The role of the banking sector in the present Lebanon crisis

The second report of the Lebanon series by Christina Lawandos we publish today considers the role that Lebanon’s monetary system and banking sector play in the present crisis.
With a debt to GDP ratio of 152%, Lebanon is the third most indebted country in the world after Japan and Greece. The Central Bank and the private banking system are considered to have poor accountability and strong conflicts of interest, being intermingled with and owned by the current political ruling class. Lebanon’s middle and lower classes have been suffering the most from the present economic crisis and hence, were protesting and targeting the Lebanese financial entities that have been ensuring the reproduction of the country’s failed political parties. Christina introduces one of the solutions envisaged by the people protesting, namely the Nationalize the Banks! movement, which aims to stop the vicious circle of the private self-referential banking system that is characterized by intrinsically flawed corporate governance.

by Christina Lawandos

Less than a month after a blast had shaken Lebanon’s most populated city, inhabitants of the country were met with the news that the Central Bank will no longer be supporting basic subsidies. To better understand the reasons behind this announcement, we turn to Lebanon’s banking sector and its underlying financial engineering. A sector that was once dubbed a pillar of the economy, yet has proven to be the main culprit for its crumbling.

The Lebanese Central Bank has recently announced that it will no longer be subsidizing the imports of basic goods as the threshold of its foreign reserves has been reached. Inhabitants of the country who are coping with a dollar crisis and still recovering from the August 4 port blast will now witness even more drastic surges in the prices of commodities. Although political parties were quick to blame the global pandemic, extrinsic geopolitical forces, and each other for this outcome, taking a closer look at Lebanon’s monetary system and how its banking sector has developed over the years paints a very different picture.

Historically speaking, Lebanon was always home to neoliberal experimentation. While a wave of nationalization was spreading across neighboring countries such as Egypt, Syria, Iraq, and Palestine in the 1940s and 1950s, deregulation was being solidified in Beirut. The banking sector became a fiscal heaven for foreign capital, including Gulf capital, looking to escape nationalization back home. Additionally, and in a bid to stabilize the local currency, the Central Bank had pegged the Lebanese Lira to the US dollar for decades. All of which rendered the banking sector a pillar of the economy in the eyes of the public, while further entrenching the country’s dependence on foreign capital.

In order to ensure that the lira remained pegged to the dollar; however, the Central Bank had been implementing speculative financial measures at the expense of the majority of the population. Over the years, local private banks have been loaning to the Central Bank at extremely high interest rates. This explains why the biggest holders of Lebanon’s ballooning debt are the local commercial banks themselves as they have been acting as loan sharks for the most part. Furthermore, top private banks control around 90% of all of the banking sector’s assets and 18 out of the 20 top banks have their main shareholders (SHs) either belonging to the current political ruling class or members of their very close circles. A study conducted by Jad Chaaban back in 2016 found that political control over a bank is positively correlated to the bank’s size and to the number of government bonds held. Additionally, banks with stronger political ties have tended to overlook the soundness of their financial engineering.

Investing in the growing public debt by either purchasing treasury bonds or through the Central Bank’s certificates of deposits has proven to be a very lucrative business over the years. Consequently, the obligation of the state to spend a third of its annual budget to pay back creditors impedes the development of a productive economy. Hence, Lebanon is heavily import based. The most basic of goods such as food products and medical supplies are imported and their suppliers are expected to be paid in dollars. The dollar insolvency that had led to the financial crisis was not some unforeseen outcome, but rather the inevitable result of a structural problem that is the Lebanese neoliberal model. As the government’s foreign reserves were starting to reach their threshold, private banks were incentivizing depositors to convert from saving accounts in dollars to ones in local currency by increasing the latter’s interest rates to over 10%.

Lebanon’s public debt has been utilized as a weapon that’s keeping an entire country trapped in paying back its private banks’ SHs by extracting value from the Lebanese middle and lower classes as its productive economy is virtually non-existent. The same debt whose trajectory has been influenced by the poor governance and conflicting interests of the private banks, Central Bank, and political ruling class trifecta. All of which was taking place under the guidance of the Central Bank’s governor, Riad Salameh, a classic case of regulatory capture. Once the local pound was no longer pegged to the dollar, banks started implementing a series of draconian measures limiting the amount of money small depositors were allowed to withdraw in order to preserve the amounts of dollars belonging to larger accounts. The preservation of the value of shareholders’ accumulated capital over the years has prioritized profit maximization over the livelihoods of the majority of the population. Inhabitants of the country have been witnessing harsh austerity measures, the slashing of already limited expenditures on deteriorating social services, and rising unemployment rates. All of which pushed people to rise up against the hardships they have been experiencing and that has been normalized over the years.

The October 17, 2019 uprising was a manifestation of that. People took to the streets to protest against the oppression they have grown accustomed to. What was unprecedented at the time was the rage protesters were demonstrating against the political elites and the financial entities ensuring the reproduction of the country’s failed political parties. A united front was formed and from that, social movements were born including the Nationalize the Banks! movement. In our next contribution, we will cover the main proposals of that movement.

For further information, see the following links: