Bank Loans: Resurgence Without Safeguards

Lebanese Banks Seek to Resume Lending with Protective and Clear Legal Terms, Focusing on Fair Distribution of Losses Among Concerned Parties, with a Limited Number of Banks Risking Offering Small and Medium Loans at High Interest Rates.

After the near-complete halt of bank lending in Lebanon since 2019 as a result of the financial crisis, banks have begun to talk about their desire to resume this activity, but on the condition that legal and regulatory protection is provided for the lending process to avoid repeating the mistakes of the past.

There have been draft laws and proposals aimed at reforming the banking system, including the “Law on Reforming and Reorganizing Banks,” which was recently approved and includes mechanisms for dealing with distressed banks, protecting deposits, and defining the limits of using public funds in reform operations.

The “Financial Gap Treatment” or “Restoring Financial Order and Recovering Deposits” law is considered a necessary complement to the previous law, as it aims to determine how losses are distributed between the state, the central bank, banks, and depositors. Without this law, the implementation of the bank reform law will remain suspended.

Banks emphasize the importance of having a clear legal framework that obliges the borrower to repay the loan in the currency in which it was issued, with clear guarantees and warranties, and to deal with exchange rate risks. Without this, banks will avoid entering into lending operations that may provide liquidity, but may cause material and legal losses later.

Despite the reluctance of most banks to lend pending protective laws, some have chosen to take the risk and open the door to lending for small and medium loans, but with high interest rates ranging between 7 and 8 percent. This group has protected its risks with contracts with clients that obligate them to pay in the currency of the loan, i.e., the dollar.

Banks were encouraged to do so by the announcement of the Governor of the Central Bank about the intention to approve legislation that allows banks to return to their role in lending, after the laws mentioned were approved.

Customers have been observed to be eager to approach banks that have announced their lending services despite the harsh conditions. These banks rely on their own capital to finance lending, given the Central Bank’s ban on them using new dollar deposits.

While the volume of credit before the crisis reached about $35 billion, current loans do not exceed half a billion dollars, but they are considered an indicator of the gradual return of confidence in banks.

Loans are currently divided between large commercial loans to companies, personal loans, and most importantly, car loans.

Banks impose harsh conditions to protect themselves, such as high interest rates of up to 8 percent, or requiring repayment in the same currency, or ensuring that the borrower does not have a Lollar account to avoid repayment from it.