Does the Lebanese Banking system have the right recipe to avoid a global financial crisis?

Source: Katarina Krempova¸ PKF Malta¸ 17 January 2012

In these times when lots of European banks are facing a brutal liquidity crunch and a lack of trust¸ the Lebanese banking system is still moving forward. There is no doubt that high liquidity levels¸ strict regulation and supervision of the Central Bank of Lebanon (BDL)¸ high confidence and trust in Lebanese banks¸ as well as the strong rigorous financial policies are some of the indispensable ingredients for the proper functioning of Lebanese Banks and its immunity to the recent global economic turmoil.

The banking sector in Lebanon is the backbone of the Lebanese economy and also the most represented sector in its history and culture. Taking into consideration that the country is well known for wars¸ turmoil and instability¸ it is quite interesting how this key sector has managed to maintain its high quality levels and to grow regionally and internationally in the past years.

Let’s have a look at the secrets of this Lebanese banking sector and its several characteristics which made Lebanon the chief banking centre of the Middle East:

  • Free Exchange System¸ Free Movement of Capital and Earnings as well as Free Banking Zone
  • Supervision of the banking and finance sector by BDL
  • The Banking Secrecy Law (in force since 3rdSeptember 1956)
    • This Law binds all banks established in Lebanon to absolute secrecy with respect to their clients in order to ensure the security of banks’ investment and to attract new funds to Lebanon.
  • Tax Exemptions from income tax on all interest and revenues (1993).
  • Fiduciary agreements as efficiency-boosting features of portfolio management¸ corporate and project financial transactions¸ as well as Islamic banking operations (1996).
  • Anti-Money Laundering Law (in force since 2001)
    • This Law’s is aimed at combating money laundering and reconciliation of the principles of banking secrecy¸ which could be used for illegal operations.
  • Detailed corporate government procedures (2006¸ additional requirements – 2011)

And the latest regulations (2010 – 2011):

  • Measures strictly regulating the banks’ lending and investment
    • It is obligatory:
      • to obtain a prior authorization from BDL¸ if commercial banks¸ financial institutions and brokerage firms want to issue or trade any financial products or instruments;
      • to follow the limits associated with bank’s operations for its own account on structured products issued in Lebanon to products that offer an unconditional capital guarantee;
    • Lebanese banks can invest in structured financial products and derivates of foreign counterparts only if these counterparts fulfil specific requirements.[1]
  • Stringent requirements on money dealers aimed at increasing the minimum capital requirements of money dealers and reinforcing their reporting obligations to BDL.
  • New Capital Market Law based on international norms

In the last couple of years¸ Lebanon’s economy experienced a significant growth which was largely fuelled by growth in the banking sector. In this fruitful time¸ Lebanon could afford a hig