For a long time, there was a widespread belief in Lebanon that the Lebanese sector was highly diversified given the large number of banks (at one stage, the sector had more than 80 institutions). The fact remains that this diversification of the banking system was nothing more than an old myth that had turned into an inefficient sector concentration by the mid 1990s. By this time, Lebanon did indeed have a large number of banks, all of which offered the same services and the same products, in varying degrees of quality. At the same time, a limited number of banks, through their better relationship skills and greater vision and understanding of the local and regional environment, succeeded in carving out a top twenty position for themselves, as Lebanon’s largest banks in terms of assets and deposits.
These 20 largest banks have slowly attracted the best quality customers in Lebanon, leaving to most banks below the top 20 the lesser quality customers and the more complicated dossiers. A significant number of unwanted depositors were also pushed out to the lower part of the Lebanese banks league table. While the larger banks have been busy capitalizing on their position, the smaller banks were mostly left cogitating about their future. Should they sell to or merge with a larger bank? Should they sell to a foreign investor who is interested in establishing a banking franchise in Lebanon? Should they update and modernize their infrastructure, invest in financial and human resources and start competing with the top twenty? Should they think hard about building a niche or specialization that would create value for their shareholders?
Strength in size
Most of the smaller banks have not stopped growing along with the larger ones since the end of the civil war, due to the significant government debt securities and Treasury bill market created by the government and the central bank. Smaller banks were needed to the same extent as the larger ones, as they too constituted a domestic investor base for government securities and made up the numbers in a increasingly liquid secondary market. However, the central bank today is keen that these small banks merge with their larger brothers, as they are believed not to have evolved sufficiently in parallel to the environment, and consequently not to have the capacity to compete in the long-term within an increasingly sophisticated global operating environment. It is clear that the forthcoming Basel II capital regulations, which are due to be implemented in Lebanon by 2008, and which focus on efficient risk management and corporate governance, are going to constitute a mammoth task for the smaller banks, which are still struggling to understand these regulations, let alone implement them.
The smaller banks are mostly family owned and, with a few exceptions, are unlikely to be able to attract strategic investors that would help these families develop expansion and build an efficient internal infrastructure. Their lack of corporate governance, managerial vision, risk management capabilities and insufficient capital, are all factors that will keep any strategic and sophisticated institutional investor away. Moreover, the constant absence of a clear cut, detailed and efficient operational and financial strategy is not only a reason for the lack of attractiveness, but also for their initial positioning below the top 20.
It is worth noting that not all the smaller banks (the 30 or so banks that constitute the smaller tier of the Lebanese banking sector) have the same reasons for being there in the first place. Some are foreign banks, which do not wish to expand their franchise in Lebanon further, as exceeding an optimum size would start affecting the risk profile of their group on a worldwide basis. Others are banks which are moving in the right direction and have sufficient financial means to buy their way up in the upper tier of the bank league table. However, the majority have been stuck in the lower divisions due to an initial lack of vision and preparation to meet a constantly evolving environment.
For those smaller banks with no financial means, the best advice would be to sell their franchise (at a realistic price) to a larger local competitor and hope to keep jobs and, for board members, seats on the board of the larger entity. For small banks that have been rising in the last decade and which have the means and financial resources to keep up the pace with the larger peers, advice would be to specialize and become a niche player. With Lebanon entering the WTO and the Basel II regulations due to be implemented soon, these banks have little choice anyway.