MAKING A MARKET
Lebanon's underdeveloped capital markets are in the process of undergoing changes aimed at increasing access and activity.
Established in 1920 by decree of the French Commissioner, the Beirut Stock Exchange (BSE) is the second-oldest in the region. Like the banking sector, it has weathered a great deal of political turmoil over the years, including suspending activity from 1983-1996 due to the Lebanese civil war. Since it resumed activity, it has sought to regain its historical place as one of the region's economic drivers. In recent years, it has undergone a number of technological and structural changes to further standardize and develop what will hopefully become a mainstay. In the past decade, it has updated its trading systems to the NSC UNIX V3 PLUS, implemented a remote trading system, and started the process of a shift to private ownership. Even with these new innovations, the BSE faces a difficult road ahead, as a slumping economy and entrenched cultural and political obstacles continue to be barriers to success. Still, changes aimed at increasing participation in capital markets suggest that the BSE could soon become a bigger regional player.
In August 2011, the Lebanese Parliament passed a new Financial Markets Law that created the Capital Markets Authority (CMA), endowed with the ability to regulate Lebanese capital markets, and a Financial Market Court able to adjudicate financial markets. The law also includes provisions for the stock market to transfer to private ownership. This process has taken some time, but Firas Safieddine, Vice Chairman of the Capital Markets Authority, is optimistic that it is finally coming to a head. “The government decided to move forward on the much-delayed privatization process of the BSE," Safieddine told TBY. “Should the cabinet approve this within a month as we expect it to, we should have a new board for the BSE with new functions to ensure that the transfer of the existing stock exchange to the new stock exchange is smooth and without major obstacles when moving forward with the privatization process. As members of the newly formed transitional stock exchange board, the CMA will closely cooperate on due diligence efforts, evaluation, the RFP, and overseeing the bidding for privatization." The shift to private ownership would be a strong indicator to international investors that the BSE is serious about its desire to become a larger and more significant part of the Lebanese economy.
As of September 2016, the market capitalization of the BSE's listed companies stood at USD11.1 million, down from USD11.22 million at the end of 2015. Total value of the market was USD1.13 million, down from a yearly high of USD1.18 million in April. The BSE's performance was negative in the first half of 2016, with the BLOM Stock Index recording a 1.69% decline to 1,149.79 points before a small rally in September took it back up to 1,157.49. This came on the heels of an uneven 210 that saw the BLOM BSE Index hit an 11-month high of 1,229.34 in March, then drop all the way to 1,108.49 in November. In comparison, the BSE's 2016 performance was less remarkable but important in taking the first steps to regain investor confidence.
One of the biggest issues facing the BSE in its quest for growth and development is Lebanon's business culture. According to a 2015 Blom Bank report, almost 95% of enterprises in Lebanon are SMEs. These firms, while productive and important of the Lebanese economy, are often averse to the stringent transparency and financial disclosure requirements that come with a listing on the stock exchange. The BSE requires minimum capital of USD3 million for listing on the official market and USD1 million on the secondary market. Combine this with a strong commercial lending sector, and these family-owned businesses have little incentive to look to capital markets for funding. “Lebanese businesses are, in their vast majority, small family-owned firms that prefer to finance their activities through bank credit in order to keep control over their companies," Beirut Stock Exchange President Dr. Ghaleb Mahmassani told TBY. "These companies do not see the advantages of being listed on the stock exchange." As a result, the BSE is the region's second-smallest stock exchange as measured by market capitalization, ahead of only Tunisia. To improve the market environment, the CMA is preparing a new Electronic Trading Platform (ETP) for SMEs. This new platform could possibly offer SMEs an alternative to the elevated startup costs of the sector's traditional path. Moreover, the CMA has introduced new regulation aimed at streamline the process of establishing financial intermediaries. “Our new regulations have dissected the activities of capital markets into five categories: dealing, managing, advising, custody, and arranging," Safieddine told TBY. “We are confident that this will create an infrastructure of focused professional financial institutions that could help increase the appetite of local firms to trade and list on the BSE. I am also confident that this new procedure will attract many of the high caliber Lebanese diaspora financial professionals to set up base back in the country."
The limited expansion of capital markets is evidenced by the fact that the overwhelming majority of traded value on the market comes from banking firms. The banking sector accounted for 89.12% of all shares traded, 85.82% of total traded value, and 80.6% of market capitalization in 2015, a reflection both of the sector's importance in the Lebanese economy and the low volume of trading on the exchange. In contrast, the real estate sector accounted for only 16.27% of market capitalization, the industrial sector 2.82%, and the retail sector only 0.04% of total traded value. It is no surprise, then, that Dr. Mahmassani says, “Diversifying the structure of listed companies on the Beirut Stock Exchange is one of the biggest challenges the stock market has been facing since its reopening… We are trying to correct the current situation by giving increasing attention to educational and promotional programs that aim to attract and convince medium sized Lebanese companies to list their shares on the BSE and to increase their capital through the broadening of the shareholders base by highlighting the importance and advantages of financing through the stock exchange."
All indications are that the CMA is serious about its desire to take the measures needed to strengthen Lebanon's capital markets. “Globally, research has estimated that the stock market growth and the long-term real growth rate in GDP is a one-to-one relationship," Safieddine told TBY. “Through a successful usage of the stock exchange we can achieve a reduction in the government's debt-to-GDP ratio from 140% to a more acceptable figure." With strong government leadership and a commitment to long-term vision, Lebanon's capital markets look ready to become a major economic driver for both the country and the region.

TABLE OF CONTENTS
Focus: Lebanese-French Relations
Let’s be Franc
Lebanon shares a close relationship with its former colonizer, both in terms of economic relations and cultural identity among Lebanese. In spite of hardships like the presidential power vacuum and Syrian war next door, the bond is only getting stronger.
read articleFocus: Tripoli Economic Free Zone
The Tripoli Transformation
The Tripoli Special Economic Zone (TSEZ) is one of most ambitious projects in Lebanon at the moment. With an initial cost of USD27 million, it is meant to provide an alternative to the heavily centralized economic activity in Beirut, a new gateway for investments and trade to settle in northern Lebanon, and will transform the image of a long-neglected region.
read articleInterview
Dr. Freddie Baz, Vice Chairman & Group Strategy Director, Bank Audi
TBY talks to Dr. Freddie Baz, Vice Chairman & Group Strategy Director of Bank Audi, on the bank's increase in profits, dealing with currency devaluation, and working to turn the economy into an export-driven one.
read articleReview: Insurance
Life is a Rollercoaster
Unlike many emerging markets, Lebanon enjoys a relatively high insurance penetration rate and strong life segment, buoyed by compulsory lines and bancassurance. Competition remains fierce, however, and reform aimed at encouraging consolidation looks far off.
read articleInterview
Max R. Zaccar, Chairman of Commercial Insurance & President of the Association, Insurance Companies
TBY talks to Max R. Zaccar, Chairman of Commercial Insurance & President of the Association of Insurance Companies, on the resilience of the sector, increasing the already-high penetration rates in the country, and remaining one of the strongest insurance companies in the region.
read articleInterview
HE Arthur Nazarian, Minister, Energy and Water Resources
TBY talks to HE Arthur Nazarian, Minister of Energy and Water Resources, on the potential offshoots from oil and gas explorations, the country's National Energy Efficiency Action Plan, and attempts to increase renewable energy consumption.
read articleInterview
Wissam Zahabi, Chairman, Board of the Lebanese Petroleum Administration (LPA),
TBY talks to Wissam Zahabi, Chairman of the Board of the Lebanese Petroleum Administration (LPA), on making the investment climate attractive for foreign companies and becoming self-sufficient in energy.
read articleFocus: Sovereign Wealth Funds
Gas Pipe Dreams
Despite excitement over exploration of Lebanon's hydrocarbons, the creation of a sovereign wealth fund, which was included in legislation, has yet to take place. The country faces several obstacles in its path to creating and properly managing a fund.
read articleInterview
Pierre El Khoury, General Director, Lebanese Center for Energy Conservation (LCEC)
TBY talks to Pierre El Khoury, General Director of the Lebanese Center for Energy Conservation (LCEC), on the development of energy efficiency in Lebanon, awareness of energy conservation, and the country's 2020 renewable energy goals.
read articleInterview
Dr. Fady Gemayel, President, Association of Lebanese Industrialists (ALI)
TBY talks to Dr. Fady Gemayel, President of the Association of Lebanese Industrialists (ALI), on the group's work to promote industrialists, new developments in terms of industrial cities, and the future of industry in the country.
read articleFocus: Industrial Cities
Industrial Solution
Domestic and regional events have stifled Lebanon in building a strong national industry to protect and sustain its economy. Four proposed industrial zones throughout the country may provide it with the economic backbone it so desperately needs.
read articleInterview
Marianne Hoayek, Director of the Executive Office, Banque du Liban
TBY talks to Marianne Hoayek, Director of the Executive Office of Banque du Liban, on the roots of the Circular 331 concept, bridging funding gaps throughout the startup lifecycle, and the country's growing knowledge economy.
read articleRoundtable
Thinking It Through
On June 12, TBY and the American-Lebanese Chamber of Commerce (AmCham) organized a roundtable titled “Startup ecosystem sustainability: fostering cooperation to drive entrepreneurship." The participants discussed the impact of Circular 331, an initiative by Bank du Liban, the Lebanese central bank, to inject a potential of USD400 million into the local enterprise market and guarantee 75% of banks' investments in startups and startup support.
read articleFocus: Infrastructure for the startup ecosystem
The New Star
Startups are ubiquitous in Lebanon despite the difficulty of starting a business and the lack of services available to new businesses. However, a number of actors, both public and private, are innovating the environment and allowing startups to fulfill a greater role in the country's economy.
read articleFocus: Maritime Exports Bridge
Bridging The Gap
The conflict in Syria has wrought serious damage on the Lebanese economy, effectively closing off the country's trade routes through Syria. However, a new program geared at balancing the price disparities between land and sea transit is poised to help Lebanese industries.
read articleFocus: Real Estate
A Stimulus For The Rest Of Us
The real estate market in Lebanon is nothing like it used to be. The sector has slowed considerably, and demand has shifted from the traditional center, Beirut. However, stimulus packages from the central bank over the years have proven beneficial for all parties involved.
read articleInterview
Armand Pahrés, President, Lebanese Pharmaceutical Importers Association (LPIA)
TBY talks to Armand Pahrés, President of the Lebanese Pharmaceutical Importers Association (LPIA), on the development of legislation in the sector, boosting further innovation, and opportunities for Lebanon to become more self-sufficient in pharmaceuticals.
read articleFocus: Incentives for pharmaceuticals in Lebanon
Pharma Land
Lebanon has always been the region's leader in all things health related. Its pharmaceutical industry is no exception, and the country's incentives for international pharma companies to operate, manufacture, and distribute in Lebanon are only getting stronger.
read articleInterview
HE Elias Bou Saab, Minister, Education and Higher Education
TBY talks to HE Elias Bou Saab, Minister of Education and Higher Education, on the ministry's initiatives to improve the education system, ensuring access to education for Syrian refugee children, and reversing the brain drain in the country.
read articleInterview
Mohamed Harajli, Provost, American University of Beirut (AUB)
TBY talks to Mohamed Harajli, Provost of the American University of Beirut (AUB), on his upcoming plans for the university, the key role played by the AUB alumni, and fostering an entrepreneurial spirit among students.
read articleFocus: Programs to school Syrian refugee children
High Marks
Proportional to its population, Lebanon has taken in significantly more Syrian refugees than any other country. With the country now facing the problem of placing the tens of thousands of Syrian children in school, international donors and local and foreign organizations are making educational support a priority.
read articleInterview
Joseph G. Jabbra, President, Lebanese American University (LAU)
TBY talks to Joseph G. Jabbra, President of the Lebanese American University (LAU), on embracing technology at the university, the challenges of Lebanon's brain drain, and the importance of having international links with other institutions.
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