Business

Enjoying a life plan

by Thomas Schellen
written by Thomas Schellen

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.”

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Business

Bank of Beirut: Going steady

by Thomas Schellen
written by Thomas Schellen

Following a very satisfactory 2003 for the country’s major banks, the outlook for the sector in 2004 is guarded but not downcast, said Salim Sfeir, chairman and general manager of Bank of Beirut.

Each and every bank in the sector’s leading stratum could outdo their expectations on the results they realized in 2003, Sfeir told EXECUTIVE. “Talking about 2004 and 2005 is a big question, because markets are slightly down and political uncertainties are still high,” he said. “But nevertheless, our financial forecast for the end of the year is not pessimistic. We look forward to having a smooth year, financially speaking.” Similar to other alpha group banks – the institutions at the top of the national banking hierarchy, with assets of more than $1 billion apiece – Bank of Beirut can point to exponential growth in the reconstruction years, both in size and range of activities. Today ranked sixth by assets and seventh in terms of tier-one capital among Lebanon’s banks, its evolution and performance appears archetypical for the fortunes of the sector’s better-achieving agents.

Entering the 90s as a very small player, Bank of Beirut ventured onto an ambitious path of expansion after installing a new management in 1993. Four years later, it was Lebanon’s third bank to go public, and in 1998, a merger with Transorient Bank completed the foundation that enabled Bank of Beirut to scale the $1 billion assets hurdle. In 2002, the bank made further headlines by acquiring Beirut Riyad Bank in a second large merger move, which contributed to a 2002 increase in assets by over 58% and boosted the branch network to over 40 domestic outlets and a subsidiary in London. The bank also established an international banking unit in Cyprus, adding to its representative office in Dubai at the seat of its strategic shareholder, Emirates Bank International. In parallel, Bank of Beirut in 2002 and 2003 undertook a number of measures to increase its tier-one and tier-two capital, including issuance of $55 million in preferred shares. It enlarged its product and services portfolio through creating new funds, retail and bancassurance products along with installation of a call center and an electronic banking operation. Perhaps more tiring than anticipated, the acquisition of Beirut Riyad Bank and integration of its labor force and customer base “was not an easy meal to digest”, Sfeir concedes, even as he maintains that the bank mastered the merger “in an excellent way. I don’t think it could have been done in a better way.” The bank’s underlying message seems to say that their growth expectations are far from exhausted but under national economic conditions, the next development cycle could be some time away.

Bank of Beirut has, so far, navigated 2004 with care – a mood primarily reflective of what management regards as ‘politically generated’ constraints on local and regional affairs encumbering the investment climate. The bank is party to a widespread sentiment that – positive impact of Paris II notwithstanding – the Lebanese political decision makers still need to fulfill their duty of facilitating macro-economic conditions more conducive for attracting investments. The lack of action on the government’s part has led the banking industry in general, and Bank of Beirut in particular, to declare itself apolitical. This does not mean that the bank would wait for political improvements before continuing their quest to innovate. Recent new products include a competitively priced account with revolving credit for salaried employees and a new lira-denominated housing loan. The bank’s current emphasis on housing loans took off with a product designed especially for Lebanese expatriates, who sought to establish a personal property bridgehead in their home country. As the interest rate environment on the lira has improved and lira products are more feasible than before, lira loans are a logical new product that many banks would follow Bank of Beirut in devising, Sfeir said. “The lira loan is another product. We are not highlighting the lira but promoting higher usage since interest rates have fallen to levels making it mandatory to start planning in this direction.” Like a dollar-denominated domestic housing loan introduced last year, the lira loan offers regressive interest rates.

In continued pursuit of its strategy to offer funds products attractive to small and large investors, the bank last year collaborated with First National Bank (FNB) in the creation of two new funds, the Beirut Global Income Fund in July and the Beirut Lira Fund in October. “Small investors took part in the funds and saw high returns,” Sfeir said. “Investors are well informed today, and expect returns that are higher than what they can gain elsewhere. As long as we are providing those returns, we are reaching our target.” According to Sfeir, the funds collaboration between Bank of Beirut and FNB was to the mutual benefit of both institutions. Could this development indicate a stronger partnership in the making, or perhaps another merger prospect? Not in the current situation, where the law and regulations supporting bank merger activities with central bank soft loans haven’t been renewed. “There is no merger law now; it would be a waste of time to get excited,” he said. “With a merger law, it would be a new opportunity.”

Profitability before size and profit optimization at lowest possible risk levels make for two fundamentals in the Bank of Beirut strategy, translating into an unhurried pace in the bank’s continued ambition for an increased role in regional markets. Together with its partner, Emirates Bank, the institution has applied for a license to establish a presence in Syria. It is also approaching the Nigerian market through a rep office project in Lagos, and – for the longer term – contemplates its entry into Iraq. In Sfeir’s view, international expansion is no easy fix and offshore markets poise high risks for Lebanese banks that venture there. They have to calculate a high costs of funds based on the interest rates paid to depositors, and offshore clients accepting those rates would not be likely to be a model for creditworthiness. “Whoever is going to borrow at our own rates will be a risky partner, on whom we have no control,” Sfeir said, “and this I don’t recommend at all to my people.” He accepts only the top five banks in the country as a peer group for Bank of Beirut and sees the optimal size of the Lebanese banking sector as containing no more than 12 or 13 banks. But domestic size ranking was never a concern of the bank, Sfeir said. “We never looked at other parties, the market and colleagues. Our policy is to compete against ourselves. To be much better than we have been.” The bank has a young labor force – the average age is below 40-years-old – and Sfeir prioritizes in-house training and continued education over hiring new staff. The priorities for the current period in the Bank of Beirut evolution are “to maintain the quality of our service and products,” he continued, “and improve the quality of our people through adequate education programs. This will reflect on our results.” The executive admonishes the existence of unprofessional banking practices that extend even into the ranks of the alpha group – but nonetheless appears less concerned about sector-specific problems than about the performance of the public sector leadership. “Lebanese bankers are good bankers,” he said, “I didn’t say that the Lebanese politicians are good politicians.”

The one internal snag factor that Sfeir identified for his institution – which adopts the motto ‘banking beyond borders’ – would be, “shyness.” “Every time when we are shy, we fail.” Extending an invitation to everyone to get closer to Bank of Beirut, the tough talking banker shows a softer side. “We are opening our doors to accommodate the public with a big smiling heart.”

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Economics & Policy

Moneyed marriage

by Tony Hchaime
written by Tony Hchaime

Following the failed merger talks between Banque Audi and Banque Libano-Francaise in 2002, few anticipated the announcement of last month’s $159 million merger acquisition of Banque Audi and Banque Saradar. Moreover, such a merger differs significantly from the type of consolidation sought by the central bank, namely a consolidation of the smaller, less efficient, banks in the country. Nevertheless, the announcement of the Audi-Saradar merger took the market by surprise at first, only to make significant sense as details of the transaction began to trickle down to the market.

The deal ($100 million in cash and $59 million in shares), will lead to the creation of the largest banking group in the country and have significant implications on a number of levels related to the banks themselves, the banking sector locally and regionally, and Lebanon’s economy.

Banks in Lebanon have been facing a growingly competitive domestic environment over the past few years, not to mention the significant difficulties such banks are facing when attempting to venture into Arab markets. Lebanese banks lack the scale, efficiencies, and branding to establish a strong presence on the turf of banks like Saudi American Bank, National Bank of Kuwait and Arab Bank, among others. In that regard, the sheer scale of the combined Audi-Saradar entity provides the group with the cornerstone upon which to build a regional platform. With total combined assets in excess of $9 billion ($12 billion including fiduciary deposits, security accounts, and assets under management), the group begins to close the gap with the likes of Arab Bank, whose assets at year-end 2003 reached almost $24 billion.

There are also a number of financial, human, and commercial synergies that underline the drivers of the transaction. Both banks achieved significant growth rates over the past few years, with Banque Audi’s total asset and deposit growth reaching 38% and 42% respectively in 2003. In parallel, Banque Saradar’s total assets and deposits increased by 11% and 13% respectively over the same period. With such growth rates achieved individually, the now combined entity is likely to generate additional growth, and further widen the gap with other leading banks in the country.

Prior to the merger, Banque Audi benefited from a strong grip on the retail commercial banking market in Lebanon, gaining significant ground on retail-oriented competitors, including large banks, such as Byblos and Bank of Beirut, in addition to medium-sized retail banks, such as Al Mawarid. Saradar, on the other hand, benefited from a strong grip on the private banking and investment banking market in Lebanon, while lacking the retail aspect of commercial banking. With the consolidation of both banks into one entity, they have successfully created one banking corporation that can provide the full range of services, targeting both retail consumers and those seeking personalized private banking services. In that regard, the new entity might introduce a new competitive spirit to a sector in which few banks can efficiently provide a full range of financial services. However, customers of smaller banks in Lebanon typically favor such small-sized institutions because they offer a more personalized banking approach. As such, they would be less at risk than larger institutions – with the latter perhaps seeking to engage in M&A activities – seeking complimenting banks to merge with, in an effort to ward off any erosion of their market shares.

On the commercial front, both banks’ commercial strategies highly compliment each other. Banque Audi is highly aggressive on retail banking, dishing out new products for end consumers almost on a monthly basis, coupled with a range of insurance services through its Libano-Arabe subsidiary. Banque Saradar is more private banking oriented, with efforts to target the high-income high-net-worth individuals and groups in Lebanon and abroad. In that regard, the banks compliment each other in such a way as to target the totality of the market, from the low-income retail customer to the high-net-worth Lebanese and Arab individuals.

Moreover, both banks’ organization and personnel structures are highly synergistic, sharing many similarities in their overall culture and management approach. Such synergies were emphasized by Raymond Audi’s statement that “[the] two banks share the same values within an overall corporate culture based on integrity, transparency, innovation and quality.”

As per the terms of the merger, the Saradar shareholders will receive shares amounting to about 9% of the combined entity. As such, the new merged bank will benefit from a strong shareholder base, combining prominent Lebanese shareholders with well-connected high profile Gulf-based shareholders. In that regard, Banque Audi has historically sought to acquire certain institutions to benefit from their well-established regional shareholders, as was the case with the acquisition of Lebanon Invest.


It should be clearly outlined, however, that the Audi-Saradar merger is not limited to the banks themselves, as it has significant implications on the banking sector in Lebanon, the region, and the Lebanese economy.

The primary implications are certainly on Banks Audi and Saradar themselves. However, such implications are likely to coincide with the factors that drove the banks to merge in the first place. As such, the implications are likely to be mostly of a positive nature, capitalizing on the synergies between the banks. The combined efforts of Audi and Saradar are likely to further boost growth in deposits, loans, and overall assets, and are thus likely to further reinforce their position as the largest banking group in Lebanon.

Now we should see other big banks such as BLOM look at alternative routes to preserve its position in the Lebanese and regional market. Industry experts indicate that a drastic strategic change, although perhaps necessary, may not fit as well within BLOM’s culture. In fact, despite its scale, BLOM remains a “family-business,” much less institutionalized than Audi and Saradar. At Audi, the bank’s management consists of a team of professionals from various backgrounds, which have no major shareholdings in the bank. At BLOM, the bank’s management is tightly in the hands of Saad Azhari, vice chairman, and son of the bank’s founder and major shareholders. In this regard, BLOM may be less willing to open up its capital to other institutions or investors. Nevertheless, certain market developments that may endanger the bank’s position in the market may finally drive the Azharis to succumb to pressures and engage in the M&A route.

The word on the street is that the Audi-Saradar merger is the necessary trigger to the much-awaited wave of consolidation in the Lebanese banking sector. Essentially, this would be true if the proper drivers behind the transaction are clearly communicated to the market as incentives for others to follow suit. Moreover, the synergies between Audi and Saradar may not be so evident to other banking institutions in the country. Nevertheless, many banks in Lebanon realize the eventual necessity of consolidation, as they face the competitive risks brought forward by local and regional large-scale banks. In that regard, they are also heavily supported by the central bank, which is favoring consolidation in an effort to reduce the fragmentation in the sector and improve efficiencies. It is likely, however, that other banks will closely watch Audi’s ability to successfully consolidate its operations with Saradar as a precedent to taking any such actions themselves.

It was clearly articulated by the chairmen of both Audi and Saradar that combining the two entities significantly enhances their chances of successfully expanding regionally. This would certainly make sense given the necessities required to establish a presence in Arab markets. The GCC banking environment is highly competitive, requiring aggressive marketing, scale, advanced IT systems, a full range of banking and financial services, professionalism and efficiencies. While some Lebanese banks may achieve some of these characteristics, none actually benefit from the combination of such parameters, certainly not to the scale required by sophisticated Arab investors. Eventually, however, Lebanese banks will have to make some defensive move to defend even their local market shares, as the large-scale Arab banks have been somewhat successful in venturing in the Lebanese market, and many have been able to carve themselves a significant market share locally.

On a more general note, the Lebanese economy stands to be greatly affected by such a consolidation in the sector. In the short-term, the economy may be ill-affected by the higher degree of unemployment that typically results from consolidations. On a longer term basis, larger, stronger and more efficient financial institutions offering a full range of financial services, up to international standards, may allow the country to regain its role as a regional financial hub – a role taken away by Bahrain and Dubai.
Tony Hchaime is an investment banker at the Middle-East Capital group (MECG).

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Business

Sphere of influence

by Michael Young
written by Michael Young

In mid-February, the London-based daily Al-Hayat published an Arabic version of a US working paper that was to be presented to the G-8 summit at Sea Island, Georgia, from June 8 to 10. The paper, which was prepared “for G-8 Sherpas,” or senior advisors, outlined what the Americans have called the Greater Middle East Partnership (GME). The aim of the US is to see the GME project adopted by the wider G8, so that it can act as a basis to help “forge a long-term partnership with the Greater Middle East’s reform leaders and launch a coordinated response to promote political, economic, and social reform in the region.” In mid-March,New York Times reported that the document would not be presented the Sea Island summit after all. However, a senior US official privately noted this was incorrect, and that what may change is the way the document’s ideas are proposed: rather than be submitted unilaterally as G8 policy, it may be presented, more diplomatically, as a response to Arab requests. The three broad guidelines of future G8 action, according to the document, are the promotion of democracy and good governance, the building of a knowledge society, and the expansion of economic opportunities.

In early March, in the run-up to Arab League summit in Tunis at the end of the month, there was considerable criticism directed against GME in the Arab world. Arab states were divided into three groups on how to respond to the initiative, with one group supporting a dialogue on it, a second advocating caution, and a third calling for outright rejection for what was deemed meddling in Arab affairs. Egyptian President Hosni Mubarak, for example, declared: “We should not give others the opportunity to map out our future, define our course, or work on reforming us. We must take the initiative ourselves.” Sheikh Khalifa Bin Salman Al Khalifa of Bahrain noted that “imposition of any foreign view point separately is not in the interests of countries of the region.”

In a commentary in the English-language Al-Ahram Weekly, Egyptian commentator Mohamed Sid-Ahmad spoke for many Arabs when he noted that affirmation of a “greater Middle East,” by expanding the geographical boundaries of the region, “dilutes the importance of the Palestinian problem and demotes it from its central position on the political stage of the Middle East to a marginal position as just one of several ‘hot’ issues plaguing a much wider region.”

However, even a cursory reading of the US working paper shows it to be a remarkably satisfying wish list of reform for the region, with many of its principles already being applied through bilateral programs. Nor were the framers intimidated by the unilateralist preferences dominating in some quarters in Washington. Aside from relying heavily on the UNDP’s Arab Human Development Report of 2002, which was written exclusively by Arabs, the document emphasized that “genuine reform in the GME must be driven internally” through the civil societies of the region. In other words, the G-8, if the GME project is agreed, has the potential to be a hybrid Marshall Plan and Helsinki process for the Middle East. So, why is there such animosity toward it in the Arab world and Iran? The easy answer is that no leader wants the West to advance social, political and economic processes that will undeniably erode their own power. As the halting reform efforts in Saudi Arabia, Egypt and Syria have proven, change is only acceptable when it can ensure, or enhance, the authority of existing regimes. From the perspective of most Arab populations, however, bona fide reform must imply a possible change of leadership. Another fear in the region, as Sid-Ahmad suggested, is that GME would simply detract from the centrality of the Palestinian problem. While no one would quibble with the necessity to end the Palestinian-Israeli conflict, the insistence on using it as a benchmark to judge GME carries with it a high price tag. For one thing, Middle East reform must not be held hostage to a conflict most states in the region cannot control; for another, true regional reform would, one assumes, positively affect the behavior of Israelis and Palestinians as much as it would that of surrounding states.

However, there is a more fundamental reason for the regional animosity to GME, and it comes from the two very different philosophies defining state-to-state relations – one prevailing in the Middle East, the other in the West. In the past decade or so, the concept of state sovereignty has been recast in the West, so that states can no longer hide behind it to shield their more harmful policies. Whether due to humanitarian intervention, international efforts to curtail war crimes, regional cooperation projects, or the expanded role of the UN, state boundaries are eroding at breakneck speed. Even American neo-conservatives are, above all else, enemies of sovereignty as a barrier to the dissemination of Western, or indeed American, values.

This is alien to the Middle East, where brutish regimes have always received a free ride (including from the US) on the grounds that outsiders had no right to interfere in their affairs. What emerged was a conspiracy of silence, as all were complicit in the nasty order of things. However, GME – much like the Euro-Med partnership agreements or the US Middle East Partnership Initiative – is a reaffirmation that what is bad for the Middle East can also, ultimately, be bad for the rest of the world. That was the message of September 11, and the inability of the region to fully gauge the importance of that day is why so many have trouble understanding the importance of GME, as well as the West’s commitment to regional reform.

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Economics & Policy

Q&A: Freddie Baz

by Executive Staff
written by Executive Staff

How long were the two banks involved in negotiations before signing the agreement to form a single group?

The two banks have had a long proactive relationship. Every now and then we sat together on the managerial level and assessed the situation of the banking industry in Lebanon and the consolidation process. In this favorable environment, more direct talks started two to three months ago but as one issue among several in our meetings. After negotiations started in serious, the whole process didn’t take more than one month.

Then it was a smooth procedure?

It was a very smooth procedure. The two parties are really open minded and not driven by any subjective considerations, which normally present an important obstacle for merger operations. There was never any ego dimension. Issues came up in a healthy way and never generated emotional attitudes or structural obstacles.

Will you form a group of banks or a single bank?

When Banque Audi becomes the sole shareholder of Saradar, Saradar shareholders will change part of their shares into Audi shares, and therefore will become shareholders of Banque Audi. We call the new entity that is emerging, the Audi-Saradar group, which, however, is not a legal concept. From an accounting standpoint, Banque Audi is the holding company where all the accounts of all the subsidiaries will be consolidated.

Under perspective of management culture and operational environment, would you describe the deal more as a merger or more as an acquisition?

In a merger, one institution absorbs another institution, which is not the case here. Both banks are keeping their legal status. As Banque Audi is paying partly in cash and partly in new Audi shares to be issued exclusively to Saradar shareholders, you can consider the cash configuration as an acquisition and the share configuration as a merger. But the spirit of the negotiations was the most important element, and the spirit was the spirit of a rapprochement of two banking groups into one mega group, which is Audi-Saradar. It is really a rapprochement between two banks, creating huge synergies at different levels: human, managerial, franchises, commercial, financial and so forth.

Is the absence of the merger law going to affect the process?

The scheme that I was describing by definition does not get any benefits from the merger law. Even if the law were in place, we would not have been granted any soft loan, because both entities are still operating and no license will be given back to the central bank.

Was size ever a consideration in the discussions?

Size has never been a target for us. Banque Audi’s target has always been to be among the best banks in Lebanon, not the biggest bank of Lebanon. However, when you reach the high quality level, which we believe we have reached over the last three years, your customer base obviously expands, and size follows.

Is your key strategic aim domestic or regional?

Both are related. You cannot expand beyond your national boundaries if you haven’t reached a mass in the domestic market. It is surprising that a country like Lebanon, which has developed its banking industry to 3.5 times the level of GDP, couldn’t build private entities with a size that would allow them to compete with regional banks. If two, three or four major banking groups in Lebanon materialize, and if each of those banks have a size similar to the top two or three in some countries in the region, we have a lot of chances to gain market shares in those markets.

Will financial firm Lebanon Invest be taken out of the market?

Who said that? By definition, if a merger or acquisition results in having three of four insurance companies or investment companies, the healthiest solution is to consolidate internally. But for the time being I cannot say that we have decided to liquidate this or merge that. Without going more into specifics, I can say we are in the process of reassessing all subsidiaries in order to generate the highest financial synergies.

But is it correct to say that Saradar Investment House will be absorbed into Audi Investment Bank?

If you believe in internal consolidation, by definition you have to consider it internally. For the time being there are no schemes at all for any of those entities. Starting with the signatures under the merger-acquisition agreement, we are becoming one entity. In each single entity, the best people have to manage the business, and in each subsidiary, the best people will get the responsibilities warranted by their expertise. I do not comment on these issues now because the steering committee has been assigned. It will assess the real values in each business. There are no preset positions.

How long do you estimate the steering committee to have to work on these assessments?

The committee’s role is to ensure the rapprochement’s best and optimal conditions to assure the interests of the new shareholders, which represent the old shareholders of both entities. It is a matter of not just assessing material things. In view of our size, it should take a minimum of two months or perhaps three.

In any merger, people in the involved companies have concerns over their jobs. Did you discuss any redundancies?

No. Since these entities will operate under their actual status, there is definitely room for all the people working for the group. The business synergies resulting from the rapprochement will probably create need for further jobs in the group.

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Economics & Policy

Revitalizing banking

by Tony Hchaime
written by Tony Hchaime

Despite its proud regional reputation, Lebanon’s banking sector has faced a number of hurdles in the past few years. Strong regional competition, stemming from the spawning of a number of large-scale Arab banks – mainly in the Gulf – have created obstacles for a sector seeking expansion, while a high level of liquidity, a large number of small-scale, inefficient banks, and an overcapacity of banking institutions for a country of Lebanon’s size have not helped the sector.

The central bank, in close conjunction with the Association of Lebanese Banks, has been working hard to overhaul the banking sector and allow it to regain its regional competitive advantages. One initiative was the unprecedented move in late February by the central bank to amend two laws – 1998’s law number 7055 and 1999’s law number 7274 – allowing Lebanese banks to lend to non-residents and invest in foreign debt securities respectively.

The amendments to law number 7055 would allow any Lebanese bank to extend loans to non-residents up to an amount of 5% of its equity per borrower. The total loans to non-residents, however, may not exceed an aggregate amount of 25% of the bank’s equity. This compares to a ceiling of 20% per resident borrower.

Prior the amendment to law number 7274, banks were restricted to securities issued by the governments of no more than 10 nations, including the US, Japan, and certain European countries. The new changes allow Lebanese banks to invest in any foreign debt security, be it sovereign or corporate, as long as the security is rated BBB or higher by any of the internationally recognized rating agencies, such as Standards and Poor’s, Fitch, and Moody’s.

The moves are being highly debated in Lebanese financial circles, as they constitute a major turnaround in the policies of central bank governor Riad Salameh, who was traditionally set on maintaining a high level of liquidity in the banking sector in Lebanon, and ensuring that such liquidity remains within the country’s borders (a policy that was underpinned by the two original laws). As such the central bank’s change in direction raises questions as to the motives behind the amendments to the laws.

The banking sector in Lebanon has grown substantially over the past few years, with growth in assets and deposits witnessing a compounded average annual growth of 15% each between 2000 and 2004. Following the events of September 11, and the subsequent so-called US-led war on terror, Arab funds have been flowing into Lebanese banks, increasing liquidity. Salameh has estimated the excess liquidity in the Lebanese banking sector at the beginning of 2004 at almost $5 billion.

On the other hand, Lebanon’s investment environment, although witnessing significant growth in certain sectors is relatively small, compared to the level of funds available for investments. Despite the lower interest rate environment, deposit rates on foreign currency deposits remain in excess of 4% among the large Lebanese banks, and may be even higher for long-term, large deposits. With such developments occurring rapidly, Lebanese banks faced problems in securing high-yielding uses of funds. A globally low interest rate environment, a limited investment climate in Lebanon, and a high risk surrounding Lebanese government bonds, might have made it difficult for Lebanese banks to achieve enough returns on all the excess liquidity to justify paying such interest rates on deposits.

In a pre-emptive move, the central bank allowed Lebanese banks to seek alternative investments for their funds, albeit in a highly selective and restricted manner, aimed at maintaining the sector’s image of safety and high liquidity. The market for such investments may be lucrative. However, the rapid growth of infrastructure-related projects in the region requires a massive amount of debt financing by regional banks. Infrastructure projects are spawning in the Gulf and Africa, in such sectors as power-generation, water desalination, and others. To this day, the long-term financing required by such projects has been restricted to international banks and major Arab (non-Lebanese) banks. Such projects present attractive lending opportunities for Lebanese banks enjoying high levels of liquidity. In fact, such projects typically enjoy a high level of safety and cash flow predictability, as they are often guaranteed by government organizations or international insurance coverage policies offered by such institutions as the World Bank affiliated Multilateral Investment Guarantee Agency (MIGA).

In such a sense, the Lebanese banking sector stands to greatly benefit from such opportunities. On the profitability front, Lebanese banks may substantially widen their interest margins, achieving higher returns on loans to non-resident companies in the region. Such returns would compare favorably to the low-yield deposits by Lebanese banks at foreign financial institutions. Moreover, such moves by Lebanese banks would significantly improve their efforts to expand regionally and compete with major Arab banks. While Lebanese banks have been historically successful in attracting Arab funds, their abilities to invest funds outside Lebanon have been highly restricted by the central bank’s regulations. The recent amendments would certainly allow Lebanese banks to aggressively expand geographically.

It remains to be seen, however, if such changes by the central bank are a precursor to more liberalization in the sector in the near future. Banking experts fail to see any other major changes in the near-term, unless drastic changes in market conditions necessitate it. After all, changes in market conditions such as the sudden increase in excess liquidity, and the lack of investment opportunities in Lebanon were potentially the main drive behind the central bank’s move to liberalize foreign lending and investment.

On the other hand, the central bank’s attention is likely to turn to a consolidation of the sector in the near term. The recently announced merger between Banque Audi and Banque Saradar has triggered much speculation as to the possibility of the merger becoming the first of a series of such activities, aimed at consolidating the highly fragmented banking sector. While the central bank governor has yet to approve the Audi-Saradar alliance, such moves have been historically encouraged by the central bank. This latest development may be used by the governor as a launching pad to entice other players in the sector to follow suit, or face the risk of being dwarfed by the scale of local and regional market leaders.

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Economics & Policy

Trouble with stocks

by Nicolas Photiades
written by Nicolas Photiades

The re-opening of the Beirut Stock Exchange (BSE) in 1996 offered local businesses the means to raise equity funding to finance restructuring and development plans, as well as expansion strategies. It also coincided nicely with the rise in emerging market equities, and the initial listings of Lebanese companies and banks, such as Solidere, Banque Audi and Bank of Beirut, met with immediate and substantial rises in stock prices.

However, for the past six years, the BSE has been a thorough disappointment – a condition partly explained by global factors affecting emerging and other Arab markets. Last year, while many Arab stock markets experienced growth of between 20% and 70% in 2003, the Beirut Stock Exchange (BSE) experienced none. It has been plagued by illiquidity and tiny total market capitalization, which by mid-February 2004 amounted to around $1.7 billion (including over-the-counter stocks, such as Société des Grands Hotels du Liban [SGHL], the Casino du Liban and the ABC). Some stocks can now spend an entire week without any trading, while it is not unusual to see that one or two stocks can account for 100% of daily trading. In the “boom” years Solidere’s market capitalization alone used to reach $1.7 billion.

Lebanon’s depressed economic environment and the consequently low credit rating of the country (B- by Standard & Poor’s) are no doubt the overriding reasons behind the BSE’s stagnation. A stable economic and, more importantly, political environment is key and has been the key driver behind the relative success of the Amman Stock Exchange, which now boasts more than 100 listed companies.

There are, however, other factors. While an uncertain geopolitical situation has constantly driven away local and international investors, the absence of a domestic Capital Markets Authority, an equivalent of the US’ Securities and Exchange Commission (SEC), has had a greater effect on dampening the enthusiasm and appetite of local, regional and international investors. Were the government to have set up a local Capital Markets Authority simultaneously with the re-opening of the BSE, a significantly larger number of quality investors, with a greater focus on transparency and proper regulation, would have been attracted by Lebanese listed stocks.

The government’s “generous” fiscal policy of the mid-1990s, which meant that interest rates on Lebanese pound deposits and Treasury bills were significantly high – at one point, T-bills paid interest rates reaching the 45% mark – turned domestic investors’ funds and savings towards bank deposits and debt instruments, and away from domestic shares. The Solidere shares suffered particularly as a result. The high interest rate structure on deposits and debt securities contributed significantly in the premature end of an equity investing culture in Lebanon.

The lack of diverse BSE stocks also contributed significantly towards its demise. The listing of real estate, cement companies and banks was not enough in terms of diversification, with domestic and international investors requiring a wider choice of sector stocks in order to efficiently diversify their investment portfolio. A stock exchange must reflect the diversification of its local economy, and clearly this was not the case for the BSE. Foreign investors assumed that the Lebanese economy had very little scope for diversification and decided to reduce their exposure to Lebanon. In comparison, the Amman Stock Exchange is much more diversified and includes a large number of stocks emanating from different sectors. Banks there account for a significant portion of the exchange’s market capitalization, particularly the Arab Bank, which is regarded as one of the few international pan-Arab institutions. In contrast, Solidere, the BSE’s largest stock, is domestically focused and carries less importance in relation to the economy than a bank.

Company managers in Lebanon never really realized that the basis for efficient financial and operating management consists of diversifying funding and financing expansion mainly with equity. Today, companies are stuck in a situation where their cash flow is completely or significantly absorbed by debt servicing, and capital stock cannot be increased, as their creditworthiness and capitalization levels are negatively affected. Strong financial fundamentals and an apparently solid creditworthiness are essential for a successful public share offering as credit risk forms an essential part of the equity investment decision.

The limited number of investment banks and specialized finance companies in Lebanon, acting as intermediaries between the stock exchange and companies, was also a reason behind the current lack of development of the BSE. The lack of market makers has led to a secondary market illiquidity and the immediate loss of value of initial public offerings. The Gulf countries, on the other hand, have more developed brokerage and finance company sectors, which make markets on a much larger panoply of stocks and other securities.

The capital structure of the majority of Lebanese institutions, which is based on family ownership and control, has been a major factor behind the under-development of the BSE. Family owners find it very difficult to concede part of their controlling stake to new shareholders, which are generally regarded as an outside threat to their total management control. Moreover, the local mentality has always focused on long-term banking relations rather than stock exchange listings, as the latter means a more stringent reporting discipline that family owners are generally unwilling to comply with. This state of play compares unfavorably with both Cairo and Amman, where transparency is a must and companies are more institutionalized.

This lack of desire to obtain a listing could be solved partly with governmental fiscal incentives that might encourage companies to list. Even though the government has already reduced the dividend tax from 10% to 5% for listed companies, this measure is still insufficient and should be compounded with other fiscal incentives. What would the treasury gain from an active BSE? Well, more income from taxes on trading and capital gains, as well as the development of local capital markets, which is crucial in providing local institutions with greater financial flexibility or with an ability to tap diversified funding sources.

A lackluster privatization program, which under any circumstances should have boosted the BSE exponentially, is regarded as another major reason for the loss of interest for Lebanese listed stocks. Although there is a current will to put privatization back on track, it comes way too late for the BSE, which could have benefited significantly from a few privatizations back in 1996-1997, when emerging market shares were in very high demand by international investors (eg, the success of the Banque Audi and BLOM GDRs during that period). Were one or two public companies to have been privatized in 1996, the BSE would have reached a strong momentum, which would have been more difficult to break in times of crisis, such as during the 1998 Russian/Asian crises. The collapse of Asian and Russian stocks in 1998 sent all emerging markets into a tailspin plunge. All Arab stock markets, which were just re-emerging after years of deep sleep (mainly in Lebanon, Egypt, and other North African countries), were significantly affected by this shock. The more recent Nasdaq debacle and corporate scandals in the US have also virtually killed off any remaining interest for stock exchange activities among Lebanese investors, who are buying stocks but to a much lesser extent than pre-2001. A significant number got burned very seriously after being badly advised by Lebanese brokers and private bankers.

The recession experienced by the Lebanese economy since 1998, and the political volatility of the last few years, contributed significantly towards the disappearance of international investor interest in Lebanese equities and the lack of faith and disheartening of local investors.

What is currently needed is above all an efficient and transparent government policy towards the domestic stock market and the development of domestic capital markets (including debt capital markets). The recent implementation of a sophisticated quotation system is a step in the right direction, but remains insufficient. Lebanon still has an inadequate regulatory framework as compared to Amman or Cairo, and has no capital markets authority to regulate capital markets as a whole. The establishment of such an authority has never been more necessary.

The acceleration and greater transparency of the privatization program and process, as well as the decrease in interest rates on the Lebanese pound, are also regarded as key factors towards the development of the BSE. The latter is a vital channel towards equity funding, and will be needed at one stage in the future, particularly by local banks, as some of them will have to increase their capital following the implementation of Basel II guidelines.

The Lebanese government’s role is crucial in the sense that it should make clear to the international investor community, through a series of continuous road shows in major cities, of its commitment to reforms and economic recovery. Investors need constant reassurance about a country’s future economic plans and have to feel comfortable with the level of transparency. The slightest doubt about the disclosure of economic plans would generally drive down any market in the world.

Finally, Lebanese banks, which claim to have developed investment banking activities, could have a major role to play in the future development of the BSE. These banks could offer advisory services to their corporate borrowers, encouraging them to follow a better and healthier financial and operational strategy. Equity financing, particularly as regards to new projects and expansion, forms the basis of corporate creditworthiness for any institution, and the revival of the BSE can only facilitate a move towards better credit quality and more efficient management.

Nicolas Photiades is managing director of Orion Financial Solutions. He is advisor to the Lebanese banking sector on securitization and structured financing.

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Business

Real success story?

by Thomas Schellen
written by Thomas Schellen

Gada Sardouk is trotting out the government line. “Beirut’s downtown is the success story of the entire region. People are visiting in huge numbers,” said the director general of the tourism ministry. “Yes, it is sometimes crowded but the area has no problems. If there were anything to harm the tourist, it would be empty.”

Warped logic aside, if the growth of the area’s restaurants and cafés is a measure of its vitality (numbers rose from around 40 in late 2001 to over 70 in the summer 2002, 99 in autumn of 2003, and more than 110 this spring), the same activity offers equally negative indicators, such as the district’s high rate of restaurant closures and re-openings, affecting one in every five establishments over the last two years and with some properties on Maarad street housing more than three outlets during the same period. But the real problem is highlighted by the teams of municipal officers that swarmed through the area in February and March, instructing tenants to remove outdoor plant decorations, abide by sidewalk seating limits and meet hygiene standards. Those, though not all who were in breach were fined. A token gesture, say many; the problem has not gone away.

The two largest stakeholders in the area, the municipality of Beirut and Solidere, the company tasked with its redevelopment, say they are engaged in a major clean-up campaign to improve the area’s image by purging the downtown hospitality sector from various style aberrations and regulatory infractions. Both have been compelled to act. City hall does want to see the downtown become ‘sin city’ and Solidere does not want its shareholders repulsed by a deteriorating ambience. “Merchants and operators approached us to discuss how to organize the management of the area,” explained Georges Nour, property administration division manager at Solidere. “Nobody was respecting the rules.”

“Presently, the Beirut Central District (BCD) works in a very narrow and ill-directed way,” said one of Lebanon’s highest ranking public figures who refused to be identified. “It is an attraction for the bad side of tourism,“ he fumed. “Ours is a country that is 7,000 years old. We should have much more important poles of attraction for tourists. The downtown is over saturated with nightclubs and pubs that are so expensive that only a few rich people can enjoy it. This is not the vision of a downtown where people meet to exchange views on topics of culture, politics, or religion. When you sit in one of these cafes today, you hear anything but.”

Prime hospitality stakeholders in the area also raised grave concerns. “Investments are risky if regulations are not enforced. Can the authorities not see what is going on?” asked an angry Michel Fernein, owner of La Posta.

“For the time being, the situation is not as we expected,” said Dory Daccache, head of the Crepaway restaurant group and who holds stakes in four budget and mid-level eateries in the district. “That the area has been going down is not really a sufficient term to describe it.” According to Ferneine, both the luxury and mid-market restaurant niches have seen revenue shrink in the last year. “The average spend per ticket in 2003 was lower than in 2002, especially in the evenings,” he said. “Patrons who would order an upscale dinner and an important bottle of wine now stay away. They are no doubt put off by the congestion, noise, and harassment.”

The downtown appears to have a problem of clashing restaurant cultures. Restaurateurs are at odds over loud music and ‘un-neighborly’ practices and fight over precious outdoor seating areas. The situation has seen three distinct sub-groups emerge: those that actively disregard rules and live by fly-by-night mentality; those that want to see rules enforced and espouse a long-term strategy of doing business; and a buffer group, probably the largest of the three, comprising entrepreneurs that fundamentally accept the need for regulations and positive conduct, but do not actively seek to improve things and instead go with the flow. Plaintiffs from the second group insist that it is neither a matter of price competition nor a complaint against the riff raff. It is, they claim, all about Lebanon’s image. “Any downturn in revenue is our problem,” said Fernein, “but the reputation of the country is at stake here. The downtown is the most important project in Lebanon. How can something this important have so many things that obviously don’t work?”

Surprisingly, many of these complaints have been echoed by operators whose establishments in the past year have been less than scrupulous in maintaining their own standards in terms of rampant outdoor seating, lack of customer bathrooms and harassment of pedestrians.

“If it is not regulated, the city center is going to be a jungle,” said the owner of an eatery serving what he called “affordable food in big portions,” out of a kitchen installed in what was clearly designated to be a retail store. On condition of anonymity, the entrepreneur admitted that he had hired a hostess for the specific purpose of approaching potential customers. “We are a new place,” he said. “People wouldn’t notice us if we didn’t send the hostesses to explain our menu.” When asked about restroom facilities for the 40 or so seats in front of his establishment, he said a new portable toilet would be installed that night. He had a simple explanation for the area’s hospitality problems. “They didn’t expect the boom,” he said. “More restaurants than they ever expected opened in this area.” There is some truth to this. According to Nour, the success of Maarad began as an “urban management accident.” The Solidere master plan had earmarked the street for vehicular traffic and not as pedestrian zone. The plan had expected retail businesses to populate the street, and most buildings were not equipped for restaurant use, creating challenges in the adaptation of facilities, setting up generators, storing supplies (including cooking gas), and the collection of waste, that only a few investors rose to.

“You cannot believe how dirty it is behind the doors of some kitchens and service areas,” lamented one manager. “Some neighbors here have had an abominable lack of hygiene.” This situation is improving now, he added, since a system for collection of food waste and used cooking oil begun in February, as part of the initiative to better the area.

Many stakeholders agreed that implementation of hygiene standards should be more strongly enforced. “Lebanese regulations on restaurant hygiene are excellent,” said Daccache, “but some restaurants do not apply the regulations, and enforcement is weak.” The inspectors from the health department at the Beirut municipality, the supervisory authority for restaurant cleanliness, are reportedly meticulous in checking that employees working in restaurant kitchens wear hair covers and gloves and have clean fingernails. As a result of the unsanitary practices of some operators prior to the implementation of a new garbage collection scheme earlier this year, pest problems reportedly got so alarming that competitors in the same building had to hermetically seal off doors in order to ward off a despicable daily invasion of cockroaches from the garbage next door. Yet some restaurant owners wonder if all establishments are inspected with equal vigor. “The health inspectors are very tough on me,” said one manager who lambasted his neighbors for having no toilets and dirty kitchens. “If they are also being checked, how come they are still in business?”

Central to the whole issue is the legal status of restaurants, cafes, snack bars and nightclubs. Stakeholders and legal experts estimate that only a minuscule portion of downtown establishments operate with a full license, a legacy of Lebanon’s restaurant law, which was adopted by parliament in 1950 and has remained virtually unchanged since 1970. “In general, obtaining a restaurant permit from the ministry of tourism is extremely difficult,” said Paul Awad, a lawyer specialized in issues relating to the hospitality industry. “Not more than 5% to 7% of restaurants hold a permit.”

Getting a permit is a two-step process. Firstly, operators have to prove their basic compliance with regulations on kitchen facilities, bathrooms and exits, etc. If these are met, the restaurant, cafe or pub can launch its business but it still needs to complete the second step of the licensing in which the applicant must prove the existence of one parking space per 4m2 of restaurant floor space, on the same grounds as the restaurant location itself. Alternatively, the establishment can pay the municipality between $5,000 and $7,000 per non-realized parking space. “Nobody has these spaces, and nobody is willing to pay these amounts,” Awad said. “Therefore nobody gets a permit.”

Realistically, restaurants that have completed the first stage of licensing requirements face little trouble and can be reasonably certain that they will not be shut down. However, the second license is the basis for the classification of restaurants, the lawyer said, and one important consequence of the lack of full licenses is that eateries and pubs are not classified by the ministry, which in turn diminishes the ministry’s ability to monitor their compliance with price levels and service charges. On a day-to-day basis it works. The ministry does what it feels it has to, to maintain standards. “To be realistic, Lebanon is a tourism country. We deal with the private sector in form of a partnership,” said Sardouk. “We are very strict in responding to complaints but very flexible in communicating with the private sector. We are not a police state.” Sardouk added that in the whole of 2003, the ministry of tourism had received 10 serious complaints from tourists and acted upon them, only one of which involved a downtown restaurant. Hospitality establishments in the area display stickers with tourist police telephone numbers, should they have a complaint. When Executive tried to contact the tourist police, it was connected to an Ogero recording that said the number was “not yet in service.”

However, weaknesses in the legal framework clearly contribute to the current malaise. Operators who disregard rules tend to use what they see as absence of a clear legal environment as an all-purpose excuse for ignoring standards and regulations, but for those who wish to instigate improvements or challenge infringements, the legal ambiguity can be a major impediment because an “unlicensed” restaurateur with a complaint does not enjoy full legal status and is immediately at risk of becoming a target. In their plan for improving downtown, the municipality intends to enforce compliance with all standards before this summer. This will involve making operators abide by the areas of public space they rent from the municipality for outdoor seating and respect those regulations that insist that emergency pathways be kept clear and enforce all other municipal codes. For its part, Solidere has retained a consultant to style the area with a range of official materials, colors and designs for awnings, tables and chairs. “We are proposing to the municipality all ideas that we want to implement,” said Nour. “The organization of the public open space is the mandate of the public sector administration. We are offering only value-added. Urban management needs dialogue between the city and the people.” Reassuringly, in this context at least, both the municipality and Solidere claim that relations between them have never been better.

Restaurant owners who want to see standards improve say they are prepared to contribute to enticing back a better class of customer. In the long run, they also expect that the overall growth of the city center towards the seafront and the hotel district will alleviate some of the problems the area has experienced in the last two years. Finally, on the legal front, a revised restaurant licensing law with more practical regulations is under review in parliamentary committees, with hopes that it will be pushed through soon. But in a country where the law is frequently overlooked when it becomes a hindrance, it remains to be seen whether this will be enough.

Overcrowded mess

With seating boundaries constantly in violation, Maarad is becoming an accident waiting to happen

The restaurants and cafés on Maarad and Al Omari Streets are demarcated by round, metal studs embedded into the pavement, which represent the limit that a restaurant can place an umbrella, awning or gas heater. If they exceed the boundary, restaurant owners are, in theory, in violation of municipal seating regulations, designed to ensure there is enough space for pedestrians and emergency vehicles to pass. Most of the restaurants regularly violate these laws and Maarad Street, with its gas heaters and plastic awnings, is an accident waiting to happen.

An example of this blatant violation could be found at Al Sa’a, located across from the clock tower. On the last Sunday of March, the café increased its sales area from its usual 100 to some 168 chairs. The restaurant not only set up extra rows of tables in front of an empty storefront adjacent to their location, it also added two tables per row to an area that passersby should freely walk through according to the law.

The manager of Petit Café, one of the places on Maarad with the highest number of outdoor seats, admitted to Executive that in the high season (when the lion’s share comes from outdoor guests), he makes an average of “including cover charge, $25 per customer.” This is too much to resist for landlords who say they are struggling with the BCD’s exorbitant rents. For Layali al Balad, for instance, the owners pay a reported $260,000 a year to sublet the tiny premises. By bending the rules during one day in the busy summer season, 24 “extra” outdoor chairs can add another $1,440 to the day’s takings; that’s in excess of $44,000 each month. When some landlords are paying up to four times the market rate, this extra revenue can make all the difference.

On March 30, Executive, posing as a potential customer, spoke to restaurant owners and managers in the area to see how many outdoor diners they could accommodate at full capacity. Al Sa’a said it could accommodate a staggering 500 diners. La Cita offered to seat 120 diners, Kiub’z 150, while Petit Café and Layali Al Balad said they could seat 450 between them. Even with the most generous calculations these seating arrangements would easily put them in violation of municipal laws. Only Hani Osman, manager of TGI Friday’s, said that if he wished to exceed his legal quota, he would have to check with the municipality.

That the rules are being broken at will is obvious, but what is inexplicable is that the municipality is unable to exert its influence. In the property management offices of Solidere, a large map, dated December 2002, is pinned on the wall. It delineates in perfect detail areas where hospitality enterprises are allowed to set up tables and where they are not. The map is equally well known in the halls of the Beirut municipality, where officials admit that the regulations are not enforceable and that patience is required in the almost daily fights with some BCD tenants. According to the municipality, rent per square meter of its territory is 3% of the annual rent per square meter of a restaurant’s indoor area. The municipality would like to increase this to 15% or 20%, but for the time being income from the downtown business, either in rent (of public space) or fines is not a money-spinner. (Some outlets have been “fined” – in some cases as much as $30,000. This constituted rental dues and fines for operating outdoor seating for two years without a license.) It may simply be that many of the owners are politically backed and, therefore, immune to the rules and regulations that mere mortals have to abide by. The Bendakji brothers –who own Kiub’z, Petit Café and Layali al Balad as well as Al Sa’a, Grand Café, and VIP (the latter two are in the area of Abdel Malak Street) – are allegedly stoutly backed by top political individuals and appear to flout regulations with impunity. In the short term, a new walkway over the downtown ruins could offer visitors and restaurateurs on that side of Maarad a solution. The walkway will be inaugurated in the summer, but the municipal board has not yet reached a decision on allowing outdoor tables. Permanent barriers are also planned but fears remain that there will always be those whose connections will encourage them to ignore the law.

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Business

Winning hearts?

by Claude Salhani
written by Claude Salhani

A CIA job advertisement currently posted on the agency’s web site is offering up to $55,000 a year for “qualified and motivated Language Instructors of Arabic, Chinese, Dari/Pashto,” to work in the Washington, DC metropolitan area.

And for “qualified individuals who are able to read and translate Arabic, Dari and/or Pashto into English to serve the CIA as Middle Eastern Language Specialists in the Washington, DC metropolitan area, with limited opportunities in other areas,” the pay is even more interesting; up to $70,000 a year. For those Lebanese who fancy quadrupling their salary, there are basic qualification criteria: for a start you must be a US citizen. Furthermore, the vetting process is strict. Candidates must pass background security checks, a polygraph (lie detector) test, and so on. Even though in 2002, the FBI, reportedly had only 25 Arabic speakers, of the 73,000 resumes received by the NSA since 9/11, only a few have been selected.

Yes indeed. Despite the anti-Arab, anti-Muslim bias that may have surfaced in the United States after 9/11, demand for Arabic speakers in various levels of government – from the US military, to the FBI and the CIA – are at an all-time high (even the British MI5 have put out the call for Arabists). It would seem that the Bush administration is heeding the advice of Chairman Mao Zedung, who wrote in his little Red Book that “the first step towards defeating your enemy is to get to know him.”

But it wasn’t always thus. When George W Bush first came to the White House in January 2000, he tried, by and large, to ignore the Arabs, Islam, the Middle East and all its confusing troubles. In fact, his critics would accuse him of turning away from most anything that was related to international affairs. The new president wanted to diverge from his predecessor’s policies and disengage the United States from foreign interference. His aim was to focus on domestic policies, first and foremost. Ironically, today it’s the domestic economic situation in the United States that is Bush’s weakest link and the one that could lose him the 2004 election.

But as we know, the September 11 attacks forever altered the way Bush, America and Americans look at foreign policy, and particularly, at the Middle East. Since then, hardly a day has gone by without some Middle East-related news item hitting the pages of the American press or airing on national television. For the most part these reports are negative, portraying the majority of Muslims and Arabs as tainted by terrorism or hating America. But every so often, there will be one item that sheds a more positive light on the issue.

As the presidential electoral storm begins to gather momentum in Washington and the rest of the country, the Muslim/Arab vote – estimated to hover around the three million mark – is beginning to emerge as something both Democrats and Republicans would like to court. Particularly in light of how close these next election results are predicted to be. Understandably, the Muslim/Arab community is starting to realize its full potential as an electoral block and one that should be reckoned with.

Some US Muslims groups have undertaken a campaign to try and register up to 85% of the estimated three million potential Muslim voters in an effort to get them to vote in the upcoming November elections. And in the process, of course, let the political landscape in America become aware of the influence this group may hold. There are an estimated seven million Muslims in the US, of which some are expected to play an increasingly effective role in electoral politics.

Some Muslim organizations put the number of currently registered Muslim voters in the US at 1.8 million. There are predictions that those numbers will significantly increase as a new generation of young Muslim Americans comes of voting age.

But the Muslims in the US are far from voting as a unified block; they are divided between Democrats and Republicans. Traditionally, being more conservative in nature, Muslims tend to vote more Republican. “Many Muslims also voted for the Republican Party because they felt more comfortable with the party’s family-oriented, conservative values and with their stand on issues like gay marriages. Like the Republicans, many Muslims have a very conservative approach to these issues,” said Naushaba Ali, a Virginia resident and female activist who voted against Bush in the 2000 elections.

Afraid of losing its solid Jewish base, the Democratic Party has avoided flirting with the Muslim-Arab constituency. The Democrats’ historic alliance with Israel and the tendency of American Jews to vote Democrat has, in the past, made the Republican Party more appealing to Arab Americans. But that was until September 11 and the drastic changes that overtook the course of events and Arab-American relations.

The clampdown by John Ashcroft, the Attorney General, on Arab and Muslim groups that followed the September terrorist attacks; the arrests and detention of hundreds of Arabs and Muslims in the US, often without warrant or viable reason; additional harsh restrictions imposed at American points of entry, and the war in Iraq, has greatly stressed relations between Bush’s Republicans and the Arab-American community.

Many Arabs and Muslims in the US feel they have become unfairly targeted and unjustly discriminated against. They like to point out that the extremist fringe in Islam represents a very small percentage of the world’s more than 1.4 billion Muslims.

That feeling is not reserved exclusively to Arabs living in the US and is even echoed by a number of Americans. “US policy [in the Middle East] is viewed as anti-Muslim, a crusade against the ‘axis of evil’ and unfair, due to practices that favor Israel over the Arabs.” Those words come from a February 2003 study by the Institute for National Security Studies of the US Air Force Academy in Colorado titled, “View from the East: Arab Perception of United States Presence and Policy.”

The study states, in part, that Arab populations have become alienated from their governments and therefore tend to turn to Islam as their only solution. Usually, the study finds, that it is radical Islam that these populations usually turn to. This explains, in part, Bush’s incentive to impose rapid change on the Middle East. But the changes, needed as they may well be, can only come with the participation of the people involved. Many Arab leaders are beginning to realize, and admit, that the area is indeed in dire need of radical change. But as is often repeated by the Arab world’s leadership and outside observers familiar with the area, these changes must come in concordance with the people of the region. This change cannot be unilaterally imposed, as the Bush administration seems to believe it can.

In a March 12, Washington Post column, David Ignatius quoted Sheikh Mohammed Hussein Fadlallah, Hizbullah’s spiritual leader as admitting that Arab leaders were delaying their move towards democracy, largely using the “excuse” that Israel stands in their way. In other words, as long as the standing Palestinian-Israeli conflict would not be resolved, neither would the issue of Arab lack of democracy.

Every Arab official one talks to will reiterate that fact; solve the underlying problem troubling the Middle East first. Otherwise, addressing other Middle East issues ahead of the Palestinian question, such as introducing democracy in the area, becomes similar to trying to scratch your left ear with your right hand by placing it over your head. Why make life more difficult?

Al-Qaeda’s pet grievance – whether accurate or not – is the Palestinian issue. The same holds true in other non-Arab Islamic countries. Yet, the issue President Bush had promised to address head-on following the Iraq war (via the Middle East Road Map) remains on the back burners of US foreign policy makers.

Realistically however, while solving the Palestinian issue is by no means going to be equivalent to waving a magic wand over the Middle East and making all its problems disappear overnight, it will, nevertheless, accomplish two very important things. First, it will remove the primary reason of discontent and source of animosity currently existing between the Arab-Islamic street and the West, (primarily the US). Second, it will remove the “excuse” mentioned by Sheikh Fadlallah from the Arab/Islamic leaders to keep stepping on the brakes of the region’s natural march towards greater democracy.

In June, Bush will present his New Middle East Initiative, when he convenes with other world leaders in Europe. The details of the plan are still unknown, but already the proposal has become the target of harsh criticism from people and leaders in the concerned area, the reason being that they were not consulted. Maybe what the president needs to better understand the Middle East is more than a handful of linguistic experts?

Claude Salhani is a foreign editor and political analyst at United Press International in Washington, DC.

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Business

Wither agriculture

by Thomas Schellen
written by Thomas Schellen

Food plays only a minor role on the national balance sheet, where agriculture is said to contribute about 8% to GDP, and it certainly doesn’t figure with any prominence in the budget. With subsidizing sugar beets and tobacco, the only somewhat significant government funding support for agriculture goes to crops that in the opinion of numerous experts have no future. The agriculture sector suffers most from insufficient public sector guidance and support, said Ragy Darwish, agricultural resource economist at AUB. “The unclear policies at the ministry of agriculture are the main problem,” he said. A second main reason for the sector’s shortfalls were the long years of civil war, he said, adding, “infrastructure and institutions have been degraded.”

But does that really matter, in context of the dwindling role of agriculture in the Lebanese economy? From a utilitarian perspective in the globalized age, food autarky is no longer the worthy policy it once was. But food security remains an issue of national economic and political importance also under conditions of globalization. “Few countries have succeeded in their economic takeoff without reinforcing their agricultural production and processing capacities,” stated the director of France‘s national agricultural research institute (INRA), Bertrand Hervieu, in a 2003 lecture. “No country can be developed or reconstructed without a minimum of agricultural economy and without being somewhat self-sufficient as regards food.” If this sector warrants strategic deliberation, it is for reasons of the unique attributes of food being at once essential livelihood, cultural identity and valuable commodity – which makes agriculture a multiple theme of food security, societal character and an economic factor. “I see agriculture as having a very important role because it is part of the basic foundation of a country, distinguishing it from its surroundings. Therefore, it is a potential source of comparative advantage and for building value-added,” said Khater Abi Habib, economist, anthropologist, and current chairman of Lebanon’s National Institution for Guarantee of Deposits and the Kafalat loan guarantee corporation. In his opinion, public and private sectors will under all economic scenarios need to invest heavily into agriculture. This doesn’t mean, however, that it would be realistic to aim for agriculture to regain an increased share of economic output. In a new positive development cycle, the basic production of commodity foodstuff would be outpaced by faster growing sectors of the economy. Whether the current contribution of agriculture to GDP reaches 8% or not, “the country remains on such a level because GDP has not risen as we had hoped,” Abi Habib said. “If our per capita income goes up significantly, we would have to invest heavily into agriculture to keep its share of GDP at 3% to 4%.”

Another consideration crucial in assessing the macroeconomic role of agriculture is the agro sector‘s massive technical development. While the high-tech revolution of the late 20th century is widely known for its immense rate of progress, the productivity increases of agriculture have been no less impressive in the larger picture of human sustainability. Over the past half century, agro productivity has grown faster than the world population, and agro industry rose to defining the sector’s viability.

The impact of the reversal of dominion by which food processing became economically more important than food growing has made farmers as dependent on agro industry demand as they are on weather and soil. Mismatches between production and demand thus count among the main problems of local agriculture. According to Darwish, some farmers who are situated just 200 meters away from agro industry companies dump their products, while the industrialists import food for processing from the region and even Eastern Europe. The remedy generally prescribed for alleviating the problem of underdeveloped collaboration in the sector is the formation of communication mechanisms. Based on the saying that it is better to light a candle than curse the darkness, Darwish and his colleagues proposed the creation of a Consortium du Agriculture National du Liban, or CANDL, as an instrument to bring all stakeholders in agriculture – farmers, agro industrialists, research institutions, statisticians and public policy makers – together, “to establish communication and work jointly for increased efficiency.” Private sector enterprises have invested considerable amounts into building agro processing capacities. However, many of these industrialists found that what is true for Lebanese industry in general, just as much applies to their situation: the domestic market is too small for justifying the capital outlays required for a modern agro industrial operation, and exports are the only viable proposition for sustainable agro processing. The Lebanese government has recently taken the first steps towards promoting agro industrial products abroad, through a pilot program for participation in food trade fairs, managed by the IDAL agency. Over the past three years, IDAL had also been entrusted with the promotion of Lebanese produce exports, which helped stabilizing production of farms but has yet to succeed in opening new markets. As things stand today, achieving marketability of Lebanese produce in Europe is a “long process” that will still require a considerable effort in educating agriculturalists, the chairman of IDAL, Samih Barbir, told EXECUTIVE (interview on page xx).

In popular local debates, excursions into the topic of Lebanese agricultural production almost invariably assume aspects of a historic comparison, measuring the national output of vegetables, fruits and cereals against the famed past when this fertile realm was the breadbasket of a much larger region than it is today. Lebanon still provides highly fertile ground. It needs to correlate its capacities for agricultural production and industrial agro processing to the role that this sector can play in a modern macroeconomic concert. According to Abi Habib, viewing agriculture under this perspective reveals development potentials not only for farming and agro industry but also for quality of life, attracting foreign companies, and tourism. Capitalizing on Lebanon‘s diversity in foodstuffs from production to culinary preparation could effect in a richer lifestyle on all levels and increase the country’s fundamental attractiveness. “It is an essential for giving us a tourism base that distinguishes us from countries around us. Sun bathing and shopping are limited and not thought nor culture enhancing,” he said. “When it is well sorted out, agriculture will provide jobs and opportunities, plus make the country richer and a more interesting place to go and look at.” A rich, successful and diverse agricultural setting thus would create a stage for highly developed tourism as well as establish the quality of life environment able to entice foreign companies to locate their regional offices here.

Agriculture could also fill a very direct function in providing parts of Lebanon with tourism revenue, added Darwish. Holidays on the farm are a fixture of tourism culture in many countries, and cultivating this segment in Lebanon could be lucrative. According to an AUB research study in two communities with agri-tourism potential, tourists would be willing to spend about $35 per day on an agricultural vacation with an arrangement of leisure options ranging from recreational fruit picking (for the guest’s own consumption or, in the case of grapes, for wine production) to hiking and eco excursions. Finally, protecting agriculture could translate into preserving the national social fabric and demographic balance between rural and urban populations, suggested Darwish. Whereas a lesser role of agriculture increases the migration pressure on cities and leads to marginalization of rural populations, the state could save considerable amounts by supporting agriculturalists, he said. “The government will be much better off in subsidizing farmers in any form rather than letting them migrate to the cities.”

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