Lebanon’s industrialists have a cordial, even respectful, relationship with the nation’s bankers, but they could never be considered bosom buddies. Not only have trade, tourism and real estate had an easier task in courting the favor of the financiers, but the very fabric of the country is intertwined in a way that hobbles those entrepreneurs who have been prepared to get their hands greasy in the workshop.
“The relationship between the industrialists and the commercial banks in Lebanon did not start on a good foot as they always preferred to do business with the traders,” explains Nazareth Sabounjian, owner and general manager of Georgi Sabounjian sarl and treasurer of the Association of Lebanese Industrialists (ALI).
The Sabounjian business started as a two-room workshop making jewelry boxes in the late 1960s and it is now a modern plant of 12,000 square meters (sqm) with more than 200 staff. A plethora of products from jewelry store stands to ring cases are produced in the Mount Lebanon-based factory for both Lebanese and international markets. Nazareth Sabounjian is the second generation at the helm of the company as well as being the longest serving member of ALI.
“Unlike the commercial traders, in the past, if an industrialist went to the banks he would find it hard to get credit. Industrialists need to buy land, build the factory and bring the machinery, and this all takes time and the commercial banks don’t like this,” says Sabounjian.
In recent years, Banque du Liban (BDL), Lebanon’s central bank, has introduced a number of initiatives to stimulate lending to the productive sectors. Industry accounted for 11.5 percent of the commercial banks’ lending portfolio in 2012, which according to the latest data roughly corresponds to the sector’s contribution to the economy.
“At the end of the day we are not really an industrial country,” explains Ibrahim Salibi, assistant general manager and head of corporate and commercial banking at Bank Audi.
The competitiveness of Lebanon’s industrial base has ebbed away in recent decades. The steadily rising price of non-tradeable goods and services has put upward pressure on the costs of industrial production. Consider this in light of the almost complete abolition early in the last decade of previously significant protective tariffs and you can understand why Lebanon’s industrialists have had such a rough ride of late.
But the steep rise in the costs of production, and hence the falling competitiveness of the productive sectors, is largely due to the huge inflows of capital to Lebanon’s banking sector that have been used to finance the gargantuan lending to both the government and the private sector. “Everything that is tradable has become incredibly uncompetitive for the Lebanese exporter and extremely competitive for the Lebanese importers, and this translates very easily into the size of the balance of trade deficit,” explains Charbel Nahhas, ex-minister of labor and widely published economist.
Not only is the persistent inflow of deposits to the banking sector hurting industrialists by driving up prices for non-tradable goods and services in Lebanon, such as land, but the high rates of interest used to attract this capital are also discouraging investments in the sector. “Potential investors in Lebanon made their studies and found that their expected returns hardly ever exceeded the cost of borrowing and that is why industries in Lebanon collapsed,” reasons Ellie Yachoui, professor and dean of the Faculty of Business Administration and Economics at Notre Dame University-Louaizé.
With a commercial banking sector more inclined towards trade, real estate and tourism and a manufacturing base fighting an uphill battle, it is little wonder why lending to industrialists has been lackluster. In such a climate, it has been BDL that has stepped in to grease the cogs of finance between Lebanon’s manufacturers and bankers.
Lebanon's industrial sector is relatively small
“The central bank did an essential thing for industrialists when they started doing soft loans. If they were not to have these programs, it would be much harder for us industrialists to get credit,” says Sabounjian.
The expansion and upgrade of the Sabounjian factory from 3,000 sqm to its impressive 12,000 sqm replacement in the Mount Lebanon region several kilometers inland from Jbeil was enabled by a $3.5 million loan in 2002 subsidized to 1.5 percent interest by the central bank.
Since 1997, government subsidized loans from commercial banks, investment banks and leasing companies have been made available for the industrial, tourism and agriculture sectors. “For years we have been using the exemption on reserve requirements to allow banks to lend to specific sectors, whether it is housing or the small and medium-sized enterprises (SMEs),” explains Wael Hamdan, executive director and head of BDL’s financing unit. “Over the past 15 years we have subsidized close to $5 billion dollars in loans: 60 percent for industry, 30 percent for tourism and 10 percent for agriculture.”
BDL has been instrumental in developing a number of different products that carry different conditions and incentives, targeting different sized operations. One such product, the Kafalat scheme, aims to encourage investment by decreasing the cost of medium and long-term financing extended to SMEs in the productive sectors that are unable to provide the guarantee necessary for the loan. A standard Kafalat loan can be up to $200,000 whereas the “Kafalat Plus” can extend up to $400,000. The guarantee ranges from 75 percent for a basic loan to 85 percent for Kafalat Plus.
For larger operations, BDL manages state-subsidized loans for which no commission needs to be paid to cover the guarantee, as is the case with the Kafalat loans. The total outstanding balance of subsidized loans granted to one institution or one economic group should not exceed LL15 billion ($10 million) and BDL applies a flat subsidy rate of 4.5 percent on all of the loans.
The commercial banks are required to reserve 15 percent of their foreign deposits and 25 percent of their domestic lira deposits at the central bank, and these reserves have been the tool by which BDL has encouraged the banks to offer such reduced rate loans. “We gave the banks some exemptions from the reserve requirement to make it more attractive for them to lend into these programs. The banks are encouraged because their clients have [a] better cash flow if the interest rate is subsidized by the government, and they are also exempted to a degree from their exemption requirements,” explains BDL’s Hamdan.
However, according to Hamdan, as the banks were being exempted from their reserve requirements in return for offering the reduced rate loans, these very reserves of the commercial banks started to deplete. What is more, the increased dollarization of the banks’ balance sheets meant that they had less local currency in their reserves, compounding the situation. Consequently, cheap loans on the market started to dry up, as this was the only sweetener BDL had to entice the commercial banks to offer these products.
This compelled BDL to offer the banks loans totaling LL2.2 trillion ($1.46 billion) at 1 percent interest, with a time limit ending December 31 2013, that would enable the banks to keep on putting the products on the market but without having to resort to taking exemptions on their reserves. This initiative, which was launched on January 14 by Circular 318, is what was popularly referred to as the “stimulus package”.
“From that 1 percent, we don’t want to see it translated in the rate the banks give to the customer so they have to keep on pricing the same way they had been as if taken from their reserve,” says Hamdan. Under the previous arrangement of reduced rate loans being enabled by the reserve exemption mechanism, BDL had not stipulated to which sectors the banks should grant the loans. However, with the stimulus package, the amounts that can be lent to different beneficiaries are clearly defined.
The majority of the money has targeted real estate in the belief that this is the most effective driving force for growth in the economy. The productive sectors got a marginal share. The BDL-stipulated credit ceiling for productive sectors under the interest rate subsidy (not including loans granted with a guarantee from Kafalat) was LL140 billion ($93.3 million), or 6 percent of the total. Conversely, housing received LL1 trillion ($666 million).
However, the 15 percent exemption taken against these loans translated the LL140 billion made available from the BDL for the industrial, agricultural and tourism sectors into LL934 billion ($622.6 million) in total loans granted by the banks.
“So if [they] can afford LL140 billion, the banks can lend against them LL934 billion as LL140 billion is 15 percent of LL934 billion,” says Hamdan.
Can more be done?
The demand for the loans to the productive sectors outstripped supply. Saad el Zein, head of corporate banking at BankMed, explains, “Everything that was allocated to the productive sectors [within the stimulus package], was consumed and what remains today mostly pertains to the housing loans sector and environmentally friendly businesses.”
Perhaps, if their hand were forced to deal with the more cumbersome productive sectors, the bankers would find that there is indeed greater demand in the market for their services.
Zein from BankMed and Salibi at Bank Audi both say their banks are willing and able to lend to manufacturers to finance expansion and diversification. There is, after all, opportunity in adversity and both referred to the fact that the proportion of their lending portfolios for the industrial sector was around 20 percent and thus higher than the national average.
However, the balance of the most recent stimulus package shows that manufacturing and other productive sectors, such as agriculture, remain on the fringes of policy makers’ agendas. Add to this the huge amounts of money being pumped into non-tradable goods and services, such as real estate, and it is understandable why Lebanon’s industries are less competitive and coming to represent a smaller portion of the economy.
The central bank’s incentive schemes may keep Lebanon’s industrialists at the table, but they will have to continue the fight to maintain their cut of the pie.