In the complicated and arcane world of Lebanese finance, the banking sector has always been held in high esteem and regarded as one of the pillars of the country. Parents could not be happier than if their offspring worked for a bank or investment house. With the right connections, and usually if you were the “right” gender, there was a promising career ahead rewarded with an upper middle-class lifestyle.

Fast-forward to the current day. In Lebanon’s economic downfall this past year, the banks are seen as a key member of the evil forces that have eroded the country’s finances, degraded its currency, and deprived the country of its future. Chief among these villains is the Central Bank (BdL) which drew the banks into a financing scheme for the country’s budgets that enriched the banks, their leadership, stockholders, and biggest depositors. It all collapsed towards the end of 2019, bringing about the first ever default by the country of its Eurobond obligations. Banks have been targeted by angry demonstrators who have destroyed or damaged a number of banking facilities.

Government negotiations with the IMF are not off to an auspicious start as the banks are balking at any reforms that would affect their profitability such as haircuts on their largest depositors and consolidation of the sector. So once again, the Central Bank is attempting to take the lead in strengthening banks, only this time it has drawn the wrath of the Association of Banks in Lebanon (ABL) which represents the banking community. BdL has issued several circulars directing the banks to increase their loss provisions for hard currency deposits and Eurobonds; increase capital by 20% by the end of 2020 with the option of allowing shareholders to transfer ownership of property to their bank for a limited period; and provide depositors an option to convert their deposits into bank shares or convertible bonds.

There is also a wishful thinking recommendation that “Banks should also urge depositors who transferred more than $500,000 abroad as of July 1, 2017, to deposit funds in a special account in Lebanon that will be frozen for five years and equivalent to 15% of the transferred amount. The directive applies to bank chiefs and large stakeholders. The equivalent deposit amount is raised to 30% for “’politically exposed persons.’”

It didn’t take long for the banks and their allies to counterattack, both in the press and in recent meetings with French government officials. Claiming that the measures “will have negative repercussions on the economy and will put additional strains on the already suffering industrial sector,” The Association of Lebanese Industrialists (ALI) objected to several provisions related to conditions for settling loans that in effect would increase funds needed by requiring settlement in foreign currencies.

The BdL also asked banks to encourage importers to transfer from abroad the equivalent of 15% of the aggregate amount of the letters of credits that they opened in any of the past four years, and to deposit these funds in a “special account” and block them for five years, without making a distinction between standby or purchase-related LCs. The ALI warned that the implementation of the circulars could put at risk the remaining productive capacity and sustainability of businesses in the country. These concerns were also echoed by the Beirut Traders Association (BTA).

Another blow is that law suits against the banks in Lebanon and abroad claiming damages resulting from blocking access to depositors are increasingly being decided in favor of the plaintiffs, further diminishing the strength of the sector and leading to the erosion of its credibility. As The 961 opined, “At this stage, with the economic and financial crisis, the banks’ reportedly low liquidity, and their unethical freezing of their customers’ money, Lebanon is losing one the main features that made it stand out in the region: Its banking services.”

And their troubles are far from over. The banks are insisting on selling state assets to repair their balance sheets, a plan rejected by both the IMF and the previous government, so they are now lobbying France which is pushing for reforms in Lebanon as a condition of it receiving international assistance.

The outreach by banks suggests they are “still in denial” over finding a solution that doesn’t inflict losses on their shareholders, according to Dan Azzi, former chairman and chief executive of Standard Chartered Bank in Lebanon. “Banks that were somewhat successful in their local lobbying efforts against a solution which involves a bail-in of their shareholders have realized that the international community will not release any funds until such losses have been recognized.”

However, French authorities prefer to emphasize deep reforms that must be undertaken to restore health to the sector. Among these measures are the swift implementation of capital controls and bank consolidation in a country with 64 banks controlled by 32 groups. Yet the banks are clinging on to the hope of avoiding any painful, large-scale changes in hopes of retaining their once vaunted status as a pillar of the economy. The reality is that the sector isn’t a shining star any longer and won’t be again without serious reforms and consolidation.

The views and opinions expressed here are those of the author and do not necessarily reflect the position of the American Task Force for Lebanon.