In recent years, the Lebanese banking sector has been breaking records time and time again. Within the first nine months of 2008, Lebanese banks saw an astounding $7.8 billion increase in deposits — smashing the already record-high $6.6 billion in deposits for the entire year of 2007. Bankers unanimously agree that 2008 has been an unparalleled year in Lebanese banking. With a relatively stable political environment, confidence levels are soaring due to increased foreign remittances, FDI, sound liquidity, strict regulations set by the central bank, a stable currency, a prosperous real estate market and an improved tourism sector. It is fair to say that the Lebanese banking sector is doing exceptionally well. In light of the global financial crisis, Lebanese banks are surely insulated but not isolated, resilient but not immune, and have been heralded in the international press as “a beacon of stability and growth,” as was stated by the New York Times.
The Lebanese central bank is performing extraordinarily, as the regulations and monetary policies it has set for local banks have created great insulation and success across the board. Because the central bank has been able to maintain the stability of the Lebanese Lira, Nassib Ghobril, head of the economic research and analysis department at Byblos Bank, strongly believes that, “the stability of the currency is the cornerstone of the resilience of the economy and of the banking sector […] It has also helped the inflow of deposits, remittances and capital inflows overall.” With a stable currency due to diligent efforts by the central bank, confidence levels continue to rise. Also, conservative policies — such as preventing domestic banks from purchasing structured financial products and subprime products — are chiefly responsible for the continuous sound performance of Lebanese banks. Ghobril is proud to say that being “conservative is cool,” especially since mishandled risk management elsewhere — i.e. in the Gulf, US, and Europe — has proven to be unbeneficial. Confidence in the Lebanese banking system is directly related to “the very strict regulatory frameworks on behalf of the central bank of Lebanon and the banking control commission, [as well as] the conservative practices of Lebanese banks,” said Dr. Marwan Barakat, head of the research department at Bank Audi-Audi Saradar Group.
Foundations of stability
Apart from playing it cool, there are various reasons as to why Lebanese banks have been largely protected from the international crisis. Firstly, seeing as they are so conservative, banks in Lebanon do not lend much — Barakat claims that “the total loans to the private sector as a percentage of their deposits is equivalent to 33%.”
Thus, with a low amount of lending exposure and high amounts of liquidity — Barakat asserts that “primary liquidity amounts to 48% of total deposits, which is very high by all standards” — hence, banks are less at risk than their regional counterparts. Secondly, since Lebanese banks are strong net creditors abroad, “the foreign assets of the banking sector are more important than the foreign liabilities in value — the difference is around $4 billion, to the benefit of [Lebanese] foreign assets.”
Only four years ago, Lebanon faced a great challenge as to how to disperse its high liquidity levels to OECD countries, because at the time, countries abroad did not need cash injections. Now, with the looming financial crisis, Lebanon has been able to successfully lend liquidity to foreign financial entities and thus make them liable to domestic banks in Lebanon. Ghobril finds it “very funny” that OECD countries “are coming to Lebanon to place money in their banks to support their liquidity. Can you believe this? It’s very ironic.” Ironic indeed, but it is surely a good thing for the Lebanese banking sector.
Another factor which is shielding Lebanon from international vulnerability is the fact that the country has contained housing loan exposure. Even though real estate prices have declined since their skyrocketing performance following the Doha agreement, they are stable enough to leave the banking sector comfortable and at present housing loans “are equivalent to less than 2% of balance sheets,” Barakat underlined. Another shield has been the Lebanese banks’ high collateralization. “The amount of loans against collateral is equivalent to 76% to those outstanding in the banking sector, which is a very high level,” Barakat said.
Currently, deposits into the Lebanese banking sector account for around 83% of total assets, “making them among the most liquid in the world,” according to the New York Times. Most experts agree that these deposits are coming from foreign remittances — i.e. Lebanese expatriates living abroad and depositing money into banks at home. Like his local counterparts, Ghobril contended that, “the expatriate remittances are a major source of capital inflow.” Fadlo Choueiri, head of corporate finance and economic research at Credit Libanais Investment Bank, explained that, “the Lebanese banking sector has witnessed in 2008 a unique inflow of foreign remittances from Lebanese expatriates living mainly in the Gulf region, with some 43.1% reported annual expansion in foreign inflows to $5.5 billion though July 2008, up from $3.95 billion in the same period of 2007.” Indubitably, Lebanese banks are increasingly dependent on expatriates. But, Barakat expects in the worst cast scenario that “remittances will be equivalent to 20% of the GDP in Lebanon, which is [still] a very high level.” Total remittances are predicted to exceed 2007’s high of $5.5 billion, which is one of the world’s highest per capita rates.
Pillars of the state
With remittances so high, Lebanon’s banks have been able to outgrow the national economy, with assets having reached a staggering $100 billion, while Lebanon’s GDP is valued at only $25 billion. On a side note, while governments across the world are stepping in to help their local banking sectors, the opposite is happening in Lebanon. Because the banking sector is so large, it has always been supporting the government. Ghobril illustrated this paradox, saying, “We were criticized in the past that the government depends [heavily] on the banks in Lebanon. But now, if you look at the global financial crisis, you have governments, finance ministries and central banks stepping in to rescue entire banking sectors in the US and in Europe. While in Lebanon it is the opposite, as the banking sector has been supporting the government for many years, and not at the expense of the private sector, this is a myth.”
Such remarkable growth has helped Lebanese banks to expand abroad, creating a larger client base and allowing domestic banks to cater to the Lebanese diaspora around the world. Most major players in the Lebanese banking sector — mainly from the alpha and beta groups — have been expanding regionally since 2002 and will continue to do so in the near future. Regional expansion illustrates the robust capabilities of Lebanese banks, thus boosting the image of the Lebanese economy altogether.
Tourism is also playing a major role in empowering the Lebanese economy, as well as the banking sector as a whole. In 2008 alone, Lebanon witnessed a 30% year-on-year increase, and Barakat holds that “it has been an important driver to the recovery that we are witnessing now.” All of these factors — tourism, remittances, high liquidity, real estate and stable currency — are sure to sustain, healthy, robust, and sound growth.
Analysts’ opinions regarding figures of the Lebanese GDP growth seem to vary. The majority of experts tend to agree with IMF forecasts, which prognosticate GDP growth for 2008 at 6% and 5% in 2009. Barakat believes that, “What supports growth in Lebanon in 2008 and 2009 is the fact that our economic recovery is tied to domestic factors much more than regional and international factors.” Given that Lebanon is not an exporting economy — Lebanese exports amount to only 10% of GDP — domestic growth cannot be predominately affected by any international or regional economic slowdowns. But, added Pik Yee Foong, CEO of Standard Chartered Bank in Lebanon, while the “Lebanese banking sector is unaffected by the global financial crisis so far … the market reality is that there will be an impact, it is inevitable.” Still, she believes that “we will remain resilient in the face of this [global] recession.”
Global challenges may thus create opportunities for the Lebanese banking sector, as “the leveling of playing fields offers Lebanese companies [the ability] to penetrate new markets,” said Foong. On another note, Choueiri expects Lebanon “to remain a safe haven for Arab and foreign investors along with Lebanese expatriates, thanks to its sound banking system coupled with an effective monetary policy that infuses an atmosphere of confidence among investors.”
Others are also quite optimistic, albeit with the possibility of political instability in mind. Even with parliamentary elections on the horizon in 2009, some experts think that the political environment will continue to stabilize and hence the banking sector is not likely to incur any negative impacts. Yasser Mortada, general manager at the Federal Bank of Lebanon, finds that “if nothing negative happens politically, 2009 will be another good year for the Lebanese banking sector.”
Barakat remarks that, “what the banking sector has to do is to continue in the same direction that it has been following over the past few years — which is a continuous upgrading of regulatory frameworks, taking lessons from the global financial crisis, while keeping in mind that the Lebanese banking sector has adopted a long term of circulars that have helped the sector avoid the crisis.”
Seeing as the banking sector of Lebanon has not been subsumed by the crisis so far, Choueiri holds that “the Lebanese banking sector remains immune from any imminent breakdown and is thus expected to preserve sustainable growth and prosperity in the coming period.”
While the chief of the IMF’s Middle East and Central Asia department, Domenico Fanizza, applauded the Lebanese central bank for protecting domestic banks from the financial chaos in October 2008, he cautioned that the worldwide turmoil may have incidental, negative backlashes on Lebanon’s economy. Such repercussions could be comprised of a slowdown in economic growth, fluctuation of tourist inflows, and decreased remittances from Lebanese expatriates. However, most analysts are confident that Lebanon’s banks will remain sound regardless of the economy slowing down slightly. With so many reasons for continued success, there are simply not enough significant factors in the banking sector’s way to sway it from further prosperity in 2009.