Lebanon, a country with a modest area of 10,452 square kilometers, had the most prestigious conventional banking services and innovative products for many decades and a very promising Islamic banking sector since 1996. Lebanese banks were acting as the Middle East’s banking center with high liquidity and reputed security. During this golden period, Lebanon was among only seven countries in the world where the value of the stock markets increased in 2008 (‘Lebanon ‘immune’ to financial crisis’. BBC News. 5th December 2008 (Archived from the original on the 30th September 2009. Retrieved on the 28th January 2010)).
However, in the third quarter of 2019, and as a result of the Lebanese liquidity crisis, due mainly to corruption of the political class, as well as recent events, the banks operating in Lebanon, whether conventional or Islamic, have been fundamentally and materially destabilized. The liquidity crisis that banks have had to face is mainly due to the Lebanese government’s inability to repay its debts, most of which are debts to Lebanese banks.
It is pertinent to note that conventional banks lent the Lebanese government through treasury bills and eurobonds, while Islamic banks, which recently joined conventional banks, concluded commodity Murabahah arrangements with the central bank to avoid Riba (interest).
Review of 2022
During 2021–22, and due to the liquidity crisis, the banks literally stopped all banking services and only focused on the process of reimbursing clients’ deposits. At present, Lebanon is a cash-based economy with self-financing as banks no longer grant loans (retail or corporate), checks are not accepted for deposit and all letters of credit/letters of guarantee/banker cheques, prior to issuance, must be fully covered by cash collateral.
It goes without saying that the process of reimbursing clients’ deposits was and continues to be anarchic and illegal. The Lebanese economy is dollarized and most of the Lebanese have accounts in US dollars. After the crisis, there were three exchange rates for the US dollar; an official rate approved by the central bank, a rate for banks and a black market rate, which is the rate adopted in business.
The banks have run out of dollar banknotes and are refunding their clients in Lebanese pounds, although the deposits are in US dollars, at the rate of LBP8,000 for each US dollar, while the black market rate is five times higher. In such an event, the banks have adopted a haircut without any legal frame.
Further, banks have limited the withdrawal of funds from accounts, whether in Lebanese pounds or rarely in US dollars, which has also aggravated the situation and resulted in a complete loss of trust in Lebanese banks. The World Bank defined the economic crisis in Lebanon as one of the worst in the world since the 19th century (Lebanon – World Bank).
Preview of 2023
We believe that this strategy, which in appearance gives the impression of a total collapse of the banking sector in Lebanon, is in a way a cleanup of the banks’ balance sheets in anticipation of any possible restructuring.
In the absence of a legal framework to establish any capital control and/or haircut, as well as in the absence of any national economic and political strategy to restore the Lebanese economy and recover the confidence in the banking sector, we believe that during 2023 the banks will maintain their strategy in order to reduce their liabilities and have a positive balance sheet for any possible restructuring of the banking sector.
We believe further that the restructuring of the banking sector will be based on mergers between banks or the acquisition of several small and medium-sized banks by larger banks. However, merger and/or acquisition transactions under current laws are not feasible for many reasons, including financial and tax reasons.
If we take for example the transfer of the real estate portfolio from one bank to another bank, in the context of a merger transaction, the acquirer would have to pay taxes based on the real value of this portfolio, which represents a considerable amount.
Thus, a special law should be enacted to deal with all fiscal and financial problems and make possible and inexpensive any merger between banks and to encourage investors to participate in the restructuring process and inject fresh funds.
That said, the promulgation of a special law for the restructuring of the banking sector as well as laws and regulations to revive the economy in Lebanon need political stability, which unfortunately is not currently available. The Lebanese cabinet resigned following the legislative elections of May 2022, and a new cabinet has not yet been formed, the mandate of the president of the Republic ended on the 31st October 2022 and the parliament does not seem able to elect a new president.
Consequently, the crisis will continue to develop and the banks will continue with their strategy for the upcoming period outside of any legal framework where in the end, depositors will be the only victims of political corruption and discords.
Conclusion
This uncertainty about the future of banks in Lebanon is faced by a strong desire of the private sector to move forward and not fall under the pressure of the crisis and the corruption of the political class, and the hope is very high in this regard given the experienced human resources available in the market, the willingness of investors to inject new funds and the determination of the Lebanese people to meet the challenges.
Emile Khoury-Hélou is the senior associate at ASAR Al Ruwayeh and Partners – Kuwait. He can be contacted at [email protected].