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The Cradle
Banks behaving badly: Lebanon’s financial sector goes rogue
The IMF says some Lebanese banks are liquid enough to pay 100 percent of the value of deposits up to $200,000. But no government body will force banks to pay depositors or restructure this collapsed sector.
By Léa Azzi
February 18 2022
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Photo Credit: The Cradle

In January this year, coffee shop owner Abdallah Assaii entered a Bekaa branch of the Bank of Beirut and the Arab Countries (BBAC) and held seven bank employees hostage.

He threatened to set them on fire – and himself – with gasoline and grenades unless the bank allowed him to withdraw $50,000 from his own account.

A father of two, Assaii was hailed as a hero because he was able to retrieve his money, a move now rendered impossible to small and medium depositors, two years after what the World Bank calls Lebanon’s worst ever financial meltdown.

The story of Assaii highlights the desperation of most Lebanese citizens and residents who are unable to withdraw their cash deposits and life savings. There is a simple reason for that. Bank shareholders refuse to take responsibility for the collapse they caused, and instead choose to pass the punishment onto their depositers.

Bad banks and social cruelty

Today, 14 banks are liquid enough to pay 100 percent of the value of deposits up to $200,000, according to an article in the Lebanese Al-Mahatta media platform published on 8 February.

The article describes how the International Monetary Fund (IMF) informed the official Lebanese bailout negotiation delegation that they had discovered those 14 banks could also pay 20 percent of the value of deposits above $200,000.

This is very welcome news for depositors, coming after two years of harsh measures imposed on them by the banks. But where is that money?

Lebanese banks stopped giving dollars to depositors in October 2019, and reduced significantly withdrawals in Lebanese liras (LBP) as well. Some of these institutions allow the withdrawal of only 1,000,000 LBP / day with a maximum of 12,000,000 / month, in a country where the average bill of a private electric generator alone costs more than 1,000,000 LBP a month – today, equivalent to around US$50.

Preventing people from withdrawing their salaries and deposits has serious repercussions, not only from securing their basic daily needs, but life-saving ones like medication, is comparable to committing a crime.

It is especially cruel as the economy has overnight transformed into a fully cash economy as a result of hyperinflation and wildly fluctuating exchange rates.

The cruelty does not stop there. Lebanese commercial banks have halted all economic activity, a result of their refusal to open new bank accounts (even in US dollars, unless the client has a referral), including issuing private loans, and to play their necessary role in the country’s economy.

Another roadblock is the irregular relationship between Lebanese banks and correspondent banks. Foreign lenders have reduced their activities with Lebanese banks in cross-border payments and letters of credit.

Some foreign banks have refused to open letters of credit unless the issuing Lebanese bank provides collateral against the full amount of the facility.

Other banks have lost ties with foreign banks and become reliant on third parties, or Lebanese peers that still hold ties with foreigners.

Correspondent banks have turned cautious on Lebanon as its currency crashed with a low to negative level of foreign currency liquidity.

So are these signs that the Lebanese banking sector is bankrupt? Their policies, numbers, figures, and their disruptive relationship with correspondent banks do confirm this.

One of the most prominent indicators of financial sector collapse is the way banks have ignored the instructions of the Central Bank, mainly circular no.154.

On 27 August 2020, Banque Du Liban (BDL, Lebanon’s Central Bank) issued circular no.154 to banks and financial institutions, entitled: “Exceptional measures to revitalize the operations of banks operating in Lebanon.”

The Central Bank circular required banks to complete a fair value assessment of their assets and liabilities, add 20 percent to their capital, and boost their liquidity with their foreign correspondent banks by 3 percent.

It also required banks to incentivize clients who have transferred more than $500,000 of their deposits abroad to repatriate 15 percent of that amount back to Lebanon. Bank chairmen, members of their Boards of Directors, large shareholders, top management, politically exposed persons (PEPs) were required to repatriate 30 percent of their foreign transfers.

A year and a half later, most banks have not increased their capital by 20 percent, have not established 3 percent liquidity with correspondent banks, and have not presented their work plans.

What banks have done is to continue speculating on the Lebanese lira by buying dollars with the LBP they receive from the Central Bank, which are meant for clients.

Both Banque du Liban and the majority of Lebanese banks refuse to acknowledge that the banks are, in fact, bankrupt. They will neither declare bankruptcy nor implement the necessary restructuring plan that would help re-launch the economy.

A financial sector non-plan, courtesy of the government

Weeks ago, the Lebanese government presented a plan to the IMF with the purpose of further protecting the banks. The plan included forcing depositors to pay for more than half of the $69 billion gap in funds, while banks would contribute a mere $13 billion by writing off shareholder capital.

The plan also included converting a large portion of dollar deposits to the Lebanese lira at rates that would wipe out more than 90 percent of the value of their deposits. The money, the plan stated, would be paid over a period of 15 years.

Official sources confirm the IMF rejected the draft plan, especially due to its enormous devaluation percentage on the lira.

Ironically, Lebanon’s banking association also opposed the government plan, and insisted on maintaining majority shares in the sector.

No escape from restructuring

Restructuring the financial sector (the Central Bank and commercial banks) is not an option but an obligation, and an essential step towards a re-launch of the economy.

Former member of Lebanon’s Banking Control Commission, Joseph Sarkis, explained in an interview with The Cradle that the restructuring process could not take place at the macro level, as stated in the government plan.

“This is a mistake and is not accepted by the IMF, anyway,” he said.

The best way, according to Sarkis, was to “analyse each bank separately, and determine who has liquidity or assets…and who should be written off. In the absence of any other legislation, the supervision and control of the process is a role that the Banking Control Commission should play.”

Out with the ‘lollar’ and in with the dollar

In the financial recovery plan of the previous government, a proposal was put forward to establish five new banks. Could this be a solution for today?

The owner of a financial company told The Cradle that this would be near impossible with the existing difference between the ‘fresh’ dollar and the dollar held in the banks before 17 October 2019, jokingly known as the ‘lollar’.

He said that “it is going to be difficult to complete inter-bank transactions with this margin. The Central Bank must resolve the phenomenon of the dollar and lollar first.”

Economist and former Ministry of Finance advisor, Dr Henri Chaoul, agreed that the banking system cannot continue to have dollars and ‘lollars’. He says that in the beginning, “a restructuring must be carried out, a new system must be established, and on this basis new banks are created.”

Nevertheless, in the current situation, according to Dr Chaoul, where would liquidity for the banking sector come from? Who would send that money to Lebanon now?

The views expressed in this article do not necessarily reflect those of The Cradle.
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