The Lebanese banking sector, a long view

Seeking clarity

Photo by Greg Demarque
Reading Time: 10 minutes

Lebanon’s geographic location and trading history dictate the need for three basic premises in terms of its Economic Policy: a strong and stable currency, advantageous trading facilities and low taxes.

Michel Chiha

Once there was a time when a Lebanese banker had a national vision. Whether a contemporary citizen agrees with this vision or not is immaterial for recognizing its historic influence. Even the question whether or not this banker was consciously intending—as some Western academics speculate—to steer the economy in a direction that was optimal for the interest of the financial bourgeoisie in the early and mid-20th century, is unimportant for the consideration that the vision shared by this banker and by his intellectual and social peers has played a profound role in writing the story of this country. It has determined the Lebanese national narrative and the country’s broad economic course for almost a century—the entire period since the adoption of modern Lebanon’s first constitution and the achievement of independence later on. 

The historic fact is that the visionary banker, patriot, and influencer, Michel Chiha, was among the key shapers of not only the 1926 constitution but also of post-independence politics and the Lebanese merchant-republic paradigm. Chiha’s credo was that a nation is created by “the desire and the will to live together.” For him, Lebanon was a composite country dependent on internal balance, a nation of many “associated confessional minorities,” and a nation whose fortune was determined by a confluence of geographic givens—the mountain and the sea—with part mythical, part historic factors, namely the Phoenician heritage of seafaring trade. The nation’s economic policy would have to incorporate a freewheeling market system, Chiha believed, because to his mind “even a moderate version of a tightly controlled economic system is not a rational option for Lebanon.”

Whether one agrees with or disdains the invention of a nation state narrative grown on Lebanese territory from an essentially European historicist seed, it is a truth not to be ignored that this country was shaped by a laissez-faire commercial culture mingled with a quasi-mythical tale of entrepreneurial spirit, trader mentality, and prowess in financial intermediation. In a competition over economic direction that a century ago juxtaposed industry and agriculture to trade and services, the course of modern Lebanon was effectively set from its first charting toward a type of economic give-and-take activity that would be nurtured by, and be attractive to, bankers in a mutually profitable symbiosis with landed gentry­­­—or, to put it more accurately in local terms, the traditional zu’ama with all their pseudo-feudal webs of tribal privileges, emotional interactions, and social obligations—and that allowed for some seriously oligopolistic cultural traits of communal and religious tribalism. 

Tests of fortune

All this made Lebanon flourish in the ways it did from the 1950s onward (when it did blossom radiantly for substantial periods of relative peace and growth of, admittedly uneven, wealth) in ways that regional peer countries didn’t manifest and that Lebanon could not have achieved without its traders, middlemen, and bankers. This history and merchant-republic paradigm with confessional and oligopolistic patterns, however, also played a massive role in bringing on the tests and temptations of the Lebanese fortune in the context of its detrimental exposure to geopolitical interests in the years of imported and indigenous internal violence and in feeding social imbalances in application of this economic model in the last 30 years. 

Long before there were 20th century-type bankers in Lebanon, there were farmers, tribal warriors, seafaring traders, artful crafts people, small but enterprising producers, hospitable innkeepers, money lenders, healers, drafters of contracts, useful scribes, religious and cultural adopters and educators, rebellious and brilliant poets, non-conformist sculptors, painters, and thinkers, monastic minds, and even hermits and spiritual visionaries. 

With this historic mental wealth of note, it would be a mistaken belief to think that Lebanese, like human beings in general, should or could be molded into a homogenous group—say, a two-layered and egalitarian sort of society composed largely of an internationally competitive agrarian producer class and an equally competitive urban class of industrial producers, a small society with a superstructure of, however ideologically aligned, administrative mandarins. It, by contrast, deserves to be acknowledged that Lebanon is a prime (and indeed exceptional beyond the confines of the Arab region) incarnation of a nation whose human diversity is its engine and capitalist division of labor is the transmission. 

Tapping into this diversity, but capitalizing on it only with deteriorating efficacy, the private sector is the historic main conduit of progress and social reality in Lebanon, with all the advantages that this has generated. But the private sector has been an imperfect engine, with deteriorating strength and, by global comparison, dwindling productivity, with all that this means in terms of impaired developments of public goods, for the concentration of capital and market power, and for harmful paralyses of social mobility reflected in economic inequality and expressed through rentier and entitlement mindsets that infested society from the very top deep down into the sectarian upper, middle, and even lower-middle classes.

These detriments of the Lebanese model—impaired social mobility, entrapment of wealth, power and freedom in the hands of a few, and horrible underinvestment in public goods—have been visible for the entirety of the past three decades. They have been criminally ignored and those who benefited from them are now facing the consequences of their moral failings. The people cannot but be applauded for insisting, in the demonstrations of the thawra (revolution), that Lebanon’s political and financial failings have to be remedied. And as many see and say clearly, this restoration of Lebanon requires a redesign of the moribund political system, judicial restitution of illicit gains, and strenuous social efforts and economic sacrifices of many coming years.  

But it is also of paramount importance—and vital in charting the next phase of Lebanon’s national course—to acknowledge and take into account that the country is inextricably embedded in the structures of a capitalist world, a world that has for the last 40 years not been challenged by any credible alternative. As it did the world’s economically leading societies, and perhaps much more so than for many small economies in culturally less exposed positions, capitalism has shaped this country and, to rely on a keen observation of political economist Joseph Schumpeter, it has created the interests that are reflected in the “manufactured will” of the populace in this Lebanese democracy. 

This has to be recognized if one wants to embark on changing the Lebanese model. One can argue with Schumpeter (who highlighted this point in his seminal book Capitalism, Socialism and Democracy) that capitalism, due to the fascination created by the tangible success of entrepreneurial activity, has acted over centuries as “the propelling force of the rationalization of human behavior.” One can then subsume in local application of this thought that all that is rational as a determinant in the evolution of the Lebanese merchant republic has, since this state’s formative years, been inseparable from the DNA of capitalism—which means that banking, trade, and private entrepreneurialism can in no way be behaviorally cut out, economically amputated, or genetically eliminated from the overall DNA of Lebanese society, irrespective of its sad secto-political reality and all that is in need of rectification and healing in this polity. 

Lebanon’s financial vitality

This entwinement of the banking and commercial DNA with the viability of Lebanon as late-emerging state in the context of early 20th century geopolitics means that it is futile to think Lebanon could exist in any contingent future without this banking ingredient in the national political identity. It is simply not possible to retain Lebanon in the sense of its history and functional organization of society and take the banker out of Lebanon. In this sense, it serves well to remember what Chiha emphasized to his compatriots of 75 years ago—that the Lebanese banker needed to be neither a gold-encrusted Croesus nor a money-worshipping “Mammonist” but fulfills his role best as simply a “talented money technician” when combined with the crucial human qualification of “someone who embodies confidence.” (Chiha apparently expounded this insight years before it became a hollow stock phrase in teaching economic fundamentals at b-schools and a boilerplate cliché thrown around by banks’ PR departments.)    

On one hand, this country’s human talent reservoir means the Lebanese are much more than just a gaggle of bankers and their subservient economists, of monopolist traders and their obliging marketers, of rentier landlords and corruptible rentier politicos who (while they instinctively and dishonestly denounce rentierism) press down on the collective neck of a vast proletarian rest. The talented, educated, and underemployed Lebanese women (and even some males) can be top agrarian and industrial producers as well as excel in all of the economic callings mentioned above. Lebanese talent and human capital should not be viewed solely or even primarily through the 20th century societal stratification lens of the western liberal market economy that, as a model, has advanced far into old age of its civilizational lifecycle. 

It would on the other hand also be delusional, however, to assume that Lebanon will thrive by ideologically or operationally reining in its talents in trade, banking, and marketing or by artificially limiting the strength of its banking sector by means of either politics of ideology. In absolute terms, the Lebanese banking sector—like this entire polity—is small, with an exceedingly small contribution to global GDP (even in pre-2020 terms) and a minuscule role in international financial markets. In relative terms of size to the local economy and strength of its human capital, however, the Lebanese banking sector has been growing surprisingly well over the post-conflict decades from 1990. 

Need for renewal

This relative increase of banking is all the more notable when financial sector performance is compared with the insufficiently growing professionalism and productivity of many other specializations in the economy. The extent and exceptional scope of this banking growth is further accentuated when examined by the harsh lights of the severe external shocks that the country was exposed to in these three decades, not to speak of the fact that ethics and law as enforced by the state were politically and societally insufficient in the past three decades. 

In the global sense and also by its internal coherence, legal, regulatory, and informal Lebanese solidarity, the country’s entire banking sector has been regarded by some local economists as if it were a single bank, and rightly so, given the tight knit identity and extensive formal and even unspoken alignment of local banks with their supervisors and regulators at the central bank. This very intimate alignment is by ethical, psycho-social, societal, and commercial standards not perfectly desirable and has not panned out over the past decade. Thus the need for digital renewal, for mental challenging of entrenched thought patterns in the top banking stratum, and for corruption-resistant managerial change and infusion of fresh minds into decision-making ranks of local banks has been building and has become ever-more unmistakable by time of this writing, judging from the evidence of listening to those who have long, often too long, occupied positions of influence. 

For the last nine months, this evidence has been overwhelming—senior bankers (with very few exceptions, see Obegi interview) have either been totally silent or exceedingly defensive in their media statements and interactions. They have been found wanting in policy declarations and in their attempts to deflect public attention—quite understandably, but not productively so—from the realities that Lebanese are facing when attempting to access their money at their banks. This is not to say that sole responsibility lies on the banking sector. It has been clear over these past few months that two conflicting narratives have been gaining traction dependent on political leanings: one that lays the blame of Lebanon’s economic crisis at the door of an intractable and corrupt political elite, and one that has been throwing increasing ire and vitriol toward the banking sector, in particular the governor of the central bank, laying the blame firmly at the feet of Lebanon’s financial sector. The reality, as it often is, is being obscured by the rife rumors and political machinations that are occurring in the country. What can be said, without any equivocation, is that there is plenty of blame to pass around. Amid these competing narratives and ideologies, too many in the banking sector have—perhaps fearing the inevitable backlash—stayed silent, and, by not speaking up at all, and doing so for weeks and months, up to mid this month, sent out the worse kind of message.   

Lebanese banks need digital transformation, internal renewal, and a move to the future—but the mechanism and method for organic change has to be what Schumpeter called capitalism’s “perennial gale of creative destruction;” it cannot be forced by the ideology of a temporary government or state intervention. Recent years—especially the time since after the Great Recession of 2007-2009—have been marked internationally by an increasing understanding that states and governments need to play roles in political economy that go beyond the blind belief in markets preached by economic theorists late in the last century under some neoliberal ideologies and the older “hands-off” thinking of laissez-faire capitalism. But experience of many economic actions by governments and central banks in the past 100 years—from Keynesian deficit-spending recipes to protectionist experiments, government bail-outs, and quantitative easing that under the impact of the new coronavirus recession have in recent months proliferated exponentially—also shows how risky government action is and how this role must be surgical in method, ideology-free, informed by facts, and collaborative instead of interventionist.    

Objective and constructive

Executive editors have to admit that we have no indication what Chiha would have thought about the sorry state of the Lebanese condition of 2020 or what the Lebanese would think of this current society for whose independence they strove, sacrificed, and even bore martyrdom. One suspects that they would not have been idle or fallen into shock at witnessing the dismal state of the country they loved (notably, a young Chiha’s 1919 return to Beirut from Egypt was to a city in “ruins, sadness and silence,” a city devastated by the wars of others).

But it is with immensely greater sadness that we confess to our current ignorance. We believe that our assessments of the Lebanese economy, and specifically the banking sector, in our coverage of the past 22 years have been accurate and analytical to the best of our journalistic abilities, collectively as magazine and individually as writers. We have been, and still are, relentlessly striving for an objective and constructive approach in our particular focuses on Lebanese banking, finance, feeble capital markets, policy-making, and political economy. 

Thus it is with a sadness that is incomparable to accepting that we cannot divine the thought, feelings, and ambitions of this republic’s forebears that we say this: as of mid-2020 the future and productive utilization of the Lebanese banking sector is obscure to our view. Not because of the sector’s reduction in size. As Association of Banks in Lebanon board member Waild Raphael noted in the association’s one interactive on-the-ground meeting with journalists in June 2020, this reduction is happening and driven by rational depositor behaviors and market logic. What is obscure is the rationale, presented by the government in its financial recovery plan, for banking sector restructuring. Introduced with the ominous note that “complacency or partial solutions are not an option” and an apparent determination to allow buildup of risk (the management of which is the existential business of banks), the government plan declares that “The authorities will elaborate a comprehensive strategy for the restructuring of banks balance sheets in due course,” before hinting that “a full restructuring of the banking sector will require new legal powers for the government.”

In the testing times of the Lebanese crisis, it is uncertain what the comprehensive strategy and the new legal powers given to the government will look like. Why would the plan further mention new legal powers for relevant supervisory bodies (without naming any)? Were the old powers not sufficient? Why would the plan say that the Lebanese government will contemplate the issuance of five new commercial banking licenses? Is the intention to create specialized sectoral banks, e.g. for agriculture, reminiscent of dated finance models that have not become known for their successes in other jurisdictions? Are the real intentions for the future of banking in Lebanon for a well-regulated, market-driven and efficient banking sector, or are they dreaming a different banking dream, one that was last dreamt in this part of the world in 1963?   

The uncertainty over the accurate data points in banking, finance, and debt realities will be resolved, as the numbers on the first part of the year have recently begun to come in, albeit a bit later than journalists and analysts might wish for. The uncertainty over eventual mergers and consolidations in the banking sector will vanish with time if market forces and the banking regulator—Banque du Liban—are allowed to do their job along the same consolidation logic that has been applied in the past decades, and improve on this practice. The uncertainty over the political economy strategy of the Lebanese state is the component that by mid-2020 appears farthest from resolution. The mindset, however, that might be most productive for this economic future, could very well be the mindset of national independence, interdependence, and responsibility—shown before Lebanon gained its statehood and self-determination in the first half of the 20th century—that might be suitable to guide constructive communication between bankers and their political counterparts, something that is urgently needed but has not been in evidence during the past five months. 

Thomas Schellen

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

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