E Marwan Iskandar recently said that it is not realistic to think that Lebanon has not been affected by the global financial crisis, especially considering the public debt; what’s your take on this?

I don’t really think that the banking sector in Lebanon was affected by the crisis. There is only one way that the banking sector can be affected by the crisis, which is remittances. For the time being, this indicator is doing well.

E How will the parliamentary elections in June affect the banking sector?

Let’s be optimistic! What can go wrong with the elections? The system has shown its resiliency to all kind of crises. The key parameter of this macroeconomic setting is the stability of deposits and deposits in Lebanon represent more than 300 percent of GDP.

E Some believe that by lending the government money, Lebanese banks are actually helping to perpetuate the country’s debt problem. How much longer can the banks carry Lebanon’s debt?

The Association of Banks in Lebanon has issued statements saying that the government has to be more aware. The government has to take more critical measures to restructure the debt such as privatizing what needs to be privatized in order to decrease the debt. This not only applies to the nominal value of the debt, you can decrease the ratio of public debt over GDP, which is a more significant indicator than nominal value. Lastly, the state cannot manage Électricité du Liban; it’s not its role.

E If you were to prepare a list of requests for the new government, what would they entail?

Public sector reform in its broadest meaning in terms of less red tape, greater efficiency, introduction and strict implementation of accountability at all levels, combating corruption, budgeting according to international principles, rationalization of public spending, computerization of public administration, registers, supplemented by an in-depth reform of the judicial system.

There should also be a privatization of key sectors such as the mobile networks, public transportation, and possibly the management of water and power networks.

E Do you expect to see mergers and acquisitions in the Lebanese banking sector?

Yes, the banking sector is very small compared to the region. Our capitalization is still low for each bank. The small banks should consolidate. It’s definitely something that has to happen somehow.

E Due to the slower pace of lending to the private sector compared to public sector lending, many feel that banks in Lebanon should increase their lending and are pressuring the central bank to lower interest rates in order to stimulate investment in the private sector and SMEs. What is your take on this?

The private sector has to be more structured to come and ask for loans. They also have to be more capitalized.

E Seeing as Lebanese banks are heavily exposed to government paper and thus largely dependent on government debt, is geographic expansion the solution to reducing dependency and strengthen the sector overall?

Definitely, because we’re a small economy.

E What are the top issues and concerns for Lebanese banks in 2009?

The risk factor is always the greatest concern, because as long as Lebanon’s risk is perceived as stable, or better still, improved, the stress in the money market is limited and banks are comfortable with doing business. Should elements of instability interfere, higher market stress will mean more expensive money and reduced or more expensive lending, which would penalize the domestic economy.

The international financial crisis and its direct impact on Lebanon has, until now, been basically limited to the return of human resources from Europe and the Gulf, as well as by a weaker appetite for real estate. The effects of the crisis will continue to be felt in the West and in the Gulf for several months, and the wave is bound to reach Lebanon, albeit indirectly, through a slowdown in the real economy. For banks, this means a slower dynamic and a shortfall in transfers, thus a slowdown in consumption as well.

E Marwan Iskandar recently said that it is not realistic to think that Lebanon has not been affected by the global financial crisis, especially considering the public debt. He said that one way to deal with the public debt from worsening would be through government reforms; what’s your take on this?

We shouldn’t kid ourselves. Because of globalization, I doubt that any part of the world or any living creature has not been affected by the crisis. We have been hit a little bit less than other economies. We can feel effects on the real estate sector — prices were booming, now they have stabilized or are receding. What Iskandar said, to a certain extent, is true. As far as the banking sector goes, it is helping the government financially. We are making life easier for the politicians. In my view, we should apply many more conditions when we lend to the government.

It’s true we are giving a lot of money to the government. In return we should ask them to be keen on having an economy that grows much faster than the current one. The fact is most Lebanese production is done abroad. We are the only country in the world where our gross national product is much higher than our gross domestic product. I wish we could measure our debt to our GNP — the GNP is very difficult to measure, but with some effort from the government we should be able to measure this amount.

E Due to the slower pace of lending to the private sector compared to public sector lending, many feel that banks in Lebanon should increase their lending and are pressuring the central bank to lower interest rates in order to stimulate investment in the private sector. What is your take on this?

The central bank recently issued a new financial plan, which would help the private sector get money at a much lower rate, especially in Lebanese lira. They need to nationalize the economy and this is one way of doing it. I don’t think the economy in Lebanon needs much more money than it is already getting from the banks. On the other hand, the total deposits in Lebanese banks are much higher than what the economy needs. Deposits in Lebanon, which are over $800 billion, are almost three and a half times our GDP last year.

E The central bank governor, Riad Salameh, believes that if elections go smoothly, economic growth could exceed 6 percent, with the summer months accounting for 65 percent of Lebanon’s economic activity. How will the upcoming parliamentary elections in June affect the banking sector?

History has proved that Riad Salameh was right, while the International Monetary Fund was wrong for the last 13 years with respect to Lebanon. This is why he was applauded in Washington. I would say that if we have a smooth election, with summer coming and the inflow of tourists and the Lebanese diaspora, I wouldn’t be surprised to have a much higher growth [rate], especially considering that the Lebanese banking sector has proved resilient.

E Seeing as Lebanese banks are heavily exposed to government paper and thus largely dependent on government debt, is geographic expansion the solution to reduce dependency and strengthen the sector overall?

It is a necessity. Salameh is encouraging all banks to go abroad for many reasons. The first being that the resources the banking sector has are bigger than what the Lebanese economy needs.

E If the central bank had not prevented local banks from investing in structured products, derivatives and toxic assets, do you think they would have invested in them?

Lebanese banks are relatively very conservative. Nevertheless, there would have been much more losses than what they have incurred, which happened to be meaningless versus their equity.

E What will happen to foreign remittances into Lebanese banks this year? Will they beat last year’s record of over $6 billion?

Up till now, we haven’t felt a slowdown in remittances. Many people are afraid that many Lebanese employees from overseas would come back to Lebanon. I think that is overstated.

E What is the main reason you believe that Lebanon’s banks have weathered the worst effects of the global financial crisis?

The year 2008 confirmed to us that what characterizes the Lebanese economy is its resilience to the aftermath of the global crisis that affected many wealthy and strong countries. In my opinion, the main reason behind such resilience lies in the strength and breadth of the Lebanese diaspora, which derives an annual value added almost as large as the entire Lebanese GDP. This translates into sizable incoming foreign remittances that reached around $5.6 billion last year, and which have been instrumental in equilibrating the country’s balance of payments, hence contributing to reviving the economic cycle and to supporting the domestic currency.

E Even so, hasn’t the financial crisis affected Lebanese banks to some extent?

The Lebanese banking sector has long proved its resistance in the face of the various crises that our country faced during the last decades, including the latest global financial crisis. It goes without saying that such resilience is not a result of chance; but is instead a combination of several factors such as the personal skills and talent of Lebanese bankers whose competency has long been confirmed whether in Lebanon or in several other countries. Another factor is the leadership and vision of the monetary authorities represented by the governor of the Central Bank of Lebanon, which led to a stable monetary and banking environment as well as strict regulations that are being enforced thanks to the effective contribution of the Banking Control Commission.

The biggest concern of the banking sector remains tied to any disruption in the country’s political stability, which exerts considerable influence on the economic stability so that we can say that there is no financial soundness in the presence of political shakiness. Banks, as funds takers, are accountable for the deposits of their customers, and such responsibility requires an active participation to preserve the financial stability and the high liquidity of the banking system.

E What have you learned from the global financial crisis?

The main lesson learned by banks is that they should strictly apply the principles of risk management on all their investments, control the levels of financing in terms of leverage and avoid investing in complex financial structures that are not backed by real securities.

As for the most important lesson, it is undoubtedly that, in the long run, the best investments are in real estate, since other types of investments could evaporate rapidly while fixed assets’ value will always subsist.

E What is the current liquidity status of banks in Lebanon?

Another characteristic of the Lebanese banking sector lies in the strong balance sheet liquidity which, at around 30 percent, is one of the highest in the world. Such levels have been attained via the combination of the prudent policies of the Central Bank of Lebanon as well as the conservative management of the Lebanese banks, which learned from previous experience and kept high levels of liquidity to face any contingency. Liquidity is a “safety cushion” for Lebanese banks as it enabled them, in times where their capitalization dropped to extremely low levels, to continue operating as usual because they had liquidity, without which their role would have been over. This lesson cannot be forgotten by Lebanese banks.

E What is your opinion on the central bank’s policies from a historical perspective? Have they always been as prudent as you say?

The central bank is the far-sighted safety valve of our banking system. The central bank has always had a very effective role in providing monetary stability since 1993, which was not the case previously. Just as a reminder, the central bank was founded in 1964 and in 1966 the Intra Bank crisis took place; its repercussions continued until 1975, when the war began, and the price of the dollar jumped from 2.5 Lebanese lira to 2,800 Lebanese lira.

Ever since the year 1994, the central bank’s governorship has pursued a policy of stabilizing the exchange rate, which has been maintained at around 1,500 Lebanese lira for several years. This has allowed investments and projects to be undertaken continuously, despite all the volatility and uncertainties encountered by Lebanon, the most important of which being the assassination of [former] Prime Minister Rafiq Hariri.

E Marwan Iskandar recently said that it is not realistic to think that Lebanon has not been affected by the global financial crisis, especially considering the public debt; what’s your take on this?

It’s clear that we cannot say the international crisis has not affected Lebanon. We live in a global economy and Lebanon is very involved in the world; many Lebanese work abroad so they will either not be able to send any money or will send less money home. Up till now, a reduction of remittances has not materialized but we have not seen any figures, it’s just speculation. This is only part of the equation.

The first [Lebanese] people that were really affected by the crisis in the Lebanese diaspora were those working in the banking sectors abroad. Nevertheless, what we’ve experienced in the past few years is a very strong euro and very strong commodity prices and we should see much less inflation this year. Also, the Beirut Stock Exchange was affected by the crisis but it was delayed.

Moreover, depositors realized that the profile of risk for Lebanese banks was totally different than other banks abroad, because they didn’t have structured products or toxic assets. First of all you have the central bank’s regulations, but also there is the conservative approach of Lebanese bankers. We’re used to crises in the past, so we always have to be cautious and keep very high liquidity. If you look at the past four years, there have been major earthquakes — the first being the assassination of [former Prime Minister] Hariri. After that catastrophe we had only 3.5 percent of withdrawal from the banking system. After a couple of months the money came back and we had a strong increase over that year.

E Some believe that by lending the government money, Lebanese banks are perpetuating the country’s debt problem. How  much longer can the banks carry Lebanon’s debt?

There are definitely structural reforms that have to be implemented. All the economic associations have asked for this for years. The Lebanese economy has huge potential and we need politicians to help raise this potential, and this will only happen through new reforms. We hope that with the new parliament, the right decisions will be taken towards reforms.

As banks, we are not encouraging the government to raise the public debt. We’re playing an active role to help the government and the state reform in order to help the economy grow. We believe there’s huge potential in the economy, we can easily double the GDP just by letting private initiative work. If you have the right set of laws and reduce bureaucracy, you will probably see a doubling of the GDP. If the GDP doubles, the level of debt that Lebanon has today will be reduced by half and it will be equal to the ratio you are seeing today in the Western world. Already you can see that the ratio of debt over GDP reduced tremendously last year, because of the strong increase in GDP and because of inflation. This is a manageable issue, but the most important thing really is to let people work, develop the economy of the country and continue to attract foreign direct investment in Lebanon.

E Do you expect to see mergers and acquisitions in the Lebanese banking sector?

Definitely there is very strong competition between banks and I think the Lebanese are getting the benefits of this competition through unbelievable rates for their deposits and their credits. Mergers and acquisitions is something that’s needed for the banks to be larger, stronger and play a major role in the region as well as on a global scale. It’s something we’d like to see but it’s not easy. The 10 largest banks in Lebanon account for 90 percent of the total balance sheets of the banks; so the other 45 groups are boutiques.

E In your opinion, what are the top issues and concerns for Lebanese banks in 2009?

To continue to see the internal stability and security, this is key for the development of the banking system and the economy. We’re monitoring the global crisis, because we’ve been quite immune up till now but if this crisis lasts we’ll definitely see an impact on businesses in Lebanon.

Bank Audi – Freddie C. Baz

BLOM Bank – Saad Azhari

Banque Libano-Francaise – Walid Raphaël

Bank of Beirut – Salim G. Sfeir

Lebanese Canadian Bank – Georges Abou Jaoude

Societe Generale de Banque au Liban – Georges Saghbini