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Hospitality & TourismSaudi return

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

by Nabila Rahhal June 7, 2019
written by Nabila Rahhal

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

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

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

The reunion

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

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

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

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

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

Will they or won’t they?

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

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

Photo by: Greg Demarque | Executive

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

Put in the work

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

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

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

June 7, 2019 0 comments
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EntrepreneurshipFinancial technology

StartechEUS to provide funds and mentorship

by Lauren Holtmeier June 7, 2019
written by Lauren Holtmeier

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

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

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

Few boots on the ground

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

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

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

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

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

Negative perceptions

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

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

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

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

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

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

To expand in the region or further a field?

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

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

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

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

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

June 7, 2019 0 comments
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CommentEconomics & PolicyEntrepreneurship

Lebanon’s long-awaited 2019 budget

by Fadi A. Karaa June 7, 2019
written by Fadi A. Karaa

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

An unnecessary ordeal

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

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

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

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

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

June 7, 2019 0 comments
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BankingSpecial Report

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

by Zeina Zeidan June 7, 2019
written by Zeina Zeidan

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

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

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

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

The role of women

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

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

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

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

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

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

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

The elevator pitch

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

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

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

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

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

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

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

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

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

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

June 7, 2019 0 comments
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BankingSpecial Report

Attracting FDI to Lebanon

by Samer Elhajjar June 7, 2019
written by Samer Elhajjar

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

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

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

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

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

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

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

June 7, 2019 0 comments
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BusinessCommentSpecial Report

The need to reform electronic money transfer regulations

by Sami Halabi June 7, 2019
written by Sami Halabi

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

Opportunity, not threat

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

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

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

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

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

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

June 7, 2019 0 comments
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BankingSpecial Report

CMA takes the lead on new exchange

by Thomas Schellen June 4, 2019
written by Thomas Schellen

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

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

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

 E  But are we talking about a financial bid?

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

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

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

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

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

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

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

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

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

For the time being, yes.

E  It might get merged at some point?

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

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

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

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

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

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

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

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

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

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

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

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

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

E  Are they listening?

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

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

June 4, 2019 0 comments
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BankingSpecial Report

SME finance as driver of job creation and sustainable banking in Lebanon

by Thomas Schellen June 4, 2019
written by Thomas Schellen

Not long ago, at the April 2019 annual spring meetings of the International Monetary Fund (IMF) in Washington DC, one of the most-touted themes was the finance of small and medium enterprises. 

That a flagship event of the IMF in 2019 would highlight SME banking is not out of the norm—after all, SME finance has been a well-known concern of international financial institutions (IFIs) for decades. However, it was a bit more unusual to hear speakers at an “analytical corner” session on financial inclusion and SME access to credit in MENAP/CCA (Middle East, North Africa, Afghanistan, Pakistan, Central Asia and Caucasus) countries open their talk with describing an entrepreneur called Tony.

 Tony, the IMF presenters said, was a successful Lebanese small business owner who had succeeded in obtaining an $80,000 SME loan “from a private bank in Beirut” that had enabled him to open a branch of the bakery that had been founded 20 years ago by his mother, with her “delicious recipe for making bread” (read mana’eesh). The loan allowed him to expand his staff and increase his retail sales by 50 percent.

In short, it was impressive that an SME credit access focus session at the 2019 IMF spring meetings featured a Lebanese SME example as a success story of SME lending in MENAP/CCA, although the narration was somewhat imprecise in certain details. Mabruk Tony, and mabruk his bake shop in Zalka.

SME access in the country better than its perception

From the local vantage point, it was perhaps even more memorable to see a Lebanese SME story highlighted in this context, given the unintended irony of using a Lebanese story as a shining example of small enterprises’ access to credit in a presentation that also outlines key factors—such as sound macroeconomic fundamentals and stability, and a favorable business environment—that, from IMF perspective, matter for financial inclusion of SMEs. 

But when Executive drilled below negative surface perceptions—that SMEs in Lebanon have an impossible time when they want to obtain credit, or that Lebanese banks are in principle very reluctant SME lenders—we found little support for this defeatist narrative. Instead, important local banks displayed a positive approach to SME finance. For example, Shirine Beyrouti, head of the project finance and syndications unit at Byblos Bank, tells Executive: “As a commercial bank, Bank Byblos has always been keen on financing and supporting SMEs. This is in our strategy. We strongly believe that the more we can reach out and support SMEs, the better it is for the economy.”

Publications and press statements by banks and IFIs present in Lebanon testify to a growing number of funding partnerships for SMEs with alpha banks, such as Credit Libanais, SGBL, and Fransabank. The partnerships often involve the provision of facilities for on-lending but can also be in form of IFI participation in equity of Lebanese banks or/and in the form of technical support and consultancy on SME finance.

At Bank Audi, where an SME unit was created just a few years ago with consulting input from the World Bank/IMF Group’s International Finance Corporation, SME unit head Hassan Sabbah says that the banking sector in Lebanon is at 17 percent of lending to SMEs—better than the regional average of 7 percent but lagging behind developed countries. According to Sabbah, the Bank Audi Group allocated a “significant” budget for SMEs, and the bank has more than 5,000 SMEs and individuals running SME businesses who are taking loans. 

“Our main reason [for establishing a dedicated SME unit] was an issue of [seeing an] opportunity, and another reason is that it is important for the bank to serve all the economic segments,” he says. “We are strong at the corporate and commercial level, and also strong at the retail level; so we wanted to establish this business line to also be strong at the SME level.” 

Credit to whom it credit is due

At Credit Libanais, another alpha bank that last November entered a long-term financing arrangement with the International Finance Corporation (IFC) in form of a $50 million senior financing facility with preferential interest rates, Deputy General Manager Nada Rizkallah explains that this move was a continuation of an SME focus that had existed at the bank for more than 10 years. According to her, Credit Libanais entered its first SME financing deal with the IFC as far back as 2007, and was one of the first banks in Lebanon to support SMEs through provision of different types of loans with preferential rates and conditions. “For this purpose, the bank, throughout previous years, took advantage of the subsidy programs that were established by the central bank of Lebanon to finance SMEs among other sectors,” she says. “We also collaborated with several local financial institutions that support SME lending, such as Kafalat and the Economic and Social Fund for Development, and we collaborated with international multilateral development banks for the purpose of securing the necessary funding.” 

The share of lending of their total portfolios that Lebanese banks dedicate to SMEs appears indeed substantially higher than the average share that the IMF found in the MENAP/CCA region stated in a report released in February and described in its 2019 spring meetings as the world’s lowest. Representatives of IFIs with long presence in Lebanon confirm to Executive that the Lebanese banking sector is advanced in its SME financing activities when compared to regional peer countries.

However, one has to consider additional nuances of the SME finance picture when adding in the activities of multilateral development institutions whose priorities are not necessarily the same as they are for commercial banks. Multilateral actors in development and finance provide funds to banks in the form of debt finance, meaning that a large facility is made available to commercial lenders under an agreed package. Such a package will have a cost frame comprising the interest rate that banks are paying to IFIs, and an agreed additional interest spread that banks charge when they lend to SMEs. These commercial banks are in turn obliged to use the funds provided by IFIs to lend to SMEs, plus the use and proceeds of funds have to be monitored by the IFI.

From perspectives of multilaterals that have the first priority to assist in economic growth and job creation in countries of operation, the local market conditions have been, at times, supportive of IFI participation in SME lending and yet, at other times, it would have not been helpful to provide local banks with low-interest credit lines for the purpose of onward lending to SMEs.

No simple game

There is, according to a representative of an IFI with experience in the Lebanese market who asked to remain anonymous, always demand for access to finance for SMEs in Lebanon. Though this demand has varied over the years, from the perspective of an IFI present in Lebanon it is part of its mandate to boost economic activity.

“But IFIs are not in the business of distorting markets; they are in the business of crowding in private sector lenders,” they explain. “Thus, during times when the Lebanese central bank provided certain SME segments with low-cost funding, IFIs were not able or willing to compete against this kind of subsidized lending, nor would IFIs push their offerings to commercial banks in periods when these banks lower cost of funding, and thus were willing to provide SMEs with financing tools at affordable rates.” 

A next layer of difficulty resides in an ambiguity of how different banks in Lebanon define what they consider to be SMEs, and in the large number of commercial actors that fit the size and economic profile of an SME, but are part of the informal economy. “The reality is much more complex, and the lower you go in the segment in terms of turnover and size, the higher the portion of informal and non-registered companies,” Audi’s Sabbah explains.

In any case, local bankers and international officials both confirm that Lebanon is now in a phase where increased cost of funding in the Lebanese market coincides with concerns over the economy, and so banks are more cautious when judging credit risk.

A new lender in difficult times

For the European Bank for Reconstruction and Development (EBRD) this constellation in Lebanon means that its timing was highly fortuitous when EBRD opened its Beirut office some 18 months ago, as the IFI extended its presence to Lebanon at a time when bank demand for low-interest finance kicked into high gear. “I think it was fortuitous timing for us to come as the country is right now in a period of economic challenge,” Gretchen Biery, EBRD head of Lebanon, tells Executive. “EBRD is an institution that puts a lot of emphasis on private-sector developments and support of SMEs, and thus I think we are a good fit in the region and in Lebanon in terms of helping private sector developments.”

As she explains, EBRD shareholders include governments from all around the world (the US being the largest shareholder) as well as supranational institutions: the European Union and the European Investment Bank (EU and EIB). With time, the IFI widened its scope of interest to a growing number of countries in all world regions and now has 67 governmental shareholders, with Lebanon and India as the latest joiners (to be a country of operation, a nation must also be a shareholder). “[Regionally], Lebanon is our newest country of operation, and our largest country by business volume is right now Egypt,” Biery says. “This is a new region for us, and we see much opportunity in Egypt. Lebanon is [a] smaller economy, but we see many opportunities here.”

However, even with qualified lending support available from a growing number of IFIs, banks Audi and Byblos both confirm that they have been recently on consolidation mode due to the economic situation and their growing cost of funds.

“In 2018 we started to decrease [exposure], and in 2019 we are really in the mode of trying to consolidate, of keeping our portfolio and our customers in the pink,” Sabbah says. According to Beyrouti, tightening of credit is visible all around the banking sector. “Most of the banks are in the modes of taking care and improving or consolidating their portfolio. We [at Byblos] have not stopped lending, although we have the liquidity, but we have tightened our lending policy. Our policy continues to be conservative, so this is nothing new,” she says. “Today being conservative means that we are a bit tighter on our credit standards. It would be very surprising for a bank to tell you otherwise after five years of limited growth [in the country’s economy] and rising interest rates.”

Diverse strategy plays

However, this reality is not the whole picture. In the strategy of Group Credit Libanais, emphasis on the development of SME lending was placed to the point that the three-year plan for 2019-2021 is to expand this specific activity. “We actually set a target to increase it from 20 percent of the bank’s total consolidated lending at the end of 2018,” Rizkallah tells Executive. “Under the bank’s three-year strategy, the objective is for SME lending to reach 25 percent of the total consolidated lending portfolio by year-end 2021.” 

Elie Alouf, general manager at medium-size BSL Bank, also confirms that his bank’s strategy is to continue increasing its SME lending. He tells Executive that BSL has recently introduced a simplified loan application for SMEs, different to that required from corporate loan seekers. In the total lending portfolio of BSL today, 35 percent of total lending is to SMEs, 44 percent in retail, and the balance is in their corporate lending portfolio. “I do not want to decrease [lending] to large corporations, but from now on, all the loan growth in our portfolio will stem from lending to SMEs and retail clients,” he says. “Our target is to reduce the concentration [of loans] for risk-management purposes.”

He goes on to say that his approach is one of a self-chosen mandate to pursue the SME market because “it is the major driver of economic growth anywhere in the world,” even as he experienced some additional barrier in not having alpha bank size when he approached a first IFI on behalf of BSL. 

“I approached one IFI that told me they only deal with alpha banks. However, they did not close the door as they said they will look into BSL. This makes me optimistic because for the last three years we have shown real nice profitability and credit risk performance,” he says. “Our asset quality is one of the best, if not the best in Lebanon, and we have an appetite for lending. We will find a way, knowing that at the end of the day it is a disadvantage [not to have an IFI facility] because IFIs are lending at very low rates, so as for their partner banks to be able to lend at low rates.” Alouf concurs that IFI preference for dealing with well-governed alpha banks is understandable, but calls for IFIs for reasons of fairness and avoidance of distorting impacts on the Lebanese banking sector to also consider beta banks that are solid, well-governed, and stable.  

Alouf’s ambition looks like not a bad match to what IFIs such as EBRD aim to achieve in Lebanon. Asked about the strategy and projects that EBRD pursues locally for the rest of 2019 and beyond, the IFI’s country head Biery emphasizes that she hopes to find opportunities across all sectors and ranging from investments in government projects and infrastructure projects in line with priorities stated at CEDRE to public-private partnerships (PPP) and private sector plays. She explains, “2018 was our first year of making investments in Lebanon in earnest, and our focus was largely on financial institutions. This is what we do in any country because local banks are critical for facilitating greater outreach to invest in real economy as much as possible. It is also an entry point for us to get to know a country. We know that the financial sector in Lebanon is particularly important and constitutes a large part of the economy, so they will always be a big partner for us here.” 

In terms of numbers, a first corporate loan and deals with banks advanced the EBRD’s local exposure to 244 million euros. “In 2018, we invested in a green economy financing facility and in the first green bond in Lebanon, took an equity stake in a bank, and did an SME credit line. We also did several trade facilitation lines and beyond this we did our first corporate deal to a private electricity distribution services provider,” Biery says. “In the background of all this, we did an enormous amount of work to understand what the other financing needs are in Lebanon; we made a wide outreach to companies in all sectors, and a wide outreach to the government to understand what the sovereign financing needs and public-private partnership possibilities are.”

Aligning divergent priorities

Economists at IFIs and local bankers are unanimous in declaring that the spiking costs of funds for Lebanese banks make the presence of capacious IFIs today even more beneficial for the Lebanese economy than was the case in previous years with less pressures. This is true even as the banks emphasize the eminent role of careful risk assessments, regardless of any IFI funding deals that they have.     

“Byblos has always kept its eyes out for industry, manufacturing, trade, and contracting. We always have wanted to finance these sectors because they, for us, are the productive sectors that promote the economy and create jobs,” Beyrouti says. “Therefore it is part of our rationale [to support these sectors and their job creation]. However, as a commercial bank, we have to study the risk for each client on a case-by-case basis.”

Noting that Byblos signed five global loans with IFI EIB over the past 15 years, and the most recent of them for 200 million euros in last December, she emphasizes, “One has to understand that the market is difficult, and that the cost of financing has lately increased tremendously, so we have to look at both the cost of funds and the matching of maturities. Since the costs of funds have increased for the commercial banks, the IFI funding lines play a greater role. Banks have to make it viable for the SMEs to get loans. We need to be able to provide financing at acceptable rates in order for the economy to keep going. Lending with IFI support provides added value to our SME clients, whether for their working capital, or in long-term financing contracts.”

Lastly, it should not be overlooked that SME finance and the extension of valuable business support to SMEs also is a matter for financial institutions outside of banking. Just one example for this entwining of the fortunes of SMEs with the broader financial sector, and for their underserved needs beyond access to loans, is credit insurance. In the experience of Karim Nasrallah, general manager of the Lebanese Credit Insurer (LCI), SMEs are a tough sell for credit insurance, although SMEs would be the companies that are in the biggest need of the cover.

“SMEs constitute the bulk of businesses, and there is a huge population of companies that LCI has not yet catered to. While our normal business in the Lebanese market caters to medium and large companies, there is a possibility in creating a standardized product that would address the difficulties SMEs have in subscribing to a credit insurance policy,” Nasrallah tells Executive. “This relates mainly to reporting—where credit insurance requires a lot of monthly reporting—and to having a product that one can acquire almost off the shelf, buying at the beginning of the year and renewing it at the end. We examined what could be implemented in Lebanon and worked on such a program, which we called Tajer, for trade.” 

He elaborates that the program’s wider concept is to make SME companies ready for trade and provide them with safety of their receivables through a credit insurance policy that moreover, from a banking perspective, could be looked at as physical or moral security to provide funding against. By Nasrallah’s reasoning, Tajer could even been sold through bancassurance channels and be used in such a way so that working capital provided by banks to SMEs could be secured with these companies’ receivables, as enhanced by a credit insurance policy.

Better financial inclusion of SMEs, whether in the form of so-called green lending, preferential SME credit lines, trade finance facilities or credit insurance, holds great promise. Even with the caveat that the economic fruits of SME activity can be small, with less benefits in terms of average salaries than generated by large corporations, people in diverse societies can benefit greatly from more and economically better integrated SMEs. It is indeed hopeful in a country passing through hard financial times, like Lebanon, to know that, the more SME finance success stories such as Tony’s they have, the better their prospects at modest prosperity.

June 4, 2019 0 comments
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BankingSpecial Report

Lebanese banking in times of scarcity and reforms

by Thomas Schellen June 4, 2019
written by Thomas Schellen

They have never seen the likes of it. Elias Alouf experienced a Lebanese childhood and adolescence. He is today general manager of one of Lebanon’s most history-rich banks, BSL, which has 155 years of existence under its belt, but in his living memory Alouf never witnessed such an intense cabinet debate as he did in May 2019. “For the first time in my life, I see in the 2019 budget discussion that the Council of Ministers is meeting regularly to discuss a single issue. What struck me most in this regard was that on one day they worked from 9 p.m. to 3 a.m. This has never happened before, and this means that they are serious in tackling the issues of the budget,” Alouf tells Executive.

Like any banker, Alouf is fully cognizant that the proposed budget’s revenue measures, of which the raised tax on interest income is the most significant one, will hit the banks as well as their depositors. “We as [the] banking sector will obviously have to contribute our part under the new budget, and we will be impacted by the planned measures. When the state increases the taxation of interest from 7 to 10 percent, this burden does not only fall on depositors who will have their revenues taxed [more than before]. This measure will also impact the revenues of banks, because the money that I am taking in from depositors is placed with the central bank and other banks and financial institutions by way of different interest-bearing instruments/deposits.” I will face a higher withholding tax on these interest earnings. Nevertheless, as banks we will have to adapt. Overall, I am very positive. What I would like to see in the budget, however, is a view for the future, a view toward profound economic reform,” he explains.

A qualified positive view on the state’s budget needs, and eventual future reforms and their economic impacts, is also the perspective of Shirine Beyrouti, the head of project finance and syndications unit at Byblos Bank. “Everybody will have to contribute their fair share, it has to be the public and private together in an equitable way, with reforms that make sense. And the banks are strong enough [for this],” she says.

Nonetheless, the upside of the cabinet’s seriousness in drafting this budget is accompanied for many by a downside in the proposed budget’s lack of convincing reforms, as economists pointed out repeatedly during the weeks when the budget law was readied for submission to Parliament. And from the banking perspective, despite the sector’s awareness of its many strengths, the debates over the budget with all their collateral protests and knee jerk actions have witnessed another, perhaps most serious downside in the fact that these debates saw fearful rumors and deliberately damaging propaganda about economic meltdowns in Lebanon run—over months—from peak to peak.

Business unusual?

“The current economic situation is not difficult. It is artificial. We are living in an artificial financial and economic environment right now, but I think this will be short-lived” answers Salim Sfeir, the chairman of Bank of Beirut when asked by Executive about his view on the prevailing economic situation in mid-2019. For Freddie Baz, chief strategist and vice-chairman of Bank Audi Group, the problem of the fake debate over the state of the Lebanese economy is as blatant as the debate is defying of logic and proportion. “If we compare the risk profile of Lebanon three years ago with the risk profile of today, how would it be rational for people to have been comfortable enough with the risk profile back then so that they had no ground for panic? We have a problem in this regard. Yes, there is a deterioration in the risk profile [if one compares 2019 to 2015], but this deterioration is not to the extent that it should translate into a justification of panic,” Baz tells Executive.

 He emphasizes that his message is not intended to signal that banks are happy with the current status of the economy, with the delays in reforms, or with the overall efficiency of the government and administration, “There are so many things in the public governance of Lebanon that need to be addressed and adjusted. Many reforms need to be implemented, and real improvement in the political governance is required. This is also necessary for the sake of the private sector so that it can recapture its competitive edge,” Baz says, continuing: “But I want to tell you that this risk profile of Lebanon and all the debate about 1 percentage point more in [the ratios of] budget deficit to GDP and debt to GDP is teeming with pseudo-experts and politicians who have their own agendas. They are making people go mad by telling them that the risk profile is an indication of definite collapse—[something] leading to a collapse, to hyper-inflation, a drift in the exchange rate, insolvency, and so forth.”

 Seen from this perspective, the last 18 months in Lebanon were marked by two narratives that propagated themes of “business unusual” and had their problematic impacts on banking. One narrative was the search of the country for a sane government. It had more cliffhangers than any Netflix series and bubbled over with irrational plot twists. The other narrative relates to the spread of negative propaganda about the economy by interested or ignorant parties.

It would be extraordinarily naïve to remain unconcerned under those double barrages of unwelcome surprises and fake news, and banking sector numbers, albeit much better than some might have expected them to be, contain enough ambiguity to fuel the minds of the eternal worriers among local and international economists. One sign that could, for example, worry some observers is the evolution of the Beirut Reference Rate (BRR), a monthly interest indicator calculated by the Association of Banks in Lebanon. Issued first in 2009, annual snapshots of the rate in May of each year show the BRR on US dollars jumping from 4.79 percent in May 2011 to 5.77 in May 2012, then advancing incrementally on an ascending slope to 5.87 in May 2013; 5.94 in 2014; 6.14 in 2015; 6.24 in 2016; 6.72 in May 2017, and 7.30 in May 2018. But from this elevated value, the BRR then jumped by more than two full percentage points in only one year, to 9.58 percent in May 2019. As the BRR is connected to lending interest calculations of Lebanese banks, the leap in the rate is not good news for Lebanese companies seeking to borrow from their banks.

However, there are doors of good promise to the future. For Audi’s Baz, one light at the end of the tunnel of fake and frivolous debates that have sought to down-talk the Lebanese economy is the fact that the propaganda assault against Lebanon’s economy has been going for 18 months without producing extreme results. “The outflows of deposits in the last 18 months was $4 billion or $4.5 billion out of approximately $115 billion of domestic deposits in foreign currencies, although the outflows were concentrated in two periods in the last two months of 2018 and in early 2019. This means that dollarization increased by 1 or 2 percent [-age points] and outflows represent 2.5 percent of domestic deposits. [By now], panic signals should have been translated into either more panic of people still holding local currency savings or more panic of those people who are keeping their savings in Lebanon. This is not the case. More importantly, if we consider Lebanon as a single bank for the argument, this bank, despite all panic signaling that has been going on, is still proving its capacity to maintain $115 billion of deposits with a rate of 5.5 percent [interest on deposits], which is 2.7 percent more than what most global banks are paying on three-month deposits,” Baz points out.

When seen in context with the positive developments that have emerged in 2019, Baz, in an interview with Executive, states repeatedly that the deterioration in the risk profile of Lebanon is indeed real, but insists that this reality is more than compensated by various improvements, such as concerning political awareness of the need to implement reforms. “In my opinion, the percentage-wise worsening in the risk profile by several points is more than compensated by the improvement in the political governance and awareness,” he says.

Strength in ethics

A further hard to assess but not to be underestimated factor contributing to the strength of Lebanese banks seems to be the sector’s diversity. This diversity and wide range of banking positions and strategies is something like a collateral benefit of the banking sector’s unusually large size in comparison with the size of the Lebanese economy. For example, while one might assume that the tighter lending approach of Lebanese banks that had to be observed in 2018 and 2019 would be engulfing all banks in the sector equally, the truth is that some banks have strategies that tend in entirely different directions. This is noteworthy, because the different banks may pursue their credit tightening and consolidations without Lebanon experiencing an aggregation of identical banking decisions that come all at the same time, and then might be counterproductive for economic development.

Another energy with strong potential to work to the advantage of banks in the to-be-expected austere times resides in their ethical orientation. The conscious tiers of the Lebanese banking sector have, in recent years, invested great efforts in the improvement of their ESG policies. Observers of Lebanese banks thus are increasingly treated to perspectives such as this one by Nada Rizkallah, deputy general manager and board member at Credit Libanais Group. “Credit Libanais continuously strives to maintain best ethical practices, which was evident in the bank becoming a signatory to the Investors for Governance and Integrity declaration. Moreover, the bank has developed an Environmental and Social Management System,” Rizkallah tells Executive. (Editorial disclosure note: Executive editor-in-chief Yasser Akkaoui is founder of the IGI initiative.) According to her, the ESM system is now applied at Credit Libanais in all of the bank’s credit decisions, meaning that, for example, borrowing enterprises have to meet well-defined environmental and social standards.  

As Bank of Beirut’s Sfeir confirms about the role of banking in periods of scarcity, “In this time, the role of the banking system is to fuel the economy of the country and give enough strength to the country to not face a long period of austerity.”

For BSL’s Alouf, the primacy of ethics permeates all of his bank’s practices. “As I have been saying since joining this bank, banks have a mission in any country, and this mission of helping the economy grow is in their DNA,” he tells Executive. For him, this means, for example, to prioritize lending that helps people fulfill legitimate needs for education, homes, and sane vehicles, but not lend money for luxury acquisitions or trips just for the sake of having the bank do more business.

There appear to be as many perspectives on ethics and moral orientation of banking in Lebanon as there are sincere banks with good governance, and a sense of their business mission that is in agreement with their shareholding structure and stakeholder interests. As the banking numbers on the whole do not appear threatening for Lebanon and have not appeared so for years, and as profit margins and profits are expected to reflect any real direction toward spending control and revenue improvement that the Lebanese state has written this year on its banner—or is assumed to commit to with notable substance this month through adoption of the 2019 budget law—banks have much to do and innovate to help Lebanon find its new direction.

Today more than ever, no one can deny that banking in Lebanon is inseparable from the fortune and economic course of the country and its government. For Byblos Bank’s Beyrouti, the issue is clear. “Until the outcomes of all discussions are visible, the only thing that banks can do is be conservative, maintain their liquidity in order to be ready to support the economy at [the right moment]. At this point, I think, everybody will have to put their skin in the game,” she says. And similar awareness is what, despite all their competition with each other, unites plenty of her banking peers (ones that Executive interviewed this summer and those that were not available for different reasons).

June 4, 2019 0 comments
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LeadersOpinion

Banks have done a lot for Lebanon, they deserve our trust

by Executive Editors June 4, 2019
written by Executive Editors

Banks have offered much to Lebanon. They have financed the country’s public and private sector needs for the entirety of the post-conflict years. They stood throughout the 1990s with a people scarred by violence and economic trauma. Through the 2000s, they stayed at the side of a state that was under constant financial pressures. In the 2010s, banks never ceased to respond positively and with vigor to the latest unconventional ideas that were sent their way by the central bank. As if this was not enough pressure, local banks all the while were subjected to the need to comply with ever-tougher international regulations on things like money laundering.

While this happened in this small country of ours, the world stumbled through overheating financial markets and over-risky banking behaviors in almost all economies into the Great Recession and its aftermath of imperfect recovery. Thus, it is well justified to regard it as miraculous that Lebanon, albeit always balancing on the financial edge, never went over this edge into the kind of receivership that exposed some other countries and bigger economies in the past three decades to the dictates of foreign rescues by the likes of the European Union and World Bank.

This does not mean that Lebanese banks are perfect, either as economic agents or as corporate citizens. They are profit-driven, just as banks have been at all times since the first money lenders set up their booths outside religious districts and centers of worship. And if the founders and revered parental figures of historic religions were cast into the roles of banking CEOs today, their first experiences would probably consist of being confronted with litigation by shareholders who challenge their lending policies for not generating enough returns.

So when asking what banks can do for Lebanon in the context of the reformist—but still fundamentally fuzzy and vulnerable-looking—budget of 2019 and, hopefully more robust, budgets of coming fiscal years, the first order of import is to understand that banks will remain profit-relying financial institutions. Lest they die, they will have to chase profits.

They also are mirrors of this society. In a country where six degrees of separation is about three degrees too many for any person, and where anyone with any decision-making influence is some sort of cousin of all other people in similar positions, it is not productive to decry the intermingling of those in political and banking power. Banks are furthermore tied to often divergent communal interests in fragmented Lebanon, whether they admit to it or pretend otherwise. How else could they exist in a country that in every practical regard is defined by sub-national and self-interested communities?

This essential business nature and Lebanese-ness of local banks are crucial factors to recognize and be aware of, so as to avoid plastering banks with unachievable expectations that no Lebanese citizen or community would accept to place on themselves. Operationally, Lebanese banks are furthermore imperfect human institutions, not superior entities. In this sense, the first thing that the Lebanese society might want to do, is humanize its banks, in a manner of speaking, and see them for the reality of their good and bad, strong and weak.

Making the behaviors in banking more holistically human and nudging lenders away from extreme homo economicus-type self-interest, will in many ways be coherent with trends in global thinking that, in one example, recently drove leading ESG (Environmental, Social, and Governance) experts at Paris-based consultancy Vigeo-Eiris to observe the essentiality of diversified banks’ strong ethical cultures in making them less vulnerable to misconduct. As impregnation with best ESG genes, resilient values and future-proof conduct is a long-term process that has to go viral in a bank’s entire organization, it is highly advisable that more banks in Lebanon embark on this path—and it is encouraging to see that several have taken the first or second step on this demanding journey. 

As this route is time-consuming, arduous, and historically under-traveled, Lebanese banks in the medium or medium-long term should not be bombarded with demands and expectations for turning themselves into pure benefactors to society—as if bank A, B, or B+ were competing for the title “savior of the month.” They will continue to be banks with behaviors that are productive and profitable for their own interests but are not going to save Lebanon’s economy. Banks will also continue to operate, as they must, under restraints of financial interest logics and international regulatory dictates.

However, there is also no reason to expect that banks will do any less for this country and its people than they did in the decades that are behind us. In these past years, even as they made important profits via the easiest routes open to them, banks paid their taxes and expanded their social actions, arguably more so than any other Lebanese economic sector or societal grouping. Let the banks be taxed, certainly, but let them be taxed fairly and in ways that will not drive them into ruin or exodus. Executive also calls for banks to improve their ESG and avoid the herd behaviors that can aggregate pressure on the people that depend on their good will, whether as household and retail borrowers or as debtors to the commercial and SME units of Lebanese banks. 

Times of scarcity and intense economic obligations are not times to disrupt all that can be disrupted. They are times to trust and earn trust. Executive is calling on our banks to make every effort they can to be absolutely trustworthy. At the same time, we call on all our readers and all the people of this country to use the greatest possible care when examining the conduct of their bankers, and empower them with the trust they deserve, and that is consistent with their record of the post-conflict decades.     

June 4, 2019 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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