The Lebanese banking sector is awash with liquidity and seeking new places to put their money. Rebecca Spong reports.


For such a small nation, Lebanon has deep pockets. Rather than worrying about debt exposures like so many other economies, the highly liquid Lebanese banks have been more concerned about where to put their money.

“Actually during the crisis, our main worry was where to place our liquidity, we were so liquid. We spent most of our time ensuring that our liquidity was safe,” remarks Maurice Iskandar, head of the international division at Banque Libano-Française.

Fuelled in recent years by large volumes of expatriate money flooding back into the country, as well as being strictly governed by a conservative central bank, Lebanese banks are liquid, well-capitalised, and have declining non-performing loan ratios. Banks successfully raised liquidity by purchasing government treasury bills, sold to help reduce the country’s budget deficit. In 2009, commercial bank deposits grew by more than 23%.

Backed by such strong levels of liquidity, Lebanese banks have been able to remain active in the trade finance market.

“Primary liquidity in Lebanese banks (excluding government euro bonds) stand today at around 50% of Lebanese banks’ customer deposits, which is one of the highest worldwide, thus empowering Lebanese banks in providing highly competitive trade finance facilities and services to sustain and support the growing Lebanese international trade activities,” comments Abdul Chebaro, head of trade finance at Bank Audi.

Domestic economic conditions are deemed to be at their most favourable since the civil war ended in 1990, according to an IMF country report released in October 2010. The economy grew by 9% in 2009 and the IMF expects it to grow by 8% in 2010, having shown “exceptional resilience” to the global financial crisis.

Yet further away from the buzz of Beirut, the appeal of the Lebanese economy begins to diminish.

Growth is concentrated in just a few sectors; retail trade, tourism and construction, mainly around Beirut. The country still has a huge public debt, projected to be 139% of GDP by the end of 2010, putting incredible strain on government revenues and preventing increased public sector spending.

Net importer

The Lebanese economy is also highly dependent on imports, with exports dominated by services, rather than manufacturing goods.

Exports have grown close to 15% between 2005 and 2009, according to the IMF, and they are projected to grow in 2011. But, buoyed by rebounding oil prices, imports will increase in the coming years, and the trade deficit is likely to widen. The IMF predicted that Lebanon will see US$5.28bn-worth of exports in 2010, and imports will total US$17.8bn.
These trade patterns are reflected in the types of deals signed in Lebanon under the global trade finance programme run by the World Bank’s IFC.

“The exceptional fast economic growth in Lebanon, estimated at around 8% for 2010 continues to trigger notable domestic and regional opportunities.”

The IFC works with four Lebanese banks (Banque Libano-Française, Bank of Beirut and Fransabank and BLC Bank – a subsidiary of Fransabank group and the newest addition to the programme). Over the past four years, it has issued more than US$540mn-worth of guarantees against trade obligations of these banks. Close to 52% of these guarantees were in support of imports into Lebanon.

Shehzad Sharjeel, regional head, Middle East & North Africa, IFC global trade finance programme, tells GTR that Lebanese banks will not have their appetite for business sated by Lebanon’s domestic economy alone.

“There are only 4 million people in Lebanon, it is not a big domestic market, banks will need to grow and find new markets. We see many banks expanding into the region, setting up branches, subsidiaries and representative offices in strategic locations, and using this network to tap intra-regional trade flows.”

Talking to GTR, one Lebanese banker emphasises the size of the market, noting that even the Greater London area is bigger than Lebanon. And yet this small Middle Eastern nation houses a disproportionately large number of banks, all competing against each other for market share.

Falling interest rates in Lebanon have put further pressure on bank profits, making them change their traditional business model based on supporting government debt, towards looking for new opportunities.

“Over 50% of our loan book (both on and off-balance sheet) is linked to projects or capital outside of Lebanon,” comments Iskandar at Banque Libano-Française.

“But we are seeing corporates becoming more active in the international trading scene. There are a lot of opportunities, Lebanese companies are continuing to establish a physical presence in other countries and we are accompanying them.”
Banque Libano-Française has offices in France, Cyprus, Geneva and Syria. It set up a representative office in Abu Dhabi in February 2010.

“There are only 4 million people in Lebanon, it is not a big market, banks will need to find new markets.”

Bank Audi is another bank that has gone through a massive period of growth. A decade ago, it was just a small local institution, and it now has operations in Egypt, Qatar and Syria, among others.

“The exceptional fast economic growth in Lebanon, estimated at around 8% for 2010, continues to trigger notable domestic and regional opportunities,” Chebaro at Bank Audi notes.

During 2010 overall commercial loans at Bank Audi went up by US$6bn. As Lebanon is a net importer, it is likely a large chunk of this amount would be trade finance activity.

Blom Bank also reports growth in its trade finance business.

“Blom Bank is forecasting no less than a 7% increase in business this year, and in terms of the value of business, we are seeing an increase of 10%,”says Jacques Saboungi, head of trade finance at Blom Bank.

New products

The opportunities for trade finance in the wider Levant region have already been recognised by Fimbank, with the institution increasing its investment from 25% to 50% in a Beirut-based factoring joint venture in November 2010.
Originally named LCI factors, the JV factoring company has been rebranded as Levant Factors. The name change alone hints at the ambitions of the company.

Fimbank president Margrith Lütsch-Emmenegger remarks in an official statement that the name change was to “better reflect the JV’s target markets, namely the Eastern Meditterranean states, which have great potential for our factoring products”.
Its partner in Levant Factors is Lebanese Credit Insurer (LCI), which in turn is a JV between Atradius Participations, part of the Atradius group.

Karim Nasrallah, managing director at LCI, tells GTR that although the Levant and Middle East region typically rely on trade finance tools such as letters of credit, the market is beginning to change.

“There has been a surge in demand for credit insurance and that’s mainly due to the international crisis, which created more awareness of the need for an insurance product,” he explains.

He adds that the target market for insurance and factoring products are small and medium-sized enterprises (SMEs). “Most companies here are SMEs and there is a big mismatch between the offer of credit and demand for credit. Banks in the region only look at real guarantees before financing any company and do not consider receivables an asset on which to lend. Factoring has a role to play in bridging that gap in financing.”

Lebanese industries are also increasing their exports to Europe, with the dollarised Lebanese economy making exports to Europe far cheaper.

Such trade flows are less reliant on the use of LCs. “The only way to compete in these markets is to use credit insurance,” Nasrallah argues.

He tells GTR that LCI’s income has grown 50% over the last 12 months. “There is a lot of appetite for Lebanon from a banking perspective and from an insurance and reinsurance perspective,” he adds.

Foreign perceptions

Most Lebanese banks report that they have been well-supported by their international counterparts in their trade finance activities, with risk perceptions of Lebanon generally improving.

Ratings agencies have improved their view on Lebanon, with Moody’s increasing the country’s government bond rating from B2 to B1 in April 2010.

Even when the financial crisis hit, Sharjeel at the IFC notes that global banks were “quite aggressive in taking trade exposure on Lebanese banks. Though they were still taking IFC support, at the same time their own exposure limits were also substantial.”

The IFC is in talks with three more Lebanese banks that are looking to join the trade finance programme.
Commenting on the appeal of Lebanese risk, Iskandar at Banque Libano-Française says: “Lebanese banks have earned a good reputation on how to manage a crisis.

“We have seen things improving, banks are more aggressive in taking more Lebanese risk, pricing is tighter, and many banks are looking to build up their Lebanese assets.”

Chebaro at Bank Audi has also seen growing international interest in taking on Lebanese risk. “As to the sale of trade assets in secondary market, this is not yet a widespread practice in the Lebanese market, however we at Bank Audi have been repetitively approached by prime international and regional banks to buy trade assets of which a notable portion is extra-regional.”

Blom Bank is also working closely with foreign banks. “Due to its knowledge and its know-how in the Lebanese banking sector trade finance risks, Blom Bank has a substantial portfolio of participations with foreign banks in the secondary market,” notes head of trade finance Saboungi. GTR

The blame game

While Lebanese banks are liquid and stable; the country’s politics are fraught with hostility and upheaval. As GTR went to press, news came through that the Lebanese unity government collapsed after 11 ministers linked to Hezbollah resigned.

Tensions have been rising in recent months due to signs that the UN tribunal into the assassination of the former prime minister Rafik Hariri would pin the blame on the militant shia movement Hezbollah. Hariri and 22 others were killed in a car bomb in 2005.

Hezbollah has aggressively rejected any involvement with the murder. The leader of the Islamic movement, Hassan Nasrallah, even threatened to “cut off the hands” of anyone who accused them of Hariri’s killing.

Prime minister Hariri, who was in talks with US President Barack Obama when the resignations happened, is likely to remain as a caretaker prime minister until a new Hezbollah-dominated government is formed.
After a power-sharing deal was brokered in 2009, Hezbollah was granted two posts in a 30-member unity government.

Hezbollah-allied parties were given a further eight seats. With one third of ministers resigning on January 12, this effectively brought down the fragile unity government.

“What this means is that Hezbollah are really in the driving seat now. It gives them a lot more power locally, and in the wider Middle East region,” explains a spokesperson from the Lloyd’s insurer Beazley.

Following the resignations, Hezbollah will look to suppress the UN investigation, putting pressure on prime minister Saad Hariri, son of the murdered former prime minister, to withdraw support from the tribunal. It is thought unlikely Hariri will bow to such pressure.

“Hariri will continue to support the UN tribunal, he hasn’t got much to lose now,” Beazley’s spokesperson adds.
Concerns have been growing that if Hezbollah is directly indicted, it could provoke sectarian violence throughout the country.
Beazley notes to GTR that although there is a worrying risk of violence, “all sides will be calculating that it is not in their interests to trigger sectarian clashes”.

The more likely scenario is that a new coalition government will be formed.

“Under the terms of the 1990 settlement, all political factions should be represented in government and I think that this will hold. But you will see a more Hezbollah-dominated government,” the political risk insurer explains.

“It will remain an unstable and ineffectual government. But you won’t see an extreme Hezbollah-supported government. I think they will continue to plot a middle way.”

It is also widely acknowledged that the contents of the UN investigation will be watered down sufficiently as to not trigger off violent reactions.

Talking to GTR late last year, Peter Jenkins underwriter, political and credit risk at Lloyd’s insurer Beazley, commented: “The parties that matter all probably know what the report is going to say. What it is going to say is probably going to be played down to fit with where the different parties are coming from, rather than being an aggressive report pointing the finger clearly in one direction.”

Yet this new fragile balance of power, now weighted in Hezbollah’s favour, could reverse the fortunes of what has been developing into a young, vibrant and dynamic country.

“Before 2006 there was a huge period of optimism and hope and a lot of expats went back. Then the events of 2006 put a brake on that,” Jenkins told GTR.

“If there is another major blow-out – what will happen?

“The financial industry in Lebanon is basically there because of its place in the region. If it is not seen as a safe haven or fun place to be, this will affect Beirut’s standing in the regional financial landscape.

“There are significant underlying political risks. If there another blow-out then you can expect to see money fly out of Beirut very quickly,” he suggests.

However, he adds that the Hariri issue is part of a far broader spectrum of challenges.

These broader issues are geo-political tensions between Lebanon and its neighbours, namely Syria, Israel and Iran.

“From our point of view, the more pressing issue is Israel,” he added. Israel does not want to continue seeing Hezbollah sitting on its borders allegedly armed with more and more capable missiles than they had in 2006.

“There is an issue of when and how does an Israel deal with such a perceived threat and thus attempts to restore its pride given the failings of the campaign in 2006,” Jenkins adds.

“It is always difficult to second guess what Israel is really thinking and planning given their generally high military readiness state.”