Beirut: Lebanon's once-booming banking industry has been badly hit by the nation's historic economic collapse. It has racked up tens of billions of dollars in losses, and many of the tiny nation's lenders now face the prospect of closure or merger.
Still, bankers have resisted efforts to make their shareholders pay for those losses and instead sought to pin the blame on the government or even their own depositors. The reforms have also been opposed by the country's political elite, who blame decades of fraud and wastefulness that led to the financial crisis.
The International Monetary Fund has given top priority to restructuring the banking industry to help Lebanon emerge from its severe financial crisis. Most of the country's 46 banks – a huge number for a country of 5 million people – are likely to be forced to close or merge as a result of the proposed IMF reforms.
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The banking industry was the economic jewel of Lebanon in the years following the end of the 15-year civil war in 1990; It offered high interest rates which attracted investments and deposits from all over the world.
Since the country's lenders made risky investments by buying Lebanese treasury bills despite widespread corruption and excessive spending by the country's political class, most of those depositors have now lost access to their savings. These actions contributed to the onset of the economic crisis in October 2019.
Banks in Lebanon no longer make loans or accept new deposits; Instead, they lend customers a small portion of their savings in US dollars at a rate that is much lower than the market rate.
According to financial advisor Michel Kozah, who contributes a financial column to a Lebanese newspaper, "they have turned into zombie banks."
According to local reports, prominent political and financial figures are believed to have siphoned billions of dollars out of the country despite informal capital controls on banks.
Clashes between angry depositors and bank employees, who have also been hit by the financial crisis, have resulted in angry depositors storming bank branches across Lebanon in recent months to obtain their frozen savings by force.
One in five bank branches have closed since the start of the crisis, and the number of bank employees has dropped by a third to less than 16,500.
Even though bank branches are limited by the current economic climate, Jeanine Hayek, who lost her job as a branch manager at one of the country's largest banks two years ago, said she understands the pain of depositors.
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In the mountain town of Bekfaya, where he opened a bakery after being fired from his job, he said, "There are some people who cannot afford to eat because their money is stuck in the bank," adding that from now on Getting away is relieved by confrontation.
The future of banks is uncertain. In April, the Lebanese government and the IMF reached a provisional agreement that called for an "externally assisted bank-by-bank assessment for the 14 largest banks".
But neither the government nor the lenders have taken any action till date. The banking industry has mounted a stout defense against the proposed legislation that would put the burden of system losses on shareholders rather than regular depositors.
According to a draft of the government's economic recovery plan published in September, losses in the financial sector, mainly at the central bank, stood at around $72 billion. The plan states that due to the size of the deficit, neither the central bank nor the banks can return most of their deposits to their holders.
According to a recent World Bank report, the deficit for 2021 is more than three times GDP, which makes bailouts impractical due to the lack of available public funds. According to the report, a bail-in that transfers the burden of payment from small depositors to large creditors and shareholders for bank restructuring is the best course of action.
Banks have opposed the bail-in solution, advocating the sale or investment of state assets to cover short-term losses.
One of Lebanon's largest lenders, Byblos Bank, led by chief economist Naseeb Ghobril, accused the government of a "complete abdication of responsibility".
He claimed that while the banking industry was luring foreign currency from around the world, the government did nothing to implement structural reforms and squandered the money. He claimed that the wage increase decision made in 2017—originally estimated to cost $800 million—actually cost three times that amount. According to him, this led to a financial crisis and led to the doubling of the fiscal deficit in just one year.
The government's choice to stop making payments on its foreign debt in March 2020, he claimed, had an adverse effect on the banks as well.
According to financial columnist Kozah, there is still time to find a way to cover the losses by having an auditing company look into accounts, returning the funds that powerful people illegally transferred abroad after the crisis started, and attempting to distinguish between good and bad banks. Little has been accomplished in the meantime in the discussions with the IMF regarding the proposed reforms.
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Another IMF demand was met in October when Lebanon's parliament approved changes to a law governing banking secrecy. However, advocacy groups claim the changes are insufficient. Even though the IMF has been pushing for them to be combined into one rate, the central bank continues to use multiple exchange rates. Due to a power outage, other proposed measures are currently on hold.
The IMF negotiations are being led by Deputy Prime Minister Saadeh Shami, who recently stated that all deposits under $100,000 will be returned to depositors, while deposits over $100,000 will be compensated over time through a sovereign fund.
Shami admitted that there isn't a fair plan for all depositors. Amin Salam, the interim minister of the economy, claimed that whenever the government discusses how losses and liabilities are shared, the banks push back.
Government officials are aware that they "need to save the banking sector because... without a banking sector, we will not be able to get the economy standing again."