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Economics & Policy

Crisis management at the central bank

by Nicolas Photiades July 1, 2004
written by Nicolas Photiades

For more than a decade, Banque du Liban (BDL), Lebanon’s central bank, and the Banking Control Commission (BCC), an independent administrative body established at the BDL in 1967 to supervise banks, have maintained a stable banking and financial system. Both have provided the banking sector with strong support, set up a good regulatory environment to enhance the reliability of the system, and have dealt swiftly and effectively with recent “crisis” situations, involving varying degrees of mismanagement at Credit Libanais in the late 80s, Inaash Bank in 1999 and Banque Libanaise pour le Commerce (BLC) in 2001. Most recently, it was forced to deal with the murky affair of the Al Madina Bank, the political implications of which, threatened to undermine the very fabric of the banking system. To its credit, the central bank emerged from the imbroglio with its integrity intact.

The BCC, with its staff of over one hundred, which include around seventy professional bank examiners, is responsible for supervising the financial sector, and monitoring the implementation by the financial institutions of the relevant articles of the Code of Money and Credit (CMC) and their adherence to the BDL’s monetary regulations. It is also supposed to verify and analyze financial statements provided by the institutions it supervises and is empowered to impose corrective measures and restrictions on individual financial institutions if necessary. So far, the track record of the BCC has been proven by the many successful interventions and bank failure preventions that occurred successively since the Intra Bank collapse of 1966. Indeed, the BDL set up the BCC in 1967 to replace the banking control department, which did not have sufficient independence and supervisory responsibilities as broad as today’s BCC. One of the most noticeable accomplishments of the BCC was the saving of Crédit Libanais in the late 1980s. This bank, which had suffered from its affiliation to the collapsed Bank Al Mashrek group, was taken over by the BDL, which re-capitalised it and imposed a senior management that remains to this day. For a number of years, Crédit Libanais remained a BDL-owned bank, whose sole purpose was to manage existing deposits and customers, and restructure operations with the view of ultimately selling the institution to a third party (which was ultimately the Bin Mahfouz group of Saudi Arabia, which owns parts of the National Commercial Bank, one of the largest banks in the Arab world). In the Inaash case, both the BCC and the BDL moved swiftly to find a white knight (Société Générale) to take over that institution, thanks partly with financial incentives, while in the case of BLC, a newly appointed management was brought in by the BDL to restructure the whole bank, and capital of around $150 million was injected, making the central bank a majority shareholder. The BLC case was similar to that of Crédit Libanais, but is currently being managed actively and is actually competing with other domestic banks instead of being constrained by the management of existing customers.

The reason behind the BCC’s swift intervention whenever a bank runs into trouble is explained by the BDL’s cast-in-gold policy, which aims at using all means available to maintain a stable financial and banking system. Indeed, the BDL believes that it would be very costly for the entire Lebanese banking system to allow any bank to fail at this critical stage of the country’s economic development and the image of financial stability must always be maintained in the eyes of international investors. For this reason, many crises of confidence, runs on deposits and bank failures have been dealt with efficiently by the BDL, which has always succeeded in reassuring investors and the public alike. Although, the more recent Bank Al Madina case appeared to have been handled too slowly, it was nevertheless sorted out without the public being too affected by the collapse of a bank that was experiencing abnormal growth.

In the months following the Paris II conference in November 2002, the BDL issued a new directive requesting the banks to increase their statutory reserve requirements. This was another effort to solidify the support and prevention policy as regards to the financial system, as it helps prevent liquidity crises, even though there are doubts as to the ability of banks to access these reserves on a timely basis. The work of the BDL and the BCC is constantly exposed to the fragile domestic economic environment and to radical external events (such as a major regional war or a disastrous domestic political decision) and the raising of the level of statutory reserves is still an insufficient measure when one realizes that there is no formal mechanism under which the BDL can make dollars available to the banks facing runs on deposits. There are however, numerous crises prevention measures. The BDL has laid down a series of regulations, which are meant to assist the banks in times of crises and to prevent a large number of banks from stepping out of normal and healthy banking practice. One measure was to allow banking institutions to hold equity in foreign currency for up to 60% of total equity, matching as a result the dollarization rate of the banks’ consolidated balance sheet. Another measure is to set up the minimum capital adequacy ratio at 12%, compared to 8% in most other countries. All these measures and rules reflect the BDL’s will to prevent major capitalization and liquidity crises, and are supposed to decrease the intensity of intervention in cases of bank failures, which can turn out to be costly and often inextricable.

Elsewhere, the BCC has consistently shown a capacity to intervene and support any banking institution in difficulty, despite the fact that its members (five in total, including the chairman) are appointed according to political affiliation and religious background. The BCC’s members are well supported by a more junior but nonetheless efficient and operational staff. The BCC stands out as arguably the most efficient government regulatory and supervisory authority in Lebanon.

Although the BDL and the BCC have proven to be able regulators and supervisors, particularly as compared to many regional counterparts, there is still significant room for improvement. Indeed, the BDL and the BCC have to start taking a significantly more proactive role when tackling banks in the country, by going beyond the due diligence stage and into enforcing financial and operational directions that would be commensurate with the situation of each individual bank. There must be stronger and more severe ways of making sure that the strategy laid down to each individual bank and every decision made by the BCC is more rapidly and efficiently implemented. There are still a large number of smaller banks, as was the case with BLC, who ignore and evade BDL and BCC rulings and who do not seem to realize that their ultimate collapse could have serious repercussions on both the banking sector and the nation.

The banking environment is now changing rapidly, with most banks in Lebanon having to abandon their traditional policy of gathering deposits and placing them in high yielding government debt securities. Most banks are now asked to behave as commercial banks rather than deposit banks, and establish the appropriate internal systems to step up their lending efforts and support economic growth. The BDL and the BCC, aware of the changing situation, should substantially intensify their pro-activeness, and guide the smaller and more inefficient banks (there is at least thirty of them) towards safe and healthy banking practices. For instance, the BDL and the BCC must guide smaller banks towards:

§ Better risk management à credit and market risks can be more effectively managed with recent techniques. Inexperience could prove fatal.

§ Capital management à Lebanese banks need to be more actively advised on how to allocate the right amount of capital to underpin risks by product.

§ Cost control à Tighter management of operating costs will be the only way to counter thinner margins and limited revenue diversification. The BCC must make this clear to the smaller banks, which have yet to realize this.

§ Product distribution à Product and service diversification and their distribution through efficient channels are key. Although this is not a prerogative of the BCC, the later must nevertheless make sure that banks look at this aspect seriously and make efforts towards achieving that objective.

More severe measures – such as suspending senior managers from their duties and publicly warning an institution (in the press) in a similar manner to regulatory authorities in Europe or North America – must be taken against banks that try to outsmart BDL and BCC directives, and consolidation must, in some cases, be forced. The laissez-faire attitude of the regulator, which worked well in the 1990s, must now give way to a stricter and more severe relationship with mediocre bankers. Leniency and apathy can be extremely damaging, and can lead to major problems such as the collapse of a medium size bank.

Setting up an independent body with the prerogative of going beyond the assessment and situation analysis stage and into actual execution of strategic plans for particular banks, could be the solution. The BCC and the BDL are bound to the tasks of realizing the situation in each individual bank and making recommendations. They cannot easily take pre-emptive measures against any bank, but would rather wait for a significant faux-pas or even an ultimate collapse. A newly set up independent body, with more aggressive prerogatives could be the ticket to greater system-wide efficiency

Such an aggressive body or behavior from the BCC would have come handy in the case of Bank Al Madina, the collapse of which could have been prevented had there been significant pre-emptive measures taken well in advance (e.g. warnings, guidance, etc.). However, it is worth noting that the Bank Al Madina case was known to have been plagued by outside political interference, which hampered the work of the BCC and the BDL. The latter must be allowed to work without such intervention, which normally affects the work of any regulator and supervisor. Political interference in the work of the supervisor affects the credibility of the national regulatory authority, particularly in the eyes of international investors, who remain crucially important for Lebanon.

It will be hard to have a perfectly regulated and supervised banking and financial system in a country where economic fragility is omnipresent and where political interference on behalf of rogue bankers is part of Lebanon’s daily life. The BDL and the BCC are an island of relative effectiveness in a sea of mediocrity. Support, partly in the form of providing the regulator with more seasoned and efficient human resources, or the provision of any necessary means that would help transform the national financial system into a global player, is crucial. This is needed sooner rather than later.

July 1, 2004 0 comments
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Business

Lost in translation: the Elyssar plans

by Thomas Schellen July 1, 2004
written by Thomas Schellen

The large majority of building stock in any modern society needs to consist of affordable, social, smart residential units, which means a massive presence of low cost apartments. This is an inescapable attribute of the highly populous and predominantly urban human existence that defines our world. Lebanon, with its very high degree of urbanization and population agglomeration, underprivileged masses and overall young citizenry, is at least as dependent as any developing country on improving and increasing its metropolitan living quality through provision of inexpensive but humane housing.

At the peak time of drafting great post-war reconstruction programs, this urgent necessity was recognized in one single key project for creation of urban living spaces – Elyssar. Under the patronage of the mythically enlarged figure of the Phoenician princess and founder of Carthage, Elyssar was initiated as a development project for the capital’s southwestern realm with a preliminary master plan in June 1995. In the area between Beirut International Airport and the new Sports City – both at the time two of the largest construction sites in a construction-happy city – Elyssar was to create a mixed environment with commercial and recreational qualities and at the very minimum, 2,500 units of quality housing for low and middle income families. Nine years later to the month, and well over half into the project’s “global estimated time frame of 14 years” for accomplishing this development, Elyssar in reality remains the forgotten twin-sister of Solidere that was lost in the slums. Not a single low-cost apartment, workshop and shop appropriate to the economic situation and needs of the poor has been built. The BHV-Monoprix shopping complex on the airport highway across from Sports City is the only element of the concept that stands accomplished. Today, outside of some references in highly academic but incompletely researched papers from international conferences on urban development, Elyssar doesn’t even exist. Or does it? Amazingly, the administrative offices of Elyssar are operating in 2004 and according to PR-responsible Fadi Moucharraf, do so with a staff of “around 40.” The entity has prepared a large amount of engineering studies and plans, said Moucharraf, but central management has put a moratorium blocking all media inquiries and interview requests due to the absence of new activities.

This leaves it anybody’s guess as to what the real status and future of the Elyssar project might be – a viable question of public concern not only because of the project’s theoretical importance but also because of its obligation to meet public scrutiny. Created explicitly for improving both the social and physical fabrics of Beirut’s suburban areas that had borne long-term damage from Lebanon’s internal conflict in form of illegal settlements and unacceptable living conditions, Elyssar is, by the decree that defined its legal status in 1996, “a public agency with administrative and financial autonomy.” As such, it ought to be directly accountable to the sovereign public and its political organs and representatives. Some reasons for the utter failure in implementing the Elyssar project to date are common knowledge. The realm under the agency’s responsibility has in critical aspects not been accessible to normal state authority. Sect-related influence spheres in the area and active resistance by people living in the concrete slums over years made it prohibitive for government representatives to instigate measures, such as the tearing down of illegal buildings that stood in the way of road and infrastructure construction. On occasion, government officials setting foot in the area, namely entering the Ouzai quarter, were confronted physically by outraged crowds. The financing formula for building the affordable housing units, which were to be offered to the displaced and underprivileged people living in the slums north of the airport, hinged on the plan to find commercial investors willing to pay large amounts for developing the neglected and run-down Elyssar seafront into chic resorts. But as Beirut reconstruction and commercial development activities began to slacken in 1997 and 1998, this concept fell victim to the less-favorable-than-expected circumstances. The worsening crisis stemming from the government’s overestimation of economic growth coupled with exploding reconstruction costs and rising public debt subsequently eliminated any rational possibility that sufficient government “allowances” would be available to increase the Elyssar project’s viability.

In addition to these immediate political and financial problems, the concept drew suspicions from an increasingly skeptical populace and became the target of opinion makers alleging that underneath the veneer of social development and promotion of economic opportunities for the masses, “dirty hands” were manipulating the project for corrupt self-enrichment. These allegations may not have been presented with full and verifiable evidence but they left large population groups with an image of Elyssar as a scam run by Prime Minister Rafik Hariri. Until today, and in the minds of some students at top Lebanese universities, Elyssar is nothing but another exploitation scheme by which the ruling clique wanted to amass more money, power and control over some of the most valuable real estate in metropolitan Beirut. All above factors played a role in turning a proposed grand Lebanese solution for an important socioeconomic challenge into a Lebanese problem exemplifying the national struggle with administrative inefficiency, distrust of politicians, internal disunity, and massive suspicions of corruption and squander of the people’s monies. Elyssar wanted “to set new precedents of the government will and dedication to promote balanced growth and to provide social equity to all Lebanese citizens,” stipulated the officious document that can be read on the agency’s website. “The success of Elyssar is also crucial for the future of Beirut. Its redevelopment should provide back to Capital [sic] its distinguished character along the waterfront while setting higher standards for quality of living,” it said.

In light of the unabated housing crisis in Beirut’s poorest suburbs and the danger of increasing social tensions among impoverished segments of society, such words constitute bitter and involuntary irony on part of a public agency that will not or cannot explain what options remain for rescuing its forgotten project, which it is managing PRO-FORMA at a cost to the public that must have accumulated to millions of dollars over many wasted years. As things stand today, it seems increasingly difficult to envision a new future for Elyssar under its original mission. Some real estate experts now expect the project to be reborn as an upscale commercial development venture, because they see the land between Beirut Airport and the city as prime real estate with potential per square meter values comparable to downtown. While the assuredly well-paid, seven-member board and general management of Elyssar and their superseding political decision makers are not available for comment, it is not possible to do anything but speculate about such possible fundamental changes in Elyssar’s orientation. The uncertainty is made worse by the fact that neither public nor commercial alternatives to the scheme are in sight, which would have the much needed capacity to serve as a model for low and middle income urban housing creation. Opinions among developers today differ whether such a project could be feasible. Some reasoned that all such projects require public subsidies and no investor would be able to venture into a socially responsible residential development of the required proportions, while others claimed that too much government involvement is the main obstacle to making social housing projects work.

There is also a growing argument for fundamental questions on orchestrated housing projects. Town planning specialists continue to discover from evidence in developed and developing societies that mega-projects in social housing run up an incessant bill of negative social and economic results, from growing crime rates to failure in motivating both job creation and job acceptance. The challenge resulting from the human limitation to centrally plan urban life and implement compatible schemes for mass-living places all deliberations on this important issue in a bind to come up with what modern marketing-speak likes to call “innovative solutions.” The progress of commercial developments of large real estate projects in Lebanon is slowly extending from top-end wealth communities down the income ladder. It may one day reach the point where social projects become satisfactory under both profit and humanitarian considerations. But the urgency in alleviating the plight of Lebanon’s slum inhabitants in the meantime gives a multitude of reasons to ask about the vision and weakness of Elyssar. On paper, the Elyssar mandate is concise and unchanged. The area under this public agency’s care is outlined in its official FINAL MASTER PLAN from May 9, 1997 as being bordered by the Mediterranean Sea to the west and the Beirut International Airport road to the east and stretching from Adnan Hakim Street (where BHV is located) in the north to the airport’s boundary. This rectangular area comprises 560 hectares of urban and waterfront properties, including three kilometers of sandy beaches.

The mandate stipulates that three sources of funding are to be used for developing the area: · Allowances from the fiscal budget

· Profits from real estate developments

· Loans or investments from public or private sources

The core development objectives of the mandate are, in order of presentation on the agency’s website:

· Creation of a vision

· Building affordable housing units

· Upgrading of infrastructure

· Creation of development opportunities

July 1, 2004 0 comments
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Economics & Policy

Pushing for consolidation

by Nicolas Photiades June 1, 2004
written by Nicolas Photiades

The Banque du Liban (BDL), through its Banking Control Commission (BCC) has so far done a good job in ensuring that the Lebanese banking sector remains stable and sound, proving to be an able, proactive regulator that has come to the rescue and support of the banking sector whenever needed.

For the record, the BCC’s main responsibility is that of supervising domestic commercial banks, branches of foreign banks, foreign representative offices of banks, and financial institutions and brokerage firms in Lebanon. By making sure that the institutions implement the relevant articles of the Code of Money and Commerce (CMC), the BCC has the capacity to make a judgment and recommend whether particular institutions need rescuing, restructuring or even consolidation. The latter is a process that began in July 1997 when Banque Audi broke the deadlock and bought Crédit Commercial du Moyen Orient. In the same year Byblos Bank bought Banque Beyrouth pour le Commerce.

The BDL and the BCC have always been keen for the Lebanese banking sector to contract down to an optimum size (a total exceeding 83 banks in the mid 1990s for a small size country such as Lebanon was clearly too much). It is estimated that around 65% of the banks in Lebanon have total assets not exceeding $500 million individually, while the ten largest banks in the country control around 70% of the sector’s total assets, roughly $50 billion. Since the first merger/acquisitions, many other deals, some out of sound economic judgment, others out of necessity, followed. Inaash Bank, Universal Bank and Bank Al-Madina, had reached a point where a rescue was needed.

In such situations, the BDL stepped in, either as an administrator, hence taking over the management of the bank (e.g. the Banque Libanaise pour le Commerce case), or as an intermediate between a white knight (typically a larger and healthier bank, willing to expand its franchise further through external acquisitions) and the troubled bank in question. Such was the example of Inaash Bank, which was acquired by the Lebanese operation of Société Générale. The latter was provided with a “soft loan,” which assisted the acquisition funding, and was allowed a generous period for goodwill write-off.

It is worth noting however, that the BDL’s policy of granting soft loans to facilitate acquisitions of banks in difficulty has abated in recent years and, according to specialized bank analysts from international research institutes and securities firms, the generous policy of soft loans was said to encourage mediocrity and malpractice among the smaller banks, who felt they could sit back, safe in the knowledge that if things got sticky, the BDL come to the rescue with a plan that would not only preserve depositors and smoothly integrate the failed bank into a bigger and sounder group, but also save jobs that should not have existed in the first place.

The process of consolidation is being progressively more favored by BDL, as most of the country’s smaller banks are increasingly facing competition from their larger peers and are unable to invest in technology, human resources and product development. These banks are also barely capable of developing into niche players and will mostly not be ready for the forthcoming Basel II Capital Accord, which is due to be implemented world-wide in about three to five years’ time.

The Basel II Accord, which correlates capital with the underlying risk profile of the bank, is closely monitored by the BDL and the BCC, which have both shown concern as to the ability of certain banks to understand it, let alone implement it. Even the larger banks remain small by international standards and will inevitably look towards consolidation if their ambitions to become regional or international players, and to successfully implement Basel II.

BDL has so far facilitated the consolidation process with financial incentives (soft loans), and allowed larger banks to acquire and merge with smaller banks. BDL’s support in this policy has allowed the bigger banks to accelerate growth, extract more synergy savings, achieve higher economies of scale and leverage their non-financial resources. However, with the exception of the recent Audi-Saradar merger/acquisition, there has been no consolidation among the larger banks. This has so far not been particularly encouraged by the BDL, which still regards the elimination of smaller banks through systematic acquisition by larger ones, as a priority.

This policy has paid off. The total number of banks has been reduced from around 66 banks in 1999 to 54 banks at the end of 2002. However, the BDL should see the consolidation of the larger tier of domestic banks as a way to accelerate the consolidation process, as a larger and better equipped institution, such as the one resulting from the Audi-Saradar venture, should be in a better position to acquire the smaller banks, and hence reduce the total number of banking institutions in the country even further.

A rapid and strong consolidation momentum should produce a more efficient banking system, which would be more competitive on a regional basis, more aware of the latest international developments, and less vulnerable to external economic crises. Nevertheless, the BDL and the BCC should make it clear to the sector that a smaller number of large banks does not necessarily mean less credit risk, and that institutionalization should be the key for improved creditworthiness. The BDL is quite capable of handling a consolidation process, as it has the know-how, experience and tools to achieve and facilitate it, but it should step up its “education” campaigns in the themes of proper corporate governance, institutionalization and efficient banking management.

Meanwhile, any post-merger period is crucial for the BDL and the BCC, which have to make sure that the newly merged entity is capable of sustaining its market share, and there is compatibility of culture and management time allocated to the acquisition/merger. The “laissez-faire” attitude of the BDL should perhaps be tightened a little bit to include the continuous advisory of bank boards and executive management committees on how to conduct proper commercial and, in some cases, universal banking work.

The BCC has also encouraged the consolidation of foreign operations of some Lebanese banks (e.g. Audi, Byblos, Saradar, BLOM, etc.) with their domestic sister companies. Foreign branches or sister companies of local banks have been quite helpful in the past decade, as they have at one point been a safe haven in case of social unrest, and provided profits and assets in foreign currency. These foreign operations would also become an immediate destination for deposits fleeing Lebanon in the case a severe local economic crisis or geopolitical instability was to become too unbearable. In such an event, the outflow of funds from Lebanon would be minimized.

Elsewhere, larger Lebanese banks have to start thinking about acquiring or merging with foreign banks in other countries, whether regionally or in other geographical locations. The strengthening of a foreign presence, which would ultimately lead to overseas assets and profits overtaking domestic ones, would allow Lebanese banks to have not only an international outlook and image, but also to pierce the Lebanese sovereign constraint. The BDL therefore, should start developing new regulations that would facilitate such internationalization, by allowing the able banks to start participating in some cherry picked foreign markets. The recent rule, whereby local banks are to be allowed to invest, up to a certain extent of capital, in bonds issued by foreign entities, provided that these bonds are rated BBB- and above, is a step in the right direction.

June 1, 2004 0 comments
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Business

Salvaging credibility

by Michael Young June 1, 2004
written by Michael Young

In the annals of transparency and accountability, the Arab world (which is already weak at the knees when it comes to either standard) will probably not want to remember the scandal over the mistreatment of Iraqi prisoners at Abu Ghraib. That’s a pity, because despite the sordidness of the episode, it was, even for some Arab commentators, a democratic eye opener.

For all intents and purposes the prisoner scandal was entirely an American affair. It was first publicized by the television show 60 Minute II, it was propelled by two searing articles by investigative journalist Seymour Hersh of The New Yorker, and it became front-page fare in all American newspapers, large and small, for weeks. It shook the Bush administration to its very foundations, threatening the future of high officials, at a crucial time in an election year. If Iraqis one day must retain anything from the post-war situation in their country, it would preferably be the images of US officials apologizing for the mistreatment at Abu Ghreib – particularly the once untouchable Defense Secretary Donald Rumsfeld. Saudi columnist Mashari al-Zaydi, writing in the London-based Al-Sharq Al-Awsat, marveled at the “summoning of the defense secretary of the world’s greatest power, before the cameras, so that he could sit in a hot seat in the American congress and be criticized, scolded and held accountable.” One recalls, by way of sinister contrast, the story of how Saddam Hussein, upon hearing a junior officer’s criticism about the management of military affairs during the Iran-Iraq war, drew a pistol and shot him. And yet the officer, like Saddam’s hundreds of thousands of other victims, could never dent the dictator’s standing in Arab eyes, precisely because he made it a point never to apologize.

Much about the situation in Iraq suggests that if anything compels the US to leave the country, it will be the American penchant to let free minds speak. Indeed, the turning mood of the public in the United States, while nowhere near a “Vietnam moment” characterized by collective despair, is emerging as the greatest threat to the success of the democratization project in Iraq. As Middle East scholar Fouad Ajami recently wrote in the opinion page of the WALL STREET JOURNAL: “It is in Washington where the lines are breaking, and where the faith in the gains that coalition soldiers have secured in Iraq at such a terrible price appears to have cracked. We…are now ‘dumping stock,’ just as our fortunes in that hard land may be taking a turn for the better.”

Ajami went on to conclude: “We haven’t stilled Iraq’s furies, and our gains there have been made with heartbreaking losses. But in the midst of our anguish over Abu Ghraib, and in our eagerness to placate an Arab world that has managed to convince us of its rage over the scandal, we should stay true to what took us into Iraq, and to the gains that may yet be salvaged.”

There is distinct pessimism in that phrase, and a sense that the US is preparing to abandon ship at the worst possible time for everyone involved in Iraq. That would suggest that democratic states, for all their strengths, can take far less punishment than autocracies. Perhaps, but accountability and the benefits of free minds are also the only truly new things the US can offer the Iraqis, and the only weapons it can use effectively. Indeed, had the Coalition Provision Authority (CPA) only provided more of it, its credibility in Iraq might have been enhanced. Take for example a leaked March memorandum written by an unidentified CPA official and whose contents were published by the VILLAGE VOICE. The author of the memo mercilessly deconstructed American errors in Iraq, highlighting the scourge of post-war corruption. He wrote: “We need to use our prerogative as occupying power to signal that corruption will not be tolerated. We have the authority to remove ministers. To take action…would win us applause on the street…We do share culpability in the eyes of ordinary Iraqis. After all, we appointed the Governing Council members. Their corruption is our corruption.”

In many ways that’s a philosophy the US must enforce in Iraq, where the rule of law must be made to prevail, whether for the occupier or the occupied. As Ajami put it best: “We ought to give the Iraqis the best thing we can do now, reeling as we are under the impact of Abu Ghraib – give them the example of our courts and the transparency of our public life. What we should not be doing is to seek absolution in other Arab lands.”

That’s a moral no amount of car bombs or videotaped decapitations will be able to undermine, and it’s one that the Iraqis, so used to seeing American military power in their streets, will appreciate as its encouraging antithesis.

June 1, 2004 0 comments
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Business

Reeling in the ladies

by Anthony Mills June 1, 2004
written by Anthony Mills

Beirut is saturated with restaurants, but how many are owned by 17 women and two men? That is the story behind Pinocchio, the five-month old $140,000 Italian ‘Pizzeria-Trattoria’ in Ashrafieh. The 140-chair restaurant threw open its doors for business in January, and has since been consistently packed for lunch and dinner. So much so that by mid-may, majority shareholder Saad Kazan, claimed that he and his “angels” had recouped their initial investment. Come autumn, predicted Kazan, he will have doubled his money. By then, if Pinocchio is swallowed by the Beirut whale, he and his co-investors will move on to new pastures.

“Doubling your investment in six to seven months is fine by me,” he laughs. “It’s fine by any standards.”

Another option is to close for the summer, when the majority of those people who would normally eat out, head to the beach instead. According to Kazan, in order to keep the brand fresh it is better to shut down and open in late autumn than compete with the beach clubs and have empty tables.

Kazan explained that he initially exploited a gap in the market for a real, traditional pizzeria in Achrafieh. “We’re selling more than 200 covers a day – more than double what anyone expected, including our suppliers. Now every supplier in Lebanon is banging down my door. They wouldn’t give me the time of day a few months ago. Sweet revenge, eh?”

But it is Beirut’s army of ladies who, like the emperor at the Circus Maximus, will have the final say. According to Kazan, Beirut’s restaurant sector is fickle at the best of times. His challenge is to survive beyond the summer season. “The customers are blasé,” he noted. “Whatever you give them is fine for a short period of time, and then they move on. This is why we needed an edge.”

The edge is, in fact, the female investors’ social connections, which have helped generate business. “We are doing well because of these women,” Saad concedes. “We did a good thing to let them in here. They’ve been the driving force behind this restaurant.” On any given day, he said, 90% of customers at lunchtime, and 50%to 60% for dinner, are women and friends of my partners.”

Nonetheless, Kazan has factored in Beirut’s short restaurant life expectancy into his business strategy. “I was fully aware of the situation when we set up. That’s why we have low overheads and are aiming for a fast return. I know that things could easily go wrong after a few months, even with the success we are having now. Success wanes quickly here and we had to factor that in.” He and his wife hold a 25% stake in the business. Two other investors have 15% and 10% shares respectively. The remaining 50% are spread in small, chopped-up parts (either 2.5% or 5%) across the other shareholders. Of the 17 female investors, all are of what the founder called a “certain social standing and they bring in the business.”


The minimal cost, low-risk, quick buck strategy explains, as well, why the initial investment was spread across more than a dozen people. It would be “sheer madness” for one person alone to shoulder the financial burden in the anticipation of drawn-out success, said the founder. “I would never do it. Unfortunately some of my colleagues have. They’ve lost a lot of money.”
Pinocchio’s simply decorated wooden-focused interior cost $25,000 to fashion. A $4,000 to $5,000 landscaping job set up an outside garden terrace for the summer months. And monthly costs run at around 50% of revenues – which are over $125,000 a month.

Nice work if you can find it.

June 1, 2004 0 comments
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Business

Feeling the pressure

by Michael Karam June 1, 2004
written by Michael Karam

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

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

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

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

Teething problems

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

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

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

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

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

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

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

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

Tell that to the OIV.
 

June 1, 2004 0 comments
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‘Drafting’ mercenaries

by Claude Salhani June 1, 2004
written by Claude Salhani

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.

June 1, 2004 0 comments
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Let’s get together

by Tony Hchaime June 1, 2004
written by Tony Hchaime

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

2 Delta Group: Deposits less than $100 million

3 Alpha Group: Deposits over US$1 billion

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)
 

June 1, 2004 0 comments
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Business

Q&A: Jerome Bon

by Executive Contributor June 1, 2004
written by Executive Contributor

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.

June 1, 2004 0 comments
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Counting the profits

by Thomas Schellen June 1, 2004
written by Thomas Schellen

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.

June 1, 2004 0 comments
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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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