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Defending the banks’ bottom line

Q&A with Makram Sader, secretary general of the Association of Banks in Lebanon

by Thomas Schellen
Makram Sader, ABL secretary general

The Association of Banks in Lebanon (ABL) is the nerve center of what is the sole highly developed part of the country’s financial sector. It is also the main lobbying organization for banking interests, responding harshly to proposals for higher taxation of banks and calling such moves “illegitimate” and discriminatory. Executive sat down to talk banking with Makram Sader, the ABL secretary general. 


When the Parliament in April began debating proposals for new taxation on banks to fund the salary scale for teachers and public servants, ABL quickly rejected these concepts. The public discussions of the proposals and ABL’s position have been intense since then. Has the association changed its position in any way?

We said that it is unfair to impose double taxation on the banking industry, penalizing this industry because we are very transparent and publish all statements of P&L [profit and loss] and all our accounts under international accounting standards as we are obliged to do. For us [the proposed tax on net revenues from treasury bills] is double taxation because you are taxing the same income twice, at the level of P&L and on the bottom line via corporate tax on profits.


Did you undertake any studies on the question of how a general increase in corporate taxation would affect banks and everyone in the economy?

No. We don’t want to publish anything on this question. The Economic Committees [a lobbying coalition for the private sector] published a very clear statement on this issue and we are part of the Economic Committees.


But your first objection to the tax increases is the issue of double taxation?

For us as the banking industry, yes.


Would you consider a different form of tax increase fair?

It is not our business to tell the government where to raise or not raise taxes. We don’t want to enter this game but all we can say is that there is a lot of money to save. There are a lot of [revenue] leaks at Électricité du Liban, at Beirut Port [and] at Beirut Airport. Before putting taxes on any sector or industry, they have to collect all the taxes that can be collected.

We as banks are making about 7 to 10 percent of the profit that the private sector is making in the country, so why are we paying 37 percent of the corporate taxes? There is a lot of money to be collected as long as there is a good administration and an efficient tax collection system.

We are also saying that it is not right to add new taxes on an economy that is not growing. Economically speaking, that is not right. When you don’t have economic growth, you inject money.


But if we look at the allocation of the taxes that the government is aiming to collect, there is basically a transfer from one side, namely corporate profits, to another side, the public sector salaries. Could one not from a supply side perspective consider this salary scale as an injection of money that could generate private sector growth by stimulating higher consumption?

That is a Keynesian theoretical approach. People who speak about this are right if you are in an economic situation with unused production capacity, in an economy without dramatic deficits on the tax income side and on the balance of payments side. But the reality is different; you cannot apply a theoretical economic formula and equation to a very bad economic, political and security situation like in Lebanon.


In your view, how should the government proceed from this point? Do you have a position or proposal for a revenue formula?

Do you think the government does not know how to proceed, that the government and the Ministry of Finance don’t know what to do? But they are always going to facilitate solutions where it is easy for them to take the money from where it is. If you look at the proposed table of receipts [for financing the salary scale increase] you will not find any economic policy behind it. You cannot find any social policy or any public servant policy or any incentives for reform. They were shopping for LL 1,742 billion [$1.15 billion] and they tried to take the money from anywhere they could, without any policy. And while they are trying to increase the tax revenues, they are forgetting completely that we already have a huge public deficit. When you have a public deficit of $4.2 billion, you have to at least give an impression of seriousness to the banking industry and to all the people watching us, such as [international ratings agencies] S&P and Moody’s and the donor countries.


A parliamentary committee produced a revised salary scale proposal with lower funding needs but without mentioning a new strategy or fundamental policy reforms. From your perspective of emphasizing the need for fundamental reforms and activation of tax collections, are you then saying that it is not the main issue to redefine the scale of the financing need?

I am not saying that. From an economic point of view it is much better to go for [roughly] LL 1,800 billion [$1.19 billion] than for LL 3,200 billion [$2.11 billion]. They are reducing the initial proposal by [MP Ibrahim] Kanaan and the financial committee by 47 percent and this is much better.


So from your perspective, this is a positive development?

For sure. I also want to say that I think the public servants deserve a restructuring of their salary scale but at the same time, [the public sector needs] a restructuring of their human resources [such as] restructuring of job descriptions and introduction of job evaluations.


It seems undeniable that demands of public sector employees and teachers for fair remuneration of their work have to be met. Does ABL have a proposal how the current shortfall in state funding can be overcome and what banks could provide at this particular moment? 

We are against any specific or mandatory contribution to be imposed on the banking sector just because we are making and publishing profit. It is not fair at all. We are already paying our taxes and we want the others to pay theirs.


How do you see the economic outlook for Lebanon and the banking industry?

The outlook is stable. Like the ratings agencies say, it is sometimes negative and sometimes stable and the B minus ratings [for rated Lebanese banks] are because of the sovereign ceiling. We are living with [these ratings] and they are perhaps obliging us to increase our capital base, which is good for us in the long run. We are now at $14.4 or $14.6 billion in capital funds and this helps us to comply with [international banking regulatory agreement] Basel III.


If you look at the performance of the Lebanese banking sector, there seems to be something like a concerted approach by the banking industry to emphasize return on average equity [RoAE] instead of highlighting other parameters such as net profits. Why is there so much focus on RoAE?

[Lebanese banks] today have a lot of shareholders: resident Lebanese investors, non-resident Lebanese investors and some Arab investors. The investors like to have dividends. When you have opened up your capital, you have to be transparent and the return on average assets and the return on average equity are very important indicators, making it easy to follow and compare with performances from other industries and countries.


Are these return ratios better indicators than other indicators such as the rates of increase in bank deposits?

I think so. I don’t like this size approach to banking because we saw huge banks [fall] in international markets. The size is not the [main issue]. In Lebanon we have two main variables to look at. The first one for me is the ratio of liquid assets in foreign currency, because it is very important to cover the unstable Lebanese environment. Whenever there is a war or internal fighting you have to have large international liquid assets to be able to satisfy your clients if they ask to transfer their money outside.

We have therefore always maintained huge liquid assets in foreign currency. It is a huge cost for us because we are keeping this liquidity with international banks and are getting 0.2, 0.3, 0.5, or 0.8 [percent interest] while we are paying on average 2.9 [percent] on the funds. So the liquidity is really a losing business for us; we are losing maybe $400 million or $500 million a year. It is costing us a lot of money during normal periods but it is protecting us in times of crisis.

The other thing is to have good net returns on assets. That means net of our non-performing loans. We don’t have huge ratios of non-performing loans but we have them. You have to make money — we are in the private sector and our aim is to grow our business and create returns for our shareholders.

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Thomas Schellen

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

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