Lebanon has long been credited for its stable banking sector.
Much of it is down to its well-regulated structure, but the ongoing unrest in neighbouring Syria is putting pressure on Lebanese banks. Central Bank Governor Riad Salamé, the man at the helm of Banque du Liban for the past 18 years, tells Joanna Andrews that precautions are in place to guarantee stability
Central Bank Governor Riad Salamé is standing firm. The man who has been credited for building a sound financial sector in Lebanon, is confident that Lebanese banks are immune to any negative fallout from the events unfolding in the region.
"Lebanese banks are immune to the current events in the region thanks to the initiatives and measures adopted by the Central Bank in collaboration with international monitoring authorities," Salamé told reporters at the Arab Economic Forum in Beirut on 10 May.
Prudent policies
The country's banks have managed to weather the global financial crisis and the negative impact of the regional turmoil thanks to prudent policies to keep the Lebanese pound stable. They have increased their provisions against non-performing loans following the events in Syria and Egypt.
But added pressure has emerged from the US and Europe, which recently tightened sanctions on Syria and Iran and intensified a crackdown on money laundering activities and terrorist funding. Lebanon has set up a Special Investigation Committee to investigate accounts suspected of money laundering with the authority to lift banking secrecy if the need arose.
The economy
In its semiannual economic outlook for the region, the International Monetary Fund (IMF) revised downward its projection of Lebanon's real GDP growth this year to three per cent, from an earlier forecast of 3.5 per cent growth. The Banque du Liban will issue its growth forecast mid-year.
Ahead of the curve
Salamé said recently that Lebanese banks will fully comply with Basel III recommendations three years ahead of the deadline set by the committee.
"At the end of this year, banks operating in Lebanon should have formed a five per cent common equity ratio, an eight per cent tier one ratio, and a 10 per cent total capital ratio by the end of 2015, these ratios should reach a minimum of eight per cent, 10 per cent and 12 per cent respectively."
"This directive came after several consultative papers and impact studies performed to ensure its smooth implementation in our banks," he added.
It follows the banks' earlier successful implementation of Basel II back in January 2008, in which they restricted the banks to adopt the "standard approach for risk."
You have been central bank governor for nearly two decades. Tell me about the journey?
My journey was in parallel with the historical events and the challenge was to build up a financial sector, to build up stability and confidence in a difficult environment. As you know Lebanon has witnessed a lot in my 18 years at the Central Bank. It has seen wars, internal fighting, deep political crises, assassinations and despite the difficult environment we have managed to build up stability in the currency and to have proper liquidity in the banking sector to finance both the private and the public sector.
Despite the many challenges you have managed to instill strength in the sector. What would you say is your biggest achievement?
I think that the sector has been strengthened by many initiatives we took. We have concentrated on capital increases and applying the directives of Basel I, II and now Basel III. We have also worked on getting the confidence in the market by applying international regulations concerning transparency and good governance in the balance sheet of the banks and by also respecting the resolutions taken to fight money laundering. Among other measures, we adopted a conservative model whereby we keep a separation between commercial banking and investment banking and we have regulated loans to the real estate sector, the equity markets and also regulated derivatives and structured products which spared the banks from having toxic assets or suffering from potential bubbles caused by factors in the stock market or the real estate.
You have been in the job for a long time. Do you have a successor in mind?
I just got renewed because the mandate is of six years. I finished three mandates and the government has renewed my position for another six years.
Congratulations! You have been credited with adopting prudent policies to keep the Lebanese pound stable. Tell me about the policies you implemented?
We have taken a market approach in the sense that we have listened to the markets, we have let the markets fix the interest rates and we have developed deposits at the Central Bank which can be in any currency. This has helped to create more confidence, because the interest rates were fixed by the market and therefore the market rates were decided by the markets covering the risks of the market and the fact that we allowed the economy to work in the currency of its choice. This has boosted confidence and attracted capital inflows in the country.
The currency is very sensitive to the banking sector and its strengths and we have taken over and above what we mentioned previously. We have taken a stand where we will not let a bank go bankrupt and depositors lose their money which again has strengthened the confidence. We have an approach for having a managed currency exchange rate vis a vis the US dollar, because Lebanon is essentially dollarized and therefore we have prevented speculation in the currency and eliminated a lot of the distortions that could have happened because of speculation especially when we have incidents in the country that can create fear for depositors. The intervention of the Central Bank was clear and the markets know that Central Bank has the upper hand in the exchange market.
You were behind the de-dollarization in 2008 - which has led dollarization to decrease from 80 per cent to 40 per cent since the 1990s. What were the main benefits of that decision?
The currency stability has helped keep control on inflation. When the currency was not stable at the beginning of the 1990 Lebanon used to have inflation rates that were around 100 per cent. The stability in the currency has created stability in prices and we have seen inflation below four per cent for the past 14 years. The second element is that by regaining the confidence of the market, vis a vis the Lebanese pound, and the increase in deposits in Lebanese pound, it has allowed the banks to start giving credits in Lebanese pound. Therefore the expansion of credit has given a boost to
the economy.
Tell me about the new banknotes in Lebanon with the 'modern' security features, and how have they helped the Lebanese pound regain some traction?
The dollarization we have in the country applies also to the use of cash and by having a modern and safe bank note this is encouraging the use of the Lebanese pound in daily exchanges. The dollarization in the cash sector has declined and now two thirds of the activity that is in cash is happening in the Lebanese pound. This was not the case 15 years ago when only 10 per cent was being used in currency. The security features we introduced are helping create more confidence in the use of the Lebanese banknote.
Lebanon is dubbed 'the most indebted Arab nation,' what needs to be done to bring down the debt to GDP level, and where does it stand now?
The debt to GDP has been declining over the past five years, and that has been in correlation with the growth in the economy. I think what we focus on is the ratio of debt to GDP more than the nominal value of the debt. Our objective as a country is to continue bringing down this ratio. For that there are reforms to be introduced, particularly in the energy sector which is very costly for Lebanon. We import around $6 billion of different energy products (a year) and that constitutes to a big percentage of GDP which is $42 billion. This is an area where I think one should concentrate to get a control over the deficits.
Tell me about other reforms that are underway?
One of the major costs of the debt is interest charges, of course the decline in interest rates has saved a lot for the government, but there are other initiative that could be taken and they are working on it such as having a partnership with the private sector and also trying to explore the gas and oil in the economic borders of Lebanon in the sea.
Finance Minister Mohammad Safadi is taking advantage of the record low borrowing costs; he recently said Lebanon plans to raise $2 billion in international bond markets this year. Tell me about the move?
I think the Minister of Finance is planning to start having issues after the summer and I think that is in line with all the renewing of the debt of Lebanon but at much lower interest rates and that is to the advantage of the country.
What are you advising banks to do to reduce their exposure to Syria (i.e. setting aside provisions)? What impact, if any, would it have on earnings growth?
Syrian credit in the Lebanese banks in Lebanon has declined 40 per cent over the past 15 months. We have asked the banks to run continuous stress tests in order to constitute general provisions so that if things deteriorate further we won't have any nasty surprises or see significant losses for the banks. They are abiding by this strategy.
What is the Central Bank doing to counterbalance the negative security situation and guarantee the stability of Lebanon's financial institutions?
We are trying to maintain confidence by having a prudent approach. We are asking the banks not to concentrate on the growth in their profit, of course they have to make profit, but there is no reason to take risks in order to ensure a yearly growth. Lebanon is behaving in an acceptable way whether financial or economically when you consider that around us either in the countries around the Mediterranean sea or in many of our neighbouring Arab countries you have many difficulties. The IMF is predicting a growth of three per cent this year for Lebanon and our deposits are growing at eight per cent and we have sufficient liquidity in foreign currency to provide for Lebanon without having to ask for any assistance from the IMF.
Have you got plans to implement more austerity measures in the country?
We are keeping a conservative approach as far as our regulations are concerned. We have also agreed with the banks and issued circulars in that sense to have them at 12 per cent solvency ratio by 2015 based on the criteria of Basel III. I think this is important to keep confidence in our banks.
Outside of the Syrian factor, what are the challenges the sector faces right now?
The banks have to deal with a liquidity that is high because we require 30 per cent absolute liquidity, plus interest rates worldwide are very low. The current environment is not providing for opportunity given the situation in the region and therefore in this period they have to restrain and be very disciplined and that of course is playing on their income.
The Obama administration is intensifying its scrutiny of Lebanon's financial system out of suspicion it is being used by Syria, Iran and Hezbollah to evade sanctions and fund their activity. What efforts have you stepped up to fight money laundering?
We have here a law that is very clear about the legality of funds. We issued a circular on April 5th asking the banks not to bank for institutions or personalities that are on the sanction lists in the United States, Europe and all the Arab countries where their corresponding banks are present so not to put these corresponding banks at harm with their own registration. We have also a unit that is attached to the Central Bank to do all the necessary investigation in order to make sure of that. Over and above, there is a clear determination from the banks here not to be doing activities that could put at threat their operations with the corresponding banks.
What impact have you seen from the fallout from the Euro zone debt crisis?
Lebanese banks are not exposed to Europe because we usually deal in dollars and we had regulations on how much banks can use their own funds or limits to invest into instruments abroad in general - and how to split the risk so we don't see direct impact. I am sure Europe will get out of the crisis.
What needs to be done to restore confidence in the global banking sector?
I believe that a separation of commercial banking from investment banking will restore confidence and that is very important for depositors. On the other side the regulation of all these derivatives and transparency attached to these products is very important so we don't run again into crises because of products that no one is regulating.
The Lebanese Diaspora is extremely important to growth, what is expected in terms of foreign remittances to Lebanon this year?
The World Bank is forecasting about $8 billion dollars in remittances this year. Lebanese immigrants around the world are very important to the economy. It represents 20 per cent (and sometimes more) in terms of remittances compared to the GDP. By keeping a solid banking sector, by keeping confidence in our institutions we are encouraging them to bank in Lebanon.
© Banker Middle East 2012
