---
title: "Banking Reform Awaits the Financial Gap Law | Ghazi Mahmoud"
url: https://ghazimahmoud.com/en/articles/2025-07-30-23b4ba/
lang: en
description: "Since the eruption of the financial and economic crisis in Lebanon at the end of 2019, it has been clear that its causes lie in accumulated failures in fiscal and monetary policies over decades."
---

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# Banking Reform Awaits the Financial Gap Law

[Brig. Gen. (Ret.) Dr. Ghazi Mahmoud](https://ghazimahmoud.com/en/about/)

30 Jul 2025 · 6 min read

[Banking and money](https://ghazimahmoud.com/en/articles/money/)[The Lebanese economy](https://ghazimahmoud.com/en/articles/leb/)

Since the eruption of the financial and economic crisis in Lebanon at the end of 2019, it has been clear that its causes lie in accumulated failures in fiscal and monetary policies over decades. Despite the scale of the collapse and the gravity of the state to which the situation has deteriorated, the political authorities, represented by the government and Parliament, have refrained from taking the necessary and urgent legislative measures to address the structural causes of the crisis and curb its repercussions, worsening and prolonging it.

From the early days of the crisis until the start of the new administration, draft reform laws continued to falter in the corridors of Parliament, at times because of political wrangling, and at others owing to the absence of any serious will to confront the financial establishment that amassed vast profits for decades at the expense of the state and society. Government initiatives, meanwhile, often lacked an integrated vision and a genuine desire for a solution amid deep political division and conflicting interests.

Today, although the new government has pledged to pursue the path of reform and find solutions to the worsening crisis, what has been achieved so far falls short of hopes and aspirations, reflecting continued hesitation and inability to address the collapse effectively and radically.

The government's most notable achievement to date is the amendment of the Banking Secrecy Law, passed by Parliament on 24 April 2025, which included substantive changes marking a significant development in the Lebanese financial system. These amendments aimed to restore the confidence of depositors and international donors, enhance transparency, and combat corruption, in addition to meeting the demands of the International Monetary Fund and the World Bank, and behind them the international community, amid the economic crisis gripping the country.

The government also referred to Parliament the draft Banking Reform Law, which it passed in amended form on 31 July 2025. The bill constitutes a modern legal framework aligned with international standards that the Lebanese banking system had lacked, even though it concentrates power in the hands of Banque du Liban, lacks transparency, and carries risks of favouring major banks. The law provides legal tools to Banque du Liban and the government to deal with current and future financial crises, and establishes a framework for recapitalising viable banks, classifying them, and liquidating or merging distressed ones.

The paradox, however, lies in the fact that the Banking Reform Law, despite its importance, will not enter into force unless another, complementary law is enacted. Articles 2, 14, 26, 36, and 37 of the Banking Reform Law stipulate that the application of their provisions is tied to the enactment of a law addressing the financial gap, legislation that is supposed to serve as a mandatory passage towards restoring financial order by determining the volume of accumulated banking sector losses and deciding the fate and repayment of deposits.

While the draft Financial Gap Law was also supposed to be passed before the end of last July, especially since the autumn meetings of the International Monetary Fund are to be held next October and the official Lebanese delegation participating in these meetings is expected to bring both laws with it to confirm that Lebanon is meeting the reforms required of it by the international community, the Financial Gap Law remains entirely absent from the government's table.

Indeed, to this moment, the government has no official draft of this law, and the previous drafts that were leaked do not rise to the level of reform or of securing justice. It is worth noting that every delay in preparing the bill and referring it to the Cabinet threatens to delay its review and subsequent passage in Parliament, particularly as elections approach, thereby leading to further delay in launching the reform process.

By contrast, information indicates that Banque du Liban has begun preparing a draft law to address the financial gap and distribute losses and responsibilities, drawing on the recent amendments to the Banking Secrecy Law, which granted it the authority to examine the accounts of banks and major depositors so as to form an accurate picture of the movement of funds and set criteria for restructuring the sector, distributing losses, and determining how deposits will be recovered.

The financial gap can be defined on two complementary levels:

First, at the level of the relationship between banks and depositors, where the gap represents the difference between total liabilities towards depositors and the value of liquidatable assets at the banks, after accounting for losses.

Second, at the level of the relationship between the banks on one hand, and Banque du Liban and the state on the other, since a large part of bank assets is placed with Banque du Liban and in Treasury bonds, which in turn suffered steep losses as a result of the financial collapse.

This means that deposits cannot be recovered from one party alone; rather, the responsibility for repaying them is in practice distributed among the state, the central bank, and the banking sector.

This financial gap has been estimated at roughly $73 billion, and its primary cause lies in several factors, most notably:

- Banks' expanded lending to the state, which relied on borrowing to finance its expenditures, causing public debt servicing to exceed total state revenues. - Policies pegging the exchange rate of the lira, which drained Banque du Liban's reserves. - The financial engineering operations adopted by Banque du Liban, which increased its liabilities towards banks and concealed the scale and causes of the crisis. - The import subsidy policy adopted after the financial collapse, which caused the loss of the greater part of Banque du Liban's remaining foreign currency reserves.

However important it may be to identify the causes that led to the financial gap, what matters even more is how to bridge this gap and the ways to address its causes and ensure they are not repeated, especially since the repercussions of this gap hit depositors first, to the exclusion of all other economic actors, particularly the banks and Banque du Liban in addition to the state. This requires that depositors, above all small depositors, constitute an absolute priority in any prospective solution.

Nor can it be accepted that banks continue to withhold depositors' funds without legal basis, or cling to their past gains without showing the slightest willingness to bear a share of the losses, ignoring their primary responsibility in excessively expanding lending to the state, in clear violation of risk management standards and the Basel principles on sovereign exposure. Restoring confidence in the banking sector requires an effective contribution from shareholders and large creditors in absorbing losses, so as to ensure fairness in their distribution and the sustainability of the banks' role in the national economy.

Conversely, the Lebanese state is called upon, through the forthcoming Financial Gap Law, to shoulder its responsibilities in protecting deposits and their holders. The state's responsibility towards its citizens, and its role as regulator of relations among economic actors and guarantor of rights, transcends the question of whether or not it benefited from the deposits, and this responsibility cannot be shirked, particularly in times of collapse. Doing so will make it possible to restore lost confidence in the state first and in the banking sector second, thereby restoring the regularity of financial activity in Lebanon.

Translated from Arabic with AI. [Read it in Arabic](https://ghazimahmoud.com/articles/2025-07-30-23b4ba/)

## Published in

- [MTV Lebanon](https://www.mtv.com.lb/news/1599051)
- [Channel 23](https://ch23.com/Article/285132/إصلاح-المصارف-ينتظر-قانون-الفجوة-المالية)
- [Lebanon Files](https://www.lebanonfiles.com/2025/articles/باقلامهم/إصلاح-المصارف-ينتظر-قانون-الفجوة-الما/)
- [OZ Arab Media](https://ozarab.media/إصلاح-المصارف-ينتظر-قانون-الفجوة-الما/)

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[23 Jul 2025 · Banking Sector Reform and Its Stalled Laws · Channel 23, OZ Arab Media ](https://ghazimahmoud.com/en/articles/2025-07-23-551b39/)

[9 Jul 2025 · Restoring Confidence Begins with Achieving Justice Among Depositors · MTV Lebanon, Channel 23 ](https://ghazimahmoud.com/en/articles/2025-07-09-21f99d/)

[22 Jan 2025 · The Momentum of the Presidency and Achieving Financial and Monetary Stability · Channel 23, Lebanon Files ](https://ghazimahmoud.com/en/articles/2025-01-22-9537f4/)