Joined at the hip: Lebanon’s bankers and politicians dig in

Almost half of Lebanon's banking sector's assets are linked to politicians

Posters published by depositors’ rights groups in Beirut, showing pictures of bank owners and chairmen in the form of 'Wanted' posters on 8 March 2024.

Joined at the hip: Lebanon’s bankers and politicians dig in

Toufic Chanbour

last update on 13 Mar 2024

There is a proposed law currently under consideration by Lebanese ministers that is designed to address the state of country’s embattled banks. It incorporates a provision that puts bank deposits into two categories.

One is qualified bank deposits, denominated in foreign currencies before the mass anti-government protests of 19 October 2019. The other is unqualified bank deposits, which are converted into foreign currencies after that date.

The uprising of 19 October 2019, sometimes called a revolution, saw huge protests against the government after ministers said they would introduce taxes on things like gasoline, tobacco, and internet calling.

The protests led to the resignation of Saad Hariri and his cabinet. This, in turn, triggered Lebanon’s political paralysis, which continues to this day.

The legislation establishes a maximum limit of $100,000 for qualified bank deposits’ cash collateral and $36,000 for unqualified.

The idea has been met with disapproval from deposit holders. They argue that the officials entrusted with enforcing the law lack the necessary qualifications to classify deposits and safeguard individuals’ rights impartially.

Conflicts of interest

This criticism arises from apparent conflicts of interest— something that most developed countries would frown upon.

Many such nations have codes of ethics for Members of Parliament (MPs) that enshrine principles of conduct. Some codes employ penalties for non-compliance, others do not.

MPs in countries like Germany, the UK, and Ireland must disclose any existing or potential conflicts, encompassing both assets and liabilities.

In Sweden, for example, MPs have to recuse themselves on matters personally relevant to them or their relatives. In Canada, lawmakers cannot vote on issues in which they hold a specific interest.

Ministers and public sector officials, particularly those overseeing the central bank, are held to more rigorous standards due to their pivotal role in fund management, programme development, and access to sensitive information.

If the proposed law in Lebanon passes, its aim will partly be to enhance transparency and mitigate conflicts of interest while also addressing the state of the country's banks and their restructuring.

AFP — Lebanese people’s deposits have been held in banks for four years since the economic collapse of 2019. The World Bank described it as one of the worst financial collapses in history.

Commission membership

It says that each member of the overseeing commission must declare any direct or indirect connections with any bank over the preceding two years.

Moreover, commission members should abstain from voting on decisions pertaining to the bank with which they have connections.

The legislation also lists specific criteria for avoiding conflicts. This says commission members should be neither major shareholders nor previous directors or senior managers of banks nor have acted as advisors to them.

Furthermore, it says commission members would ideally not be borrowers, depositors, or have any family relations at the banks, within reason. The criteria also apply to any temporary manager appointed by the commission for a bank.

In Lebanon, politicians have long had close relationships with banks. Many, therefore, ask why this proposed law on conflicts of interest does not extend to MPs and ministers.

Lebanon's current Prime Minister Najib Mikati, for instance, is a significant shareholder in one of the largest banks and a beneficiary of substantial subsidy loans, yet he is central in this oversight process.

Questionable ties

The international community has questioned the ties between Lebanon's politicians, bankers, and central bankers, particularly over their dealings with Hezbollah.

As reported by Le Monde on 30 November 2020, this was characterised by a troubling two-way dynamic. Hezbollah tolerates the political-financial oligarchy's indiscretions, according to the logic.

The oligarchy reciprocates by overlooking Hezbollah's involvement in arms, corruption, Captagon (fenethylline) production, the smuggling of goods through ports, and its 'soft loans'.

On 21 October 2021, The Washington Post brought global attention to the Lebanese central bank's orchestration of a scheme to enrich politicians, highlighting the bankers' cosy relationship with MPs.

The article showed the huge extent to which the country's banking sector was concentrated in just a few hands, with politicians never far away.

A total of 18 banks had significant political ties, meaning that almost half of the sector's assets were linked to politicians.

Almost half of Lebanon's banking sector's assets are linked to politicians.

Moreover, just eight powerful political families command almost a third of the total assets of the commercial banking sector. This concentration raises concerns about transparency and fair governance within Lebanon's economic and financial landscape.

Furthermore, a study on the Lebanese banking crisis released by the French Institute of International Relations (IFRI) in May 2022 sheds light on the proximity of the central bank and its affiliated entities to sectarian political alliances.

The report highlights how the selection of central bank managers is intricately tied to their allegiance to specific political heavyweights. This makes the politicians key influencers in the policy decisions of the appointed managers.

A rapporteur's rage

Olivier de Schutter, the UN special rapporteur on extreme poverty and human rights, said in November 2021 that "political ties to Lebanon's banking system are widespread".

This indicated "serious concerns about conflicts of interest in their handling of people's savings", he explained, adding that "the destructive actions of Lebanon's political and financial leaders are responsible for poverty".

It was a pointed charge, but according to De Schutter, Lebanon's politicians were well aware of the pending economic catastrophe for years.

Not only did they do little to prevent it, some even moved their money out of the country to avoid it, exploiting legal loopholes that facilitated the outflow of funds.

The envoy was clear that political and financial leaders were to blame. He cited their connections to the banking system, conflicts of interest, and a lack of proactive measures to address the economic crisis.

His report underscores how impunity, corruption, and structural inequality are baked into a corrupt political and economic system.

It emphasises the absence of accountability in bailout processes and stresses the urgent need to restore people's lost trust in the financial sector.

AFP — A demonstrator in 2023 demands a lifetime reward for losses from the banking chaos.

His report says, "Over decades, national wealth has been recklessly squandered due to government and central bank mismanagement."

"Central bank policies have resulted in the currency's deterioration, economic collapse, the depletion of people's savings, and their descent into poverty.

"Furthermore, the actions of the Lebanese state are deemed to be in clear violation of international human rights law."

Macron unimpressed

French President Emmanuel Macron addressed the situation in Lebanon at a press conference on 27 September 2020. He pulled no punches.

He accused bankers of colluding with special interests—namely, politicians—in undermining the reliability of the financial system.

He specifically blamed the Bank of Lebanon, accusing it of supporting politicians' interests, which, in turn, contributed to the current collapse of the banking system at the expense of depositors.

Trust in Lebanon's banking system could not be restored with the same actors in place, said the French president, adding that this applied both to private and public banks, as well as within government administrations.

Expressing his disappointment, he said he was ashamed of the Lebanese officials and that there was a critical need to audit all Lebanese banks to identify those responsible for the current crisis and re-establish a foundation of trust.

Macron felt Lebanon could only overcome its challenges with massive international aid but said this would not be forthcoming without a full housecleaning. He added that no help would be forthcoming if those in power stayed in power.

The selection of central bank managers is intricately tied to their allegiance to specific political heavyweights.

Entrenched interests

According to British economist John Maynard Keynes, Lenin was right—the best way to destroy the capitalist system is to debauch the currency.

In Lebanon, however, the destruction of the Lebanese pound has not (yet) led to the overthrow of the existing capitalist system but has contributed to the consolidation of power of the political-financial oligarchy.

Meanwhile, bankers have sought to shift the blame. The Association of Lebanese Banks recently lobbied for the country's banking crisis to be called "systemic" in any draft law. The reason? To absolve banks of any responsibility.

The draft law's approach to covering the remittances of politicians, bankers, and other politically exposed people (PEPs) outside the country suggests that the conflict of interest is likely to continue.

It calls for the return of these transfers to Lebanon but does not specify whether they would be classed as qualified funds or new funds with unrestricted disposal.

Nor does it say whether this includes credit deposit transfers, or returning money that was previously sent abroad as fresh funds. Finally, there are no indicated penalties for non-compliance.

Many of those this law would affect can repay or convert their loans from dollars to Lebanese pounds at favourable exchange rates.

The draft law does not address this or cover those who benefited from subsidy operations or engaged in the central bank's so-called financial engineering procedures.

Holes in the plan

Analysts, therefore, ask whether this draft law is comprehensive or effective enough to disentangle Lebanon's complex conflicts of interest.

The division of deposits into 'qualified' and 'non-qualified' categories lacks any legal basis, particularly concerning the opening of dollar accounts after the 2019 uprising. Banks restricted dollar withdrawals during this period, citing a lack of liquidity.

Consequently, the dollar accounts opened can be viewed as book accounts that did not contribute to the mandatory reserve formation at the Bank of Lebanon.

This implies that holders of these accounts may not be eligible to participate alongside holders of 'qualified' dollar deposits established before 17 October 2019.

The draft law's provision for such participation may be considered a blatant violation of rights, and any attempt to validate such a legal provision may face scrutiny from the Constitutional Council.

Furthermore, the bill does not align with numerous international requests to base bailout plans on accountability, a crucial element in restoring lost confidence in the sector.

Instead, it appears to go the other way, dedicating itself to usurping depositors' rights and obscuring the extraordinary gains and profits of the political and financial oligarchy.

The final words, therefore, go to the American economist Thomas Sowell. He once said:

"We seem to be moving steadily toward a society in which no one is responsible for what he himself did, but we are all responsible for what somebody else did, either in the present or in the past."

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