--- title: "Banks and Restoring Lost Trust | Ghazi Mahmoud" url: https://ghazimahmoud.com/en/articles/2024-01-17-730f80/ lang: en description: "For the fourth consecutive year, Lebanon's financial and economic crisis continues in all its complexity, with no serious signs or initiatives on the horizon to put the crisis on the path to a resolution." --- [All articles](https://ghazimahmoud.com/en/articles/) # Banks and Restoring Lost Trust [Brig. Gen. (Ret.) Dr. Ghazi Mahmoud](https://ghazimahmoud.com/en/about/) 17 Jan 2024 · 7 min read [Banking and money](https://ghazimahmoud.com/en/articles/money/) For the fourth consecutive year, Lebanon's financial and economic crisis continues in all its complexity, with no serious signs or initiatives on the horizon to put the crisis on the path to a resolution. While most economic activities, despite their varying sizes and diverse fields, have regained the initiative, the services sector remains mired in the labyrinth of the crisis. The services hardest hit by this crisis and its repercussions are hotel and banking services, whereas educational and hospital services were quick to regain their vitality. Only the banking sector remains in distress, floundering in the repercussions of the crisis, as the contours of suitable solutions for it have yet to take shape and the time that has elapsed since the crisis began has brought no imminent end in sight. It should be noted that the banks' distress was not caused by the crisis; rather, it was the banks themselves that caused the crisis, at least in its financial dimension. Instead of foreseeing the risks of the state's fiscal and monetary policies, these banks went to great lengths in promoting them and attracting depositors out of greed for further extraordinary profits. Even though a bank's default is legally tantamount to bankruptcy, the entire banking sector fell into distress without Banque du Liban declaring a single bank bankrupt. These banks managed to maintain their continuity at the expense of depositors and their savings, and with the collusion of the central bank and the political authorities. Procrastination in passing laws designed to reorganize banking operations to confront the repercussions of the financial and economic crisis has played the primary role in the banking sector's continued distress and its failure to fulfill its pivotal role in economic activity. This procrastination has allowed banks to continue withholding depositors' funds and imposing restrictions on withdrawals, or what is known as "capital control," on the one hand, and applying a "haircut" jointly and severally with Banque du Liban on the other, without legal justification in either case. Added to this is the arbitrariness they adopted in transfers, going so far as refusing to wire funds to students pursuing their studies abroad despite Parliament's passage of the student dollar law, among other practices. All of this has stripped banks of their credibility and prevented depositors from regaining trust in them or returning to rely on them for their financial transactions, particularly transfers, thereby driving up both the cost of those transactions and the risks accompanying them. Meanwhile, the footprint of banks was shrinking, as they closed more than 400 of their branches one after another in Lebanon and around the world as a result of declining revenues and a lack of placements. Conversely, financial institutions are increasingly emerging and expanding across various Lebanese regions, including money transfer companies and other firms offering diverse services that include extending loans, issuing credit cards, and more. This has prevented banks from reclaiming these roles, over which they once held a monopoly, and deprived the state of the fees and taxes generated by such activities after the state lost its supervisory role over the financial sector and over import and export operations, amid rising tax evasion. The negative shifts in the economic role of the banking sector and the dominance of the cash economy have contributed to the depreciation of the national currency and stood in the way of economic recovery. These shifts have played the main role in the growth of the shadow economy and cross-border smuggling, placing a burden on the state and causing a decline in its revenues from fees and taxes. On the other hand, however, and despite the aforementioned negative repercussions, the cash economy and the shadow economy have served as enabling factors for the survival of the national economy amid the state's inability to provide suitable alternatives. The banks' responsibility for the financial crisis battering the national economy began the moment they confined their placements to financing the public debt and subscribing to government bonds. That constituted a violation of the provisions of the Code of Money and Credit and the rules of banking practice, particularly Article 121 thereof, under which banks are required to deploy deposits into lending to individuals and investment enterprises. As a result, banks voluntarily curtailed their role in the national economy in terms of encouraging consumption and financing domestic investments, something which, had it happened, could have stimulated the economic cycle and helped expand the size of the economy and broaden the tax base. The banks' responsibility lies in their exposure to sovereign public debt risks without setting aside corresponding provisions, while reducing their lending to the private sector, where lending risks were no greater than the risks of financing the state, demonstrating poor assessment by bank managements of the risks of their placements. It likewise lies in the banks' violation of the risk management rules previously established by the Basel Committee, which mandate a considered selection in lending operations in accordance with hedging and prudential standards. This generated vast and extraordinary profits for bank owners and shareholders by risking depositors' funds and at their expense. Conversely, it is difficult for the wheels of the economy to return to turning normally while banks remain in distress, given that this sector forms the backbone of the remaining economic sectors, and restoring its pivotal role is a prerequisite for regularizing their activity. Indeed, the sectors that have regained their economic activity have done so only partially, and they face numerous obstacles that are difficult to overcome, particularly regarding financial transactions and investment financing. Resolving the banking sector crisis is therefore an essential part of resolving Lebanon's financial and economic crisis. Today, following the persistence of the crisis, the dominance of the cash economy, and the ballooning of its figures, the need for banks to regain their role in credit and financing has become clear. Yet standing in the way of banks reclaiming their role are numerous legal and regulatory obstacles, perhaps the most significant of which lies in their insistence on absolving themselves of responsibility for the crisis and its exacerbation. While removing legal and regulatory obstacles is the responsibility of the political and monetary authorities, banks for their part must formulate suitable, indeed creative, solutions that ensure the sustainability of banking sector operations while preserving depositors' rights as well as state resources and assets. Although it is difficult for those who caused the crisis to help resolve it, the banks' own interest in regaining their role in accepting deposits and granting loans compels them to take the initiative and seek appropriate solutions, not only for the banking sector, but for all economic stakeholders, especially depositors, whose rights must be safeguarded. There is no point in betting on the passage of time to resolve crises, for time is passing while the crisis grows more complex, and advancing time makes solutions harder and further out of reach. Consequently, the path for banks to regain the trust of their depositors and attract new ones, and indeed to restore the confidence of all economic stakeholders, begins with three fundamental steps. The first is recapitalizing the banks as a prelude to restructuring them, whereby solvent banks continue under their current identities while less solvent banks merge with them, while the alternative consists of new banks or branches of foreign banks. The second step is working on having banks draw up a realistic plan to return deposits, ensuring that they are repaid within a maximum period of ten years while taking care to minimize depositors' losses, as the scale of these losses is what restores trust between banks and depositors and encourages them to deposit their money with them in the future. The third and final step is for banks to resume granting loans to individuals and institutions by using part of the profits they previously realized. For banks to regain the trust of their individual and institutional clients requires that they trust them first and provide them with appropriate financing for their investments and other needs. These three steps that the banks must pursue must coincide with measures by the fiscal and monetary authorities to protect them and provide favorable conditions for implementing them and achieving their objectives. This stems from the state's responsibility for managing the economy, particularly the continuity of the banking sector, as well as its responsibility for citizens' rights and deposits. Moreover, the steps required of the state are not limited to ending procrastination in enacting laws on bank restructuring, capital controls, and other legislation governing banking operations; rather, the state across all its authorities must articulate a vision for Lebanon's economic future across its various sectors. Translated from Arabic with AI. [Read it in Arabic](https://ghazimahmoud.com/articles/2024-01-17-730f80/) ## Published in - [Radar News](https://www.radar-news.net/المصارف-واستعادة-الثقة-المفقودة-بقلم/) - [Lebanon Files](https://archive.lebanonfiles.com/2024/articles/باقلامهم/المصارف-واستعادة-الثقة-المفقودة/) - [OZ Arab Media](https://ozarab.media/المصارف-واستعادة-الثقة-المفقودة/) ## More on banking and money [All articles on this subject](https://ghazimahmoud.com/en/articles/money/) [3 Jan 2024 · Between Unifying the Exchange Rate and Liberalizing It · Radar News, Lebanon Files ](https://ghazimahmoud.com/en/articles/2024-01-03-1ef118/) [22 Nov 2023 · More Than Mere Monetary Stability Is Needed · Channel 23, Lebanon Files ](https://ghazimahmoud.com/en/articles/2023-11-22-de319e/) [22 Nov 2023 · Monetary Stability and a Sad Independence · Radar News ](https://ghazimahmoud.com/en/articles/2023-11-22-867c3f/)