Lebanese banking in times of scarcity and reforms

A house of many futures

Illustration by: Ivan Debs

They have never seen the likes of it. Elias Alouf experienced a Lebanese childhood and adolescence. He is today general manager of one of Lebanon’s most history-rich banks, BSL, which has 155 years of existence under its belt, but in his living memory Alouf never witnessed such an intense cabinet debate as he did in May 2019. “For the first time in my life, I see in the 2019 budget discussion that the Council of Ministers is meeting regularly to discuss a single issue. What struck me most in this regard was that on one day they worked from 9 p.m. to 3 a.m. This has never happened before, and this means that they are serious in tackling the issues of the budget,” Alouf tells Executive.

Like any banker, Alouf is fully cognizant that the proposed budget’s revenue measures, of which the raised tax on interest income is the most significant one, will hit the banks as well as their depositors. “We as [the] banking sector will obviously have to contribute our part under the new budget, and we will be impacted by the planned measures. When the state increases the taxation of interest from 7 to 10 percent, this burden does not only fall on depositors who will have their revenues taxed [more than before]. This measure will also impact the revenues of banks, because the money that I am taking in from depositors is placed with the central bank by way of different interest-bearing instruments. I will face a higher withholding tax on these interest earnings. Nevertheless, as banks we will have to adapt. Overall, I am very positive. What I would like to see in the budget, however, is a view for the future, a view toward profound economic reform,” he explains.

A qualified positive view on the state’s budget needs, and eventual future reforms and their economic impacts, is also the perspective of Shirine Beyrouti, the head of project finance and syndications unit at Byblos Bank. “Everybody will have to contribute their fair share, it has to be the public and private together in an equitable way, with reforms that make sense. And the banks are strong enough [for this],” she says.

Nonetheless, the upside of the cabinet’s seriousness in drafting this budget is accompanied for many by a downside in the proposed budget’s lack of convincing reforms, as economists pointed out repeatedly during the weeks when the budget law was readied for submission to Parliament. And from the banking perspective, despite the sector’s awareness of its many strengths, the debates over the budget with all their collateral protests and knee jerk actions have witnessed another, perhaps most serious downside in the fact that these debates saw fearful rumors and deliberately damaging propaganda about economic meltdowns in Lebanon run—over months—from peak to peak.

Business unusual?

“The current economic situation is not difficult. It is artificial. We are living in an artificial financial and economic environment right now, but I think this will be short-lived” answers Salim Sfeir, the chairman of Bank of Beirut when asked by Executive about his view on the prevailing economic situation in mid-2019. For Freddie Baz, chief strategist and vice-chairman of Bank Audi Group, the problem of the fake debate over the state of the Lebanese economy is as blatant as the debate is defying of logic and proportion. “If we compare the risk profile of Lebanon three years ago with the risk profile of today, how would it be rational for people to have been comfortable enough with the risk profile back then so that they had no ground for panic? We have a problem in this regard. Yes, there is a deterioration in the risk profile [if one compares 2019 to 2015], but this deterioration is not to the extent that it should translate into a justification of panic,” Baz tells Executive.

 He emphasizes that his message is not intended to signal that banks are happy with the current status of the economy, with the delays in reforms, or with the overall efficiency of the government and administration, “There are so many things in the public governance of Lebanon that need to be addressed and adjusted. Many reforms need to be implemented, and real improvement in the political governance is required. This is also necessary for the sake of the private sector so that it can recapture its competitive edge,” Baz says, continuing: “But I want to tell you that this risk profile of Lebanon and all the debate about 1 percentage point more in [the ratios of] budget deficit to GDP and debt to GDP is teeming with pseudo-experts and politicians who have their own agendas. They are making people go mad by telling them that the risk profile is an indication of definite collapse—[something] leading to a collapse, to hyper-inflation, a drift in the exchange rate, insolvency, and so forth.”

 Seen from this perspective, the last 18 months in Lebanon were marked by two narratives that propagated themes of “business unusual” and had their problematic impacts on banking. One narrative was the search of the country for a sane government. It had more cliffhangers than any Netflix series and bubbled over with irrational plot twists. The other narrative relates to the spread of negative propaganda about the economy by interested or ignorant parties.

It would be extraordinarily naïve to remain unconcerned under those double barrages of unwelcome surprises and fake news, and banking sector numbers, albeit much better than some might have expected them to be, contain enough ambiguity to fuel the minds of the eternal worriers among local and international economists. One sign that could, for example, worry some observers is the evolution of the Beirut Reference Rate (BRR), a monthly interest indicator calculated by the Association of Banks in Lebanon. Issued first in 2009, annual snapshots of the rate in May of each year show the BRR on US dollars jumping from 4.79 percent in May 2011 to 5.77 in May 2012, then advancing incrementally on an ascending slope to 5.87 in May 2013; 5.94 in 2014; 6.14 in 2015; 6.24 in 2016; 6.72 in May 2017, and 7.30 in May 2018. But from this elevated value, the BRR then jumped by more than two full percentage points in only one year, to 9.58 percent in May 2019. As the BRR is connected to lending interest calculations of Lebanese banks, the leap in the rate is not good news for Lebanese companies seeking to borrow from their banks.

However, there are doors of good promise to the future. For Audi’s Baz, one light at the end of the tunnel of fake and frivolous debates that have sought to down-talk the Lebanese economy is the fact that the propaganda assault against Lebanon’s economy has been going for 18 months without producing extreme results. “The outflows of deposits in the last 18 months was $4 billion or $4.5 billion out of approximately $115 billion of domestic deposits in foreign currencies, although the outflows were concentrated in two periods in the last two months of 2018 and in early 2019. This means that dollarization increased by 1 or 2 percent [-age points] and outflows represent 2.5 percent of domestic deposits. [By now], panic signals should have been translated into either more panic of people still holding local currency savings or more panic of those people who are keeping their savings in Lebanon. This is not the case. More importantly, if we consider Lebanon as a single bank for the argument, this bank, despite all panic signaling that has been going on, is still proving its capacity to maintain $115 billion of deposits with a rate of 5.5 percent [interest on deposits], which is 2.7 percent more than what most global banks are paying on three-month deposits,” Baz points out.

When seen in context with the positive developments that have emerged in 2019, Baz, in an interview with Executive, states repeatedly that the deterioration in the risk profile of Lebanon is indeed real, but insists that this reality is more than compensated by various improvements, such as concerning political awareness of the need to implement reforms. “In my opinion, the percentage-wise worsening in the risk profile by several points is more than compensated by the improvement in the political governance and awareness,” he says.

Strength in ethics

A further hard to assess but not to be underestimated factor contributing to the strength of Lebanese banks seems to be the sector’s diversity. This diversity and wide range of banking positions and strategies is something like a collateral benefit of the banking sector’s unusually large size in comparison with the size of the Lebanese economy. For example, while one might assume that the tighter lending approach of Lebanese banks that had to be observed in 2018 and 2019 would be engulfing all banks in the sector equally, the truth is that some banks have strategies that tend in entirely different directions. This is noteworthy, because the different banks may pursue their credit tightening and consolidations without Lebanon experiencing an aggregation of identical banking decisions that come all at the same time, and then might be counterproductive for economic development.

Another energy with strong potential to work to the advantage of banks in the to-be-expected austere times resides in their ethical orientation. The conscious tiers of the Lebanese banking sector have, in recent years, invested great efforts in the improvement of their ESG policies. Observers of Lebanese banks thus are increasingly treated to perspectives such as this one by Nada Rizkallah, deputy general manager and board member at Credit Libanais Group. “Credit Libanais continuously strives to maintain best ethical practices, which was evident in the bank becoming a signatory to the Investors for Governance and Integrity declaration. Moreover, the bank has developed an Environmental and Social Management System,” Rizkallah tells Executive. (Editorial disclosure note: Executive editor-in-chief Yasser Akkaoui is founder of the IGI initiative.) According to her, the ESM system is now applied at Credit Libanais in all of the bank’s credit decisions, meaning that, for example, borrowing enterprises have to meet well-defined environmental and social standards.  

As Bank of Beirut’s Sfeir confirms about the role of banking in periods of scarcity, “In this time, the role of the banking system is to fuel the economy of the country and give enough strength to the country to not face a long period of austerity.”

For BSL’s Alouf, the primacy of ethics permeates all of his bank’s practices. “As I have been saying since joining this bank, banks have a mission in any country, and this mission of helping the economy grow is in their DNA,” he tells Executive. For him, this means, for example, to prioritize lending that helps people fulfill legitimate needs for education, homes, and sane vehicles, but not lend money for luxury acquisitions or trips just for the sake of having the bank do more business.

There appear to be as many perspectives on ethics and moral orientation of banking in Lebanon as there are sincere banks with good governance, and a sense of their business mission that is in agreement with their shareholding structure and stakeholder interests. As the banking numbers on the whole do not appear threatening for Lebanon and have not appeared so for years, and as profit margins and profits are expected to reflect any real direction toward spending control and revenue improvement that the Lebanese state has written this year on its banner—or is assumed to commit to with notable substance this month through adoption of the 2019 budget law—banks have much to do and innovate to help Lebanon find its new direction.

Today more than ever, no one can deny that banking in Lebanon is inseparable from the fortune and economic course of the country and its government. For Byblos Bank’s Beyrouti, the issue is clear. “Until the outcomes of all discussions are visible, the only thing that banks can do is be conservative, maintain their liquidity in order to be ready to support the economy at [the right moment]. At this point, I think, everybody will have to put their skin in the game,” she says. And similar awareness is what, despite all their competition with each other, unites plenty of her banking peers (ones that Executive interviewed this summer and those that were not available for different reasons).

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.