The recent Paris Agreement is a departure in form and substance from previous climate change accords; it calls for a bottom-up approach to limit greenhouse gas emissions. Unlike the 1997 Kyoto Protocol — a bifurcated approach that legally bound developed countries to reduce their emissions — the Paris accord removes the distinction between developed and developing countries, allocating responsibility, for the most part, to the local level.

At Kyoto developed countries were allotted a target to reduce their emissions, but developing countries like China or Mexico (Lebanon too) were given no target and allowed to let their emissions increase at will. Developed countries with emission reduction targets were meant to ratify the Kyoto Protocol into law, but the United States — then the world’s largest emitter — declined to do so. For much of the 2000s, the agreement was suspended and climate change negotiations ground to a halt.

Then came the 2009 Copenhagen Accord that saw developed countries and the largest developing countries agree to reduce emissions, but not in a legally binding agreement. What had carried over from Kyoto to Copenhagen was a clean development mechanism for carbon trading. The carbon market aimed for cost effectiveness — a reduction of carbon emission per dollar invested. At Copenhagen the failure to fully articulate a legally binding treaty pushed the price of carbon into a global downspin, putting a halt to carbon trading as a mechanism to reduce emissions.

Not all was lost after Copenhagen. Part of what was agreed upon at the 2009 conference made its way into the Paris accord — financing. In Copenhagen there was limited transparency on the issue of funding developing countries; rich countries agreed to provide $100 billion annually starting in 2020 to help poorer countries invest in green technologies to reduce emissions. But in the years since Copenhagen, developed countries have largely held true to their promise: in October 2015 the Organization for Economic Co-operation and Development issued a report showing that close to two-thirds of the required financing was already being supplied.

Targets for Lebanon

The Paris accord stepped away from requiring emission reductions to be legally binding, instead placing responsibility at the local level for reducing emissions through discretionary contributions. This effectively means that countries, such as Lebanon, will voluntarily phase out fossil fuel use.

Lebanon’s contribution to the Paris accord is laid out in its Intended Nationally Determined Contribution (INDC). The INDC sets forth two targets: an unconditional target that Lebanon will contribute to reduce emissions, and a conditional target if Lebanon were to receive international support — mainly financing from the $100 billion yearly fund, but also technical knowhow and technology transfer.

Under a business-as-usual scenario — with no measures taken to reduce greenhouse gases — Lebanon’s emissions would rise to nearly 44,000 million tons CO2 equivalent by 2030. Lebanon, as a low emitter of greenhouse gases, set an economy-wide target because it does not specify which sector of the economy emission reduction must come from, thereby offering greater flexibility. The country will target a 15 percent reduction by 2030 — limiting a rise in greenhouse gases to 37,400 million tons CO2 equivalent — as unconditional, meaning that emissions can be reduced in the economy wherever it is easiest. Lebanon will also produce 15 percent of its power needs through renewables and will aim for a 3 percent reduction in power demand through energy efficiency measures.

Lebanon will set more aggressive targets if it receives financing from the international community. By 2030 the country will aim for a 30 percent reduction in greenhouse gas emissions; renewables will also produce 20 percent of total power demand, while energy efficiency measures will aim to cut power demand by 10 percent. Targeting a 30 percent reduction would see Lebanon limiting the rise of its greenhouse gas emissions to just more than 30,800 million tons CO2 equivalent by 2030.

In 2010, Lebanon’s greenhouse gas emissions totaled 19,139.27 million tons CO2 equivalent, 0.04 percent of global emissions. By 2014, that proportion had risen to 0.07 percent of the global share. With countries voluntarily pledging to reduce the emissions they produce, it is not yet clear how Lebanon’s emissions might rank vis-a-vis other countries moving forward.

The post L’accord de Paris appeared first on Executive Magazine.

Playtime is over. Nearly one year after calling for unregulated lenders to step out of the shadows, Banque du Liban (BDL), Lebanon’s central bank, imposed new restrictions and reporting requirements on what are locally known as comptoir creditors. Until January, articles 183 and 184 of the 1963 Code of Money and Credit – Lebanon’s banking bible – allowed companies to engage in consumer lending absent of any BDL supervision provided they did not accept deposits. While a few of these companies – most notably al-lebananiyeh al-arabieh lil tasleef, which was running television, print media and billboard campaigns to promote its willingness to approve a loan in five minutes – have garnered media attention because of legal trouble in late December and early January, the exact size of this market segment and the overall economic impact of the new rules are difficult to quantify.

Consumer protection?

In early 2015 and again in January 2016, BDL published decisions related to comptoirs (see box). The January 2016 rules set out new regulations for these type of companies. While the central bank refused Executive’s interview requests to discuss this topic, circumstantial evidence suggests consumer protection was at least a partial motivator.

Bad reputation

In investigating this story, Executive reached out to other lenders operating without the same supervision as that imposed on banks and financial institutions – microfinance institutions (MFIs). Every MFI Executive spoke with says a comptoir would be called a loan shark in an English-speaking market, meaning their practices are predatory and they charge interest rates in the neighborhood of 30 percent or more per month. According to a report in the local press, two comptoirs were shuttered in late December – Housing Finance for Financial Loans in Hadath and MFD in Jal el-Dib. Both were closed because of consumer complaints about their loan practices, the report said. The comptoir with the most aggressive advertising strategy, al-lebananiyeh al-arabieh lil tasleef, is under scrutiny for allegedly selling collateral before a borrower defaults, a practice now specifically banned by BDL. Local media report that al-lebananiyeh al-arabieh lil tasleef would draft documentation allowing the company’s owner – Fadi Jairo – to sell whatever collateral they offered up in exchange for the loan if the borrower defaulted. One of the company’s print ads specifies that collateral can be property, land or a car or truck title. Customers allege that Jairo tried selling their possessions before they defaulted. Executive contacted al-lebananiyeh al-arabieh lil tasleef for an interview and was originally told a meeting with Jairo would be arranged on January 20. When Executive called on the agreed date, an employee of Jairo said, “He has a problem. He’s not coming.” On January 25, Executive called the company to ask about interest rates on their loans only to be told that it is no longer accepting new borrowers pending clarification of the new central bank rules.

Into the fold

As evidenced by the February 2015 decisions, comptoirs have been on the central bank’s radar for some time. Bachar Kouwatly, general manager of Ibdaa Microfinance, tells Executive that BDL even tried to ascertain their numbers, although he did not have more details. Youssef El Khalil, president of the Microfinance Association – a group of MFIs recognized by the Ministry of Interior in 2015 – tells Executive that, according to figures from the central bank, where he also works, there were “over 1,000” comptoirs prior to 2015, but no more than 40 after the bank began requiring them to register. This does not necessarily mean there are fewer loan sharks in Lebanon, of course, as BDL’s request for information could well have pushed some comptoirs further into the shadows. Each MFI Executive interviewed distinguished between shadow lenders registered as companies (the comptoirs) and village loan sharks operating without any pretense of formality. “The local loan shark has existed forever and a day,” says Youssef Fawaz, executive director of Al Majmoua, an MFI. Some of Al Majmoua’s micro borrowers, he explains, took their first loans from his institution specifically to pay off debt to village loan sharks. That said, he adds that he has noticed some comptoirs – like al-lebananiyeh al-arabieh lil tasleef – being more aggressive in recent years, but notes loan sharking is not something the central bank can eliminate completely. “They’ve been there, and they will always be there,” he says.

The new central bank rules, however, seem aimed at making the comptoir business less lucrative and easy to engage in as well as curbing some of their more unsavory and potentially illegal practices (such as selling collateral before a borrower defaults, which is the subject of a court investigation into al-lebananiyeh al-arabieh lil tasleef). For example, a comptoir must have 2 billion LL (over $1.3 million) in paid-up capital in order to register, and must have the same paid-up capital for every branch it wants to open. Comptoirs must also register all the loans they give at the central bank; their clients cannot be made to pay monthly installments that exceed 35 percent of their household income; loans they give cannot be worth less than 60 percent of the collateral on offer, nor can the loans exceed 5 percent of the comptoir’s capital or $100,000, whichever is less; and they cannot take fees for opening a new file for a client.

Following the money

Requiring comptoirs to report all their loans to the central bank serves two purposes. In the year 2000, the central bank created a Central Office of Credit Risk to keep track of all outstanding loans in the country. The office is a tool to limit over-indebtedness – meaning that it prevents consumers from taking out multiple loans with different banks. Without it, enforcing caps on the percentage of monthly income going toward debt payments would be more complicated if not impossible when a consumer has different loans from different institutions. Requiring comptoirs to register loans with the central office means they will be part of this system. Prior to the central bank’s January decision, comptoirs could theoretically add to a consumer’s debt burden if that consumer had other outstanding loans. This rule therefore helps protect consumers from themselves. However, it also adds a level of control to this previously unregulated market segment by making these loans known to the central bank. Khalil, head of the Microfinance Association who spoke to Executive just days before the new rules were public, likens steps to control comptoirs to central bank moves to crack down on then-unregulated money exchange offices in the wake of US Treasury Department accusations in 2013 of money laundering against the Lebanese Canadian Bank, which supposedly involved exchange offices. “Exchange bureaus in this country were operating [with no regulation beyond registering their names at the central bank prior to 2013], but nowadays with anti-money laundering laws, [the central bank] had to intervene, and now they are very heavily regulated.” The loan registration rule means the central bank will have an idea of the total value of this market segment, information that is lacking until now.

Welcoming the change

One previously unregulated lender that will now have to abide by the central bank’s rules is Money sal. Founder and General Manager Elias Samia tells Executive he welcomes the new rules. Since launching operations in 2012, Samia says his company – which lends at an annual interest rate of 17 percent to salaried employees of what he describes as “top tier” companies – has been fighting perceptions that Money is a loan shark. More regulation, he says, is another weapon in that fight. Money launched an aggressive expansion campaign in October 2015, partnering with retail outlets – mostly cellphone shops – to extend its reach and build a national distribution network. He tells Executive that, as of mid-January, Money had 150 such partnerships with a goal of reaching 700 by the end of 2016.

He describes the company as an “investment vehicle” for sister company UFA Assurances, founded by Henri Chalhoub and focused on insurance, which Samia notes means UFA has plenty of excess liquidity. Money takes no collateral and promises quick and easy loans. It even offers a loan-delivery service, of which Samia is particularly proud. The company caps its loans at $6,000 and Samia says the average ticket size among Money’s 7,000 borrowers is $2,500. He wants to double that portfolio in 2016 and grow by 30 percent in each of the following four years, meaning Money would have around 40,000 clients by 2021 with an average ticket size reaching around $4,500. The company, he says, currently has provisioned for a non-performing loan rate of 1.7 percent but the actual default rate is 0.4 percent.

One risk to his business posed by the new regulations, Samia says, is the loan reporting requirement. He estimates around 15 percent of his clients choose Money specifically because of the anonymity it was able to offer. In an interview before the new rules were made public, Samia says that some clients also come to Money because they have loans from banks but cannot borrow more because they are already spending 35 percent of their household income to service existing debts, yet they have enough disposable income to take on a bit more of a debt burden. Asked after the new rules were made public whether the fact that the cap now also applies to Money will shrink his client base, he denies that the regulation poses a new business risk for the company, saying he is confident that the central bank may waive that requirement in certain cases.

Needed protection

Perhaps the most significant impact of the new central bank rules will be the level of consumer protection that comes with subjecting monthly comptoir loan payments to caps based on household income. Lebanese law, according to Toufic Soudayha – a lawyer with Alem & Associates – puts no interest rate limits on lending. Coupled with the requirements to fully explain to people the loan’s terms when borrowing from a comptoir, the loan-to-income limit will help protect people who might not fully realize what they are getting themselves into.

What effect BDL’s new regulations will have on the wider economy is unclear. As Société Générale de Banque au Liban (SGBL) notes in its January 2016 monthly economic publication, “In late 2014, the Central Bank tightened personal lending requirements in a bid to keep household leverage ratios in check and reduce risk in the financial system.” In the wake of that rule change – which mirrors the monthly payment versus household income cap placed on comptoirs – SGBL notes that the value of consumer loans offered by banks “rose by only 1.84 percent [year-on-year] in the first six months of 2015 to $6.65 [billion], a net production of just $14.3 [million] over the period, down from $325.7 [million] in the first half of 2014.” It seems safe to assume comptoirs will face a similar lending slowdown, meaning consumers will be pumping a little bit less cash into the system.

The post Shark hunt appeared first on Executive Magazine.

On the list of what separates humans from our primitive ancestors, one activity usually gets neglected: lending with interest. Finance seems embedded in our DNA. We have debt records that date back more than 4,000 years. As the historian Niall Ferguson put it in his book, “The Ascent of Money: A Financial History of the World,” these ancient ledgers serve as “reminders that when human beings first began to produce written records of their activities, they did so not to write history, poetry or philosophy, but to do business.” Not surprisingly, debates about interest rates are nearly as old. Religious authorities, philosophers and even state officials have, at one point in the past, advocated a ban on interest altogether. Islam still considers interest sinful.

Questioning interest, however, is as much an ethical debate as a financial one. Does a person with more resources have an obligation to help – free of charge – a person with fewer resources for that poorer person’s benefit? For the non-Sharia compliant, the answer humanity has settled on seems to be: the person with more deserves some kind of compensation for his or her assistance, with some limitation. After all, loan recipients use what they borrow to better their own lives (either by increasing their own wealth with the loan or acquiring a possession they did not have the means to buy on their own), so why shouldn’t the lender benefit too?

As noted, however, humanity seems to have generally agreed that lenders have an obligation to limit how much they benefit from the arrangement. Many jurisdictions today ban excessively high interest, commonly referred to as usury. Lebanon has no such ban (nor do its legal codes put a limit on what interest rates lenders can charge), but Banque du Liban (BDL), Lebanon’s central bank, has devised rules to keep consumers from being buried in debt by placing limits on how much of their monthly household income can be spent repaying a lender. In the end, the effect is arguably the same.

A premium for the poor

The exact rate of interest charged on a loan does not seem to be what distinguishes an ethical lender from an unethical one. Taking advantage of the vulnerable or financially illiterate and misleading people are the real distinguishing marks of an unethical lender. For example, microfinance is currently the darling of the development community. Microfinance institutions (MFIs) lend small amounts to poor borrowers who typically invest the funds into some modest business venture. The idea is to help the poor create more wealth for themselves. Microloans come in ticket sizes far smaller than most commercial banks would ever consider (hundreds or a few thousands of dollars) and thus they come at a premium. Though the rates are higher than a bank would charge, microfinance is considered by most an ethical practice.

More important than specific rates, therefore, is just how well a borrower understands what he or she is getting into. The Great Recession might never have happened if duping poor people into buying homes they could not afford had not become such a rampant practice in the United States.

One of the biggest risks MFIs face, according to the three Executive interviewed for this report, is over-indebtedness. If MFIs do not have effective tools to communicate or a centralized list of clients and their outstanding debts, borrowers could take out several loans from different institutions, eventually finding themselves with more debt than they can afford. MFIs are hoping a new association, officially launched in mid-2015, can help mitigate this risk (known as cross lending).

Protecting borrowers from themselves

Poor decision-making on the borrower’s behalf – rather than unethical lender behavior – is not only a risk faced by micro-borrowers. People using otherwise legal services like payday loans or car title loans often get in over their heads, and governments in the UK and the US have legislated protections for people who use these services, such as legislation regarding debt restructuring and personal bankruptcy. One of the prime tools these governments are using as a protective measure is more information. The thinking goes that if a borrower fully understands the risk of certain types of loans, he or she will seek funds elsewhere. Lebanon’s central bank has also recently demanded lenders provide potential clients clear and easy-to-understand information as a consumer protection measure. For a lender-borrower relationship to be both ethical and mutually beneficial, both parties need to have agreed to all terms with a full understanding of what they mean. Further, if the borrower is coming at a moment of vulnerability, a lender has a moral — if not always a legal — obligation to make sure not to take advantage of the borrower. Until humanity agrees on an ethical paradigm to govern lending, this seems like the best we can hope for to ensure credit does more good than harm.

The post Toward ethical lending appeared first on Executive Magazine.

Finance is a complicated topic to understand. The jargon and math don’t help. Top employees of Lebanese lending institutions have admitted to Executive that even some bankers cannot define an annual percentage rate (APR). Look it up on Wikipedia, and you’ll no doubt be researching more new terms (such as nominal APR and effective APR) before you finish reading the first sentence. Financial literacy is not a global strong-suit. Surveys from 2011 conducted by researchers with the non-profit, US-based National Bureau of Economic Research asked residents of Germany, Italy, Japan, the Netherlands, New Zealand, Russia, Sweden and the United States three short questions designed to assess respondents’ ability to calculate interest rates, understand inflation and understand risk diversification. Only in Germany did more than 50 percent of those surveyed answer all three questions correct. In all eight countries, at least 10 percent of respondents got all three wrong.

Financial literacy is becoming a hot topic internationally, according to the Organization for Economic Co-operation and Development. The OECD explains that this stems, in part, from a global “concern about the potential impact of shrinking public and private welfare systems, shifting demographics, including the ageing of the population in many countries, and the increased sophistication and expansion of financial services.” In other words, people around the world are likely to be increasingly responsible for taking care of themselves financially rather than being able to rely on state-organized savings or pension schemes. In response, the OECD also reports that “as of 2014, more than 50 countries at different income levels are well advanced in the design or implementation of a national strategy for financial education, and many other countries are considering developing one.” While Executive was unable to find financial literacy statistics for Lebanon, it is safe to assume we would not score higher than the majority of other countries. What we know, however, is that this country has no effective pension system, and citizens are basically left to fend for themselves when it comes to having a secure financial future. We were shocked to see advertisements featuring an elderly man taking out a loan with his house as collateral. In fact, this ad inspired this month’s investigation into loan sharking in Lebanon. We we saw that advertisement, We didn’t see a man securing his family’s financial future. We saw an attempt to dupe the vulnerable. We saw a population in need of protection. In this regard, we must once again tip our hat to Central Bank Governor Riad Salameh. Banque du Liban (BDL), our central bank, recently passed much needed regulation to limit the potential bite of loan sharks (see Shark hunt), but there is still a lot more work to be done to educate and protect the population.

In the United Kingdom, there exists a company called Lending Stream. It offers so-called “payday loans” – short-term, high-interest credit many borrowers cannot repay on time, which can rather quickly bury them in unsustainable debt. Quite prominently on the company’s homepage is the following note of caution: “Warning: Late payment can cause you serious money problems. For help, go to moneyadviceservice.org.uk.” Money Advice Service describes itself as  “an independent service, set up by government” with a mandate to “help people manage their money.” Their offerings are diverse, and their financial advice is clearly aimed at helping people who understand nothing about finance get a grip on the basics. Lebanon needs something like this. While it may be too much to ask the government to follow the exact model, the Ministry of Economy and Trade could quite easily include information like this (do’s and don’t’s of borrowing, understanding interest rates and how to calculate them, identifying and mitigating risks, etc.) on the consumer protection section of its website.

Given that government is not the only stakeholder in citizens’ economic well being, the impetus to act should not be expected to come from elected and appointed officials alone. Civil society, business and economic associations, and even banks and financial institutions themselves can easily step up and help financially educate the public. We already have one example of a local ad company and a local bank partnering to produce 30-second financial literacy spots (see Q&A with George Jabbour). We need much more of this. And as an increasing number of local corporations seek ways to deploy capital on do-good initiatives under the banner of corporate social responsibility, here is a perfect place to start spending. For banks in particular, increasing financial literacy can actually translate into more business opportunities. Research out of China from 2013 shows that people increase the amount they deposit into retirement savings accounts the more they understand interest compounding (which means that interest earned is added to the principal after a certain time period – yearly, for example – thus generating the account holder more money the longer said money is kept in the account. See, increasing financial literacy can be that simple). The central bank can even help incentivize private-sector efforts to increase financial literacy by awarding the corporations doing the best job each year. Companies love affirmations of how excellent they are.

Stopping at financial literacy is not enough. We also need all relevant stakeholders to understand that they must never exploit financial illiteracy. Again, BDL has done commendable work in this regard – twice passing decisions demanding that banks, financial institutions and now even loan sharks fully explain products and services to customers. These are excellent developments, but we need more players to understand their ethical obligation not to mislead people into making poor financial decisions. The head of Lebanon’s Advertising Association says he’s keen to develop an industry code of ethics. This is a must, and it requires buy-in from not only the agencies producing ads, but the media outlets that run them and the intermediaries in between.

To build a prosperous future, we have to understand how to get there without being duped into bankruptcy along the way.

The post The ABCs of the 123s appeared first on Executive Magazine.

The war years in Lebanon were particularly ugly near the end. I was 16 years old when the bottom fell out from under the lira, and the currency collapse changed everything. People lost their jobs. Wealth vanished. Desperation reigned. We were used to being terrorized by bombs, bullets and ever-accurate mortar shells. Financial terrorism proved even worse.

Crooks preyed on distressed and vulnerable people who, even if they might have known better, still fell for their scams. Fear that your family would starve or be pushed onto the street, however, did not inspire the best decisions. Criminality was everywhere. Certain unscrupulous types were approving loans they knew would fail to get their hands on land or property at obscenely low prices. It was a morality-free zone.

Last December, seeing an advertisement designed to dupe people who lack a social safety net brought back some of my worst memories. We’ve been living through an economic disaster the past few years, and all signs point to distress. Even our drug trade is flourishing again. I fear for what we’re becoming. I don’t want to live in a country of outlaws, isolated from the global economy. I want a country where honest hard work and entrepreneurial risk taking are respected and rewarded.

Executive has spent more than 16 years advocating for ways our government officials can make Lebanon better for all. We must remember, however, that building a prosperous country requires individual initiative and individual responsibility. Our focus in 2016 on business ethics includes a series of warnings we all must heed. We take a look at the many opportunities that adherence to international best practices can provide.

This month we report how Beirut should position itself as a hub for private banking with an ethical investment focus. Money can be made honestly, and we mustn’t forget that. We have been sailing back into the morality-free zone. It’s time to reverse course.

The post Worse than weapons appeared first on Executive Magazine.

The sun had not quite risen one cold January morning in east Lebanon as an army patrol set out to arrest individuals suspected for the murders of Sobhi and Nadimeh Fakhri in November 2014. What was to be a raid in Baalbek turned into a major drug bust – the army stumbled upon a Captagon producing laboratory as well as large quantities of cannabis and heroin. It was the latest in a series of seizures by the Lebanese authorities of Captagon, an illegal drug whose trade has skyrocketed in recent years and whose black market value is said to be in the hundreds of millions of dollars annually.

Business is booming and media reports insinuate that a number of players are addicted to the action – Lebanese and Syrian foot soldiers, Lebanon’s armed militias, the drug lords of Lebanon’s Bekaa Valley, the drug lords in Syria’s Qalamoun Mountains, a member of the Saudi royal family, a Bulgarian chemist flown in to cook Captagon – even a feature film has hooked the public. One Reuters report from 2014 suggested that the outflow of Captagon from Lebanon had fallen by 90 percent between 2011 to 2013. But statistics reported to the United Nations Office of Drugs and Crime (UNODC) by Lebanese authorities show a spike in seized Captagon starting in 2013. That year the Lebanese authorities as a whole seized 11.7 million Captagon pills. In the 12 months following, Lebanese Customs alone found more than double that amount. This points to a major shift in trafficking Captagon through Lebanon, if not significant local production of the drug as well. Now, a new law passed by the United States might answer who runs the Captagon show.

The region’s stimulant of choice

Captagon got its start in the 1960s as a pharmaceutical drug most commonly prescribed to treat attention deficit hyperactivity disorder (ADHD). The arrival of newer drugs that were more effective and less addictive (at treating ADHD) prompted the US government in 1981 to conclude that Captagon no longer had any medical use, leading to a ban. The World Health Organization followed suit a few years later, recommending prohibition of the drug globally. While the pill sold on the black market today carries the same name because of the pharmaceutical’s reputation, it is not the same drug (see Captagon Explained below).

Today’s street Captagon is an amphetamine-based stimulant that is said to be used both by Syrian regime forces and rebel groups fighting the country’s now five year long civil war. The pill, the Washington Post alleged, is said to make monsters out of normal men so that they can kill “with a numb, reckless abandon.” But that’s not really the case, according to addictions psychiatrist Joseph Khoury of the American University of Beirut Medical Center. Khoury, who treats patients that abuse Captagon alongside other drugs like Tramadol (a highly addictive opioid pain medication), says that Captagon keeps users alert much like a can of Redbull does. “If you want to sit at the front for days it is a valid tool – that is the purpose [to stay alert],” he says.

It neither makes users into superhumans nor does it have the psychedelic effect that the media has paraded. “If you want a guy to attack a trench and he’s on Captagon, he’ll probably be overconfident. But the idea that it makes people turn into suicide bombers is ridiculous. It’s not what explains the alteration of somebody’s personality, turning the normal caring and loving human being into a monster that can be mind-manipulated – it’s completely not true,” Khoury says. Other practitioners tend to reach the same nuanced conclusion, and a recent article in Forbes cuts straight to the point: “there is nothing especially magical about Captagon.”

A trafficking thoroughfare

Outside of use by combatants in various conflicts from Syria to Yemen, Captagon has regional fame as a recreational drug, and is in particularly high demand in the Gulf countries. Lebanon and Syria have traditionally been waypoints on the route of Captagon from the laboratories of Southeastern Europe and Turkey to the Gulf. But recent reports of Captagon-factory busts, as well as UNODC and Lebanese Customs’ data, not only indicate Lebanon’s continuation as a Captagon trafficking thoroughfare but also point to a rise in local production as factories are increasingly set up.

The UNODC reasoned in its 2008 World Drug Report that in the Middle East, “the growing seizure volume appears inconsistent given the small number of clandestine laboratories reported by authorities in Bulgaria [three laboratories] and Turkey [12 laboratories] in 2006.” Interpretation of factory busts and seizure reports led the UNODC to conclude that, in as early as 2006, production of Captagon began shifting from Southeastern Europe and Turkey to the region. Syria has been a source for Captagon production since at least 2006, the UNODC wrote in its 2009 World Drug Report. By 2014, a report by the International Narcotics Control Board (INCB) concluded that the breakdown of, or at least severe strain on, Syria’s government institutions created the ideal environment for the drug’s production to flourish. “The crisis situation in the Syrian Arab Republic clearly creates conditions favourable to the illicit manufacture and trafficking of tablets sold as Captagon,” INCB wrote.

But it is difficult to determine how much Captagon still originates from Syria. Officials that Executive spoke with say that while production continues there, the all-out war in the country has disrupted land routes popular for transiting the illicit drug through Jordan to the lucrative black markets in the Gulf – namely Kuwait, Saudi Arabia and the United Arab Emirates – requiring new ways to move the product and possibly shifting some Captagon production from Syria to Lebanon.

Lebanon witnessed a stark rise in the number of Captagon tablets seized by authorities in 2013 compared to previous years, according to the latest dataset compiled by the UNODC from Lebanese authorities. The statistics show that in 2013 Lebanon discovered 11.7 million tablets, having seized only 680,000 two years earlier. Data from Lebanon’s customs authority – Executive could not obtain police and army seizures by time of print – show a steeper rise in Captagon busts in 2014. That year, customs seized 25.4 million tablets at the airport and Port of Beirut. Customs valued the seizures to total $151.85 million – $6 per pill, a conservative estimate given that the street value price in the Gulf countries where the pills were destined can range anywhere between $10 to $20 per pill, a price range cited by the UNODC’s Illicit Synthetic Drug Expert Martin Raithelhuber.

Access to the Port of Beirut and Lebanon’s airport as export points has become increasingly important. “They conceal [Captagon] sometimes inside the bowels of machinery or hide it in furniture,” says head of the drug unit at Lebanese Customs, Colonel Nizar Jurdi. Recent seizures by customs at the port detail the manner in which pills were concealed – in nursery school tables, engine blocks or water cisterns. “You should not imagine that there is one container full of Captagon, that is not how it works,” Raithelhuber illustrates. “It might be one container among hundreds on a cargo ship, and in this one container there might be one large box which may not even contain the pure drug but may contain machinery, and in the cavities of the machinery is where the drug is [concealed],” he says.

Jurdi says his drug unit at the Port of Beirut inspects somewhere between 15 and 20 containers per day. The paperwork of all containers imported from Latin America, Romania and Ukraine and those exported to Arab countries are scrutinized because of those countries’ reputation as big drug producers or consumers. When a customs inspector reading the scan of one of these containers detects something unreadable or suspicious in the container, it is referred to the drugs section, says Jurdi. The goods in the shipment, the reputation of the goods’ owner and that of the import/export company, and any shared intelligence information between countries’ customs authorities are all factors that Jurdi says are taken into account when deciding whether a flagged container requires manual inspection.

In 2014 the Port of Beirut recorded 1.2 million container movements in and out of the port. The sheer scale in container volume limits the number of containers that can be X-ray scanned and an even fewer number undergo a manual search. A rough calculation indicates that less than 1 percent of all container movements at the Port of Beirut underwent manual inspection that year. According to the UNODC, in 2015 there were an estimated 750 million container movements globally and the organization says, as a very rough estimate, only 2 percent of those containers were physically inspected. “Monitoring the contents of the sheer volume of containers,” reads a recently published UNODC document, “without interrupting the flow of legitimate trade poses tremendous challenges to customs.”

“That just shows the challenge we’re facing here – [having] good intelligence on what is a suspect shipment [is very important] – we want to increase the hit rate they have with this small percentage by improving the exchange of information between [UNODC] member states,” says the UNODC’s Raithelhuber. Indeed, when Executive conducted its interview with Jurdi, a Kuwaiti customs official was present in the room, indicating that at least some level of cooperation between these two countries is real.

Less than 1 percent of containers at Beirut Port in 2014 were manually searched | Greg Demarque

A Gulfie drug

For years recreational pill-poppers in wealthy Gulf countries have taken Captagon to get high. In these countries, says the UNODC, “it is popular among the younger, affluent population and it has also enjoyed a reputation as a sexual stimulant since the beginning of the 1980s.”

There is only anecdotal testimony that its usage is picking up in Syria and while drug-related arrests and Captagon court cases are on the rise in Lebanon, it is not a popular drug among local users. The real market for the drug remains the Gulf countries, where the street value is most attractive for distributors. Between 2011 and 2013, according to UNODC data, Saudi Arabia alone seized some 173 million tablets.

Statistics on the number of users are harder to come by. One recent article by Voice of America estimated as many as 50,000 Saudis undergo drug rehabilitation annually, but the report did not say whether that was for Captagon treatment and it did not cite any sources. In an October 2015 interview with Arabic-language publication Economic, Abdelelah Mohammed Al-Sharif, secretary general of Saudi Arabia’s National Committee for Narcotics Control, said that Captagon use was prevalent among the country’s youth and that 40 percent of the total drug-using population fell between the ages of 12 – 22, but he did not elaborate on the number of users. In any case, the amount of tablets seized suggest that the drug’s use in the Kingdom is significant.

Captagon, and amphetamines more widely, have been the Middle East’s drug of choice for the best part of the last four decades, says the UNODC’s Raithelhuber. Boredom is a driver of Captagon use in many Arab countries where alcohol is banned and access to other drugs such as cocaine is limited. There is evidence that in the past, recreational Captagon consumption was a socially accepted and established pattern. In Kuwait, for example, when pharmacies still sold the drug legally it was taken with morning tea, a visiting Kuwaiti customs official volunteered to Executive. Raithelhuber says that drug markets have a certain resiliance. “Once a drug has established itself in a user population, that’s what users know and that’s what they want to get again; not all of them are willing to experiment with other drugs,” he says.

Lebanon – production province

The figures on seizures show an explosion in the quantity of pills that are at least trafficked, but may also be locally produced. Jurdi reasons that instability caused by the war in Syria and the closure of its borders, along with the rise of seizures and laboratory busts in Lebanon, are correlational evidence of this shift.

In the last few years both the Lebanese Army and the country’s police, the Internal Security Forces (ISF), announced Captagon factory busts and arrests. The rise in incidents was enough for head of the ISF, Major-General Ibrahim Basbous, to sound the alarm at an October 2015 Captagon-focused drug conference held in Beirut. Though Basbous did say that Lebanon’s security forces had made progress in the fight to stem the drug, he appealed to the delegates to “contribute to rooting out the operations of smuggling Captagon tablets.” Lebanon needs all the help it can get.

Security forces – the ISF, Army and customs – have dismantled and arrested criminal groups manufacturing or trafficking Captagon, but lack of government clarity on the number of Captagon-factory busts and arrests does obscure the current extent of production. The amount of Captagon that Lebanon has seized does, however, imply that production volume is large, though an estimation is impossible. “We don’t have that indicator for synthetic drugs because it’s a footloose industry. Laboratories can be anywhere – in a basement, an empty industrial factory – they don’t have to be very big to produce several tons per year,” the UNODC’s Raithelhuber says. An April 2015 report by the European Council concluded that shutting down Captagon production capacity in Lebanon requires more specialized security personnel, equipment and logistical support (e.g. intelligence) and that without these Lebanon is challenged to curb production and trafficking.

Hezbollah’s ‘kingpin’?

Armed military groups are said to use the Captagon trade as a source of revenue to rival the state’s control in parts of the country – and fingers point to Hezbollah. A January article in the Arabic language Sawt al Jabal is the most recent to allege Hezbollah’s role in trafficking Captagon – it reiterated the insinuation that the brother of Hezbollah MP Hussein al-Moussawi, Sheikh Hashem al-Moussawi, is a major Captagon manufacturer and smuggler in Lebanon’s Bekaa Valley. Back in 2012, Lebanese television channel MTV ran a documentary following the ISF as it raided Hezbollah-funded Islamic schools it said were directly connected to Moussawi. A subsequent article by Al Akhbar stated that Lebanese authorities were not able to apprehend the sheikh. Another sheikh identified only by his first name and last initial, Abbas N., said during a police interrogation that “there is a religious edict allowing [Captagon] usage because it is a stimulant and not a drug,” Al Akhbar reported.

A 2012 article in online publication Middle East Transparent alleged that the religious edict was issued by Moussawi. It sanctioned the manufacturing and trafficking of Captagon as long as followers of Wilayat al-Faqih (Guardianship of the Jurist, an Iranian interpretation of Shia doctrine) did not consume the drug. The journalist of that article alleged that revenues from trafficking ignited an internal power struggle at the highest level of party leadership – Hezbollah’s Bekaa Valley faction was gaining influence that threatened Hezbollah’s southern-dominated top brass. The factional infighting, the article alleged, gave Lebanon’s anti-drug officials the green light to raid Bekaa Valley’s Hezbollah-linked Captagon factories under the presumed outcome that the raids would weaken that faction’s influence within the party to the advantage of the other. Executive could not independently verify this claim.

The validity of the power struggle claim is questionable but it may have helped to attract unwanted attention. Research published in May 2015 by George Washington University in the United States paraphrased testimony from an anonymous US Drug Enforcement Agency (DEA) agent stationed in the Middle East. The DEA agent told the researchers that “the top of the pyramid in the global Captagon trade has been since the 1980s and remains the same core group of Lebanese gangsters based in the Bekaa Valley.” The research points to the Captagon trade as sanctioned by Hezbollah and says that there is increasing evidence that the party is directly involved. “All available indicators point to Hezbollah with Iranian backing as most involved in Captagon production as an officially sanctioned fundraising strategy,” the research concludes.

Following the money would provide conclusive evidence as to who runs the Captagon show, but that is no simple task. There is very little information available on the flow of cash from Captagon trafficking, although all officials that Executive spoke with agreed the drug’s illicit trade is in the hundreds of millions of dollars annually. It is not easy to trace the money because it often remains as cash that does not flow through the traditional banking system, and there is no global framework for coordinating the tracking and seizure of drug money.

The Hezbollah International Financing Prevention Act of 2015 signed into US law in December may change that. Section 201 of the law calls for a report on narcotics trafficking by Hezbollah – Congress will be briefed on Hezbollah’s narcotics trafficking, the procedures for listing the party under the United States Foreign Narcotics Kingpin Designation Act as well as government efforts to combat Hezbollah’s narcotics trafficking activity. The Kingpin Act grants the Treasury Department’s Office of Foreign Assets Control (OFAC) the authority to block individuals and entities from the US financial system and prohibits any transactions between designees and US companies and individuals. Previously the Kingpin Act was invoked in 2014 to designate the Medellín, Colombia-based criminal organization La Oficina de Envigado (La Oficina), the enforcement and collection arm of deceased-leader Pablo Escobar’s Medellín Cartel. In October 2015 OFAC used it to designate Hezbollah-affiliated individuals and organizations.

Already listed as a terrorist organization by the United States, the application of the Kingpin Act as part of the new law will broaden OFAC’s mandate to sanction Hezbollah for any alleged role it has in narcotics trafficking – though OFAC does not publish justification for its designations. Completion of the narcotics report is expected in the first quarter of 2016 and the law requires its publication. A month later Congress will be briefed. By the middle of the year, America believes it may be able to offer an answer as to the actual size of Captagon production and the nerve center of its trafficking.

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It had to be one of Lebanon’s top resolutions for 2016 when Banque du Liban Governor Riad Salameh pledged at the BDL Accelerate event in December to see to the establishment of an electronic stock exchange for small and medium enterprises. “Our aim for the year 2016 is to succeed in the launching of an electronic trading platform,” Salameh said in his speech to open the event, and told Executive after his speech that the prospectus for the new exchange will be circulated in January.

The creation of the electronic exchange for Small and Medium Enterprises (SMEs) is an important proposition and one that deserves to be monitored religiously, particularly after announcements for realizing the project within 2015 came to a quiet demise – possibly because the BDL governor had vocalized the project idea last year without any regulatory groundwork having been implemented by the Capital Markets Authority. This is probably also due to a margin of severe uncertainty over the ability to institute the SME exchange under the umbrella of the Beirut Stock Exchange (BSE).

Given that the privatization of the BSE is not a likely event in the 2016 timeframe, the prospectus for the SME electronic exchange should provide a private sector path to its creation. A hint in support of that may be Salameh’s remark in the December 10 speech that participants in the electronic trading platform will be “banks, financial companies, brokers, family offices [and] professionals”. Listings will be supervised by the Capital Markets Authority, he added. The purpose of the new mart is easy enough to divine: as per the governor, it will allow startups to list and provide exit opportunities for successful companies, with creation of liquidity in service of “startups and others” as its true aim.

Another motivating force in the establishment of the electronic exchange must be the limited lifespan of the central bank’s funding flow into the startup ecosystem under the famed Circular 331 that incentivizes banks to channel investments into knowledge economy ventures at greatly reduced risk. The system’s venture capital players such as the Berytech Fund II, which used the BDL Accelerate event to announce close to $20 million in startup investments, and Middle East Venture Partners (MEVP) need exit opportunities that jibe with the seven-year timespan of Circular 331 funding of up to $400 million; a small cap exchange will open part of that realm at least in principle.

It is beyond dispute that the ratio of market capitalization to gross domestic product in Lebanon is in serious need of improvement. However, an electronic exchange with a market capitalization of a few hundred million dollars would be nowhere near enough to lift the Lebanese market cap to GDP ratio into the 50 to 100 percent range that is often considered indicative of stronger economies when compared with very low ratios associated with poor countries or with countries at less than 50 percent ratio that are considered undervalued. In this regard, the call for creation of greater liquidity in Lebanese financial markets raises the question of what other securities, besides stocks in startups, the new privately-held and privately-run market could trade and if it would be instituted with an intent to challenge the Beirut Stock Exchange.

Better market mechanisms needed for Lebanon

The attention in the BDL Accelerate event’s opening session was fully focused on Governor Salameh, documenting the awareness that most of the Lebanese entrepreneurship ecosystem’s progress in the past three years is owed to the central bank. But notwithstanding the applause with which the crowd received Salameh’s electronic exchange announcement, the main thrust at BDL Accelerate was the quest for capital; a plurality of young entrepreneurs told Executive that they had raised funds, were engaged in fundraising or were seeking to raise money in early 2016 in a variety of funding stages. By contrast, these entrepreneurs’ — and also some investment bankers’ — comments on the potential and practicality of a Lebanese SME exchange were at best enthusiastic in the vaguely affirmative way of someone who has not given a lot of thought to the matter.

More important for the project of an electronic exchange is that promises and acclamations do not compensate for absence of market fundamentals. Well regulated stock markets are noted for their macroeconomic value as they facilitate price discovery, flows of capital, and efficiency. But markets need to be supported by adequate economic incentives and, as researchers for the Organization for Economic Co-operation and Development argued in 2013, “radically different intrinsic nature[s] of markets for large cap and small cap stocks” mandate that markets for small caps should be designed differently from large cap markets. How the proposition of a small cap market can work in an environment with an anemic large cap market is, from a common sense perspective, a question that needs to be asked when deploying a small cap exchange formula in Lebanon.

Small cap ventures are notorious for their liquidity risk, meaning that investors in SME stocks may not be able to divest of shares at the time and/or price they need. It has to be asked how an electronic exchange in Lebanon could be enabled to attract market participants in sufficient numbers on both sides of the equation, namely in terms of qualified investors and of startups that can qualify as issuers of equity. This question cannot be unreasonable in a financial market that has been defined by lack of liquidity for more than 10 years. So the compounded bigger question is if a country with a fledgling capital markets authority, a history of illiquidity in its stock exchange and no recent experience with any initial public offering or much activity in secondary markets can pull off the launch and invigoration of an electronic exchange that should probably achieve more than just help startups in price discovery.

Questing for hub appeal

When compared with the marketing talk about Lebanon’s role as emerging hub, the number of genuinely international startups that presented themselves in booths provided for free to entrepreneurs at BDL Accelerate was hardly a handful, among them a UK firm that took advantage of the UK–Lebanon Tech Hub avenue to come to the Middle East. And just as BDL Accelerate did not feel like a magnet for international participants outside of some very isolated cases, global eyeballs did not seem drawn to Beirut in any approximation of the great attractiveness that local promoters talk about. In December, for example, a Huffington Post piece on dark horses in the race to attract international startups to rising tech hubs pointed not to Beirut but to Amman as one of three worth taking a closer look at. Ironically, it was posted right at the time of BDL Accelerate. Other cities in MENA that recently found mention in stories on up-and-coming startup hubs worldwide included Tunis, Cairo, Dubai and Tehran besides the familiar international contenders in Asia, Europe and Latin America.

Of greater indicator value than such — usually partisan and typically somewhat coincidental — rising ecosystem stories or promotional messages about the attractiveness of startup hubs in this or that emerging economy may be the 2015 Global Startup Ecosystem Ranking of San Francisco-based firm Startup Compass Inc. Their report, while falling quite short of evaluating hubs from all parts of the world, made several noteworthy observations on trends in what Compass described as a rapidly emerging and interconnected global startup landscape.

In an observation on the environment for exits, the report expects Silicon Valley to stay in the lead for exit values for several more years but anticipates “ultimate convergence towards an equilibrium that looks a fairly conventional 80/20 power law” in the world’s 20 largest startup ecosystems, meaning that Silicon Valley would capture between 30 and 50 percent of the annual exit pie, followed by three ecosystems that combined would also capture 30 to 50 percent, and another 16 startup ecosystems that will draw in the remaining 20 percent of the exits pie.

Just as interesting as the startup exchange for the development prospects of tech ventures is the issue of Beirut’s startup-hub appeal beyond the ranks of resident and expatriate Lebanese that comprise the ecosystem’s natural stakeholders. The idea of advocating Lebanon as an internationally attractive hub was an important premise of BDL Accelerate. However, while the event constituted a great initiative for showcasing the emerging startup ecosystem, it came dressed up with marketing messages that were far stronger than the event organization. The gaps between advertorial lore of huge local and international participation (presences of “100 speakers, 200 exhibitors and 100 startups from around the world” had been trumpeted all over the media) and the reality of attendances were visible everywhere in the Beirut Forum venue but never more so than on the second day when scheduled discussions went completely off schedule and when main-stage speakers and moderators sparred in front of a thousand empty chairs, while the more vibrant conversations were those of the people queuing for free coffee and a doughnut at the convention’s “coffee sponsor”.

The post Smart money talks appeared first on Executive Magazine.

Absolute discretion; the strength of character that engenders trust; the emotional intelligence that enables one to gauge a client’s needs, wants and insecurities; and a keen financial mind. Such are qualities that distinguish a top private banker. These qualities, or at least their appearance, have for eight centuries opened the doors of the wealthy and given private bankers access to the money-drenched souls of the super-rich, from the doges of Venice, Belgian merchants, European royal families, American industry tycoons and third-world rulers to dot.com billionaires and post-communist oligarchs in Russia and China.

When asked about their interaction with high net-worth individuals in the current era, private bankers at the start of this year still, as they did a decade ago, talk about advising their clients on expanding and preserving their wealth, about assessing their conservative, moderate or aggressive risk appetites and, quite a bit, about asset classes and diversification of portfolios in volatile times.

Yet in important ways, private banking has changed more in the few years of this century than in the 700 years before. The three main components of this change were the redrawing of regulations, the impact of technology and the globalization of markets. Regulations moved away from selective laissez-faire regimes and from being accommodative to the private greed of the upper 20 percent, to the intense scrutiny and punishment of financial rule-breaking by banks, of complicity in money laundering and individuals’ tax evasion, of sanctions breaking and so forth. ICT systems for asset management and private banking were developed in revolutionary leaps, allowing for unprecedented sophistication of the planning, management and reporting of portfolios. In tandem with the rising data volumes, markets on every continent became richer and more accessible, giving wealth managers more options to diversify than ever before while, at the same time, engendering interconnectedness of risks with new and perhaps entirely unknowable upsides and potentially devastating downsides.

All the while, there is a growing understanding that the destruction of nature, eruption of large social conflicts and unmitigated concentration of power in the hands of self-absorbed individuals and institutions are detriments to the world’s economic future and even threaten the survival of mankind. Environmental, social and governance (ESG) considerations have risen from fears on the fringe of human debates to central concerns in the shaping of the 21st century society and economy.

Some – but certainly not all – necessary lessons have been learned in this context from the Great Recession and social upheavals of the past seven years.

Instead of capitalist orthodoxy allowing us to presume that mere pursuit of individual interest will sustain the public good, new ESG responsibilities demand attention and have begun to inform our ethical orientations and behaviors. Tying this into the behavior of private banking means to extend and enhance business ethics beyond the notion that the most successful private banker in the long term is the one who puts the client’s interest first in all things (for some options, see story on private banking ethics).

From what we can see in history and human behavior, wealth will always be more concentrated under the stewardship of the few rather than distributed into the hands of the many. Even when significant portions of wealth get redistributed via violent or peaceful ways, the concentration process will immediately restart after a revolution or, in the far superior case of voluntary distribution, carry on. Given the continuity and the considerable benefits of managing this process of growing, preserving, sharing and regrowing wealth, and acknowledging that banking is the top asset and best performer in the Lebanese economy, there is no reason why the wealth management process under observance of best ESG standards and in practice of highest business ethics should not involve Beirut as one of its strongest hubs.

As 2016 is a year that started with many questions and rising uncertainties for private bankers and all wealth management disciplines (see story page 36), there is one lesson from the recent past that demonstrates why ethical behavior would be a win-win for private banking institutions in Beirut. While a lot of private wealth was destroyed in 2008 and 2009, the total sum of wealth and most high net-worth family fortunes were restored by 2012 or so. But wealth managers that were exposed during the Great Recession for their unethical greed, recklessness, self-absorption and institutional malperformance, in some cases ended up in jail and in others vanished from the markets. The best time to distinguish yourself as a private bank and advertise yourself for future business is to excel in ethical behavior during a period of financial uncertainty.   

The post Leader in ethics, leader in managing wealth appeared first on Executive Magazine.

It was as if the in-laws had decided on New Year’s Eve that it would be fun to come for an unannounced visit. Volatility. It is part of the family experience in any investment strategy and, like the parents-in-law, volatility is never far away but the average investor feels so much more comfortable when it is out of sight. Well, in the first days of 2016, volatility was all over the place, but made itself noticed most strongly in China where the Shanghai Composite Index fell almost 12 percent from 3,540 points on December 31 to 3,125 points on January 7.

Perhaps it is no wonder, then, that an often-quoted January 8 research note by the Royal Bank of Scotland contained warnings like “history tells us that a United States downturn may be nearer than you think”, bullet-points that vacillated from thrice bearish outlooks for China, commodities and oil, to widening output gaps and predictions (almost certainly computer assisted) that automation is on its sneaky way to destroy up to half of all jobs in developed markets. “Watch out. Sell (mostly) everything” was the recommendation (emphasis original). Surveys of other economists ensued immediately showing that, although few economists agreed to the disaster scenario, many couldn’t totally dismiss it – “cataclysmic year” became the words of the hour.

Now, one lesson of the Great Recession is that any analyst or economist who could lay claim to have predicted the catastrophe became an instant celebrity. One can wager on this doomsday (DD) effect using a new economic formula where precise prediction of gloom (1), multiplied by actual cataclysmic percentage drop in world markets (X) and divided by the [accidental] number of months between the prediction and the [arbitrary] date presented in media as the actual key date of market collapse, results in the lucky DD effect number (YN). A high positive YN acts as multiplier of book sales and social-network followers, better speaking opportunities on television and YouTube and elimination of the awkwardness factor when starting conversations with “I am an economist…”. As a bonus, the risk of a negative YN appears to be negligible because the information markets tend to quickly forget erroneous predictions due to their sheer volume, even ignoring it when outlooks for, let’s say, key commodity prices turn out to be egregiously wrong by 30 percent or more.

Nonetheless, 2016 began with many interesting questions. The impact of the Federal Reserve’s December interest-rate hike, analyses showing a stealth bear market in the US, the dichotomies between monetary policies in the US and in the Eurozone, the China syndrome, the Brazilian crisis, Russia’s conundrum, capital outflows from emerging markets, the inverted oil shock and the economic troubles of oil producers in the Gulf Cooperation Council and weaknesses of their stock markets; there was much to think and talk about. What would the implications be for Lebanese investors? Keeping all the vagaries of the outlook business in mind, Executive sat down with a selection of Beirut-based private bankers and wealth management experts to learn of their views on the state of markets and advice for 2016.     

General expectations

Investors will do best if they lower their expectations, recommends Toufic Aouad, general manager at Bank Audi Private Bank. Noting that the start of 2016 appeared internationally to be “the worst in the past 84 years, since 1932,” Aouad perceives the theme of 2016 to be low growth, low inflation and high volatility, leaving no ground to anticipate high returns. “For the same risk profiles, [investors] should expect that returns will be lower. This is not very good news to share with investors but that is really the situation today,” he explains.

Neither he nor his colleagues in the Lebanese private-banking realm see the writing on the wall to be prophesizing doom. “I don’t think 2016 will be dramatic,” says Georges Abboud, global head of private banking at BLOM Bank Group. He thinks that investors will have to change their behavior in selection of equities to favor stock-pickers over investing in passive funds but believes that there is also money to be made this year.

“Some people talk of the financial meltdown, but we don’t think so,” says John Dagher, the chief executive officer of Julius Baer (Lebanon), a unit of the Swiss private bank by the same name. “We believe that it is going to be a challenging year but we also believe that central banks will continue to be a major factor in the markets and will continue to have adaptive policies. A lot of industries are under pressure, so you have to be selective and you have to diversify, but there is always somewhere in this world where you could employ some money. Interest rates are still going to be on a slow tone and the correction in prices will also reach a place from where on you could see some buoyancy,” he elaborates.

For Nadim Kabbara, who is head of research and manager of several funds at FFA Private Bank, the general outlook is for more uncertainty, also when adding in factors such as a possible exit of the United Kingdom from the European Union, the migration issues in Europe and the presidential elections in the US. “There is a lot of uncertainty and one thing that brokers are convinced about is that there will be more volatility this year. That is why we advise our clients to invest into more balanced portfolios,” he says.

Scenarios on the United States

The US markets are in many ways still not to be scoffed at, says Youssef Dib, general manager of private and investment banking at Near East Commercial Bank, part of Saradar Group. “Our view on the US is that it is still benefiting from strong fundamentals – the economy is supported by growth,” he explains. He points to positives of low unemployment and interest rates that are still low even as the Federal Reserve has embarked on their normalization at the end of 2015, to strong consumer sentiment and to corporate profits that have been sufficiently attractive on downward revised sentiments. For negatives, Dib lists the unattractively high equity valuations, the suffering of the investment sector, high corporate debt levels and the general toll that the strong US dollar is taking on corporate profits. “Overall, what we can say about the US market is that it is resilient but it is not our favorite because of the rate increases by the Fed. But the resilience of the US market is a mitigating factor against possibly adverse developments,” he tells Executive.

Pointing to the impact of the Fed’s interest rate tightening, Audi’s Aouad sees the US dollar as the probable first winner of this decision, despite the fact that the appreciation has already previously been priced in on the currency markets. Given that the Fed has started intervening rather late when compared with previous rate liftoffs, it is hard to use historic reactions in any attempt to predict market reactions this time, he notes. Audi Private Bank is selective on US markets, seeing financial companies for example as stocks that are likely to benefit directly from rate hikes. “We can say today that the US bull market is entering its last phase, where we usually witness narrow market breadth and high volatility,” he says.

In addressing the interest rate issue, Dagher also describes the approach of Julius Baer’s researchers as one of digging through historic records on interest rate hike impacts and trying to see what could happen under today’s circumstances. The bank does, however, anticipate little further movement on interest rates in the near future. Dagher says that Julius Baer expects to see no or “perhaps one more” quarterly increase in the US interest rate in 2016. (note: all interviews for this story were conducted more than a week before the January 27 announcement by the Federal Open Market Committee that it would keep the federal funds rate steady at this time). Given the hidden bears and expected end of the historic bull-run on Wall Street, he adds: “Diversification becomes very important. Although some people have been writing that diversification is not going to achieve much in this huge globalization, it still will help you when you diversify into different markets and different industries.”

Drifts in Europe

When looking over various very recent European predictions that the Eurozone might be on the verge of collapse or reading speculations that the EU is sitting on a precipice above the abyss that is about to open, it may be useful to recall that pundits with a personal interest in currency markets told Lebanese audiences of an impending euro meltdown. That was in early 2010, just after Greece in 2009 started to suffer from confidence losses because of its lying over debt levels.

Construction of similar narratives seems to be a cyclical habit in some otherwise elusive European psyche, as perhaps best exemplified by the centenary propensity for predicting the end of their civilization as the end of all worthwhile civilization. The seminal European work representative of this cultural pessimism, and counter piece to some neocon American writings, is Oswald Spengler’s “Untergang des Abendlandes”; known in English as “The Downfall of the Occident” or “The Decline of the West”, it was written just about a century ago.

But the continent’s love for self-doubt notwithstanding, Europe in 2016 does not look that bad a place for investors seeking a bit of extra diversification. “If we look at Europe, we see that stocks trade at price to equity (P/E) ratios of 12 to 13. This is below peak levels and when you look at the profit margins of European companies, they are also 20 percent off their peaks. There is space for European companies to improve their margins,” reasons Abboud. Considering that the quantitative easing (QE) program by the European Central Bank (ECB) is supposed to stay in place at least until some time in 2017, he adds: “All these factors show that there is some potential for [stock prices in] Europe to grow. I am sure if you dig in, you will find value stocks, with good dividends and good fundamentals.”

For Aouad, European stocks – amidst overall expectations that returns will not be high in 2016 – appear better positioned than those in the US to deliver high single-digit returns. “The Eurozone is recovering, you can see it by profit margins or the credit cycle. You have some tailwinds, which are the weak euro for exporters and the low oil prices,” he says. Within the European space, Bank Audi Private prefers companies that are domestically focused for being not as vulnerable as some exporters to eventual disruptive developments in emerging markets. “Among exporters, we prefer those who trade with the US as the exchange rate will be to their advantage. High-dividend domestic names in continental Europe are also to be considered. We like mainly financial and mid-class [stocks],” he explains.

In Kabbara’s perspective, it is prudent to use opposing strategies in Europe and the United States, namely to look at small cap and domestically focused companies in the US, and at exporters or companies whose input costs are in euros in Europe.

Dagher characterizes Europe as a region that retains trust of investors and will remain a very important market. Outside of market issues, he notes that points for necessary consideration in 2016 include terrorism threats, immigration controversies and matters of external relations such as the Turkish-Iranian issue. The bank’s researchers expect no big changes in the euro-US dollar currency relations, and Dagher cites indications that the currency pair will move this year in either a narrow range of 1 euro to $1.07 – $1.10 or at most shift into a wider range of $1.05 – $1.15. On the monetary side, he agrees that the ECB’s task is less easy than the Fed’s in decision-making terms. Overall he sees potentials on both sides of the Atlantic. “Valuations in European markets are perhaps a bit better than American ones; [but] this doesn’t mean that there are no US equities that you can move into after the last correction,” he says.

Dib sounds almost Europe-bullish. “The economic picture in Europe looks rather good and it is our favorite equity market. Even the euro might appreciate by yearend. If the market goes up and the euro as well, it would even be a plus-plus,” he says. From a Lebanese perspective the dollar strength results in European buying opportunities, such as apartments that look 25 percent cheaper than two years ago, but cautions that he would still avoid southern Europe and Greece as well as the UK because of it giving the impression that it is taking a course of its own.

Emerging markets and China

As to the, in comparison with developed economies, even more enigmatic markets, Dib sees no specific dangers. “The reasons why we are not positive on emerging markets are that sentiment on them is still very negative and that a lot of them have problems politically. Valuations, however, are very compelling. Valuations in emerging markets have gone down 50 percent and that puts a floor on any further downside that could happen,” he comments.

Chinese stocks got off to a really rough start in January | Johannes Eisele | AFP/Getty

Aouad highlights that emerging market equities have been broadly the subject of severe risk-aversion by investors, which materialized in net outflows especially in the second half of 2015. “Within this asset class, country selection is very important. We are very cautious on emerging markets and when we say we are country specific, we don’t like to name countries. [However], we look more at India and Mexico rather than the rest in the spectrum of emerging markets,” he says.

China, the current top enigma within the enigma of emerging markets, remains a big uncertainty, Aouad admits. “The question is whether the Asian giant will be able to succeed in his shift to a consumer and services based economy while dealing with lower investments and huge debt burden,” he posits. While he agrees that “China is obviously the big scare” of today, Abboud offers the view that there may be mitigating factors as well as over-emphases of risk potentials when it comes to the Chinese economy in a global context. “As a whole we think the market will continue to be volatile in China, but so far we are giving credit to the Chinese government to be able to guide the soft landing,” he says. That an oversupply of analyst fears have been projected onto the country’s economy, and that the Chinese deserve to be given time to manage their challenges, appears to be a majority view among the private bankers who talked with Executive.

The GCC and oil: still the fateful pairing

Forget any notion of decoupling. The start of 2016 must have reinforced the perception that Arab markets, especially the countries of the GCC, and oil have a correlation that is as strong and fateful as ever. “For the GCC specifically, the last year was not easy and market caps in large GCC markets have certainly corrected in value since oil prices started coming down a year and a half ago. The oil price has been front and center for GCC equities but we want to remind investors that markets have been pricing in a lot of that downside in oil. P/E multiples [of companies traded on GCC stock exchanges] are today more in line with emerging markets. Also, dividend yields are quite appetizing now versus developed markets and even versus other emerging markets,” explains FFA Private Bank’s Kabbara.

Having a dedicated exposure to markets in the Middle East and North Africa (MENA), FFA Private Bank has noteworthy views on regional equities. According to Kabbara, the bank’s regional investment approach is to concentrate on companies with growing market shares and which have strong balance sheets, good management and pay dividends. “Our outlook for 2016 in MENA is cautiously optimistic and we are trying to manage the [correlation of corporate valuations with the oil price] by focusing more on countries that are diversified away from oil,” he says. Kabbara then adds: “From the macro perspective, there are no changes in why we are invested in MENA; we benefit from the demographics that you find in emerging markets but not elsewhere, from the income growth, from the young population, from governments that continue to invest in their economies and from the peg that until now links local currencies and the US dollar, which you don’t see elsewhere in emerging markets.”

Dagher, who has decades of experience working in financial markets around the Gulf, confirms that GCC economies face major changes because of the oil situation but emphasizes that the bank does little in research on the GCC and that his comments are based on his personal observations. “The mere fact of thinking about an initial public offering of Aramco means that there is a huge change in that GCC economic decision makers are looking at shifting risk of oil as the main business from the state into private hands, at least for a part of the risk,” he says. Since changes in the GCC also involve introductions of value-added taxes and removal of subsidies, or possible withdrawals from full dollar-pegs, “it is a very interesting period to see how those things will materialize,” he says.

That the magnitude of the challenge for change and adaptation of companies in Saudi Arabia and other GCC economies extends into the non-oil sector was demonstrated last month by top dairy manufacturer Almarai and food and consumer conglomerate Savola Group. The two Saudi companies were hit by the removal of energy subsidies but also, in Almarai’s case, by a government decision to phase out domestic production of alfalfa and animal forage because of high water consumption; the transition to sourcing forage abroad is going to cost it $53 million in 2016 alone, Almarai estimated in a disclosure in January. The stock lost almost 30 percent of its value in the first three weeks of January before recovering about half of the lost ground in the fourth week. Savola, which owns part of Almarai, fell even more, by about 40 percent, before coming back to a one-month loss of 18 percent on January 28.

There are clearly more things to be known about GCC equities than some far-away analyst’s notes on emerging markets can cover. As Dagher corroborates, many factors besides oil are at play in the GCC markets. “It will always be rewarding to be in the GCC markets,” he says.

Still a fateful combination | Yasser al-Zayyat | AFP/Getty

Not for conclusions

As January drew to its close, major Arab stock indices closed the month’s last trading week on positive notes. All markets in the Gulf Cooperation Council gained a bit on January 28 but for the year to date (ytd), the region’s major bourses were all still bleeding, at ytd drops of more than 9 percent in Dubai and Abu Dhabi, around 11 percent in Kuwait and Qatar, and 14.5 and 14.9 percent in Egypt and Saudi Arabia.

In the wider world, China ended the month with investor distrust, as the Shanghai Composite Index was down 25 percent between January 1 and January 26. The Fed met expectations that it would not venture into another rate hike and adjusted its coded communication to tell markets that they should not consider upcoming decisions as foregone conclusions. The trend to issue wildly alarmist analyst notes seems to have abated to some degree but it seems that uncertainty could be even deeper than one would like to assume. The concept of economic predictability was certainly not helped when the World Bank was compelled last month to lower its forecast for 2016 crude oil prices to $37 per barrel. The astounding 28 percent downward variance from the $51 forecast issued in the previous commodities outlook in October 2015 cannot be regarded as reassurance of any person’s or any institution’s ability to give accurate predictions for the global economy in 2016.    

Doom or just volatility? Maybe the anonymous interstellar power that left us the Mayan calendar had a special sense of humor and moved the doomsday notch one leap year into the past – so that 2016 is the real 2012. Or perhaps, by way of other wholly uneconomic and unscientific but entertaining mind games, all the blood moon, harvest moon and blood-harvest moon occurrences of last September were warnings for wealth owners to repent, divest of all assets, distribute everything to the needy by [insert date of personal preference] and start rebuilding private wealth in a new cycle of global enterprise to get wealthier than ever before in the coming period of [insert lucky number] years. We will never be able to guess right.

The post Crash course on markets appeared first on Executive Magazine.

“Why is there so much more research done on baldness than on malaria? Because rich people go bald, and they don’t die of malaria.” William H. Gates III

There were times when homegrown private banking in Lebanon looked like a short-distance runner trailing behind the field in a long-distance race. A decade ago, whenever Executive would report on the wealth management and private banking options from Beirut, representatives of foreign institutions were the natural go-to people. Local and regional directors at Merrill Lynch, BNP Paribas, Credit Suisse, UBS, HSBC and other foreign institutions provided the most insightful interviews. They also, in courting local clientele, took the business of Lebanese high net-worth families and individuals to the financial centers overseas. London, Geneva and New York stood out as the places where Lebanese private wealth accounts were managed. Sure, some local banks had knowledgeable individuals with job titles such as “head of private banking” and offices situated in unexpected corners of their respective banks’ headquarters. But mostly these people would talk about interesting ideas and projects envisioning future growth, and several of them, and their fledgling departments, were no longer to be found when Executive came around again a year or two later.

Visiting with private bankers last month, the flair was stronger on the side of the locals. From the rep office of UBS and from Credit Agricole Suisse (Liban) came understandable apologies for not being available to discuss the global scenarios at this time. The Lebanese units of Swiss banking organizations Julius Baer and UBP provided perspectives originating in their global head offices, plus valuable personal insights into regional markets. But the managers of homegrown private banking were just as interesting to listen to and had intriguing news of their own to share.

Interviewees at sector leader Audi Private and at local independent FFA Private Bank signaled calm confidence about their performance and shared their assessments of the whole range of areas of financial interest – i.e. the broad array of volatile markets and potential worry spots. Growth was clearly on the minds of Georges Abboud, global head of private banking at BLOM Bank Group, and Youssef Dib, general manager for private and investment banking at Near East Commercial Bank (NECB).

News on capacity growth

BLOM Private Bank is working on expansion of its private banking operations in Switzerland, Abboud said, full of enthusiasm. “We will definitely grow the operation in Geneva because we have a lot of demand from our clients visiting us there. We will build the advisory offering that will have a common platform between Beirut and Geneva,” he told Executive after having just returned from a visit as part of a new mandate to take care of all of the group’s private banking operations.       

With positions in the deep middle field of the Lebanese market in terms of headcount and other metrics, NECB has not been a bank in the forefront of banking activity. For the past two years, management appeared reticent to accept interview requests as the bank was working out its merger with another institution, Banque de L’Industrie et du Travail (BIT). But as Dib told Executive, the veil of the bank’s new identity – neither to be NECB nor BIT but a new brand related to the main driving force behind the institution, banker Mario Saradar – will be lifted within a few months. “2015 was an important year for Saradar Group with the official merger of the two banks. At present we are one group with two banks, NECB and BIT, and around April we will be one entity with a new name and new corporate identity,” Dib said. According to him the merged bank will have a strategy to operate as universal bank with a retail network of 20 or more branches but private banking will be one of the key business lines. “Wealth management is in the DNA of both NECB and Saradar [Group], which is highly reputed in this field,” he added.

Noting that FFA Private Bank has almost completed a decade of operating as an independent private bank (it was established as brokerage Financial Funds Advisors in 1994), and given that private banking culture appears today soundly rooted in the units backed by the country’s top two commercial banks, the new positioning of Saradar Group is a welcome addition to private banking capacity in Lebanon. However, four reputable names and growth-oriented organizations do not yet make a crowd and the Lebanese market is still a good distance away from passing important milestones that would allow the local sector to compete for all the high-powered Lebanese specialists who work the world over in asset management, funds management, private banking, etc. And while IT systems are in a process of significant enhancement at Audi Private Bank and also are being beefed up at BLOM, strengths would have to increase further before advisories here can deliver on all client needs and requests. Also the national environment, as ever, will have to become conducive to the needs of bankers and clients to allow Beirut to become a rising star in private banking.

Under those circumstances, perhaps angling for ethics can help in carving out a stronger niche. It may be counterintuitive to the popular notion that banking for the rich is akin to depriving the poor or the view that a private banker’s success requires loving money more than love itself, but business ethics and private banking are in no way mutually exclusive. If one attempts an unbiased examination of the contentious issue of wealth, one can find historic and new touch points with ethics concerning the what-in and the what-for of investing and the how of best wealth management behavior.

Three roads less traveled

In regard to the what-in, the reality of an alternative investment dimension has been demonstrated through growth of green, socially responsible, and ethical investment strategies as well as Sharia-compliant Islamic finance. Retail funds applying environmental and ethical selection criteria were no more than quirks in the financial landscape when first devised in developed European countries. But that was before the real spread of awareness of climate threats and the proliferation of investment choices. Between December 1999 and June 2014, the assets under management (AUM) in the Socially Responsible Investment (SRI) fund market across Europe grew from 11 billion euros ($12 billion) to 127 billion euros ($138.4 billion) according to a report by specialist French research firm Vigeo.

In a comparable but more recent view of the United Kingdom market, the non-profit Ethical Investment Research Service (EIRIS) of the UK, which merged with Vigeo in the beginning of 2016, said that the UK’s AUM in retail funds with ethical or green orientation grew from less than 300 million GBP ($431 million) in around 1990 to more than 15 billion GBP ($21.5 billion) in June 2015.

The Vigeo report notes that ethical AUM represent 1.7 percent of European retail AUM but that is a veritable niche and has ever-more potential for growth as attention to environmental and social issues soars, and management structures of SRI funds have been maturing and performances becoming more competitive with conventional funds.   

Similarly, the Islamic finance industry has been fed by increasing appetites for religion-compliant products. A report by the Malaysia International Financial Center (MIFC), which is affiliated with Bank Negara Malaysia, the country’s central bank, said last month that Islamic AUM stood at $60.2 billion globally in the third quarter of 2015, albeit down from $75.8 billion a year earlier. Attributing the drop to lower oil prices and some changes in regulatory environments, MIFC said that Islamic AUM are expected to grow to $77 billion by 2019, at slightly above 5 percent per annum, and added for evidence that the average growth rate of Islamic funds over the past five years was 9.6 percent per annum.

On the one hand, the growth potentials for ethical funds of Western and Islamic orientation seem worth pondering from a Lebanese perspective because the outlooks and descriptions have become less propagandistic when compared with some hyped-up conferences and reports 10 years ago. On the other hand, it seems a good rationale for Beirut as the prospective wealth management center in the middle of East and West to develop expertise in funds that have untapped marketing potentials in Western and Muslim-majority markets, and conceivably elsewhere in emerging markets.     

The ethical what-for of investing can perhaps best be approached by examining a recent fruit of philanthropy. There are 1,382 people who work at the world’s largest philanthropic organization, according to the entity’s latest factsheet. Among these people are one Melinda Ann French, married name Gates, and one William Gates III. It is widely known that the Bill and Melinda Gates Foundation has been endowed with billions of dollars by the Gates family and their collaborators, such as Warren Buffett. It has a trust endowment value of $41.3 billion (at mid 2015) and grant payments of $34.5 billion since inception, according to its factsheet.

It is in no way probable that many philanthropic organizations will quickly meet the benchmarks set by the Gates Foundation. Moreover, initiatives like the Giving Pledge, which Gates and Buffett founded in 2010 to entice their high net-worth peers toward dedicating over half of their net worth to philanthropy, are yet far from creating a sustainable tradition. But all this, including the lags behind best practices, could make advising on philanthropy a more interesting pursuit for Lebanese private banks.

There are precedents from world-leading private banks. Not only do big names operate their own foundations for giving and corporate citizenship but organizations such as Credit Suisse, UBS and Lombard have instituted philanthropy advisory services as part of their offerings for high net-worth clients. Again, the what-for of giving could be an underexplored and twice – socially and financially – profitable niche for private banking in Lebanon.     

How to be ethical?

The how of ethical private banking starts with affirmation of the best existing practice. As John Dagher, a Lebanese private banking veteran and current CEO of Julius Baer (Lebanon), put it, “Every banker and every bank should put the client as their prime focus, without any other interest.” Conflicts of interests between giving the best advice to clients and pushing for sales performance in product campaigns must be avoided and he would not agree to rewarding employees on product campaigns, said NECB’s Dib. “Understand your client and make her or him understand what he or she really wants. One thing that is important is that you have sometimes to contradict your client – if he wants to take risks that are higher than what you [see as good],” he advised on the ethics topic.

Experience of criminal behavior in top financial centers such as rate-fixing in the long-running Libor scandal and countless examples of ethical failures in banks that helped customers get away with tax crimes have taught that the implementation of ethics requires significantly more than being honest in the dealings with the client. Being their banker, it can be a serious ethical failure to prioritize clients’ financial interests over the community’s financial interest. When going as far as evading the law in the process, misguided focus on a client’s private interest over the public rule puts a banker’s personal future at risk, not to forget reputational damages and financial punishments for the bank.

To reduce financial crimes in a banking hub as much as possible, regulations and supervision are the first line of defense. The second anti-crime rampart are codes of conduct and internal controls within the bank. The third element in keeping bankers ethical is a multi-layered tradition of best practices and ethical behaviors that ideally stretches from acculturation to values in one’s family and childhood environments to training in ethical behavior during school and university studies and later on, continual education and job-training programs.

There are some elements that could be utilized to the advantage of Lebanon in quietly building capacity as a private-banking hub, especially in a regional context. “If we compare to the Gulf Cooperation Council, we definitely have more human resources for private banking. We have a strong banking sector and we have a very strong central bank, which has given a lot of power to the capital market authority as a regulator which we did not have before and which is even better for us,” said BLOM’s Abboud.

Lebanon’s central bank has, in the past, been able to keep the market’s many bankers closer to the straight and narrow than other supervisory regimes were able to do, judging from the evidence of violations in hubs like London, New York and Geneva. Incentives for a much stronger ethic are at least not inconceivable if the private banking industry here were to agree on setting up new beacons of integrity and ethical advisory services that will contribute to sustainable profitability. One way of reasoning for ethics is simple and practical: by knowing that they have more to lose from ethics violations than to gain from acts of corruption, most people will make the rational choice. The additional good news is that the managers of our private banks seem to be in agreement on the potential to make honesty a competitive edge.

The post Great potential in need of an edge appeared first on Executive Magazine.

When La Libanaise des Jeux, the country’s sole concessionaire of lotteries and scratch-card games, introduced a new game last month, it was sheer coincidence that the launch event was held within five hours of a record-shattering lottery draw half a world away. Nobody could have predicted that Yawmiyeh, the new Lebanese daily draw game, would see the light just after the Powerball lottery in the United States declared that three winning tickets would each be eligible for 30 annual payments totaling around $533 million.   

In many ways, the two games couldn’t be more different from one another. Powerball jackpot amounts are determined on basis of sales revenue from tickets and payouts are shared among winning tickets. Through two revisions over the past few years, Powerball structures have been rigged in favor of producing huge jackpots with ever-lower chances of reaping them. Yawmiyeh is structured to offer fixed odds – every winner will get a preset multiple of the wagered amount, irrespective of eventual other winners.

The top prize at Yawmiyeh thus cannot be larger than LL 120 million ($80,000), based on the maximum possible wager of $2 and a multiplier of 40,000. On the other hand, there could be any number of winners and each of them would get the top payout. This exposes La Libanaise des Jeux to a small risk of ending up with a loss for a daily draw but the company has calculated that payout ratios for winners on yearly terms should be 45 percent. This, says president and largest shareholder of La Libanaise des Jeux, Rainier Jreissati, is the same risk as is taken with the other draw games operated by his firm.    

Describing Yawmiyeh as a set of three games – with bets on three, four or five numbers, in sequence or disordered – Jreissati tells Executive that the game is “cheap and easy” to play. It is marketed as a single game to the public and Jreissati expects that the daily game’s high frequency, simplicity and low barrier of entry through a minimum wager of LL 500 ($0.36) will generate new business in the Lebanese lottery market and enhance participation in the existing lottery scheme, Loto Libanais. “It is always good to have a new game and it is good for the synergy of the lottery. I am expecting something from the new game, because when you introduce a new game, the old one will work as well,” he says.

State-sanctioned lotto was introduced to the Lebanese market in the second half of the last century and has been operated by La Libanaise des Jeux since 2002. According to Jreissati, the total winnings dispersed by the lottery between 2002 and the end of 2015 amounted to $480 million and the company recognized 28 million winning tickets. Top prizes, accumulated in accordance with the jackpot principle, reach up to two to three million dollars apiece and there are 11 to 14 major wins each year.

Jreissati sees potential to boost the size of the Lebanese lottery market, which according to him is currently worth around $100 million per year, by 30 to 40 percent through adding Yawmiyeh and at least one other game that the company has in its pipeline. “I am optimistic by nature and I think that the market can perhaps reach $150 million,” he says, but concedes that it is difficult to say what game innovations would take the market to this size because of the need to take cultural factors into account and get the aiming of games at potential target groups right.

A global game

In general terms, the story about lotteries’ immense lure of immeasurable fortune is universal across history and geographies. Lottery receipts in earlier eras were used by sovereigns to finance wars and colonial expansion. Presented today generally within the context of raising funds for cultural, social and educational causes, the lotto equation works well across developed markets. According to the European and North American lottery associations, revenues from lotto and sports betting in 44 European countries amounted to 82 billion euros (2012 data) and $70 billion (2014) in the United States and Canada. No 2015 data were available from the North American Association of State and Provincial Lotteries at time of writing. A 2013 consulting study for the European Lotteries Association said, based on 2010 data, that citizens of the European Union allocated 1.2 percent of their consumer spending to gaming products offered by lottery operators in 26 EU countries.

In emerging markets, China is the big lotto story of the past decade. According to data cited by a major supplier to the country’s two official state lotteries, spending on lottery products by Chinese consumers exploded from less than 200 million Yuan Renminbi (RMB) in 2000 to over RMB 382 billion ($56 billion) in 2014 and grew to represent almost 20 percent of the global lottery market, which in 2014 was worth $284.3 billion in sales according to the World Lottery Almanac, an industry publication.

In relation to such global performances, the Lebanese lottery market is both insular and minute. La Libanaise des Jeux has some dealings with lottery operations in Africa but is reducing these activities. There are no market links between La Libanaise des Jeux and other lotteries in the Middle East and North Africa. Most Arab countries have no official lottery schemes and apart from Lebanon’s lottery program, only Morocco and Egypt have been receptive to the idea.

Probability engineering

For most of its modern history, the myth of wealth by lotto has been sustained by operators who offered players the chance to become millionaires. But recently the appeal and performance of lotteries in developed markets have been boosted by a few tricks. Operators of games in the US and the EU have employed two toolsets to fight against any waning of interest among their audiences. The first was the congregation of markets via interstate lotteries such as Powerball, Euromillions and the Eurojackpot. By combining national lotteries in Europe and state lotteries in the US into border-crossing games, operators pooled players into much larger groups and thus expanded finance flows into jackpots.

Changing the odds was the second tool. This was achieved in the case of Powerball last October by increasing the general count of numbers in the game from 59 to 69 and simultaneously lowering the number of options for the additional red “powerball” from 35 to 26. The measures increased the probability of small wins and at the same time massively lowered the probability of winning the jackpot. By reducing the chance of top-tier wins per draw, operators supported the aggregation of mega jackpots. In practical terms of jackpot amounts, lotto companies used the two tools to the effect of pushing prize ceilings from less than $100 million in the late 20th century to hundreds of millions of dollars in the past 15 years; the deliberate inflation of prizes and jackpots has now peaked in the smashing of the billion-dollar-barrier.

Low-income individuals spend the highest proportion of their incomes on lottery tickets | Greg Demarque

The frenzy factor

It can be counted on that the accumulation of mega jackpots will not cease. Nothing in state-sanctioned gaming works better than a big jackpot for simultaneously attracting players and empowering their irrational behaviors. The record Powerball jackpot in the United States last month provided proof if such was ever needed. With over $1.5 billion in the pot, some otherwise sane people drove hundreds of miles to buy their tickets in convenience stores that had sold a winning ticket in the past. Regular consumers increased their spending from their usual $2 to $10 per draw to hundreds of dollars for dozens of tickets. Lottery agents had to work overtime to serve queues of customers who wanted to part from their money for a one-in-300 million chance to be the next lotto billionaires.

The results of the people’s many irrational attempts to get extra lucky by overspending for some magic were very exciting – for the vendors and for the ultimate beneficiaries, the participating US states, that is. Reporting from sales outlets around the US, UK-based newspaper The Guardian found anecdotal evidence of gross sales increases between three and 25 fold for the January 8 to 12 sales periods when compared with an average week. For the final day before the January 13 draw at 11 p.m. Eastern Standard Time, lottery revenues were estimated at a record $600 million, up from $326 million on the day before. During just one hour on the evening of January 13, $8.6 million worth of Powerball tickets were sold in Texas alone. The New York State Gaming Commission said lottery sales in the ‘empire state’ were up by $310 million in the fiscal year ending March 2016. It reported record sales by its licensed retailers to the tune of $9.7 million in commission earnings during the full cycle of Powerball jackpot buildup between November 7 and January 12.    

United in play

International researchers into gambling addictions and socially motivated critics denounce huge jackpots as exploiting people who don’t understand the odds and decry big lotteries as regressive taxes on the poor, arguing that the highest proportions of incomes spent on lotteries come from low-income people. When asked why Loto Libanais jackpots have remained humble when compared with the mega-jackpots in developed economies Jreissati points to the very limited size of the Lebanese market versus the interstate lotteries that have access to huge player pools.

Regarding social stratification of players, he says that Lebanese from all walks of life participate in the game and that his company has found no indications that players come predominantly from low-income groups. For evidence, Jreissati points to the profiles of winners. “How can I know that people from all social groups are playing? Because when the winners come [to claim their prizes]; there are all kinds of people who are winning,” he says.

Against allegations that playing the lottery could cause the sort of problems of addiction and financial ruin that are associated with other forms of gambling, Jreissati argues that it is very difficult to lose a fortune playing the type of games offered by La Libanaise des Jeux. “You cannot lose all your money playing the lottery; even if you go crazy for a mega jackpot, it is still only one draw. Don’t cry over people who lose on one day, cry over the people that come back to gamble on each of the next seven days, trying to win back their money,” he argues. He also refutes the assumption that his company is doing better in difficult economic times because people would gamble more during periods of distress. “That is not true,” he says and explains that he believes people are reluctant to spend even one or two dollars on lottery tickets when they are short on cash.

According to Jreissati, a high degree of equal participation in the lottery applies not only on socioeconomic but also on communal terms. He claims that there are no religious objections against the games and affirms that point-of-sale outlets with the requisite gaming terminals – currently numbering 1,200 units – are distributed evenly in terms of geography. “We are present all over the country, in every single place,” he says, insisting that no region accounts for a dominant share of sales. He acknowledges, however, that the lure of a big win entices players in Lebanon just as it does anywhere. “We are well balanced in terms of regional distribution of players and players come from all income groups, but we have definitely more players when there is a big jackpot.”

Jeremy Arbid | Executive

In tandem, jackpots and revenues are reaching record levels worldwide | Greg Demarque

Winner takes a lot

The image of playing lotto in Lebanon has had positive connotations of giving to charity since the 1980s when the lottery was designated to support orphanages. Up until the early 2000s, for every draw at the Tele Liban state television network, an array of converted bicycle wheels – faintly reminiscent of the Marcel Duchamp dadaist installation, Bicycle Wheel – was operated by residents of an orphanage or charitable institution that was a beneficiary of lottery revenues. Spinning those wheels in front of boxy cameras in an austere room at the Tele Liban production center in Verdun, six youngsters every week were visually conveying the message that the lottery had been established to help the disadvantaged.

According to Jreissati, who has been involved with the lottery business in Lebanon since 1984, a guaranteed share of lottery revenues is transferred to the National Directorate for Lottery at the Ministry of Finance. With the MoF website offering no insights into the allocation of lottery revenues and Jreissati saying that the income stream is treated by the government as increasingly important, it is a compelling assumption that the chronically disadvantaged Lebanese state finances have been benefiting from the game more than any other lottery stakeholder in the past 13 years.

There is no doubt that at least as a gateway, governments are the strongest gainers from gaming activities in practically every jurisdiction with officially licensed lotteries. In the Lebanese case, the state is a triple winner. The MoF takes not only a guaranteed amount off the top of every sold ticket, it also comes to knock on the doors of every winner for taxes and it thirdly collects corporate taxes from the operator.

In hard bucks, the state share of gross revenue comes out at 42 percent, or north of $40 million annually, given sales of around $100 million as stated by Jreissati. From the winners of payouts, La Libanaise des Jeux is mandated to deduct 10 percent in tax on behalf of the state and transfer these amounts to the authorities. At the 45 percent payout ratio to winners, the annual tax yield related to $100 million turnover would come to over $4 million. Adding in the corporate taxes that La Libanaise des Jeux pays on its income, it does not seem too daring to say that an annual lotto jackpot approaching $50 million goes to the treasury.

Humble rewards

Operating a state-sanctioned lottery appears to be a low-risk and fairly steady enterprise. However, when accounting for the guaranteed payouts and for the state share of revenues, plus distribution costs of 5 percent that go to the independent ticket resellers in La Libanaise des Jeux’s point-of-sale network, it presents itself as anything but a license to print your own money. After overheads and marketing costs, the profit margin for the company is less than 2 percent of annual revenues, Jreissati says. “The setup is heavy; we have more than 100 employees, and when we don’t sell, we lose,” he adds.

The company’s concession for operating the lottery extends for another eight years, based on a renewed contract with the government. In winning the new contract, which includes an obligation to guarantee the state revenues of LL 50 billion ($36.34 million) per annum during the current concession period, La Libanaise des Jeux last year faced a single competitor since a foreign company decided not to enter a bid after reviewing the terms of reference. “The market is not that attractive,” Jreissati admits. The narrow margins under the concession are making it challenging to survive and newcomers would have to invest great amounts if they wanted to build it up with a different arrangement, he adds.

In operating the concession since 2002, La Libanaise des Jeux achieved strong growth of their franchise until 2005; it experienced a slump in 2006, followed by “normal growth rates” until the present, Jreissati says. For expanding into the daily game, the company has committed to renewing and enlarging its network of lotto terminals from currently 1,200 to 1,500 units. Based on a cost of $3,000 per terminal this will require investment of $6 million, or the equivalent of four years’ profit.

Projections by market research companies see future growth drivers for the global lottery market in mobile gaming and in upswings of national economies that would entice people to increase their leisure spending, of which playing the lottery is a big component. For Lebanon, Jreissati estimates that a return to economic growth could boost his business by double-digit percentages. As to the potential for shifting the game to mobile, he says that deployment of an app had been intended to coincide with the launch of Yawmiyeh in January.

The app was not completed in time for the launch but Jreissati appears unfazed by the delay as he is far from following the hype for everything mobile. “I don’t believe that online and mobile gaming will take a big part of the market,” he explains, pointing to persistent distrust by many people in usage of credit cards and to the importance of social aspects of buying a ticket in a neighborhood store. Where online and mobile lottery options could be a boon in Jreissati’s view is the mobilization of expatriate Lebanese who trust the lottery in their home country. By playing from wherever they are in the world, they would bring new money into the country. “This is good for us and for the government,” he says with the optimism of someone who unfailingly trusts in his luck.

The post Luck of the winners appeared first on Executive Magazine.

One might look at the change in number of registered Syrian refugees in Lebanon during 2015 and incorrectly assume Syria’s civil war is on the wane. Since the Office of the UN High Commissioner for Refugees (UNHCR) first began recognizing Syrian asylum seekers in Lebanon in 2012, their numbers have grown year-on-year until 2014. In 2015, however, the number of registered Syrian refugees in Lebanon began going down. The slight decrease (approximately 77,000 refugees or 6.7 percent as of November 30, 2015 — according to the most recent data available) is no indication that stability is returning to Syria. Rather, it is the direct result of a Lebanese policy decision to push the number down.

The decline is in part attributed to stringent visa restrictions put in place in January 2015 for Syrians attempting entrance into Lebanon. The country still grants Syrians humanitarian visas, but UNHCR says “very few” cases have since qualified. In tandem with these new visa rules, the government passed a decree in 2015 to deregister refugees, also lowering the number of refugees supported by UNHCR. In an email exchange with Executive, UNHCR explains that, “On April 24 [2015], the Ministry of Social Affairs notified UNHCR that refugees having entered after January 5 and having subsequently registered should be deregistered. UNHCR was duty bound to comply and inactivated individuals who had entered Lebanon after that date.” Based on data from UNHCR’s website, Executive calculates that at least 37,304 Syrians lost their refugee status as a result of this decision. Under normal circumstances, UNHCR only deregisters refugees if they have died, left the country or stopped showing up for meetings or other interactions with UNHCR. In the first nine months of 2015 — the most recent data available — UNHCR’s representative in Lebanon, Mireille Girard, told Executive in a November interview that 149,000 refugees had been deregistered, up from the 125,000 deregistered in 2014.

Joseph Kaï

Life after Lebanon

For UNHCR, determining where people have gone after deregistration is no easy task. Some, Girard says, have returned to Syria, though she notes that it is not a choice refugees make “unless they have a compelling reason. It is not a decision full of hope that things have gotten better [in Syria].” Some, she adds, have either left Lebanon to live with family elsewhere in the region while others have turned to smugglers, hoping to make their way to Europe. There is a solid number of deregistered refugees who have illegally left the country by paying traffickers to smuggle them into Turkey or Europe. “We get information from different sources to try and triangulate the information. We do try to find out if there are indications that people have tried to go to Europe. We conducted a random survey recently and found around 40 percent of people said they either knew someone or heard of someone who has left,” Girard says. Lebanon’s Internal Security Forces have prevented illegal departures. According to United Nations’ estimates, about half of the International Organization for Migration’s figure of 332,000 asylum seekers through August 2015 that tried to reach Europe from the Mediterranean Sea were Syrian.

Executive was only able to obtain conclusive data on the number of formal resettlements to third countries. Since 2013, countries have agreed to resettlement pledges for some 162,000 Syrian refugees from countries across the Middle East. For 2015, the number of pledges allocated for refugees in Lebanon is 16,600. Through October 2015, some 4,228 Syrian refugees had left Lebanon to third countries through resettlement programs. The aim, UNHCR’s Girard told Executive, is to sooner-rather-than-later resettle 10 percent of Lebanon’s Syrian refugee population. “With 1 million refugees in Lebanon, our target is 100,000. That would be noticed by everybody and would have an impact,” she said.

In the near term, that target for Lebanon will be slow to reach. The process of resettlement takes time, with refugees sometimes departing more than a year after their application is submitted. Since 2011, only 10,155 Syrian refugees in Lebanon have been resettled — primarily to countries in the Americas, Europe and Oceania. UNHCR says they cannot give a specific country-by-country breakdown of where refugees were resettled.

For 2016, UNHCR is still waiting to hear what resettlement quotas will be allocated for Lebanon. With seemingly no end to the war alongside deteriorating living conditions, Syrian refugees in Lebanon no doubt question their future. Only a few, however, will receive a permanent answer.

Joseph Kaï

The post Globalization of resettlement appeared first on Executive Magazine.

Retailers in Lebanon have been faced with challenging circumstances for the past four years. Regional turmoil that began with the war in Syria has been pushing tourist numbers down, and the remaining clientele – those residing in Lebanon – have decreased purchasing power compared to the visitors who were so common a few years ago.

The Fransabank-Beirut Traders Association retail index shows that although the Consumer Price Index is on a continuous decrease (for the fourth quarter in row), some sectors of the retail market did not pick up as one would expect in a deflationary environment. In fact, the Lebanese retail market generally remained stagnant in 2015. 

Given such a scenario, it is no wonder that many retailers were reluctant to share their woes with the media. Not so LG, the Korean consumer goods and electronics manufacturer. Executive sat down with Tae Hun Ryu, the general manager of LG Electronics in the Levant, to discuss the company’s performance in Lebanon and the challenges it faces in this market.

E   Are you specifically segmenting your target markets in the Middle East for the household and electronics products that LG manufactures?

Yes. There are so many suppliers and brands and each supplier and brand has their own target audience. The market now is seeing many Chinese low-cost products. The names of their manufacturers are not known, and they are targeting the low- to middle-income demand segments. We have passed through such stages a long time ago as we are in this market for more than 30 years, first under the Goldstar brand and then as LG. We have continuously upgraded our position, and today we no longer position our brands as affordable for earners of middle- or low-incomes. People who want low-cost products have to look for other brands. We are targeting the upper 35 percent of customers to be our loyal customers.

E   In your home market of Korea, LG is number 2 in brand value after Samsung. Have you measured your brand awareness in Lebanon and how much it has grown in the past four years?

I can say that the LG presence in the Middle East is much higher than it is on average in global markets. Lebanon and Jordan are among the few markets where LG enjoys extremely high brand awareness as top consumer choice. Above 82 percent of consumers in Jordan and Lebanon name LG as number one or number two when asked for their favorite brands in televisions and washing machines.

E   What markets do you cover from your Amman regional head office?

My coverage area is Iraq, Syria, Lebanon, Jordan of course, and Palestine. It is the most conflict-prone area.

E   Is it correct that you maintain no LG-owned sales organization in Lebanon?

We have a legally established branch office in Beirut but did not acquire a license to sell directly in Lebanon. We have three distributors in the country.

E   When you buy international brand products in Lebanon, you often find stores that sell them, perhaps at discounted prices, but then do not continue to offer these products or any after-market service. On the other hand the local market for major household consumer goods appears to be dominated by a handful of large importers and competition in this segment seems very limited. How are you handling these challenges?

This is a very complicated issue. The consumer has the right to get the lowest possible price for the same products and the market is protecting consumers from monopolies. [But] if you have multiple distributors, they sometimes enter wild competition and blindly cut their price so that at the end of the day everyone in the market is losing.

We have to be very well balanced on how to protect the consumers’ interests but also the distributors’ interests at the same time. We have to satisfy both, and it is one of our hallmarks that we try to support our distributors with better advertisement or better showrooms like the one we are meeting in.

E   Do you finance their showrooms?

No, we don’t finance them but we support the distributors with decorations or trainings for their staff on the selling of premium goods. One of our refrigerators here retails for $3,500. This is no small money for anybody and so we have to give the distributors training to sell not by price but by product.

Service requires a lot of systems because you need more than half a million different [spare] parts, and it requires a very well organized system to manage these components. We have a big service depot in Jebel Ali, Dubai, and from there we supply each distributor.

E   Lebanese traders are perhaps craftier than others in sourcing products informally from abroad. When it comes to pricing strategies for mobile phones for example, do you face problems from grey imports because your official brand dealers are not as competitive? Do you price mobile products to be competitive against the street market or based on your customer assessment?

What you are describing is a big current headache and very important issue that we face in the mobile [handset] market. This is what happens in Lebanon and in the whole Levant, even worse in Syria and Iraq, and also in Jordan. It is difficult to solve. Even if LG provides the products at the same price to the over 200 markets that exist around the world, these products do not necessarily sell for the same price because of differing margins that are added. We are businessmen and have to make our business flow despite such situations where two factors are conflicting. We cannot dictate to anyone what price they put but we can say that anyone who adds the official premium will have support from us and can provide a differentiated service offer to their customers.

E   Where do mobile handsets rank within your different products, in terms of unit sales and in terms of value added to the LG company in the Levant?

LG is number two for television both in value and quantity [of sales]. For refrigerators and air conditioning units we are number one. In mobile we are number three in some markets and number four in others. We want to be number one or two someday but to be frank with you, this will not be easy to achieve in the coming two to three years.

E   Did you then allocate a particularly healthy marketing budget to expand you position in Lebanon and what are your market share targets for 2016?

I discussed this the other day with our Lebanon manager, Mr. Lee. [In 2015], we expect to have about 10 percent market share in Lebanon and we are hoping to increase our market share to 15 percent [in 2016]. To achieve 15 percent means [that we need to have] 50 percent growth; this is a very aggressive target. Hence, to grow from 10 to 15 [percent market share] you have to calculate what this means in terms of input needs in terms of your investments, your channels, your in-store [promotions and activities] or your communications. All these must be changed accordingly, including your logistics.

E   Was there any specific difficulty or special opportunity that you encountered in Lebanon in 2015?

As you already mentioned, the difficulties for the mobile business in Lebanon are very specific and the parallel market was the biggest difficulty for us. If there had not been the parallel importers, we could have gained even more market share.

E   Did the economic difficulties that we saw in 2015 have a negative impact on your sales?

Absolutely. Our region is very heavily impacted by two factors. One are the regional conflicts; these wars affect not only the whole region but also Lebanon. The other factor is the fall by half in the petroleum price which reduced the budget of every government and every individual in all surrounding markets and this indirectly affected Lebanon; according to the statistics, this market suffered more than 10 or even 15 percent of minus growth in demand cumulative for 2015 until end of September. We made a very slight positive growth in this period and I am very pleased with this, because it is no small achievement under the circumstances.

E   Is it then correct to say that an amount of positive growth that was in the single digits in absolute terms, allowed you to increase your market share to 10 percent, because competitors did not grow?

That is what happened.

E   What is your strategy for this year from this angle?

Overall I do not expect any meaningful growth in prosperity in both the Levant area and Lebanon for [2016]. How I predict it, [2016] will be another year like 2015. However, that does not necessarily mean that your business will shrink. We have a strategy how to deal with this kind of situation and we are ready to take on those challenges. The market, if it is good, may suffer a decrease of about five percent or in the worst case even see minus growth of about 10 percent, but for the LG operations in Lebanon we are expecting growth of something like five percent also in 2016.   

E   Are you advising your distributors to increase their workforce or strengthen their networks this year?

Our distributors’ channel power is one of the most important factors for us to spend on, and we have already started doing so. We will expand our channels, and I already talked to most of our distributors and they are ready to do so. Each crisis, recession or difficult time brings an opportunity for us to expand our influence. That is how we view it.

E   How much does Syria usually contribute to demand for LG products in the Levant region?

Syria traditionally gave us 30 percent of our business; this has now decreased to less than 15 percent. That is still a good pie for us, given the situation in the country.

E   Is Jordan number one for you in terms of the contribution to LG’s regional sales?

Iraq is number one. It accounts for over 50 percent of my business; Jordan and Lebanon combined contribute about 30 percent to our business, at almost equal proportions. We sell less quantity here than in Jordan but we sometimes have more value generated than in Jordan. This means Lebanon is a premium market and it is very much worth it for us to maintain a good market share here.

E   But you do not intend to move into direct sales in Lebanon?

We do not have such a plan because in order to establish a direct sales presence, the business volume must be quite huge, something like $200 million in annual sales. This is not predictable for Lebanon.

E   Out of LG’s total product portfolio, how much is available in the Lebanese market?

As I said, this is a test bed for us, and we carry in Lebanon almost every product which we offer in other markets. I would like to add that I have come to realize that Lebanon is very important for us in terms of our premium marketing. Lebanese customers have given us a very good opportunity [to test] how we can interact with all consumers in the Middle East. I very much appreciate the continuous support and affection that Lebanese customers have given us.

The post Growth amid the thorns appeared first on Executive Magazine.

Despite some difficulties attributed to the region’s unstable geopolitical situation in 2015, the major Lebanese global spirits distributors nonetheless had cause to celebrate a generally successful year. Last year saw increased consumption of some key alcohol categories among Lebanese as well as some changing trends in drinking habits which worked in the interests of these distributors.

A year of growth

The spirits distributors Executive spoke to all boasted an annual growth in sales in 2015.

Carlo Vincenti, who currently runs G. Vincenti & Sons, says the company’s overall growth reached 10 percent, with the spirits division alone witnessing an increase of 35 percent. While Vincenti attributes part of this growth to the continuing positive performance of their main brands, he says the strongest driver was the significant growth of the Jim Beam spirits group, including Jim Beam bourbon, for which they fully took over distribution in Lebanon in April 2014.

Etablissements Antoine Massoud (EAM) also reported toast-worthy numbers, according to Anthony Massoud, the company’s owner and general manager. “It was a good year in general. On a company level, we had growth of 6 percent but if you take alcohol alone, then we have around 19 percent growth; if you add The Malt Gallery [EAM’s specialized whiskey retail store] to the equation it is even more, with 27 percent growth,” says Massoud, attributing this growth to the strong performance of their classic brands such as Russian Standard Vodka and Jose Cuervo tequila – and also because, as a company, they shifted their strategy to a value-driven versus a volume-driven portfolio, thereby representing fewer but stronger spirits brands.

The alcohol seasons

The last three months of the year are usually a high-activity period in terms of alcohol sales, suppliers tell Executive. This time of year is traditionally marked by family gatherings, festivities and celebrations, often involving alcohol. The month of December alone, according to suppliers, accounts for 25 to 40 percent of the year’s turnover.

However, Roy Diab, marketing manager at Fawaz Holding, which imports Ballantine and Chivas whiskies among other brands, says that consumers were thriftier with their alcohol spending during 2015’s holiday period. Diab explains that while this typically busy period usually begins in the two months leading to December, in 2015 it shrank to include only the final fortnight of the year.

After the party-fuelled month of December, the summer season follows as a strong season for alcohol, according to EAM’s Massoud. “In 2015, Ramadan moved back into June which allowed us to have a solid July and August, the period when expats usually return to Lebanon for the holidays. We were doing well [during that season] until the garbage crisis occurred, affecting the on-trade sector (hotels, restaurants and bars) and killing the end of August and all of September for us. But by mid-October, people went back to the normal trend,” recalls Massoud.

The garbage crisis watered down the summer season | Greg Demarque

On-trade versus off-trade

Lebanese spirits distributors generally reported using a mix of on-trade and off-trade (retail stores) distribution channels depending on the category of alcohol. “On- versus off-trade distribution of spirits clearly depends on the category of spirits – vodka, tequila or champagne are more reliant on on-trade than, for instance, whiskey,” explains Vincenti.

However, 2015 saw a drop in the distribution in the on-trade sector because of the effects of the regional and local turmoil on the Lebanese hospitality sector which caused spirits suppliers to slightly modify their distribution strategies and channels.   

Massoud says EAM have become more selective about which bars and restaurants they will work with because of this tumultuous period in the hospitality sector, which has led to an increase in default rates. “We have a high default rate in the on-trade and we have to be very cautious; this is what happens when you have a constant crisis state in the country,” he warns.

With the on-trade struggling slightly, Vincenti explains that most brands had to emphasize their off-trade activities to make up for sales losses in the on-trade.

Ziad Chami, marketing manager of Diageo Lebanon, which includes Johnnie Walker, Smirnoff and Baileys in their portfolio of spirit brands, says the company relies predominantly on the off-trade sector which accounts for three quarters of its total sales in Lebanon. Chami says they saw a growth in their performance this year through this channel from the modern trade, or hypermarkets and supermarkets, calling them a “critical channel to building our brand and bringing it to life for the consumers.” 

Changes in consumption habits

Despite the difficulties, spirits suppliers consider the on-trade sector a critical channel of distribution and monitor its developments carefully, especially the rise of new nightlife areas and trends.

Chami speaks of an expanision into new areas of Lebanon that he says played a role in attracting different consumers and facilitating access to nightlife. “There are always new pop up areas coming up with investors leading these moves – in 2015 we saw a boom in areas like Dbayeh with The Village and Blueberry Square, as well as further expansions in areas such as Badaro or Mar Mikhael,” he elaborates. But it wasn’t all parties and celebrations in Lebanese nightlife, says Chami, giving the example of Uruguay Street and the closures there which started towards the end of August 2015. 

Massoud also speaks of the developments in Lebanese nightlife in 2015, saying that such cyclical expansions, with consumers moving from one party street or area to another according to trends, is the norm in Lebanon. It is up to the distributors such as himself, he says, to study these developments carefully and make the right choices of investment in bars and restaurants.

Both Chami and Massoud also speak about a shift in consumption habits from nightclubs and big parties in favor of cocktail bar culture, mentioning that this has impacted their trade positively. “Definitely big celebrations are still part of the Lebanese socializing fabric but, in terms of a shift, we are seeing a bigger shift into cocktail bars and small bars where people can meet and drink casually. As a result, it’s driving a very strong mixology and culinary boom, which is really good for us because this is one of the main growth drivers of our reserve or high-end portfolio,” explains Chami.

The rise of mixology and cocktail bars

The increase in cocktail bars in Lebanon has led to higher demand for more creative and tasty drinks, as well as professional bartenders to concoct and deliver them. This allows alcohol distributors to market more of their portfolio to eager and ambitious bar-owners, leading to a rise in consumption of spirits most often used for cocktails, such as gin or Aperol.

“Gin, in the premium and above-premium segments, is growing following a global trend which Lebanese bartenders are heavily exposed to through a diversity of products and global bartending networks. The level of sophistication in cocktails has grown from a bartending and a consumption perspective, with consumers becoming more demanding and in search of ‘new’ experiences. Cocktails, where gin has always been a key ingredient, are picking up again,” explains Diab.

A worldwide mixology trend comes to Lebanon | Greg Demarque

The malt expansion

Another spirits category that continues to impress locals is single malt and Japanese whiskey. “Single malt whiskey is a smaller percentage when compared to blended whiskey, which is the dominant category, but in terms of growth rate, single malt is definitely the fastest growing subcategory of whiskey,” says Chami.

Vincenti attributes this growth to a more mature consumer base wanting the more pronounced and complex taste found in single malts. Vincenti also adds that the main driving force behind this trend is the consumer’s increasing awareness of single malts through both social networks and distributors who have greatly contributed to introducing these single malts to consumers. “We have a single malt brand ambassador who has been working nonstop to educate consumers through special masterclasses and tasting sessions and also educating the bartenders,” adds Vincenti.

EAM launched their specialized whiskey retail venue, The Malt Gallery, in late 2013 and Massoud says their single malt and Japanese whiskey category has almost doubled in growth since. Massoud explains that through their specialized venue, they have created a platform which invites direct channels of communication with consumers who are interested in discovering high-end whiskey, which in turn led the growth of this category in their portfolio. 

Overall, the year 2015 closed on a happy note for spirits distributors in Lebanon, and all say they are looking ahead to a successful 2016 in which they will continue to grow the brands they represent in Lebanon, despite the various obstacles that stand in their way.   

The post Toasting a good year appeared first on Executive Magazine.

Just like all commodities, alcohol revenues are significantly impacted by successful branding and marketing campaigns. When well-crafted advertisements are relatable to consumers, these promotions ultimately influence their perceptions and increase the product’s popular appeal.   

Marketing budgets

Alcohol distributors Executive spoke to say that Lebanon, in comparison to other countries in the region, is an advertising haven because there are no restrictions on alcohol advertisements in media channels.

As such, they consider extensive expenditure on promoting their portfolio of spirits brands (although spirits distributors declined Executive’s request to provide the total amount spent on advertising per year) to pay off well in sales. “In Lebanon, there is always a strong impact of advertising in terms of driving sales. Advertisements also have a strong impact on top-of-mind awareness, but also on commercial awareness. Our ultimate objective is to build our brand and have a strong and healthy brand performance,” says Ziad Chami, marketing manager at Diageo, the multinational alcoholic beverages company with a portfolio of brands such as Johnnie Walker, Bacardi and Smirnoff.

According to suppliers interviewed for this article, the biggest percentage of their marketing budget is usually spent in December which is, distributors say, typically the busiest month of the year for spirit sales. Carlo Vincenti, owner of G. Vincenti & Sons, characterizes his company’s experience: “The months of November and December usually account for 40 percent of annual sales, so obviously we spend a large chunk of our marketing budget in that period whether in traditional media or consumer promotions and visibility. Since December is marked by festivities with lots of family and social gatherings involving both gifting and consumption of spirits, all brands tend to launch special packs with gifts and special offers then.”

To each brand its own

Lebanese spirits distributors often work with advertising or PR companies to create the ideal promotional campaign and say each brand requires a tailor-made marketing strategy depending on its positioning and the age group of its target clientele. “Every spirit category and even every brand has its own strategy and marketing objectives that could include the traditional media tools or more targeted and flexible ones,” says Vincenti.

Anthony Massoud, managing director of Etablissements Antoine Massoud (EAM), a distributing company with a wide line of spirits including Russian Standard Vodka and Nikka whiskey, says: “Every brand has its own strategy, target audience and complexity. We have more than eighty alcohol brands in our portfolio but we have nine core brands which we focus on in our advertising campaigns.”

The classics: television, print and outdoor marketing

Traditionally, mass-media tools such as television, radio spots, print advertisements and outdoor promotions were the most effective means to reach a wide base of consumers. Today, Lebanese spirits distributors still consider these pillar methods for some brands but say they believe there are better, more targeted ways to reach the consumer.

Nahla Haddad, communication manager at Fawaz Holding, a distribution company managing a wide portfolio of brands including spirits such as Chivas Regal, Jameson whiskey and Absolut Vodka, says they don’t heavily advertise their spirits portfolio on television for several reasons.

To begin with, according to Haddad, most of the global brands they represent lack advertisements which are localized for the Lebanese market. Moreover, television requires a huge advertising budget which they can more effectively spend on other more engaging media. “Finally, for brands such as Jameson whiskey or Absolut Vodka, the target audience doesn’t watch local television and so we prefer to appear where the target is,” explains Haddad.

Massoud says he prefers hosting PR events and tastings – where they invite the media and select consumers – to advertisements on television or billboards. “Our marketing is very much PR driven as its effect is sometimes stronger than advertising because here you are talking to the consumer directly and increasing the word of mouth effect which is very important in Lebanon. In mass media, you might reach people who are not interested in your brand, but with PR and events you are getting your message across directly to a few people that represent a lot to your brand rather than the masses who might not be interested,” explains Massoud.

The rise of digital media

Discussions with distributors did not indicate the collapse of traditional advertising methods, only their supplement with more engaging forms of advertisement. “In general, traditional advertising is still a key part of our advertising mix. But, over the last few years, we have become more active on social and digital media, which is a trend that is happening all over the world and is becoming a more important part of the mix,” says Chami.

Davina Atallah, creative director at Leo Burnett which works with Diageo on advertising in Lebanon, says they found a creative way to engage consumers through a mix of social media and outdoor advertising in Johnnie Walker’s Keep the Flame Alive campaign.

In that campaign, recalls Atallah, they asked members of the public across Lebanon why they believe it is worth staying in the country; Leo Burnett then had a fire calligrapher flame-write these statements on the spot, took pictures of the final results and uploaded them on social media. They also released these flame-written statements on LED billboards across the country. “It was an evolution in terms of the brand, from the Keep Walking campaign which focused on stories of well-known Lebanese to a story about the resilience of the Lebanese people [through the Keep the Flame Alive campaign], creating an interaction with them which we had never done before,” says Chami.

Haddad says social media has allowed them to develop a two-way channel of communication with their consumers, while also reaching out to the younger generation for brands such as Ballantine whiskey which were commonly associated with an older generation in Lebanon. For the launch of Ballantine limited edition “Beirut” bottle, Fawaz Holding asked people to share pictures reflecting the true spirit of Beirut on the company’s social media pages. The pictures were then reproduced with an image of Ballantine’s Beirut bottle embedded in them and the name of the photographer who took them mentioned on Fawaz’s social media pages. Those with the best pictures, as voted by Fawaz’s communications team, won the limited edition bottle. “Within three weeks, we were able to increase our fan base, recruit a younger audience and enforce brand awareness,” says Haddad.

The mass and the direct

For categories with a wide appeal to consumers, such as vodka, a mass-marketing approach emphasizing their association with a party spirit works best, explains Massoud. Therefore, Massoud says they invest in sponsorships of design events across Beirut and parties such as Decks on the Beach in the summer or of bars such as the new Pacifico (where they have a banner above the bar).

Vincenti also invests in hosting parties with international DJs through Poliakov, a vodka brand in their portfolio, but they are best known for their Jim Beam Rocks musical festival, a now annual event produced by Jim Beam at the beginning of the summer season showcasing local bands as well as one major international act.

On the other hand, according to Massoud, some categories of spirits, such as malt whiskies and wines, are a more refined niche and benefit from targeted marketing involving direct interaction with the consumer. “In single malts, the one-to-one approach is very important. You need to take your time with the consumers, educate and initiate them: it’s a long but solid process. This is why we launched The Malt Gallery (EAM’s specialized whiskey retail store) as it is an ideal platform to talk directly to the consumer,” explains Massoud, adding that this can also be done through tasting plans in other specialized outlets.

Bartenders are key

Massoud says EAM devises their alcohol marketing campaigns based on whether the particular spirit’s category is consumer or trade driven. With trade-driven brands (mainly used in bars and clubs) Massoud says it is better to invest in the outlets themselves, while with consumer-driven brands interacting directly with the consumers becomes very important.

As such, bartenders and bar owners become the biggest allies of spirit distributors and priority is given to marketing and promotions targeted at influencing spirit choice when preparing cocktails or establishing their bars.

Many spirits distributors invest in bringing brand ambassadors or expert international bartenders to Lebanon to give workshops and training to local bartenders. Some spirits distributors organize worldwide annual mixology (bartending) competitions where the winner of a country-wide contest goes on to represent Lebanon, and their bar, in the international competition. Speaking of the Diageo World Class competitions, Chami says: “The objective is to raise the bar when it comes to mixology and bartending. Sales-wise, World Class creates a strong engagement between the bartenders, and the trade itself, with our brands; it will translate into a stronger performance of our reserve portfolio when it comes to the on-trade.”

The post Advertising alcohol: the business of selling responsibly appeared first on Executive Magazine.

The opening crawl of the movie “Reefer Madness” served as a morality tale to parents of the Silent Generation: “…the new drug menace is destroying the youth of America in alarmingly increasing numbers. Marihuana [sic] is that drug – a violent narcotic – an unspeakable scourge – The Real Public Enemy Number One!” The narrative represents a viewpoint on how to limit drug prevalence in the United States – complete abstinence – otherwise drug users will commit horrific crimes. The 80-year-old film is useful in that it shows just how much the world has changed its perception of illicit drug use.

Nowadays, substance abuse – including alcohol, tobacco and illicit drugs – is considered by the World Health Organization as a mental health disorder. Lebanon’s Ministry of Public Health agrees. In 2015, the ministry introduced a five year roadmap to improve mental health treatment, including substance abuse.

International bodies overseeing narcotics – including the United Nations Office of Drugs and Crime and the International Narcotics Control Board – lay out the best practices of drug enforcement that many of the world’s police agencies follow. The approach is to be a balanced one – stem the source of drug production to reduce its supply and raise its street cost while also going after consumers.

Targeting illegal drug manufacturing facilities and individuals – traffickers and dealers – is challenging but necessary to stop drugs at the source. In this regard Lebanon has destroyed drug crops, raided known drug factories and made arrests. But there are still large swaths of the country with a relatively low level of state control, while instability along the Lebanese-Syrian border is an enabling factor.

That Lebanon is not able to stamp out drug production and trafficking is frustrating, even more so when looking at statistics on user-related drug arrests. Rather than receiving their right to rehabilitation treatment, offenders are locked up. Lebanon’s drug law 673/1998 incorporates rehabilitation as an alternative to prison time but there are problems in the law’s application. The problem is, on the one hand, that cases of drug use are not being heard by a rehabilitation committee [see story Crime and punishment].

On the other hand Lebanon does not have the health infrastructure to cope with rehabilitation demand generated by drug-use arrests. Executive agrees with the view that there needs to be a better and faster process to determining rehabilitation referrals – The Legal Agenda, a local non-governmental organization monitoring Lebanon’s judicial system, recommends the committee be expanded to serve different geographically-located user populations and it must be funded. The health ministry’s five year plan should address the lack of rehabilitation provision.

Since the early 2000s a more progressive approach to drug use has been championed in some countries – Portugal being an example. Drug use and possession in that country is still illegal but is instead punished with administrative penalties (fines or community service) rather than criminal ones (prison time). The idea goes back to drug use as a mental health issue, one that must be treated through rehabilitation. Short of legalizing cannabis and all its products, Lebanon should decriminalize personal use and possession. There are international benchmarks on the classification of drugs and the amounts that define user possession and intent to sell. Lebanon should use these benchmarks as a guide to define decriminalization.

At the very least, Lebanon must amend its drug law to distinguish between possession of any drug for personal use and possession with intent to sell. Portugal considers a 10-day supply as personal use warranting only administrative penalties, any amount more than that warrants criminal penalties. Amending the law to remove facilitating drug use as criminally punishable is also necessary – sharing a joint with a friend or giving them drugs for free can land someone in jail for a minimum of five years.

Best practice in rehabilitating drug users accepts them at their level of readiness to bring them closer to a healthier lifestyle even if that means accepting that some of them will continue to use temporarily. But there is a legitimate need for society to be protected from people that do become violent while under the influence of dissociative drugs (e.g. hallucinogens). With harm reduction programs the aim is not to eliminate drug use but to reduce the negative consequences (to personal health, to interpersonal relations, to livelihood, and with the law) of drug abuse, and there is evidence that harm reduction programs do have positive impacts. The programs can serve to reintegrate users into society whereas criminalization may disenfranchise or disbar them from social welfare programs (e.g. education and housing). NGOs in Lebanon can and are already providing this public good. The risk is always that these programs are too little but are better than nothing.

If Lebanon is to curb illicit drug manufacturing and trafficking then it must go after the big fish – the tycoons living large. Recreational users and those that have become addicted need medical help more than an extended stay in the clanker, and prison time spent for drug use can ruin a person’s life. Decriminalizing personal use and possession of cannabis and its products ensures recreational users don’t end up in prison in the first place.

The post Rehabilitation first appeared first on Executive Magazine.

Not much is known about Captagon prevalence in Lebanon. Anecdotal testimony regarding court cases and rehabilitation treatments suggest that use is low but rising. The prevailing explanation for this is that there is a leakage of pills into the drug-using community as more Captagon is produced in the country and trafficked through it, but there are no statistics to verify the extent. What is known is that individuals caught using the drug are arrested and that there is deficient data on the number of Captagon-specific criminal proceedings. When arrested, users are thrown into a state of limbo that drug users generally face when they are arrested in Lebanon.

“Drugs have spread so much in the last few years,” says Faisal Abdallah, a Lebanese lawyer specialized in criminal law. Executive was not able to obtain statistics on drug-related criminal proceedings, neither in general nor specific to Captagon – the Ministry of Justice did not respond to Executive’s request and Mohammed Saab, a judge who has presided over user-related hearings, declined an interview to discuss the findings of a book he published on drug-related crimes in 2015. Whether user-related arrest figures have risen as a function of drug prevalence or due to vigilant law enforcement cannot be answered.

According to statistics from the Internal Security Forces’ (ISF) drug unit obtained by The Legal Agenda – a non-governmental organization monitoring Lebanon’s judicial system – 5,381 individuals were prosecuted for Captagon use in 2013 and 2014, about 2,000 more than in 2009 and 2010. But the failure to report details of the number of users arrested and prosecuted for popping pills, alongside a complete dearth of data on Captagon rehabilitation, results in an inability to define the problem. Rather, what the figures show is that Lebanon’s police are increasingly arresting, prosecuting and jailing drug users when the law says rehabilitation should be an alternative.

Even first-time offenders face serious and punitive consequences rather than the rehabilitation they should be offered. Depending on the drug, a first-time offender can face fines of 2 million to 5 million Lebanese Lira ($1,327 – $3,318) and prison time ranging between three months to three years. Arrested drug users are, according to the law, entitled to be heard by a committee set up in 2013 to follow up on rehabilitation treatment. The Legal Agenda found that the committee is hardly used, hearing only 120 cases in 2013 and 2014.

A clogged up system

The Legal Agenda, Abdallah and addictions psychiatrist Joseph Khoury all agree that underutilization of the committee has two causes. Its ad hoc nature – the committee’s board members are volunteers and it has no clear mandate – undermines its purpose because the government, the police and the legal profession do not take it seriously. But the greater challenge is due to a backed-up judicial system, Abdallah says. Offenders can only be referred to the committee once a judge has heard their case, but because the court system is so clogged, offenders rarely receive their right to present their case to the committee for treatment referral. Instead, drug offenders face prison time, incurring a criminal record, and are thrown into the general prison population. This, the Legal Agenda says, means that users are subject to upfront punishment that deters them from seeking drug rehabilitation treatment on their own.

Lebanon’s narcotics law 673/1998 classifies drug use as a health issue but in practice the judicial system still views it as a crime, and offenders have many obstacles in their way to receive rehabilitation treatment. A drug user has to be very motivated, Khoury says, because they may have to pay out of pocket – government insurance programs cover psychiatric care and drug addiction treatment for security forces and public sector workers, and private insurers cover some segments of the population, but this leaves many insufficiently covered. Lebanon’s Ministry of Public Health does not have enough money to cover those that fall between the cracks.

A 2010 report from the World Health Organization (WHO) pointed out that some of Lebanon’s public health budget was allocated for mental health services, but that it included neither short-term inpatient care nor outpatient care and only covered certain psychotropic medicines. WHO called for the establishment of in- and out-patient treatment centers for substance abuse, but acknowledged a lack of funding to do so as well as a lack of specialists – psychiatrists and psychiatric nurses – to staff those facilities. Khoury told Executive much the same in a January interview – that Lebanon does not have enough psychiatrists nor the health infrastructure to rehabilitate users.

The recommendation of The Legal Agenda is to empower the committee to enable the treatment alternative to imprisonment. But this, the NGO says, would at least require the expansion of the committee’s mandate, and adding a committee in each of Lebanon’s six governorates to hear rehabilitation cases of offenders in different parts of the country. This, however, would require amendment to the law to both articulate and expand the committee’s mandate, as well as to fund it and a healthcare rehabilitation system to treat users. “I would be for not incarcerating any users – I think people need to be treated,” prescribes Khoury.

The post Crime and punishment appeared first on Executive Magazine.

The entrepreneurship ecosystem is evolving and becoming more ‘startup friendly’, hosting networking events every other week and improving the access youthful entrepreneurs have to information. Little by little, startups are crawling into the spotlight and are being given opportunities, access to capital and resources that weren’t readily available five years ago. The second Banque du Liban (BDL) international conference was held in December 2015. For some Lebanese startups, however, the exposure and prizes of up to $10,000 won through competitions was second to none.

BDL Accelerate is a good example of how the entrepreneurial landscape is changing – the event simply didn’t exist three years ago. There are further examples of showcasing talent to local and international investors, and events which provide young entrepreneurs with real-world experiences of startup success and failure. Fuckup Nights, the Mexican-born event where high-profile entrepreneurs share with the community stories about their past failures, had its third round in AltCity on January 14; their mission is to create solidarity by sharing experiences of failure and lessons learned. Bootcamp by AltCity and Speed@BDD, two of the accelerators Executive profiled in our special report in November 2015, have both finished their rounds of startup acceleration, and hosted their Demo Days – events which showcase accelerated startups in an attempt to generate funding from investors who are invited to attend.

Demo day: first cycle

Both Demo Days were positive, according to Theo Khoury and Sami Abou Saab, managers of Bootcamp and Speed respectively. “People weren’t expecting a lot [from Bootcamp’s first Demo Day] but were very impressed by what was available,” explains Khoury, who notes that present venture capital representatives gave very positive responses to the relatively inexperienced teams that were presenting to a packed room. Khoury admits that AltCity was reluctant to reach out to foreign investors to attend their Demo Day, as the organization lacks enough long-standing and regional credibility to warrant a one-day visit. Aside from contact from the managers of the 500 Falcons, a $30 million regional micro-fund that is an offshoot of seed-funding powerhouse 500 Startups, foreign interest has been quiet. Their plan is for future Demo Days to attract foreign investors based on the credibility that Bootcamp builds at home and abroad. However, the ecosystem’s current pipeline of funding does not help startups at a very early stage, as the money is more readily available at later stages of development. Both Middle East Venture Partners and LEAP, two venture capital powerhouses, only offer ticket sizes to large entities, and often to the tune of hundreds of thousands of dollars, if not millions. Whilst successive Demo Days and rounds of acceleration will tell whether AltCity can build enough reputation and credibility to gain international traction, the startups themselves will only flourish if more money is made available at every stage of the developmental journey.

One Cinderella story from the current Bootcamp, however, is ReAble, a startup featured in Executive’s “Top 20 for 2015” that has created an online mobile wallet app for people with autism to help with cashflow and money management. The company has received external investment of $25,000 from a private Canadian backer, on top of the $10,000 first prize in the Early Stage Startup Competition at BDL Accelerate 2015, and exhibited at the Arab Health Exhibition in Dubai, the second largest health expo in the world. Emile Sawaya, ReAble’s CEO and co-founder, credits AltCity with key development processes at the early stage and helping them transform from idea only to startup. He does, however, credit some of his company’s success to networking through the wider community rather than exposure at Demo Day – the private investment was made through personal contacts.

Accelerators have also begun to evolve, much like the entire entrepreneurial ecosystem. Originally, AltCity’s Bootcamp gave a $25,000 investment to startup teams after a three month acceleration course which took ideas to fully-fledged startups. AltCity shifted their entire acceleration business model from the beginning of the current and fourth Bootcamp cycle; they are no longer giving $25,000 in exchange for a 6 percent equity slice, but are splitting the accelerator into two phases. Phase one will be online, and allow Bootcamp to analyze the teams remotely, thus maximizing the number of participants due to less strain on physical resources. Roughly five teams that complete phase one will be selected to proceed to phase two, thereby halving the number of teams which was in the previous Bootcamp at the physical stage and therefore concentrating its resources on fewer teams. Khoury explains that these changes were made due to time commitments and restraint on resources, which resulted in Bootcamp’s inability to dedicate as much time as was needed for individual startups. “Before Demo Day we decided we had too many teams, and we couldn’t spend enough time with teams individually,” explains Khoury, who notes that the new model will allow for more efficient time expenditure. The original $25,000 per team investment was made through a partnership with AL-MAWARID Bank, which sits on the board of Bootcamp, as AltCity and Bootcamp were only mandated by BDL to take an equity slice (without investment) in order to sustain Bootcamp. They will therefore revert to this mandate, and take 2 percent in equity from teams in phase two only, though the bank would still be able to offer an investment independently of Bootcamp.

Speed’s Abou Saab was also keen to point out how his accelerator has evolved. Part of the culture of Speed is to incorporate feedback mechanisms which allow the accelerator to improve and best serve its startups. One key example of this was the overhaul of how startups receive advice and mentorship during the program. Initially, talks were given by experts to all startups simultaneously, and although they covered generic problems, were largely untailored to specific needs of individual startups which varied drastically from team to team. After consultations with the startups, the three-hour slot that experts were booked for to address the entirety of Speed’s startup class was divided into six half-hour slots, as “a one-to-one mentorship could actually solve specific points a startup has which generic talks cannot address,” explains Abou Saab.

Silicon valley

Charlie Khoury, CEO and co-founder of drone-building company Next Automated Robotics (NAR), was also keen to explain how Speed’s entire accelerator process had helped his company to evolve. “The number one thing that changed was scalability,” says Khoury. “When we first came to Speed our product was just a quadcopter – a simple drone with limited flight. During the acceleration we [changed] to a design that could have outreach and applicability.” NAR incorporated vertical takeoff and landing technology into their drone, which now has better wind resistance, higher speeds, a greater flight range and overall a greater applicability to different industries.

Speed’s great contribution, however, comes in the form of creating a direct vehicle for Lebanese startups to head straight to Silicon Valley. This process enables startups from Lebanon to apply to the ‘LebNet Ignite powered by Blackbox connect program’, an immersion which focuses on global startups and provides access to mentors and resources in Silicon Valley, and, for example, includes coaching on pitching and business strategy. The program was made through a partnership with LebNet, a network of Lebanese-American hi-tech professionals in the Bay Area, and in turn was organized for Speed by Lebanon for Entrepreneurs, some of whose members sit on the board of the accelerator. George Akiki, president of LebNet, explains the driving factors behind the immersion; “Lebanon has been witnessing an accelerated pace of deal flow, innovation, startups and startup capital. Our intent at LebNet is to build a closer relationship with the ecosystem in Lebanon and impact the formation of world-class companies and entrepreneurs.” NAR and Rational Pixels, the latter of which creates product-placement technology, will enroll in the two-week program, and startups in subsequent Speed cycles will be encouraged to apply to the program on a regular basis. For Charlie Khoury, the opportunity is second to none, as direct exposure to Californian firefighters allows them to fine-tune the usability of their drone, which was originally built with the intention of combating wildfires: “We want to see daily examples of how [firefighters] deal with the fires, and can see, for design purposes, how people use and would use [our technology].” As for NAR, the US is a key market for the drones they are developing; therefore being in-country and having the opportunity to have direct meetings with different stakeholders will “have a huge impact on our future” explains Khoury.

By giving entrepreneurs clear access to opportunities abroad and exposure to strategy and business giants within Lebanon, Abou Saab hopes future talent will be more likely to remain in the country rather than seek employment abroad. “We were able to get Rida [Sadek, of Rational Pixels] back from Barcelona after he had lived there for eight years to come for the acceleration [program],” explains Abou Saab, himself a returnee from the US after a career at Microsoft and Skype. “Even for the next batch we have started receiving applications from [Lebanese] living outside of Lebanon, with the idea of coming back. Having something which is retaining them here is a big value added [to the ecosystem] right now,” notes Abou Saab.

Pipeline problems

Participants in both Speed and Bootcamp are encouraged to be open to constructive criticism, alterations and continuous external validation to their product and ideas. For Khoury, one key piece of advice to startups was “never [to] move forward before you have external validation. Stop wasting your time on assumptions.” Speed’s similar ethos is useful for those attending the post acceleration immersion in Silicon Valley, where the final chapter in the disastrous saga of golden startup Clinkle has rocked investors and entrepreneurs alike. After a hugely successful round of initial $25 million seed-funding in June 2013 – despite Clinkle not having a publicly available demo of their highly-anticipated mobile payments app – the company imploded in the summer of last year with a mass exodus of employees, upon realization that the promised app didn’t exist, and a press hounding of the company’s hollow investor promises made by the CEO, Lucas Duplan. According to American business magazine Forbes, in January 2016 investors made the rare move of asking for what was left of their money back from Clinkle’s accounts. Whilst NAR and Rational Pixels are a long way off from seeking funding of $25 million, hopefully the lessons of humility that Duplan has had to learn with a spectacular failure will already be installed, in some fashion, in the Lebanese entrepreneurs thanks to the coaching they initially received.

The work of both Speed and AltCity is crucial to developing the entrepreneurial ecosystem, but only if it is met by similar efforts along the pipeline. At the moment, there seems to be a gap in the development chain as the ticket sizes offered by venture capital powerhouses MEVP and LEAP are far greater than what most startups require. Tickets of up to $1 million are good for series A and B level funding, but are far beyond the requirements for idea and seed-stages which AltCity and Speed offer – traditionally $25,000 and $30,000 respectively. There are tentative steps to amend gaps within the pipeline. Fadi Bizri, managing director at Bader Young Entrepreneurs Program, has joined forces with Abdallah and Ghaith Yafi, managing partners at Y Venture Partners, and Rami Jisr, former general manager of Audi Investment Bank and current managing partner at Broadgate Advisers. The group has created Broadgate and Yafi Venture Partners (BYVP), a $50 million hybrid fund which aims to invest tickets in early stage startups. Ticket sizes are estimated to be between $100,000 and $1 million, and the venture is in final stages of negotiation for the license with the central bank, and is due to go live around March 2016.

However, arguably there need to be further programs like Speed which invest in very early stages, or even up to $100,000 in total, otherwise many startups will fail to get off the ground. Without this investment, as Theo Khoury analogizes, it’s akin to participants in a marathon receiving a gallon of water at the 5km mark, and 50 gallons at the 20km mark, but nothing between 0 and 5km. “They’ll just die of thirst before they even reach 5km,” says Khoury. Only when every inch of the pipeline is fixed, and startups are given investment at earlier stages, can the central bank rest safe in the knowledge that the money from Circular 331 is being spent in a way that most effectively develops and showcases the talent that Lebanon has to offer.

The post Talent takes the stage appeared first on Executive Magazine.

Startup ecosystems in the United States continue to be major magnets for young Lebanese companies that want to benefit from valuations that the local market seems unlikely to generate. Executive learned of a new fund called Bireme Ventures from Elie Habib, the fund’s managing partner. In an interview during the central bank’s international startup conference BDL Accelerate 2015, Habib tells us that the fund has a target of $20 million and wants to achieve a first close of $5 to 10 million by the second quarter of 2016 to be deployed in facilitating the sojourns of Lebanese and Gulf-based startups across the Atlantic Ocean.

“We are seeing more and more companies maturing and facing the need to expand into the United States to accelerate their growth and acquire new customers. These companies need capital to reach the place from where they can reach the next level in their performance,” Habib tells Executive.

Habib, a Lebanese-American who spent most of his career in Silicon Valley and has been involved with funding efforts in the Lebanese startup scene since 2009, says that the move into the US is as challenging as it is necessary for those local startups that have potential to penetrate global markets. He argues that such companies will do best if they take advantage of the US market for raising funds and later on for realizing the fairytale returns that people associate with the American entrepreneurship ecosystem.

According to Habib, entrepreneurial communities of many countries are represented in the US market by funds that enable startups from nations such as India and China to enter the American scene but the Middle East is lacking such representation and this is the gap that Bireme wants to close.“The only region that does not have representation in the US [through] capital from or direct influence on startups coming from that region is the Middle East,” he claims.

He warns that it is very difficult for young companies to transplant themselves into the US because of the American market’s legal and organizational requirements and that being accepted by American venture capital (VC) and private equity (PE) firms is especially challenging for startups from the MENA region. “Many US VCs are very hesitant to deal with Middle Eastern startups and invest in Middle Eastern companies. The barriers are cultural, legal and perception based, and [about] intellectual property rights. [US VCs] are not going to invest into an intellectual property that is not correctly protected – that is where their assets are,” Habib explains.

Bireme aims to build relationships between Arab startups and US VCs in order to present the American funders with Middle Eastern companies that meet their investment criteria. According to Habib, this approach positions the fund outside of the realm covered by BDL Circular 331 by addressing the needs of Lebanese companies that seek international acceleration. Startup profiles that will be a good fit for Bireme will nonetheless include companies that received funding from a Lebanese VC under the 331 framework, or companies that have been nurtured by VCs in the United Arab Emirates.

In this context, Habib points to his ties with Middle East Venture Partners (MEVP), with whom he has been a venture partner for several years already. Within the now burgeoning environment, the possibilities for sailing startups to the US under Bireme’s participation are much improved, Habib enthuses. He says that the fund has a pipeline of “around nine companies that are at various stages of development but are generally post-A” in their funding stages and Bireme is ready to source companies from any VC in the region. While MEVP is a strategic partner, “this is not about [working with] any specific [VC] firm but about investing into breakthrough best-in-class Lebanese or Middle Eastern entrepreneurs that have the capacity, potential and product to go global,” Habib emphasizes.

Bireme Ventures will have a structure of limited partners (LP) and general partners (GP). The management team comprises three Lebanese-Americans under Habib’s leadership. In legal terms, it will be a US-based partnership with a management company in Delaware and a GP-LP fund in the Cayman Islands in order to facilitate participation by international investors. The fund will require no licensing from the Lebanese central bank, Habib says. He expects LP participations to comprise approximately 60 percent in investments from members of the global Lebanese diaspora and about 40 percent from individual and institutional investors in Lebanon.

Planning for a total life span of eight to 10 years, the fund’s strategy hinges on bringing in US-based VCs and motivating them to co-invest in the companies in Bireme’s portfolio. Beyond the envisioned US money, the fund at a later stage will also grant its LPs the right to co-invest directly into the companies. As Habib notes, the whole enterprise is based on a calculated expectation of high mortality among the invested startups with an aim of developing a group of winners that will provide high returns. He says, “What we are focused on is an [internal rate of return] of 25 percent and a return of 3 to 3.5 times money for the fund. We are going to play the role of the physical platform that is going to impact the three stakeholders (the fund’s participants, the startups and the US VCs), but we are ultimately going to look for creating exits — this is not a developmental fund; this is for profit.”

The post Bireme ad(ventures) appeared first on Executive Magazine.

“Just five minutes,” the elderly man tells his waiting wife. He’s busy securing their financial future, he explains.

The advertisement by al-Lebananiyeh al-Arabieh lil Tasleef (LAT), a loan company, could not have been clearer: quick and easy money. At the end, the ad duly informed viewers that potential customers need collateral to receive their loans, such as a property or land deed, or a car or truck title. (This information was elaborated in a print ad the company took out in Al-Waseet, a free weekly classified ad newspaper). As the company is not a bank, it was not legally required to disclose the interest rate on the loans it offers. However, the company is now being sued by consumers who allege its owner was executing sales contracts on land and property before borrowers defaulted on their loans.

In focusing on an elderly man, the ad may have been particularly targeting the financially vulnerable. Lebanon does not have a state-run pension program. The National Social Security Fund is an end-of-service indemnity, not a pension. This means retirees receive a lump sum that is meant to last until death. For any number of reasons, retirees may find themselves needing cash but unable to secure a bank loan given their lack of income. When financially distressed, people often make bad financial decisions. LAT’s potentially predatory business practices prompted Executive to investigate non-bank lenders (see story Shark hunt), and the company’s commercial raised questions about ethics in the local advertising industry. The ad did nothing illegal, but preying on the vulnerable is undoubtedly unethical.

On its website, the global International Advertising Association does not have its own formal code of ethics. Rather, it links to the International Chamber of Commerce’s ethics code for advertising and marketing. Among the guidelines, the code includes: “Marketing communications should be so framed as not to abuse the trust of consumers or exploit their lack of experience or knowledge,” as well as “Marketing communications should not contain any statement, claim or audio or visual treatment which, directly or by implication, omission, ambiguity or exaggeration, is likely to mislead the consumer, in particular, but not exclusively, with regard to: […] the value of the product and the total price to be paid by the consumer.” Given the advertisement provides no information on the loan’s interest rate nor does it warn consumers that they stand a chance of losing their collateral, Executive sought to find out what consideration was given to advertising ethics when producing and airing this ad.

An employee at the advertising department of a prominent local television station that aired the ad tells Executive, “I have no idea” how it ended up on the station. This particular media outlet works with a media planning company (which buys airtime and then chooses which ads to run where, meaning the media outlet has no say in which ads get aired). A representative of the media planning company – who asked not to be named – says that because the company does not actually create advertisements, ethics are not a company consideration. She explains that General Security reviews all ads before they can go on television, but says they focus on considerations such as violence, keeping “inappropriate” products – like condoms – off the air when children may be watching, and screening for “more than what we are allowed to see” when it comes to the wardrobe choices of actors and actresses in the ads. Whether an ad encourages retirees to gamble with their homes is not one of General Security’s considerations, she says, thus it was not something the media planning company thought about either.

Executive proceeded to talk ethics with George Jabbour, head of the Advertising Association, Lebanon’s official syndicate for the profession. While Jabbour says ethics in advertising is a priority for local practitioners, he acknowledges the association has no written code of ethics, but hopes to begin drafting one in 2016.

Executive sits with George Jabbour, president of the Lebanese Advertising Association and CEO of the Middle East Communications Network, to talk about ethics in the local advertising industry.

E   What did you think of the al-Lebnaniyeh al-Arabieh lil Tasleef commercial?

If we want to talk about how the advertising was done – purely advertising without evaluating the [company’s business model] – I think it was effective. It was convincing. It was attractive. And it was, in a way, shocking, even.

E  Was it professionally done from a production standpoint?

No. It was not done by an advertising company. Looking at the production value, it was not really impressive at all. It’s basically a very simple, straightforward message: “You want money, ok, get it in five minutes.” So it’s shocking. Because to get money, if you have a bank mortgage, it will take five days to do just the paperwork alone. So there are people who are going to come in, to call and ask how it works.

E   The ad featured an older man who claimed to be securing his family’s future. Traditionally the business model is to trick people in order to acquire their property cheaply. Isn’t that misleading?

The ad was not misleading. It’s the nature of the business that’s misleading. Advertisers usually follow a brief. I can imagine the client said to whomever produced the ad, “I want to tell people that whenever you want money, you come here and get it.” Nobody told them what the conditions were. It’s like an ad for a new house; they don’t tell you how much the house costs, the quality of the materials in the house, or of the electrical and mechanical equipment. All of these are details you negotiate over once you are there. The purpose of advertising is to attract customers. In advertising you don’t give the full message – it’s not a brochure; it’s a 30-second spot where you attract the customers.

E   But there’s arguably a difference between not giving every detail about a new apartment and tricking someone.

Let me elaborate by jumping to other issues because this is very important. For example, Zein al-Atat and his herbal medicines that claimed to cure everything from pimples to cancer. One of his customers died. What did they do to him? They stopped his advertising, but he’s still selling very well. His products are everywhere in town. But the decision taken was to stop the advertising. We have to differentiate between the product itself and the message you deliver as an advertising agency. After all, the advertising agency is not an investigation committee. We have to trust the source – which is the client – and it’s up to the authorities – or the client who is bluffing the authorities – to check the product. So if the product of this 5-minute ad company is faulty, it’s up to the authorities to stop the guy.

Georges Jabbour, head of Lebanon’s Advertising Association, sees the need for a code of ethics | Greg Demarque

E   When you read famous quotes by advertising great David Ogilvy, such as you should never write an ad that you wouldn’t want your family to read, one may wonder if it is true that no advertising executive ever lies to their spouse. From a legal perspective, it is not a problem when advertising people and media people just do their jobs. But with regards to the ethical aspects, Ogilvy also said not to advertise anything evil, right?

Basically, you are right. When it comes to the ethical part, unfortunately, it’s subjective. How? It can differ from one country to another. What is ethical in Lebanon may not be ethical in France. You cannot have an ethics practice around the world that’s the same. If we take Lebanon as an example, the Advertising Association is fully in line [with the idea] that no advertising message should be unethical. And when we say unethical, we mean misleading the consumer. But if you have an unethical message, we don’t have the means and tools to stop it right now because this needs either an ethics protocol agreed to by everybody – which is not easy to achieve – or you need measures you can take against the advertiser or advertising agency, as well as a committee to decide what is ethical or not.

E   As we agree that a big problem with financial advertisements arises when they are likely to mislead people who are not well informed about risks and pitfalls of borrowing, could ethical leadership perhaps start from another point? For example, should the advertising industry be a stakeholder in educating the public on financial literacy?

We [at the agency I manage] have started this with [a large Lebanese bank]. It was a project I initiated myself with [the chairman of the bank that is our client]; we have started a program we call financial literacy through which we inform the masses. It is not addressed to professionals, we’re explaining to people how to get a car loan, what it will cost, what [interest cost] is high, what is low. We have a program of everyday messages after the news at 8:30 p.m.

E   Should the Advertising Association be more proactive in this field?

For sure. We have the intention to be, but unfortunately we don’t have the staff. The Advertising Association today has a board of 12 people, all of whom have their own businesses. And we have only one secretary. We do not work full time for the association. And we have many topics to tackle – one of which is ethics. But to do it, we need funds and we need staffing. Today if you tell me, “Look this is an unethical ad,” we will take a decision to stop it. But sometimes we don’t know, because we don’t have a committee supervising every ad being aired. In principle, 100 percent yes [we care about ethical advertising].

E   In Lebanon the state has set a few clear rules for advertising, but there’s a lot of ambiguity, especially concerning whether or not an ad is ethical. Does that not increase the responsibility you as the advertiser have?

Yes, I think the private sector is doing too much on behalf of the state. The state is almost absent. In principle, what we preach in terms of inspiring excellence or the right to choose, yes, we all do respect this and I think today most of the advertising agencies are in line with this practice. If you have any examples of where we need to take a position, I’d like to know them.

E   There are certain ads where the message immediately sounds fishy. This 5-minute ad was one of them.

If you take this ad, even after the court decision to stop the advertisement, many stations continued running it. Even after a court decision. I’m not talking about an advertising agency’s opinion. So what are the measures we can take? We are not here as a dissuasive organization. We’re an advisory organization.

E   Doesn’t it risk reputation harm if ads like this are put on the air?

Sure, but more than 30 percent of advertising goes directly to the media. And most of these are the tricky ones. These ads did not go through advertising agencies.

E   In conversations we had with the TV station and the company that booked the ad, neither seemed to understand the idea of having any ethical obligation of oversight. The ad booker said as long as General Security approves an ad, it’s fine and the obligation ends there.

I understand what you’re trying to say and I believe in it, but how can we find a way to apply what you’re aiming for? We all aim for that.

E   We got close to it with a code of ethics. Do you have one?

No. And I ask you, is there any written code of ethics that would be relevant for Lebanon? Also, we’d need a committee. What you’re talking about is great, but when it comes to implementation – you need a process, you need a vision, you need people, and – before all – you need money. Since I took over the [Advertising Association], I’ve tried many ways to raise money. We need a river, a flow of money coming always. I’m trying to do that.

E   What is your program for 2016 for giving ethics more space?

The first thing I will share in our next meeting with all our board members is this discussion. We will discuss it. Perhaps an advertising campaign would give more information to the consumer. If we raise awareness, we can go from there to write a code of ethics. But I’m not sure it will end in 2016. There are so many people who will give their opinions and we’ll have to amend some things here and there, but we can begin the process.

E   Are ethical considerations a part of the industry today or does everyone know General Security’s red lines and leave it there?

No. It’s a case of just getting the money whenever General Security gives the license. But I think this is more on the media level. When you have a known product, you go to an agency. When you want to sneak in, you do a production for $10,000 and do a deal with a media outlet to run a bulk of ads. The media today are in need of money and they don’t care about ethics. It’s like everything else – whether littering or driving crazily – the media outlets will say everyone else is doing [something unethical], so why should I stop? We don’t have moral values anymore in this country.

The post Questioning the messenger appeared first on Executive Magazine.