For over two decades, Governor Salamé has proven Banque du Liban’s (BDL) resilience and success in the midst of political and security risks which have constantly threatened the Lebanese financial sector. He has consistently been seeking excellence and continuous improvement with the accomplishment of multiple achievements for the central bank and its related entities. These successes include strengthening monetary policy, pushing modernization forward, striving to achieve sustainable economic growth and financial sector stability, fostering transparency and integrity by establishing best in class financial sector supervision and anti-money laundering capabilities and strengthening internal systems and processes.
SAFEGUARDING MONETARY AND ECONOMIC STABILITY
BDL’s monetary policy has been first and foremost targeted at stabilizing the Lebanese pound exchange rate and controlling inflation. The central bank’s continuous commitment to a stable exchange rate has proved to be key in the stability of the financial system.
- Maintaining Exchange Rate Stability
After the deterioration of the Lebanese pound (LBP) during the 1980s and early 1990s, Banque du Liban realized that maintaining monetary stability using the exchange rate as a nominal anchor was an essential prerequisite for financial stability. The BDL has followed a managed exchange rate regime, keeping the LBP/USD within a narrow band that has been set at LBP 1501-1514 to the dollar. A gradual appreciation of the Lebanese pound was recorded over the period 1992-1999, followed by relative stability since then. Drastic price containment came along with exchange rate appreciation.
Against previous viewpoints, the IMF acknowledged in its Article IV consultations’ report dated February 2012 that “The peg to the U.S. dollar has served Lebanon well and remains the linchpin for financial stability in a highly dollarized economy".
- Maintaining Low Rates of Inflation
The three-digit inflation rate that crippled the Lebanese economy in the early 90s has been successfully contained at a single digit rate over the past twenty two years. Currently, the inflation rate is maintained below 4%, which is in line with BDL’s objectives.
- Boosting the Central Bank’s Foreign Assets
The accumulation of large amounts of foreign currency assets over the years has proven to be a buffer against crises that may hit the economy. It has indeed safeguarded the Lebanese economy from major political, security and economic shocks. The Central Bank’s total foreign assets increased from around USD 3 billion in 1993 to over USD 37 billion today, excluding gold reserves estimated at more than USD 11 billion as of May 2016 market prices.
- Strengthening of the External Position
Large capital inflows have been the backbone of the Lebanese Economy. Stable remittances from the large Lebanese diaspora have helped in adjusting the large current account deficit in the country. According to the World Bank, total remittances were estimated at around US$7.2bn in 2015. Lebanon is the 16th largest recipient of remittances globally and the second largest recipient of remittances among 16 Arab countries.
- Ensuring a Gradual Decrease in Interest Rates
The BDL’s compliance with market tendencies in the determination of interest rates maintained the latter at appropriate levels to spur capital inflows and strengthen the external position.
Growing confidence in the local currency has resulted in gradual interest rate cuts since the 90s. The massive cash injection into the Lebanese market during 2008-2010 also helped the interest rate structure to decline further; which resulted in debt service savings over the past years. As current interest rates have reached a well-balanced level paving the way for good growth and productive investments, the Central Bank is not expecting any drastic change in interest rates, and continues to be keen on preserving financial stability.
ENSURING THE SOUNDNESS OF THE BANKING AND FINANCIAL SECTOR
Salamé’s efforts have been channeled in the past 22 years to building a prudent financial model which has inspired confidence in the system. In fact, lessons drawn from the Lebanese model are similar to many of the recent reforms suggested by international financial regulators: Less leverage, regulating derivatives and structured products, strengthening banks capital and liquidity requirements, enhancing the corporate governance and transparency of financial institutions. The central bank oversees all players in the financial market, and creates a clear distinction between commercial banks and investment banks, so there is no defaulting of banks that threaten to shake the systemic stability, and so on.
- Reinforcing Prudent Regulatory Measures
Long ago BDL regulated banks' dealings with derivatives and structured products, which require prior approval from the BDL's Central Council, and forbade banks from making subprime investments both domestically and overseas. BDL has also regulated the on and off-balance sheet operations, and ensured that the off-balance sheet assets were related to the actual solvency of the banks. It has set out lending regulations that place a ceiling of 50% on the value of an equity portfolio and a requirement of a 20% down-payment on foreign exchange operations. In order to prevent a real estate bubble, banks were not allowed to lend more than 60% of a project’s value.
- Setting General Precautionary Regulations
These regulations aimed at deepening the resilience of the banking sector against risks in general, keeping in mind that respecting free market rules doesn't contradict with setting precautionary measures. Banks were required to avoid excessive leveraging, to maintain high levels of liquidity, to build adequate provisions against doubtful operations, and to abide by international standards on good governance, risk management, transparency and capitalization requirements.
- Preserving the Reputation of the Banking Sector
The credibility and integrity of the banking sector is essential for its subsistence. The BDL has unremittingly strived to uphold them to the highest levels and to always comply with international standards and practices. Over the years, It has preserved the reputation of the banking sector by reinforcing anti-money laundering measures while maintaining banking secrecy; encouraging small banks to merge with bigger ones in order to avoid bankruptcies or losses to depositors; solving the problem of non-performing loans by allowing creditors to reschedule their loans over a 10-year period; imposing academic, technical and ethical requirements for staff in key banking and financial positions; and promoting the export of banking services by supporting the regional expansion of leading Lebanese banks.
More recently and after years of perseverance from the BDL, the Lebanese Parliament passed, at end-2015, three important laws related to the regulation of trans-border cash movements, cooperation to fight tax evasion and amendments to the anti-money laundering law. The Lebanese Parliament also approved Lebanon’s adherence to the UN’s 1999 International Convention for the suppression of the financing of terrorism.
- Preserving Stability in the Financial Market
BDL has regulated the establishment and management of all financial market participants, from financial institutions to brokerage firms, collective investment schemes, money dealers and so on. BDL has also set a clear distinction between the role of commercial banks and investment banks, which has protected both banks and customers’ interests.
- Securing Efficient Payment Systems and Fostering e-services
BDL is playing a key role in the development of domestic payment systems. Long ago, it issued a circular to regulate e-banking and provide a secure platform for e-services in the Lebanese financial sector. Its objective has been directed towards compliance with international norms and standards in order to promote safety and improve efficiency of the multi-currency payment system in Lebanon. BDL is relying more and more on real time, online connections with the financial sector, thus enhancing the efficiency at the service of the economy. In July 2012, BDL has implemented the Real Time Gross Settlement (RTGS) system for domestic settlement. BDL-RTGS offers the banking and financial sectors a secure, reliable and real time method of payment that adheres to international standards. In November 2013, BDL launched the automated Retail Payment & Clearing System (BDL-CLEAR) for clearing retail payments, including cheques, direct debits and card transactions. BDL-CLEAR is a low value - high volume bulk payments system.
- Preserving confidence in the banking and financial sector
The Lebanese banking sector is best described as confidently resilient, financially sound, profitable and well-capitalized thanks to the prudent regulation and supervision by BDL. It has been able to weather various internal and external crises, most notably the global financial crisis that has shaken many banking systems in the world.
Despite the current challenging operating environment, the Lebanese banking sector is still reporting a healthy growth in total banking activity. Total assets of banks in Lebanon have exceeded US$188bn in April 2016, an increase from US$8.5bn in 1992.
Bank deposits, accounting for 86% of total banking activity, grew by around 5% in 2015 to reach a new high of US$160bn in April 2016; when they were only US$7.1bn in the early 1990s. The dollarization rate of deposits dropped to 64% after peaking at 77% in early 2008.
In parallel, lending activity registered 6.4% growth during 2015. The level of credit to the private sector has surpassed that to the public sector, reaching historical levels of more than US$56bn in April 2016 versus US$2.9bn in December 1992. The loan dollarization ratio continued its downward trend to reach 74% in April 2016, its lowest level in more than two decades.
The Lebanese banking sector enjoys high levels of liquidity that enables commercial banks to finance the government and private sector needs while maintaining a stable interest rate structure. In terms of capitalization, Lebanese banks are exceeding the required ratios as stated by BasleIII. Exposures of Lebanese banks operating abroad are regularly monitored and assessed by BDL. The banking sector has the appropriate regulatory and supervisory framework which is in line with international standards.
- Providing Incentives to Foster Economic and Social Stability
Not only is BDL devoted to ensuring the soundness of the banking sector, but it is equally dedicated to fostering economic and social stability. It has taken a leading role in stimulating the Lebanese economy through fostering growth and employment.
To secure adequate financing in the economy, the BDL has been providing incentives to the private sector, offered through banks. The purpose of this strategy is to promote economic activity by lowering the cost of borrowing significantly, thus encouraging investments in vital economic sectors such as tourism, agriculture, industry, IT, housing, education, and the environment.
In early 2013, a new stimulus package was introduced by BDL consisting of USD 1.47 billion in the form of soft loans extended to Lebanese banks in order to boost lending activity and fuel economic growth. In addition to supporting productive sectors, housing, education, eco-friendly and renewable energy projects, this package targets entrepreneurs in order to help them finance new projects in the field of knowledge and innovation, as well as research and development ventures in the productive sectors.
Given the palpable results of the first stimulus package in 2013, the BDL renewed this stimulus for the third consecutive year, with an average of more than USD 1 billion per year. The importance of these catalyst endeavours lies in their sizeable contribution to real GDP, and their momentum in job creation.
- Fostering the Knowledge Economy
Supporting productive sectors is essential, but alone insufficient to ground Lebanon’s economy in sustainable growth and development.
Today, it is uncontested that a single idea can change the course of a nation, let alone an economy. Innovative ideas and knowledge fueling economies have become the newest growth models.
Considering that the wealth of Lebanon lies in its pool of high skilled labor, and aiming at being innovative itself, the BDL launched in August 2013 a new initiative enabling banks to contribute, for the first time, in equity financing of start-up companies, incubators and accelerators and venture capital. Acknowledging the fact that strengthening the Lebanese knowledge economy improves the performance of all the economic sectors, creates job opportunities, increases GDP per capita and ensures sustainable development, BDL is encouraging banks to invest capital over a period of 7 years, in order to nurse these vital economic agents. Access to interest free financial facilities will be provided to banks who participate in this initiative.
The first substantial results of Circular 331 have been perceived with the growing number of startups attracted and benefiting from this equity financing scheme.
New sources of funding will hopefully be available in the near future and will further stimulate entrepreneurial activity. Examples of such would be crowd funding or investing which is currently developing in Lebanon and the Arab World. The Capital Markets Authority – chaired by Governor Salamé- has started regulating such activities.
BDL REFORMING AND MODERNIZING
Looking forward, Salamé is continuously seeking excellence for the institution. In November 2013 and in a first initiative of its kind, BDL inaugurated a money museum for the public. The BDL museum displays local and foreign currencies including old and rare banknotes and coins dating back to different stages of history. With the Money Museum, the BDL aims at revealing the story of money as being one of the most influential developments in the history of human civilization. It also aims at increasing public awareness of the role of BDL in safeguarding the stability of the Lebanese pound and the whole banking and financial sector.
Salamé is continuously eager to reform and modernize, and to achieve comprehensive corporate governance. To build on its achievements, BDL launched in March 2014, a comprehensive modernization plan that aims to develop a new generation of central banking services.
As part of its modernization plan, BDL established two new units in 2014: the Financial Stability Unit whose mission is to monitor the financial sector in Lebanon in order to avoid any likely crisis, and the Consumer Protection Unit to ensure that banks deal equally with all their customers in a transparent manner. Another unit, the Compliance Unit, has been established in early 2016. It aims at ensuring the compliance of BDL's departments as well as banks and regulated institutions with applicable laws and regulations, particularly in relation to combating money laundering and the financing of terrorism and proliferation. This unit will also propose measures to prevent and/or manage the risks that could arise in case of non-compliance with these laws and regulations.
The successful implementation of the comprehensive modernization plan will be considered as a major achievement for BDL and a preservation factor for future generations.