Global Arab Network | Banking in Lebanon - Solid position with strong growth

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Banking in Lebanon - Solid position with strong growth

Tuesday, 30 March 2010 15:14

By most measures, Lebanon's banks are is a solid position, enjoying high levels of deposits and a strong flow of inbound capital while operating in an economy that expanded rapidly last year and is expected to do so again in 2010. However, analysts warn that a number of factors could yet rock the boat.

With the coalition government of Prime Minister Saad Hariri apparently working in harmony, and the economy predicted by the Ministry of Finance to grow by up to 8% this year, Lebanon's banks have prospered. Furthermore, the sector's deposit base has hovered around the $100bn mark, fuelling recent reports on the bright future of the country's banks.

In its latest study of the Lebanese banking sector, issued in mid-March, ratings agency Moody's said the credit outlook for the industry was stable, thanks to the buoyant performance of the local economy last year, the reduction of tension in the domestic political sphere and relative stability in the region.

Similarly, a report issued by Commerzbank at the end of February said that the country's ability to resist financial shocks and the accumulation of capital flows had boosted market confidence and exchange rate stability.

Though the banking sector is riding the crest of a wave there remains potential for troubled waters. The outlook for Lebanon's banks could weaken quickly should the political situation deteriorate and result in a resumption of serious acts of aggression, Moody's warned. Despite its steady credit outlook for the Lebanese banking sector, political risk remains high as long as the country continues to be the theatre for proxy conflicts, said the report, authored by Stathis Kyriakides, an assistant vice-president and analyst at Moody's. Lebanon has been a theatre for proxy conflicts over the past 40 years and the banking system survived even if the economy collapsed. Stability would certainly help maintain a climate that has made Lebanon's banks very attractive to depositors, both local and foreign, as noted by Moody's.

"The stability of the Lebanese banking sector reflects, to a significant extent, its remarkable success in attracting a constantly large stream of foreign funding from the Lebanese diaspora and Gulf investors," said Kyriakides. "Indeed, bank deposits have displayed a notable resilience to political shock throughout the country's turbulent recent history."

Though a mark of success and resilience, the banking sector's ability to attract funding can also pose difficulties. Many of Lebanon's banks have a problem that lenders in some other countries would be delighted to have to deal with - having too much cash in hand. According to central bank figures, more than $1.5bn is flowing into Lebanese bank vaults every month, drawn by the 7% interest rate on deposits in the local currency and the fixed exchange rate.

To try and soak up some of this excess liquidity, and thus keep inflation in check, the central bank resumed selling certificates of deposit at the beginning of March, having stopped in June last year, and also sought to take some of the heat out of the money market by lowering its overnight lending rate from 3.25% to 2.75%.

"We have an objective of keeping inflation at 4% and we want to absorb excess liquidity that could cause an increase in prices," the cental bank governor, Riad Salameh, told international media on March 2. "We want also to prevent speculation, especially in real estate, as too much liquidity could cause that."

Salameh said the central bank has started issuing certificates of deposit after the Ministry of Finance announced that it would temporarily stop selling treasury bills as it had sufficient funds to meet its short-term fiscal needs.

While Lebanon's banks may be cashed up and operating from a solid base, that is not to say there is not room for improvement, according to some. There was a need for Lebanon's banks to upgrade the level of services they provided to private customers, in particular ensuring that consumer rights were protected, Fadi Abboud, the tourism minister, told a conference discussing the relationship between consumers and financial institutions on March 15.

"This will positively contribute to the economic development in the country and the citizen will be considered a partner in the banks' success," said Abboud. "The improvement in banks' services will be a key driver in the economic development and the creation of job opportunities in Lebanon."

The finance minister, Raya Hassan, also used the conference to call for reforms in the way banks operated. Hassan said there was a need to improve financial institutions' transparency and relations with their clients. "Transparency should be improved in the contracts signed between banks and consumers in a way that protects the citizens' interests," she said.

Having been criticised for reducing loan activity during the economic crisis, instead preferring to focus on building up reserves and funding state debt, Lebanon's banks may indeed need to brush up on the human touch. However, it appears they do not need tuition in wealth management, with their success at gathering liquidity showing they have graduated top of the class.

Global Arab Network

This article is published in partnership with Oxford Business Group

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