Challenges of Banking in Lebanon

Interview with Dr. Makram Sader, Secretary General of Association of Banks in Lebanon

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IMF revised Lebanon’s real GDP growth to upwards of 9% for 2009 and forecasts growth of 6% in 2010.  Given the conditions and recent developments 2009 was an outstanding achievement but they are predicting a year of slower growth.  What do you think about 2010?

It will be around 6%.  The IMF review is realistic but I think we have a good chance of even outdoing this figure if the operating environment of the country and region is stable.  Over the last two years we had a very high growth rate because we were coming out a long period of instability in the country.  Thus, in 2008 and 2009 we were able to perform due to a boost on the demand side from domestic factors and regional factors as well.  Public and private spending/investment was also exceptional during this time so it is normal to expect that 2010 will settle down a little bit.  However, we are still talking about a

"growth rate at around 6% so we are

performing better than the Middle Eastern region in general. "

Fitch rating has upgraded Lebanon’s long-term foreign and local currency issue default ratings from B-.  The rating is improving so what is your overall assessment of the banking sector in Lebanon and what are some of the challenges in the sector?

Our bankers are used to managing their banks under unusual circumstances because we have been doing this since 1975 due to regional wars, internal political troubles, and even civil wars.  From all of these crises we have been able to learn a lot.  On the other hand we always opted to operate under international standards and norms.  We also have to consider the dollarisation of the Lebanese economy because when you have a highly dollarised economy as a bank the only think you can do is to keep highly liquid assets, preferably in foreign currency.  The banks need to have their own last-resort financiers, being themselves.  Our bankers are mastering risk very well, in the domestic market as well as in the regional ones. One more thing, we always accepted moderate returns rates on our assets & equity respectively around 1% & 12%. This was the price to pay to keep high liquid assets. 

There is a lot the Lebanese banking sector can offer.  However, if it is a bulletproof sector why isn’t the rest of the world following your model?

We have to stay modest because we don’t have lessons to give to others; we have may be a good story to tell to the world as mentioned above.  In fact, we have learned a lot from the world and since the 1950s we have had international banks operating here in Lebanon.  For a small country you don’t have to produce the rules yourself but respect the already established rules world-wide.  Right now the world is in a transitional period and under a tremendous economic imbalance. We are a small open country & economy. We have to comply by international banking industry’s standards in the area of risk management, anti money laundering, fighting of terrorism financing, accounting capital adequacy ratios, etc… In Parallel we have to be very attentive & prudent considering our own characteristics. Banking for us is an intermediation business between short terms savers & borrowers, retail, corporate sovereign,. It is not excessive and uncalculated risk taking. We learnt to be conservative, prudent. We are making good traditional banking. This is our simple story. We know very well our clients, deposits as well as borrowers,…  A new world is emerging and the old world hasn’t died off yet.

"This transitional period could take 15-30 years and.

It will mean deep and costly changes. "

What is your vision for this new order? What about the US Dollar?...

Serious economists are saying that we can have a new economic order with more than one international currency.  Perhaps it will be the dollar, the euro, and Chinese currency; there won’t be one dominant currency.

"There will also be real economic correction."

Everyone will need work to find an equilibrium as well because in some countries domestic demand is unhealthy and in others there is too much consumption.  Managing this transition period will be a real challenge for many countries, like China in particular and the United States. Currencies are not the name of the game.

"The real thing will be in the area of production,

incomes, technologies, trade and investment: Economic Power."

What will this mean for developed markets like the US and Europe?

Unless they accept restructuring and reallocation of their resources they will have to accept their standard of living decreasing.  The most difficult thing to reallocate will be human resources in order to fit the economy and this will take time and it important to realize this.  No one can say you will see a drop in your standard of living as long as you are capable and willing to readjust. Strong sustainable and well balanced economic growth among regions, countries and social classes is not impossible. But it requires leadership and good management for the transition period in terms of balanced distribution of sacrifices and gains.

Do you feel the world powers who bailed out people in the GCC, Europe, and the US are doing good?

They are just buying time.  People need to accept their problems and make sacrifices.  It is in the hands of the ruling people, government, parliament and everyone to accept restructuring.  But who will pay the price of this?  It is a political and social problem.  You can see this manifest in the people especially who may be forced to work for reduced wages.  It will depend on the political balance of power within every country and among countries.

What are the dangers to the Lebanese banking sector?

"I would like to see increased economic real absorption

capacity to process properly the in flows of capital to

Lebanon not just being obliged to sterilize deposits

coming into our banking sector."

A lot of Lebanese expatriates who deposit their savings into Lebanon and it is not always easy to recycle efficiently such a large inflow of capital into the country.  In 2009 we had a surplus in our balance of payment of 8 billion dollars and usually such a surplus is between 1.5-3 billion so this is a large increase that is not always easy to manage.  Unless we price them at international rates.!..

"We need our interest rate to decrease a little

more to give a break to the large inflow of capital to the country."

We cannot put barriers on the exit of money but perhaps we can put up some barriers to the entrance of capital into the market through market mechanism which is interest rates! .  We are also working in region that is by definition unstable.  We have to manage our banks with political and security concerns in mind. I.e. such big in flows can out flow massively if the security deteriorates.

Can you tell us more about ABL?

We act like any bankers association in the world.  We lobby for banks in Lebanon.  All operating banks in Lebanon (65 banks) are full members of our association and while nobody is obligated to be a member they still are.  We are financed up to 75% of our budget coming from participation fees of our bank members.  Every year we come up with a budget and allocate the budget over the member banks.  We have thirteen classes of banks that depend on their balance sheet.  For example, larger banks like Audi and Blom pay 100 billion Lebanese pounds ($63,000 a year), and the smallest banks pay 10 million Lebanese pounds. While all members have the same voting power small or big, Lebanese or foreign. No discrimination on size or on nationality. We provide our bankers with various services in the area of training in particular.  We have a very intensive training program at our training center and we make many lobby efforts on behalf of the banks and deal with different laws, regulations, and legislation.  Every two years we negotiate a new collective convention with the unions.  Finally we provide our bank members with various publications and applied studies, statistics and banking, financial and economic indicators.

Are you satisfied with the current regulations in the Lebanese market or would you like to see something changed?

We don’t have a need for new regulations but we do need better implementation, especially from the side of the courts as this is our main problem.  We see a lot delays in implementing laws and regulations on the country even though they are very good.  Every month we meet with the Central Bank and go over an agenda that we propose regarding the industry and what we want to discuss.  Then we write up the meeting and circulate it among our banks to keep them informed of the current efforts and issues. [-] At ABL we have 26 people on staff and 11 specialized committees of almost 120 bankers covering different issues and whenever someone proposes a project one of the appropriate committees researches the issue. These committees then give recommendations to our board of directors who meet once a month and if we decide on something then we bring this issue to the central bank or we recommend it to our bank members.  We are well organized, we have been around for fifty years, and we are a completely private entity. [ This cooperation with financial and monetary authorities is a good part of our business and is a normal activity for us.]