Despite the general rapid growth of Islamic finance and its increasing penetration in the global market, in Lebanon, this growth is slower due to a number of factors raised by Lebanese Islamic banks.
On the 7th September 2017, Al Baraka Bank, one of the first and largest Islamic banks in Lebanon, issued a press release stating that the workflow of Islamic banks in Lebanon remains extremely slow as a result of two main reasons: the first being the law governing Islamic banks issued in 2004 with its implementation regulations issued by the Lebanese Central Bank (BDL) and, the second being the monopoly held by traditional banks over banking activity. This does not seem to have changed in the last three years but rather it seems that the situation of the Lebanese banking sector as a whole has been worsened by a series of compounding crises hitting Lebanon.
Review of 2020
The situation of Lebanese banks in 2020, including Islamic banks, is a direct result of the recent rapid decline of the Lebanese banking sector. In October 2019, the Lebanese economy took a huge dive with the onset of the economic and financial crisis which led to a progressive and major devaluation of the Lebanese currency in the market. The financial and economic crisis was further exacerbated by the political crisis marked by the uprisings of the 17th October 2019 and other exceptional circumstances disrupting Lebanese life and the economy, including most notably the COVID-19 pandemic and the Beirut port explosion of the 4th August 2020. As a result, banks in Lebanon have enforced a number of informal capital controls such as limitations on international money transfers and withdrawals of cash from foreign currency bank accounts. This exposed the failings of the Lebanese banking sector leading to the progressive loss of faith and trust of the public in Lebanese banks.
According to the IMF’s Working Paper on Islamic Finance, although there is no empirical evidence to this effect, Islamic banks appeared to demonstrate greater resilience to the recent [global] financial crisis compared with conventional banks given that, in theory, Islamic finance provides for an emphasis on risk-sharing, limits on excessive risk-taking and strong links to real activities. While generally Islamic banks may demonstrate more resilience than traditional banks, in Lebanon specifically, Islamic banks appear to be in the same situation as traditional banks and have imposed the same informal capital controls on their clients as the traditional banks have; these informal capital controls still apply to date.
Preview of 2021
As 2020 comes to an end, there are only four Islamic banks out of the 142 banks registered on the list of banks of the BDL in Lebanon, namely Al Baraka Bank, Arab Finance House, BLOM Development Bank and Lebanese Islamic Bank. According to the BDL, the number of Islamic banks in Lebanon dropped from five to four; effectively, this lowers an already meager presence in the Lebanese market in comparison with the large and overwhelmingly dominant number of “traditional” banks in Lebanon. One explanation is that Islamic banks in Lebanon seem to suffer from a lack of general awareness among the Lebanese and their operations tend to be relatively unknown to the public. Consequently, although Islamic banking and finance could offer advantages and alternatives to traditional banking and finance, the Lebanese public generally refers to traditional banks and financings to cater to their needs, further reinforcing the domination of traditional banks in the Lebanese market. We do not see this situation changing any time soon.
Looking ahead to 2021, the situation for Lebanese Islamic banks is aggravated by the economic and financial crisis that is still looming over the Lebanese market in late 2020, and it is likely to continue its effects well into 2021 if no drastic changes are made to the Lebanese economy and the country’s political situation. Currently, it seems unlikely that the Lebanese public would change its banking habits in 2021 without a strong push by Islamic banks to put upfront their services as an alternative to traditional banks during this crisis. This would be no easy feat knowing that Islamic banks have been affected by the economic and financial crisis in Lebanon and they are likely to consider measures to sustain their economic situation such as acquisitions, consolidations, recapitalizations or other measures.
The development of the Islamic banking and finance sector in Lebanon has been incredibly slow with this sector being dominated by traditional banks and also due to the situation of the Lebanese banking sector in general. The future of Islamic banks will likely be dependent on the future of the Lebanese banking sector as a whole, on the policy around capital controls to be adopted in the coming years and on whether the recent loss in the credibility of the banking sector as a whole can be regained from the local, regional and international communities.
It remains interesting to see in 2021 how the Lebanese Islamic banks will manage to navigate through the financial crisis in Lebanon in comparison with their traditional counterparts and whether they would be able to put upfront their services and relatively better resilience as a more attractive alternative for the Lebanese public.
Chadia El Meouchi is the managing partner at Badri and Salim El Meouchi Law Firm. She can be contacted at [email protected] Zouheir El Baba is an associate at Badri and Salim El Meouchi Law Firm. He can be contacted at [email protected]