Last month, two shark-like super yachts sat in Solidere marina, the sun’s reflection glinting menacingly off their blacked-out windows. Inside, built-in swimming pools, jacuzzis, radar masts and other space age gadgets come as standard. But that’s what you get for $60 million, a price range that shuts out all but the biggest spenders – and it is these that Lebanon’s marina owners want to woo as an increasing number of Arab owners are looking for suitable destinations to moor their boats. “It is a growth industry. We have more marinas and more people coming from the Gulf,” said Mohamad Chehab of Chehab Marine, a yacht accessory shop in the Starco building. The local yachting sector can be divided into two segments: sailors (mainly European), who include Lebanon in an Eastern Mediterranean cruise itinerary, and Arabs, mainly from the GCC nations, seeking to permanently moor a boat in a Lebanese marina. Not surprisingly, those in the industry are most excited about business coming from this latter group of high net-worth individuals.

“I have received had ten phone calls today from Kuwaitis and Saudis interested in yachts. It’s incredible. It’s the first time in 12 years that I have noticed this demand coming from Gulf residents,” Chehab said. This could be explained by the post-9/11 effect that has seen many Arabs eschew Europe for the delights of Lebanon. Many in the sector believe it will only be a matter of time before a yacht will become the ultimate accessory of the well-heeled Arab. “Wait one year and you will be amazed. Just think of all the luxury apartments you have in downtown, many of the people who will buy these will also be interested in boats,” Chehab said.

Investors in turn are keen to get a slice of this pie and are now showing more interest in the sector. It is rumored that several big marina projects are planned in Lebanon with property developers from Dubai showing interest. “We know of three or four (marinas) that are going to be launched in the coming years. One in the south and one in Beirut, and we expect to have some up north,” said Christine Asmar, project manager with International Fairs and Promotions (IFP), the company who with its German partner, Messe Duesseldorf, organized the recent Beirut Boat Show that attracted roughly 18,000 visitors.

“We all know that this is a country where everything lends itself to the marine industry: the weather is nice for nine months a year, it’s never too windy, it’s never to rainy and it’s conveniently located in the Mediterranean,” said Asmar. Interestingly enough, despite these relatively ideal sailing conditions, there seems to be little interest in sail boats, as most Arabs buyers are interested in engine-powered boats. “In the [global] super yacht segment, 20% are owned by Arabs,” said Asmar.

Prior to the Beirut Boat Show, now in its fourth year, IFP conducted a feasibility study that pointed toward major future growth in the industry. “The market projections for marinas and other water front facilities in the whole Middle East and Lebanon would be about $20 billion, with Lebanon’s potential estimated at $1 billion,” Asmar said. Although it could be argued that any report commissioned by the expo organizers may not be entirely objective, the potential was borne out by unprecedented sales at this year’s show.

“The highest number of visitors we had was in 2001. But the spending power was greater in 2004. It’s not the quantity that is important it’s the quality. A lot of sales took place at the show this year,” she said. “We also had a bigger participation on the international level.” Asmar said she felt that Lebanon and Dubai both catered to different markets and were not really in competition with each other. “Dubai is not a rival. We had exhibitors from Dubai this year and they are the people who confirmed to us that this is a complimentary market to Dubai, it doesn’t compete in any way,” said Asmar. “The region is big and the investments so huge that we can afford to have two shows, one in Beirut one in Dubai.” Asmar added that water sports centers on the Sinai Peninsula, such as Sharm el-Sheikh, attracted a different kind of market, one more interested in diving and other activities than yachting.

There are three large-scale marinas in Lebanon, Joseph Khoury in Dbayeh, Automobile et Touring Club du Lebanon (ATCL) in Jounieh and Solidere marina, near the old St Georges hotel. ATCL, a non-profit private club and the oldest marina in Lebanon is almost always full, said director Nabil Gemayel. Most of the club members are Lebanese but Gemayel said the club often attracts Europeans coming from other Eastern Mediterranean destinations. “We receive every year around 40 or 50 yachts from Cyprus, Turkey and Greece,” he said.

The Joseph Khoury marina in Dbayeh opened five years ago and is arguably the biggest marina in the Middle East, with 700 berths and 200 staff. Manager Joe Bassoul said the occupancy rate was around 30%, but he believes business will improve as the marina – the newest in Lebanon – becomes more established. “It needs time before you can improve the situation,” said Bassoul, who added that the boats in his marina ranged from small size yachts to bigger boats, with usually around 15 luxury yachts moored in the facility.

Imad Dana, manager of the new Solidere marina, said that 95% of the members are Lebanese. The marina boasts around 150 boats in the 250 berth marina and Dana said he expected to see an increase in interest. The Solidere marina employs around 40 people, but Dana added that many of the bigger yachts have their own crews, some with as many as 20. Fueling the new interest in boating are two yachting events in the country: ATCL recently hosted the Emir Rally, a boat race across the Mediterranean, and Solidere marina will be the starting point for the La Route d’Elissa boat race that involves 10 sail boats with all female-crews racing from Lebanon to Tunisia. However, despite this new bubble of optimism, Lebanon still cannot compete with yachting hubs in Turkey, Cyprus and Greece where easy air access, cheaper mooring prices and stable politics attract European yacht owners. The key to Beirut’s attraction is that it is the genuine destination for Arabs to come and play on their boats. Although Dubai has some of the biggest sea-front developments in the world, such as the massive Palm Island project, many in the Middle East and Gulf are more interested in mooring their boats permanently in Lebanon, where the lifestyle is more in keeping with the yacht-owning culture.

“It’s very hot in the Gulf so they never use their boats and there are no destinations. In Lebanon, we have created summer resorts all over the coast,” said Chehab, who was at pains to mention that it wasn’t only the Gulf owners who were buying and mooring boats in Lebanon. “You have a lot of Lebanese emigrants coming from abroad and buying boats here,” said Chehab, while Alain Maaraoui, managing director of Sea Pros, said most of his sales were to locals. “Sales are going up, although last year was better than this year, but mostly they are Lebanese.”

Nonetheless, Lebanon could do more to attract visits from European yachters. Aside from the hazy images of war and uncertainty, Lebanon faces a major a hindrance with red tape in the customs and general security procedures, which deter foreign visitors. “It’s too much paperwork and people prefer not to go through that and just go somewhere else,” Asmar said. Moreover, bureaucracy makes it difficult for boat owners to leave their non-Lebanese registered boats here for longer than six months; this is in contrast to Turkey, where there is no time limit on mooring periods for foreign boats.

The conflict with Israel also restricts movement along the Lebanese coast. “To go through the Lebanese coast is not really permitted by the Lebanese authorities. They prefer the boat to come and stay in the marina and then people can visit the coast by car,” said Gemayel.

Cost is another factor that may put off the price-conscious European boat owner. Lebanon simply cannot compete in the Eastern Mediterranean. Average mooring prices in Lebanon are $350 per meter a year for smaller boats, with the price rising to around $600 a year for larger yachts. This is almost double the mooring charge in Turkey and Cyprus. But many in the industry say prices will drop as soon as there is more competition. “When there are more marinas the price will go down,” Asmar said.

Car drivers around the world usually agree on one opinion: gas prices at the pump rapidly shoot up when world crude prices increase but slip much less eagerly when crude rates head back south. In the period immediately after the world oil market relaxed from its $42/barrel (bbl) peak in late May, the reality in Western Europe and the US fit that view, as pump prices after one week relaxed only by about $0.04/ liter, or 2%, in Europe’s largest market, Germany, and rates in the US took until June 14 to drop back below $2/gallon. One can credit both stronger market confidence and improved balance of the supply-demand logic for allowing international crude oil prices to dip back below $40/bbl last month, following the June 3 Beirut OPEC meeting to increase production quotas by 2.5 million barrels per day (bpd) and legalize already existing overproduction, and subsequent physical increases in production from Saudi Arabia and the UAE (total around 1 million bpd) that brought a corrective factor onto record high prices. But although prices at the gas pump eased slightly in the second half of June also in Lebanon, vital concerns over the cost of fuel to both the Lebanese economy and the individual consumer remain.

In Lebanon, gasoline prices are government mandated, with weekly reviews of price ceilings that in all practical terms translate into the effective sales price that the consumer pays at the gas station. As the state thus exerts double influence on gasoline prices through taxation and price determination, the demand to lower retail prices for fuel became a central rallying point in the country’s May 27 general strike. However, while economic hardships make them more than understandable, demands for capping the maximum amount that Lebanese consumers have to pay at the fuel pump must in the end remain wishful thinking. The reasons behind high gasoline prices are too complex and the implications of reduced revenue from gasoline taxes are too vast to allow for such a “simple solution.” One may never forget that the first driver of the consumer gas bill is the supply situation. All mineral fuels are refined from crude oil and so the price of a gallon of gasoline derives directly from the price of crude oil. It has been well established that a number of reasons have influenced the high prices of crude oil, which soared as high as $42/bbl in trading on the New York Mercantile Exchange by late May 2004. Such a high price of oil will inevitably be passed along the refinery chain to gasoline prices and thus affect the end user. What then were the causes behind the recent oil price rally? It was spurred on by a combination of angst over potential supply shortages, strong demand, and aggressive speculative buying. Looking at the details, most analysts agree that the following main factors influenced the market in the first half of 2004:

· Instability in Iraq

· Terrorist threats to producer nations in the Middle East (including Saudi Arabia)

· Increased global demand, particularly from China

· Lower-than-expected non-OPEC production

· Shortages in spare refining capacity available to OPEC (and non-OPEC) producers

· Aggressive fund buying (more significant in the early stages of rally).

The large extent to which the war in Iraq added instability to the markets must not be underestimated. Attacks and acts of sabotage have hampered reconstruction efforts designed to rebuild the country’s archaic oil industry. At the time this article went to print, an attack on the Northern Kirkuk pipeline to the Turkish Mediterranean port of Ceyhan, and two separate attacks on the southern export terminal of Basra completely halted Iraq’s 1.8 million bpd of crude exports; repairs are expected to be completed around the second week of July. Kidnappings of foreign nationals hindered progress and prompted some foreign organizations to withdraw their employees, including construction companies who are in need of valuable experience for the reconstruction job at hand.

Iraqi exports had averaged 1.8 million bpd, around 1.6 million bpd of which is from the Basra oil terminal, while the remainder came from the northern Kirkuk pipeline that leads to the Turkish Mediterranean port of Ceyhan. Resistance to the US occupation and terrorist attacks against the country’s political and security infrastructure have been stiff, dimming the prospects for a successful performance of the Iraqi Interim Government in the second half of 2004. Numerous local leaders have openly opposed US plans for the handover of power in local elections, thus making additional violence and continued instability very likely. Terrorist threats to other Middle East producers have also pushed markets higher and are adding a premium to crude prices. An attack by gunmen against a Saudi Arabian refinery complex in Yanbu that killed six workers in May and further terror strikes against foreign oil workers in June underscored the threat against the security infrastructure in the world’s largest producer. If attempts to restore security at Saudi oil facilities and ward off terrorist groups are not successful, future supply fears could grow to levels that would make crude oil prices of $35 to $40/bbl seem cheap. In trade developments over the past year, crude markets have become increasingly affected by heavy speculative non-commercial buying, primarily by investment funds. Large speculative net long positions have pushed markets higher as well as raising the possibility of a massive sell-off when investors decide the market has topped off. NYMEX WTI net non-commercial longs hit a 15-year high of 87,000 lots in February, although this has now fallen back to 40,000 lots. Estimates of the impact of the funds on the market vary greatly but on average, traders see the impact as comprising around $4/bbl in the composition of current prices. However, it is important to note that the last $4 rise in the market (from $37 to $41 on WTI) has not been driven by fund buying. This reduces the likelihood of a large fund sell off as the funds are all heavily in the money. It also means that demand from buyers does not seem to have been significantly impacted by current high prices.

As for the demand outlook, figures are also not in favor of significantly lower oil prices. In its monthly OIL MARKET REPORT, the International Energy Agency (IEA) raised its forecast for global oil demand in 2004 by 360,000 bpd to 81.1 million bpd, reflecting the largest absolute increase in global oil demand in 24 years. The report cited stronger than expected energy consumption among industrialized nations, which was bolstered by explosive demand growth in China, as the main cause of the increase. The IEA forecasts world consumption will rise 3.8 million bpd from the second quarter’s 78.7 million bpd to 82.5 million bpd in the fourth quarter of this year. The upward revision adds to worries that increased demand will continue to prevent inventories from accumulating and cause disruptions in the supply of products such as gasoline. The IEA also said that non-OPEC producers are failing to pump as much as expected this year, increasing reliance on OPEC for extra crude. The IEA raised its forecast on the call of OPEC crude by 500,000 bpd to 26.4 million bpd for this year. However, numerous producing nations are currently producing at maximum levels leaving little room for any additional output to help ease prices. While predicting oil price developments is a fickle business, the combination of the above elements makes it seem unlikely that dropping crude oil prices could drive gasoline prices down to levels global consumers enjoyed in the late 90s. Here, it is also important to remember that as high as they are, nominal (inflation adjusted) crude oil prices today are far below their highest levels, reached in 1980 (see table).

But this fact cannot be a total comfort to Lebanese consumers. Apart from global market developments, end prices for gasoline are determined to a very significant portion on the domestic front. As stated unmistakably by a survey on global gasoline prices (undertaken in May by research firm AirInc for CNN Money), “the main driver of price disparities between countries is government policy.” In one word: taxes.

Different tax burdens contribute greatly to the fact that gasoline prices for a 20 liter tank filling in May 2004 could range up to $35 in the United Kingdom, Hong Kong, and Germany, while US drivers would have paid not much over $10 and motorists in some countries – try Azerbaijan –

could get away with filling up for as little as $6 to $8 per 20 liters. In Lebanon, the tax burden on motorists has increased substantially over the past four years, first through a hike in gasoline tax and then through addition of Value-Added Tax. The sum of tax levies on each 20-liter filling thus today easily exceeds 50%. The ratios fluctuate somewhat according to the rate decisions taken at the ministry of water and electricity (at the beginning of June, for instance, the ministry reportedly reduced the excise tax on gasoline by LL2,000 to curb pump prices at LL23,000 but in subsequent weeks it re-raised the rates by LL800 when supply costs dropped). But in essence, fuel tax rates in Lebanon are the highest they ever were and extremely unlikely to drop by any significant percentage.

In addition, under the regime of Saddam Hussein, Lebanon had import/ export agreements with Iraq that offered it crude oil at significantly below the market price. Although the legality of the Iraqi exports, and alleged related provisions to political leaders, has yet to be analyzed by a reliable source, the deliveries of Iraqi oil were relieving the Lebanese consumer of paying the true price of crude and helped in protecting him from abrupt price shocks as we see today. One can always question whether these levies were instituted with sufficient foresight on their macroeconomic and socioeconomic effects, which were exacerbated greatly by the rise in crude prices. Under a principle that applies equally to mature and developing economies, transportation-related taxes and fees are means to steer development, avoid wastage of fuel resources and limit pollution. Due to contradictory impulses, the Lebanese system of car registration fees and fuel taxes gives grounds for questions also in this context. But there can be no doubt that the fragile Lebanese fiscal situation today would be very negatively impacted by a massive contraction in revenue from fuel taxes.

The third force in determination of fuel prices are distributors. Local importers and distributors of gasoline are frequently accused of acting as cartel and bearing responsibility for the high gasoline prices. But although they are licensed to trade mineral products for profit, Lebanese importers and distributors of fuel oil play a much smaller role than the state in the setting of prices for end consumers.

Lebanon’s fuel importers and distributors say they are not benefiting from the high fuel prices and even claim that they put them at a disadvantage for several reasons. Regardless of the pump price, their government mandated dealer margins are fixed (at $0.20 per 20 liters) and remain unchanged. Costs in importing, such as obtaining letters of credit and pre-paying customs, and distribution-related costs, namely extension of credit lines to their buyers, are on the other hand being driven up by higher product prices. In addition, higher prices impact consumption and importers predominantly describe motorists as monitoring their consumption more than before. Some see mitigating effects in new cars and increasing tourism but overall, the sector speaks of stable to slightly negative developments in sales. Moreover, fuel distributors can only compete in very limited fashion, mostly through discounting in times of falling supplier prices. The limited leverage to set prices coincides with the limited buying power of Lebanese oil importers, restraining their ability to obtain good prices in international markets.

On the other hand, it appears undeniable that the Lebanese scenery of a few local and no multinational operators has reduced pressures that would normally give incentive to firms to develop, rationalize and become more competitive. Some traders admit that abolition of government fuel price mandates would most likely be immediately followed by a practice of price-fixing among distributors, since cartel structures already exist in several respects. Local refining capacities for oil remain theoretical and the small market – which lacks transparency in governmental pricing policies as well as in industry structures – seems not able to attract multinational firms to come in and develop local product chains to the end consumer. All these factors can be attributed with contributing to the very sluggish development of Lebanon’s domestic gas station culture, which is currently characterized by high service levels but a scarcity of modern efficient filling stations with associated retail marts. In conclusion, the issue of whether or not increases in global crude prices are affordable to the Lebanese consumers should not be a case for the treasury and its meager reserve but rather a case for alternative modes of transport, increased investment in public transport facilities, and perhaps a reduction in the number of cars the average household chooses to have. As inexpensive individual transportation (with emphasis on individual car ownership) does not qualify as either civil right or absolute economic necessity, the consequence is inescapable: if you want to drive it, you need to pay for it. Whether or not one can afford a private car is not a case for a depleted treasury to address, but rather a case of re-evaluating options. Said Ghusayni is the Energy Derivatives trader at Mitsui Bussan Commodities LTD in London.

The frightening rise in the number of terror attacks in Saudi Arabia appears to be aimed primarily at the expatriate community. This seems like a clear attempt to strike at the soft underbelly of the kingdom – its economy. Initially, it might seem the attacks are aimed at causing panic and claiming as many lives as possible. Or perhaps this is al-Qaeda’s promise to follow up on earlier threats to kill as many “crusaders” as they can. Closer analysis, however, reveals a more sinister motivation is driving the recent terror campaign. Its aim is to hit the kingdom where it would hurt the most.

Yes, it’s still very much about the economy. The terrorists, said Marc Sageman, a forensic psychiatrist and author of UNDERSTANDING TERROR NETWORKS, are applying the old communist logic, that “you wither away the state,” in order to have it fall. Sagemam is also a former CIA case officer for Afghanistan.

For the record, Saudi Arabia earns nearly $500 million a day, allowing the kingdom’s 7,000 princes and their assorted consorts – a total of some 24,000 royal household members – a healthy yearly stipend of $500,000 each. The grand total of that budget hovers around the $3 billion mark. Money that critics of the House of Saud say is wasted on luxury items, extravagant villas and apartments strewn across the Mediterranean.(A recent report circulating around Beirut these days has the crown prince reserving about 1,000 hotel rooms for him and his entourage in Lebanese hotels for the summer. If true, this would certainly give a boost to Lebanon’s economy.) But let’s return to the Saudi economy, which terrorists hope to disrupt. And this they can accomplish by targeting the petrochemical industry. There are basically three possible ways in which to obstruct the flow of oil. The first is to target the installations – the rigs that pump the oil from the ground, the refineries that process the crude, storage facilities and shipping terminals. But, all those locations are extremely well protected and hard to approach.

“The oil facilities are very well defended,” said Roger Diwan, managing director of the Petroleum Finance Co., a Washington, DC, firm specializing in analysis of oil industry trends. “There are armed troops, cameras, multiple levels of defenses, etc., that make it very difficult.”

The second option is targeting the oil pipelines, which carry the oil from the fields to the refineries and from there to shipping facilities. While also protected, these offer easier targets given the vast distances they cover. It is practically impossible to secure every mile of pipeline across the desert. In Iraq, for example, pipelines have become a favorite target of insurgents over the last year.

In Saudi Arabia the situation is far different, and security is far more stringent than in war-torn Iraq. Secondly, sensors, cameras and other devices closely monitor the pipeline network. Any interruption in the flow caused by an act of terror can be rapidly rectified. The oil flow can be quickly stopped from a remote monitoring station, the damage quickly assessed, minimized and repaired. And finally, the pipelines traverse remote desert regions where attacks carry little or no fear effect on the population. They have no propaganda effect.

That leaves the third option – the so–called “soft targets” – otherwise known as the civilian workers. Because civilians are less defended than the oil installations, they make far easier targets, and are therefore the “soft underbelly” of the kingdom’s economy.

Those behind the spate of attacks know only too well that if they manage to scare away the expatriate workforce, they disrupt the production of oil and in the process succeed in crippling the economy. That, in turn will paralyze the country, therefore weakening the government, allowing them to come all that much closer to achieving their ultimate goal: overthrowing the House of Saud. In the last month alone, armed gunmen killed six employees working for an American company in the Red Sea port of Yanbu, they murdered 22 civilians in a housing complex in the Eastern province city of Khobar, killed an American, an Irish BBC cameraman and wounded Frank Gardner, the BBC’s security correspondent and kidnapped an American in the capital Riyadh.

Civilian employees – particularly Westerners – easily stand out and make easier targets than the oil installations. Diwan pointed out that unlike the installations, terminals and refineries, “for the civilians, it’s far more difficult. In Dhahran, for example,” he said, “you have an entire city to defend. It’s very hard.” And what is hard for the authorities naturally becomes all that much easier for the terrorists. There are about six million foreign workers in Saudi Arabia. Tens of thousands of them are employed in the country’s huge petrochemical industry. Saudi Aramco, the state-owned oil company that holds the world’s largest oil reserves, employs 56,000 people, of whom about 2,300 are US and Canadian citizens and about 1,200 Europeans. Striking them in their place of work, as in the Yanbu attack on the Houston-based ABB Lummus Global company on May 1, or in their homes, as in Khobar, is simple enough from a tactical point of view. Despite stepped-up security at all work and housing locations, there is, after all, a limited amount of security that can be implemented without making those places resemble maximum-security prisons. Additionally, with the use of Saudi military uniforms, as the terrorists were reported to be wearing in several of the attacks, fooling the real security personnel is even easier.

Following the latest attacks, a number of Americans have already stared to leave the kingdom, encouraged by their embassy in Riyadh who advised all US citizens to leave as soon as possible. The British issued a similar warning and the Foreign Office is warning of more attacks to come. In an e-mail made available to this reporter, an oil executive at Saudi Aramco voiced his fears that the “exodus of ex-pats has begun.”

The terrorists hope that carrying out additional attacks on foreign workers will eventually scare more away, thus creating a vacuum in the oil industry, crippling the economy, and in turn weakening the authorities’ grip on power. This, the terrorists hope will facilitate the overthrow of the regime. Alternatively, following a sudden exodus of expatriates, al-Qaeda and its affiliates could replace the vacuum with sympathizers, positioning themselves for an eventual “take-over” of the oil infrastructures in the country. While these scenarios may seem far-fetched, neither possibility should be brushed aside without considerable thought. Either way, the terrorists could seriously undermine the kingdom’s oil-based economy. To take a page from Robert Baer’s book, SLEEPING WITH THE DEVIL, where Islamic terrorists sabotage the oil installations, this situation could now become all too real. Baer, a former CIA Middle East operative, describes a hypothetical situation in which Islamic fundamentalist terrorists sabotage Saudi Arabia’s oil facilities in the country’s eastern province, severely hindering the flow of oil to the West. Although imaginary, the scenario is nevertheless worrisome and the threat now very real.

The one positive outcome that may emerge from these frightening developments is that they should serve as a rude wake-up call for many Saudi officials who, until just recently, refused to believe that their country could be on the verge of serious civil strife.

For a long while the leaders of the kingdom refused to take the terror threat seriously. Lately, they have begun to say they would fight terrorism and crush it with “an iron fist.” But so far, the fist has failed to come down very hard, and the terrorists continue to operate and become bolder in their deadly endeavors. Prince Turki al-Faisal, who for decades ran Saudi intelligence and who is now ambassador to Great Britain, told the BBC that all but one of six al-Qaeda cells operating in the kingdom had been “dismantled.” But judging from the brashness – and the rise in number of attacks – one could easily assume the opposite to be true. After the Khobar attacks Abdulaziz al-Murqrin, a Saudi leader of a terrorist group known to be affiliated to al-Qaeda, published a statement on the internet calling for urban warfare and the toppling of the royal family. He promised that the remainder of the year would be bloody for the kingdom. Some analysts believe that the terrorists might have already infiltrated the security services. “The fact that most of the arrests have resulted in open gun battles suggests either that the Saudis are remarkably inept at security operations or that the terrorists know that security forces are coming,” reported MJ Gohel and Sajjan M. Gohel, terrorist analysts with the London-based Asia-Pacific Foundation. “Riyadh’s ability and the loyalty of its security services, to break up the terror network now operating in Saudi territory is questionable,”

“Bizarrely, the Saudi Arabian government announced that the current three terrorists still on the loose after the Khobar attack are part of the last terrorist cell in the country,” said the Gohel brothers. “I am very worried,” said Sageman, who added that he feared Saudi Arabia could be in the midst of a “full-blown insurgency.”

Claude Salhani is the foreign editor of United Press International in Washington, DC.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Strange times, indeed.

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

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

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

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

Al Mawarid Bank SAL

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

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

Jammal Trust Bank

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

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

Banque Misr Liban SAL

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

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

Near East Commercial Bank SAL

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

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

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

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

Creditbank

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

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

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

Lebanese Swiss Bank

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

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

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

Middle East & Africa Bank

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

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

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

Federal Bank of Lebanon

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

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

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

Banque Lati

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

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

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

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

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

THE BOTTOM END

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

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

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

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

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

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

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

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

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

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

What kind of students are you interested in attracting?

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

How does the program fit in with global economic trends?

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

How would you describe the capacity of Lebanese students?

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

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

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

How will you judge the success of the program?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Merger Ability

It is an accepted business paradigm that mergers can be instrumental in corporate growth, especially as positions in the top three companies are in many sectors associated with taking the lion’s share in total profits realized in the sector. However, the overall global picture shows that the majority of mergers are unsuccessful because they either fail outright or the financial savings of consolidation, mostly capital and expense synergies, are in the end not larger than the costs incurred through the merger. A crucial factor in the ability to acquire and integrate another company is determined by information technology and systems. Paul McCrossan, an international expert and consultant in merger negotiations among financial firms, told a Beirut seminar last month that in his experience, “a company with an excellent computer based administrative system can absorb another company one third its size with a similar product mix with almost no additional administrative staff – if it has a decent administration system.”

Banks in the alpha group have established good IT systems and automation levels, which would meet the requirement for technical administrative capacities that increase the ability to integrate a smaller bank.

Transparency of operations and openness of corporate culture are further factors seen as supportive of integrative abilities in a business organization, whereas the fixation of the entity on a single dominant individual as top decision maker is regarded as a potential obstacle.

For the record, a full nine of the 12 banks in the lead of the industry have accomplished acquisitions of smaller banks. Byblos Bank, SGBL, Bank of Beirut and Fransabank have the strongest track records for completed mergers and acquisitions in the last five years. Before shouldering the responsibility for building the Audi-Saradar group, both parties to the rapprochement had succeeded in absorbing smaller banks. Banque de la Méditerranée, although it does not prioritize presenting the public with a transparent view of its balance sheet figures and processes to the extent practiced by its peers, also has the systems and proved its ability to integrate a smaller bank into its group by buying Allied Business Bank in November 2001. Credit Libanais, which had undertaken two acquisitions in 1994 and one back in 1977, picked up the business of the American Express Bank in Lebanon in June 2000. These often-quoted merger waves and their sector-purging effect not withstanding, experts contend that the institutionalization process of Lebanese banks has been uneven and describe personality-centric management cultures in at least two big banks as obstacles standing against maximization of benefits from mergers, both potential and actual. From negotiations over assimilation of numerous small banks into larger ones in the past 10 years, it is also evident that the acquisition candidates –specifically because of lacking financial transparency but also owing to vanity issues on part of owners – have presented difficult negotiation partners.

Corporate governance

A critical qualitative category, and major buzzword in management seminars, is corporate governance. Although the level of corporate governance has improved over the past decade in all leading banks and human resources strategies have been implemented, experts view the level of institutionalization and corporate governance achievements in Lebanese banks as still lagging behind international standards. Good internal communications are crucial for achieving a high-quality corporate governance and strong identification between employees and bank. Proactive Lebanese banks have moved towards open door policies and open communications structures. In several major banks, however, employees admonish that communication fails in terms of reciprocity. Especially performance reviews are strictly one-way processes, top-down, and evaluations of their superiors by employees are missing from the corporate culture. Talking to Executive in confidence, banking insiders with many years of experience in operations and middle management raised further serious questions on the progress of corporate governance (see box).

The positive outlier in terms of achieving a corporate governance quality that is comparable to good, although not the top internationally achieved levels is Banque Audi, with Bank of Beirut and SGBL also mentioned by analysts and consultants as advanced on the path to fulfilling institutionalization.

Business Community Relations

The business community interactions between a bank and society are of two main categories, relations with customers, peers and business partners, and fulfillment of corporate social responsibility. Customers, who are the life of the bank, are treated generally with more courtesy and professionalism than in the mid nineties, when retail banking was traipsing precariously onto new grounds of customer relations. However, banks still get less flattering remarks when it comes to taking proactive roles in understanding and responding to customer needs. As ample anecdotal evidence from business and retail banking clients shows, customers still feel that banks are difficult to deal with, often bureaucratic, and less accommodating in practice than in their advertising projections.

The term corporate social responsibility (CSR) attaches a strategic quality to the contributions an enterprise makes to the community. CSR has been a concept on steady global advance for some 10 years. From large multinationals to niche entrepreneurs, corporations are emphasizing CSR as a core aspect of their identity and adopting the practice of publishing dedicated CSR reports. Lebanese banks by and large do not yet carry an emblematic CSR identity. However, banks are among the most socially active enterprises in Lebanon. Albeit showing a larger gap between local performance and international standards than for other qualitative elements, about half of the banks in the alpha group are perceived as more active than most in terms of contributing to their communities. What Lebanese banks generally have been lacking in, was adoption of specific areas of concentration and development of track records in pursuing a relevant CSR agenda and consistent activities, whether in ecological, social, educational, cultural or inter-communal dialogue. As an epitome in every assessment of quality achievements in the non-balance sheet dimension of Lebanese banks, one guiding thought should accompany the reflection on the status quo and continued strife after excellence: banking is a serious business but it is up to all stakeholders to put money matters daily into the context of the living qualities and inalienable truths that endow the entire play of funds and finances with value. A drop of humor, perhaps even self-irony, goes a long way in keeping the serious from falling dead serious.

Fair Game?

Unfair payscales and a glass ceiling are holding back the advancement of employees

Salary fairness, evaluation procedures and equal opportunities are still tender spots in the corporate culture of Lebanese banks. Although bank employees have, by national standards, an exceptional average income, the high total salaries over costs ratios at banks camouflage huge income gaps. Three to 4% of the workforce benefits from, by Lebanese standards, very large salaries, said an insider. A division head in a big bank can take home $150,000 in annual compensation but another executive in the same division, who holds near identical qualifications and responsibilities, but with a slightly lower position, would be paid no more than $30,000 or $40,000.

When no performance bonuses and incentives are paid, as was the case in several banks in recent years, motivation to provide outstanding service diminishes. Talking among themselves and to friends, increasing numbers of employees also express high frustration levels because they are aware of the exact financial gains that their work contributes to the bank but see their salary increases as disproportionately small in comparison to their productivity. This job dissatisfaction on the branch level can be exacerbated if local managers are perceived as under qualified. According to banking analysts, some branch heads are paid not because of their managerial skills but hold their positions solely on the basis of their pull as ranking members in the local township, which the bank regards as essential for attracting customers from the community. Banks accomplished opening the career ladder to women up to the middle and some upper management positions. The echelons above those levels, however, have thus far remained closed. “Are Lebanese banks ready to appoint a woman to the post of chairman or general manager? Certainly not today and not tomorrow,” said a senior female corporate loan manager in the upper ranks of a major bank, who deals with companies above $5 million in turnover. If a woman is both highly qualified and outspoken, her stand in the acquiescence driven and male-dominated Lebanese business environment is decidedly tough. “I am not a ‘yes person;’ that is why I have a lot of problems in my professional life,” she said, “but sex discrimination is not as obvious as some other forms of discrimination. If someone says that there is no religious discrimination in the banking workplace, they are lying.”

Relying entirely on organic growth of their business, BLOM Bank carried the baton of leading the Lebanese banking sector in terms of assets for more than two decades. As the creation of the Audi-Saradar Group is exerting consolidation pressure at the top of the sector, EXECUTIVE wanted to know how BLOM Bank views recent developments and if the bank is changing its strategies. EXECUTIVE asked and BLOM vice chairman and general manager, Saad Azhari, answered.

As the leader in the Lebanese banking sector, you have seen a new group emerging besides you, a competitor of regional format. How does that affect your plans and ambitions?

Our policy will not change, in terms of looking that we have a strong bank, that our assets are good assets, and making sure that our shareholders always get the best return. BLOM Bank has an important size in the Lebanese market and we achieved this in continuous internal growth over 40 years, which allowed us to contain costs. Our level of cost to income is extremely low. That is why we have the highest return on our equity, and the lowest cost to income ratio. And that is why we have also the highest rating. We are the only BBB+ rated company by ratings agency, Capital Intelligence.

What do you regard as the key factor enabling you to reach market leadership?

We achieved this position of number one because of the confidence of our customers and we have been number for over 20 years, since 1981. Our customers believed that we provide security and a good service, and came to us because of that. We are still continuing to grow at a rapid pace and increasing our market share, as our figures for this year show.

Did merger and acquisition projects ever play a part in your development plans?

I cannot hide that there were a lot of merger discussions between us and other banks. Frankly, we found that elements that we require were missing: either the price was too high or the quality was not good. We would definitely not buy a bank just to grow. Some of the banks we discussed with, both foreign and local banks, have been bought by other banks.

How do you view mergers in Lebanon in terms of their benefits to the bottom line of the banks that went this road? 

Figures talk. Compare the actual present size of the banks that merged with what should have been their size, and look at BLOM. If you compare the risk profiles and look at profits of BLOM and the profits of banks that have merged, you will see that BLOM has the highest level of profits, even as it does not have the highest level of loans. Here you have high profit and low risk. What is better: high profit and low risk or high risk and lower profit? You judge for yourself.

If a new merger or acquisition prospect would enable you to ascertain the status of largest bank in Lebanon, would you pursue it more actively than in the past?

No. Our strategy will not change. For any merger to happen, it has to be sure that the quality of our assets will not deteriorate and that it does not negatively affect the return to our shareholders. Those are the essentials for us. We want to stay a strong bank with the highest rating in Lebanon. It is also very important to us to be able to give a good service to our customers.

Would you consider a merger as means to facilitate regional expansion?

BLOM Bank is the Lebanese bank with the strongest presence abroad. We have a subsidiary in Paris, which has branches in London, Dubai, Muscat and Sharjah. We have an offshore in Cyprus and we have constituted a bank in Syria where we have management control. We are also opening a branch in Jordan. We are expanding wherever we think it is possible and interesting for us.

It is often said that Lebanese banks need to be stronger and considerably larger in size to successfully compete in the region. What is your perspective on this?

I think that the size of the banks in Lebanon compares well to banks in the region. Compare the size of Kuwaiti banks and Lebanese banks, for example. The assets and deposits in Lebanese banks are almost twice of those in Kuwaiti banks. The banking sector in Lebanon is number three in size in the Arab countries, after Saudi Arabia and Egypt. Lebanese banks are growing larger and larger and today have large asset volumes. For example, we ourselves have passed $9 billion in assets. Our size is large compared to the economy and with our shareholders’ equity; we are over capitalized when compared to the risks on our balance sheets. We already have a good size compared to the region, we are able to have a presence outside and we have the possibility to expand.

So you do not consider large regional banks as having a size advantage over BLOM and other Lebanese banks?

Many Arab and foreign banks have a presence in Lebanon. Lebanon is an open market, while some regional markets are closed to us. I think we have a future advantage as these markets are opening up. Jordan is an example. Before, we could buy a bank in Jordan but not open a branch. As this has now been allowed, we are opening a branch there in September of this year. Lebanese banks have important opportunities in the region and I hope that we will be playing a much more important role in future.

Where does BLOM set priorities for domestic development?

We at BLOM have seen important growth in corporate banking and also in retail banking. This is for specific reasons. Retail is still a developing sector, where all banks increased their activities. In corporate lending, big corporate names here were historically mostly dealing with foreign banks. Some foreign banks have already moved out or are planning to move out of Lebanon. BLOM saw this opportunity. Last year, we created a corporate unit and effectively grabbed an important amount of clients that used to deal with foreign banks, which either left or are scaling down their portfolio, mostly because of Basel II and the strategy of international banks to reduce their exposure to emerging markets. That is why our loan portfolio had a good growth in lending last year, even though the lending in the Lebanese market was generally stable.

What is your ratio of non-performing loans?

The non-provisioned non-performing loans stand at less than one percent, 0.5 to 0.6%.

How important are private and investment banking in your activities?

In Lebanon, private banking is generally very limited, frankly speaking. You cannot strengthen private banking much, especially because of the taxes that the government collects on interests on international bonds. The big private banking activity is done by our subsidiary in Geneva. We have an investment bank that is mostly specialized in medium and long-term lending. Corporate and retail are expanding at a faster pace than other activities, but we are working in all activities.

Have Lebanese banks improved as much in non-balance sheet capabilities and quality as they grew in terms of balance sheets?

The services given by banks have improved a lot over the past years. Before, you had to deal with three or four people at a bank branch, to undertake an operation such as depositing a check or transferring money. Today some banks, including ourselves, have a teller system, in which one person can facilitate your operations. Secondly, delivery channels and their variety improved a lot. Before, the only option was to go to the bank. Today you can use ATM, phone banking, internet banking, and the call center. In standard of services, Lebanon has arrived at a very high level in worldwide comparison. You cannot see this from the balance sheet but you can see it through the operations, dealing with the bank.

Do you expect the banking sector to continue its first quarter good performance in the remainder of 2004?

It will definitely not be an easy year, because the treasury bills that Lebanese banks had bought before Paris II, especially in September, October, and November of 2002, will all mature by end of 2004. Those treasury bills carried a high interest rate and banks hold a large number of them. The renewals will be at a much lower rate. Secondly, we have to put a legal reserve of 15% of our US dollar deposits at the central bank. A central bank circular in 2002 asked banks to deposit a certain level of their dollar reserves for two years with the central bank, at interest rates that first stood at 9% and then were lowered to 8.75 % at the end of 2002. These two-year deposits are all maturing and will be replaced at a much lower rate. Banks thus are definitely going to be squeezed on those interest margins.

How about deposits by Arab investors?

We are continuing to see an important growth of deposits coming towards Lebanon from Lebanese and Gulf countries, and the pace may be a bit higher than last year. This is a good sign of confidence. We are also continuing to see interest in different projects. I have recently been in Kuwait and met a lot of people who are interested to buy homes in Lebanon. And some of the big groups there want to undertake important projects here. The same is true for groups from Saudi Arabia and the Emirates.

So overall, your expectation for 2004 is for a smooth year?

In general terms, 2004 will achieve a good growth of deposits and assets for the banking sector in Lebanon. There is going to be more pressure on banks in terms of profits towards the end of the year, and perhaps there will be a slight decrease in profits. We will not see a repeat performance of 2003. It would be good if banks can achieve stability of profits, which is a little difficult. Banks are expanding and all banks are trying to increase their market share and there is more competition. Overall, I don’t see any troubles in 2004.