Tag: Libya

How the Arab Spring Creates Growth Potential for Islamic Finance

Posted on February 24, 2012

With Islamist parties dominating recent elections in Arab Spring countries, the Islamic finance industry will likely find opportunities to capture large volumes of new customers and emerging infrastructure projects, according to a report by global law firm Simmons & Simmons.

Intent on maintaining a secular financial system, regimes in Egypt, Tunisia and Libya were not supporters of Islamic finance, notes Tariq Hameed, a Dubai-based managing associate with the firm, and author of the report, “Blue Print for Islamic Finance following the Arab Spring.” But in elections that have seen Islamist parties come to power, such as the Muslim Brotherhood in Egypt, Shariah-compliant banking has been endorsed as part of a larger social and financial reform campaign. “All of the [Islamist] parties have gone on record saying they support Islamic finance,” Hameed says. “It reflects their beliefs.”

Hameed notes that at the consumer product level, there is huge potential for growth. Partly because many people in these countries do not have bank accounts — approximately 25% of Moroccans and 33% of Tunisians have bank accounts, and only 10% of Egyptians, according to his findings. “There was a lack of offerings,” he says. “Many didn’t engage with the conventional banking system.”

While expected customer growth would be in volume, Hameed notes that the majority of such accounts would likely be low-income savers. Compared to Arab Gulf countries, GDP per capita among the Arab Spring countries is low: Libya is the wealthiest, but GDP per capita is estimated at just $14,000. In addition to creating savings products, one opportunity could come from the further development in Islamic microfinance offerings, Hameed states. Currently there is very little being offered to grassroots Muslim entrepreneurs, he says, but institutions will have to respond to demand from rural communities and micro-enterprises. The state can act as sponsor of such an initiative, he suggests.

Separately, Islamic finance may become an option for these governments as they seek foreign investment. According to Reuters, a number of Islamic financial institutions are opening branches in Libya, for instance, as it explores the industry. Successful Islamic financing of infrastructure projects already exist in Bahrain, Saudi Arabia and Bangladesh, Hameed says, so there are models states can study for implementation.

There remain challenges for the Islamic finance industry before they can reap the potential of these markets, Hameed adds. There are several issues that need to be addressed to ensure growth, his report notes, including the strengthening of consumer protection laws, clarifying governance, and establishing central Shariah boards for finance.

For Western financial firms and businesses seeking to be in the region, they will have to have a capability to engage in Islamic finance, Hameed notes. “If the customer wants Islamic finance, competitors will provide it if they don’t,” he says.

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After Qaddafi: The Oil Question

Posted on October 24, 2011

The sudden, bloody end to Colonel Muammar Qaddafi’s 42-year rule in Libya has observers concerned about the risk of a power struggle in the North African country. But for the moment, the world’s focus is on Libya’s oil.

Economically, Libya has primarily relied on its oil resources. According to 2010 figures from the CIA World Factbook, before its civil war, the country’s petroleum industry produced 1.789 million barrels a day, and its oil exports accounted for 25% of its GDP.

But production fell to less than 400,000 barrels a day during the conflict. The most optimistic analysts suggest that full production capacity could be restored by early next year. The country has roughly 46 billion barrels of oil reserves — the ninth largest in the world — and nearly 55 trillion cubic feet of natural gas reserves.

“Libya is fortunate in having a [relatively] small population … and valuable oil resources. It has the potential to derive a large income from oil after an initial period of reconstructing the infrastructure,” says Ann E. Mayer, professor of legal studies and business ethics at Wharton. “But the oil sector cannot offer enough jobs to satisfy all Libyans demanding employment.”

Mayer notes that under Qaddafi, “the unemployment rate among Libyan citizens was high, in part because of the distaste that Libyans felt for accepting work in low status jobs that were seen to be demeaning, which were left for migrants to handle.” Most migrant laborers fled the country when civil war broke out.

The International Energy Agency (IEA) has advised caution on expectations of renewed oil production in Libya. “If [Qaddafi’s death] leads to greater political clarity within Libya, and to a more stable operating and investment environment, then it may result in a more rapid restoration of the Libyan oil sector,” David Fyfe, head of the IEA’s oil industry and markets division, noted in a press statement. “However, many logistical, operational and security-related challenges remain in that country, so we are not changing our underlying assumptions on Libyan production recovery for now. We still believe it could take many months for production to regain pre-crisis levels.”

The thorny question of who takes control of Libya’s oil exports was first raised while fighting still raged in the country. Speaking with Reuters, the head of the country’s National Oil Company speculated that he would not remain if a reshuffle occurred. Divisions between the western and eastern parts of the country also loom large in future control of the country’s oil resources.

Most analysts suggest that little stability will exist while a transitional government forms, hindering any plans to get Libya’s oil flowing again. “The death of Qaddafi changes very little in the underlying dynamics of the oil picture on the ground,” Barclays Capital analysts noted.

Juan Cole, a Middle East expert at the University of Michigan, told Reuters that strife in Libya between its tribes could be avoided through egalitarian economic policy. “A more or less democratic government that spreads around [Libya’s] oil largesse more equitably could easily overcome this divide, which is contingent and not structural,” Cole said.

According to Mayer, Libyan economic planners will also have to figure out how to address unemployment concerns, which will include deciding whether or not to revive the former system of extensive reliance on a vast underclass of migrant workers, a system that is typical in oil-rich countries but that naturally creates social tensions and imbalances. “Do they want to invite back the same diverse population of migrants?  Do they prefer to try to integrate their economy with the economies of Egypt and Tunisia by favoring their nationals?  Do they want to try to alter Libyans’ attitudes so that they will accept working in jobs that were previously left for migrants? A lot will hinge on the answers to these questions.”

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Wharton’s Stuart Diamond: Arab Spring Has Provided Little Value for People

Posted on August 16, 2011

When protestors first took to the streets across the Middle East earlier this year, the world watched as thousands of Arabs demanded an end to governments that were corrupt and self serving. Dubbed the “Arab Spring,” it was a movement propelled by technology and imbued with optimism for change toward a more equitable economy.

After the initial blush with relatively peaceful demonstrations in Tunisia and Egypt, the social revolution has led to strife rather than reform, as Yemen, Bahrain and Egypt have all witnessed bloody protests, while Syria and Libya have been plunged into all-out civil war. Much of the violent turn of events, according to Wharton legal studies and business ethics professor Stuart Diamond, is the result of dashed expectations.

“Entrepreneurs know that the idea is just the start; without building out an enterprise, no value is created,” Diamond, who teaches negotiation courses at Wharton and is the author of “Getting More: How to Negotiate to Achieve Your Goals in the Real World,” told Arabic Knowledge@Wharton. “This is the problem with the Arab Spring. Now that many [people] have more power, they actually have to do the hard work to build out a different sort of economy.”

Another failing of the movement is the emphasis on past grievances: Putting Egypt’s former president Hosni Mubarak on trial, Diamond noted, is the wrong way to start rebuilding Egypt. “Negotiate with him on what he and others in his circle will provide,” he suggested. “Leave them with something to get them to agree. Now that would better help in building a new Egypt than the trial of a sick old man.”

For those challenging leadership, such as protestors in Syria, the best thing would be to avoid confrontation, he added. “If Syrian protestors stop the violence, all the negative focus will be on the existing government, which will not be able to withstand the continuing criticism. The goal of the protestors now should be to document everything and keep telling the world.”

According to Diamond, the situation in Libya “is perhaps the best example today of the stupidity of not negotiating.… Libya will never be able to provide a better life for its citizens until the war stops. And the quickest way to do that is negotiate with Qaddafi.”

Read the full interview with Diamond on Arabic Knowledge@Wharton.

Previously:  Stuart Diamond on Middle East Reform: Organize, Start Small, Replicate and Negotiate

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Food Security Concerns Lurking Amid Arab Region’s Unrest

Posted on July 6, 2011

Before the tumult of the Arab Spring, one of the biggest challenges to the rule of then-Egyptian president Hosni Mubarak was a lack of bread. In the summer of 2008, long queues and short tempers over bread shortages were enough that the army was called in to bake and distribute loaves to Egypt’s poorest.

Egypt’s bread protests were soon forgotten. But there now is a growing consensus among analysts and policymakers that rising food costs and food shortages are contributing to the region’s unrest. In a new briefing by the International Food Policy Research Institute (IFPRI), a Washington, D.C.-based think tank, researchers detail some aspects of the Middle East’s food security concerns, and how they relate to the ongoing turmoil.

“People’s satisfaction with their standard of living has deteriorated in most Arab countries in recent years, especially in Egypt, Libya, Bahrain and other countries with civil disobedience,” noted the authors of the brief, “Economics of the Arab Awakening: From Revolution to Transformation and Food Security“, which included all of the Arab countries in the Middle East and Africa.

Food security has worsened in most Arab countries, the authors wrote, due to high food-price inflation. For instance, in Egypt, according to the World Bank, year-on-year food inflation in February was at 19%. “The proportion of people without enough money to buy food increased or remained unchanged in all but one of 12 countries examined,” the IFPRI brief stated. “Egypt and Sudan saw particularly large increases.”

Even in oil-rich Gulf countries, concerns over food price inflation have resulted in various government actions, including planning food reserves and forcing retailers to heavily discount certain basic foodstuffs. In the United Arab Emirates (UAE), the federal government has gone further, asking food retailers to agree to a six-month price freeze on certain items, while conducting store inspections to ensure prices do not increase in the month of Ramadan, when Muslim shoppers tend to buy more groceries. Prices for edible oil, sugars and rices last year in the UAE rose by 50%, according to local media reports.

These food security concerns have also led some Gulf countries to purchase farmlands in other countries for their own food production needs. The UAE has become one of the top purchasers of global farmland, according to IFPRI, while Saudi Arabia has made a number of farmland purchases in Africa. Government officials say that with direct access to food crops, they can save on import spending.

In an Arabic Knowledge@Wharton story about Middle Eastern countries investing in farmlands in Africa, Wharton management professor Stephen J. Kobrin said such land purchases risk reviving a colonial system in which large tracts are controlled by overseas interests that hire many of their own people, reducing the economic benefits to the host country. “The big question is, are you developing local skills or just creating an outpost of the investor country?” Kobrin noted.

And more immediate, easier solutions for Arab countries to reduce import spending costs are available, according to an analysis by the World Bank, including improving logistics efficiency, and using risk-management tools to reduce exposure to price volatility and shocks.

The IFPRI brief also questions some of the measures Arab countries have taken in the wake of the unrest, such as raising civil employee salaries and lowering import tariffs. “Most, if not all, of these ‘firefighting’ measures were used by Arab governments before,” the brief states. “These popular but costly responses have been inefficient in stimu­lating sustainable growth and poverty reduc­tion. “

The authors recommend that Arab governments facing food security issues should seek to improve their “trade agreements, logistics and infrastructure, as well as support for the agriculture sector in countries with agri­cultural potential.”

While the authors acknowledge that it is beyond the report’s scope to determine how large a role living standards and food security played in triggering the revolutions, “results clearly show that in most Arab countries, both indicators have worsened.”

Read the report here:  http://knlg.net/pzgcK1

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