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Lebanese entrepreneurship requires a robust regulatory framework

Lessons from the UK

by Roxana Mohammadian-Molina
  • Regulation is key for the success of entrepreneurship initiatives.
  • Tax breaks, a regulatory sandbox, and access to finance will aid investment in small and early stage startups in Lebanon.
  • The Banking Control Commission of Lebanon could play a pivotal role in kick-starting the fintech sector through a regulatory sandbox.

The High-Level Lebanon-UK Tech Forum, held in London on September 19, was a showcase not only of the Lebanese entrepreneurial spirit, but of the global outreach of Lebanon’s tech industry and digital ecosystem. The takeaway was that despite undeniable and plentiful challenges in Lebanon’s startup ecosystem, at the governmental level the desire is there to actively support entrepreneurship, particularly within the tech sector. 

Yet, underpinning the government’s goodwill is a key cornerstone on which the success or failure of entrepreneurship initiatives depends: regulation. The experience of other countries that have successfully created a thriving business and startup hub shows that creating an appropriate regulatory framework to support such efforts is key. Investors seek stability, consistency, and proportionate and predictable regulation that is built around a long-term strategy.

A look at measures that have proved successful in other countries is a good starting point. Take, for example, the UK tech startup ecosystem, which has evolved rapidly over the past decade, outpacing other European countries in terms of funding—7.1 billion euros ($7.8 billion at the time of writing) was raised in 2017 alone. The ecosystem has largely benefited from support by the UK’s financial services and markets regulator, the Financial Conduct Authority (FCA), through its Project Innovate, designed to aid innovative businesses in fintech and regtech. A key element of this project was its regulatory sandbox, established in 2015, that allowed authorized businesses to trial innovative propositions in the market with real consumers. A review of the regulatory sandbox published by the FCA in October 2017 confirmed that it had indeed reduced the time and cost of introducing innovative ideas into the UK market.

Practical solutions in Lebanon

What exactly are the regulatory measures that could see investment in small and early stage startup businesses transform Lebanon’s economic landscape and even make the country a global hub for startup capital? We will look at three: tax breaks, a regulatory sandbox, and access to funding. 

The UK Seed Enterprise Investment Scheme (SEIS) has been a successful government policy to encourage investors fund small and early stage startup businesses in the UK by offering those investors tax-efficient benefits—allowing up to 50 percent of the investment to be claimed back as income tax relief. Before 2012, investors would be taxed relatively heavily on any money they put into a new business, creating a lack of incentive to fund small and early stage startups. However, under SEIS, a number of tax breaks were introduced to would-be investors that made it much more rational for them to fund a startup.

A common area of concern for investors in early-stage startup is the regulatory certainty of firms.

Undoubtedly, a well-designed tax benefit scheme similar to the SEIS for would-be investors targeted to boost growth in specific sectors (fintech, agritech, medtech, and insurtech) would be a good starting point in Lebanon.

A common area of concern for investors in early-stage startup companies is the regulatory certainty of the firms in which they are considering investing. Feedback from all startup firms who participated in the UK regulatory sandbox indicated that taking part in the sandbox program provided a degree of reassurance to investors through the oversight of the FCA and the increased regulatory certainty participation provided. The Banking Control Commission of Lebanon (BCCL) has the opportunity to play a pivotal role in kickstarting the fintech startup industry with measures such as a regulatory sandbox. This would serve as a framework to allow small-scale live testing for new business models and increase the credibility of domestic Lebanese startups with both investors and customers alike.

As for access to funding, fintech, with solutions such as loan-based peer-to-peer (P2P) and investment-based crowdfunding platforms, stands as a serious contender to unlock the funding challenges faced by Lebanon’s SMEs. Yet the emergence of a P2P lending sector requires a strong regulatory framework to protect both lenders and borrowers and ensure that investors receive the appropriate level of protection.

In the US and the UK—the two largest P2P markets in the world by volume—the sector is highly regulated. In the UK, the regulatory framework around P2P has been designed primarily to provide additional protection to consumers, while promoting effective competition within the P2P lending industry. The regulation of this sector in Lebanon would allow the emergence and growth of the industry in a controlled way. What is needed is a combination of legislation and a regulatory framework from BCCL and Banque du Liban, Lebanon’s central bank. This would not happen overnight, but with the right roadmap in place this could be achievable in the next five years. 

The Middle East has one of the highest savings rates in the world, but people do not use a lot of credit, and investment opportunities are lacking. Therefore, a P2P model has the potential to place Lebanon at the receiving end of savings to be channeled into a dynamic SME and startup ecosystem.

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Roxana Mohammadian-Molina

Roxana Mohammadian-Molina is chief strategy officer and board member at Blend Network. A former banker at Morgan Stanley in London, she now focuses on investing in, growing, and advising fintech companies.

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