Although shattered by conflict and undermined by an ongoing political crisis, Lebanon has some good news: the economy is still growing, with economists predicting 2.4% growth in 2008, up from an estimated 2% in 2007. Better still, the country’s bigger banks have once more ridden out crisis, positioning themselves as players in the competition to reinvest the neighbouring Gulf region’s huge liquidity.
On the downside, the fragile political environment is holding back crucial economic reforms. These include reforms pledged at the Paris III donor’s conference in 2007, the privatisation of two GSM mobile phone licences and the restructuring of state utility Électricité du Liban, which supplies 85% of Lebanon’s electricity and has been looking for a private sector investor since 2003.
Lebanon had only just begun recovering from the devastation of the 1975-91 civil war when it was shocked by two new crises, whose ramifications are felt to this day: the summer 2006 war between the radical Shia movement, Hizbollah, and Israel, which severely damaged civilian infrastructure; and the assassination in early 2005 of prime minister Rafiq Harriri. Since then, the Syrian-backed president, Emile Lahoud, who had been in office since 1998, finally stepped down in November 2007 – although opposing factions have not been able to agree on filling his seat.
In a destabilising situation, much depends on how Beirut is able to negotiate with its regional neighbours, particularly Syria, which plays a key role in Lebanese politics. Analysts believe that the stalemate could last until the next parliamentary elections, which are set to take place in the first half of 2009.
Political concerns
Bankers are reluctant to discuss the situation in public but in private they express strong concerns. Lebanese banks are a crucial source of funds for the government, and the financial services sector is one of the main drivers of economic activity.
According to ratings agency Standard & Poor’s (S&P) most recent analysis, the Lebanese banking sector accounts for 3.5 times the country’s gross domestic product (GDP), which amounted to $24.4bn in 2007.
The sector is driven by deposits from residents and non-residents – the latter attracted by the high returns available and drawn by longstanding family and community ties. In 2007, the level of deposits in Lebanese banks increased by about 11%. The dependency on non-resident deposits raises the risk of funds going offshore if confidence in the system is lost, and this ultimately depends on improvements in the political sphere.
The good news, according to Moody’s Investors Service, is that Lebanon’s bank depositors tend to be stalwarts and are not easily spooked. These include Lebanese residents, members of the large Lebanese diaspora, and wealthy Gulf citizens with holiday homes or other ties to the country.
Going abroad
For all its trials and tribulations, Lebanon still boasts 64 commercial banks, including 11 specialised institutions and four Islamic banks. At September 2007, total banking assets reached $81.9bn. The five largest banks, which include Blom Bank, Banque Audi and Byblos Bank, account for more than 60% of the sector’s assets.
The trend among the larger banks is to move into fast-growing under-banked neighbouring countries in the Gulf, Levant and north Africa. Fransabank, which is present in Algeria, Syria and Sudan, has stated its intention to move into Iraq in the middle of this year.
Byblos Bank was the first Lebanese bank to be granted a licence in Iraq in July 2006, and it bought Armenia’s International Trade Bank last September. Bank of Beirut has a 17.76% stake in Sudanese French Bank, the second largest private bank in Sudan with about 18 branches and total assets of $395m.
Syria has attracted a number of Lebanese players including Blom Bank and Byblos. Crédit Libannais launched operations in Bahrain last October, while Lebanese Canadian Bank holds a stake in Al-Salam Bank. Saudi Arabia has granted investment banking licences to BankMed, Banque Audi and Blom Bank.
A growth story
Having developed a strong base at home, Blom Bank – one of Lebanon’s top three banks – is taking its model abroad. Its recent entries into Egypt, Jordan and Syria have proved highly profitable, so in the year ahead it plans to conquer new frontiers, particularly in the Gulf and across north Africa.
This is as much Blom’s growth strategy as it is a coping mechanism from the turmoil at home. Chairman and general manager Saad Azhari tells The Banker: “In the past few years, our overseas profits have been growing by an average 4% to 5%, so that now 22% comes from abroad.” In terms of assets and deposits, two-thirds are generated in Lebanon and the remaining third comes from abroad.
Similarly, half of Blom’s loan portfolio comes from books outside of Lebanon. In March, it began operating in Abu Dhabi; it had earlier opened offices in Dubai and Sharjah.
In January, Blom received approval to open an investment bank in Saudi Arabia. Mr Azhari says that the bank has found a location and plans to start operating before the end of this year.
Blom is also expecting to hear this month if it has won approval to open a corporate bank at the Qatar Financial Centre. It has also applied for a licence in Algeria and expects to have the approval soon.
The bank’s total assets amounted to $16.6bn in 2007 and it made a profit of $205m, which it says was the highest figure in Lebanon. It is present in 10 countries in the Arab region and in Europe. Its branch network spans across Lebanon, Syria, Egypt, Jordan, the United Arab Emirates, Paris, London, Geneva, Cyprus and Romania.
Modelling success
“We have two strategies: one in the Arab world and another in Europe,” says Mr Azhari. The strategy in Europe focuses only on the Arab community and Lebanese diaspora, to whom Blom offers mainly trade finance and private banking. In Arab countries, the strategy is to open banks that provide full banking services, including trade finance, commercial, retail, corporate and private banking to all residents.
“Our competitive advantage over other banks is that we share the same language, and it is very easy for us to replicate our products and procedures from those that were successful in Lebanon,” says Mr Azhari.
“We already had some existing relationships in those countries that we entered and geographically we are very close, so that Cairo is one hour by plane, Amman is 40 minutes by plane and Damascus is an hour and a half by car. Also, the culture is very similar.”
These factors have enabled Blom’s new banks to become profitable in a short time. For example, Blom bought the unprofitable Misr Romania Bank in Egypt in December 2005 – the only instance of it purchasing an unprofitable bank, for which it paid $100m. Now called Blom Bank Egypt, in its first year of operation the subsidiary made a profit of $10m and in 2007 a profit of $20m. It has also increased the number of branches so that from eight it now has 23 and by year-end will have 30.
Blom also purchased a brokerage firm in Egypt called Investia, and it is working to increase its capital and expand its operations.
Mr Azhari says this is a model that Blom is using elsewhere. It opened a bank in Jordan in 2004 and, from one branch, it has increased its network to six. This operation has emerged as a leader in new car loans in Jordan. Last year, it reported an overall increase of 66% in new loans and more than 55% in deposits.
“It is clear that we can play a very important role in nearby markets, because we achieved success in Lebanon in an open market where there were no restrictions on foreign or local banks. This shows our success comes down to having a good model,” says Mr Azhari.
Islamic finance emerges
Islamic finance has swept over the Gulf’s financial scene, where bankers are eager to grab their share of a market that is projected to grow to $1000bn by 2010. Based on the principles of Islamic sharia law, in which charging interest is prohibited, Islamic banking is still at a fledgling level in Lebanon, but there is considerable support for its growth.
The central bank, Banque du Liban (BDL), approved an Islamic banking law in 2004. Bankers say that the Banking Control Commission, Lebanon’s banking supervisory body, is also supportive, seeing Islamic finance as a way of diversifying the banking sector’s activities. The central authorities are targeting a market share of 5% to 10% for Islamic banks in the foreseeable future.
Ahmed Jachi, BDL first vice-governor, is co-chairing a committee with the Global Association of Risk Professionals to create a certificate in risk management for Islamic financial institutions (IFIs). The certificate is due to be launched in late 2008. Mr Jachi told a recent Islamic finance conference in London: “The objectives of the central bank and IFIs are complementary. The central bank needs to provide an enabling environment for banks to make money.
“But the main problem is that there is too much emphasis on rules and regulation and less on the enabling environment, particularly with Islamic finance, which is still at the very early stages of development.” Mr Jachi says that his aim is to avoid a “one-size fits all” attitude when regulating the Islamic finance industry.
The BDL does not have a sharia committee of its own because “it is not in the business of religion”, says Mr Jachi.
Sharia committees are usually comprised of Islamic scholars, whose background includes training in Islamic law, banking and commerce, and languages. Their role is to advise on the sharia-compliance of a product. There are four Islamic banks in Lebanon, all of which are required to have corporate governance and independent sharia committees: Blom Development Bank, the Bahrain-based Al-Baraka Bank, the Qatar and Kuwaiti-backed Arab Finance House, and Lebanese Islamic Bank.
Assets rules
According to the BDL’s Islamic banking law, the investments of an Islamic bank in Lebanon must account for at least 50% of its assets.
“We see a big potential for Islamic banking, but it is still at an early stage,” says Blom’s Mr Azhari. “Our bank is operational but we are not marketing it hard because we’re in the process of strengthening our IT infrastructure, which will cater specifically to Islamic products.”
Blom plans to move more aggressively with its Islamic banking unit by the second half of this year.
Ties to government
Lebanese banks continue to be key financiers of the government; they hold more than 50% of total sovereign debt and most surplus liquidity is channelled into government securities.
According to Mr Azhari, the number of government Eurobonds that banks in Lebanon are holding has increased in the past five years, although it has decreased in percentage terms compared with their assets and equity. This is because the banks and their assets have been growing rapidly, while the holding of government securities has slightly increased.
Banks are trying to move away from this situation but, according to S&P, they are not in a position to allow the sovereign to default, given the implications for their own balance sheets.
Banks are increasingly playing the role of an investment bank, according to Mr Azhari. “Before, we were holding all the securities on our books. But in the past three years, when we all developed brokerages and investment banks, we started playing the role of lead managers. Before, it was only the foreign banks that were lead managers and we were the purchasers. Now, local banks are getting involved in lead managing those issues and selling the bonds to funds outside Lebanon.” For example, in 2003, 63% of Blom’s income came from treasury securities. This figure dropped to 29% last year.
“The problems that banks face is with the government’s deficit and public debt, which is high. But this is waiting for a political solution so that they can go ahead with reforms,” says Mr Azhari.
Although public finances have improved slightly in the past 18 months, so that the overall fiscal deficit narrowed to 10.3% of GDP in 2007 from 13.3% of GDP in 2006, interest payment on the huge public debt consumed a striking 57% of total revenues in 2007.
Confronted with numbers like these, there has been speculation that BDL governor Riad Salameh might be the right candidate to become Lebanon’s next president. On this topic, local bankers politely declined to comment.
