Middle East | Knowledge@Wharton Today

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.

Posted in Finance and Investment, Knowledge@Wharton Today, Law and Public Policy | Also tagged Arab Spring, Egypt, Islamic finance, Libya, Tunisia | Leave a comment

How Arab American Tech Entrepreneurs Can Help Arab Spring Countries

Posted on February 7, 2012

Arab-American technology entrepreneurs have a special role to play in helping Arab Spring nations find their way back to stability and development, according to David Hamod, CEO of the National U.S.-Arab Chamber of Commerce.

Addressing an audience at the Plug and Play Tech Center, a well-known Silicon Valley incubator run by Iranian-born Saeed Amidi, Hamod said such members of the Arab Diaspora could provide the experience and skills needed to jump-start innovation in Arab economies. “For the Arab world to make the transition from hydrocarbon-based economies to knowledge-based economies, the next big thing, in a sense, is innovation,” Hamod noted. “Innovation, hand-in-hand with entrepreneurship, will create those productive jobs that are so vital to growth in the Arab world.

“There is a special role to be played in this process by Diaspora Arabs, who have made it in Silicon Valley, who have learned the lessons of Silicon Valley and who are uniquely situated to share those lessons with the Arab world,” he added.

Hamod spoke at a global forum examining ways to harness the economic potential of the Middle East and North Africa (MENA) region in the aftermath of the Arab Spring revolution. At a time of uncertainty as well as promise, Arab-Americans are looking inward to discover their role in helping usher in democracy and economic stability in their traditional homelands. He told forum attendees that technology alone is only part of the equation. “If the Arab Spring at its heart is about dignity, respect, having a voice, reducing economic disparities and being able to put bread on the table for one’s family, then there’s no time to lose in promoting innovation through entrepreneurial ecosystems,” he said.

Throughout the day, some of Silicon Valley’s leading Arab-American technologists reiterated Hamod’s applause-inducing speech by creating an atmosphere that resembled a high school pep rally. There were discussions about cultivating the start-up ecosystem in the Gulf region and perhaps most important, getting access to venture capital. It is that final hurdle that deserves a watchful eye in the coming months as the grassroots revolutions turn to the formation of new governance, observers said. Political resolution might encourage the citizenry to return its attention to the daily duty of work. Hamod predicted that there will be no return to the status quo, but where that leads the region is anyone’s guess.

The forum was held on Martin Luther King Jr. Day, and Hamod found a parallel between King’s fight for freedom in the 1960s and the protests in the Arab world that have broken the stranglehold of entrenched regimes. He quoted from a portion of King’s famous 1957 speech delivered at the Prayer Pilgrimage for Freedom in Washington D.C.: “Sometimes it gets hard, but it is always difficult to get out of Egypt. The Red Sea always stands before you in discouraging dimensions. And even after you cross the Red Sea, you have to move through a wilderness with prodigious hilltops of evil, gigantic mountains of opposition. But I say to you, keep moving. Let nothing slow you up. Move on with dignity and honor and respectability.”

King’s speech was meant for an African-American constituency. But it sounds less ethereal to modern Arabs, especially those who risked their lives in Tahrir Square protests one year ago, and for those who continue to grapple with how to move forward after creating unprecedented change.

Gulf Common Currency Effort Critiqued

Posted on January 10, 2012

Even as the eurozone’s troubles deepened this year, Saudi Central Bank Governor Muhammad Al Jasser said in September that long-delayed plans for a common currency for the Gulf were moving forward. Saudi newspapers carried the results of a survey released by Qatar University this month that found a majority of Gulf nationals supporting a common currency.

But the idea of a “khaleeji” currency, as it is informally known, has since garnered opposition from International Monetary Fund analysts. “Without a higher degree of synchronization in business cycles, the cost of a monetary union may outweigh its benefits,” wrote IMF economist Serhan Cevik in a report on the region’s business cycles. “The [Gulf Cooperation Council] countries need to expand and deepen economic diversification and become more complementary in intra-regional trade and financial flows.”

Of the six countries in the Gulf Cooperation Council (GCC), only four still support the creation of a regional monetary union: Saudi Arabia, Bahrain, Kuwait and Qatar. Oman and the United Arab Emirates (UAE), two countries representing almost a third of the region’s entire gross domestic product, are not involved. The UAE was part of the union’s discussions until 2009, when political disputes led to its exit, scuttling a 2010 deadline for a currency launch.

Any currency bloc would also have to tackle divergent opinions about keeping the U.S. dollar as a currency peg. Kuwait moved to a basket of currencies in 2007; a number of Gulf analysts and financiers would like to follow its lead, but Gulf government officials remain committed to the dollar. “We are very much with the [dollar] peg,” UAE Central Bank governor Nasser al-Suwaidi told reporters in November.

A Gulf common currency does have support from one academic though — Nobel laureate Robert Mundell, who spoke earlier this year about the proposal with Arabic Knowledge@Wharton. The “father of the Euro” said that a common currency for the Arab Gulf nations is still a potent idea, and will eventually be instituted. “The zone is not just purely economical, it’s also social and defense as well,” Mundell noted.

Posted in Finance and Investment, Knowledge@Wharton Today, Law and Public Policy | Also tagged common currency | Leave a comment

The Food Fight in the Middle East

Posted on October 4, 2011

Like most Gulf nations, the United Arab Emirates (UAE) has little agricultural resources, forcing it to import the majority of its food supply. The oil-rich country brings in roughly 80% of its supply; Dubai, its most famous Emirate, imported over 4 million tons of food in the first half of this year alone.

Its neighbors are similarly active in the food market. In September, Iran became the biggest buyer of Brazilian beef for the first time in its history. Such dependence is projected to only rise with time. According to the World Bank, the Arab region’s need for food imports is expected to increase by almost 64% over the next 20 years.

As a result, these Gulf economies and the region as a whole have found themselves particularly vulnerable to rapid global food price increases. The United Nations reported in September that its world food price index climbed 19% from last year.

The increases have translated into higher costs at grocery store across the region. In the UAE, a survey by Gulf research group YouGov Siraj of more than 1,500 residents found that over a quarter had been paying more for meat and fresh vegetables in the past six months. A summer survey by Middle East job site Bayt.com reported that after housing, 40% of respondents said their biggest monthly expense was grocery bills.

Even in Qatar, which the International Monetary Fund recently named the world’s richest country in terms of per capita wealth, there is local concern about the price of food going up — prompted partially by the Qatari government’s recent announcement that it would hike salaries for nationals working in the government sector by 60%.

The World Bank study notes that the Middle East and North Africa consume 30% of the world’s wheat. Any rise in the cost of bread, cereal and rice falls hardest on the largely South Asian expatriates in the region’s laborer class, where a worker’s monthly wages often do not exceed $200 a month.

In response, Gulf governments have taken two different actions. Some are applying economic controls, mandating grocery stores in their countries to freeze prices of certain foodstuffs. In the UAE, hundreds of goods are price fixed until the end of the year. A number of international food companies have questioned the measure, including Unilever and Kraft.

Additionally, some Gulf nations are buying foreign land for food production. The UAE, Saudi Arabia and Qatar have made investments or have purchased freehold farms across the world. According to a study by Washington, D.C.-based International Food Policy Research Institute, the UAE is behind only China and South Korea as one of the top purchasers of global farmland.

There is added incentive for Middle Eastern governments to ensure that food prices remain at a low cost. A number of academic reports suggest that rapid food price increases in the region had a role to play in the popular discontent that led to the Arab Spring — unrest that Gulf countries such as Saudi Arabia have allocated billions in social spending to prevent from happening within their own borders.

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

Featured Professors: Stuart Diamond

Posted in Knowledge@Wharton Today, Law and Public Policy | Also tagged Arab Spring, Bahrain, Diplomatic Relations, Egypt, Hosni Mubarak, Libya, Stuart Diamond, Syria, Tunisia, Yemen | 1 Comment

For Expatriates in the Gulf, Ignoring Ramadan Customs Could Spell Trouble

Posted on August 1, 2011

As Muslims around the world begin observing the month of Ramadan, non-Muslim visitors and expatriates in Gulf countries are being asked to take heed of Islamic customs to avoid problems with local authorities.

Although abstinence from food, drink, smoking and intimate relations during the day are required of observant Muslims during Ramadan, non-Muslims are also expected to follow the same rules while in public in Gulf countries.

In Dubai, the glitzy sheikhdom of the United Arab Emirates (UAE), one language school is offering a free “Ramadan etiquette” course to non-Muslim expatriates, while a number of local newspapers have published etiquette guides, and do’s and don’ts lists. Some Western embassies have also released advisories on proper public behavior.

Though offered in the vein of broadening cultural understanding, these advisories also serve as guidelines for self-preservation. Breaking these rules in some Muslim countries, notes an advisory on Ramadan from the British Foreign Office, could result in arrest. Just this past month, a British expatriate was fined $US800 by the Dubai Court of Misdemeanors for insulting Ramadan on her Facebook page.

Even Dubai, considered the most Westernized city in the Arab world, said it would police the behavior of non-Muslims living there. For a first infraction, an expatriate would receive a warning if caught by police. Subsequent infractions, according to Dubai police, could result in arrest and a fine of up to US$550.

Dubai’s chief of police, Lieutenant General Dahi Khalfan Tamim, told Arabian Business, “We train our officers how to deal with different nationalities and to respect non-Muslims who may inadvertently offend Muslims during Ramadan by eating, drinking or smoking in public places during the day…. They are to deal with it in a courteous way so that [non-Muslims] would refrain from doing it again.”

International companies have learned it is good business to adhere to Ramadan. A number of brands offer Islamic-themed advertisements and Ramadan messages to customers throughout the Gulf. In addition, it is now common practice for companies to hold corporate “iftaars” (the meal Muslims take at sunset to break their fasts) as a means of socializing and deal-making.

Doing business globally often requires companies to conform to different cultural and governmental systems, but many of those challenges are ultimately outweighed by the benefits of operating within those nations, Wharton management professor Michael Useem told Arabic Knowledge@Wharton for a 2010 story about clashes between BlackBerry maker Research in Motion and governments in the Middle East over demands to monitor the company’s e-mail service. “It’s a little bit like operating in cities like Bangalore, where the power goes [out] for three hours a day,” Useem noted. “It’s a royal pain in the backside, but you still create your operation there. It’s one more challenge there of doing business.”

For long-time expatriates in the Gulf, the strict rules related to Ramadan come as little surprise. Though the oil-rich Gulf countries, with the exception of Saudi Arabia, tend to be the most hospitable to Western expatriates in the region, there has been an increased demand in recent years from the native Arab populace to protect cultural norms.

Partly fueled by locals feeling inundated by expatriates — foreigners make up nearly 90% of Dubai’s population, for instance — there have been a number of recent cases where Western expatriates have run afoul of local customs and laws, and have been jailed and deported.

In 2008, two British expatriates became infamous for being caught having drunken sex on the beach in Dubai, and were jailed and deported. Another Briton was jailed in Dubai for two months last November, and then deported, for giving the finger to an airport worker. And in 2007, a famous British DJ was sentenced to four years in prison after he was found to have 2.16 grams of cannabis in his possession. Due to these and other high-profile cases, the British Embassy said in 2009 that Britons were more likely to be arrested in the UAE than anywhere else in the world.

Featured Professors: Michael Useem

Posted in Knowledge@Wharton Today, Law and Public Policy | Also tagged Dubai, etiquette, Ramadan, Saudi Arabia, UAE, United Arab Emirates | Leave a comment

Post-Arab Spring, Confidence in Middle East Business Climate Remains Steady

Posted on July 13, 2011

Despite the tumult witnessed across the Middle East and North Africa in the wake of the Arab Spring, senior executives in the Gulf’s leading economies remain confident in the region’s business climate, according to a new survey conducted by management consultants Oliver Wyman and polling firm Zogby International.

A survey of more than 160 senior executives in the United Arab Emirates (UAE), Saudi Arabia and Qatar found that opinions were mixed about the Arab Spring’s short-term and long-term impact on economic development. Just 35% of respondents took a negative view, and most were expatriate Arabs in the Gulf.

“People still are focused on macroeconomic shocks rather than regional issues,” says John Turner, who leads Oliver Wyman’s public sector consulting practice in the region. “The Gulf, particularly the UAE, was harshly impacted by the global financial crisis, and that is still lingering.”

But Turner notes the research reflects “a sizable increase,” in concerns about regional, ethnic and religious tensions. This is the fourth survey of regional executives conducted by the firms, and compared to the last poll in December, there was a 19% rise of tension concerns in Saudi Arabia, which has taken a leadership role to forcefully contain any unrest in the region, and a 7% increase in the UAE, despite the absence of social or economic disruption associated with the Arab Spring there.

Also, the widely mentioned contributing factors to the Arab Spring — the need for education and labor reform to address the region’s youth unemployment — were considered the biggest threats to the region’s long-term competitiveness, and deemed the highest priorities for quick action, according to the survey. “Human capital is at the top of the list for executives in the region,” Turner says.

He adds that the challenge of youth unemployment shifts by scale across the region — Egypt has a population of over 83 million, while the UAE has a population of only 5 million. But the traditional regional solution of providing government jobs to young Arabs has reached a limit, he says. Regional governments in recent weeks have taken more aggressive approaches to ensure spots for their nationals; in Abu Dhabi, several state-linked bodies have purged expatriates to make positions for Emiratis.

The solution lies with private industry, but that has been difficult to achieve, Turner notes. The survey highlights a key factor in this issue: expatriate executives in the Gulf prefer to hire other expatriates, rather than local Arab graduates. “They are more difficult to hire, and costly to train,” Turner says. “Also, most of these expatriate executives have a three- to five-year horizon. There is a mismatch of incentives.”

The survey also took note of the infrastructure spending spurred by the Arab Spring in oil-rich Gulf states — Saudi Arabia, for instance, announced US$130 billion of additional public spending in recent months.

“All those things, businesses like to see, so confidence rises,” Turner notes. But these measures largely aren’t geared to solving underlying issues, he adds. “In the short term, it boosts businesses and appeases discontent. But in the longer term, does it get rid of the fundamental problems, such as youth unemployment?”

Earlier:

Oliver Wyman CEO John Drzik: The Middle East Needs a Comprehensive Risk Management Strategy

Facebook’s Growth in the Arab World Is Surging with Demands for Political Change

Posted in Knowledge@Wharton Today | Also tagged Abu Dhabi, Arab Spring, business climate, Egypt, North Africa, Qatar, Saudi Arabia, United Arab Emirates | Leave a comment

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

Featured Professors: Stephen J. Kobrin

Posted in Knowledge@Wharton Today, Law and Public Policy | Also tagged Bahrain, Egypt, food, food costs, food price inflation, food reserves, Food security, food shortages, Libya, Saudi Arabia, Sudan, United Arab Emirates | Leave a comment

Tag: Middle East