---
title: "No Banking Reform Before Confidence Is Restored | Ghazi Mahmoud"
url: https://ghazimahmoud.com/en/articles/2025-10-08-26e642/
lang: en
description: "The Constitutional Council's partial invalidation of the \"Law on Reforming the Status of Banks and Reorganizing Them\", numbered 23/2025, has reopened the debate over the condition and fate of the banks, especially as confidence between the Lebanese and the banks remains lost."
---

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# No Banking Reform Before Confidence Is Restored

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

8 Oct 2025 · 6 min read

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

The Constitutional Council's partial invalidation of the "Law on Reforming the Status of Banks and Reorganizing Them", numbered 23/2025, has reopened the debate over the condition and fate of the banks, especially as confidence between the Lebanese and the banks remains lost. The Lebanese Parliament passed this long-awaited law on 31 July 2025, in a necessary step at a time when it constituted a core demand of international institutions and donor countries, foremost among them the International Monetary Fund, as a prelude to reforming Lebanon's distressed financial sector.

It is worth noting that the first to object to the "Law on Reforming the Status of Banks and Reorganizing Them" when it was still a draft bill was the Association of Banks in Lebanon, which recorded several observations on the initial version of the bill in a letter addressed to former Prime Minister Najib Mikati on 23 November 2023, arguing that the banks do not need reform, but rather need the return of the funds borrowed from them by the state and those they deposited with Banque du Liban, so that they in turn may return them to depositors.

Remarkably, the objective set out in the law's explanatory memorandum, summed up as "establishing a modern legal framework in accordance with international best practices, which banking legislation in Lebanon lacks and which the government as well as Banque du Liban need to deal with all financial crises, foremost among them the current crisis", differs from the objective specified in Article 3 thereof, which stipulates "enhancing financial stability and addressing cases of distress, protecting deposits in the process of liquidation and reform, and limiting the use of public funds in the process of reforming any distressed bank."

Regardless of the discrepancy in the objectives of the contested law between its explanatory memorandum and Article 3, depositors' overriding concern with this law is the recovery of their deposits, even as it contains provisions tying the implementation of several of its core articles to the enactment of a subsequent law, with Articles 2, 14 and 37 referring to suspending the implementation of the law pending the passage and publication of a law currently under preparation concerning "Financial Regularization and Deposit Recovery". This renders the "Law on Reforming the Status of Banks and Reorganizing Them" merely a step toward regulating the banking sector with its execution stayed.

Indeed, the collapse of the banking sector since the outbreak of the financial crisis in Lebanon in 2019 was accompanied by the failure of the relevant authorities to enact legislation and establish legal and regulatory frameworks for properly addressing the unfolding crisis, resulting in a freeze on deposits, a halt to transfers abroad, an absence of unified accounting standards, and a loss of confidence in the banking sector as a whole. Today, after more than five years of ongoing deterioration, the challenge to the "Law on Reforming and Reorganizing Banks" adds yet another delay to restoring confidence in the banks.

The entire banking sector fell into distress without Banque du Liban declaring any bank bankrupt, even though from a legal standpoint bank distress is tantamount to bankruptcy. These banks managed to preserve their continuity at the expense of depositors and their savings, and through the complicity of the central bank and the political authorities. Notably, stalling on passing laws designed to reorganize banking operations to confront the repercussions of the crisis played the primary role in prolonging the banking sector's distress and its failure to fulfill its pivotal role in economic activity.

This procrastination allowed the banks to continue withholding depositors' funds and imposing restrictions on withdrawals, known as "capital controls", on the one hand, and applying "haircuts" jointly and severally with Banque du Liban on the other, without any legal justification in either case, in addition to the arbitrariness they exercised in transfers. This stripped the banks of their credibility and prevented depositors from regaining confidence in them or returning to rely on them in their financial operations, particularly transfers, thereby driving up both the cost of these operations and the risks accompanying them.

The contested law aims not only to resolve the current crisis, but also to prevent its recurrence in the future by establishing accounting controls and standards, sound governance, and clear and transparent legal intervention tools modeled on internationally adopted frameworks for banking crisis management. It is difficult for the wheels of the economy to return to their normal turn while banks remain in distress, since this sector forms the backbone of all other economic sectors, making the banking sector's recovery from its slump a prerequisite for regularizing the activities of economic sectors.

While it is difficult for those who caused the crisis or contributed to its emergence to resolve it, the banks' own interest in reclaiming their role in accepting deposits and extending loans compels them to take the initiative in seeking appropriate solutions, not only for the banking sector, but for all their economic partners, especially depositors, whose rights must be safeguarded.

The banks must work in parallel with the drafting of the "Law on Financial Regularization and Deposit Recovery", or the "Financial Gap Law", to restore confidence. There is no point in betting on time to resolve crises, as time passes and the crisis grows more complex, and the passage of time makes solutions harder and further out of reach.

Proceeding from the above, the path for banks to regain the confidence of their economic partners and attract new depositors and investors, indeed to regain the confidence of all economic actors and reclaim their pivotal role in economic activity, begins with four essential steps. The first is recapitalizing the banks from shareholders' funds in preparation for restructuring them, whereby solvent banks continue under their current identities and other, less solvent banks are merged into them; otherwise, there will be no alternative other than new banks or branches of foreign banks.

The second step centers on reconnecting Lebanon to global financial markets through strict adherence to international standards and to the risk management rules previously established by the Basel Committee, which mandate carefully considered lending decisions in accordance with hedging and prudential standards, as well as streamlining the banking sector and raising its productivity, making it once again a trustworthy sector, which contributes to lowering sovereign risks and consequently improving Lebanon's sovereign credit rating.

The third step is for the banks to take the initiative in drawing up a realistic plan to return deposits, increasing their contribution to the value of depositors' monthly withdrawals in accordance with Banque du Liban circulars and in agreement with it, a plan under which banks abandon the classification of deposits into "eligible" and "ineligible", and ensure the return of small depositors' deposits within a maximum period of ten years while taking care to minimize depositors' losses, since reducing the scale of these losses accelerates the restoration of depositors' confidence in the banks and encourages them to return to depositing their money in them in the future.

The fourth and final step consists of the banks resuming lending to individuals and businesses by deploying part of the profits they previously generated. For banks to regain the trust of their individual and corporate clients requires that they trust them first and provide them with appropriate financing for their investments and other needs, so that these banks once again become the hub and vital artery of the economy, performing the role of financial intermediary between savings and investment, and securing financing for the various commercial, industrial and service sectors.

These four 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, stemming from the state's responsibility for managing the economy, particularly the continuity of the banking sector, as well as its responsibility for preserving citizens' rights and their deposits.

Translated from Arabic with AI. [Read it in Arabic](https://ghazimahmoud.com/articles/2025-10-08-26e642/)

## Published in

- [Channel 23](https://ch23.com/Article/302218/لا-إصلاح-للمصارف-قبل-استعادة-الثقة)
- [OZ Arab Media](https://ozarab.media/لا-إصلاح-للمصارف-قبل-استعادة-الثقة/)
- [Lebanon Files](https://www.lebanonfiles.com/2025/articles/مقالات-مختارة/لا-إصلاح-للمصارف-قبل-استعادة-الثقة/)

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