Development of the Beirut Stock Exchange

Once the financial center of the Middle East, Lebanon's economic and physical infrastructure have been severely damaged by years of conflict and civil war. The country began its recovery when the war officially ended in 1991. The path to reconstruction is made less difficult by Lebanon's historical status as a cultural and economic power in the region. Many of the financial institutions that were closed down at the onset of the war, including the Beirut Stock Exchange (BSE), are being opened once again.

Broad-based economic growth is strongly linked to a positive rate of investment. An improved capital market and regulatory environment in Lebanon will, therefore, strongly stimulate economic recovery and expansion. The Beirut Stock Exchange is one of Lebanon's most important tools in this process. It will be a principal means for attracting foreign investment to the country, which, according to U.N. estimates, will need up to $25 billion during the next ten years for reconstruction and capital development.

In support of the economic redevelopment of Lebanon, MetaMetrics is providing technical assistance under a subcontract to Coopers & Lybrand, through the Private Enterprise Development Support Project funded by the U.S. Agency for International Development. In 1996, MetaMetrics conducted an assessment of the Beirut Stock Exchange and the related capital market and regulatory environment. The purpose was to identify the functions most in need of being strengthened and restructured. As a follow-on activity, in early 1997 a MetaMetrics team assisted the Lebanese Central Bank and the Ministry of Finance in the drafting of a revised securities law, and assisted the Lebanese in defining an appropriate regulatory structure to attract additional capital, expand the kind and number of financial instruments traded, and increase involvement of brokers and investors, both domestic and international. In the current 14-month effort, a Resident Advisor and team of Securities Specialists are assisting the Government of Lebanon to develop securities and investement fund regulations and establish the National Council for the Securities Market.

BACKGROUND

Lebanon's economy has become more favorable since the end of the civil war, and while still vulnerable, its prospects for sustained recovery and continued growth are good. The country now enjoys currency stability, contained inflation, and balance of payments surpluses. The country maintains a financially sound banking system and a private sector with strong resources. Industrial production, agricultural output, and exports have showed substantial gains.

The government of Lebanon is fostering this positive environment by encouraging private sector and foreign investment in Lebanon's reconstruction and economy, and taking actions to reestablish Beirut as the regional financial center. Steps have included the creation of the Investment Development Authority of Lebanon in 1994 to support foreign investors; the establishment of Midclear in 1994 to facilitate domestic and regional equity transactions; and the reopening of the Beirut Stock Market in 1996.

The Beirut Stock Exchange was originally established just after World War I, with the start of the French mandate in 1920. In its early years, operations were restricted to gold and currency transactions. This market, the first in the Middle East, attracted investments from France and Syria as well as from within Lebanon, and flourished with the establishment of mixed Lebanese-French joint stock companies in the 1930s, which were quoted simultaneously on the Paris and Beirut Stock Exchanges.

Trading on the Beirut Stock Exchange continued to prosper into the 1950s and 1960s. However, trading slowed down with the beginning of the war in 1975. In 1983 the Stock Exchange Commission suspended activities, as economic activity was seriously disrupted. This suspension lasted 12 years. In September 1995, the Beirut Stock Exchange was officially reopened, and trading began in January 1996.

ASSESSMENT OF THE BEIRUT STOCK EXCHANGE

The assessment of the Beirut Stock Exchange and related capital market and regulatory environment was completed in September 1996 by Anderson Wilson, Managing Director of the International Securities Consultancy in London and Capital Markets Specialist for MetaMetrics Inc. This work was performed under a subcontract to Coopers & Lybrand, through the Private Enterprise Development Support Project funded by the U.S. Agency for International Development. The assessment was conducted to identify functions most in need of being strengthened and restructured. A prioritized set of recommended technical activities to strengthen the BSE and its regulatory environment were defined.

The final report (Assessment of the Beirut Stock Exchange and Related Environment, Anderson Wilson, MetaMetrics Inc./Coopers & Lybrand, for the U.S. Agency for International Development, Washington, D.C., October 8, 1996) was received in both Washington and Beirut and formed the basis for further technical assistance on the high priority issue of the development of a Securities Law that meets international standards. The report includes a discussion of the legal structure of the BSE; recommendations regarding risk management and physical security; constraints to the expansion of the stock and bond markets on the BSE; a discussion of the investment climate; and a description of the central depository and the Beirut Secondary Market. The assessment also contains a report on property rights, legal recourse for investors, securities law, and other capital market legal provisions; a discussion of foreign investors' status, tax treatment, and access to markets; recommendations on appropriate balance between regulation and market development; and a discussion of other key factors likely to affect the development of the market, with recommendations regarding appropriate regulations to encourage and safeguard investors.

Selected findings from the assessment are presented in the Summary of the Assessment of the Beirut Stock Exchange. References to information extracted from this on-line summary or from the original report must be properly cited. Full copies of the report can be obtained through the Center for Development Information and Evaluation at the U.S. Agency for International Development.

REVIEW OF THE LEBANESE SECURITIES LAW

A MetaMetrics team, comprised of Securities Markets Specialist Anderson Wilson of International Securities Consultancy, London and Harry Malcolmson, Securities Lawyer, provided technical assistance in 1997 to the Lebanese Central Bank and the Ministry of Finance in connection with the drafting of a Revised Securities Law. The team also assisted the Lebanese in defining an appropriate regulatory structure to attract additional capital, expand the kind and number of financial instruments traded, and increase involvement of brokers and investors, both domestic and international. This work was performed under a subcontract to Coopers & Lybrand, through the Private Enterprise Development Support Project funded by the U.S. Agency for International Development.

The purpose of this technical assistance was to:

• Address potential issues in the initial draft of the Securities Law;
• Provide Lebanon with the technical basis for a modern Securities Law to international standards;
• Analyze and describe a regulatory structure appropriate for Lebanon's financial markets;
• Define any difficulties in the legal and regulatory framework prior to undertaking any major steps to establish and develop a securities regulatory organization (self regulation activities and a Securities Exchange Commission).

The Review of the Draft Securities Law resulted in intensive discussions and actions taken. The project team analyzed related financial markets legislation and the proposed regulatory structure with respect to the objectives of ensuring compliance with international standards, providing investor protection, and attracting international investment. Following this review, Banque du Liban (Lebanon Central Bank) personnel revised the draft law to make it more consistent with international standards for securities legislation.

DEVELOP REGULATIONS AND ESTABLISH THE NATIONAL COUNCIL

The purpose of this project is to establish the National Council for the Securities Markets (National Council) and strengthen the legal and policy framework for Lebanese financial markets. To this end, MetaMetrics is providing technical support to develop regulations under the new Securities Law that will meet international standards for securities regulation and support the objectives of the Government of Lebanon for international financial markets. The project will also recommend the organizational and functional structure and development of the National Council, consistent with the provisions of the new Securities Law, and provide technical support, as necessary and requested by the Government of Lebanon, for the review and development of appropriate ancillary legislation and regulations. Refinements on the basic legislation will be accomplished through the development of detailed regulations. Specific issues include licensing of brokers, underwriters, and advisors; timely disclosure; takeover bids; prohibition of insider trading and other abusive investment conduct; regulation of stock exchanges; and government powers of investigation.

The project team includes three key specialists: the Senior Securities Advisor, the Resident Advisor, and the Securities Legal Specialist, plus selected securities market specialists. The team is working with counterparts in the Central Bank and other Government of Lebanon agencies and committees to accomplish project objectives. At the end of a fourteen month period, drafting of core regulations to support the Securities Law will have been undertaken and the National Council is expected to be fully operational, with executives and staff able to implement regulatory activities and work with the financial community.

In the conduct of the Assessment of the Beirut Stock Exchange and Review of the Draft Securities Law, the consultants established excellent working relations with financial markets personnel in the public and private sectors and with the two senior officials of the Banque du Liban who are responsible for guiding the development of financial markets in Lebanon and the drafting and passage of securities law and related legislation. Consultant recommendations were incorporated by the Banque du Liban counterparts into the securities legislation approach, and a foundation was established for conducting tasks to support continuing capital markets development in Lebanon. The activities in the current Task Order are derived from the reports generated under the previous Task Orders and follow the major findings and recommendations of those efforts.

RELATED WEB SITES

Banque du Liban - Financial Markets
This is the official Central Bank of Lebanon website. It contains information on the Beirut Stock Exchange and the Beirut Secondary Market. Other related financial data and information can also be found here.

Financial@Lebanon.com
This page provides links to information on the Beirut Stock Exchange, the Central Bank of Lebanon, and to the offical websites of other stock exchanges around the world.

Lebanonlaw
This website, produced by Nasser & Nasser & Associates, provides information on many aspects of law and finance in Lebanon.

Lebanon Country Commercial Guide
The U.S. Department of State publishes the Lebanon Country Commercial Guide, which is available through this page. The guide presents a comprehensive look at Lebanon's commercial environment through economic, political and market analyses.