times, indeed.

Did the Audi-Saradar merger hint at a possible consolidation trend in the Lebanese banking sector, or was it a one off? The sector has seen a number of waves of mergers and acquisitions in recent years, especially in the beginning of the post-war era, as some larger banks capitalized on the difficult situation in the early and mid-1990s to eat up smaller ones. Many large banks looked to expand their branch networks, and realized the most efficient way to achieve this was through the acquisition of smaller ones.

Since then however, branch network expansion is no longer the primary goal of leading banks in the country, and can therefore no longer trigger significant mergers and acquisitions. Nevertheless, other drivers that can inspire consolidation in the global banking industry are present in the market and are likely to ignite a similar wave locally.

The gap between the top Lebanese banks and the smaller ones is constantly widening, with a marked concentration of deposits and loans among the top 20 banks. Top banks are constantly seeking to fend off competition from large regional banks by achieving a larger scale and striving for higher quality services. By targeting certain specialized institutions through ‘horizontal’ consolidation, these banks can achieve critical mass in terms of the financial resources, skill, and geographical diversification needed for competing on a regional scale (amply demonstrated by Audi’s acquisition of Saradar, which gave it a private banking unit and access to the Gulf market). Furthermore, Lebanese banks face sizeable overhead costs, and as such, they would substantially benefit from spreading such costs over a wider asset base. Another driver for consolidation is the access to distribution channels and new markets. Regional and international banks, such as NBK, Gulf Bank, HSBC and Standard Chartered, have established a presence in almost every major city in the Middle East. As the region is becoming more economically cohesive, businesses require “fully regional banks.” Lebanese banks should attempt to establish a widespread presence if they are to retain a role. Currently, a number of medium and large Lebanese banks do have branches in certain neighboring markets. Consolidating such banks under one institutional roof with a regional presence would certainly provide competitive advantages to the overall sector. The highly competitive domestic banking environment in Lebanon, coupled with the threat brought on by regional banks, is already forcing Lebanese institutions to look to nearby markets to expand into. As such, many banks are making distinct efforts to plow into the GCC market (Audi-Saradar, BEMO Bank), the African market (Byblos), and the Levant (SGBL, BEMO-Saudi Fransi, BLOM, Fransabank).

EXECUTIVE has identified 10 banks (from the “gamma ” and “delta ” groups of banks) that it believes offer attractive merger and acquisition opportunities. The order in which the following banks are listed is by no means an indicator of preference, and their inclusion in no way indicates a willingness of the existing shareholders of those banks to entertain the possibility of consolidation.

Al Mawarid Bank SAL

Al Mawarid Bank, ranked number 21 in the banking sector, was established in 1980. Following some limited growth during and immediately following the war, the bank’s management, led by general manager Marwan Kheireddine, undertook a major revamp of the bank’s operations. The bank is currently perceived as one of the few with high standards of efficiency, customer service and reliability, and its network of 12 branches focuses on Beirut’s southeastern suburbs, an area weakly catered for by other banks. Furthermore, the bank’s personalized approach to banking has earned it a favorable word-of-mouth reputation with the middleclass and has a strong Druze customer-base, especially in the Chouf. From a financial standpoint, the bank enjoys a healthy balance sheet. Liquidity levels are high, with cash balances around 35% of total assets, and only 11% invested in Lebanese government treasury bills. Customer loans account for just under 50% of total assets and benefit from a doubtful loans ratio of only 4.5%. The bank has also managed to diversify its income, with interest income accounting for around 56% of the total, and income generated from transactional services (commissions) at around 42%.

Al Mawarid Bank thus comes forward as a bank with modern management systems led by a well-educated management team, a good reputation, attractive geographical presence, healthy financials, high liquidity levels and strong growth.

Jammal Trust Bank

Jammal Trust Bank, ranked number 33 in the banking sector, was established in 1963. The bank was originally established as Investment Bank SAL, and was renamed Jammal Trust Bank in 1971 following its acquisition by Ali Jammal.

The bank is reasonably well established in Lebanon and has four branches in Egypt, a representative office in London, and owns local subsidiaries in real estate investments, trusts, and insurance. It has 20 branches domestically, including in Tripoli, Bint Jbeil and Baalbeck. From a financial standpoint, the bank has a diversified balance sheet, with cash balances of around 25% of total assets. The bank does, however, have a little more exposure to government debt, with Lebanese T-Bills accounting for 35% of total assets. Loans account for around 30% of total assets, with doubtful loans at 7.5% of total facilities. Interest income accounts for around 80% of total income, while commissions account for only 16%. Jammal Trust Bank, therefore, offers an opportunity for institutions looking for new product lines and markets to expand into.

Banque Misr Liban SAL

Banque Misr Liban is one of the oldest banks in Lebanon, registering third on the central bank’s list of banks. The bank, which currently ranks 24th in the sector, was established in 1929, and is majority held by Bank Misr Cairo. While the bank currently has no foreign presence in Egypt, it remains associated with Bank Misr-Cairo, which maintains control of the bank’s management. The bank currently operates a network of 16 branches, evenly spread out throughout the country. The bank’s growth has been stalled in recent years, with little banking activity. Nevertheless, the bank benefits from a high level of liquidity, as cash positions represent in excess of 37% of total assets, while investments in Lebanese government T-Bills account for 48%, with a small loan portfolio. The bank’s sources of funds consist almost exclusively of customer deposits and shareholder equity, with almost no other liabilities whatsoever.

As such, the bank presents to interested parties a clean and liquid balance sheet, which can be leveraged upon to re-launch the institution and use the available funds to transform it into a full-fledged national bank.

Near East Commercial Bank SAL

Near East Commercial Bank seems to be another “dormant” bank in Lebanon. Established in 1979 and currently ranked 41st in the sector, the bank has not witnessed any significant growth in the past few years, despite having many of the characteristics that would allow it to prosper.

The bank also benefits from high levels of liquidity, with cash balances at almost a third of total assets, and investments in short-term Lebanese government T-Bills at 37%. While loans constitute around 29% of total assets, they comprise to a great extent short-term overdraft facilities, while doubtful loans do not exceed 5% of total loans. On the other hand, the bank’s source of funds consists primarily of customer deposits, which are to almost 75% locked in long-term saving accounts, thus providing the bank with a healthy match of assets and liabilities.

As such, the bank is highly liquid, with well-managed assets and liabilities, and consequently an adequate platform to grow both locally and regionally. Interested institutions may also benefit from cooperating with the bank’s existing majority shareholder, Al Wafa Holding, in jointly developing the bank. Societe Nouvelle de la Banque de Syrie et du Liban SAL

After undergoing a wave of restructuring over the past years, which has also included a change of the bank’s corporate identity, and a marketing effort to reposition the bank on the market, the bank’s balance sheet looks improved, with ample liquidity. Cash balances account for almost 30% of the bank’s total assets, in addition to around 53% in short-term liquid government T-Bills. The bank’s loan portfolio accounts for only around 15% of total assets, with doubtful loans at around 13% of the total. Sources of funds consist mostly of long-term customer deposits in saving accounts, in addition to the bank’s equity. While the bank is not witnessing any marked growth, its liquid balance sheet, long-term sources of funds and domestic branch network of 18 branches – provides an adequate platform for expansion. As such, the bank would seem attractive to institutions seeking an already established network, coupled with enough liquidity to aggressively tackle the market.

Creditbank

Creditbank is the result of the merger of Credit Bancaire and Credit Lyonnais-Liban, in 2002. The new bank, ranked at number 26 by total assets, inherited the assets of both banks, along with a team of professionals from Credit Lyonnais-Liban and Credit Lyonnais-France’s operation in Beirut. The bank has been achieving significant growth since its establishment in 2002, not really suffering from any post-merger gap.

Creditbank benefits from a highly liquid balance sheet, with more than 30% of assets held in cash, and another 33% in short-term liquid T-Bills. While the bank’s loan portfolio also constitutes around a third of total assets, doubtful loans do not exceed 6% of total loans, and are adequately provisioned for. The bank’s sources of funds are mainly long-term customer deposits held in savings accounts.

As such, the bank presents potential investors with a clean and liquid balance sheet, a decent branch network, a professional management team, attractive growth, and a clean reputation in the banking sector in Lebanon.

Lebanese Swiss Bank

Lebanese Swiss Bank is a 100% Lebanese bank. Ranked number 28 by total assets, the bank has been undergoing steady growth in the past few years, building upon an evenly distributed branch network of six branches nationwide.

The bank’s balance sheet is highly liquid, with cash balances at almost 40% of total assets and Lebanese T-Bills just over 31%. The bank’s loan portfolio constitutes less than 30% of total assets, of which half is in short-term overdraft accounts. Doubtful loans do not exceed 7%, and are well provisioned for.

Lebanese Swiss Bank presents interested investors with a liquid and clean balance sheet, with a good platform for branch network expansion, and room for growth in the private banking field, in which the bank enjoys a good name.

Middle East & Africa Bank

Middle East and Africa Bank, also a 100% Lebanese bank, is owned by the Hejeij family, which founded the bank following the end of the war in 1991. The bank developed into a decent financial institution, which has continued to undergo growth in recent years. The bank, ranked number 32 by total assets, focuses on Beirut and the southern suburbs, providing corporate and private banking services to its clientele.

The bank enjoys a high level of liquidity, with cash balances at more than 40% of total assets, and short-term Lebanese T-Bills at around 30%. With a loan portfolio of around 20% of total assets, doubtful loans are at less than 6% of total loans, and are almost fully provisioned for consistently. The bank also has a diversified income base, including interest income at 57% of total income, commissions at 25%, and other service-related income at 18%.

The bank provides interested buyers with a good name, a liquid balance sheet and a clean loan portfolio, in addition to a wide range of services that constitutes a platform for development into any specialized type of financial institution.

Federal Bank of Lebanon

Federal Bank of Lebanon is one of the smallest and oldest banks in the country, ranked at number 40 by total assets. Established in 1952, it remains owned and run by the Saab family, covering Beirut and some suburbs with eight branches.

The bank’s balance sheet enjoys a decent level of liquidity, with cash balances at 25% of total assets, and T-Bills at 27%. Loans represent 39% of total assets, but suffer from a doubtful loans ratio of over 26%.

The advantages to a potential buyer would be the family aspect of the bank, which would facilitate potential acquisitions, a decent branch network that can be potentially expanded, and a good level of liquidity on its balance sheet. However, potential buyers should be cautious when reviewing the bank’s loan portfolio.

Banque Lati

Banque Lati has been operational in Lebanon for more than 80 years, and is still held by the Lati family, the bank’s original founders. Nevertheless, the bank was not able to achieve scale, and remains a two-branch bank.

On the other hand, the bank’s balance sheet presents attractive opportunities to potential buyers. Cash and T-Bills represent around 35% of total assets, providing decent levels of liquidity. In addition, the bank’s balance sheet holds a large portfolio of real-estate assets, and one can certainly capitalize on them given the high growth in the real-estate market in Lebanon. In addition, the bank’s doubtful loans remain at less than 8% of the total portfolio, and are fully provisioned for. The bank also has a diversified income base. As such, Banque Lati provides potential investors with a name that has been present in the market for more than 80 years, an attractive balance sheet structure with liquidity and real-estate properties, and a diversified income base.

Nevertheless, it takes much more than a display of attractive features in the sector to entice either local or foreign institutions from undertaking the numerous efforts to invest in or buy out local banks. Large Lebanese banks, which have already completed a number of acquisitions in the past 10 years, are likely to be too busy digesting, or rather integrating, their acquisitions. If a new wave of consolidation is to take place in the market, it is likely to involve banks other than the top five in the country – perhaps the bottom 10 of the alpha and top five of the beta groups. It remains to be seen whether such banks are likely to entertain the possibility of seeking organic growth through acquisitions. Chances are that all bankers are eyeing the market and recent developments – such as the Audi-Saradar merger – are increasing the level of concentration of the industry to previously unseen levels. According to central bank figures, 80% of the sector’s assets are distributed among the top 16 banks. Such a trend would threaten medium-sized banks, which will ultimately seek ways to gain mass to ensure their presence among the giants.

1 Gamma Group: Deposits between $100 million and $300 million

4 Beta Group: Deposits between US$300 million and US$ 1 billion
 

THE BOTTOM END

While Lebanon’s lowest ten banks may look like bargains to potential buyers, they offer little to no investment opportunities, only unwanted baggage

To the untrained eye, the best bargains for those seeking to acquire banks in Lebanon may lie in perhaps the 10 smallest banks in the sector. Such may be the case in other markets, where even the 10 smallest banks may be operational, and may present potential buyers with some value-added in return for the price paid to acquire them. In fact, Lebanon’s bottom 10 banks offer little or no opportunities.

Only three – Banque Pharaon et Chiha, Finance Bank, and Banque Lati – are Lebanese. Only the latter could provide potential buyers with an opportunity, given a clean and liquid balance sheet. As such, a potential buyer would benefit from a banking license without any associated burdens. On the other hand, banks like Finance Bank and Pharaon et Chiha carry unwanted baggage, which would have to be borne by any incoming investor. Banque Pharaon et Chiha’s loan portfolio accounts for more than 30% of total assets. Doubtful loans, however, stand at around 10% of the bank’s total portfolio, while bad loans account for another 10%. In addition, of the bank’s total loan portfolio, more than 88% are in the relatively less liquid commercial loans. Such a ratio does not compare favorably to the Delta group of bank’s loan portfolio composition, where around 50% of total loans are in short-term overdraft accounts, and only 21% in longer-term commercial loans.

The same can be said for Finance Bank, the loan portfolio of which accounts for almost 30% of total assets. In parallel, doubtful loans stand at almost 13% of total loans, while provisions for doubtful loans cover roughly only half that amount. In addition, the bank’s income base is not at all diversified, with more than 95% of the bank’s income coming from interest revenues.

Of the seven foreign banks in the bottom 10, many, like Standard Chartered, Banca di Roma, the Saudi National Commercial Bank, and Bank Saderat Iran are making attempts to make inroads into the domestic market, and as such are not likely to present acquisition opportunities. Others, like Pakistan-based Habib Bank and Iraq-based Rafidain Bank, while not aggressively attempting to increase their market share, have been present in the country as semi-dormant banks since the early 1960s, weathering the war days, and are not likely to bail out now. Arab African International Bank, owned in almost equal shares by the ministry of finance in Kuwait and the central bank of Egypt, is also somewhat of a dormant bank, with neither institution likely to give up their presence in the Lebanese banking market.

Finally, for those who aspire to owning a bank, central bank governor Riad Salameh seldom misses the opportunity to emphasize his support for consolidation in the banking sector, to the extent that the central bank is prepared to extend subsidized credit facilities for banks wanting to acquire others. In yet another effort to improve the consistency and efficiency in the sector, the central bank has been reluctant to issue new banking licenses, having not done so for over 10 years. As such, new entrants to the banking sector in Lebanon must acquire one of the existing licenses, whether local or foreign. Nevertheless, the sale and purchase of such licenses is closely monitored by the central bank. One of the conditions to be met by potential purchasers of banking licenses in Lebanon is a close personal and professional profile of all of the individuals making the purchasing party. Through such a screening process, the central bank ensures that those acquiring a banking license in Lebanon are of a certain caliber, have the proper banking background, and professional expertise to positively contribute to the sector as a whole. Through such control, the central bank was able to conserve the image of the banking sector, at a time when a large number of high net worth individuals are returning to the country with enough funds to cover the price of a banking license.

Tony Hchaime is an investment banker at the Middle East Capital group (MECG)
 

Jerome Bon, professor of marketing at France’s premier Business school ESCP-EAP, has been an ESA intermittent teacher and advisor since the two institutions joined forces with the central bank of Lebanon in 1996. In an interview with EXECUTIVE, Bon talks about the new two-year masters in management program at ESA and ESCP-EAP, set to begin this fall, which he hopes will give students the opportunity live, work and study in France and Lebanon, and work against the dynamic of the brain drain.

Explain the linkage between ESA and ESCP-EAP and how the new masters in management program builds on that relationship.

Bon: ESA was originally created with the help of ESCP-EAP. Most of the courses are delivered here by faculty from ECABAB, exclusively in Lebanon. Now though, we are launching a new joint program – a two-year masters in management for students. In this program, the students will be in a position to spend one year in Lebanon and one year in France. In the final six months of the program Lebanese students at ESA will most likely also study with French students who will come here [to Lebanon] for a semester. Additionally, the students will be registered as students from both institutions and receive a duel masters in management degree from both.

What kind of students are you interested in attracting?

Bon: We are trying to have students who are deeply concerned with the development of their country, but completely aware of the importance of international experience to help their country to develop. We want to see students who want to take advantages of internship opportunities in France or in Europe so that they can get some benchmarks of how it goes in companies in Europe. One of the problems of training is to teach how it goes in real life, being able to benchmark how it goes in different countries. What we think is that education is not only the course content. Education is also a process and the process is what you are living, what you experience during your education period. A lot of what you experience is with the other students so the composition, the mix is something that is very important in the training process.

How does the program fit in with global economic trends?

Bon: It is not that we think the headquarters of companies are more and more composed of people from different companies, companies themselves are increasingly operating in different countries with different cultures so we think we are at a very important point now to offer such programs to students – to enable them to really understand other cultures and be able to work with other cultures. Otherwise you may have a very good knowledge of techniques etc. but your ability to work with other people is very poor.

How would you describe the capacity of Lebanese students?

Bon: This comes back to the real objective of this program – to see whether there are cultural differences in the way that students work and if we can enrich the program through those differences. I would say that there is a very strong oral communication capacity for Lebanese students. They can talk very easily, they can be very convincing and tenacious when they discuss. They may lack some scientific rigor in their reasoning – i.e., not always trying to go deep into a problem to solve it. Maybe they don’t always test the hypothesis that they have in their mind. For example, if I take German students, they go very, very deep into the details. They do not always communicate very easily however. So I think that globally, when you mix people from different countries and when they work in the same group, they will see that in each way, in each culture, while there is not someone who is right or better than the other, they can absorb part of what is good in each culture. This mix is probably better, more compatible, with the ways in which organizations work right now. What we try to do is not to try to develop mimetical cultures. We want people to keep their culture, but to be able to understand and accept other ways of working.

What do you see the new programs role and responsibility, if any, in Lebanon’s on-going exodus of talented individuals?

Bon: This is a question not only for Lebanon. We are working with Morocco and India, for example. We want people to keep their link with their country and to experience a link with other countries. Our objective then is to have a network of people, national people, working in different countries and being well connected so they can develop activities. So through that, our objective is not to [encourage the] “brain drain” so people can work in France. Our objective is for people to know French people, they will know the French system, sufficiently that they will know how to work with France in their future projects. What we want to give them is a knowledge network that will help them to develop activities in Lebanon with France, with Europe, lets say. With a rather tight employment market in Europe right now, a growing number of Moroccans are coming back to Morocco, a growing number of Indians are going back to India, despite lower salaries, because they want to keep on living in their countries. We have done this program precisely to enable students to experience this abroad experience without being kept from the Lebanese environment. So to answer your question, the design of this kind of program is done precisely to keep the contact with the country and to keep them in the country.

How will you judge the success of the program?

Bon: Our final evaluation will be if we have alumnae groups with people from all over the world…. If we want that, then we have to have people stay in their own country. For our school, it is very important. We cannot limit our role to just teaching. We have a responsibility that is more than that. Our customers are not only our students, they are also the countries where we are located. Our success then will also be the success of Lebanon.

The position of modern banking in the global economy vastly exceeds the main functionality that banks fulfilled during their 600-year rise since the Medicis: financing trade and warfare and serving as safe havens in times of danger. The expansion of banking and finance into universal socioeconomic denominators has come at the price of intense interdependence with national fortunes and developments outside of the safety and confinements of the bank vault. A few years ago, technology issues dominated many discussions over future banking trends. But talking global about banking today, three universal issues come to the fore that concern bankers and stakeholders, regardless of the development level reached by their national banking sector: crises, concentration of power and convergence of standards.

Banking crises are the nightmares of financial stability and big, sector-wide crashes – or, in technical terms, systemic banking crises – tend to occupy media reports and discussions over years. The Russian and Argentinean crises, for instance, are frequent examples in business stories and learned discourses alike.

Surprisingly, systemic banking crises do not crop up far and wide apart. For the last quarter of the 20th century, World Bank researchers diagnosed 113 systemic banking crises in 93 countries. Wars, loss of government credibility, transition from communism and other sweeping changes in political systems, financial and general market upheavals have been identified as leading causes for these epidemic cases of banking malaise – plus, in another main cause, interventions by international financial institutions (namely IMF and World Bank) set off numerous outbreaks.

According to the historic research, Lebanon experienced one war-triggered systemic banking crisis between 1988 and 1990, with four insolvencies and 11 banks coming to depend on central bank bailouts. But while the country continues to receive warnings of another potential systemic crisis, the general international and local consensus is that the danger is minor, and Lebanon’s bankers do not rip out their hair in fits of crisis fear. As far as crisis candidates are concerned, the banking industry in China’s overheated economy today is the focal points of worries.

Concentration is the other inescapable reality, with larger and larger mergers. Between January and May 2004 alone, four, billion-dollar bank merger projects were announced in the US, the latest and smallest of them valued at $7 billion, between regional players SunTrust and National Commercial Finance would create America’s seventh-largest bank with $148 billion in assets. The $10.5 billion acquisition of Cleveland-based Charter One Financial by the Royal Bank of Scotland illustrates a recent trend of European banks to buy American. Even Germany’s Sparkassen, a conglomerate of savings institutions with entrenched provincial high street image, last month started talking about becoming “global players.” Lebanese bank mergers, although puny by comparison, follow the same logic, which is not abating.

Last but certainly not least, actors in national banking industries are coerced to increasingly adjust to standards that are streamlining their operations to meet the economic and political codes of the world’s leading powers and international institutions. The Basel II rules of the Bank for International Settlements (BIS) and the money laundering regulations by the OECD-created Financial Action Task Force (FATF) are the crucial determinants for accelerating uniformity in global banking.

Since its inception in 1989, the FATF has progressed and significantly expanded its influence especially in the last five years. Lebanon got a strong dose of FATF experience when it was placed on the organization’s non-compliance list in 2001 and had to make legislative and institutional efforts to be removed in 2002. The countries collaborating on the issues of combating money laundering and terrorism finance through the world’s financial networks have just extended the FATF mandate until December 2012. Although the May 14 decision spoke of a temporary mandate, this looks pretty permanent. Authorities and bankers in Lebanon, thoroughly committed to safeguarding national capacities as banking center, know that they have to satisfy the new global rules against money laundering and terrorism finance, just as much as they have to gear banking performance up to meet the Basle II standards over the next few short years.

Against these global macro trends, current concerns in the Lebanese banking industry are at the same time relaxingly minor and yet illustrate the need to embark on further qualitative development efforts. If the 2003 and first quarter 2004 performance of Lebanon’s listed banks were reported in a developed stock market, a rally of banking values would be as safe a prediction to make as one ever could in the craft of market guessing. The results of the Lebanese banking sector for the past 12 months were simply beyond expectations, with the numbers for the six listed banks speaking loudly.

The published balance sheet of Banque Audi, the bank at the center of attention since their successful merger deal with Banque Saradar, recorded 35% growth in total assets over 12 months ending March 31, 2004, to $7.51 billion. This increase was equaled by Audi’s 35.4% gain in customer deposits. At $6.29 billion in customer deposits, the bank’s market share of total banking deposits reached 12.7%.

Net income at Banque Audi for the first three months of 2004 was $14.5 million, an improvement of 13% on the same period last year. According to a Banque Audi press release, these figures are in line with quarterly result averages of 2003 and reflect the bank’s position without including figures for Banque Saradar following the rapprochement between the two entities.

BLOM Bank, the leader in terms of total assets, continued their growth with a 22% increase in each, assets and deposits to $9.2 billion and $8 billion between the end of March 2003 and end of March 2004. BLOM net profits for the first quarter of 2004 amounted to $22.4 million, up 0.9% over Q1 2003.

Assets of Byblos Bank climbed by 13.6% to $6.2 billion over the 12 months ending March 31, 2004, and customer deposits rose by 16.3% to $5.1 billion. The bank achieved a net income of $10.3 million in the last quarter. This marked a drop of 12.7 % over the same period in 2003, which the bank attributed to a tightening in its net interest margin from 2.63% to 1.81% between the two periods, due to its “conservative strategy to keep highly liquid assets.”

At Bank of Beirut, improvement of assets was by 11.3%, to stand at $3.66 billion at March 31, while customer deposits rose by 15.1% over the past 12 months, to $2.56 billion. BoB achieved net profits of $4.8 million for the first quarter, a gain of 14% over the same period in 2003. BLC Bank succeeded in achieving assets of $1.62 billion and customer deposits of $1.33 billion at the end of March, improving by 27.7% and 26.3%, respectively, from March 2003. Under the central bank-installed new management, BLC reported an increase of almost 93% in its gross income at the end of the first quarter and an unaudited net income of $3.55 million, a turnaround from a $2.1 million loss in Q1 2003. Non-performing loans still accounted for 78.5% of BLC’s total loan portfolio of nearly $720 million. BEMO Bank recorded an increase in total assets of 12.7% year-on-year, to $562.4 million at the end of March, with customer deposits growing by 9.2%, to $432 million. Net income at BEMO was $1.06 million in the first quarter, which signified a noteworthy increase of 50.9% over Q1 2003.

In summary, the banking sector performance clearly defied cautious predictions made by experts one year ago. “Banking performance has been more satisfactory than I projected, because resources from investors increased by 14%, a fairly significant amount under the climate we are in,” said Marwan Iskandar, one of Lebanon’s leading economists. He attributed the sector’s good results largely to Arab investors “who find it convenient to place some money in Lebanon.” Several major ventures brought funds into the country, notably the Sannine Zenith project whose land purchases had been undertaken mostly in 2003, Iskandar added.

A leading banker agreed that sector results beat forecasts but cautioned, on condition of anonymity, that first quarter profit statements of some players might show strong increases only based on their revaluation of eurobond assets. “Most Lebanese banks hold eurobonds to maturity. By revaluing eurobonds as market-to-market, banks can state profits instead of keeping them hidden – but these are one-off gains,” he said.

Banking analysts also reiterated the long-standing admonition that the, albeit substantially diminished, possibility of sovereign insolvency would be extremely dangerous for many of Lebanon’s large banks. They still have 30% to 35% of total balance sheet exposure to government debt, meaning, “if the currency collapses, all are in trouble.” But these realities can be quite safely considered to be non-threatening to the development of the banking sector at least in the near future. In the opinion of Iskandar, there are no reasons to anticipate any major worries in the Lebanese banking industry for 2004, as the crisis over Bank Al Madina has been largely resolved and the formation of the Audi-Saradar Group created the basis for a major Lebanese financial institution with regional and international reach. The sector could even witness another step in the evolution of massive banking power, Iskandar said, pointing to “serious discussions” as ongoing between the Audi-Saradar Group and Banque Libano-Francaise for yet another big merger move.

The majority shareholder in BLF, French banking group Credit Agricole, has for some time been known to seek to reposition their involvement in Lebanon. BLF, one of the five first banks in the country, had already twice been engaged in merger discussions in the past three years – once with Banque Saradar and once with Banque Audi.

Also for near-term fund inflows, Iskandar maintained a strong outlook. “Indicators for inflows of Arab money are promising this year, perhaps slightly better than last year,“ he said.

In the spring weeks leading up to the 2004 GAIF conference, Lebanese insurers engaged in a flurry of new product releases. Each of three fancy launch events presented results of collaboration between local insurers and partner firms, from a leading multinational insurer and an international finance firm, to well-known domestic players in banking and trade. AXA Middle East, the Beirut-based affiliate of insurance multinational AXA and the fifth-largest sector company here, used the opportunity to unveil Viva, a new life insurance plan. Buyers of the plan can benefit from participating in fixed-income and equity-based funds managed by the asset arm of the AXA group. The insurers celebrated by inviting friends over for lunch – over 250 of them.

UFA Insurance, a provider ranked in the upper third of the market, teamed up with payment card company, Visa International, and Lebanese financial institution Fransabank, in co-branding a credit card that offers buyers of insurance policies extended payment facilities and discounts on policies. The combination of credit card and insurance branding marked the first product of this kind in the Middle East, according to a regional Visa Card executive. After introducing the new card with brief fanfare, the occasion called for obligatory management photos, and a buffet with quality snacks.

Horizon Insurance, a smaller operator and niche specialist in motor insurance, entered a partnership with First National Bank (FNB) and the Lebanese distributor for Hyundai cars. The launch of the company’s latest product, TriPlan, was recently celebrated at the InterContinental Phoenicial hotel. The plan presents as a rather complicated arrangement aimed at wooing customers with steep discounts on the purchase price of a new Hyundai car and a cash bonus in financing it with FNB, after they commit to purchasing a full comprehensive motor insurance with Horizon.

The Lebanese market, long regarded as under-insured, can no doubt do with as many innovative approaches as possible. Life and retirement products are still direly needed in greater variety and more effective distribution. But while assorted product creations and accompanying launches well demonstrate the combination of inventiveness and savoir vivre – the hallmark of Lebanon’s enticing business environment – all marketing strategies are fundamentally aimed at bypassing the prolonged economic stagnation that has consequently infiltrated the insurance market.

In 2003, the country’s only annual survey of insurance industry results – published by a sector magazine on the basis of unchecked company figures – offered a picture of encouraging double-digit sector growth for both general and life insurance for the first time in several years. But industry members questioned strongly whether last year’s sector performance was worth a celebration.

“In 2003, the insurance industry achieved only very slight improvements. As a result of the stagnating economy, plus political disturbances, the situation does not allow for the possibility to improve the premium volume,” said Abraham Matossian, president of Lebanon’s insurance association ACAL. Insurance leaders in the country’s still highly crowded field of providers regarded 2003 improvements in life premiums as continued genuine progress. They were widely concerned, however, over the role of motor insurance in last year’s premium income growth in general insurance. Lebanon began to enforce mandatory third-party liability (TPL) insurance for motor vehicles in 2003 – but the low minimum premiums decreed by the government and substantial upward changes in claims judgments made many experts and insurers fear that the motor business could flood the sector with losses in the near future. These concerns were accentuated even more on account of widely reported undercutting of the already low premiums by a number of unsavory providers, who have generated much negative publicity on the sector. Overall, most industry insiders and analysts consider the sector to suffer from excessive competition and still in great need of consolidation by mergers or company closures. The troubles are not to suggest that Lebanon’s insurance industry was void of progress over the past few years. The sector made impressive steps forward in increasing professional capabilities. The introduction of mandatory motor insurance in itself was highly positive. Bancassurance developed well, opening new paths to spread insurance awareness. Many companies refined their technical skills and streamlined their operations. The organized insurance brokers undertook substantial efforts to shape up the unfavorable image caused by shady practices of unqualified operators in war and immediate post-conflict years. In the matter of regulatory frameworks, the 1999 revision of the country’s old insurance law mandated higher capital requirements and more prudent financial practices. The country’s insurance control commission at the ministry of economy and trade stepped up their role.

This spring, the commission received the results of the first-ever field audits of insurance companies, carried out last year by international auditing firms contracted by the ministry. With these findings, the supervisory authorities expect to gain an unprecedented full and timely assessment of the industry’s state. The regulators at the ministry now hope that a just written entire new proposal for a national insurance law would be adopted and propel the insurance sector to another, much advanced state.

Insurance law upgraded

Canadian experts draft a new insurance law for Lebanon, championed by the World Bank

Lebanon’s insurance regime underwent measurable upgrades in the course of phasing in revisions of the dated insurance law augmented by flanking ministerial decrees between 1999 and 2003. But the revised old law was a makeshift solution that could not address all needs of a 21st century society. The new Lebanese insurance draft law is a piece of work supported by World Bank funding and authored by two Canadian experts intensely familiar with insurance issues in developing countries and with Canada’s insurance law, which is supposed to rate among the world’s best. Drafting of the law was authorized in September 2003 by Lebanon’s minister of economy and trade, Marwan Hamade, who last month hailed completion of the effort as a milestone. “The proposed legal framework draws on cutting-edge concepts from developed countries but does so in a form that recognizes the size of the industry and the nature of the Lebanese insurance environment,” Hamade said during a press conference on April 16. Among other things, the draft newly defines the structure and supervisory competencies of the Insurance Control Commission (ICC), calls for stricter separation of life insurance and general insurance activities as distinct corporate entities, and for increasing minimum capital requirements in several stages. At $3.5 million, the heightened capital requirements would be still far lower than those of comparable countries in the Middle East, said proponents of the new law, who described it as a document capturing the essence of advanced insurance legislation in a condensed and highly practical form on only 70 pages.

In the austere ICC offices at the ministry of economy and trade, the release of the draft created near euphoric vibes. ICC head Walid Genadry had the document and a synthesis distributed to all Lebanese insurance companies before the end of April, in hopes that stakeholders would rapidly register their comments, suggestions and modification requests. First comments from major insurance industry representatives were cautiously positive, but not without undercurrents. “We can only congratulate the head of the Insurance Control Commission on the good job they were performing last year,” said Elie Ziadeh, president of the Lebanese Insurance Brokers’ Syndicate. “However, we fear that at the ICC they do not understand the need to work with the people in the industry. We have the impression that they think they have an important project, work hard, and move forward with it. That is not enough. They should work with us.”

“The draft needs to be studied very carefully. It will be our challenge to look at the new law in a spirit of cooperation, give our recommendations and comments in a scientific approach and seek changes that we believe could improve the law,” said Fady Shammas, general manager of Arabia Insurance and recently elected new member on the board of insurance association ACAL. Other board members of the association voiced similar comments. When agreeing to sponsor the drafting of the law, the World Bank made it a specific aim for the project to create a law that would not only aid Lebanon but serve as a model for a large number of developing countries in all parts of the world. And the World Bank was so convinced of the quality of their final product that their experts already started presenting the document as a model insurance law in other countries. There can be no arguing against the point that being known as a country where a world-class exemplary insurance law was implemented first would serve Lebanon extremely well in heightening its reputation to becoming an international reference. Becoming that reference, however, would need a reasonably fast adaptation of the draft – and fast action on insurance legislation is not a matter of record in a country where implementation of a law on mandatory motor insurance broke all records for procrastination. But it may be that the past does not have to repeat itself. “It is our duty to assist in the progress of the new law. I call upon all colleagues that this law should be entering into effect in 2005,” said Shammas. “There is no reason why it shouldn‘t. Eight months would be enough.”

The General Arab Insurance Federation (GAIF) is the umbrella organization for the insurance industry in Arab countries. Based in Cairo, Egypt, GAIF biannually convenes the regional sector’s landmark conferences. This year, the event is taking place in Beirut from May 10 to 12, and prepared by a committee chaired by Abraham Matossian, president of the Lebanese insurance association, ACAL. The Secretary General of GAIF, Abdul Khaleq Raouf Khalil, gave EXECUTIVE an interview explaining the role and positions of the Federation.

How many companies are members in the GAIF?

A: The Federation is an international Arab body, comprising 237 insurance and reinsurance companies, associations and national insurance unions. GAIF essentially aims to support relations among Arab insurance bodies and markets in order to promote cooperation among them and coordinate their various activities, with the aims of protecting member interests and developing the insurance sector in the Arab region.

By what methods are you pursuing those aims?

A: We concentrate our activities on four areas and main objectives. These areas are a) achieving economic integration among insurance markets in Arab countries; b) developing the insurance sector in the Arab region; c) supporting and developing business opportunities and activities of Federation members; and d) enhancing cooperation between the Federation and other Arab and international organizations and bodies. For each of these areas, we have identified a set of measures that we view as instrumental in furthering our aims.

Could you give us some examples of specific activities?

A: In seeking to achieve economic integration among Arab insurance markets, our activities include examining insurance legislations and systems in Arab countries, cooperation with Federation members in establishment of joint insurance companies, as well as cooperation in matters that could promote investment policies in insurance and reinsurance. We also strive to promote the Arab insurance market as a unified entity on the international scene. For developing our region’s insurance sector and dealing with the issues pertaining to Arab insurance activities, we are, among other things, engaged in forming both permanent and temporary expert technical committees and in establishing service and GAIF-affiliated consultancy centers that offer members technical, legal, and investment consultancy.

You are also committed to the education of Human Resources in the region?

A: Yes. We regard it as important to improve the technical and educational levels of employees in Arab insurance markets by exchanging expertise and information. To this end, we support the establishment of specialized insurance centers and institutes, along with the implementation of training programs and the organization of insurance conferences and seminars.

What role does Arabicizing of insurance language play in your efforts to integrate the sector?

A: Human and general resources available in Arab insurance markets must be employed to the greatest benefit. Arabicizing the insurance language means creating a unified terminology in Arabic and setting unified templates for insurance contracts, reinsurance agreements and other documents. This would help greatly to coordinate work among insurance companies in Arab countries.

How does GAIF contribute to the creation of new business opportunities for member companies?

A: Possibilities in this area begin with the publication of magazines and books that contribute to spreading awareness and integrated scientific thought in the insurance community and range to provision of arbitration and conflict mediation services for members. Conducting studies on the sector’s problems, collection and dissemination of statistics and information and regular expert meetings also are tools in developing the environment for new business growth for Federation members.

And what do you do to further the cooperation between GAIF and other Arab and international bodies?

A: We participate in international conferences and seminars related to insurance where we also coordinate the presence of Federation members by organizing exhibition involvement and stands. We extend a standing invitation to Arab organizations and bodies that are interested in insurance to attend our Federation’s conferences.

GAIF members will hold their 25th general conference this month in Beirut. Do you expect the event to mark a turning point for Arab insurance companies?

A: Beirut is preparing to host the 25th GAIF conference under the theme of “Arab Insurance: A Future Outlook.” We hope the conference will issue resolutions and recommendations that can be applied and would positively reflect on the Arab insurance sector.

What is the GAIF position on the role of insurance in developing Arab societies?

A: The Arab insurance industry plays an important role in supporting our national economies by providing insurance protection to individuals and institutions. This industry is also a main pillar of society as it gathers capital collected from insurance premiums and invests that capital in various economic areas, which reflects positively on the socio-economic level.

Mr. Khalil graciously granted this interview to EXECUTIVE via electronic transmission in Arabic, from which editorial staff extracted the English translation.
 

Toward the end of last month, insurance managers from the Middle East and North Africa crowded onto the website of Saudi Arabia’s Monetary Agency (SAMA) to download the final version of the kingdom’s new insurance law. Many an executive surrounded himself during the following days with the new Lebanese insurance draft law and the Saudi law.

Years in the making, the Saudi law defines a new insurance regime that provides sector companies with a window to a potential boom in what is currently the region’s most interesting insurance market, with a per capita expenditure of merely $46 in 2002 and an insurance penetration of 0.35%. According to statistics published by Middle Eastern ratings agency i.e., this makes Saudi Arabia the lowest ranking oil economy in terms of insurance penetration.

The law’s announcement also points to an issue at the heart of the Arab world’s insurance industry concerns: the disparate regulatory environment. Observers and industry members widely agree that regulations have been, and still often are, either insufficient or damaging to insurance development – the latter occurring mostly in countries where protectionism eliminated competition on government projects. A paper analyzing strengths, weaknesses, opportunities and threats (SWOT) for the Middle East insurance sector in the year 2000 by then vice-chairman of Arab Reinsurance and Insurance Group (ARIG), Ali Al Bahar, stated “laws governing the insurance industry across the Middle East are not uniform. This hinders cross border activity.” He went on to note that the practice of protected markets “hindered many companies from enhancing their products and services.” Self-defeating underwriting practices in some ruinously over-competitive markets, under capitalization of many insurers, one-sided portfolios and lack of internal transparency were other weaknesses listed in Bahar’s paper, juxtaposed by a smaller number of strengths, including the absence of natural disasters, high returns on shareholder equity, and wide availability of products. Promoting harmonization of regional insurance laws is one of the core aims of the General Arab Insurance Federation (GAIF), said the secretary general, Abdul Khaleq Raouf Khalil, in remarks to EXECUTIVE outlining the Federation’s principles and policies. In Khalil’s views on regional industry concerns, the era of economic globalization created new challenges to Arab insurers by opening these “promising markets to international companies, which made giant companies flock toward them.” As a result, established companies in Arab countries faced the challenge of “confronting weak insurance awareness comprehensively by unifying efforts among institutions.” Khalil named insurance education in schools and insurance promotion through the media as desirable means to increase awareness but specifically called upon governments to aid the sector by reducing taxes on insurance and offer incentives for policy buyers.

In context of larger demographic and cultural changes, societal provisions for retirement plans and pension funds are issues of monumental dimension in the Arab world. According to recently published research by Lebanese financial firm Saradar Investhouse, the share of life insurance premiums out of total premiums is remarkably low in nearly all Arab countries. Ranging from 31% in Egypt down to 4% in Saudi Arabia and 1% in Syria, life insurance ratios are in stark contrast to developed markets, where life insurance and wealth creation through insurance products dominate. Also in global averages for developed and developing countries, life premiums outweigh general insurance, said the report.

Executives from Arab insurance companies point to a number of reasons for the Middle East’s low acceptance rate of life products. Throughout most of the period following the eruption of their national wealth (which in some countries coincided with their independence), oil economies in the Gulf region provided their citizens with extensive free welfare assistance. In a few countries, selling of life policies was simply outlawed. Population growth and experiences of economic and cultural transformation have begun directing these societies towards appreciation of the tools that life insurance offers. However, communal and religious identities in Arab countries run strong, and carry an element of rejection to life insurance on account of dual factors. On the one hand, many Muslims abstain from buying standard life insurance products because risk concepts and investment structures of conventional plans are forbidden under the Islamic legal canon. On the other hand, the notion of ‘life insurance’ also carries emotional messages that can be interpreted as attempts to outwit the creator and deny the sole divine authority over life and death.

Arab advocates of the benefits of life insurance thus have been emphasizing that the real character of a life plan lies in financial safeguarding of people’s loved ones and in preparing for the future. And in course of the overall trend to evolve Islamic finance, insurance companies in Muslim countries are working towards a stronger presence of TAKAFUL insurance, that is insurance where policies and investment methods are in compliance with SHARI’A rules, satisfying both Islamic religious and secular supervisory standards.

Insurers involved in TAKAFUL, including subsidiaries of global financial player HSBC, speak of a great potential. However, provider experiences do not yet suggest that sales growth of either Islamic or conventional life policies would suffice to meet the region’s needs for wide spread wealth creation and building of pensions. “Some insurance and reinsurance companies are building experience with TAKAFUL, but it is yet premature to pass judgment on the feasibility and relevance of these concepts,” opined the deputy general manager of regional reinsurance firm Arab Re, Tayseer Treky. Given the youth-heavy demographic structures of the large and populous Arab countries – from Algeria and Egypt to Iraq, Saudi Arabia and Syria, as well as smaller countries such as Lebanon – in conjunction with severely underpowered public sector social nets, planning for ageing populations appears as a need that will only increase in importance and urgency for decades to come.

In relation to this massive socioeconomic issue, concerns over intra-regional reinsurance capacities may be of lesser long-term consequence, but they have been weighing on the minds of Arab insurers for many years, and attracted a massive increase in attention after global reinsurance markets began to harden four years ago – and more so in the aftermath of September 11. Numerous Arab insurance companies felt hard pressed by the sudden drop in reinsurance availability, and industry members renewed calls for strengthening regional reinsurance pools. For the region’s reinsurance providers, the development offered a welcome opportunity. Nonetheless, managers do not dream of replacing the international firms in the market. “We do not look to international reinsurers as a threat. Reinsurance is international per se,” said Treky.

All deliberations of economics and business concerns in the Arab world are void without paying reference to regional security and political issues. Every Middle Eastern war, from 1948 until the 2003 Iraq invasion, dented the economic stance of the insurance industry to at least some extent. The abrupt decline of the Lebanese standing as the region’s avant-garde location for insurers after 1975 and the downturn of the Iraqi market after 1990 were both directly conflict-caused. And fundamentally, the regional insurance outlook will not be completely positive in the absence of peace.

Future prospects of individual markets with the greatest development potential thus are subject to the two key influences of political stability and improvement and liberalization of regulatory regimes. Iraq shows the strongest current promise of a yet to be realized huge peace dividend for insurance operators. Saudi Arabia is the encouraging example of market opening and regulation for the day, Libya is also en course, Syria another candidate for opening up. Countries that have a history of a strong private sector insurance market and countries that have successfully established and implemented advanced insurance legislation have the best prospects to serve as centers for Arab insurance development. Bahrain, where authorities adopted ambitious aims of establishing a major financial hub, is the noted example for the latter scenario, Lebanon the indisputable representative of the former. Veterans of the Lebanese insurance industry do not tire to declare that the Human Resources, experience and expertise concentrated in this country create a fertile ground suited like no other country in the region for fulfilling the role of insurance center. In view of the benefits of multi-polar structures and respectful competition, the Middle Eastern insurance industry would be extremely well served if these two and eventually additional countries were to evolve into centers of insurance excellence. Sound domestic markets with healthy, well-governed companies and exemplary supervisory regimes are required as ingredients for achieving such functionality for either country. In the opinion of Abraham Matossian, president of Lebanon’s insurance association, ACAL, and head of the event’s preparatory committee, the 25th GAIF conference represents a good omen for developing Lebanon’s role in the Arab insurance world. ”This is not one of many conferences,” he said. “More than 1000 participants have registered, which is an unprecedented number. Our topic is the future of Arab insurance. The fact that the GAIF is convening here this time is unusual because the conference never before assembled twice in the same country within a twelve-year period, and what further adds to its importance is the fact that this is the Federation’s silver jubilee conference.”