PILLAR OF STRENGTH
Circular 33 is a potential catalyst to the rise of private equity in Lebanon, which is taking on an ever greater role in the economy, as explains Souraya Machnouk.
The Central Bank of Lebanon (BDL) has always acted as a driver for investments in Lebanon, most recently by announcing several Economic Stimulus Packages in the past three years, but its Circular 331 remains its boldest move to date. Issued on August 22 in 2013 with the main objective of stimulating the creation of startups and facilitating finance to companies at their earliest stages, it was hailed by Lebanese private equity investors (PEs) and venture capital firms (VCs) as a great success for the Lebanese SMEs' ecosystem in general.
The banking industry in Lebanon is generally of a conservative nature, primarily reliant on risk-aversion and capital hoarding, which has reflected unfavorably on the development of business startups that are in desperate need of capital. Aware of this distortion, BDL, who cannot directly invest in equities according to Lebanese law, implemented through Circular 331 a creative mechanism to advance $400 million to Lebanese commercial banks, which are required to invest these funds either directly in startups, or indirectly in startup funds, through the acquisition of equity participations in these entities.
The mechanism consists of the bank receiving a seven-year interest-free loan from BDL, then using this loan to buy treasury bills bearing a 7% interest rate, and finally selling the latter to BDL at a discounted rate, thus increasing the current value from which the bank derives a profit amounting to 75% of its investment in startups.
To ensure that banks reduce their investment risks, and continue to diversify their investment portfolios in startups, Circular 331 stipulates that BDL will guarantee 75% of the banks' investment in startups, and prohibits that a bank's total participation exceeds 3% of its capital without BDL's approval. BDL receives 50% of the profits accrued to the investing bank through the startups' distribution of dividends or the sale of the bank's shares in the startup
VCs and PEs, diffident at first, started in 2014 garnering investment that they would otherwise have trouble finding especially with the current unstable political and security situation that is hindering demand for long-term investments such as equities.
To incentivize the investments under Circular 331 even further, BDL ambitiously launched in November 2014 the “Accelerate 2014" program, and organized Lebanon's first international startup conference bringing together over 500 top entrepreneurs, investors, and knowledge-economy stakeholders from around the world to lay the foundation for establishing Lebanon as a premier international startup hub, and for providing startup support activities and relevant startup investment opportunities to a high caliber international audience. Consequently, this year saw existing VCs and PEs fundraising amounts much higher than their previous funds.
Nevertheless, and despite the BDL's efforts to encourage banks to offer private equity financing to companies, rushing to invest in startups poses certain challenges to commercial banks that have long been accustomed to dealing with SMEs in a lending capacity, and have demonstrated a historical preference towards name-based lending as opposed to business model, collateral, and cash-flow based lending. These banks have neither the knowledge nor the background in investing in startups. Moreover, another challenge is the general hostility of the family-owned and owner-manager enterprises in Lebanon, which constitute 98.2% of all Lebanese companies, towards ceding partial corporate control, even in exchange for capital injection.
The Lebanese banking sector is in a dire need of a cultural shift from conservative lending to best investment practices. There's also a growing awareness, especially with the change of generations in family businesses, that institutional investors and equity funds bring financial boosts, management know-how, and better corporate governance to companies. Only time will tell if Circular 331 will lead to the renaissance of private equity in Lebanon.
PILLAR OF STRENGTH
TABLE OF CONTENTS
Review: Diplomacy
Root & Branch
The Syrian asylum crisis dominates headlines, yet Lebanon is using its political influence more widely, and is utilizing its diaspora to good effect. Meanwhile, the government is striving to reform itself amid pressures for greater effectiveness, yet even here the ongoing war in Syria risks a paralyzing political impasse at home.
read articleGuest Speaker
The Hon. Julie Bishop, Minister , Foreign Affairs, Australia’s Federal Coalition Government
TBY talks to The Hon. Julie Bishop, Minister for Foreign Affairs, Australia's Federal Coalition Government, on areas of cooperation and ways in which both countries are working to support the region.
read articleFocus: Syrian Asylum Crisis
Seeking the Cedar’s Shelter
The impact of Syria's crisis on the economic and social stability of Lebanon has been profound, with over 1.18 million displaced Syrian nationals now living among the 4 million Lebanese population, Lebanon has the highest per capita concentration of refugees worldwide.
read articleGuest Speaker
Abdallah Al Dardari,, Deputy Executive Secretary, UN Economic and Social Commission for Western Asia (UN-ESCWA)
TBY talks to Abdallah Al Dardari, Deputy Executive Secretary of the UN Economic and Social Commission for Western Asia (UN-ESCWA), on the participation of women in the economy and the workforce and regional integration.
read articleInterview
Dr. Freddie C. Baz, Vice Chairman and General Manager, Bank Audi
TBY talks to Dr. Freddie C. Baz, Vice Chairman and General Manager of Bank Audi, Group Strategy Director, on the Bank's contribution to Lebanon's economy, its regional diversification strategy, and Odea Bank's expansion in Turkey.
read articleInterview
Saad Azhari, Chairman & General Manager, BLOM Bank
TBY talks to Saad Azhari, Chairman & General Manager of BLOM Bank, on increasing their market share and maintaining a strong regional presence amid the global financial crisis, the Arab Spring, and ongoing instability in Lebanon.
read articleFocus: Lebanese Banks Abroad
Across the Globe
In the era of globalization, Lebanese banks are trying to take advantage of several opportunities, not just in terms of satisfying the needs of a large Lebanese diaspora, but also by filling the niche for anyone who needs optimum banking products and service delivery.
read articleInterview
HE Minister Arthur Nazarian, Minister , Energy and Water
TBY talks to HE Minister Arthur Nazarian, Minister of Energy and Water, on the balance between traditional and renewable energy sources, incorporating wind into the country's energy portfolio, and how the government supports private sector investment.
read articleFocus: Green Spaces
The Other Side of The Fence
The Beirut Municipality has launched the “Beirut is Amazing" campaign, created to invite all independent organizations, private companies, and educational institutions interested in developing green spaces to collaborate with the municipality.
read articleFocus: Beer Culture
Brewed Force
Ever since the first Lebanese beer was produced in 1933 by Brasserie Almaza, the local beer market has been dominated by one single brand. To most Lebanese, Almaza has been synonymous with beer. However, over the past nine years, a new craft beer movement has been challenging the status quo of the Lebanese beer market with newly established brands, introducing new beer styles and more diverse tastes.
read articlePhoto Essay: Reconstruction of Beirut
Building Up Downtown
What is now a beautiful downtown was not so long ago a wasteland of scorched buildings and rubble from a civil war that plagued Lebanon from 1975 to 1990, totally destroying an area known for its picturesque Mediterranean vistas and Roman and Mamluk ruins.
read articleFocus: Restoring Tripoli’s Reputation
Not So Secondary
In a drive to create the conditions for increased local economic development and enhanced quality of life, the Cultural Heritage and Urban Development Project has been launched by the World Bank to improve the conservation and management of Lebanon's built cultural heritage and boost the development in country's secondary cities.
read articleInterview
Salam S. Rayes, CEO, Saint George Hospital University Medical Center,
TBY talks to Salam S. Rayes, CEO of Saint George Hospital University Medical Center, Beirut, on the role of R&D at the hospital, the challenges faces the health sector, and Lebanon's potential to become a medical hub for the region.
read articleInterview
Irina Bokova, Director General, UNESCO
TBY talks to Irina Bokova, Director-General of UNESCO, on the organization's campaigns to protect and promote Lebanese heritage, expand educational programs in the country to serve Syrian refugees, and celebrations for UNESCO's 70th anniversary.
read articleInterview
Hamed Al Hammami, Director, UNESCO’s Beirut Office
TBY talks to Hamed Al Hammami, Director of UNESCO's Beirut Office, on their projects in the fields of culture, education, human rights, freedom of expression, and youth in governance across their regional mandate of Lebanon, Syria, Jordan, Iraq, and the Palestinian Territories.
read article