Restoring Credibility: Is There Any Relief For Small Depositors?
Protecting the assets of small depositors has become a battle cry among those fed up with the larceny ascribed to the banks’ handling of deposits under the “financial engineering” scheme of the Central Bank. Whether coerced by the BdL (Banque du Liban – The Central Bank), as some claim, or driven by the dream of “too good to be true,” the result is the same. Lebanon has a dysfunctional banking system and it is viewed as such by much of the public.
While it is important to avoid tarnishing all of the banks with the same brush of mismanagement and greed, the results speak for themselves: an overbanked sector, with too few banks having solid foundations that will pass a rigorous audit; and a lobbying group, the ABL, that routinely opposes greater transparency and legislation conflicting with the enshrined interests of their largest depositors and shareholders, often the same people.
Based on the findings of one poll after another running up to the elections, corruption was named as the greatest issue facing Lebanon. This has also held true in rankings looking at transparency and the overall business environment. This is partially due to the obfuscation of the bureaucracies that consider contracts as a legitimate means of supporting their community. Another reason is the lack of incentives for financial actors to do what is right – whether it relates to contracting, price controls, capital controls, or just doing their jobs transparently and dutifully. Of course, the lack of an independent judiciary looms in the background as a pall over the business environment as well – not being able to have recourse to the courts without bribes or favors dampens the enthusiasm of investors and businesses to put up the capital needed to get started or expand.
If you are a bigger fish, you can always do business elsewhere, or choose to play the payoff game to suppliers, contractors, officials, and others who salivate at the prospect of your business. But what about those small depositors whose pensions and salaries were supposedly tucked away in the commercial banks? Well, until now, they are the real socio-economic losers in Lebanon. Able to withdraw only a fraction of their money and at unfavorable exchange rates, the middle and lower classes have seen their assets impounded by informal capital controls which only favored those who can move their money abroad.
So what is the government prepared to do to help the small depositors recover their funds at an exchange rate that doesn’t make their situation more intolerable? The Institute of International Finance (IIF) in their latest report on Lebanon, stated that, “the government’s clear commitment to return deposits is essential to restoring confidence in the Lebanese economy and to the credibility of the economic recovery plan.”
Various proposals to repair relations with depositors share at least three components: qualification for relief below a certain level of deposits; a unified exchange rate; and a timeframe for accessing the funds. The minimum proposed has varied from accounts with under $100,000 USD to those of under $200,000 USD. The current caretaker government is at the lower end while the upper limit is favored by international institutions and lenders who note that this represents 95% of the total number of bank accounts. The IIF also points out that this should be done over a short period of time, although others have mentioned 10-15 years as the timeframe. More progressive analysts argue that access to the accounts in the short to medium term (one to three years) is critical to restarting the economy for consumers making daily purchases and for small businesses with respect to supplies, expansion, and procurement of goods and services.
There is also sentiment for excluding from the accessible funds the accumulated interest on foreign currency deposits above comparable US interest rates – i.e. those monies paid out under the financial engineering of the Central Bank, about $12 billion from 2015-2019. There is also a proposal to factor in those Lebanese deposits converted to US dollars as the economy imploded following the October 2019 demonstrations, estimated at some $10 billion.
The bottom line is that $22 billion can be deferred until the overall system is rebalanced and credibility gets restored to the system through the adoption of the IMF package of reforms that would ultimately restructure the banking system writ large, including the BdL itself. Once a unified exchange rate is set – and at a much lower value than the current array of market rates – the BdL could then rein in its printing of the Lebanese currency to allow banks to meet the demands of depositors for their funds, in Lira.
The other option for supporting the small depositors is some combination of access to accounts and issuing government securities based on various government assets that could be held for longer periods of time (5+ years) to pay interest to the bond-holders. Variations of this option have been proposed utilizing state entities that could be leased to the private sector to operate such as electricity, telecommunications, the airport, Middle East Airlines, and other entities owned by the government but lacking sufficient oversight. Another option is packaging the government’s broad real estate holdings to produce revenues for restitution and investment; and a similar fund for potential revenues from offshore oil and gas exploitation that could be held for future generations.
The other option for supporting the small depositors is some combination of greater access to accounts and issuing government securities based on various government assets that could be held for longer periods of time (5+ years) to pay interest to the bond-holders. Variations of this option have been proposed utilizing state entities that could be leased to the private sector on an operational level such as the electricity sector, telecommunications infrastructure, the airport, Middle East Airlines, and other entities that are owned by the government but with insufficient oversight. Another option is packaging the government’s broad real estate holdings to produce revenues for restitution and investment; and a similar fund for potential revenues from offshore oil and gas exploitation that could be held for future generations.
These are not fantasies, but feasible solutions requiring political will and serious management. While Lebanon has the skills and the talent to deliver these remedies to all depositors, the commitment to make it work transparently and equitably is lacking. Moving on the issue of restoring confidence in the banking system begins with honoring those small depositors who make up the bulk of those invested in the Lebanese banking system.
Disclaimer: The views and opinions expressed in these articles are those of the author and do not necessarily reflect the position of the American Task Force on Lebanon, a non-profit, nonpartisan leadership organization of Lebanese-Americans. The above image is licensed under the Creative Commons Attribution-Share Alike 4.0 International license.