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Opinion

Lebanon debate: Lebanon aims to build on new era of stability

Inward investment is rising, government debt ratios are falling, and a government of national unity has ambitious plans to revitalize Lebanon’s economy. Bankers and politicians alike want to capitalize on what could be an unprecedented opportunity to transform Lebanon’s fortunes.

Recent coverage of Lebanon: Lebanon sells $2.2 billion of bonds 

Lebanon debate: Learn more about the panelists


Executive summary

• Lebanon is at a crossroads: Can it turn optimism into real achievement?

• Banks want the Hariri government to accelerate debt reduction through securitization and privatization

• Politicians say banks need to do more to invest in the private sector, but banks want government to provide more opportunities

• Beirut could become an international finance centre again if stability continues

• Leading Lebanese banks will continue to look overseas to expand their operations

Clive Horwood, Euromoney Let’s start with an overview of the political and economic situation in Lebanon. What are the key things potential investors should take into account when looking at the country?

Saad Azhari, Blom
SA, Blom Clearly, since the May 2008 Doha agreement [between Lebanon’s political parties, ending 18 months of tension], the political and security situation has improved immeasurably. We have seen increased consumer confidence internally and increased inflows of capital from outside. The aim now should be to capitalize on this new environment. The main problem remains the level of public debt and the deficit. The government needs to address these problems and come up with a sustainable plan for economic growth, which is the only sure way to overcome the debt issue.

Mazen Hanna, Office of the Prime Minister
MH, Office of the Prime Minister I agree that there is a positive sentiment in the country. The macro situation is no longer a pressing issue and there is an opportunity for real reforms. However, real reforms are easy to envisage but much more difficult to implement. And in Lebanon we have had much greater difficulty than the rest of the world in implementing straightforward, non-contentious reforms. The main challenge remains, how do you implement sustainable socio-economic policies while maintaining fiscal stability? There is an ambitious reform agenda. There is an ambitious investment programme being designed by the various ministries; all these activities have to be coordinated while maintaining fiscal stability and monetary stability. And the key to all of this is growth – growth shared by most economic sectors and more sectors of the population.

Dr Jihad Azour, Booz
JA, Booz Lebanon is at a crossroads. Can we translate optimism into real achievement? The fact that Lebanon has weathered the crisis and been able to post growth of 6% to 7% a year is clearly a positive. From this good start we need to focus on the sectors that can create growth in future and we need to have a plan for the roles of the public and private sector in generating this growth.

There is also an opportunity in terms of regional developments. After what happened in Dubai and other places, investors are looking more positively at Lebanon. Sectors such as telecoms, transportation and electricity offer potential for large investors.

And, as Mazen and Saad were saying, the state has to address certain issues. Fiscal containment is the priority, as well as keeping inflation under control. Beyond stability we need prosperity, and proactive policy by the state in certain sectors is necessary. Also there are some institutional reforms that would help Lebanon.

Mohamed-Ali Beyhum, BankMed
MAB, BankMed Fiscal containment is crucial. Even though the economy has enjoyed three years of very healthy, steady growth, we cannot ignore the deficit. However, there is a role for the private sector in taking over some of the responsibility for infrastructure financing. Bank liquidity is strong but the banks have not yet played a significant role in this sector, choosing instead to finance the government deficit. Direct financing to help the economy to grow, create employment and solve the issues we have with telecommunications and power generation. It would also boost the capital markets, which are underdeveloped.

Joe Issa-El-Khoury, M1 Group
JIK, M1 Group Let me shy away from the typical answer. Perception is always stronger than reality and that is true here too. Lebanon has unfortunately served as a stage for some of the regional conflicts and the repercussions of whatever might be going on in the region. At the same time there is a strong perception, I strongly believe, that Lebanon will never be let down. What I mean is that not only the Lebanese who are residents, but also the Lebanese who are in the GCC, and other investors in our part of the world support the country when there are problems. The Paris agreements might be an indication that, every time Lebanon needed help, the international community was there to give assistance and support.

I certainly agree with what has been said so far, but what we really need is to secure some kind of sustainability of inflow of funds, be it in the form of FDI, or whatever, to counterbalance the deficit in the current account.

Alain Bifani, Finance Ministry
AB, Finance Ministry The economy still relies on just a few sectors. It is not clear that we are creating sufficient jobs to match the growth we have. Lebanon has a big deficit in physical capital and we are bleeding in terms of human capital. On the other hand, credit is plentiful and in that regard we are in a better position than many other countries.

On reform, the key issue is physical capital, but it is also a question of bringing back the state to what it should be doing and bringing back the private players to what they should be doing. We need to redefine the role of the state because in many sectors we have too much state and in others we don’t have the state at all.

Shrinking the state

CH, Euromoney Well, if redefining the role of the state is crucial, surely two ways to do that are first privatization and second cutting through the bureaucracy of the regulatory environment?

Mohamed-Ali Beyhum, BankMed

MAB, BankMed Absolutely. For example, we need a revitalized telecoms sector. Privatization is a must – not to pay off the debt but because the private sector will do a much better job in running the sector in terms of productivity, efficiency, and bringing in capital. That would be an excellent start in redefining the role of the state and a clear indication from the government that it wants the private sector to be involved.

CH, Euromoney Why do you place so much emphasis on telecommunications?

Dr Jihad Azour, Booz

JA, Booz Because telecoms is the backbone of a knowledge economy. If we want this economy to be based on human capital and to be productive, the telecoms sector has to be managed as a key driver for growth. Electricity generation and distribution is key for the same reasons.

Samir Hanna, Bank Audi
SH, Bank Audi We need to securitize revenue streams from the mobile phone industry. There’s been no progress on privatization so far, and we can move things forward much more quickly through securitization. That kick-starts the process of reducing the government’s debt service costs, and begins a virtual cycle whereby banks can move away from funding the government and instead finance infrastructure projects that will create jobs and growth.

CH, Euromoney Mazen, are these sectors and the involvement of the private sector in them at the top of the government’s agenda?

Mazen Hanna, Office of the Prime Minister

MH, Office of the Prime Minister Near the top. Of course we must remember that a government has other priorities than purely economic goals: the reform agenda includes healthcare and education for example. And I also believe that we can do much more for the economy in the short term by simplifying the regulations that cover setting up a company, getting a work visa for it and in general getting the state as far away as possible from the day-to-day business of companies. But I do agree that electricity, and power in general, and telecommunications are the two crucial issues. Together they form the basis for the infrastructure we need for economic growth. However, it will not be easy. We have had this problem for many years and it has not been solved yet. Simply in terms of financing and logistics these are big issues and the ability to implement reforms is further hampered because the government has not yet articulated its own vision on each of those sectors. The ministers concerned have not divulged what they would like to do. It doesn’t mean that they won’t or they have no idea what they want to do, but they haven’t communicated it yet.

On the telecoms side, my personal opinion is to privatize and not to securitize, especially given a macro situation in which debt to GDP is declining and the bid for proceeds is falling.

Joe Issa-El-Khoury, M1 Group

JIK, M1 Group Remember that we have a privatization law and that there aren’t many things to be privatized as the private sector has traditionally played a major role in the development of the economy in Lebanon. I have always been a strong promoter of whatever could be privatized but I do not believe that right now might be the right time to sell, given the price we would likely receive. In that context, securitization is just postponing the sale until the right time. The bigger problem with privatization is that we have no agreement on who would run the process, and this is an issue of trust among the various political factions. That is the issue that needs to be solved.

Alain Bifani, Finance Ministry

AB, Finance Ministry I would like to go back to your initial question. I would like to see change in the way the government prioritizes. Disregarding any particular sector, the key problem has been that, because of our history, government has been weak relative to other entities and individuals. This affects our priorities and explains why projects that are less necessary sometimes win over those that are vital. This is why investment in power has been too low for many years, for example. To change this, first we need a government that agrees on priorities and enforces them.

We also have a financial dilemma: infrastructure requires heavy, upfront investment over years before the government sees any return. But the government has available money. So we should not neglect this fact before involving the private sector.

On the issue of trust, I agree. To reform the system people need to trust each other, but also be willing to make short-term personal sacrifices in the national good. This will take time.

Saad Azhari, Blom

SA, Blom And remember we have success stories as well, perhaps not in privatization but in terms of reforming state-owned companies. For example, our national airline was loss-making and we had a problem in terms of overstaffing. There was a decision to restructure the company and the central bank, which owned it, gave management its full support to go ahead. They were able to restructure the company and now it is making important profits and returns and it is a success story. Later it is a candidate for privatization, but what is important is that state-owned entities can be turned around without privatization.

Political instability and paralysis

CH, Euromoney The question of weak or divided government is a good one. Take for example the issue of the lack of agreement on staffing the committee for banking supervision. It clearly leads to the question: "If the government can’t manage to agree on a six-person committee, what chance is there of this coalition government being able to force through some of the tough decisions that need to be made?"

Mazen Hanna, Office of the Prime Minister

MH, Office of the Prime Minister I understand. I believe it was premature for anybody to think that in this unity government all the competing views would see eye to eye on every issue from day one. However, what exists today is a willingness to listen to the other parties and to try to understand what the other party wants and so to remove the distrust that is embedded within the political system in Lebanon.

To go back to the banking supervision committee: obviously the banking sector is one of the most important sectors in the economy. Clearly too, supervision is a major issue both inside and outside Lebanon. In order to come up with a cohesive set of names, it has taken much more time than initially envisaged because this is a committee or a board that has to take decisions not by voting, but by consensus. Not only do they have to be qualified people, they have to be harmonious as a group. Coming up with a set of five names has not been as easy as we thought.

CH, Euromoney Saad, do you think this is a government that will get things done?

Saad Azhari, Blom

SA, Blom The challenge and the opportunity for us is to create strong, sustainable growth for Lebanon. I don’t have a feeling that the government is sufficiently focused on ways to do that, nor that this is even their main priority. That worries me. Having said that I am not an insider, I don’t know the details of the plan to achieve this growth, but what we are reading in the newspapers doesn’t give me a lot of hope, frankly.

Samir Hanna, Bank Audi

SH, Bank Audi Today I agree with that sentiment. Nevertheless, in the east where we are living, nothing is deemed definitive. Our history in Lebanon has demonstrated that things can turn around quickly. Come back in a few months and we will see.



Alain Bifani, Finance Ministry

AB, Finance Ministry Give this government a fair chance. We have lived through a period of conflict that has been longer and more difficult than that experienced by most countries. Any institution after a period like that needs time to develop a modus operandi and this is what is happening now. It is a new game and the players are looking for a new modus operandi.

We are in the lengthy process of building trust and agreeing on the right priorities. This is something that we should be asking any government to do, instead of, from the beginning, giving it a very small chance for success by focusing on the difficulties only.

Saad Azhari, Blom

SA, Blom I want to add one very important thing and I will be very frank. We have been lucky in the last couple of years. The political and security situation has been good, even without effective government. We’ve still had growth and improvement of debt to GDP. What worries me now, with a consensus government, is that to please all the parties the allocation of resources will not necessarily be consistent with the true needs of the economy, but will be determined by the political need to keep all the ministries happy. That may also increase spending to the point where we need to increase taxes, which will depress growth.

Handling the debt burden

CH, Euromoney Moving on, how can the debt level of around 150% of GDP be brought down given the need for Lebanon to invest in infrastructure, health and education?

Mohamed-Ali Beyhum, BankMed

MAB, BankMed  I don’t think it is realistic in the short term to dramatically reduce the debt level. The most important factor in longer-term debt reduction is economic growth, which requires the steps we have already discussed with regards to setting priorities and the encouragement of the private sector. The short-term solutions that have been suggested, especially privatization and securitization, are more controversial. Realistically, we all know privatization is not going to happen in the near future, so securitization is a possible way for the government to raise funds and it is a cheap way of doing that. But the key is to promote the private sector because that is the catalyst for capital inflows into the country. For this we need stability and security, and those are the most important contributions the government provides.

Samir Hanna, Bank Audi

SH, Bank Audi This discussion proves that it is impossible to talk about privatization or securitization without getting bogged down in politics. So it might be unlikely that these tools will materialize, bringing down the debt burden and upgrading our infrastructure. Now, we can question why we have continued to borrow in the way we have – whether it is to create a reserve cushion at the central bank or to alter the currency mix of the debt – but we can assert there is no agreement on how to reduce the debt and how to kick-start investment in infrastructure.

CH, Euromoney There doesn’t seem to be a lot of consensus on how this deficit should be brought down around the table.

Mazen Hanna, Office of the Prime Minister

MH, Office of the Prime Minister No, because the securitization issue derails the underlying discussion. The IMF has clearly stated that securitization of government proceeds does not lead to debt reduction. People focus too much on it without looking beyond it; I don’t think there is disagreement on the need to reduce the debt to GDP ratio. First of all, all our macro indicators today are much better than they used to be. Secondly we are converging with the rest of the world.

CH, Euromoney But that is because rest of the world is getting worse.

Mazen Hanna, Office of the Prime Minister

MH, Office of the Prime Minister The government has also built up cash reserves, because the banks have been oversubscribing to Lebanese treasury bills – this is the issue and Mr Hanna knows this. Low interest rates have attracted non-resident deposits, there is excess demand, interest rates have been pushed down and today the treasury is flush with cash almost to the equivalent amount of $4 billion.

Samir Hanna, Bank Audi

SH, Bank Audi Yes, but the depositors are coming mainly for interest. When interest rates go down, they might reconsider. This is where you have to ask your bankers, those who finance investments with people’s savings, about how you see things developing. Believe me they have the right measure. The low interest rate environment is mainly due today to the international environment, not to the banks or the government.

Mazen Hanna, Office of the Prime Minister

MH, Office of the Prime Minister I disagree with you.




Samir Hanna, Bank Audi

SH, Bank Audi Do you believe that it is normal for a B– country to borrow at spreads of just 250 to 300 basis points? There is an exceptional environment today in Lebanon that perhaps next year might not be there.



Joe Issa-El-Khoury, M1 Group

JIK, M1 Group The debt to GDP level on paper is extremely high. It is lousy. In theory, it should have driven away investors. But the opposite is happening. At the end of the day our paper in the capital market is not trading where it should be given our rating. This is an indication that the debt ratio is not the key factor.

The banking sector

CH, Euromoney Let’s talk more specifically about the banking sector. Is the sector as successful as it seems and how can it become more involved in real lending to the private sector?

Saad Azhari, Blom

SA, Blom Yes, the banking sector in Lebanon is very healthy and has been very successful. Lebanese banks are now present in more than 25 countries: 12 countries in the Arab world and 13 countries outside the Arab world. The private sector is well serviced by the banks and lending to the private sector is relatively high as a percentage of GDP. I don’t think there is a problem here. The question is how to grow the economy and how can we attract back successful Lebanese people who went abroad. Is it a question of infrastructure, of telecommunications? Is it a problem of taxation? What are the reasons? This should be a priority to see how we can grow this economy strongly.

Mohamed-Ali Beyhum, BankMed

MAB, BankMed I agree. The reason behind the overseas expansion of the banks is the fact that the local economy is a small one relative to the banking sector. So diversification is the correct strategy. Some follow the Lebanese diaspora outside; some invest directly in other markets solely on the premise of their own potential.

CH, Euromoney Samir, do you also feel you have no choice but to look for expansion outside Lebanon?

Samir Hanna, Bank Audi

SH, Bank Audi One-third of bank deposits are in Lebanese pounds and every single penny is placed either with the central bank or the government, with very few lent to the private sector. The other two-thirds, which represent two times GDP, are in foreign currencies and they cannot find enough opportunities domestically. Now, with domestic growth at 8% or 9%, the local market might attract a growing part of the available liquidity. But today there are not sufficient opportunities relative to the growth of funding that we are witnessing. To create these, we need to expand the size of the national economy through high-value-added projects. The country needs for instance 20 or 30 hotels; we need at least $1.2 billion for dams; we need better infrastructure in utilities and airport services, etc. The private sector can do most of the job, provided the government is capable of setting the right tones on sustained political stability and long-awaited reforms.

CH, Euromoney What is it specifically that you think the government needs to do then? You want a formalized public/private sector partnership programme? Is that something you are working on at the moment?

Samir Hanna, Bank Audi

SH, Bank Audi There is discussion. We support such initiatives and hope they will materialize.




Mazen Hanna, Office of the Prime Minister

MH, Office of the Prime Minister Yes, this is something that is envisaged and there is consensus in the government over this – I can speak on behalf of the minister of power, who very much advocates such policies. However, this is something that the banks themselves have to lobby for and make vocal and show willingness to participate in.

CH, Euromoney It sounds as though they are.

Mazen Hanna, Office of the Prime Minister

MH, Office of the Prime Minister To an extent. Despite what has been said previously, there has been crowding out. The high interest rates paid by the government have made lending to the government more attractive than lending to the private sector. As rates fall, this will change, especially if the perceived risks also fall. The political climate has been more of a deterrent than the level of debt to GDP in terms of investment. Today we have a more accommodating political environment; the debt to GDP ratio is declining; so now the government has to create an environment that is attractive to investors. If there is uncertainty on tax policy, if people believe that the government’s role in how business is done in Lebanon is too great, if electricity is not properly managed and available, if telephones, roads, water, etc are inefficient then investment will be less forthcoming.

Dr Jihad Azour, Booz

JA, Booz  I agree that there is a need for the state to partner with the banking community more in contracts. Second, the state should accelerate the development of capital markets. Third, I believe that we need to ensure that the tax and regulatory regime is adapted to ensure that Lebanon becomes a centre for all kinds of financial services, not just banking but also, for example, insurance, brokerage, private banking.

Joe Issa-El-Khoury, M1 Group

JIK, M1 Group One of the things I believe is missing for someone looking at the banks is international levels of board governance in terms of audit compensation committee nominations, in terms of segregation between the roles of chairmen and chief executives, in terms of having a minimum of independent board members; these are things that would send a good message to any potential investor in any company in general and banks in particular.

Second, given our qualified workforce – 65% of the employees in banks have university degrees and 45% of the employees are women – I believe that the top three or four institutions could be a platform for the development of asset management and wealth management activities. I believe Beirut can still become – here we need the input of the banks – the asset management platform for the region.

CH, Euromoney What more can the banks do to spur the development of these new business lines and also the capital markets, which would also be needed to create a deeper financial centre and to foster economic growth?

Saad Azhari, Blom

SA, Blom Lebanon’s financial system is definitely bank-based and not market-based. Most companies are family owned and relatively small. We have very few large companies. And it is tax efficient to keep businesses in family hands. So we have to find ways to encourage the companies to have a bigger balance sheet, to become larger and then to go public.

In terms of developing new business lines, we ourselves have developed brokerage activities, we have developed asset management and we have issued funds not only in Lebanon but also in Jordan and we are going ahead with Saudi Arabia. Unfortunately for this vision of Beirut as a financial centre to be realized, many of the regulations have to change. In particular there are taxation issues that make it easier to create, say, a bond fund in Bahrain than here. I don’t think that the banks don’t have the capabilities. As we mentioned before, when the banks go elsewhere they excel. The problem is not the banks, the problem is how to fix the rules here.

CH, Euromoney Mazen, are you working on a new framework for capital markets?

Mazen Hanna, Office of the Prime Minister

MH, Office of the Prime Minister There has been a capital markets law from the time when Mr Azour was minister [of finance] so, yes, we will see a number of developments in this area.

CH, Euromoney Do people think that will assist in promoting the capital markets?

Samir Hanna, Bank Audi

SH, Bank Audi I don’t think so. Even if they deliver the new rules, Lebanon is T+3. Yes, the larger companies in sectors such as telecoms, banking and insurance are in a position to issue equity. But as long as the majority of domestic companies can borrow from the banks to meet their needs, they will not go to the capital markets. And the key issue is size: we just do not have that many large companies.

Mohamed-Ali Beyhum, BankMed

MAB, BankMed And as in other emerging markets a key question is whether companies are willing to go through the process of transforming from an entrepreneurial activity to an institutionalized operation, even after we show them the merits of such a process. As long as they are being served by the banks they rely on direct borrowing. So they think: why should they go to the market? We are not, as banks, going to create the capital markets; of course we strongly believe that it is in everybody’s interest for these markets to develop and prosper, but that has to be driven by the clients. As long as we can fulfil their needs, they are unlikely to go elsewhere and ask for a bond or equity offering.

Joe Issa-El-Khoury, M1 Group

JIK, M1 Group It is too cumbersome to establish a fund, but why? I might be mistaken but I think when all these regulations were issued it was at a time when we were under scrutiny by the money-laundering authorities back in the late 1990s. Very strict regulations were put in place back then to deter certain types of people from being able easily to create fund vehicles. Whereas if you want to develop a capital market in a country you need to make it as easy as possible for people to enter the market. So these regulations ought to be revised to facilitate rather than to deter.

Banks too big?

CH, Euromoney One of the arguments for the capital markets is disintermediation and diversification of risk. That is relevant here because of the significance of the banking sector to the economy, especially in the light of the global crisis. What is your view on this question of the size of the banks relative to the economy and whether that is a risk?

Alain Bifani, Finance Ministry

AB, Finance Ministry I don’t think we have banks that are enormous compared with the size of the economy. I think the economy has simply not grown enough. The deposit base is large but it is balanced by the huge financing needs of the public sector. Also, the banks have recognized this risk and have reacted by expanding abroad and moving as many assets as possible out of the system. A key issue in this debate is also the wishes and concerns of the central bank. These are driven by the inflows that we are witnessing, by the inflow sterilization that is taking place, by the need to finance the government and so on.

Dr Jihad Azour, Booz

JA, Booz  Obviously a balance is needed. On the one hand, having strong Lebanese banks is good for the economy. The expansion of Lebanese banks abroad to capture additional business is positive. On the other hand, we need to be mindful that over-reliance on one sector, particularly banking, is not a sensible long-term economic strategy and also, as we have all seen, is not sensible from a risk perspective. However, at present Lebanon has a large banking sector and it is needed to finance both the public and the private sectors and so a deliberate policy of, for example, shrinking the sector, is not feasible.

CH, Euromoney Should the financial sector be doing more to help fund the deficit? There is talk of increasing the tax on deposits from 5% to 7%, or of asking banks to make a voluntary rise in the corporate tax rate from 15% to 22.5%?

Mazen Hanna, Office of the Prime Minister

MH, Office of the Prime Minister Banks are the backbone of any financial system. The banking sector has previously assisted Lebanon whenever there were difficulties and whenever there was any concerted effort towards reform. So any contribution will be voluntary. I don’t believe that this government has an intention to target the banks themselves for specific taxes. Obviously a tax on deposits is not a tax on banks, it is a tax on depositors. The Paris III reforms envisage an increase in this tax rate from 5%. I can only say that such taxes will be levied if there is a convincing reform agenda, and to pay for increases in expenditure such as on infrastructure.

Samir Hanna, Bank Audi

SH, Bank Audi Increasing the tax on deposits is the worst thing you could do. It would affect inflows and therefore the growth of deposits if we pass on the tax to depositors; if we don’t, then it would have a shrinking effect on our net interest margins, which are already under pressure after the drop in foreign benchmark rates.

Saad Azhari, Blom

SA, Blom Surely the point is comparative. A 5% tax on deposit interest is extremely low compared with that tax in other countries, even such places as Cyprus or Syria. So let’s not exaggerate the impact. Also, we do not want to create a situation where through the tax system we effectively drive residents’ deposits out of Lebanon elsewhere. And by the same token, we also want to be able to identify non-resident deposits so that we do not deduct the tax from them. These are the key points.

On the corporate side we have learnt what works and what does not. In the past, when taxation levels in Lebanon were very high, the banks moved their headquarters abroad. When the taxation level in Lebanon has been low compared with the rest of the world, the banks have grown and repatriated their business. Increasing corporate tax rates on Lebanese banks is dangerous because companies of all kinds have the freedom to move elsewhere. A reasonable tax rate, which is 15%, makes it attractive to be in Lebanon.

Samir Hanna, Bank Audi

SH, Bank Audi I insist on my argument concerning taxes on interest rates, especially that banks are willing to offer incentives to help the public sector again, as was previously the case in Paris II.



Mohamed-Ali Beyhum, BankMed

MAB, BankMed My worry here is long-term consistency. The current rates are not a problem, but the trend is the issue. Increasing the current rate from 5% to 7% to 10% and so on – do we end up with a 15% withholding tax in three years? My concern is thus tax stability. Governments should try to aim for stable, long-term tax policies. We should not be changing the tax regime every time there is a fiscal funding gap. Random moves in tax rates or policy create an environment in which investors are uncertain and that is bad for current as well as future investment flows.

CH, Euromoney And just to confirm, the banks are willing to make a concrete contribution in terms of financing the public sector without the need for special taxes?

Saad Azhari, Blom

SA, Blom If there is a real reform and money is going to real infrastructure projects, the banks will be ready to finance at extremely low rates. Paris II was different from now: Paris II was a situation where the banks were holding government paper at extremely high rates and the question was, if there is a successful Paris II, the banks will make a huge profit because just before Paris II the government had to borrow at extremely high rates to be able to get to Paris. The question was to return the profit that the banks are going to make on their holdings back to the government. It was a special situation and almost all the banks played an important role.

Now, speaking as vice-chairman of the Association of Banks, the banks are not ready to make a sacrifice that would reduce their profits. Today the government is dropping rates on treasury bills below the rates we are paying depositors, and so the situation is different. Instead of huge potential windfall profits, the banks face falling profitability and so it will be much harder to persuade people to further forgo profitability.

Mohamed-Ali Beyhum, BankMed

MAB, BankMed We have nothing to say as a bank about any proposal for withholding tax. But rather than the Paris II contribution at zero interest rates, I would prefer the banks to come in directly, for specific projects. I do think consideration should be given to the fact that the banks were much more profitable in terms of return on equity and on assets back in 2002 than they are today. Yes, we are still profitable, but, increasingly, these profits are generated from having invested in overseas expansion and having penetrated new markets.

Joe Issa-El-Khoury, M1 Group

JIK, M1 Group We ought to be consistent. My concern is that the message that we have tried to establish over the past two decades about being tax friendly is being undermined. When the late prime minister Hariri came to power his tax policy was crafted to attract capital into the country. Then later came an increase in debt and then came the VAT programme put into application by Jihad, which was OK. And the government showed that it could break the tax evasion culture of Lebanese society: there was great success in collecting VAT and customs duties. But the issue has always been income-tax collection. Instead of looking to increase the tax burden we should be focusing on putting in place a system which could be applicable in Lebanon and my belief is that a zero-income tax to be substituted with increases in indirect sales taxes is probably the best choice for Lebanon.

Alain Bifani, Finance Ministry

AB, Finance Ministry The choice we face is between some form of [one-off] contribution, or some form of tax. I personally favour a contribution for a number of reasons. The contribution should be easier because the payers know what they have to pay and they have agreed it. Secondly, asking taxpayers to pay for something whose return they cannot see is difficult. And third, we can much more exactly match the maturity of the expenditure to a contribution than to a tax increase, and we can earmark the contribution for the exact purpose we have in mind. Finally, the contribution avoids the impression of tax instability that worries some of my colleagues around the table.

Overseas expansion

CH, Euromoney What are the main opportunities for the banks to expand beyond Lebanon?

Saad Azhari, Blom

SA, Blom The real opportunity for the banks is to expand in the neighbouring Arab countries. We know the culture, the language and we are nearby. And we have already had considerable success in doing this. That said, we face several challenges. The main one is that not all the countries around us are opening their systems. If I go to Kuwait and I want to open a bank they will tell me they are not giving licences to banks coming from countries that are below investment grade. There are countries such as Saudi Arabia that will issue licences for brokerage or asset management but not for commercial or retail banking, which are more attractive. Then there are countries where we may have branches but only one or two, which happens in the UAE for example. So this is a slow and patchy process.

CH, Euromoney Do you have a preference for organic growth and development in those countries or are you also looking at potential acquisition opportunities?

Saad Azhari, Blom

SA, Blom In general, as a bank, Blom prefers organic growth unless the only way into an important market is to acquire. So in Egypt we acquired a bank. In general we prefer to grow organically to avoid surprises, to grow gradually and to apply our systems.




Samir Hanna, Bank Audi

SH, Bank Audi Our priority is the Arab arena, whether we have the opportunity to be there or to buy a bank. So we are happy to acquire institutions and banks as long as the deal adds value to our shareholders.




Mohamed-Ali Beyhum, BankMed

MAB, BankMed Our backyard is the region. Organic versus acquisition, that is the million-dollar question, and usually you end up doing both. When the larger banks start to look more overseas, that might create opportunities locally for the smaller financial institutions. They may pick up the unserved SMEs left behind by the big banks’ expansion plans.

Dr Jihad Azour, Booz

JA, Booz Clearly there are great opportunities. There are the very immature markets – Syria, Iraq and Sudan, for example. Those present traditional banking opportunities. Then there are the clients that will be looking for new bankers after the crisis they have faced with their traditional lenders over the past three years. Then there is the new generation of businesses that will emerge in the Gulf as a result of family transitions and the mergers, and spin-offs and sales that will follow. The Lebanese banks are well positioned to benefit from these trends.

I also believe that in the next 10 years we will see the emergence of larger, regional banks. The fact that the Lebanese banks have already exposed themselves to overseas markets and competition will also benefit them.

I also believe that Lebanon will be a platform for the creation of other financial services businesses launched off this successful banking franchise.

CH, Euromoney You mention competition. Surely as the country bounces back competition will increase from international banks?

Joe Issa-El-Khoury, M1 Group

JIK, M1 Group That is not a threat, it is something to be welcomed. Before the civil war back in 1975 most, if not all, the international banks used to be based here. We had about 120 financial institutions from all over the world using Beirut as a hub to cover the region. This was one of the reasons why we had a generation of first-class, well-seasoned bankers trained by these foreign banks. If that were to happen again it would be great for the country. Yes it would mean competition for the locals. But it would be better for the country as a whole.

Saad Azhari, Blom

SA, Blom Remember too that the major international banks are here. HSBC, Citibank, Standard Chartered, the regional banks, NBK, Arab Bank – they are all here. One key issue created by Basle II and tomorrow by Basle III is that when you are established in a country that has a low rating it is a problem to have significant debt in that country because of the capital requirement that creates. That comes back to improving the rating of the country, to attracting foreign investors and so on.

In terms of growth, yes, we are going to other countries, to Egypt, to Jordan, to Syria and we are not only increasing our commercial banking activity, we have also bought a brokerage business and we started an insurance business in Egypt. In Syria we have done the same. We want to succeed in all these types of financial services business, not just banking.

The future

CH, Euromoney Finally, you all agree that there are great opportunities for Lebanon, but what are the risks? What needs to be done to make these opportunities become concrete achievements?

Alain Bifani, Finance Ministry

AB, Finance Ministry The biggest risks are still external. But the key for the government is to set priorities clearly and transparently and then to stick to them. Establishing the necessary partnership is a long process, but it will allow what needs to be done to be done.

SH, Bank Audi I agree. For us the most important thing is just that the government takes the right initiatives and triggers the long-awaited adjustment process and does it as quickly as possible.

Joe Issa-El-Khoury, M1 Group

JIK, M1 Group My priority has always been to be able to provide the right platform for job creation. My concern is that the political process is not capable of addressing this issue. The trilogy for success is based on a good education system, which we have, well-educated people, which we have and finally the necessary funding to back new ideas generated by the first two, which could be easily attracted if the regulatory environment is well in place.

Mohamed-Ali Beyhum, BankMed

MAB, BankMed The fact is that we don’t have a real partnership between the private sector and the public sector. Any lack of decision-making today is going to hurt us in three to five years’ time, not immediately, and so there is a lack of urgency. We need decisions today in order to sustain the growth of the economy in the long run.

Dr Jihad Azour, Booz

JA, Booz Basically, notwithstanding the security issues, the key issue is reform and the re-creation of our role and a regional magnet for growth and opportunity. If all the political parties are in the same decision-making team that should accelerate things, but we need an operating model for that. Can they work together to expedite reform? Or does the consensus approach paralyse decision making? I worry about the latter.

Mazen Hanna, Office of the Prime Minister

MH, Office of the Prime Minister My fear is missing this opportunity and not being able to capitalize on all the positives that are available today to launch the reform process. The solutions to Lebanon’s problems have been debated over and over again and most of us agree on 95% of the solution; but 5% is blocking the right decision. This has to change.

Saad Azhari, Blom

SA, Blom I hope and I wish that the government will do what is necessary to grow the economy by investing in it, controlling the deficit and creating the conditions in which we can attract the funds necessary for funding growth. This is my hope and we are waiting anxiously during the next days and weeks to see the details of the reform programme.

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