At a time when banking is materially challenged by economic and financial stresses, and is faced with extreme criticism from distressed depositors and the explosion of economic commentators and activists of all colors in the country, Executive wanted to know what local banking leaders have to say about the quagmire and the way forward. Riad Obegi, chairman and general manager of Banque BEMO, was ready to answer.
Where is the banking sector situated in terms of the short-term crisis and of the long-term economic recovery, rescue, or revival of Lebanon?
Let me start with a more basic consideration of banking. Any economy is based on trust and banks are traders of trust. People prefer to put their money in a bank rather than lending it directly to persons who need the money. So you have people who have savings and people who need funds for investing in the future. To put those two together, you need someone of trust in the middle. When you have lack of trust, or lack of trusting this middleman, the whole system is compromised.
In Lebanon specifically, the situation in my opinion is not really a question of total bankruptcy. There is no bankruptcy, but there is a lack of trust. Unfortunately, the people whose role it is to [instill] trust, are in fact doing the opposite. Everybody is a little guilty—[including] banks of course. They made a mistake closing for two weeks [last October]; they made a mistake by not expressing themselves clearly; they made a mistake in not being very transparent in their policy, and they made a mistake not defending themselves when they were attacked.
Only the banks?
Banks are a little bit guilty but the government is extremely guilty. I am not talking about the previous governments. This present government is saying we are bankrupt and cannot do anything without the International Monetary Fund (IMF). It says: ‘The IMF is requesting that we do a haircut and we are going to do a haircut. We don’t know how much but we are going to do it.’ So they are creating uncertainty. Uncertainty does not generate trust. Adding to that is that they are saying there are too many banks in Lebanon. Forty is too much, 20 is better, they say. Why should it be bad for Lebanon to have the second [highest] ratio of deposits to GDP in the world? The first country in this regard is Luxembourg and I don’t think it is bad for any country in the world to aim to be like Luxembourg. They have the highest GDP per capita in Europe.
When the government is saying that banks are bad or banks should close, I think it is destroying the trust and also destroying the possibilities of recovery. In the theory of [American economist Ben] Bernanke, the Great Depression of 1929 was so deep and so long because the authorities in the United States allowed banks to go bankrupt and disappear. This has crippled the credit channel. The information [stored] in the banks disappeared and the recovery took much longer. This is very well known but apparently not by our government and not by the advisors of this government.
What can be done as an alternative to having our finance and economy exposed to the state?
I think the most important thing is to bring back trust. I don’t know what the government is going to do but if he [Prime Minister Hassan Diab] does a haircut, I don’t think trust will come back very soon. This [government narrative] is very absurd because he, and experts around him, say we do a haircut and decrease the debt of the government and then the IMF is going to give us money, and then people are going to trust us. I am a banker. If a client [takes a loan] and then finds ways not to pay me back, I am sure that I am not going to lend to him again. Not only am I not going to lend to him again, bankers usually have a long memory and they talk together. I do not expect this recovery plan, except for picking [funds] from one pocket to the other, to give good results.
If we are looking at the proposed recapitalization of banks, do you think banks will be interested in adopting the government’s idea on recapitalization?
The government is saying: ‘Do recapitalization.’ Suppose you have just been robbed by the Mafia and then the Mafia tells you: ‘This is the last time. Come back, bring in your money again.’ I don’t know. I am not sure.
It seems that some of us do not care to reflect on how we as consumers have been benefiting from the elevated value of the lira in the past decade. Could we blame the banks for making us consume?
There is something that is more serious in that the government should normally be an entity that creates coordination between people, not cause problems among people. This government is saying there is this category of people; these are bad people. Thus they are creating animosity between the people.
We could debate for hours if banks are just the intermediaries between savers and investors or if banks have a societal role to play beyond this function.
They do of course. They are the depositories of trust.
What is the role of banks today in recovering and protecting assets of the Lebanese people, not just financial assets in the short term but also environmental assets, assets of civil peace among diverse population groups, or assets of Lebanese identity?
I think the Lebanese banks don’t have much of a say in these things now. They cannot do much.
But they could?
Yes. Again, let us go back to the assumptions of the government of Lebanon. These assumptions are that the state of Lebanon is bankrupt, that Lebanon is bankrupt, that the Lebanese lira is overvalued, and that the banks are bankrupt. Everything is bankrupt, and whatever we do, it doesn’t matter. We cannot do anything. For us, this is wrong because the state of Lebanon is not bankrupt. It has assets. [We should tell the world:] ‘The state of Lebanon has liquidity problems but it has the assets and can pay—however, not now. We are not the type who does not pay our obligations.’ If we can make this point, everything goes up.
Even the lira?
Even the lira. Another assumption [of this government] is that Lebanon is consuming much more than it is producing. This assumption is based on wrong figures that do not make sense. We are importing $20 billion dollars in goods and exporting $3 billion in goods. But the services are not counted in this equation. If, for 50 years, we had been consuming more than we were producing, we would not be here. You can see from the figures in the banks that savings are increasing year after year since we are producing more than we are consuming. In the last few years, because of the financial engineering, we perhaps received some money that was opportunistic but over 50 years or 70 years? This does not make sense. It is impossible.
Based on these wrong assumptions [the government] concluded with our foreign friends that the Lebanese lira should be devalued. I think this is a political decision in order to take back from the public servants what was given to them perhaps somewhat too generously. But there is no reason [for a devaluation because it would help us to export more], because we are mainly exporting services and services are not very elastic in terms of price changes. If you are a lawyer you are not going to get more business if you are going to say my hour is no longer costing $200 but only $100 from now. People would ask: ‘What type of lawyer are you when you are pricing yourself at $100?’
In that sense it is almost a Veblen good (based on the theories of American economist and socialist Thorstein Velben) where the demand and price are positively correlated.
Exactly. So I think that it is a wrong decision; wrong assumptions and wrong decisions. What can banks still do? I will tell you what we as bank [BEMO] are doing. I cannot talk for all other banks. We decided that we will lend again to our clients because our job is to take deposits and lend money.
You resumed lending actively as of when?
We resumed lending as of April.
How much demand did you encounter?
There is not a lot of demand, frankly, because people feel uncertain. But there are still people who are saying: ‘They are lending to me at a lower price than the bank from whom I am borrowing now, so let me go to them.’ All of this is progressing little by little as we decided to lend.
How much of a percentage contribution to GDP do you see banks make by 2025?
The progression of loans follows the progression of GDP everywhere in the world. You might have temporary distortions, but on the long term, you see a very strong link between progression of GDP and progression of loans and as everything is going to reduce bank loans [in Lebanon], you have to expect a reduction of GDP. What can banks do? I think that banks, as much as possible, should resume lending. This is what we have done.
Are there other things banks can do beyond their core financial business?
Banks can also help their clients to become more productive. How can they do this? I think that one of the weaknesses in Lebanon is that people do not like to work together. So we have to push them to work together, to make partnerships. Not necessarily to become public [as listed companies] but at least to partner together. I think the current situation pushes people to work together and also to try and look outside of Lebanon, because Lebanon is not [a territory of] 10,000 square kilometers; it is much more. You have Lebanese everywhere and Lebanese companies everywhere. They are using Lebanon as a base. The government does not like that, but that does not matter. [People] will continue working until this government goes away and somebody else comes and understands what Lebanon truly is. As banks, we need to help our clients to become more efficient, not necessarily to hire more people.
We need to help [with regard to] the basis of the wealth of Lebanon, which is education. Today, universities and schools have very big problems in collecting tuitions. So we are going to develop financial products where tuitions are going to be financed partly by our bank and paid back over a long period of time. This [type of education finance] does not really exist now but we are going to do that. We are also going to—and are announcing this week—support mediation. This is because we have to expect a lot of bankruptcies very soon, which means that the judiciary system, which is already not very efficient, is going to be overburdened. What we as bank would do is encourage mediation, which might solve 20 to 30 percent of the problems [which otherwise would end in court]. It won’t solve all of them; mediation is not the judiciary.
Would that be mediation in the sense of an arbiter or perhaps offer mediation to people who seek extensions of loan maturities?
A mediator is not a judge and not an arbitrator. He just puts people together and helps them to close the distance between their positions. A mediator gets active when there is a conflict, for example you call a mediator when there is a conflict between you and your banker who is saying I will not finance this need etcetera. So you call a mediator and the bank should accept this mediator who asks both sides what they can offer and tries to facilitate the dialog between the conflict parties. A mediator has a moral authority; however, he has zero power to force anything on you or the second party. There are universities that teach mediation. We are partnering with the Professional Mediation Center at Saint Joseph University (USJ) in Beirut. We are a bank but we can support mediation and push our clients perhaps to have a mediation clause in their contracts.