“You can take it to the bank,” is an idiomatic expression commonly uttered by someone – usually a politician or manly man with business power – to express a very high degree of confidence that their latest assertion or promise, such as winning an impending election, is going to be fulfilled. It is an example for how deeply and easily our minds can correlate the notion of trust with the concept of banking.
The exact opposite association has been building up in Lebanon, where banking is being demonized. The animosity against banks has been festering in an environment of supercharged activism, to a point where an assault on a bank branch ignores the possibility of traumatizing customers and employees for the sake of raking in an emblematic amount of cash under a claim of “one’s right to one’s money.”
Taken in this context of a lost societal glue, the investigation of the three-plus years-long banking crisis of Lebanon (the exact moment of its start in 2019 is arguable and can be posited a few months before the overwhelming evidence of the troubles appeared at the end of October) is much more than research into accounting for losses, attribution of blame, and attempts at however partial short-term restitution of their rightful belongings to the depositors. It is an exercise that turns into an arduous and sometimes agonizing journey of the mind. Reflecting on what is gone amiss in Lebanon with the shock of the abrupt shuttering of many banking services, the use of which previously had been almost self-evident and certainly indispensable part of daily life, requires a conscious effort that also might serve as a reminder of the importance of recovering the principle of trust that underlies finance, money, and the entire economy.
The current status quo
It is frequently overlooked that Lebanese banks have suffered along with their depositors. The latest news is that the suffering of banks, in a manner of speaking, has eased. According to numbers cited in Bank Audi’s Lebanon Weekly Monitor (LWM) publication, the contraction of customer deposits in the banking sector has slowed when comparing the first seven months of 2022 to the same period in the previous year. Deposits are said to stand at $127.8 billion at the end of July.
Amounting to $1.7 billion for the period, the contraction in deposits looks almost benign when compared to the rates of stricture, which stood from January 1 to July 31, respectively, at $5.89 billion and $15.57 billion in 2021 and 2020. Unsurprisingly, LBP deposits grew in 2022 while FX deposits contracted. This brought the deposit dollarization ratio down by almost three percentage points. An estimated $2 billion in dollar deposits are “fresh.”
The slowing in contraction of deposits is a dangerously double-edged phenomenon as banks are still illicitly holding these deposits, which are their liabilities, back from the people to whom they belong. On the other hand, one can interpret the narrowing in the rate of deposit contractions as a relative indication that the overall financial situation, albeit in the perverse manner of a bank run that is frozen in time, has moved from extreme convulsions towards a glimmer of financial health.
On the side of assets, banks’ loan portfolios contracted by $4.45 billion over the reporting period to reach $23.3 billion. This compares with contractions of $4.75 billion and $9.5 billion in the first seven months of the previous two years. Shareholder equity stood at $16.9 billion in July 2022, a reduction of $0.9 billion from December 2021, a weakening which the publication attributed to losses related to FX costs, operating expenses, inflation, and needed provisioning.
“The banks’ Eurobond portfolio contracted from $4.4 billion in December 2021 to $3.9 billion in July 2022, a contraction of $0.5 billion. The contraction in this year’s Eurobond portfolio is mainly the result of the provisioning requirements imposed by the Central Bank of Lebanon,” Bank Audi said. In terms of net foreign assets at the central bank, the contraction, attributed primarily to currency interventions, was reported as $3 billion.
Another noteworthy set of data was related to the number and concentration of existing bank accounts. Citing the 2021 Annual Report of Association of Banks in Lebanon – which Executive did not see – the LWM noted that the banking sector’s resident depositor base at the end of last year was 2.35 million account holders, of whom more than 56 percent held deposits of less than LBP 5 million (LBP values calculated at the rate of LBP 1.507 to the dollar).
Interestingly, the majority of these banking clients own a dismal 0.7 percent of total deposits, or LBP 1.3 trillion out of LBP 188.6 trillion at the aforementioned “official” rate of LBP/USD conversion. The holdings of depositors overwhelmingly do not exceed LBP 300 million per account, with 29 percent of cumulative deposits’ value held by 95.2 percent of depositors, whose account balances at the end of 2021 were below that threshold. According to ABL’s disclosures, some 114,000 account holders – the remaining 4.8 percent of the depositor base – call 71 percent of total deposits their own, in the nominal value of LBP 134 trillion.
As extreme as this concentration of wealth in the hands of approximately 2 percent of Lebanese citizenry and the top 5 percent of bank account holders is, and as much as it sends strong signals for policy making in favor of better tax collection, a redistributive tax system, and perhaps even an annual wealth tax (as banker Riad Obegi proposed when talking to Executive), the reported concentration is somewhat less severe than has been rumored by some activists and in social media posts.
Yet, the veracity of the above numbers is not easy to ascertain in an atmosphere where some bankers have been evading accountability. Moreover, reliance of data is marred by well-founded skepticism if any data on the banking sector is actually relevant in any way, given that banks have been holding depositors’ hostage for three years.
This notwithstanding, it is a continuing reality that banks in Lebanon, despite selling international units, closing departments, downsizing branch networks, overworking tellers and reducing headcounts, have remained operational and in some counter-intuitive manner, shown resilience. In legal language, both the largest commercial banks and the sector at large are not formally bankrupt – even though insiders of the industry occasionally, and publicly, declare that they consider all of the 14 largest lenders in the country, to be de-facto bankrupt.
This contradiction in itself makes Lebanese banking an intriguing object of study; inviting a deep dive into the situation of banks, the impact of their behavior over the past three years on society, and the changed realities of the sector in banking players’ own perception, beyond their slightly improved annual numbers (in comparison with the two previous years). Additionally, it constitutes the minimum of diligence to inquire about the longer-term outlook of Lebanese banking, and to evaluate from a wider social and economic perspective, but also considering banking sector financial signals; trends of high relevance in the economy and society that have emerged over the past three years.
Sampling new realities and inflection points
So, what has changed in the experience of finance at banks, from a public observation point of view, and for banks in their own perspective? The second part of the question cannot be answered comprehensively for all banks. Too many chief executives and board chairmen are covering behind veils of determined, counterproductive, and one assumes, either helpless or desperate silence. However, a sample of creative perspectives from the sector can be obtained by listening to a minority of bankers who are confident enough to talk.
One new reality is a departure from banks’ past group behavior, which until 2019 conveyed the impression of a well-controlled and mutually intertwined collective identity among all lenders. “I think that for the first time in the past 30 years, the outlook and behavior of banks is taking different routes. A bank like [AM Bank], which is a medium sized bank that has handled the crisis more efficiently than some other banks, does not see itself as necessarily aligned [with] a much larger bank that did not handle the crisis properly and is now hated by most of its clients,” Marwan Kheireddine, chairman of AM Bank, tells Executive.
Although he describes banks as having different opinions in response to the economic crisis, he says that they are still behaving mostly as one group. “This is because no bank has gone bankrupt and the central bank has made it clear that it does not wish to bankrupt banks. Also, we are in this wait-and-see game to see what laws the government is going to enact, so that we can devise our strategies accordingly,” Kheireddine continues.
“But for sure, you have today some banks that have a much higher exposure to government risk than others, and therefore the objectives [of banks] have to differ from one another. There is far more in common between medium and small banks than with larger banks. This does not mean that banks will fight against each other but it means that depending on government policy, some banks might establish different strategies from other banks,” he elaborates.
Economist Jean Tawile is a board member of the Rassemblement des Dirigeants et Chefs d’entreprise Libanais (RDCL), an association of business leaders, who has in recent months authored papers discussing crony capitalism, as well as good bank, bad bank solutions for restructuring the financial sector. In his analysis, many banks are too weak to transform themselves, while others are not ready to accept that their equity will fall to zero and need to be rebuilt, while a third group have accepted the need to reset equity to the zero point and rebuild.
“Under a good bank, bad bank model, you are structuring a banking sector on the size of the commercial portfolio of loans. There are banks that hold no commercial loan assets, so they would be completely under the bad bank side of the structure,” he says. This third group is willing to embark on ways of addressing the solvency problem over time and operating as a legitimate bank by obtaining some fresh dollar inflows, while in the meantime tackling the liquidity problem in collaboration with international financial institutions (IFIs) by way of giving loans through the banking channel.
For Riad Obegi, chairman and CEO of Banque BEMO, the situation of banks has become comparable to a person who is kept every day in uncertainty over whether they might be executed the next day. “The decision makers are showing very little respect for the people and they are also showing very little understanding,” he says, in reference to not only the government of Lebanon, but also foreign governments and IFIs. “The problem is to bring back trust, and you will not bring back trust by talking every day that you will take someone’s head off.”
In searching for exit routes from the endless anticipation of what laws may be adopted, and ways to end the paralysis of banking, his thoughts do not stop at the idea of shaking the defining institutions of money and banking in Lebanon. “Society wants full dollarization – so why would you fight society?” He argues that there is no need to hold on to Banque du Liban (BDL) as the central bank for the purpose of issuing currency. In his reckoning, the central bank has not succeeded in its core functions of managing a monetary policy, supervising the banks, and printing money responsibly. He goes on to compare BDL with a railway company; keeping a nonfunctioning railroad operator may be inexpensive and worthwhile in the longer run, but the maintenance of a central bank is very dear.
“The central bank has not fulfilled its role, and it costs a lot. Is there a chance that it will do its job in the future, [with regard to] one, the currency, two, the monetary policy, and three, the integrity of banks?” he asks rhetorically. Positing that a return of reserves to commercial lenders and the handover of gold would enable banks to restart lending – providing they succeed in deferring to honor their depositors’ withdrawal demands under a clear time schedule of several years – he presents the dissolution of BDL as a step that would help banks return to a path of orderly business in service to the economy.
Proposed taxation somersaults and debt aerobics
As well as improving state revenues towards fiscal balances, Obegi envisions an annual wealth tax as the best method. “Taxes on profits are regressive, unprogressive and in my opinion immoral. I personally believe that tax on profit is bad but tax on wealth is good.” he say, before continuing: “If the aim of the state is to create more solidarity among people, and have taxation that creates growth and does not destroy growth, taxes should not be on revenues but on wealth.” He believes that a combination of a 10 percent value-added tax as the conduit to steer consumption, in combination with a one-percent annual wealth, could replace other taxes as a flat but continual wealth tax could bring in the equivalent of more than 10 percent of GDP per year.
The assumption of the state’s responsibility for paying its debts is crucial for a solution. Obegi emphasizes that banks must be accountable for the mistakes they made. But he contends that analyses of the risk exposure accepted by banks are incomplete, without taking into account that banks had to operate under the law and in a small country with a highly interconnected set of economic behaviors. He refers to the zero-coupon bonds through which banks were obliged to channel funding to government needs for a limited time in the early 2000s, as an example of this. “Banks could not not abide by that,” he says, delivering a model sentence of double negation, before asserting that he also sees it as a non-negotiable red line that banks have to abide vis-à-vis to their customers. “Before the depositor gets a haircut, the bank needs to go bankrupt.”
“I think banks have to assume a level of responsibility [for the crisis] that is commensurate with the risk that each one of them has taken, as recorded on their balance sheet,” Kheireddine says. According to him, the central bank will have to bear some responsibility when it comes to providing the government with US dollars versus receiving Lebanese pounds, though he concedes: “But it was an open market at the time, and in my opinion the central bank had no choice. But the elephant in the room is the Lebanese government. Our government has run budget deficits every single year for the past 30 years,” Kheireddine says.
It is a common perception that Lebanon has slid into an intersection where one road leads deeper into the abyss and the other offers uncertain and difficult improvements of the economy. While deeply political in terms of requiring a clear presidential election and a political will for reforms and sacrifices that many bankers and economists do not see as forthcoming, the intersection can be seen as also including economic and financial inflection points.
Inflection point: dollarization
In early discussions of the unhinged Lebanese pound back in 2020 and also in 2021, it appeared pertinent to assess the pros and cons of two opposing currency regimes – free float versus hard peg. Deliberations at roundtables and in expert papers more closely explored currency regime variants, such as full dollarization and currency board solutions on the hard-peg side, an intermediate model such as a crawling peg and currency basket, and options such as a radical free float or managed float.
Currency regime choices, even in theory, were not many in the spring and summer of 2020, but the number of solutions with reasonable prospects for popular acceptance, seems to have further evaporated during this year.
The rational choice for most people is dollarization. BEMO’s Obegi compares it to a fever that helps a body recover its health. On one hand, he says “society is doing this dollarization to fight corruption: the corruption of decision makers.” Yet on the other hand, “people are moving toward dollarization because it is the way in which they can go on living.” Spinning the metaphor further, he adds that fighting against society’s choice of dollarization at the current time would be like fighting the healing process, and result in no cure for the country’s ills, except for the most radical cure: cutting off your head. “Dollarization is good. Fighting this would be fighting the healing process.”
The diagnosis, but not the treatment angle is shared by economist Tawile. “The economy is being dollarized and the local currency is only for the public sector,” he says. An ancillary journalist’s look at the dollarization phenomena on a street level of people’s economic choices – which are rational by their respective experiences – provides ample anecdotal evidence of growth in practical dollarization.
Some local restaurants, tired of having to adjust Lebanese pound prices all the time, changed their prices this year to dollars. George T., a neighborhood hairdresser who has worked for 25 years in the same spot in Achrafieh, put up a sign pricing his standard haircut at “$10 (Sayrafa)” in June, switching a sign that had successively read “50,000”; “75,000”; “100,000” and “LL150,000” over the previous 24 months. Across the street, a chocolatier called Roger calculates his margins in the US currency before telling his clients a Lebanese pound price. He explains that he charges 20 percent less on a dollar basis when compared with 2018, despite sharp rises in the cost of imported materials and local electricity supply. Wherever one looks, society has been adopting the dollar not only for communicating prices of imported goods but also for pricing local services.
Inflection point: The over-boarding informality of networks and activities
In Tawile’s analysis, the divisive economic reality is also manifesting as further escalation of an already high level of informality that has roared beyond 50 percent. “We have [a] two-speed society, one [part of which is equipped] with dollars, and all the others. Dollarization is based entirely on cash and today, the parallel economy for me is much bigger than the formal economy. This is the biggest problem in Lebanon,” he says. Operating solely on the basis of the formal economy, and dependent on fiscal management for its compliance with taxes and standards set by the government, any current budgetary planning will be handicapped by the fact that the formal half of the economy will be bearing the cost of the entire economy, he adds.
Correlated to dollarization, economic informality, and distrust in banks is the entrenchment of unconventional financial networks that are at play; from family-level support between expatriates and their loved ones in Lebanon, to disbursements of cash support from international NGOs to needy persons in the country. Although, previously regarded as fragile and possibly temporary, in light of research of soaring inbound cash transfers directly after the Beirut Port explosion of August 4, 2020, this segment of the financial industry has been stable and growing in user numbers up to the middle of this year. This is according to data announced at the beginning of this month by BDL, and information from inbound market leader, OMT. Together with another local partner company of global money transfer operator, Western Union, OMT dominates this particular business, which on a micro-level contributes to cash in the pockets of beneficiaries, and on the macro-scale helps a bit with the current account balance.
According to BDL data cited in the Lebanon This Week (LTW) publication of Byblos Bank, inflows of remittances stood at $6.4 billion for the full year of 2021 – a decrease of 3.6 percent from $6.63 billion in 2020. However, net remittance inflows were $4.3 billion for last year, 16.6 percent more than in 2020, an increase which LTW attributed to a significant drop in remittance outflows between 2020 and 2021.
Although the money transfer segment of the local financial industry has to contend with numerous logistical issues and market complexity according to OMT, which can act as barriers to competitors, some new entrants say they are seeking to establish franchises with stronger digital aspects, besides promising to lower cost and work for financial inclusion. “By launching our services in Lebanon in 2021, we opened the doors for people all around the world to contribute and be more involved in the Middle East market through sending remittances and supporting those economies,” Imane Charioui, the director of francophone Africa and Middle East at money transfer Fintech WorldRemit, tells Executive.
Taking all inflection factors and distortions into account, the picture of the Lebanese economy looks an increasingly fragmented system operating not just with two speeds, but which is subject to many centrifugal forces compelling its pieces further apart from one another and from the state as the organizational center; because of the formal and informal, dollarized and lira-based contours of pieces in the economy that comprise differing inflationary pressures and, in some cases, experience deflationary moments. And as the formal financial market, historically controlled by banking and not well-balanced between equity and debt markets, is caught in a stupor of political and banking confusion, the untenable lives of the common person, become more untenable even in the time it takes to produce a single analytical banking story.
A visit to conduct a routine cashless transaction at a bank branch located barely a kilometer from the location of a branch assault on September 14, 2022, took five times as long as one month ago and included an hour’s wait on a stair in front of branch doors that admitted persons on individual basis, since they were not allowed to enter the branch freely, resulting from measures in place since a wave in anti-bank activism. In the following days, banks declared a three-day closure following an alarming same-day surge of hold-ups by armed depositors at banks across Lebanon, and subsequent announcements by the Depositors’ Outcry Association to conduct more heists.
Aware of the fact that the state in Lebanon has been taken to the verge of total failure, or “hell,” the people of Lebanon have been suffering from deprivation of more than their meager financial assets. But vigilantism will not open ways to solve the financial and economic dysfunctionality that underlies the state’s failings, because of the dictum that a functional and legitimate state is dependent on its monopoly over coercive capacities. Further, at a time when vigilantism and escalations are perceived by many as alternative to investing into a viable state, the need to rebuild banking as a key to better economic performance, and thereby provision of fiscal revenue, converges with the urgency of building a stronger state. A system in which reform mandates also enforce law and justice against the powerful, who might consider themselves too rich to be held accountable. In this context, banking becomes a vital channel for the return to societal hope as it is for the economy.