A bank branch in Sin al-Fil. (Credit: Philippe Hage Boutros/L'Orient-Le Jour)
With the publication of the banks' annual budgets for the year 2023, the first signs of an end to the disappearance of credit that has been raging since the fall of 2019 began to appear. Bank Audi, in its latest annual report, said that "the board of directors approved the allocation of funds in fresh dollars to grant loans to companies and traders with solid solvency and credit history.
This strategic measure aims to strengthen relations with these key customers while optimizing income in fresh currencies – currency that entered into the system after October 2019. These announcements are in line with the statements of the acting governor of the central bank (BDL): During the second conference on real estate, held on June 25, Wassim Manssouri underlined this necessity for the banking sector, to revive investments, create jobs and stimulate economic growth.
However, this position has sparked an intense debate between banks, which now want to be able to lend these "fresh dollars," and depositors' associations, which have been waiting in vain for an end to the restrictions and a solution to the crisis that has been ongoing for more than four years. For them, if institutions have liquidity, it should be used as a top priority to repay their losses according to a specific schedule.
Banking sources confirmed to L'Orient-Le Jour that some institutions are currently granting loans, albeit in a very limited manner, to privileged clients in whom they have confidence. However, they require many very secure guarantees for each credit application submitted. According to these sources, the lack of credit expansion is explained by several factors. The main one is that borrowers in dollars were able, legally, to repay in Lebanese pounds (at rates well below the parallel market exchange rate) or in "lollars" (through the trade of bank checks). This was particularly common during the crisis for loans exceeding $30 billion. Consequently, the banks are advocating the adoption of a law requiring repayments in the same currency.
In the meantime, some banks lend to a small number of customers through branches or affiliated banks abroad. The contracts for these loans include specific clauses regarding the repayment currency. This is possible only at a limited number of large banks, with interest rates of up to 10 percent or more, often for short maturities.
'Good' and 'bad' banks
The aforementioned banking sources put forward several arguments in favor of the return of loans, stating that it is in the interest of depositors. They emphasize the need for banks to continue operating in order to survive and generate profit, thus contributing to the return of deposits, in accordance with Circulars No. 158 and 166, pending a final solution to the crisis. In addition, the resumption of activities of the private sector and borrowing investors would increase the state's revenues, which they believe should participate in the return of deposits. These sources added that the adoption of a law on the restructuring of banks could take a long time, and therefore wish to separate, for the time being, the fate of deposits from before October 2019 from current banking activity. They add that if loans resume, it would be possible to resume paying interest to depositors.
Some banks, without saying so explicitly, have therefore adapted in their own way a local version of the “Good Bank, Bad Bank” strategy. This method, used during recent financial crises, consists of isolating non-performing assets (such as bad debts) in a bad bank structure that will gradually liquidate them. Meanwhile, healthy assets are grouped together in a “Good Bank” to ensure normal operation. Knowing that this formula requires a specific law, never adopted, the banks, with the support of BDL, have found a disguised solution: Distinguishing accounts denominated in “lollars” from accounts opened after April 2020, funded in “fresh” dollars, and allowing free deposits and transfers, and which they are now starting to use to grant loans.
A banker who is very enthusiastic about this idea said that those who prevent or oppose the resumption of lending are tightening the noose around the necks of depositors, who would only be able to recover a tiny part of their deposits in the event of bankruptcy. He confirmed that banks that comply with the BDL circulars – in particular by maintaining a liquidity ratio of 3 percent of all deposits with correspondent banks, and by paying what they owe to depositors in accordance with circulars Nos. 158 and 166 – still have additional liquidity. Why should they not be able to lend it?
Artificial distinction
On the other hand, depositors' associations warn BDL against this solution. They rejected the idea that loans are granted based on this artificial distinction between "new" and "old" deposits and suspect that new loans actually concern both. They also refused to endorse this variation of the "Good/Bad Bank" principle and cannot accept the idea of several separate balance sheets within the same bank: One generating profits for bankers and the other awaiting legislation that has been discussed since 2020. Critics of the return of loans reiterated their lack of confidence in banking institutions. Indeed, they fear that the owners and managers of these banks will exploit the profits through various means, including salaries, bonuses and other benefits that they have always enjoyed, despite the fact that BDL issued a circular (No. 693) last March prohibiting banks from distributing dividends until further notice and stating that the profits will be used to replenish deposits.
Other observers also oppose the separation, questioning whether it would restore trust in banking institutions if an artificial distinction between a good and a bad bank were to be introduced. "Currently, the fresh dollar deposit accounts are short-term. So how can banks lend from short-term deposits if the borrower is looking for long-term financing? And how can they manage this large mismatch between maturities without risking further difficulties?" they questioned. "Where is the new capital needed to cover possible defaults?" According to international accounting standards, the banks have lost all their capital and must inject new funds, the terms of which will be determined by a specific bill currently being studied by the government.
As with every outstanding issue in the banking sector, the debate inevitably comes back to square one: The need for a radical resolution of the crisis. However, there has been little movement to address this problem. In the meantime, some no longer hesitate to put the cart before the horse.
This article originally appeared in French in L'Orient-Le Jour.