Experts urge quick reforms to restore confidence in Lebanon’s banking sector

by Dana Halawi

BEIRUT, Aug. 17 (Xinhua) — Lebanon’s banking experts urge quick reform measures by the Lebanese cabinet and the central bank to restore confidence in the banking system that has lost about 80 billion U.S. dollars in deposits.

Wissam Fattouh, secretary general of the Union of Arab Banks, emphasized the need to start with financial reforms at the cabinet level.

“When we reduce the state’s expenses and activate the industry and agriculture sectors by not importing much from other countries, the government would start generating revenues, and then it will be capable of returning the years of government borrowing from the central bank,” Fattouh told Xinhua.

Lebanon has been facing the worst financial crisis in its history as the banking sector lost billions of dollars in deposits. The deposits were used over the past 30 years to finance the government’s expenses.

Fattouh explained that the Lebanese government has for years relied on the central bank to cover the public sector’s expenses, even though structural reforms at the cabinet level are “the key thing to do now,” Fattouh said.

After the reforms, each bank can be studied separately to assess its need for either recapitalization or merger, said Fattouh, who ruled out liquidating any bank.

“We are not in favor of banks liquidation as this would give depositors the right to recuperate only 75 million Lebanese pounds (830 U.S. dollars) of their deposits each, considering the Central Bank of Lebanon and the government are financially incapable of compensating depositors for their losses,” said Fattouh.

On the contrary, added Fattouh, acquisitions for local banks by foreign banks would help restore confidence in the local banking sector with the entry of foreign investors to the Lebanese market.

“It will also create competition to offer better banking services,” he added.

Lebanese Prime Minister Najib Mikati requested earlier this month that parliament drafts a bill to allow the state to borrow from the central bank.

But Nasser Saidi, former economy minister, said the bill goes against the Lebanese law Code of Money and Credit, which stipulates that the central bank does not grant credits to the government and the public sector.

“This law means we are automatically violating the central bank’s independence, and such practices contributed to the current financial crisis,” he added.

Saidi told Xinhua the central bank has in the past financed unsustainable budget deficits and wasteful government spending.

“This amounted to quasi-fiscal spending: the central bank financed activities that should have been government budget funded under parliamentary scrutiny,” he said.

Saidi stressed the need to overhaul the central bank’s governance by reinstating transparency and disclosure through publishing financial statements.

Saidi, who was also the first vice-governor of the central bank of Lebanon for two successive mandates, told Xinhua that former Central Bank Governor Riad Salameh held several functions, including the presidency of the Special Investigation Commission while heading the Capital Market Authority and also overseeing the Banking Control Commission and the Higher Banking Council which should all be separate and independent functions.

Saidi noted that the central bank’s central council, which sets the monetary and credit policies of the bank, must play a dominant role in decision-making, which should not be confined to the central bank governor only, as was the case during Salameh’s mandate.

He added that Lebanon needs between five to 10 years to restore confidence in the banking sector by implementing necessary reforms at the government and central bank levels.

Meanwhile, Fattouh said that Lebanon could restore its position as an important regional banking hub despite the emergence of several financial and banking hubs in the region.