"People are killing each other to steal LL100,000 or LL200,000,” says Mohamad Choucair, president of Lebanon’s Chamber of Commerce, Industry and Agriculture. “That’s how bad the situation is.”

While perhaps infused with a pinch of hyperbole, his sentiments are echoed by Nicolas Chammas of the Beirut Traders Association, who says the current situation in the country “is extremely painful and no one would have imagined the extent of the economic chaos due to the situation in Syria”.

Indeed, Byblos Bank’s consumer confidence index, initiated in July 2007, has reached its lowest point ever, following a summer season in which Lebanese watched kidnappings and roadblocks scare away tourists and hack away at security, economic growth and employment.

Deposits drop, lending up

With economic growth shriveling for the second year in a row, Lebanon’s corporate and consumer debt becomes all the more worrisome, with the latter group swallowing an increasingly larger slice of the pie; consumer loans, of which half are going to finance homes, account for a quarter of total private debt.  The Lebanese private sector has been increasingly reliant on loans from domestic banks in recent years, with a total of $42 billion in debt now weighing on its shoulders, amounting to almost 30 percent of the banking sector’s assets. Notably, this surpasses cash lent to the public sector, which makes up 20 percent of commercial bank assets.

There is no reason for panic, however — at least not yet. Despite the significant expansion in private sector loans in recent years, they were starting from a comparatively low base and assessing this portfolio relative to gross domestic product does much to calm nerves. Standing at 85 percent in 2011, according to World Bank estimates, Lebanon’s private sector debt vs. GDP ratio pales in comparison to Spain’s staggering 204 percent, the United States’ 193 percent and the United Kingdom’s 188 percent. But with slow economic growth — estimated by the International Monetary Fund (IMF) at a meager 1.5 percent in 2011 and 2012 not looking any better — it is only prudent to question the private sector’s capacity to meet their payments and the banking sector’s ability to continue on lending — especially if the sector continues to see an outflow in deposits.

The banking sector, the backbone of the economy, registered a net outflow of $110 million worth of deposits in July, after seeing deposits grow through the previous months of the year.

“This outflow reflects depositors’ concern,” says Byblos Bank’s chief economist, Nassib Ghobril, while highlighting that previous periods when the sector experienced an outflow of deposits were in February 2005 following the assassination of former Prime Minister Rafik Hariri, in the summer of 2006 due to the war with Israel and in January 2011, after the collapse of the Lebanese government.

Ghobril says the severity of Lebanon’s economic crisis is “the worst I have seen in the 15 years I’ve been in Lebanon”, and he expects banks’ August numbers to show an even more significant drop in deposits, due to the unrest and kidnappings.

Seemingly undeterred by falling deposits, banks have still been lending to the private sector, with loans up 5.4 percent in the first seven months of the year, almost two percent more than the growth in deposits. With more attractive interest rates on private sector loans than on public sector debt, banks still have the stomach in these dire economic conditions to extend their lending arm. Consumer loans grew 27 percent in the first half of the year vs. 9 percent growth for corporate loans — both solid growth rates given the wretched state of the economy.

“Of course if the current economic situation continues, it will be more difficult to increase loans,” says Marwan Mikhael, chief economist at Blom Bank. Indeed, both consumers and corporates are filling out less loan applications lately. “Consumers’ demand for loans is receding because they want to hold on to their spending for now,” says Elias Aractingi, deputy general manager of Blom Bank. Corporates are also adopting a wait and see approach; “They didn’t need extra borrowing with no new projects since the beginning of 2011,” adds Ghobril.

Covering their assets

Most private sector loans are secured, meaning the bank holds collateral in case of default — as would be expected from the conservative Lebanese banking sector. “In small loans like credit cards, you extend a small amount without taking collateral because that’s the nature of the beast everywhere in the world,” says  Aractingi. The overall amount of non-asset backed loans is only a small percentage of overall loans, according to Mikhael.

So if Choucair and Chammas’ gloomy assessment holds and leads to their forecasts of bankruptcies and mass layoffs, the banking sector should have its back covered in terms of defaults. For now, with regards to their distressed clients, “Banks are giving a grace period, they are being a bit more flexible because it is better to negotiate with the clients than to launch a legal procedure and that’s why we have not seen many legal cases,” says Jihad Rizkallah, lawyer at El Meouchi law firm.

For personal loans that are not asset backed and merely linked to salaries, for instance, a redundancy will lead to the bank having to write off the debt.
“That’s why we suggest to banks to take other guarantees in the form of assets such as a car or a bank deposit,” adds Rizkallah, while stressing that non-asset backed loans are done for small amounts.

So far, despite the economic headwinds, there have been no mass redundancies, though economic associations in Lebanon have been foreboding that they are expecting them soon.

For now, the banking sector, accustomed to dealing with challenges, is taking the situation in stride. But with domestic unrest gnawing away at the county’s commerce on one end, and regional turmoil shutting down trade abroad, the future outlook is in question. Longer term, banks’ capacity to continue lending will eventually have to match their ability to attract deposits. For many consumers, the situation may increasingly come down to not just losing their jobs, but their collateralized homes as well if the economic situation does not improve.