The Platform

Graffiti in Beirut, Lebanon. (Brian Wertheim)

Lebanon’s financial sector is at an inflection point.

The international clarion call for Lebanon’s renewal rang out first at the “International Conference on Lebanon’s Reconstruction,” colloquially termed “Paris I,” in the French capital on February 23, 2001. There, the political elite garnered 500 million euros in pledges.

This effort was augmented at the “Paris II” summit, also in Paris, on November 23, 2002, which saw 23 countries and international bodies commit an additional 4.2 billion euros, including 1.3 billion euros specifically for project aid. The aid continued to flow at a subsequent meeting in Stockholm on August 31, 2006, with $980 million allocated. Yet, this influx of funds did little to catalyze political and fiscal reforms in Lebanon.

Notably, concerns regarding the performance of Lebanon’s sole monetary authority—the Central Bank of Lebanon (BDL)—remained absent. The BDL, led by a single, unchallenged governor, who simultaneously presides over each of its offshoots, including the Higher Banking Council (HBC), the Capital Market Authority (CMA), and the Special Investigation Commission (SIC), has become a symbol of centralized power, with the governor also effectively leading the Banking Control Commission of Lebanon (BCCL).

The lack of reform did little to deter international support or to curb the Lebanese ruling class’s penchant for corruption. On January 25, 2007, France hosted “Paris III,” aiming to scrutinize Lebanon’s political need for an empowered state, its sectoral needs, and its macroeconomic and financial health, with a focus on debt management and reform advocacy.

The international community, increasingly intent on addressing Lebanon’s internal challenges, convened to discuss state sovereignty and governance. Yet, what was debated did not align with the Lebanese government’s intentions. Despite $7.6 billion in pledged aid and soft loans, the Lebanese government—persisting with its longstanding political elite—merely unveiled yet another reform plan, echoing previous conferences’ outcomes.

Lebanon’s ruling class has since been beset with uprisings, political assassinations, wars, and economic crises, all while the expectation for reforms looms large. Despite a crippling economic crisis and the clamor for change, the political hegemony remains unshaken, with the ruling parties bearing the brunt of the blame for the stagnation.

France and the international community’s resolve has not faltered, but their patience for empty promises has. At the CEDRE (“Conférence économique pour le développement, par les réformes et avec les entreprises”) conference in Paris on April 6, 2018, almost $11 billion was conditionally pledged, hinging on the Lebanese government’s display of credible reforms. It took eighteen years for Lebanon’s allies to confront the stark reality: the Lebanese ruling class fundamentally opposes any reform that might diminish their political influence and economic gain. CEDRE may very well be the last stand, offering a plethora of support and promises, contingent solely on Lebanon’s demonstration of authentic reformative strides.

In the unfolding narrative of Lebanon’s resilience, a stark dichotomy presents itself: the commendable tenacity of the local economic sectors in the face of a crippling crisis, and the lamentable capitulation of the financial sector to political avarice. Since the political conflagration in October 2019 and the subsequent economic tumult, Lebanon has stood at an inflection point. The government’s inertia contrasts sharply with the robustness displayed by the economic fabric of the nation—except for the financial sector, ensnared by political machinations, languishing in dysfunction.

Dr. Wassim Mansouri’s ascendancy to the helm of the central bank earlier this year, under Article 25 of the Code of Money and Credit, is not merely a procedural shift but a beacon of transformative potential. To misconstrue Mansouri’s role as transitory is to overlook the authority vested in him—a governor in more than title imbued with the capacity to steer the financial sector away from its current peril.

The governor stands at a crossroads, with avenues open to salvage the beleaguered financial sector without legislative crutches. A revival plan beckons: reinvigorate the BCCL to its erstwhile vigor, ensuring that banks adhere to rigorous audits and risk assessments. The BCCL’s oversight is vital to re-establishing the eroded trust in Lebanon’s financial institutions and reinstating banking services as a reliable pillar of the economy.

Moreover, the imposition of stringent compliance on banks, aligned with the central bank’s directives, is imperative. Mansouri has the authority to scrutinize and amend problematic circulars, fortifying the legal and operational framework of the banking sector.

Restoring faith in banking is paramount, necessitating credible actions such as the domiciliation of salaries and the easing of account openings, eschewing prohibitive fees. The Basic Circular No. 165, aimed at rejuvenating banking, and the enforcement of Basic Circular No. 154 for sector restructuring, are critical to this restoration process. These measures promise liquidity and stability, delineating a future for robust banks while addressing those in distress.

The preservation of mandatory reserves is a contentious issue that Mansouri must address decisively. The suggestion to relinquish the 14% mandatory placement against local-dollar deposits and ensure its rightful return to depositors is a bold yet necessary step.

Setting a pragmatic exchange rate, consonant with the economic milieu, for accounts not covered under Basic Circular No. 158 yet falling within the ambit of Basic Circular No. 151, can alleviate inflationary pressures. This nuanced approach to withdrawals—favoring electronic transactions over cash—can stabilize market dynamics.

The urgency of these reforms cannot be overstated. The onus lies with the Central Council of the Central Bank of Lebanon, endowed with the mandate to act, independently of legislative dithering. The financial sector’s redemption is within reach, contingent on the will to enact these measures with alacrity.

Mohammad Ibrahim Fheili is currently serving as an Executive in Residence with Suliman S. Olayan School of Business (OSB) at the American University of Beirut (AUB), a Risk Strategist, and Capacity Building Expert with focus on the financial sector. He has served in a number of financial institutions in the Levant region. He served as an advisor to the Union of Arab Banks, and the World Union of Arab Bankers on risk and capacity building. Mohammad taught economics, banking and risk management at Louisiana State University (LSU) - Baton Rouge, and the Lebanese American University (LAU) - Beirut. Mohammad received his university education at Louisiana State University, main campus in Baton Rouge, Louisiana.