By Alexander Jones, International Banker
On April 24, the Lebanese Parliament successfully voted to update its regulations pertaining to banking secrecy, as it seeks to step up its reforms to lure back international creditors, particularly the International Monetary Fund (IMF). The government’s third attempt to implement such reforms, after the IMF deemed its previous amendments to banking-secrecy regulations insufficient, is a welcome sign of progress after years of frustrating inaction following the beleaguered country’s financial collapse in 2019. That said, the failure to resolve substantial banking-industry losses continues to prevent Lebanese depositors from recouping their funds, which remain frozen indefinitely.
Indeed, talks with the IMF over a funding package for Lebanon’s struggling economy have been ongoing since 2022. But with a myriad of political and financial problems preventing a series of required reforms from being enacted, discussions have stalled in recent years. To secure financing from the United States-led multilateral institution, Lebanese authorities are required to restructure the banking sector, repay losses from the 2019 financial crisis and refund depositors as part of a broad economic-reform programme aimed primarily at restoring macroeconomic sustainability and supporting financing for reconstruction.
Key reform areas include:
- Restoring the banking sector’s viability and protecting depositors to the maximum extent possible;
- Achieving fiscal and debt sustainability, while enhancing social safety nets and rebuilding institutional capacity;
- Establishing credible monetary and exchange-rate policy frameworks;
- Strengthening governance and transparency;
- Enhancing the country’s anti-money laundering and combatting the financing of terrorism (AML/CFT) regime; and
- Reforming state-owned enterprises.
Lebanon’s prime minister, Nawaf Salam, and its recently appointed president, Joseph Aoun, have promised to pursue these reforms, which were largely ignored by their predecessors. The latest amendments to banking-secrecy regulations represent merely the beginning of this journey. They permit regulators, independent auditors and the central bank (Banque du Liban) to access commercial banks’ historical records retroactively, up to 10 years. It is hoped that such a boost to the banking sector’s transparency will enable authorities to uncover fraudulent transactions, identify suspicious accounts and detect the previous instances of illegal capital flight that were instrumental in causing the 2019 crisis. What’s more, the amendments may also reveal those accounts and parties that illicitly prospered from the crisis.
According to Salam, the legislation is a “necessary step towards the desired economic reform which our government has pledged to achieve” and is fundamental to “holding perpetrators accountable”. The IMF, meanwhile, views the lifting of banking secrecy as crucial to restructuring the country’s financial sector and laying the necessary groundwork to repay depositors. “Bank restructuring remains a critical priority to restore the health of the banking sector, move away from the cash-based economy, restart credit to the private sector, and protect depositors to the maximum extent possible,” the Fund recently observed.
Despite this welcome progress, however, considerable uncertainty persists over whether Lebanese depositors will ever be able to reclaim funds that remain frozen in commercial banks to this day—funds estimated to total around a massive $93 billion. Bank customers are still subject to strict withdrawal limits, with most able to access only a maximum of $500 per month. For certain newer accounts, that limit is halved to just $250 per month, while annual withdrawal ceilings are limited to between $5,100 and $6,800, again depending on the account-opening date.
Some also believe that repaying depositors is unlikely to occur anytime soon, despite a flurry of lawsuits being filed abroad to force banks into unlocking the frozen funds. “The return of depositors’ funds will be extremely complicated and politically charged,” Walid Abousleiman, co-founder of Cyprus-based financial services company Aksys Global Markets, told Abu Dhabi, UAE-based news publication The National on April 16. “Despite repeated promises, there’s no credible or comprehensive financial recovery plan in place, especially one backed by solid legislation and international support. Without such a plan, I don’t see a full return of deposits happening anytime soon.”
Why, then, are customers still waiting for their money, and why haven’t the powers that be acted to ensure that funds are returned? Several factors are evidently responsible, such as consistently fierce opposition to such a move being voiced by an economic elite, one that includes a banking lobby wielding considerable political power and providing substantial backing to Lebanon’s political class to act in its interests. The resulting dearth of political will to tackle the problem, therefore, has stopped lawmakers from proceeding with the crucial financial reforms that would have unfrozen depositor funds.
Much of the banking sector also continues to push back against the new legislation, with analysts noting that lenders have refused to accept responsibility for the initial 2019 crisis, despite imposing strict capital controls on withdrawals and transfers to shore up liquidity, thereby trapping customers’ savings and severely eroding public trust. “Specific actors in the banking sector who had the most to lose and the most to hide have been those who are investing more heavily in supporting a certain narrative in the media,” according to Ayman Mhanna, executive director of Beirut-based media watchdog the Samir Kassir Foundation, who spoke with the Financial Times on May 4. “So far, the campaign is not succeeding to actually reach its policy goals. This is why we expect the campaign to continue and to get even more forceful.”
Dr. Dania Koleilat Khatib, co-founder of the Research Center for Cooperation and Peace Building (RCCP), holds the banking sector responsible for “all” of the turmoil, mainly due to its failure to prioritise the interests of depositors, instead expanding lending to the government, which, in turn, has provided banks with an easier route to make money. The banks also enjoy the protection of a corrupt political class, according to the co-founder and president of the RCCP, a diplomacy-focused non-governmental organisation.
“The corruption of the government was financed by the banking sector,” Dr. Khatib recently noted in an April 27 article for Arab News. “Banks used customers’ deposits to finance the government; they lured depositors with the promise of high interest rates and then put their money into bonds at the central bank, a very profitable strategy with very little risk to the banks. The central bank in turn provided the government with loans that were squandered through corruption.”
Indeed, the central bank itself represents another distinct organ of Lebanon’s myriad banking and financial failures. For one, Lebanon’s former central bank governor from 1993 to 2023, Riad Salameh, was widely blamed for implementing policies that helped spark the initial crisis in 2019 and for triggering the collapse of the local currency, which has seen virtually its entire value wiped out in the ensuing years. Salameh has since been investigated at home and abroad for several potential crimes, including embezzlement of public funds, money laundering, forgery, illicit personal enrichment and tax evasion.
Many groups, including the Depositors Union (which represents the rights of Lebanese depositors), also opposed the appointment in late March of asset manager Karim Souaid as Salameh’s successor, claiming it was too politically motivated. However, the reasons why the banking lobby fiercely backed Souaid remain clear, according to Ali Noureddeen, a senior inclusive economies associate at the Tahrir Institute for Middle East Policy (TIMEP), which focuses on issues related to fiscal policies, socioeconomic inequalities and social protections in Lebanon.
“He had previously presented a plan to address the crisis by converting the deposits that banks are unable to pay into debts owed by the Lebanese state. The responsibility to repay these deposits would therefore be transferred from the banks to the government,” Noureddeen stated in an April 9 article. “The plan then suggests implementing a ‘haircut,’ or a write-off, of up to 90 percent of the government’s debts, which means that the depositors’ rights would just disappear. This way, banks would be able to rid themselves of their crisis at the expense of depositors and taxpayers.”
Nonetheless, Souaid has stated that repayments to customers will eventually proceed, starting with small depositors, then medium-sized accounts and finally large depositors. “We must work to gradually repay and restore all deposits, with the Central Bank, commercial banks, and the Lebanese state each bearing their responsibilities in this matter,” he recently acknowledged, whilst calling for “recapitalising commercial banks and contributing to deposit repayments”.
Souaid also pledged to “rebuild trust in the banking sector” and to “create incentives and reactivate the economy through legitimate financial and banking channels”. But with words from Lebanese authorities rarely being followed by actions, depositors will undoubtedly be closely monitoring the new central bank governor to ensure that he follows through on his promises.