Executive Magazine

An analysis for 2013-2018

by Dany Baz & Thomas Schellen June 18, 2019

written by Dany Baz & Thomas Schellen

Banks included in Bankdata’s classification for alpha and beta banks with deposits respectively exceeding $2 billion and $0.5 billion are regarded by many international analysts and local banking industry observers to represent the top tiers within the Lebanese banking sector of 59 banks, comprised of 46 commercial banks and their 13 subsidiaries.

Together, the 16 alpha and 11 beta banks are the dominant banking players in the domestic market and are the only two banking groups with foreign presence. Alpha and beta banks, according to Bankdata’s analysis, also represent 96 percent of loans issued by the banking sector over the past five years. In this period, they injected $10.8 billion into the economy as they grew their loan book from $60 billion in December 2013 to $70 billion at the end of 2018.

Analyzing the provision of loans by these banks within the five-year period under consideration, the highest growth in lending activity was registered in 2014, with an increase of $6.8 billion, or 11.4 percent in year-on-year comparison. Loan growth gradually dropped to $3.8 billion in 2015, and then stalled at $1.5 billion yearly in the following two years, 2016 and 2017; it dipped into a negative growth of -3.8 percent at the end of 2018.

Further analysis highlights that the decrease in total loans was mostly due to the drop in foreign loans over the period. The overall growth registered in 2014 was evenly distributed between domestic and foreign loans, but after an exceptionally strong growth in foreign loans at the start of the period—+22 percent in 2014, followed by a mild increase of 2.9 percent in 2015—this growth fully reversed into negative territory in 2016-2018, in a development presumably related to currency pressures in Egypt and Turkey in the past three years. Consequently, in analysis of the five-year trend of the lending activity by Lebanese banks in foreign markets, as reflected in the banks’ consolidated figures, the end-to-end picture on these loans over the period is quasi -flat, with a growth of merely $126 million.

In parallel, the domestic loan book continued growing over the period 2013-2017, representing 99 percent of the growth in banking sector lending—and noting that the Lebanese banking sector’s loan book consists of 74 percent of domestic loans.

Loan developments in Lebanon, owing to the policies of Banque du Liban, Lebanon’s central bank, were isolated to a major extent from foreign exchange pressure that globally affected emerging markets under the Federal Reserve’s move to a tightening of monetary policy at the end of 2015. Other factors and unconventional influences came to bear on the Lebanese lending market in the past three years, as witnessed in the domestic lending developments of Lebanese banks. Notably, negative growth in the amount of foreign currency (FC) denominated loans between 2016 and 2018—after FC loan growth in 2014 and 2015 that was in line with the overall growth of loans in those years—translated into a net increase in the domestic loans in foreign currency portfolio of $5.7 billion. This compares with a net increase of loans denominated in Lebanese lira to $5.1 billion over the analyzed period.

In a context where dollarization of domestic loans steadily decreased from 75 percent in 2013 to 70 percent in 2017, LL-denominated loans saw double-digit growth annually until end of 2017, but contracted by the equivalent of $1 billion (-5.9 percent) in 2018. The overall ratio of loans to deposits dropped from an average of 37.7 percent for the 2013-2017 period to 36 percent in 2018. The breakdown by currency shows that the loans to deposits ratio in LL increased from an average of 25 percent in 2013-2017 to 29.3 percent in 2018; the ratio in FC dropped from an average of 43.2 percent over the same period to 37.1 percent in 2018.

Over the past five years, alpha and beta banks in Lebanon have strengthened their provisioning against the impacts of a low-growth economic environment. These banks increased their specific provisions for non-performing loans from $1.5 billion in 2013 to $2.3 billion in 2018, a hike of $766 million. Furthermore, collective provisions were increased by nearly $500 million and reached a peak of $1.1 billion at year-end 2017. Thus banks undertook conscious efforts to shield themselves and the stakeholders in the Lebanese economy from risks that could materialize as loan takers among households and enterprises face downward pressures on their finances.

Lebanese banking sector
The following infographics refer to alfa and beta banks

Net primary liquidity to deposits by currency

June 18, 2019 0 comments

A potentially important step toward a new social contract

by Executive Editors June 10, 2019

written by Executive Editors

As a democracy, Lebanon has a sovereign. This sovereign—which the constitution affirms to be the people of Lebanon—has, for the longest time, appeared remarkably unconcerned over a very specific dereliction of duty by its public officials. The dereliction in question was the government’s serial failure to produce a sane, credible, and timely budget, and the sovereign indifference was the near universal quietude over the failure. Moreover, such practical irreverence of the budget’s crucial functions has festered in the Lebanese political body and government since the days of the elder Hariri until last year, when a late and astonishingly unrealistic budget was rushed through.

Although the Lebanese body politic has, over the years, become increasingly irate about the corruption of its many political chieftains, complaining that thieves, hoodlums, and incompetents run their polity, the same body politic did for many years not take to the streets to demand a responsible budget from its cabinet. Thus, while the politicians did not produce, the people did not insist on their acting responsibly. Small voices of the people and civil society stakeholders calling for a budget were academic, self-interested, anemic, and ineffective.

It would be a waste of energy to try and list all the reasons for this specific non-performance of state and citizens, even as the civic and public budgetary indifference were related to the country’s being overburdened with existential concerns. However, this past state of budgetary affairs is nonetheless galling in practical and philosophical terms. This is because everybody with even the most rudimentary understanding of anything resembling political economy should understand that a Lebanese state with no budget is a Phoenician trireme lost among dangerous reefs before an unknown coast.

In this sense, anybody examining the risk that a budget-less course meant for the ship of the Lebanese state and its crew of many communities, could not pretend that the perils were not mounting. Nor could one assume that nonexistent budgets would result in just a tiny and diminishing smidgeon of deficiencies—these deficiencies had to accumulate and were moreover incorrigible. You simply cannot ameliorate by one iota something that does not exist.

Now, in late May 2019, the Lebanese people have been presented with a reformist budget. The first thing that must be acknowledged about the process of designing this budget is that the involved ministers and the parties they represent sent out signals of sincerity and seriousness. But it also is clear that in 2019, the chickens of years of waste and indifference have come home to roost. They did so in two forms.

On one hand, citizens concerned over the assumed loss of their entitlements rose up in protests that were often described as preemptive. Case by case, these protests may or may not have had validity as material concerns. Taken all together, the protests also may have, as some experts allege, conveyed to international observers that the new budget has real austerity teeth.

But in another perspective of these protests, which in May 2019 often looked premature more than anything else, would be to consider them as multifaceted signal that Lebanese people have learned to distrust their government in response to innumerable deceits they were subjected to by their leaders in the last 20-30 years. At the same time, however, as “preemptive strikes”—a word choice that, at least in peace-oriented thinking, smacks of morally repugnant military actions—in defense of entitlements, the hasty protests did not smell healthy against the background of the public’s previous indifference concerning the state’s ability to finance an increasingly burdensome range of entitlements. Nor did they serve to reduce concerns over the likelihood of future social conflicts that could result in economic damages of magnitudes that are in no proportion to the value of the entitlements that various social groups might be seeking to protect.

With regard to the interpretations of the budget process by international and local analysts, the budget draft and its design process were met with the degrees of skepticism that must be expected from herds of economists. As analyst perspectives are informed by the past performance of the objects or matters they study, examinations of the 2019 budget and of different scenarios of fiscal and economic developments of Lebanon in the next few years, struck the reader as anything from being tainted by disappointment of failed and insincere political promises in the past quarter century to containing heavy doses of questionable economic modeling and vulnerable assumptions.

Much remains to be done

Whereas the recent views of experts thus vary from emphasis on the 2019 budget’s short-term importance for the state’s ability to stave off financial draining of hard currency and instill investors with new confidence, to a medium-term focus of the budget’s alleged potential to improve fiscal balance and real GDP growth, or create a turning point in the evolution of Lebanon’s debt-to-GDP ratio, such narratives are all constructs produced under conditions of uncertainty.

The only thing that one might assume with a reasonable degree of probability is that the next budget will not be perfect. The draft and resulting 2019 budget law cannot be expected to be void of miscalculations and understated cost expectations, regardless of the number of sessions and hours of deliberations which are invested at the levels of executive (Council of Ministers) and legislative (Parliament).

As practical measure for improving the management of Lebanon’s political economy in the coming period, the budget imposes the sacrifices that people will not commit to otherwise. As such, the budget may save the state’s economic neck.

However, the budget can potentially also be an important step toward a new social contract. Devising of new social contracts is a universal challenge and issue of concern to societies around the world these days, as new contracts are needed for the age where the previous liberal democracy model—which since the mid-20th century postulated that the combination of free markets and liberal democracies to be unbeatable for the improvement of peoples’ prosperity and wellbeing—can no longer be sold as the one and only winning ideology for existence in a simultaneously fractured and digitized global community with new definitions of the wealth of societies, global progress, sustainability, and environmental and social priorities.

In the fading age of liberal democracies under American political-economic tutelage and claims to ideological leadership, social contract thinking was informed importantly by the philosophy—formulated by American thinker John Rawls almost 50 years ago—that a society of reasonable people will acknowledge the primacy of liberty as well as the reality of inequality in economic existence. But this understanding is not complete without the mandate that a social contract in such context must ascertain that unequal distribution of wealth is beneficial to the least advantaged members of society without any ambiguity. For a country, this philosophical aim is the moral mandate to structure society in such ways that unequal distribution of economic assets leaves the least-advantaged people better off than they would be under any other form of economic distribution.

It must be said that Lebanon, under its social contract with its rentier and entitlement drivers from the post-civil war years until today, has not made any progress toward implementing a society where the least-advantaged are better off. While unequal distribution was the country’s most prominent economic and social determinant for the last 25 years—arguably much more than the oft-debated consociationalism of the political system and even more than the proverbial entrepreneurial orientation of the Lebanese—the failure of this system to benefit the least-advantaged among Lebanon’s people is undeniable. Poverty rates tell the story that the opposite has been happening.

From this vantage point of seeing the 2019 budget not only as something practical that is needed for the survival of the Lebanese nation and its protection against international financial interventions that would be even costlier to the people than the new avowedly reformist and restrictive budget, the viability test will be not if the percentage targets for deficit reduction, revenue generation, and other ratios are realized with digestible margins of error. The philosophical test for the budget will be if it will improve the lives of the least advantaged and bring Lebanon closer to developing a new social contract.

And yet, over the many years of a state without a budget, it would have been quite the delusion to expect any Lebanese group to have donned their yellow vests to scream in public and protest that the management of their free and independent nation was conducted by core constitutional institutions—the legislative and the executive branches of government—without diligent observation of their duty to issue and implement an annual state budget. It would have been even incomparably more utopian to ask the people to volunteer personal sacrifices for the national wellbeing.
Now, in late May 2019, the Lebanese people have been presented with a reformist budget. The first thing that must be acknowledged about the process of designing this budget is that the involved ministers and the parties they represent sent out signals of sincerity and seriousness. But it also is clear that in 2019, the chickens of years of waste and indifference have come home to roost. They did so in two forms.

Much remains to be done

The experts on all sides, and in all international institutional stakeholders in the Lebanese reform process, have, of course, still much to do in pouring over the figures and implications of the 2019 budget, but it would not be the wisest thing to assume that this budget and its confessed target figures on revenue enhancements, waste cutting, etc., already constitute a trustworthy treasure map that is viable for setting the Lebanese state’s fiscal course over the next three to four years.

Whereas the recent views of experts thus vary from emphasis on the 2019 budget’s short-term importance for the state’s ability to stave off financial draining of hard currency and instill investors with new confidence, to a medium-term focus of the budget’s alleged potential to improve fiscal balance and real GDP growth, or create a turning point in the evolution of Lebanon’s debt-to-GDP ratio, such narratives are all constructs produced under conditions of uncertainty.

But on the philosophical upside of all this, the struggle for a new budget in Lebanon can and should trigger much more than a fiscal discussion for the year 2019 with implications for the coming years and the five-year deficit reduction targets that Lebanon has made commitments to in April 2018.
As practical measure for improving the management of Lebanon’s political economy in the coming period, the budget imposes the sacrifices that people will not commit to otherwise. As such, the budget may save the state’s economic neck.

June 10, 2019 0 comments

Last word Opinion

Press freedom in Lebanon today

by Paul Morcos June 7, 2019

written by Paul Morcos

At the time when it is essential for the press to be independent, when everyone should be investing their efforts into safeguarding the well-being of the press, instead, the world over, there are economic, religious, political, and legal pressures that are controlling the freedom of expression of journalists, media outlets, and even citizens themselves.

Freedom of the press has always been perceived as a trademark of democracy. It is protected by both local law and international convention. In the fundamental provisions of the Lebanese constitution it is stated that “Lebanon is a democratic parliamentary republic based on respect for public liberties especially the freedom of opinion,” while article 13 stipulates that “the freedom to express one’s opinion orally or in writing, the freedom of the press, the freedom of assembly, and the freedom of association shall be guaranteed within the limits established by law.” Internationally, the first principle of the declaration on media freedom in the Arab World—adopted on May 3, 2016 in Morocco—verifies freedom of expression, including media freedom, as being a fundamental human right to seek, receive, and transmit information and ideas of all kinds through any means of communication, even across frontiers.

The fundamentals of a democratic society are the rotation of power, freedom of expression, and independence; if any of these are lacking, the nation or state shall no longer be considered democratic. In Lebanon, the relationship between the media and public opinion remains ambiguous, in the sense that media freedom is juxtaposed with partisanship and hidden or open dependencies. This, unfortunately, results from most media institutions being dependent on the influence of religious communities and funding from the different political parties.

Freedom of the press in Lebanon has always been at risk; many Lebanese journalists have been assassinated for their opinions. In honor of World Press Freedom Day, celebrated on May 3 of every year, the regional office in Beirut of the United Nations Educational, Scientific and Cultural Organization, organized a conference on May 2, 2019 entitled: “Media for Democracy: Journalism and elections in times of disinformation.” During the event, it was revealed that between 2016 and 2019 around 100 summons of journalists were recorded in Lebanon. The main reason behind these summons were journalists turning to social media to publish their personal point of view on certain subjects. These numbers are shocking and increasing from one year to another. Lebanon’s press freedoms have been regressing since 2015 because of these arrests.

Can we expect this issue to be resolved when almost every media institution is politicized? Can we safeguard the freedom of the press at a time when social media has—for better and for worse—allowed anyone to disseminate information? Can we preserve freedom of the press when laws are not being respected anymore due to a lack of authority and mal implementation?

In civil states everyone’s rights are well preserved. The Lebanese political system allows for freedom of expression and of the media; had this been obstructed we could no longer call Lebanon democratic. It is a journalist’s job to report the news impartially and with objectivity, yet the media landscape in Lebanon—with the affiliation of media outlets to certain political forces—makes this difficult, and self-censorship has been common among journalists in the country.

Media is a major leeway for people to communicate their ideas and opinions; it is the window that exposes them to news and information. More importantly, it remains the crucial ombudsman watching over the performance of the ruling bodies. That is why it is essential to support its freedom and safeguard it.

For us to achieve full press freedom, the government should take legislative actions through, for example, reviewing the current laws pertaining to media and information, passing new laws, enacting the laws relating to detecting corruption and the data protection act, and modernizing the penal code. This, however, will not be enough if we suffer from a lack of commitment to the ethical and professional standards required to realize full freedom of the press.

June 7, 2019 0 comments

Hospitality & Tourism Saudi return

Five star hoteliers preparing for forecasted boost in tourism from Saudi Arabia

by Nabila Rahhal June 7, 2019

written by Nabila Rahhal

The rising temperatures in Beirut signify a rapidly approaching summer, typically a peak tourism season in Lebanon and one that five star hoteliers in the country are eagerly anticipating. Tourism in Lebanon has been slowly getting back on its feet over the past four years—thanks to a diversification of markets that included European and South American visitors to the country—but hospitality stakeholders expect 2019 to be the best in terms of visitor numbers to Lebanon since 2010.

The reason for this unabashed optimism largely lies in the Gulf, specifically in the lifting of the travel advisory against Lebanon by Saudi Arabia in late February. Saudi nationals had been warned against travel to Lebanon for almost seven years—although the advisory was briefly lifted in 2017 only to be reinstated following Prime Minister Hariri’s retracted resignation—and over that period there was an almost consistent decrease of visitors from Saudi Arabia to Lebanon.

Lebanon’s five star hoteliers are hoping the lifting of the travel advisory means the tide has changed and GCC nationals will be flocking back to Lebanon this summer in the same volume they did pre-2012.

The reunion

Following the lifting of the travel advisory, some hotels, such as the Phoenicia Hotel, say they felt an almost immediate positive impact on their occupancy rates, according to Tracey Bolton, its cluster director of sales and marketing.

Others say the real upshot of the lifting of the travel advisory manifested a bit later in the year. “Definitely, the number of visitors from the Gulf—and specifically from KSA—has increased so far in the year,” says Gilbert Zeait, general manager of Gefinor Rotana. “The effect of the lifting of travel restrictions was felt to some extent when it first occurred in February, but we can talk of a significant impact to tourism in mid-April when there were school holidays in KSA.” Speaking for the Four Seasons, its regional vice president and general manager Ramy Sayess says 2019 has been a positive year so far, and April 2019 was the best performing month since the hotel opened in 2010.

While the holy month of Ramadan is typically a slow one for tourism from the GCC countries, early indicators—interviews for this article were conducted in mid-May—suggest that Eid el-Fitr, this year falling in the first week of June, is going to be a busy period for Lebanon’s five star hotels. Nadia Madi, director of sales and marketing at Kempinski Summerland Hotel & Resort, says the property is fully booked starting from Eid and for the remainder of June with mainly Lebanese expats, and GCC and European nationals.

Bolton says all 72 rooms in Phoenicia’s sister property, Le Vendome, are already fully booked for the Eid period, and she expects Phoenicia to be fully booked as well for the same period by the time Eid is celebrated in June. She explains that their royal and presidential suites—favored by the Saudi nationals who were visiting Lebanon before the travel advisory—are being frequently booked again. “We’ve had support from the KSA market in the past five years—we’ve been lucky that way—but it hasn’t been from the big spenders, so now the average rate is intrinsically increasing again because they have started to come back and book these big suites,” Bolton says.

Zeait says Gefinor Rotana is at 50 percent occupancy for June—already an increase when compared to the same period in 2018—but explains that GCC nationals are usually last-minute bookers, and so he expects June occupancy to increase substantially during the last week of Ramadan. Zeait also mentions that the property’s suites and two to three bedroom apartments—which are part of the hotel and serviced as regular rooms—are an advantage in attracting Saudi tourists, who tend to travel in large groups.

Will they or won’t they?

Now that the Saudis can visit Lebanon freely again, the question is: Will they want to? Hoteliers interviewed generally believe that they do. Although Saudi nationals have likely developed other preferred travel destinations during their almost seven-year absence from Lebanon, hoteliers are hoping that there is truth in the expression that absence makes the heart grow fonder. Madi says Lebanon is still viewed as the “ultimate summer destination among its neighboring countries,” while Sayess explains that, based on his conversations with Saudi nationals, “they love Lebanon, and they miss Lebanon, and so for them to be able to come back, it’s like finding their first love.”

In a more pragmatic manner, Bolton explains that many Saudi nationals visited Turkey when they were unable to come to Lebanon, and now that relations between Saudi and Turkey are strained, Lebanon can reap the benefits—especially since they had not been able to visit Lebanon for a while, so it feels like a new destination to them.

The younger generation of Saudis—who have grown up travelling to the likes of London, Dubai, and even Istanbul—might conceivably pass on visiting Lebanon, but here again hotel operators are optimistic. “They will of course want to come to Lebanon because the feedback they hear about the country from those who have been here is always positive,” says Zeait. “I used to live in Saudi, and am talking from my personal experience. For those in their early 20s, and even if they had never visited Lebanon, they see it as a place where they can have fun.”

Put in the work

Although the perception is that Saudi nationals are eager to revisit Lebanon, the reality is that the global tourism market has become very competitive, and in order for Lebanon to grab its piece of that pie—and attract GCC and other international business—it has to put in the effort. “It needs a push from the government to market the destination Lebanon and reposition it, targeted at the countries which have not supported Lebanon as much in the recent past,” explains Bolton. “We work very closely with the Ministry of Tourism, and we go to a lot of trade shows to represent Lebanon—and all it has to offer in terms of history and culture—as a destination.”

Over the past three years, tourism stakeholders have indeed been working to promote Lebanon through a combined effort from the Ministry of Tourism and individual hospitality establishments, according to Sayess. In the then-absence of a steady GCC market, the European market was better developed by these stakeholders, as was the South American market with a focus on the Lebanese diaspora. This was achieved through a variety of efforts including participation in international trade shows marketing Lebanon as a destination and the organization of Visit Lebanon—the second edition of which took place at the end of May—a B2B trade show that invites international travel and tourism agencies and introduces them to all the tourism that could be done in Lebanon.

Today, both the European and the South American tourism markets are gradually growing, and so the expected boost from the Saudi market will serve to drive visitor numbers to Lebanon even higher. This is leading several tourism stakeholders to say that summer 2019 is likely to break tourism figures records, with Sayess saying his only wish is that the works in the airport will finish in time to accommodate the large number of expected visitors. While Eid el-Fitr is predicted to set the season off on the right foot, the belief is that Eid el-Adha (in mid-August) will be when visitor numbers will flow until the end of the summer season in mid-September, provided there are no unexpected negative surprises. Stay tuned.

June 7, 2019 0 comments

Entrepreneurship Financial technology

StartechEUS to provide funds and mentorship

by Lauren Holtmeier June 7, 2019

written by Lauren Holtmeier

Fintech—financial technology— is a buzzword in the entrepreneurship sphere and a fast-growing segment of the financial services industry globally and in the MENA region. In 2018, the fintech sector saw $36.6 billion invested worldwide, a 329 percent increase over a five-year period, according to UK-based non-profit Innovative Finance. Lebanon is no exception—in 2015 the country hosted 14 percent of the region’s fintech startups and was the fourth most-served market by fintech companies, according to the Investment Development Authority of Lebanon (IDAL). Despite this, Lebanon’s nurturing of local fintechs still seems to lag behind the global trend. Those Executive spoke with noted that with a highly skilled local labor force there is potential for launching successful fintech startups here, but entrepreneurs still face challenges, primarily in the form of regulatory hurdles.

StartechEUS, a new fintech hub, opened its doors on May 1 in Beirut Digital District (BDD) and hopes to help startups navigate these obstacles by serving as a one-stop-shop for budding fintech entrepreneurs. Founded by Alexandre Harkous, who is also StartechEUS’ managing partner, the new hub aims to provide funding, mentorship, and physical space to primarily late-seed phase fintech startups. Harkous is an experienced player in financial services, having previously founded BI-SAM Technologies S.A., a company that offers analytics software, client reporting, and data management solutions to the investment management industry. The hub is expected to occupy a 800 square meters space in BDD, though at the time of writing, this space was not yet confirmed. Like Agrytech, an accelerator that focuses on startups in the agri-food vertical, StartechEUS is a vertical-specific endeavor targeting a niche market.

Stephanie Abi Abdullah, BDD’s program director argues that StartechEUS will be a significant contribution to BDD. “It’s good to have them close to the startups, leveraging their expertise, and building relationships with them,” she says. “Having the first fintech hub at BDD is just natural for us.” She notes that the Lebanese Economic Vision (LEV) produced by international consulting firm McKinsey positions fintech as one of the key pillars of the Lebanese startup industry, with a high potential for success. The financial services section of the LEV sets the target for the number of fintechs in Lebanon serving the global market as rising from 15 today to 45 by 2025.

Few boots on the ground

Executive spoke with Nizar Ajeeb and Giovanni Khalil, chief technology officer and chief marketing officer at StartechEUS respectively, to discuss how StartechEUS plans to contribute to the ecosystem. They explain that the organization is comprised of three pillars: the “Finnovation Fund,” a hybrid fund of private partner funding and funding via Circular 331; the “FinHub,” which is the accelerator arm, and the “Technology Academy,” which will provide partnering entrepreneurs with training sessions and access to physical space and technology. “The main difference here is that we aren’t a silo,” Ajeeb says. “We’re not only an incubator or an accelerator, we’re all of these together.”

Khalil tells Executive in a follow up email that they expect the Circular 331 portion of the hybrid fund to equal $25 million. When asked about the size of funding raised from the private sector thus far, the duo declined to comment. They say, however, that chosen partnering startups will be eligible to receive between $50,000 and $2 million in funding, depending on which stage they are at in their life cycle.

Asked how many startups StartechEUS would be able to support at any given time, the duo declined to give a number, but did say that each startup would be in the program between five and seven years until exit into global EU and US markets. The focus on these markets is driven by the idea of job creation for Lebanese graduates as well as increasing the foothold of international companies in Lebanon, says Karl Naïm, chief investment officer and partner at StartechEUS. Currently, StartechEUS lists one company in its portfolio, OneWealthPlace, also founded by Harkous. Ajeeb says they are conducting due diligence on two potential companies now, which, if successful, would be announced via their website.

With just two potential companies in the pipeline and only one in their portfolio, the question remains if there are currently enough fintech startups in Lebanon—or enough in the development pipeline—to justify an endeavor of this scale. Especially considering that StartechEUS plans to focus solely on fintech companies started by Lebanese or members of the Lebanese diaspora, limiting their potential market.

Executive posed this question to Fawzi Rahal, managing director of Flat6Labs, a regional accelerator program, and his reply was blunt: “No.” Despite a growing number of fintech pitches, Rahal says that only five of Flat6Lab’s 26 startups are fintech. While this constitutes 19 percent of their portfolio—not an unimpressive portion—he says there are not enough fintechs in the rest of the country that would be suitable for StartechEUS to invest in. Most of the fintech startups that apply to Flat6Labs cannot, or should not, be validated in Lebanon, Rahal says, because either the idea is not suitable for Lebanon, or the infrastructure is not available to test and develop an idea.

Negative perceptions

Ajeeb says StartechEUS will look for graduated startups from the likes of Flat6Labs to feed into their program, and on this front Rahal seems optimistic. “For us, we see [StartechEUS] as a healthy advancement of the pipeline,” Rahal says. “Because when startups do graduate from Flat6Labs, right now the only other option for fintechs is Phoenician Funds.” Focusing on seed and early stage companies, Phoenician Funds does offer support to fintech, but it is not the VC’s sole focus.

As far as the diaspora is concerned, attracting investment from abroad is challenging. The 2018 Arabnet report on the Lebanese Innovation Economy notes that while the diaspora is large, it has proven challenging to motivate them to invest in Lebanon. Most investors do not want to invest in such a risky environment and opt for other, less volatile markets. There is also a perception problem with Lebanese products; if there is a cheap Lebanon-based solution, it is perceived as being of lesser quality, according to Rahal. This, he says, is a perception the startup ecosystem needs to overturn by continuing to launch quality products.

Naïm says that startups StartechEUS invests in will have Lebanese talent and presence, but will not necessarily have a Lebanese holding, meaning that IP and holding companies may be located abroad. He says this should help combat negative perceptions and will facilitate smoother international adoption and expansion, and alleviate risk that may be associated with a company in Lebanon.

Rahal also says that for a Lebanese national in the country, going through the pipeline here is a lot easier than elsewhere in the region or abroad, as there is funding available and the overhead costs are not as high. However, for non-Lebanese, he argues there is little incentive to set up shop in Lebanon because of the difficulties faced in navigating the regulatory framework—cited by 64 percent of tech startups as a main impediment in the Arabnet report.

Currently Lebanon lacks any sort of regulatory sandbox, a testing environment used to ensure regulatory compliance and security checks for financial operations. Places like Bahrain, the UAE, Saudi Arabia, and Egypt have all introduced sandboxes linked to their central banks to encourage development in the sector, but Lebanon is still lagging.

Creating a fintech-friendly environment would require serious regulatory change from Banque du Liban (BDL), Lebanon’s central bank. Without measures from BDL, along with improvements to digital infrastructure, there is little incentive for those abroad to launch their companies here.

To expand in the region or further a field?

Ajeeb says he is hopeful the hub will be a positive contribution to the ecosystem by providing Lebanese talent the opportunity to launch their companies here, while attracting the knowledge and expertise of the global Lebanese diaspora who may have started their companies in Europe or the US. StartechEUS has partnered with Lebanese International Finance Executives (LIFE), a worldwide membership organization of diaspora-based Lebanese financiers that has over 250 finance executives, to help gain access to this talent pool, Khalil says.

Attracting investors knowledgeable of EU and US markets would be an advantage for StartechEUS, which promises to provide access to these markets abroad and regulatory compliance training, such as training on the General Data Protection Regulation that exists in the EU, to their partners.

Rahal says that Flat6Labs has taken a different approach. “We believe the first step needs to be the GCC and the MENA,” he says. It is difficult for a startup developed in Beirut to be taken to Europe, because most of the validation that must happen is easier done within the region, he says, arguing that it is easier to scale and grow a startup regionally than suddenly competing against extremely well-versed founders in Europe or in the US.

Naïm said in an email that there are successful Lebanese fintech startups abroad, like Murex that was founded in Paris. “There are no reasons why a Lebanese startup with the right idea, execution, contacts and partners, couldn’t compete globally, and StartechEUS is here to facilitate this,” Naïm says.

There are a lot of challenges that fintechs must navigate in Lebanon, especially those that seek to export their product abroad. Where perception problems and a lack of a regulatory framework will be hurdles any fintech startup StartechEUS partners with will have to leap over, Naïm seems confident that his team is prepared to help them do so. He acknowledges that the startup ecosystem in Lebanon is still in its infancy, and he agrees that as of today there are not enough fintech players in Lebanon, but says that StartechEUS’s role will be to help nurture and accelerate the vertical’s maturity through their VC funding, mentorship, and targeting of the diaspora, and added that with the backing of BDL and the banking ecosystem, pushing this initiative forward is feasible.

June 7, 2019 0 comments

Comment Economics & Policy Entrepreneurship

Lebanon’s long-awaited 2019 budget

by Fadi A. Karaa June 7, 2019

written by Fadi A. Karaa

A sobering reality emerges in the shadow of the long-awaited 2019 budget, declared by Prime Minister Saad Hariri as the most austere in Lebanon’s history. As a stop-gap fiscal rescue package, it falls short of the transformational budget, based on a grand national vision for debt reduction and upgrading of critical infrastructure that is sorely needed at this juncture. Justifiably, the refinancing of near-term maturity Eurobonds is on hold as foreign investors ponder the absence of the promised public reforms. Similarly, the CEDRE creditors—about 8 percent of the pledged amounts are grants, with the majority of the funding in new loans—have also withheld the pledged funding on the requirement that Lebanon undertake serious public reforms.

An unnecessary ordeal

A unanimous austerity consensus across the political class was met with anxiety, disappointment, and anger by large segments of the population, particularly public sector employees, military officers, teachers, and pensioners. The budget follows unusually gloomy statements over the last 12 to 18 months by top political and community leaders regarding the financial crisis and the severe lack of liquidity. These announcements often coincided with the customary reassuring statements of Banque du Liban (BDL), Lebanon’s central bank, regarding the stability of the currency and the health of the financial sector. This dual-track discourse has generated a sense of deep financial crisis and an overall distrust of institutions, gradually amplifying a national suspense about a possible looming disaster, and the usual flight to foreign currencies. Combined with the mounting geopolitical risks, the repatriation of large numbers of previously-employed Lebanese citizens from the Gulf countries, and the continuing burden of the refugee crisis, a national ordeal of negativity has befallen consumers and producers alike. This has affected investment and spending decisions and depressed entire asset classes, such as the real estate sector.

Since much of the pressure from creditors is tied to the high 2018 budget deficit and debt-to-GDP ratio, Lebanon should defer any further debt, and instead, reduce its total debt by enacting structural, organizational, and financial deleveraging reforms on a fast-track basis. Instead of utilizing debt to rebuild infrastructure, Lebanon should reorganize the power sector into independent private utilities, with equity and debt issues to be owned by a majority of Lebanese investors. The delivery of a long-awaited reliable electricity sector should be entrusted to competitive private utilities subject to public regulation regarding rate setting. A reform of the capital markets in support of an “Invest in Lebanon” program would help reduce debt through new infusions of capital into the public and private entities, and create a new investment vehicle for future employee retirement plans.

Lebanon has made inroads in startup formation, information services, tourism, healthcare, and higher education. With potential major new revenues from energy production within the next decade or so, Lebanon now needs a long-term vision for success. It needs to chart a clear course on the enlightened socio-capitalism spectrum, both geopolitically and economically, with similarities to Switzerland, Singapore, Monaco, UAE, and others. This vision must be communicated to Lebanese citizens and international markets alike, in order to elicit the essential trust in the direction of the country, and the acceptance of the austerity measures as a means to an end: a new more vibrant Lebanese economy.

The Lebanese political leadership has elected an unusually tough stance regarding the austerity measures. To many, such cuts—while unwelcome—could be acceptable, if perceived as a worthwhile sacrifice and an investment in the future of Lebanon. The communication of such measures—which affect not only public employees and pensioners, but also investors by boosting the tax on interest income—as a national short-term sacrifice for all, is critical to their acceptance and renewed public confidence.

Lebanon is at a crossroads, but also a tipping point. It can either solve its problems through sound long-term measures, or continue to avert the short-term crisis by further mortgaging the future and increasing a future risk of default. In order to gain the trust and patience of its population, it is in sore need of a grand vision, better coupled with prudent management of its finances, and a deleveraging and modernization of the public sector, in order to lead its citizens to a period of renewed prosperity. Adding more debt to the balance sheet is by no means the highest priority.

June 7, 2019 0 comments

Banking Special Report

Reduce the gender gap in Lebanon’s finance sector to boost productivity and growth

by Zeina Zeidan June 7, 2019

written by Zeina Zeidan

Lebanon’s capital market needs a turbo boost. The Beirut Stock Exchange (BSE) has long been hobbled by the lack of companies listed, and the lack of associated opportunities. This is reflected in the BSE’s low market size—$9.2 billion—and in its performance. In 2018, the BSE was the fourth worst performing bourse in the world, down 15 percent on 2017, with overall trading down by 36 percent. The downtrend has not eased in 2019. At the end of April, the BSE’s market capitalization had shrunk to $8.8 billion.

This needs to change. Given the current economic condition of the country—the runaway debt and the need for reforms—it is necessary to invigorate the economy by supporting and empowering our capital markets to accomplish three interlinked objectives: to direct savings into qualified enterprises, to invigorate trading of equities, and to attract liquidity.

It has been established by ample research that efficient and well-regulated capital markets are great tools for improving the national economy. This fact has been extremely well understood by Banque du Liban, Lebanon’s central bank, and thus over many years Lebanon has seen attempts to create and empower its capital markets.

Initiatives with this aim have been present since the BSE was reopened in the mid-1990s and have entailed moves like the creation of a Capital Markets Authority in 2011 and more recently, the approval by the cabinet to transform the BSE into BSE sal. The decision to establish the BSE as joint stock company, taken in 2017, was a welcome move to many stakeholders in financial markets, such as myself, and it is also highly desirable to see efforts that would implement the partial privatization of BSE sal through the selling of shares to the private sector, an action that needs to be given a green light by the newly formed cabinet.

The role of women

Another new initiative, which has been under preparations for several years now, is the creation of an Electronic Trading Platform (ETP). The relationship of the two entities to each other, and the question if Lebanon is best served by integrated or separately managed capital markets platforms, however, is still in need of clarification at this time.

But even as the BSE privatization and ETP projects are progressing in 2019 amidst such lingering uncertainties, much attention should also be given to another factor that could improve our capital markets. This factor is the role of diversity, and specifically the role of women in capital markets. While lost opportunity costs abound in the delays to reinvigorate the stock market, lagging behind the global development curve does have a potential upside. Discussions are underway on how best to turbo charge the capital market; it is an opportune time to tag onto the agenda the empowerment of women in the stock exchange as well as the financial sector.

Just a decade or so ago, such a notion would have been politely dismissed, if not openly laughed at in such a male-dominated ecosystem. But over the past several years, empowering women has risen higher on the agendas of global institutions such as the World Bank, the International Monetary Fund, and the United Nations, while the financial sector itself is increasingly adopting gender equality programs, evidenced in the launch of Bloomberg’s Gender-Equality Index 2018.

There are regional initiatives emerging as well, the American University of Beirut was awarded a $1.5 million federal grant by the US Department of State Middle East Partnership Initiative to create an index with the title: “The KIP Index: A Comparison of the Status of Women in the MENA Economies.” This index is concerned with creating a localized measure of women’s contributions to MENA economies through measuring recruitment, retention, and promotion of women in Arab organizations.

As a lot of attention will be paid to the privatization and development of the BSE, it is essential that the bourse reflects the global move toward greater gender equality as part of improving environmental, social, and corporate governance (ESG). This is needed not only in the financial sector, but across the board, as Lebanon’s country ranking on gender inequality reflects in many ways the underwhelming performance of the BSE. According to the World Economic Forum’s 2018 Gender Gap report, Lebanon ranked 140 out of 149 ranked countries.

Working to reduce the gender gap will not only promote equality, inclusive growth, and stability, but would have myriad macroeconomic benefits. According to the UN’s International Labour Organization, closing the gap in economic participation rates by 25 percent would have a corresponding boost in GDP (in purchasing power parity terms) by 9 percent.

While closing the gap would have a wider economic boost, more needs to be done in the financial sector and at the stock exchange. Gender equality must cover all rungs of the career ladder, especially the middle and upper rungs where there are very few women. I would know, as I am one of just a handful of women in upper management at a Lebanese financial institution. In fact, just 4.4 percent of all Lebanese firms have a female senior executive, according to a 2019 study by the International Finance Corporation, lower than the MENA average of 5.4 percent, and the world average of 19 percent.

The elevator pitch

To address this, the Lebanese League for Women in Business (LLWB) is working on a draft law to ensure a quota of 30 percent of women on boards (WOB) by 2025. It will be a challenge to ensure this is achieved in the next six years, but that is where the capital market and the financial sector itself can play a role in driving change.

It is not enough to change mindsets to get women on boards. This is where the hard sell comes in: the economic argument for gender equality. Numerous studies in recent years have highlighted the improved performance of companies and boards that have greater gender equality, but a few highlights can serve as a sort of elevator sales pitch.

Bank of America Merrill Lynch research, published on International Women’s Day this year, showed that companies with high scores on board diversity and women in management, which also have policies on diversity, had lower earnings volatility, higher returns on equity (ROE), and lower risk. In the same report, the one-year median ROE for 2010-2016 was higher for S&P 500 companies that had at least 25 percent of female representation among executives, “suggesting diversity may drive better returns.”

A 2015 Diversity Matters study by international consultancy firm McKinsey found a relationship between diversity of leadership teams and financial performance, with top quartile companies by gender diversity 15 percent more likely to have an earnings before interest and taxes above the industry median. One final point: Management diversity is of importance to female investors, with 77 percent of women in a global study cited by Bank of America Merrill Lynch stating a desire to invest in companies with a diverse management. In short, diversity is profitable.

The same can apply to the BSE. The more diverse its offerings, the more profitable it will be. And this concerns women and men alike: why capital markets are crucial for Lebanon today, what opportunities and liquidity they can generate in the country, and what are the primary triggers to activate the potential of capital markets. In March 2014, the BSE signed an agreement with Euronext, a wholly owned subsidiary of New York Stock Exchange, for the implementation of a new trading application platform that supports the expected growth in equity listing and the entry into new asset classes in the Lebanese markets.

For the ETP project we need a better understanding of which consortium would be the optimal licensee for the project, and a discussion with banks and other firms on the expertise required to ascertain that the ETP gets the right platform solution (neither too small nor outsized), technology advice, and expert staff. Other questions include market making, and the participation of banks and foreign specialist companies, such as stock market operators and technology providers.

There are also questions about how much regulation, of which sort, is ideal; how the governance of listing candidates, such as SMEs and startups, can be supported; and how governance and regulations should be optimized to enhance the size and volume of capital markets activity in Lebanon. To attract investors, it is important to tap into the very special ratio and relationship potential of diaspora investors.

Capital markets also link the present to the future, but that radical uncertainty is the secret sauce that flavors all the assumptions we have about how and in which direction the financial markets of the near future will develop.

In brief, the most important work in capital markets in the Lebanese context today is unlocking growth potentials and job creation in private companies by bridging savings silos to entrepreneurial initiatives. We need to mitigate risks through determined political will, wise leadership, and reforms. We know this involves capital markets with a strong, agile, and responsive operator that is sensitive to markets and the regulator.

There are many challenges and risks in developing markets, but we know from our experience that the way to success is not by avoiding risk. We need to facilitate superior, regulated risk taking. All players in this endeavor—and we want to be among them together with the right partners in an operator consortium—have to continually strive to balance market forces, regulation, and society.

June 7, 2019 0 comments

Banking Special Report

Attracting FDI to Lebanon

by Samer Elhajjar June 7, 2019

written by Samer Elhajjar

While Lebanon is seeking to attract significant foreign direct investment (FDI) inflows in order to stimulate economic growth, the promotion of FDI is still lagging behind. Lebanon faces two main strategic marketing problems: an unclear positioning statement, and an ineffective promotion strategy.

It is all too easy for Lebanon’s political leaders to blame regional instability for their inability to attract FDI, yet there is little evidence of the kind of thinking required at a governmental level on how to position the country as an attractive destination with a fertile ground for investments. To this day, important strategic questions remain unanswered. These include: Is Lebanon hoping to become a host country offering the most stable FDI attraction policy in the Middle East? Will Lebanon be a country where investors can achieve the highest profit margin in the region? Is Lebanon trying to be a global leader in digital innovation? Is Lebanon planning to be the most popular tourist destination in the region? What unique value does Lebanon provide to foreign investors? A strategic competitive positioning plan, including a detailed understanding of Lebanon and its relative position to competitors and different sectors, needs to be elaborated by the government.

Ineffective communications is another marketing problem Lebanon currently faces. Potential foreign investors are hearing conflicting messages from different stakeholders in the state. Lebanese delegations tend to present general descriptions of the Lebanese economy, while providing little of what potential FDI enterprises really want to know. What foreign investors need is more specific information on how they can start a business in Lebanon, what incentives the government is providing, how the government can help and support them, and so on. Moreover, an international comparison of Lebanon with its neighboring countries is rarely provided by Lebanese delegations. Lebanese delegates believe that just presenting Lebanon’s country profile, investment policy, and economic potential, will be enough to persuade foreign investors.

Marketing is central to investment promotion and critical in attracting inward investment and shaping foreign investors’ overall perceptions of Lebanon. While evidence suggests that marketing is effective in image building and producing investment (see Anthony Bende-Nabende’s 2017 update of his book “Globalisation, FDI, Regional Integration and Sustainable Development”), there are always questions over regulations, incentives, infrastructure, and the economic system and vision. Some indicators are useful to evaluate our situation. To start with is the ease of doing business index, which ranks countries against each other based on how conducive their regulatory environment is to business operations. Lebanon is ranked 142 among 190 economies, as a result of the mandatory use of legal services in the company registration process, the financial burden of starting a business, the use of notary services, and the complicated, long, and bureaucratic procedures necessary to start a business. Regardless of all of these challenges and obstacles, many good solutions can emerge in order to make it easier to start a business, including: creating one-stop shops and simplifying registration processes, developing a single electronic interface for investors, and eliminating the paid-in minimum capital requirement—reforms that are necessary before any FDI promotion.

The Global Competitiveness Index, which combines executive opinion survey results and quantitative data to compare the competitiveness of an economy, is another indicator that Lebanon needs to take into consideration. The pillars of this index are grouped to assess institutions, policies, and other factors. Lebanon is the lowest ranking Arab country on global competitiveness. The country’s score on the majority of the long-term growth pillars lags behind the Arab world’s. The main problematic factors are corruption, poor infrastructure, and an inefficient public bureaucracy. All of these elements confirm that Lebanon is not positioning itself as an easy or trustworthy location for FDI. Thus, a new mentality should be developed in the government based on updated regulations and approaches. Emotionally appealing to the Lebanese diaspora should not be our only comprehensive approach to raising FDI. The government should know that investors need a proper investment climate, good incentives, and institutional transparency.

The Heritage Foundation’s Index of Economic Freedom is also useful to guide Lebanon to improve its economy by expanding economic freedom. Lebanon currently scores 51.1 out of 100, making its economy the 154th-freest in the world. One of the many factors that causes this modest economic freedom ranking is the pervasive corruption in government contracts, taxation, judicial rulings, and real estate registration. Therefore, a public-private partnership project to provide a platform for businesses to invest in anti-corruption reform could be impactful in reducing the harm caused by corruption and improving transparency.

A favorable FDI “enabling environment,” involving the facilitation the government can give to investing companies, alongside with a clear marketing strategy are preconditions for attracting foreign investment. Otherwise, we will continue to waste opportunities, and will keep shooting ourselves in the foot.

June 7, 2019 0 comments

Business Comment Special Report

The need to reform electronic money transfer regulations

by Sami Halabi June 7, 2019

written by Sami Halabi

All over the world, every day, millions of financial transactions take place at the press of a button. The words—and now the verbs—PayPal, TranferWise, and Venmo, are to payments what WhatsApp and Facebook are to messaging. Modern electronic money transfer (EMT) services have lowered transaction costs for individuals, facilitated business growth through e-commerce, and made payments a whole lot easier for everyone—except Lebanese. Like most other services in Lebanon that lag behind the modern world—read: electricity, water, healthcare, transport, internet, etc.—the reason EMT services have not developed to their full potential in Lebanon is not an issue of competence or capacity; instead, narrow-minded protectionism and years of market dominance mean Lebanese pay what, in 2019, can only be called extortionate amounts to make payments.

Opportunity, not threat

Using available EMT services, Lebanese can expect to pay anywhere from $15 to $35 to send $500 to someone abroad. In addition to transfer fees, Lebanese consumers also face other hidden fees, such as currency exchange rates priced some 5 percent higher than mid-market rates available through modern EMT platforms. Sending or receiving money locally can be cheaper, but considering that Lebanese receive around $7.5 billion to $8 billion every year in remittances, our loved ones foot a bill they would not need to if we were in Egypt, the Emirates, or Jordan—all of which now have access to modern EMT services. What’s more, services such as direct caller billing could provide Lebanon’s unbanked with access to financial services, meaning another 55 percent of the population would start using these services. But not all Lebanese lose out from the financial status quo.

Around 65 commercial banks, along with a few money transfer institutions, are licensed to carry out domestic and international EMTs by Banque du Liban (BDL), Lebanon’s central bank. As a result, these institutions enjoy a dominant market position, and have little interest in offering globally competitive EMT fees, on the spot services, or mid-market currency exchange rates. In fact, banks have come to rely on fees as a major source of income. Non-interest income is equal to around 70 percent of what commercial banks profit from interest, according to the latest figures available from the Association of Banks in Lebanon.

In fact, only one EMT license has been issued to an ‘independent’ and ‘modern’ EMT service: PinPay. PinPay, however, was only issued that license when Bank Audi and Bankmed bought the company and vouched for PinPay’s solvability and security (Fransabank invested later). The two banks then made PinPay only available to their clients, a service other banks in Lebanon have now copied. In effect, this acquisition strategy nipped Lebanon’s only home-grown modern EMT service in the bud, bringing us all back to where we are now—still unable to make electronic payments to anyone outside our own banks without paying exorbitant fees.

In late 2018, Law 81 on Electronic Transactions and Personal Data was passed introducing electronic signatures and standards on data privacy in electronic transactions. While the law brings new hope for modern EMTs, it also places the buck squarely at the feet of BDL, giving it the sole power to update its currently broad and nearly two-decade old EMT regulations. Right now, for instance, Lebanon’s regulatory framework does not have a legal definition for peer-to-peer EMTs, electronic money transfers made from one person to another, typically through a payment application. When a market lacks this kind of clarity, it keeps companies like PayPal and TransferWise away, not to mention home-grown fintech.

It is hard to fathom that BDL is unaware of these standards, having seen neighbouring countries enact regulations that protect consumers, apply international compliance standards, and facilitate access to modern EMT services. What is easier to fathom is that there has been pressure from the banking sector not to open up easy access to cheaper, more secure, and more efficient payments—in effect preserving their market power. There is another way.

BDL needs to issue detailed and clear definitions of EMT standards that facilitate interbank transfers in near real-time, from any device, and not only through the brick-and-mortar financial institutions. For their part, banks need to see modern EMT as an opportunity, not a threat. Across the world, financial institutions have not gone broke because services like PayPal and TransferWise exist. Banks may have had to lower their fees to remain competitive, but they have benefited from more financial inclusion and even spearheaded the development of local EMT and e-commerce providers. That is the kind of innovative mindset we need in the banking sector, not one that tries to protect its revenues by keeping the Lebanese in the Stone Age—and making them pay for it.

June 7, 2019 0 comments

Banking Special Report

CMA takes the lead on new exchange

by Thomas Schellen June 4, 2019

written by Thomas Schellen

While the capital markets show on the Lebanese national financial and economic stage had been one that, for years, fit above all a characterization of spurned overtures and unconstitutional delays in the implementation of declared and legislated measures, such as the transformation of the Beirut Stock Exchange (BSE), 2019 was kicking off with the boost. Already in December of 2018, a request for proposals (RFP) went out from the Capital Market Authority (CMA) and invited interested entities to submit their concepts and express their ambitions for becoming the operators of a new exchange, known as Electronic Trading Platform (ETP) and talked about as such in financial circles for about five years. Next, at the end of February, Beirut witnessed the convening of international exchanges upon the city—whose languishing BSE has only moved further down and has long attracted unflattering epithets, such as dormant and comatose—that in the first part of 2019 saw BSE market capitalization dwindle even below $9 billion. Executive sat with Firas Safieddine, the vice chairman of the CMA to find out more.

E At the end of February, the CMA welcomed participants to a conference on securities exchanges. After dedicating your energy to hosting this, what was the value of holding an international event of this caliber, with such a wide range of topics?

The importance of the World Exchange Congress (WEC) in February was two-fold. [First] is the size of the conference and its weight internationally. The organizers of this conference plan their annual flagship event in the way that you bid to host the conference. Lebanon was chosen as winning bidder to host the 2019 event.

E But are we talking about a financial bid?

No, [bidding] is about the program and commitment. There is no financial bid. Basically [you demonstrate] how committed you are, why you want the conference to be in your country, and if it is a good time for [the WEC] to be held in a country: Will the topics affect the local market, and will they impact the international side as well? Two years ago, we were chosen to host [this event], which was the 14th WEC. According to the organizers, [this edition in Beirut] was the most successful in terms of organization, in terms of size and attendance, and in terms of international participants: [meaning] exchanges. We had more than 50 exchanges that participated and exhibited here. One has to understand in this context that the WEC is not a regulatory conference, but a conference of exchanges. We decided [as the CMA, the regulator] to take the lead [of looking to host such an event] because the [BSE] is not taking such steps. We, therefore, decided to step up and organize this.

The second important matter regarding this conference was the timing. The conference happened just at the time when Lebanon is about to witness the launch of an Electronic Trading Platform, or new exchange. By the end of May, as all the bids for [operating the ETP] have been submitted to the CMA, we will be choosing a licensee. As the WEC came at a time when we had already issued the request for proposals for bidding for an exchange, and we benefited from this [concurrence] first and foremost in terms of generating awareness of Lebanese capital markets internationally, and [signaling it] to other exchanges—and not just them, but all downstream businesses, such as consultancies, technology providers, etc., everything related to exchanges. Also, [in terms of local participation], Lebanon was there at the event, and we thus now have a lot of awareness among the Lebanese on what we have planned for the future. One of the observations that we made at the event was that we saw one bidder for the [ETP license] actually make contact with one of the international exchanges. They then worked out an agreement and issued a bid together. If you want to have a tangible success, this is a tangible success. I am not saying that this specific bidder will be the licensee, but the [two parties] at least have come together for a joint bid.

E Is it correct that the CMA was not averse to having international bidders, and in the RFP did not specify if the successful bidder can be fully international or has to form a consortium with a local partner?

Nationality was not a criterion, it was simply the readiness to offer the best business solution catered to the Lebanese market. The evaluation formula of the bids was transparently communicated within the RFP, whereby CMA has set forth the criteria weight distribution according to technical, financial business plan and market development strategies, market making commitment and operator’s ownership and governance profile.

E When talking about international attendance at the WEC event, you referred to participation of technology providers. The operating of any exchange today relies very heavily on the respective technology platform and the chosen electronic systems. Is the technology platform proposed in a bid an important factor, and does the technology provider receive an important consideration when a bid is evaluated? And how important would it be for a local bidder to have capacity for adapting such a system from a foreign provider for the local market, or could the local operator just buy such a system and run it in Beirut?

It is a possibility. Technology is one and the same. The providers of the technology are limited in number, and their systems have been adopted by most of the exchanges around the world. I think the key [for offering a strong bid] would not be the underlying technology of the platform—this is accessible to anyone. [The key bid components] would be on the operations of the ETP, the marketing of the ETP, and the understanding of the market. At the end of the day it is the business side. It is the licensee who is going to promote [the ETP] and who is going to assess what the opportunities on the capital markets are. We will appoint a licensee. The licensee then has six months to organize and open shop, but within that time, we will be working very closely together with this licensee. We have given the bidders now four to five months to understand the market, and we made ETP requirements so flexible that they can put anything on the platform, meaning they can decide whether to launch [the ETP] with the foreign exchange [platform], the SME platform, or the commodities platform, as an example.

E What is the relationship between Law 161 (2011), the conversion and privatization of the BSE as BSE sal, and the ETP?

Law 161 stipulates clearly that within one year of establishing the board of the CMA that the status of the BSE has to be switched from a government institution to a joint-stock company and that one year after that, they have to privatize it. This is clearly stipulated, and the [deadline] dates were clear. Now it has been [over] seven years [since passing of Law 161] or six years beyond the establishment of the board [of the CMA] and nothing has happened. There was advancement, a cabinet decision was taken 18 months ago [at the end of 2017] to take those two steps, but this is still hanging because of the appointments of the interim board members of the BSE have not been finalized until today and nothing has moved. Law 161 allows for the board of the CMA to license other exchanges if it deems this necessary for the capital markets. Ideally, we would have liked for one exchange to cover everything, but we are seeing this delay [in transforming the BSE] at a time when we urgently require the exchange to be much more active and much more dynamic. This is needed for many reasons, for instance the exchange can be the venue for CEDRE in terms of [public-private partnerships] PPP, and the exchange could also be the [conduit] for reducing the exposure of banks to commercial loans. [This exposure is] 110 percent of GDP; it can be a venue for moving into securitization, into factoring, and whatnot. The exchange can be the venue to help create more liquidity in the economy. We would have liked [this venue] to be one [single] exchange, but I don’t think that the BSE is ready to play such a role with the structure that it has today. Thus, we decided on the board [of the CMA] to create another exchange—not to compete with the BSE, but to complement whatever is not on the BSE today.

E But the ETP as second exchange will have a separate identity and be operated separately from the BSE by the winning licensee?

For the time being, yes.

E It might get merged at some point?

This remains to be seen. As I say and want to repeat, we would like it to be one exchange.

E You mentioned that the licensee for the ETP would have six months to open shop, and there was some talk about July 2020 for the opening. Is there a fixed target date for the commencement of the ETP operation?

It will be up and running in the first quarter of 2020.

E Could that mean that everyone migrates from the BSE next year?

Not necessarily at all. There is no incentive for them to migrate at the moment. What the new exchange will be focusing on are the products that are not listed on the BSE. The BSE today does not have forex trading, it does not have commodities trading, it doesn’t have reduced requirements for listing of SMEs, and there are no clear directives to support startup listing.

When we look at the prospects and expectations for the Lebanese economy as of today, also considering the reform and austerity aspects of the budget that has been under finalization this month, things are moving—albeit slowly—and outcomes in the long term could well be very positive.

E However, would one have to expect in the short term that Lebanese capital markets will be impacted by uncertainty, protest moods, and debates over austerity? Might the ETP in the first year of its operations then reflect negatively what could be a temporary slowing of the economy?

In spite of all the challenges we are facing, now is the time to focus on new outlets for capital formation.

If you were to tell us that today might not be the optimal time to launch the ETP, we would say, ‘This is exactly the time when we need to speed up the process and launch the new exchange.’ We are going through very tough times, and the capital markets are reflecting this—as we see from the performance of the BSE. There is also another indicator that I want to tell you about: For the past few months, the amount of funds and products that have been submitted to us for approval has gone down. We would like to give things six months in order to compare numbers properly, but the way that the trend is, such activities have been reduced, that is why opening up to new investment opportunities and allowing Lebanese companies to access capital at lower cost might help some of them better face the challenges of today.

E When discussing the potential of the ETP just before, you mentioned the CEDRE context and PPP projects—which presumably can benefit greatly from access to a liquid capital market. Would the ETP also be a venue for privatizing companies that have hitherto not been successfully privatized, such as Middle East Airlines (MEA)?

Absolutely. The platform needs to be promoted and positioned in a way that it is a solution provider for overcoming all the obstacles that we have been facing, whether in the regulatory framework or the ways laws are written. The ETP is a platform that is there to be utilized as means to create more liquidity in the market. We could list Middle East Airlines, and plans are for it to be one of the leading stars to be listed on the exchange. This has been communicated by the main shareholder in MEA, which is the [Banque du Liban, Lebanon’s] central bank.

E How are things developing in terms of awareness and preparedness for capital markets in the local financial and investor communities? Do you see increasing skepticism, enthusiasm, or what?

I will answer this question taking it from two sides: the supply side and the demand side. If you need [to attract] an investor, you need a product. So if we approach the issue, therefore, from the supply side, we are at this moment reaching out to major SMEs and family businesses. We have a team that is dedicated to contacting these companies; they are explaining to them what an exchange and listing would mean for them, and how they can access capital through listing on the exchange.

E Are they listening?

Perfectly well. They are extremely interested and have a lot of questions. We have collected those questions and created like a town hall meeting session to which we are inviting all the companies that we believe are the first crop of potential companies that can be listed. Some of them already have full governance in place, some of them are on their way to having full governance, and some have a good appetite for governance. On the supply side, we need products, companies who understand that they can access capital in a cheaper, long-term way and sustainable way. We are adapting our fees and have a formula to make listing more sustainable for all of them, not a burden.

On the investor side, we have the institutions and the retail side. Institutions are definitely interested because when they are investing, they are not lending, and thus capital requirements are less. In the retail investor side, we have investor education activities and are reaching out to them. We are tackling the issue therefore from both sides, supply and demand.

June 4, 2019 0 comments