Lebanese banks face prospects, challenges
It is not an overstatement that Lebanon’s banking sector forms the backbone of the country’s economy. Banking activity contributed, from the 1950s to the 1970s to its economic prosperity. Even during the darkest hours of the civil war that tore the country apart and hindered its economic development, funds continued to flow into Lebanese banks that benefited from a policy of banking secrecy, which embodied its free economy and gave it an important advantage over others.
In the post-war years, the sector played a pivotal role in the reconstruction process, despite the great difficulties, errors that were committed and opportunities that were lost. Lebanese banks took it upon themselves, as a result of an unspoken understanding between them and the Rafik Hariri-led cabinet at the time, to finance government projects by subscribing in treasury bonds pursuant to a central bank monetary policy predicated on maintaining the stability of the Lebanese pound’s exchange rate.
These banks reaped substantial profits through this equation, but they also had to take on significant risks that revolved on their over-investment in government bonds, at the expense of portfolio diversity, which is considered a main tenet of good governance. This choice led to high interest rates of 8-10% that hampered the development of the private sector, the main driver of growth, which has always distinguished Lebanon from other countries of the Middle East.
From this perspective, critical voices rose against the central bank’s policy, accusing it of artificially buoying the currency and condemning the existing understanding between banks and the government, which came at the expense of the interests of citizens and the economy. This campaign was not devoid of some degree of politicization. Such a monetary policy could be costly because it was not complemented by governmental reform policies that addressed the economy’s structural imbalances and lacked the measures needed to control wasteful spending and corruption. In addition, interest rates could have been better manipulated to accommodate the requirements of growth.
Yet, undoubtedly, the choice of stabilizing the Lebanese pound’s exchange rate was necessary and unavoidable. Without such measures, the banking sector’s solvency would have been negatively affected, causing it to lose its ability to finance the economy and public debt. Truth be told, until 2011, bank deposits continued to grow at a pace warranting the admiration of the global financial community as well as that of rating and monitoring agencies.
Today, on the other hand, Lebanese banks face sizeable challenges. It is true that deposits continue to increase and have so far reached $130 billion. This is equal to three times the local gross domestic product or twice the level of public debt. It is also true, however, that the pace of deposit growth has slowed in the past two years as a result of the current political and security situations, as has the pace of growth of other bank assets, which today total $160 billion. There is no doubt that this decline negatively impacted bank balance sheets and, consequently, their special financing ability in light of the rise in the fiscal deficit and the rise of public debt.
The other challenge faced by Lebanese banks is the intense regional competition. Despite their excellence in the arena of customer relations and services offered, nothing points to Lebanese banks having an advantage over their Gulf-based counterparts.
The widest gap, on the other hand, lies in the scale efficiency or the optimal size of a bank. Here, we must point out that the deconcentration of Lebanon’s banking sector hinders its growth and competitiveness on the regional scene. It is true that the largest 10 banks control 80% of Lebanese bank assets. It is also true, however, that the existence of 71 different banks dilutes the abilities of the Lebanese banking sector and restricts its competitiveness. That is why the coming period might witness beneficial mergers between banks, particularly the smaller ones.
Another challenge entails limiting the sector’s exposure to Lebanese treasury bonds, while diversifying its investment portfolio. The recent reclassification of some Lebanese banks, despite their outstanding performance on a managerial and service level, was due to the weight of these treasury bonds on their balance sheets. Current circumstances complicate matters, not because of a lack of funding sources, but, on the contrary, because of a surplus in deposits. Investment opportunities are scarce in light of the bad security situation. Foreign investments have markedly decreased, while loans to the private sector have reached $47 billion despite the fact that the sector’s capitalization is dwindling and its debts are increasing. Housing loans, on the other hand, which dramatically grew — from 44,000 loans in 1993 to 700,000 loans this year — have also reached a ceiling that current demand cannot overcome.
There is no doubt that the need and opportunity now revolve around diversifying bank services, by expanding business banking services and developing Lebanon’s financial markets. This would help grow the economy and distribute risks. In turn though, this requires the establishment of a favorable political atmosphere that revolves around a minimum level of security and stability. A functioning government and institutions are thus required, but nothing points to them seeing the light of day in the foreseeable future.