Updates on Lebanon’s banking sector

Twenty-two minutes with central bank Governor Riad Salameh

Central bank Governor Riad Salameh (Photo credit: Greg Demarque | Executive)

Executive sat with the governor of Banque du Liban (BDL), Lebanon’s central bank, Riad Salameh, for updates on the banking sector, the results of the central bank’s monetary policy, the stimulus of the knowledge economy – known as Circular 331 – and the response to latest foreign initiatives, namely compliance with the United States’ Hezbollah International Financing Prevention Act.

All indicators, Salameh says, point to a continuation of slow economic growth in the country. One challenge to the economy is the low demand of consumption and credit, weakness offset by the central bank’s stimulus plans and incentives that directly contributed to growth rates in the targeted sectors. He tells Executive that the central bank will issue two new circulars to complement its May 2016 decision compelling local banks to comply with a US law meant to isolate Hezbollah from the global financial system. The Special Investigations Commission (SIC) will issue a circular requiring banks to detail justifications for the closure of any account. The Banking Control Commission (BCC), meanwhile, will also issue a circular concerning debtor’s accounts [i.e. those with a negative balance]. The balance of any forcibly closed account – whether positive or negative – must be addressed.

E   In all your statements you point out that Lebanon’s banking industry is still very healthy. What are the major developments, if there are any, relating to the growth of the sector and what would be the policies in order to amend or improve these ratios?

The growth of deposits is an important indicator as the Lebanese economy relies on remittances to fund the private and public sector. The central bank monitors closely this development and we can, in our assessment, look at the underlying base. That underlying base has been constantly increasing and therefore the percentage of increase is not really meaningful, it’s the amount that is being added to the liquidity of the country that is more important. Obviously, the remittances were affected by the low oil prices in 2015, and by the decline in commodities in general, as most of the remittances come from either the oil producing countries or from Africa. The increases last year were around $8 billion, which is lower than the previous year but enough to fund the public and private sector, especially since we saw a decline in the demand for credit from the private sector. For 2016 we expect the same amount and so far it is progressing in that sense. The country is liquid and today banks have excess liquidity. The issue is that we don’t have demand on credit, meaning enough to offset this liquidity.

E   But commercial banks’ lending opportunities to the private sector seem subdued. Why is that in your opinion?

The credit policies of the banks, and you see it from advertising, is still in force with the same energy. But today you have to recognize there is less demand for consumption and for investment.

E   Several circulars have been particularly impactful to the economy: the limit on borrowing by necessitating consumers to downpay 25 percent (from 2015), and those circulars seeking to inspire economic growth in areas ranging from renewable energies to creative industries and the arts, not to mention the stimulus package. How are these developing in 2016?

The general guideline and the target of the central bank is to increase local demand. We are in an environment where there is a slowdown in all the countries around us, and the reliance on external input to the economy has decreased. This is due to the political and security conditions in the area but also, again, due to lower liquidity because of lower oil prices. The incentives we are putting in place, we believe, are yielding results because today 67 percent of the growth rates of the country are directly linked to these incentives. Therefore, as long as we can increase the local demand without creating inflation or threatening the stability of the currency, the central bank will pursue these policies.

We have shown that the monetary initiatives, although non-conventional, have had results.

On consumer debt, preemptively, we wanted to have more equity involved when there is a consumer debt and that is to protect from excesses or bubbles. Today, [households are] dedicating almost 44 percent of income to servicing their debt and we believe that we are close to a ceiling after which there will be social problems in that debt. The consumer debt in general represents 20 percent of the total portfolio of credit in the banks, and it is important to also be prudent so that we don’t have, in the future, failures in that sector that could affect the sustainability of our banking sector.

E   In the absence of fiscal policy in Lebanon and knowing that medium to long term monetary policy takes time to have effect, to what extent does the central bank have a margin of maneuvering in impacting the Lebanese economy with its monetary policy?

We have shown that the monetary initiatives, although non-conventional, have had results. Financial inclusion has developed and also the number of accounts dealing with banks exceeds today [one million accounts]. Credit has been spread to the community and you have today whole sectors relying on these credits that we initiated. Since 2008 most of the world’s central banks have been trying to stimulate their economies through monetary policy and they undertook non-conventional initiatives. The [European Central Bank] is buying all types of papers just to inject liquidity, even corporate papers. The [United States’ Federal Reserve Bank] has done it before, and they even bought companies. The Bank of Japan is buying shares. Of course adequate fiscal policy is helpful for the economy but the role of the central bank as of today is to try to avoid collapsing into a crisis.

E   Is it correct that the transformation of the Beirut Stock Exchange into a joint stock company is imminent, and does the central bank have a specific view of measures that are in support of developing capital markets in Lebanon, such as the drafting of a Private Equity Funds law?

The government under the recommendation of the minister of finance has asked the [Capital Markets Authority (CMA)] to prepare the first step changing it into a joint stock operation, which we are in the process of finalizing and then it will be up to the government to see how they’re going to do that privatization.

The CMA, on another course, had prepared an electronic platform for trading and it is intended that that platform be operated by the private sector. The advantage is that this platform will be accessible worldwide [so that] all the Lebanese diaspora can invest in the Lebanese markets. Both markets, the stock exchange and the electronic platform, will be monitored as per the law by the CMA which will guarantee transparency and good governance. The final package is not yet clear but ideally what we will try to do is a joint privatization for both entities in a way that the stock exchange in Lebanon will be under one umbrella and not have two exchanges competing.

The central bank by law does not interfere in business decisions or business activities. We provided an engineering approach that is a legal one to create funding for this sector

E   Critics of circular 331 say that the equity guarantee initiative should only be used for investments in very high-risk seed investing into idea-stage startups. Some say fund managers cannot identify promising entrepreneurs in this category and are therefore not using the guarantee as intended. Also, some argue too much 331 money is being spent in London, here specifically talking about the UK Lebanon Tech Hub. What is your response to criticism directed at 331?

The central bank by law does not interfere in business decisions or business activities. We provided an engineering approach that is a legal one to create funding for this sector. The markets will decide how they invest. But what we have seen so far is that the banks have already committed and invested around $300 million in various funds and companies. The accelerators are needed in order to make this a success and that’s why we give a guarantee. Whether the companies will sell into London or the US is not an issue for us as long as the company that is profiting from the funding engineered by [the central bank] is a Lebanese company. If they are not taking funds from 331, we cannot oblige people to be in any place. We’re trying to create jobs, this is the only aim we have, by creating a new sector that would enrich all Lebanon, so one should not ask the central bank to go and organize that sector – it’s not our role.

E   Stepping back to the beginning of May just after circular 137 was published, there were reports in the media that some banks had closed the accounts of several Hezbollah MPs as well as affiliated organizations. Your mid-May statement clarified that banks will need to justify why an account was closed. Are reports accurate then that a new circular will complement 137, and, if so, what will the clarifications be?

The central board [of the central bank] dictates the policies that the banks have to follow based on [its] prerogative as determined by law. The board cannot ask to look at names because of the bank secrecy law, so the SIC will complement that circular by asking the banks prior to closing accounts to submit a file to the SIC – which has the right to look at names and cannot be opposed by banking secrecy. That file has to be documented by the activity in the account and the [know your client (KYC), due diligence] of the account. The SIC will look into that matter – there is a timespan of 30 days. If there is no answer [from the SIC], the bank will act on its own responsibility.

The BCC will also issue a circular on how to treat the debtor’s account that could be closed. If there is a dispute, the higher banking court will take the final decision – its decisions cannot be challenged. The aim is first, as we stated, to implement [the US] law locally. Two, is to be fair and don’t commit, without study and justification, financial exclusions.

Of course there are protests about [complying with the US law], but our concern is to protect the interests of Lebanon and to keep the integrity of our dealings with external banks.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

Jeremy Arbid

Jeremy is Executive's in house energy and public policy analyst.