In recent years, Lebanon’s banking sector has played a pivotal role in supporting local economy. In spite of repetitive security crises and heightened tensions, the financial industry has been able to navigate through tricky waters — rendered uncertain by Lebanon’s political situation — while at the same time contributing to the resilience of the economy.
“The banking sector assets are larger than the actual Lebanese economy. In most countries, deposits amount to once or twice the national income, while in Lebanon, it is as much as three times,” said economist Marwan Iskandar. Commercial banks’ assets hover at $85.1 billion, while the GDP is only $24 billion. The economist attributes this unusual situation to the large number of expatriates — estimated at about 40% of the total population — making yearly transfers to their families in Lebanon.
Iskandar believes this year’s remittances have reached as much as $7 billion. “This figure actually exceeds the central bank’s last official figures, as it includes the further wave of emigration Lebanon has faced in the last two years, the undeclared cash brought in by Lebanese into their home country as well as the riches witnessed in the Gulf, where many Lebanese are residing. One has to also to include in the estimates Iran’s aid to Hizbullah,” he underlined. Iskandar also included the steady aid flow received by Lebanon from Paris III as an important factor contributing to Lebanese resilience, with inflows estimated at about $1.5 billion last year only.
In the opinion of Nassib Ghobril, head economist at Bank Byblos, Lebanese commercial banks have also contributed to the stability of exchange rate, a cornerstone of the Lebanese economic resilience. “To stabilize the Lebanese exchange rate, the Banque du Liban (Central Bank) has relied on resources constituted by deposits of commercial banks, which are bound by the law to place with the BDL 50% of their reserves in foreign currency and 25% in Lebanese pounds, both amounting to $20.5 billion,” Ghobril pointed out.
Lebanese commercial banks have supported the economy by purchasing a significant part of the country’s public debt. When in the 1990s commercial banks initially subscribed to Treasury Bills issued by the BDL, they were primarily concerned with Lebanon’s economic stability. “By issuing certificates of deposits with long maturities on numerous occasions, and more particularly during phases of political instability such as the assassination of prime minister Rafik Hariri, banks have relieved pressures on the Lebanese pound and attracted capital,” Ghobril said.
Multiple approaches
However, the approach of banks towards public debt banks has been far from monolithic. While some banks have been reluctant to subscribe to new debt emissions, others have simply renewed subscription. A third category of banks still adopts an aggressive stance and purchases government bonds. As Ghobril highlighted, “Commercial banks would naturally like to see debt to GDP ratios decline but this can only be achieved by implementing the reforms envisioned by the Paris III conference, an impossible exercise in the absence of political consensus.”
Lebanon’s donors’ implicit guarantee that they will support the Land of the Cedars in difficult time has helped to alleviate some of tension on the local level. Lebanese investors are also dedicated to their banking sector and have proven numerous times that they will not exit the market at the first shock, as has been the case in some South American countries. “The internal debt does not really represent a real risk for banks as the central bank can always turn to printing money, although it comes with an inflationary price,” Iskandar explained.
Regardless of the internal debt’s weight on Lebanese banks, their expansion abroad has positively affected the BDL’s resources, helping its deposits to steadily grow, and promoted investors’ confidence. This has reflected indirectly on the flow of remittances into the country “as senders feel assured their transfers will not witness any significant erosion in value,” declared Ghobril. Most Lebanese banks have followed an aggressive expansion strategy. “Seven of the ten largest Lebanese institutions have set up shop in Syria, while others have opened in Jordan, Egypt, Sudan, Algeria, and Saudi Arabia,” Iskandar said.
Iskandar also observed that about 30% revenues of the two largest banks — Audi and BLOM — stem from outside Lebanon, as featured on their balance sheets. “The sector has established its competence on the regional level and been able to maintain its credibility despite the local dire situation,” Iskandar underlined, adding however that growth of the sector is lower than what is hinted by indicators if one removes accumulation of interest. “Another significant indicator showing relatively lower growth of the banking sector than what figures may boast lies in number of bank employees that has remained constant in the last few years,” he added. Ghobril argues, however, that falling interest rates in recent years have proven deposits are growing at a faster rate than interest accumulation.
Contrary to popular belief, commercial banks have continued extending loans to small and medium enterprises and the private sector in general, in spite of higher risks on the local market associated with political volatility. “Loans to the private sectors amounted to some $18.5 billion last year and credit growth has been partly fueled by rising competition among banks,” Ghobril emphasized.
As the largest Lebanese employer, the banking sector’s some 16,000 workforce also boasts higher salaries than other industries.
The resilience of the sector does not, however, necessarily imply that it operates independently from the rest of the economy. “On the contrary, the banking sector is exposed to all Lebanese industries and reaches into all classes of the local population,” highlighted Ghobril. Investor’s commitment to the industry has helped the sector maintain some of its buoyancy in addition to the BDL’s efforts.
“Lebanese banks have been able to stay away from the subprime crisis and avoid any significant losses,” Iskandar added. Ghobril believes that rules and policies adopted by the BDL have allowed commercial banks to maintain their credibility and stay in line with international regulations. “In addition, the Central Bank has protected its depositors and their funds as well as encouraged the consolidation of the sector, earning it the 41st place among developing countries on the IMF autonomous index,” Ghobril said.
