How Lebanon’s banks can get money back to depositors

"We work and insist on the state to ensure there's a fair solution to recover the deposits, and we hope this solution will materialise with the election of a president [of the republic] and the return of regular governmental work in the near future,"he said.

The interview went into significant detail – outlined below – but first, this is the story of the fall of what was once the most renown national financial sectors in the entire Middle East.

Lebanon's banking sector was once long-distinguished in the region as a model of strength, solvency and modernity.

Its high reputation was recognised internationally. It was a magnet for foreign investment and a destination for capital seeking safe and reliable investment opportunities via institutions integrated into the global financial system.

And it proved enduring. In what became seen as the Lebanese banking miracle, it outlasted a series of shocks, including war, the disintegration of much of the rest of a functioning state, the Israeli invasion of Beirut in 1982, and the subsequent collapse of the Lebanese pound in the 1980s.

Throughout, Lebanon's banks remained trusted by the country's citizens and expatriates, with life savings and remittances flowing in from around 1.8mn depositors.

Death of a high reputation

Eventually, the standards of the banking sector were brought low by the country's government and the state's central bank. It allowed the government to siphon off billions from private bank deposits and the state treasury amid a financial crisis sparked by the political class that came to power, with no regard for the consequences of its corruption for the country and its people.

Depositors can no longer access their money from the bank they entrusted with their life savings, nor can private banks retrieve what it deposited with the central bank.

The spectacular fall came amid a crash for Lebanon's currency, and was to make it even worse, as confidence disappeared. The purchasing power of the Lebanese dissolved. Tens of billions of dollars evaporated as Lebanese banks collectively became empty overnight.

Depositors lacking access to their cash are left with no more than claims relating to the balances now beyond their reach. Along with the private banks themselves, they are hostages to the state.

Billions of dollars have been lost to corruption, sectarianism, and even political indifference to the impact of the crisis. There is no sign of any hope that action will ever be taken to return the money taken from the banks and their customers.

Read more: Restoring Lebanon's depositors' frozen funds needs an international court, not the IMF
 

Banks tried to keep afloat with whatever was available, relying their foreign branches to survive as along as possible. They adopted medium- and long-term strategic plans focusing on cutting expenses to the minimum and adopting austerity to survive.

So far, the Lebanese banking sector has avoided declaring bankruptcy – in the formal sense at least –  and has not permanently closed its doors.

But any recovery will depend on the return of a responsible form of political authority, which is currently absent. In the meantime, those 1.8mn depositors have been reduced to the hardship of poverty with no access to their money.

Al-Azhari blames the state

When Al-Azhari spoke to Al Majalla, he blamed state mismanagement for the unprecedented crisis.

"The crisis is systemic and didn't arise because of banks, but because of the state's and central bank's policies", he said.

The way out of the imbroglio into a long-term solution for depositors may be shown by the fate of international investments know as Eurobonds, debt issued by Lebanon denominated in a foreign currency.

"The fate of Eurobonds is linked to the comprehensive solution, which will naturally include an agreement between Lebanon and the IMF", said Al-Azhari, in a reference to the International Monetary Fund.

The price of Lebanese Eurobonds has recovered on secondary markets, in a sign of hope that a move back toward some sort of normality might be underway, although Al-Azhari approaches the rebound with caution.

Eurobond warning

He says the bounce higher relates to moves toward what he calls "a comprehensive solution", which in the case of Eurobonds will need wider backing. "Any agreement with bondholders must be preceded by an agreement with the IMF," he says, attributing the "limited" rise in Eurobond prices "perhaps to the alleged intention of the Lebanese government to buy Eurobonds at their low prices in the secondary market".

Then came a warning: "But in my opinion, that won't happen", he said.

There are also precedents that are likely to be created over how investors in shares in Lebanese banks are treated. The market value of global depositary receipts – or GDRs – in the sector has reached almost zero.

Al-Azhari admits: "In the absence of a comprehensive solution and with the extension of the crisis, it was expected that stock prices on the stock exchange, including bank stocks, would fall. This decline was contributed to the collapse of the national currency and the Lebanese State's cessation of debt repayments, in addition to banks' inability to distribute profits (if any) to shareholders since 2019 because they're banned to do so by central bank circulars."

Transfers for some but not others

Lebanon's banks have faced high-profile accusations of honouring deposits held by Lebanese officials and politicians abroad while preventing the same kind of transfers for small depositors.

Al-Azhari justifies this by saying capital control law hasn't been enacted so far, although it shouls have been, as soon as the crisis began.

"We would've avoided all these issues because transfers would then become illegal", he points out, adding: "But in the absence of such a law, any transfers by the banking sector for some clients are legal, although unethical."

He added: "I can't confirm if some Lebanese banks actually made these transfers or not."

However, Al-Azhari asserted that his bank – and all banks with high professional standards – only made small and limited transfers for urgent humanitarian reasons.

Additionally, banking privacy rules were waived for senior executives and board members to allow judicial authorities to inspect their accounts, which proved that no transfers had been made from them since the crisis began.

And he was clear in one regard in particular: "There's no relationship with Hezbollah or its allied forces, based on Lebanese banks' compliance with the central bank's and international regulations", he said.

Regional conflict

Meanwhile, Lebanon is constantly affected by regional conflicts, particularly by international and US sanctions on its political parties, foremost among them Hezbollah and what are known as the "resistance forces."

The banking sector, under the management of the former central bank governor, Riad Salameh, managed to bypass sanctions for two decades with US understanding on one side and political authority's agreement with Hezbollah on the risks involved on the other side, a question arises about the current relationship between banks and Hezbollah and how they handle its or its allies' money.

Al-Azhari confirmed: "There's no relationship with Hezbollah or its allied forces. This is based on Lebanese banks' compliance with the Central Bank's and international regulations."

Relations with the Central Bank

The acting governor of the central bank, Wassim Mansouri, has highlighted the need for Lebanon's private banks to return to their proper role: Lending to people and businesses to provide finance for economic growth and as custodians of deposits.

When asked if there is any hope that could happen, Al-Azhari said: "This is the natural role of banks, which we certainly hope they'll return to when the crisis ends and is resolved. At the same time, some banks are currently conducting limited lending operations in 'fresh dollars' [new dollar-denominated accounts not linked to old accounts] for their creditworthy clients but under strict conditions to protect their liquidity and assets."

In this context, Al-Azhari doesn't see any difficulty in banks regaining depositors' trust. For example, despite the crisis, there are currently significant amounts of fresh dollars in Lebanese banks, and the banks are operating normally and successfully abroad through their foreign units.

This is unambiguous evidence that the banks' management didn't cause the crisis but rather the responsibility lies with the State's financial and monetary policies, he avers.

A few weeks ago, the central bank amended circulars 158 and 166 to include a new range of depositors entitled to access parts of their deposits, which displeased some banks to the point where some considered that Mansouri "embarrasses them out" of the market.

However, Al-Azhari sees what the central bank is doing – including the recent amendments to the circulars – as:

"Positive signs aimed at comforting depositors and providing them with more liquidity until a comprehensive solution to the crisis is agreed upon and implemented, which we hope will happen as soon as possible.

"At the same time, some banks face a problem in securing liquidity to meet these circulars, especially after the Central Bank stopped paying part of the interest on deposits with it when the exchange rate against the dollar changed from 15,000 [Lebanese] pounds to 89,500 pounds in early February 2024 because the Central Bank feared an increase in liquidity in pounds and its negative impact on the exchange rate.

"This is except for the 25% of the interest still paid in non-cashable dollars, the so-called 'lollars'. But the Central Bank promised to find a solution to this problem soon, and we in the sector hope for the best from that."

He added: "Deposits up to $100,000 can be recovered from the current liquidity of banks and their deposits with the Central Bank, and this can be done starting now".

Al-Azhari alos proposed a phased solution to the deposits  problem, a solution that he says hasn't faced objections from officials and international financial institutions.

 He still hopes it, or part of it, will be implemented as a solution to recover deposits and bridge the financial gap at the Central Bank. The scheme is based on three mechanisms summarised here:

1. Recovering deposits up to $100,000 from the current liquidity of banks and their deposits with the Central Bank, which can be done starting now.

2. Establishing a Deposit Recovery Fund (DRF) jointly between banks, the Central Bank, and the Lebanese State, aiming to recover most deposits exceeding $100,000. It will be funded from several sources, mainly a portion of future distributed profits of banks, a share of state asset revenues, including future revenues from gas and oil, the State's contribution to recapitalising the Central Bank, and a tax on the profits made by debtors who paid their loans in dollars at official exchange rates much lower than market rates.

3. Restructuring banks, which will be much easier compared to the earlier period, due to the significant reduction in the balance sheets of banks as a result of eliminating the financial gap at the central bank.

Leaks, disputes and fault lines

The Association of Banks in Lebanon faces differences and disputes among its members according to a series of leaks, which reveal fault lines between large and small institutions and over restructuring schemes and government plans to save the economy. That could prove to be a hindrance to such plans, even when they have been made in such detail.

Al-Azhari said: "The ABL is united, and there's no disagreement among its members on the basic principles of the crisis and ways to solve it."

These principles are threefold, and can be summarised as follows:

1. The systematic and state-level origins of the crisis relate to the central bank's policies, not the behaviour of private banks. This doesn't mean there are no weak banks or banks with wrong policies, but it means the solution to the crisis starts with bridging the gap at the Central Bank and the State taking responsibility.

2. The solution shouldn't include any write-off of deposits. In this context, banks are ready to contribute a portion of their future profits to provide this solution.

3. The solution should also be fair and equitable, where all concerned parties bear the burdens of its success, and its main objective should be to rebuild the banking sector, not to destroy it because this means eliminating the future of the Lebanese economy.