Middle East: Banking in an age of conflict

Amine Awad, a veteran of Lebanese banking, has been a mainstay at Blom Bank for many years. But his career at Lebanon’s most prominent financial institution got off to a grim start.

Hired in 1986 to lead the bank’s reorganization, Awad only stayed for two years. Why so brief?

“Because of security reasons,” he tells Euromoney. “I decided to resign from the bank and go to another bank, which was close to my house.”

Civil war was then raging in Lebanon, and Beirut was split between warring factions.

Awad, now a general manager at Blom, explains: “At that time, there were the Palestine Liberation Organization checkpoints, it was not easy.”

He put his safety first and quit Blom for Saradar Bank, whose offices happened to be nearer to his home. Only after the war had ended in 1992 did he return to Blom, where he has enjoyed a fruitful career since.

Michel Accad, also a Lebanese national and now chief executive of Kuwait’s Al Ahli Bank, has a similar recollection. Except that he chose to brave the checkpoints at grave personal risk.

“Beirut was divided, and I had to cross between the western area, where I lived, to the eastern area, where the head offices of Citi for Lebanon were. It was quite an adventure,” recalls Accad, who was then Citibank’s head of corporate banking for Lebanon.

Did he make the perilous journey every day?

“On most days,” he replies. “But on certain days the fighting was too bad and you couldn’t cross from one district to another.”

In retrospect, he calls himself “careless” for facing such dangers at the very start of his career, from 1978 to 1984, at which point he left Beirut to work for Citibank in Senegal.

Asked if banking ground to a halt during Lebanon’s 15-year civil war, Accad says that it only did briefly, as was the case in another uprising he witnessed as a banker.

“I was in Zaire-Congo during the overthrow of Mobutu [in 1997], and we had a couple – more than a couple – of strange months when nothing was happening.”

In both cases, he says, business eventually proved resilient.

“Work continues,” he says. “Work continues all the time.”

More recently, Egypt’s bankers were confronted with another moment of upheaval, when the country’s revolutionaries ousted long-standing president Hosni Mubarak in 2011, sparking years of intermittent unrest since then.

Hisham El-Khazindar, the co-founder and managing director of Qalaa Holdings, an Africa and Middle East-focussed investment firm headquartered in Cairo, has vivid recollections of that unrest.

Qalaa’s offices, in a hotel in Cairo’s affluent Garden City district, are only a 10-minute walk from Tahrir Square, the focal point of the revolution and the ensuing protests.

“We lived it up close and personal,” El-Khazindar tells Euromoney. “In 2012, we had an armed mob outside our offices at the Four Seasons trying to get into our building.”

The crowd’s target was not Qalaa in particular, just the luxurious premises, but Qalaa staff were shaken by the event.

“It was unsettling,” El-Khazindar recalls of that moment, which, as far as the firm was concerned, represented the height of danger.

Yet, Qalaa was still able to keep working through this period. Against the odds, the firm was able to close a $4.3 billion debt and equity transaction for a large Egyptian refinery in June 2012 – just before the tense presidential election that saw the Muslim Brotherhood’s Mohamed Morsi rise to power. That was no easy task.

“There was a lot of vigorous debate,” El-Khazindar says of negotiations with international banks regarding this deal. “But we got it done.

“It’s all about making sure what happens around you doesn’t distract you from your fundamentals and what needs to get done.”

Bankers across the region echo that sentiment in conversations with Euromoney.

Hisham Ezz Al-Arab, the long-standing chief executive of Egypt’s Commercial International Bank, says that he also managed to steer the bank through the most troubled period by keeping a cool head. Just like El-Khazindar, he also lived the revolution up close. So close, in fact, that he even took up arms to secure his neighbourhood, he says.

He tells Euromoney that he spent night shifts on the streets of Cairo with his two sons, both in their 20s at the time, equipped with recreational rifles. He says that they faced a “very high risk” in doing this, but adds, somewhat surprisingly: “This was fun.”

Asked if there was any trouble on the streets where he stood guard, he says: “There was.” But he declines to say whether he fired his gun, saying only: “We dealt with it the right way.”

Al-Arab was not alone in taking matters into his own hands and he is grateful to bank staff who adopted a similar attitude during the revolution.

“Many of the bank staff were guarding the branches where they lived,” he says. “They were guarding their houses and their branches. A very good spirit.”

He says that these events represented such a valuable learning experience that he would happily relive them if history were to repeat itself. It taught CIB the true meaning of contingency planning and crisis management, he argues.

These accounts, by some of the region’s most senior bankers, paint a picture of the realities of work and daily life during the tragedy of war.

Those interviewed for this story stress that war is not constantly on their minds. They say that finance as practised in the region is virtually indistinguishable from finance in the west. But most also say that they have had either direct or indirect experience of banking through war – something most western bankers cannot relate to – and that these crises have had an enduring impact on the way they approach risk.

They say that their knowledge of conflict, revolution and geopolitical tension in the Middle East has hardened them to issues beyond their control. Readiness and resilience are the key skills they say they have learned while dealing with tense and dangerous situations.

Euromoney has covered every big crisis in the region over the past 50 years, from Lebanon’s civil war in the 1970s and 1980s, the Iranian Revolution of 1979, the First Gulf War of 1990, the Iraq War of 2003, the Arab Spring of 2011, to today’s conflicts in Syria and Yemen.

Such crises have shaped the region’s banking sector. They have contributed to the fortunes and failures of financial centres and institutions. They have also plagued the region’s banking relationships with the outside world, by making foreign banks wary of working there. Our earliest in-depth article on the effects of war on Middle Eastern banking came in November 1976, a year and a half into Lebanon’s civil war. That piece described how, in the minds of foreign bankers, Beirut had suddenly gone from haven to hell.

Large numbers of expatriate financiers left the city, once the region’s main banking hub, leaving Lebanon and the broader region depleted of top international institutions. Many banks simply moved their regional businesses back to their home bases in Europe. Such was the case for the three biggest Swiss and the four biggest German banks.

However, some did stay in the region, moving their offices to Cairo or, in the case of BNP and Lloyds, Bahrain. As the Lebanese crisis dragged on, foreign banks eventually realized that they would not be returning to Beirut soon. Partly as a result of that realization, over time Bahrain claimed the business Beirut had lost.

But while Lebanon’s civil war sparked a mass exodus of expatriate bankers, the local institutions stood their ground. In 1983 Euromoney reported on the extreme resilience of Lebanese financiers, describing the daily routine of Banque Libano-Francaise staff, who each morning arrived early to replace the destroyed sandbags protecting their office building. Staff absenteeism was remarkably low in those days; Accad was not the only banker who faced the daily danger of crossing the demarcation line between East and West Beirut.

As some argued at the time, this behaviour was about more than professional diligence, however. Michael Penniman, deputy manager at Bank Almashrek, was quoted as saying: “With all of the havoc in the streets, people needed to have a sense of order in their lives. So they came to the office.”

Henri Tiyan, another senior banker in Beirut, agreed.

“If you didn’t work, you went crazy,” he said.

Even on days when shelling lasted 17 hours, Almashrek consistently opened its doors at seven in the morning. The vast majority of Lebanon’s 91 banks remained open through the war.

That conflict proved a case study of how finance reacted to virtually every conflict in the Middle East over the last half century. International bankers by and large moved out at the first signs of trouble, while local staff saw the crisis through, doing everything in their power to maintain at least basic services.

To this day, Lebanese financiers are known across the region for their ability to work in the harshest of conditions – an ability which partly explains the presence of the country’s banks in some of the world’s most dangerous places today, from Syria and Iraq to Libya and South Sudan.

Those bankers who had hoped Lebanon’s hard-earned peace would bring about a return to stability in the region were soon disappointed. Just as the Lebanese civil war was ending, conflict erupted in another banking hub, Kuwait. In August 1990, Iraq’s armed forces under Saddam Hussein invaded the small Gulf state – an act of aggression that soon led to military intervention by the US and its allies.

Euromoney’s September 1990 cover story, ‘Under the gun’, recounted the banking damage that resulted as financial firms in Kuwait and in neighbouring Saudi Arabia, Bahrain and the United Arab Emirates struggled to overcome the pressures of war.

Runs on Gulf banks led to $15 billion of withdrawals in the first two weeks of the conflict alone.

The region’s banks were further affected by a sudden drop in international confidence in them. As one Arab banker told Euromoney, western banks cut most ties to financial institutions in the region after Iraq’s invasion, including banks based in countries not directly affected by the conflict.

“The damage wasn’t limited to any one country,” the source said. “It was a blind panic, regardless of nationality. We saw Egyptian banks being cut, Swiss Arab banks, everyone.”

Japanese banks were the first to cut their lines.

“The Japanese have shown themselves to be fair-weather friends,” one Bahraini banker said sourly. A Saudi banker agreed: “It was amazing. They just packed up one morning and left. There is not one Japanese left in the entire Middle East.”

Japanese banks have since returned, and now play an important role in the region.

Most domestic institutions pulled through, however, thanks to heavy central bank support and the war’s short duration. But the events demonstrated once again how much at risk the region’s banking sector was to unexpected events and how little it could rely on foreign banks in times of strife.

The situation is still the same today. Recent testimonies of bankers in Syria and Yemen, where civil wars have been raging since 2011 and 2015, respectively, hardly differ from those of the Lebanese and Kuwaiti bankers of previous years. One recalls how he witnessed fighting outside the bank branch in which he was working; another describes certain branches staying open through months of war, until bombs finally destroyed the premises.

Syria’s bankers explain that the country’s financial sector has remained as healthy as it could in the circumstances but that banking activity is dormant, with virtually no loans extended since the start of the conflict.

Lebanese banks present in Syria before the war have since deconsolidated and written off their investments in the country. They have maintained their presence on the ground, however, as they hope to lead the financing of the country’s reconstruction once the war ends.

Banking through war is as much about planning the peacetime opportunities that will follow its conclusion, as it is handling the challenges of the actual conflict.

In Yemen, the conflict has embroiled not only private banks but also the central bank. As in Libya, where two warring sides split the central bank in the aftermath of the war that toppled Muammar Gaddafi, the Yemeni central bank has becoming a key contested institution in the conflict.

Since 2016, two central banks have operated in parallel, one in Sana’a, the country’s capital, and the other in the port city of Aden, as politicians have sought to use the institution to further their own interests in the war. Trapped between those two sides are the Yemeni population; the country’s banks are largely unable to service its most basic needs.

Besides the current conflicts, there are also past crises that continue to exert a damaging influence to this day. Among these is the Iran hostage crisis of 1979 to 1981, which led the administration of then president Jimmy Carter to impose economic sanctions against Iran. They have remained in place ever since, meaning Iran’s financial sector has been limited in its contacts with the outside world and has had to operate on outdated infrastructure and with low levels of trust from western institutions.

Similarly, the Iraq war of 2003 has had an enduring effect on that country’s banking sector. That conflict destabilized the country and paved the way for the rise of Islamic State. The organization’s conquest of vast swathes of Iraq and Syria, beyond its human toll, also led to the closure of numerous bank branches, preventing access to basic banking services for the local population.

In early 2017, when Islamic State was a far stronger force in the region than it is today, an official at the US State Department, speaking off the record, told Euromoney that every effort was being made to constrict finance in the areas controlled by the organization, including using the US’s close partnership with the Iraqi government.

“In Iraq we have a very willing, very enthusiastic partner, very focused on going after ISIL’s finances, taking steps to cut off banks from the financial system, really focused on determining whether there are money exchanges or other institutions that may have been processing transactions for ISIL and cutting them off,” the source said.

Because of this regulatory pressure and the sheer danger on the ground, even bankers used to working in war zones shunned Islamic State territory, meaning that the financial system in those areas was reduced to the organization’s cash vaults – targeted by US bombing raids – and to small money transfer shops.

It would be wrong to suggest that war is a constant challenge for bankers across the Middle East. But it would also be wrong to claim it has had no effect on the way the region’s financial sector developed.

Shayne Nelson, chief executive of Emirates NBD, tells Euromoney that Dubai owes its status as the region’s preeminent financial centre in part to its stability. Those that had once been as dominant as Dubai is today lost their advantage after going through phases of unrest: Beirut after Lebanon’s civil war and Bahrain after the popular uprisings it experienced in the 1990s and during the Arab Spring.

Stable peace is a rare commodity in the Middle East and one that has proven a draw for countless expatriate bankers to Dubai.

Qalaa’s El-Khazindar agrees that capital tends to migrate in line with perceptions of risk.

“It’s important to know that, until now, you had those crises specifically in certain countries at certain times,” he says. “You never had a period where it was difficult in the whole region. You always had turmoil in one place benefiting another place.”

As an example, he cites the 2011 events in Egypt, which he says benefited Dubai, as Egyptian businesses relocated there. By the same token, he adds, Kuwait suffered in the First Gulf War, but the Iraq war, from 2003, benefited Kuwait and the other Gulf countries, except Iraq.

El-Khazindar concludes with an Arabic saying, which he translates as: “The problems that befall some are a blessing to others.”

The Middle East’s homegrown banks have remained committed to servicing their customer bases – even when it means working in a war zone.

“We are present everywhere. There are only two countries where we are not: Kuwait and Iraq,” says Nemeh Sabbagh, chief executive of Arab Bank, an institution still active in Syria.

Arab Bank does not plan to set up shop in Kuwait, which is too competitive, but does intend to enter Iraq, Sabbagh says.

“During the Arab Spring years and also historically, the bank has seen the ups and downs of these countries and the challenges – political, social, economic – but we manage to run our business quite well despite,” he says. “Some countries contract, some countries do better, but we have a portfolio of countries.”

Sabbagh declines to comment on the specifics of his bank’s activities in times of war, calling the subject sensitive. Bankers in the Middle East have learned to work in the toughest of environments, but they have also learned to stay quiet about it.

For Accad, it is important for banks in the region to remain aware of the threat of conflict.

“In certain countries, you’ve got almost constant upheaval,” he says. “Yemen and Libya have been going through extremely tough times, Iraq for a long time now, Syria for 10 years. The hot spots change, but the challenges always remain. Banking is just a small part: anybody who’s got a business of any sort in any one of those countries going through upheaval faces immense suffering.”

He says that it is very hard to imagine the whole region being peaceful for a long period of time. “It affects your view of risk.”

Asked if the threat of unexpected crises affects his thinking on the internationalization of his bank, he says: “Absolutely right.”

Echoing Sabbagh’s point, Accad says diversification of risk is key.

Qatar’s blockade by several of its neighbours further confirms the unpredictability of regional geopolitics and the need to count on more than one jurisdiction to ensure resilience in the face of crises.

War may not be bankers’ preoccupation in the Middle East at all times, but it certainly holds a special place in the regional perceptions of risk and reward.