Guards or Thieves?! This Is How Lebanon’s Banks Stole People’s Money!

For many years, the banking sector in Lebanon was considered the jewel of economic sectors, the most important of which are Arab and Middle Easternm, but many things suddenly changed, prompting the banks not to hand over their money to depositors in foreign currency, and to impose restrictions on withdrawals in Lebanese pounds.

The crisis began at the end of August 2019, when the ATM completely stopped providing US dollars due to its unavailability. 

Before that, it prevented the conversion of the Lebanese pound to the US dollar, which increased the people's resentment. The disaster of losing their money in banks became a reality.

This prompted the citizens to go to streets, and announced a popular uprising against the government, which did not know how to deal with the crisis, and was not able to address the outstanding economic problems.

Huge pandemonium occurred during the popular demonstrations, the breaking of banks and the ignition of others, which prompted the Association of Lebanese Banks to decide to close the banks, which remained so until the first half of November under the pretext of the unrest.

After reopening it, depositors rushed to withdraw their deposits, due to the lack of confidence in the banks. They found that dollar withdrawals are restricted according to the value of the deposit.

 How did that happen, and what are the reasons for the collapse of the banking sector in Lebanon ?

Depositors' Destination

In the fifties and sixties of the last century, the Lebanese banking sector witnessed an unparalleled growth, because it managed to attract Arab wealth fleeing from nationalization and socialism, and the huge Gulf wealth derived from oil.

 Writer TawfiK Kaspar points out in his book "Lebanon's Political Economy" to the great role that the adoption of the banking secrecy law in 1956 played in attracting these wealth and transforming Lebanon into a safe financial haven and a destination for depositors, nicknamed the "Switzerland of the East".

Kaspar also points to the "Palestinian role" in strengthening the banking sector in Beirut, after the Palestinian Nakba in 1948.

 The development of the Lebanese economy and its financial markets is largely due to the flight of Palestinian capital to Lebanese banks, in addition to the deposits of many Palestinian businessmen.

Former Minister Kamal Deeb says in his book: "Yousef Beidas - The Empire of Antra and the whales of money," that the number of banks in Lebanon rose from 21 in 1954 to 99 in 1966 with 133 branches, most of which are Lebanese, including French, American and British banks.

He added, "Between 1950 and 1962, the Lebanese national income increased at an average growth rate of 4.5 percent annually, and the financial sector's share of this growth amounted to 200 percent (95 percent of this sector was banking)."

While bank deposits increased during the same period by 500 percent.

Banking activity focused on rent-based activities with high and rapid profitability and high risks, such as issuing bonds and short-term loans, disregarding long-term loans.

The dark side of the banking movement was represented by the small number of loans granted to industry and agriculture, as most of the deposits were invested in Europe and in gold and hard currency accounts.

Despite all the turmoil and unrest that Lebanon has witnessed since its independence until today, banks remained among the few sectors that survived the civil war that swept Lebanon (1975-1990) and the impact of the Arab-Israeli wars.

In the wake of the signing of the Taif Agreement in 1990, which ended the civil war in Lebanon, the banking sector experienced great prosperity and steady growth that brought it back to the regional front, especially with the opening of Lebanese banks with branches in more than one Arab country.

In the last decade of the nineties and the beginning of the second millennium, Lebanon witnessed a huge economic, financial and urban renaissance led by the late Prime Minister Rafik al-Hariri.

During this renaissance, and in light of the Syrian guardianship over Lebanon, the Lebanese government continued to borrow from local banks and international funds, in order to rebuild what was destroyed by the war.

The Lebanese banks also gained international fame because they were not affected by the global financial crisis in 2008, which attracted huge capitals and deposits that affected their coffers and created a great savings in the trade balance.

With the start of the Syrian revolution, Gulf support declined greatly due to the Lebanese government's alignment with the Syrian regime.

As a result of the decline in Gulf support, estimated at tens of billions annually, the chronic and persistent deficit in the trade balance has persisted until today.

Causes of collapse

This was in line with the banks continuing to lend to the government to cover the deficit, which drained their deposits and the savings achieved after the 2008 crisis.

In a report published by The Economist on the banking situation in Lebanon in August 2018, exactly a year before the start of the sector’s collapse, it said that economic growth had fallen from 8 to 2 percent due to the events in Syria.

The report warned of a crisis and now here are the effects, and it also touched on the banking sector, which was appearing solid at the time, with deposits amounting to about 200 billion dollars, but "only on paper."

 The report sheds light on financial engineering in 2016, as the Central Bank of Lebanon conducted a massive “swap” operation. It is a complex scheme in which the central bank borrows foreign currency reserves from commercial banks, and uses the dollar to maintain the currency peg.

In return, the banks got amazing returns, reaching 40 percent within one year.

 Given the Central Bank of Lebanon's reluctance to publish data on its net reserves, Tawfiq Kaspar estimates that the deposits that were subject to "swap" amount to 65 billion dollars. This means that net assets are already negative.

Fearing devaluation, banks are increasingly desperate to attract foreign currency.

With the beginning of 2018, the Lebanese government, with a purely electoral aim, approved a series of new ranks and salaries, covering all categories of the public and private sectors, which burdened the Lebanese economy. In fact, the country is unable to bear this increase.

The economic crisis worsened, growth rates declined, record rise in inflation , and the local currency began to lose its purchasing power.

It is worth noting that most of the borrowed money went to the pockets of the beneficiaries, including Lebanese politicians and parties, and Syrian officers and politicians, who were entrusted with the political process in Lebanon.

 This has caused Lebanon to lose vital development projects, and made it into a situation of debt.

 With the absence of external support, the sector could no longer resist, and it will be completely distructed.

Way of Recovery

In the recovery plan approved by the Lebanese government to get out of the economic crisis on April 30, 2021, it removed a number of banks from the financial market, and allowed the establishment of five new ones, with the aim of introducing new financial system into the market.

Journalist Nader Alloush believes that "this step is important to bring a new dollar into Lebanon," but at the same time it points to its repercussions on more than 20,000 employees, who will pay the price of closing half of the current banks.

He told Al-Estiklal: "Lebanese banks are still resisting popular and official pressures until now, but restructuring the sector is inevitable."

 This is what the management of banks acknowledges, as the dispute with the government and the International Monetary Fund is about the details of the plan, especially since the restructuring of the sector will be part of the plan to restructure the debts of Lebanon and the Central Bank.

Banks want to charge depositors for their recklessness.

According to the plan prepared by the government and which fell in Parliament under the pressure of banks, the losses of the banking sector are about 60 billion dollars.

The Central Bank attempted to impose a recapitalization of 20% on banks inside Lebanon, and 3% in correspondent banks outside Lebanon.

In a report published by Al-Modon newspaper, April 12, 2021, only 15 banks out of 43 operating in Lebanon were able to meet the capital increase.

To solve the banking crisis, economic researcher Mounir Rachid says: The Libanon Bank, which has owed obligations towards banks, must replace these obligations in whole or in part with assets (shares) in the Libanon Bank in favor of the banks.

This replacement comes when the banks become partners in the capital of the Libanon Bank and become the main owner of it, this requires a change in the management structure of the Libanon Bank.

The banks will gradually recover their money through the distribution of Lebanon Bank’s profits after amending the Monetary and Credit Law.

 The government will be able to restore its role in monetary policy by purchasing shares of the Lebanon Bank on the Beirut Stock Exchange when solvency is achieved in its financial position, and in turn, it will return the frozen funds to the banks.

This method of solving will restore confidence in the banks that have been lost by promoting that the solution will be effective only by writing off depositors' deposits in banks.