The big picture

Dangerous liaisons: How finance and politics are inextricably linked in Lebanon — part I of II

Dangerous liaisons: How finance and politics are inextricably linked in Lebanon — part I of II

Protesters march against the payment of eurobonds in March 2020. (Credit: Nada Maucourant Atallah/CDL)

The unprecedentedly violent financial crisis that broke out in Lebanon at the end of 2019, and turned into an acute economic depression, caught most Lebanese by surprise.

For most experts, however, the crisis was foreseeable. Many economists had, in fact, warned of a collapse of the system. Some had even been sounding the alarm for years.

So, how did this extremely flawed and defective financial system survive for so long? Beyond the political and geopolitical context, both politicians and their financiers kept the system on its feet because it served their interests. This alignment of interests in the often overlapping political and financial spheres maintained the status quo, even after the onset of the crisis.

Back in November 2020, Lebanon’s president, Michel Aoun, admitted his powerlessness in the face of what he described as “an intertwined system which has held the reins of financial decision-making for decades.”

So, what is this “system,” and what kind of influence does it wield? Below are some answers in the first of a two-part series. Find part two here.

*     *     *

“The Bank Party,” a term that was coined and popularized during the Oct. 17 uprising, illustrates the close ties between politics and the world of finance.

It is hard not to see the link between politics and the banking sector in Lebanon.

The most obvious example is undoubtedly Future Movement head and Prime Minister-designate Saad Hariri.

Hariri is the main shareholder (42.24 percent) of BankMed, while his former interior minister, Raya El Hassan, was recently appointed the bank’s chair. Hassan was also previously finance minister.

Hariri’s brother, Fahd Hariri, owns 12.25 percent of Bank Audi via FRH Investment Holding SAL.

But the Hariri family is by no means the only party to have interests in the banking sector. A quick glance at the commercial register reveals a long list of figures, from across the political spectrum, who, at one time or another, wore their banker’s hat and politician’s hat simultaneously (see the separate section at the end of this article).

Can we, therefore, speak of the “Bank Party,” a term that was popularized by the Oct. 17 uprising to designate those responsible for the crisis? And if so, what is this “party’s” margin of maneuver?

Historical relations

“Lebanon is a small country; it is no surprise that politicians, who are also businessmen, are involved in a sector as profitable as the banking sector. This is nothing more than simple investments,” says one banker.

But for Hicham Safieddine, a lecturer in the history of the Modern Middle East at King’s College London, the fact that many bankers are also politicians and vice-versa is not a trivial matter.

Bankers constitute “an integral part of the ruling class,” he says, stressing “the historical role of finance in the composition of the political power.”

This role had been, since Lebanon’s independence from the French, embodied by the Eddé brothers, who “were key figures in founding the two institutional pillars that turned the country’s banking sector into an organized political community,” Safieddine wrote in his 2019 book “Banking on the State.”

Raymond Eddé, then a member of Parliament, was behind the Banking Secrecy Law of 1956, which attracted finance capital to Lebanon from Iraq, Egypt and Syria as it fled nationalization in the Arab world.

This influx of capital shaped the emergence of a ruling elite “whose wealth largely depended on imports and financial services.”

For his part, Pierre Eddé was a former finance minister and a bank director, as well as one of the founders of the Association of Banks in Lebanon. Founded in 1959, “this lobby always resisted any serious regulation of the sector and pushed its agenda in political and media circles, and even in the corridors of the central bank,” Safieddine explains.

Jakub Jajcay, a Ph.D. student in history at the American University of Beirut who has written about Lebanon’s banking history, seems to concur with Safieddine’s views. He says that since “Lebanon’s independence, the legislation had done everything to create an extremely favorable environment for banks.”

But if relations between banks and politicians have always been strong, they took on a whole new dimension after the 1975-90 Civil War, when the banks, which until then were not much solicited by a state with relatively balanced accounts, became the state’s main creditors.

Alignment of interests

To finance a state plagued by corruption and institutionalized patronage and clientelism after the Taif Agreement, which ended the Civil War, the treasury offered staggering interest rates on debt securities purchased by banks, directly or through Banque du Liban, Lebanon’s central bank.

In turn, banks offered attractive interest rates to depositors, while also benefiting from generous profit margins.

This mechanism was perfected in the late 1990s when the Lebanese lira was pegged to the US dollar and the state’s debts were also set in dollars, which fueled the influx of capital and kept a political and economic system afloat — a system that nevertheless continued to prove its ineffectiveness with ever-growing budget deficits.

“This policy caused the explosion of the public debt service,” says Roy Badaro, an economist.

In his book “An Economy and a State for Lebanon,” Charbel Nahas, an economist, former minister and the secretary-general of Citizens in a State, a minor political party, estimates the total interest paid by the state between 1993 and 2019 at $87 billion.

During this same period, the public debt rose from $4.2 to $92 billion, an increase of more than 2,000 percent, while banks’ assets grew by more than 1,300 percent. The country’s GDP, on the other hand, increased by just 370 percent.

Moreover, according to Nisreen Salti, a professor of economics at AUB, the profits of the 14 largest local banks represented 4.5 percent of GDP in 2015, compared to less than 1 percent in the United Kingdom, 0.2 percent in Germany and 0.9 percent in the United States.

If banks’ shareholders received large dividends, their clients benefited from high interest rates on deposits, especially for the wealthiest among them, i.e. the 1 percent (with 22,506 accounts), who alone held 47 percent of total deposits in 2019.

The politicians who accumulated significant wealth during and after the Civil War were likely among this 1 percent. With the exception of some specific cases, the political class had no interest in reconsidering a model which made it possible to finance the state’s clientelistic spending and its personal projects.

In addition to the public debt, “one of the main foundations of the collusion between banks and politics is the loans granted for political considerations, outside the financial reality of the client, even if this raised concerns of solvency,” says a former banker who asked not to be named so they could speak freely.

This is particularly true since the regulatory authorities were also committed to the scheme.

The political authorities, in fact, gave BDL carte blanche by neutralizing the role of the government delegate, who is supposed to monitor the central bank. The same goes for the Banking Control Commission of Lebanon, whose members are appointed every five years by the cabinet.

Created in 1967 as an independent administrative body, “the BCCL has always reflected BDL’s and the banks’ position,” according to a government source. The post of chair of the BCCL, reserved exclusively for Sunnis, has traditionally been occupied by someone close to the prime minister.

Samir Hammoud, the BCCL chair until last year, is no exception to the rule. Widely described as Hariri’s trusted man, he had been at the head of BankMed’s Remedial Management Division for 13 years before becoming chair of the BCCL. Hammoud also owns 5.17 percent of Future TV, the now-defunct television station aligned with Hariri’s Future Movement.

Moreover, he is a member of the board of directors of the Capital Markets Authority and the Special Investigation Commission, which is ostensibly responsible for investigating suspicious transactions and fighting against money laundering. Both the CMA and SIC are chaired by the BDL governor.

Financial engineering

The collusion between the political class and the banks thus favored the concentration of wealth and the maintenance of the status quo, despite the many signs of an impending catastrophe and in the shadow of a state incapable of arbitrating between the elites’ interests and those of the majority of Lebanese.

The financial engineering, which escalated the crisis by draining banks’ liquidity, proved nothing but an illustration of converged interests to save a system — and it ended up trapping the banking system and the entire population.

In 2016, to save the political class some time, BDL injected $5 billion into banks, which is “equivalent to 10 percent of the GDP, without any equity stake in return,” the IMF stated at the time, underlining that “a few banks also passed on part of their income to high net-worth depositors by offering very attractive rates on sizable deposits.”

Among these “high net-worth” depositors is MP and businessman Michel Daher, who said in Parliament a few years later that he had been offered — prior to his election, he specified — interest rates reaching up to 31.25 percent for a deposit of $5 million.

Large depositors, bankers and politicians have thus united in safeguarding a common interest, that “of capital and money, which usually straddles political divides,” Safieddine says.

“If more stakeholders in banks are from the March 14 camp, the large depositors belong to both [March 14 and March 8] camps,” he continues.

Thus the term the “Bank Party,” which is used “to designate the banking lobby and all those who defend its interests,” Saffiedine adds.

This lobby’s tentacles spread to the executive branch as well as Parliament, according to Karim Daher, a lawyer and the president of the Lebanese Association for Taxpayers’ Rights.

Daher points out that “since 1993, the banking sector has benefited from tax exemptions and continues to do so.”

A clear example of this is the impossible reform of the law on banking secrecy, even though this would be in the best interest of the tax authorities and the judiciary.

“ABL’s members have actively campaigned against [this reform], and continue to do so, under the pretext of the need to preserve an attractive financial sector, even if this argument has become totally obsolete,” Daher argues. This is especially true since the entry into force of international anti-money laundering and tax evasions rules that apply to most accounts of nonresidents.

In May 2020, despite popular pressure, the law allowing the lifting of banking secrecy on politically exposed persons was equally opposed by “BDL, the BCCL and the majority of MPs,” before it was stripped of its substance at the time of the parliamentary vote, according to Daher.

During this same period, low-income Lebanese were deprived of subsidized loans, but were repeatedly told that the situation was fine.

BDL has not responded to inquiries. An ABL board member declined to speak on the record.

Media influence

Another lever of influence used by the “Bank Party” is the media, with media outlets often owned by politicians and financed by banks.

“Before the crisis, of our five largest advertisers, four were banks. Their advertisements represented around 15 percent of our turnover,” a media outlet official requesting anonymity says.

“Advertising revenues remained among the rare financing options for traditional media outlets in crisis,” explains Ayman Mhanna, the executive director of the Samir Kassir Foundation.

For television channels, the pressure is even greater. “Prior to the crisis, the banks used to be the main sponsor of many, if not most, political talk shows, across all major TV stations. They also sponsored special primetime newscasts, such as the economic news bulletins,” Mhanna explains. “Financial agreements could include the production costs of the program or airtime for specific messages they would like to spread.”

“And this is only the tip of the iceberg,” says a source in another press group, citing much more direct attempts at influence, even alleging that bribes were offered by an ABL member to one of their journalists.

Therefore, it was no surprise that the Lebanese did not hear about the financial crisis before it was at full throttle by the end of 2019.

Since then, the Lebanese have no longer been under any illusion, but the establishment has not lost one bit of its determination.

*     *     *

Bankers and politicians: Jacks of all trades

Besides the Hariri family, the examples of interconnections between the banking sector and politics are many.

Some politicians are at the same time shareholders in banks, such as Marwan Kheireddine, who served as a minister of state from 2011 to 2014 and is also the brother-in-law and adviser to Talal Arslan, the head of the Lebanese Democratic Party. Kheireddine holds 13.34 percent of Al-Mawarid Bank.

There is also Adnan Kassar, one of the main owners of Fransabank, who served as the economy minister from 2004 to 2005.

In the same government, a former shareholder and official with SGBL, Maurice Sehnaoui, served as the energy minister. His son, Nicolas, is also a former minister, and is today an MP and high-ranking member of the Free Patriotic Movement.

According to the commercial register, Deputy Parliament Speaker Elie Ferzli holds 391,699 shares in IBL Bank. Former Economy Minister Raed Khoury is an executive board member of Cedrus Invest Bank and a non-executive board member of Cedrus Bank.

Moreover, many politicians are independent board members in banks, such as Demianos Kattar at Credit Bank.

Demianos serves as caretaker minister of environment and administrative development in the current government. He was also minister of finance and economy in Najib Mikati’s 2005 government. Mikati, for this part, was once a shareholder in Bank Audi. In addition to being a sitting MP and twice former prime minister, he was also a longtime public works minister.

Among other MPs, Anwar El-Khalil, who caucuses with the Amal Movement and sits on Parliament’s Finance and Budget Committee, is a non-executive member of the board of directors of Bank of Beirut.

Marwan Hamadeh, an MP who caucused with the Progressive Socialist Party before resigning in the wake of the Aug. 4 Beirut port blast, is a board member of Crédit Libanais bank. Hamadeh sits on the board of Société Générale de Presse et d'Édition, the company that publishes L’Orient Today and L’Orient-Le Jour and owns a majority stake in Le Commerce du Levant.

This article was the first in a two-part series. Find part two here. The series was originally published in French by Le Commerce du Levant. Translation by Sahar Ghoussoub.

The unprecedentedly violent financial crisis that broke out in Lebanon at the end of 2019, and turned into an acute economic depression, caught most Lebanese by surprise.For most experts, however, the crisis was foreseeable. Many economists had, in fact, warned of a collapse of the system. Some had even been sounding the alarm for years.So, how did this extremely flawed and defective financial...