With Lebanon’s bank deposits representing four times the country’s gross domestic product, Executive sat down with Riad Salameh, the governor of Banque du Liban, Lebanon’s central bank, to find out which way Lebanon’s backbone will be leaning next.
- Lending to the real estate sector is expanding. Is this trend threatening to create a bubble?
We constantly run surveys on the relationship between credit and the real estate sector. Our surveys are showing that we have no bubble; [the growth] is based on real demand because the activity in real estate has not been fueled by credit from the banks.
The total credit to the whole construction sector represents around 18 percent of the total loans of the country. If you want to take it as a percentage of the total balance sheets of the banks, it doesn’t go over 15 percent. Housing loans represent around 8 percent of the total balance sheets of the banks… so we don’t have a bubble.
A few years ago, there were circulars from the central bank capping the credit that a bank could give on a real estate project at 60 percent, so 40 percent had to be pure equity. Now for housing loans, the banks are assessing the risk by themselves, but they do require deposits of around 20 percent according to what we hear… I don’t think we have a bubble situation here.
- How do you ensure that there is no speculation in the market?
Speculation exists, we cannot prevent it, but it is not being fueled by credit, because of the circular limiting the level of credit to 60 percent of any real estate project.
Effectively, the bubbles [elsewhere in the world] were created by excessive credits related to real estate, which is not the case here.
- What can you tell us about consolidation in the sector? What is your opinion?
We have reinforced the law that allows mergers among banks and the possibility for the central bank to fund the cost of these mergers and [allow] the legal simplification of the formalities for that.
We think that in the future there will be a few mergers. But our position has been stated clearly that we will not accept mergers among the country’s top 11 banks because we think, for competition’s sake and risk diversification, it is a better structure to have this spread over many groups.
We do think that below the first 11, there is an interest for banks [to merge] and there is a decrease of the risks and the costs for the country if there is consolidation through mergers. This can be done among middle-and-small banks or it can be done by having the big banks acquire the middle-sized or small-sized banks.
But we will never force banks to merge. We will only let them agree on it, and then we interfere if these banks are not in compliance with the requirements of the central bank.
- Oversaturation in the market is currently forcing you to encourage banks to expand abroad — will the allowance of mergers quell this trend?
Expansion abroad is a strategy that we agreed upon with the banks a few years ago. Today Lebanese banks are present in almost every Arab country and they are also present in Africa and other continents.
[Those with a foreign presence] are deriving around 20 percent of their revenues…from their external activities. So we believe that this can increase.
Our objective here is to decrease the sensitivity of Lebanese banks to the Lebanese sovereign rating and also to have a sector that would enrich our balance of payments and provide opportunities for employment, because the Lebanese have skills in financial services and banking and you can see them working everywhere in the world.
The banks also have the possibility to invest abroad without being physically present abroad and we have limited that to 50 percent of their own funds.
- Can international expansion really improve banks’ credit ratings?
When more than 50 percent is derived from [abroad], when they get to this level, then the rating agencies will have to look at not only the Lebanese risk, but to the overall picture. And that will improve their ratings.
- Can the lira ever be a lending currency?
We have seen that there is sensitivity between loans in Lebanese pounds and the interest rates. These circulars have proven that if interest rates are low or not very far from what is charged on debtors’ accounts in dollars, then people don’t mind having their loans in Lebanese pounds. The return of the Lebanese pound on the credit market has been successful because we are seeing now that three of every four loans are given in Lebanese pounds. Although we have, from previous activities, a large stock of loans in dollars in the banking sector, new Lebanese pound loans are progressing quickly.
We were able to succeed because the balance sheet of the central bank is rich now in foreign currency and therefore we don’t mind seeing, or we are not scared to see, loans in pounds that ultimately get turned into US dollars.
There is the demand and supply between Lebanese pounds working smoothly and there are everyday excesses in US dollars that we are buying. So, if the interest rate structure on the Lebanese pound remains low, the Lebanese pound is going to gain more and more steam in the credit market.
This is good for the economy because the expansion in credit can be more aggressive by banks because it is in Lebanese pounds and they know that the central bank, as a last resort, can provide them liquidity when they need it. Also, it reallocates a role to the central bank in the economy because now by changing the interest rates, we will have influence on the credit market in the country.
- Regarding the public-private partnership (PPP) and build-operate-transfer (BOT) deals being discussed, are these kinds of plans something that you would advise and how would you make sure that they are soundly structured?
Lebanon has engaged in the application of the criteria of Basel II and the level of solvency has been determined to be 8 percent, and today we are on average at 10 percent. Mismatching, which can be created by this type of credit, is also weighted in Basel II. So as long as the banks can provide the long-term credit and at the same time maintain the acceptable solvency, it is normal business for them. It is exactly as housing loans have been done for the last 17 years. So we will look at this aspect. We are going to monitor that the solvency ratios of banks are still respected and it’s up to them to do it or not.
Another way to do it is that the banks have the right to put up funds, which can issue shares that can be bought by banks’ clients. This method can fund projects related to PPP or BOT.
What has to be very clear is that we will always continue to take a prudent approach concerning credit because it is very important and because we follow these solvency ratios. The banks will use their judgment to see what they can operate as direct credit and what should be funded through other types of products directly by their clients.
- Do you think that these products are a realistic goal for the near future?
I think that there is an opportunity for Lebanon today to develop various sectors that could improve the quality of life of the Lebanese. These projects are from different sectors, from infrastructure, environment, energy, education and transportation – we need these projects. And we need to do it without increasing the public debt and there is enough confidence today to do that.
Personally, I hope that the different political parties in the country will agree on such a scenario, but of course I cannot know how fast they are going to move on this.
“The returun of the Lebanese pound on the credit market has been successful [as currently] we are seeing that every three or four loans are given in Lebanese currency”
