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.