Home BusinessAnalysis The legality and the perceptions of banking based in Lebanon

The legality and the perceptions of banking based in Lebanon

The public has been unwittingly enjoying a governmental charade of discussions, statements, and little change

by Thomas Schellen

To the interest of anyone who is not a part of the political and banking power ensemble, an absurd theater of dance and song is being played out on the nation’s institutional public stages. But this year’s summer theater is being performed in rationality-defying ways; as if the goal was an emulation of an ancient Athenian tragedy whose protagonists’ immersion into inescapable misfortune and his aims at catharsis are available only on the basis of divine intervention.

These are some of the acts in which the legal drama has been progressing: After a staff-level agreement between the Lebanese government and the International Monetary Fund (IMF) was announced on April 7, the choirs of politicians were immediately intoning praises and hymns with promises of rapid action. Even the Association of Banks in Lebanon (ABL) congratulated the government on the staff-level agreement in a letter, calling it “a crucial first step towards the implementation of an IMF program.” But then the progress towards actually signing an IMF agreement over the following five months resembled a play of double-talk, twists and intrigues. It invited the thought of how social media, or today’s Erinyes – the epitome of vengeance for broken promises – will be busy for years. It would give any ancient Greek tragedian a run for their money.

The bewildering performance in the national theater has been commented upon by a chorus of media and civil society voices attempting to vocalize the hidden agendas and unspoken fears of the main actors to the spectator. In one example of the chorus-worthy drama, the presidential signature for the banking secrecy law was reportedly held back in August, because of pending evaluatory responses to a revised draft. In September, news agency Reuters reported that the IMF uncovered “key deficiencies” in the recent modifications by Lebanese lawmakers to the draft of the banking secrecy law. The law is one of several prerequisites for the IMF agreement.

Another such prerequisite is the capital controls law, which by September 2022 is approximately 35 months late. Local media site, Naharnet, reported on the last day of August that a joint session of involved parliament committees “agreed on finding a capital control solution that would both preserve the rights of depositors and the ‘existence’ of banks.” No decisions were reported from the joint committees’ meeting. Government representatives, however, have been waxing wisely that the country is at a crossroads and has to go toward reform or further collapse. Soon after, advocacy organization Legal Agenda added its two cents by commenting: “The Government, like parliament, is still unable or refusing to take any step on the road to reform or exit from the crisis, which puts the whole country in front of risks whose limits are difficult to predict.” The group also decried that along with the failure to produce a capital controls law, a governmental economic rescue plan has been debated to no avail on three occasions during the eight-month period up to September 2022. 

And so, throughout this summer it has continued; a now three-years-long charade of conferences, plans, law discussions, expressions of absolute determination, and non-implementation of anything decisive, least of all honest reforms and laws prerequisite for an agreement with the IMF. The local audience of this charade, long mired in disbelief of political assurances, in the meanwhile is held captive to a macabre dance of depreciation of the local currency, alongside domestic, pass-through, and now global inflation, and desperate struggles for their livelihoods. A dance of a slow economic death that is separating the haves-of-a-few-real-dollars from the haves-of-near-worthless-lira by an ever-widening gulf of inequality.

A clear list of legislative and organizational needs

One perspective shared by virtually every economist and expert heard by Executive throughout this year is that Lebanon will not recover without a viable financial sector. Although, the views of these experts vary regarding important nuances; nevertheless economically relevant laws are necessary to the foundation on which to rebuild banking and the economy. Driving this point home in an interview on the legislative priorities and the legality of banks’ behaviors, lawyer and former minister Ziad Baroud leaves no doubt that the legal requirements make room for any ambiguity. “The IMF staff level agreement is very clear in envisaging a package deal of at least four laws to be voted [in]: [laws on] the budget, capital controls, bank restructuring, and banking secrecy,” he tells Executive.

Noting that laws on banking secrecy and capital controls have been initiated, while a budget is the minimum that any country should commit to and legislate in a timely manner, Baroud elaborates on the order of these laws’ importance. In his view, the bank restructuring law deserves the utmost attention. “In my reading, the number one priority is the restructuring of the banking sector because the other three laws would not create much impact unless you restructure the banking sector. And if you don’t have banks, you don’t have an economy,” he explains.

There are many contentious issues in local debates about all banking-related laws however. These debates show how crucial the legality of bank actions is for the current and future relationship between banks and their depositors, and even their imagined stakeholders. Here, uncertainties and misconceptions abound over issues such as the use of reserves at the central bank, along with the baseline liabilities and responsibilities of politicians, central bank, and commercial banks. “But before talking about reserves and the legality of their use, I want to say that deposits are protected by law. Thus, everything that has been happening since Oct 2019, is de facto not really legal,” Baroud emphasizes.

According to him, the mandatory or compulsory reserves is an instrument granted to Banque du Liban (BDL) by virtue of the Code of Money and Credit, Article 76, paragraph D, according to which the central bank can deposit with banks up to 15 percent of their respective obligations. “Such reserve is provided in order for the BDL to perform its operational tasks in terms of liquidity and – for instance – credit policy. Therefore, it cannot be regarded as deposits’ guarantee; this is a common blunder. It’s a tool in the hands of the central bank, which can consider the Treasury Bonds as part of said compulsory reserves as per the law,” Baroud clarifies.  

This seems divergent to positions expressed by ABL in 2021, under which the association blamed the central bank for submitting – when it lowered the reserve requirements by a percentage point – to pressures from “the political authorities, contrary to the Monetary and Credit Law where the purpose of the mandatory reserves is limited to the needs of the banking sector.” However, as to whether the mandatory reserves are actually fixed at an exact level of 15 percent, Baroud explains that this is a ceiling set in the Code of Money and Credit, and the central bank can lower it.

A quick headline query on the subject of reserve requirements by central banks shows that comparable steps to the one enacted by BDL in 2021 have been taken by many central banks elsewhere, or that such requirements in developed economies commonly range in the low single digits, in terms of what central banks require from commercial banks. For example, the European Central Bank (ECB) tells online visitors: “Reserve requirements are a standard monetary policy tool in central banking, but are not required by all central banks,” citing as examples of the latter Australia, Canada, and Sweden. According to the ECB, banks in the eurozone had to hold a minimum of 2 percent of relevant liabilities as reserves in accounts at national central banks until 2012, after which time the rate was halved to 1 percent.

For Lebanon, dealing with the commercial bank’s unsecured deposits, the lawyer points out that as the regulator of the banking sector, the central bank has a huge supervisory obligation. Moreover, it is not some private enterprise but part of the Lebanese Republic, and therefore carries responsibility on par with those who hold political responsibility. As a combination of economic and monetary factors, together with a lack of transparency, have engendered the crisis, the problem over the use of reserves is essentially interlaced with central bank independence, discretionary power, and responsibility. “The main problem we are facing is linked in my reading to the lack of transparency in the operations pertaining to the reserves and more specifically to the undefined and open-ended boundaries between the needs of the government and the margins of maneuver of the BDL,” Baroud says. “In any case, compulsory reserves are definitely not the guarantee for deposits, at least from a legal perspective, although [they are] viewed as such by the depositors at large.”

Perceptions and self-perceptions

As Baroud further notes, banks have historically been transparent and compliant enough when interacting with correspondent banks and counterparties abroad. Yet they also went to great lengths – and successfully so – to conceal their real data from public scrutiny and local stakeholders. “We need more transparency in the banking sector, better monitoring by the regulator and by the shareholders and boards of directors,” he says, adding that under a 1994 law, each bank in Lebanon should appoint at least one independent, non-executive board member.

The demand for improved governance and transparency at Lebanese banks is well known to the readers of Executive magazine. Today, it resonates even larger, as for the past two years banks have done astoundingly little to communicate their real situations, both relating to meaningful data and staff welfare factors.

Despite conducting previous interviews with multiple leaders of ABL, like Salim Sfeir, the organization’s current president, he did not accept Executive’s invitation to be questioned for this issue. Sadly, nixing our hope to understand his current views on the resilience of banks.

In our most recent in-depth interview with him in the summer of 2019, Sfeir had acknowledged a wave of deliberate social media assaults on the banking sector which occurred in the second half of the 2010s. At the time, however, he opined dismissively about the sector’s reputation problems, “no, it is not a problem,” displaying with hindsight an unseeming confidence that banking was valued in society as the “services industry that existed to best serve the interests of its customers.” 

Two mid-tier banks that responded affirmatively to our interview requests, however, provide glimpses into the mindsets of bankers who are battered by the furies of public opinion. Marwan Kheireddine, the chairman of AM Bank confesses that he has gathered overflowing experience in being misunderstood, and much of that on purpose.

“Because I am visible in the media, I constantly get attacked,” Kheireddine says as he meets Executive in his office in Hamra. An hour earlier, further down the street, a chaotic scene had been unfolding involving protestors, a bank, and one shotgun-wielding depositor demanding access to his money. “In reality, I am defending the free market economy,” he says.

“Bankers in general feel bullied, feel threatened, and feel that they are [made to bear] responsibility for something that they did not do. [Bankers] find it very hard to have an educated conversation with society overall as they have been under attack for two and a half years,” Kheireddine says of the experiences of his peers. Though, he admonishes that on their part, banks failed to create a lobby to defend against attacks in the media or on social media, which have morphed from unpredictable moments into much more harmful incidents.

“My message to banks is that they should be more courageous,” agrees Riad Obegi, chairman and general manager of Banque BEMO. For him, the role of banks in society is not limited to financial markets, and not even limited to their contribution to the economy. “Banks are like a symbiotic virus. If our host dies, we die as well. If we are becoming too strong, our hosts become too weak. There must be an equilibrium. We need to help our hosts become stronger so that we become stronger,” he tells Executive.

Quarrels over the liability of banks between depositors and banks as their debtors have been playing out in cycles of varying intensity over the past three years, with emotive peaks of distress and litigious energy. There are no improvements to date as far as restoration of trust between the Lebanese people and their government or their banks. 

Irrespective of the depressing short- and medium-term pecuniary realities that are prevailing in the country, alongside the backdrop of evading accountability attempts by actors responsible for the ongoing tragedy, there may be no reason to expect that banks will be resolved lastingly of their moral and legal obligations in the ultra-long-term.

Today’s examinations bring to mind how the realms of long-delayed accountability for past misdeeds across the globe have lately been expanding in time. We have been seeing judicial reckonings of corporate crimes involving apologies and financial payouts by religious and civil organizations to victims of abuse, national governments scrambling to restitute art treasures to former colonies, inner-European legal conflicts over claims for reparations 70 years after World War II, and struggles of ethnic groups for compensations from their ancestors’ slave masters. Accountability may be coming late, but its arm is proverbially long and getting longer. Moreover, in the even longer run, the unknown does rule and other challenges will beckon, raising questions that are as likely to remain unsolved as all big questions of humanity but these questions will render today’s worries and preoccupations of bankers and depositors, as ever, absurd.

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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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