Lebanon moves forward in times of global economic turmoil

“When the going gets tough, the tough get going” best describes the exemplary immunity of Lebanon’s banking system to the recent global financial crisis.  Acute activity slowdown in regional and global markets was met with increasing FDI (foreign direct investment) inflows to Lebanon equivalent to 12.6% of GDP in 2010, the highest in the Arab World for the second consecutive year. Lebanese banks have maintained high liquidity levels.

The rigorous financial policies, regulations and supervision of the Central Bank of Lebanon (BDL) have proven efficient in shielding Lebanese banks from any major exposure to structured financial instruments, the eye of the storm of the recent financial crisis.

Operations on structured products and derivatives

Building on Decision 7776 of 2001, BDL continues to pass measures strictly regulating the banks’ lending and investments.  A recent example is BDL Decision 10482 of July 22, 2010, which limits, with some exceptions, a bank’s operations for its own account on structured products issued in Lebanon in any currency to products that offer an unconditional capital guarantee and provided their aggregate nominal value remains below 25% of the bank’s Tier 1 capital.

By virtue of Decision 10713 of April 27, 2011, BDL extended the requirement for commercial banks, financial institutions and brokerage firms to obtain a prior authorization from BDL in order to issue or trade any financial products or instruments (including notably structured products, derivatives, futures and securitized products) regardless of the number of target clients, the value of the offering or the minimum subscription.

On another note, BDL through Decision 10852 of December 7, 2011, added a new component to the arsenal of stringent regulations in relation to investment in structured financial products and derivatives, whereby banks may only conduct operations on such products or Off-Exchange Retail Forex operations with foreign counterparts who fulfil specific requirements related namely to their rating and accreditation.  In addition, the Decision implements conservative and rigorous conditions and standards aiming at preventing the banks from engaging in hazardous speculations and limiting their scope of investments to relatively low risks products.

Banking secrecy and AML regulations

Banking secrecy, a principle inherent to the country’s history, is governed by the provisions of the Law of 1956.  This Law binds all financial entities regulated by BDL to absolute secrecy with respect to their clients’ personal and account related information and provides that banking secrecy can only be lifted in very limited circumstances.

Despite increasing regulations aimed at combating money laundering, banking secrecy remains the core principle of the banking system and plays a key role in attracting funds to Lebanon.

In 2001, the Lebanese legislature enacted a comprehensive Anti-Money Laundering Law, which reconciles the principles of banking secrecy with the need to comply with international AML standards.  The AML Law provides for the establishment of a Special Investigation Commission (SIC) whose mandate includes investigating suspected money-laundering offences and deciding to lift the banking secrecy.

Following its Decision 7818 of 2001 dealing with AML implementation procedures and in line with global trends, BDL Decision 10622 of December 30, 2010 explicitly adds “terrorism financing” to the list of offences constituting money laundering.

More recently, BDL Decision 10725 of May 21, 2011 imposes “caution” measures on banks in their operations with money dealers. All money dealer institutions established after May 18, 2011, are required to (i) introduce and adopt AML and terrorism financing (TF) procedures and(ii) certify that all their shareholders and persons involved in their direct or indirect management have successfully passed training courses on AML and TF administered or approved by BDL.

In the same vein, BDL issued a set of additional decisions in May and December of 2011 instating stringent new requirements on money dealers in Lebanon in order to deter their usage for money laundering and terrorism financing by notably increasing the minimum capital requirements of money dealers and reinforcing their reporting obligations to BDL.

Financing of environmentally friendly projects

In 2010, BDL in collaboration with the United Nations Development Program (UNDP) launched the National Energy Efficiency and Renewable Energy Action NEEREA to provide a comprehensive financing through commercial banks for energy efficiency and renewable energy initiatives across Lebanon.

In its striving to support sustainable energy in Lebanon, BDL recently approved the first project in energy efficiency under the NEEREA, a loan of $3m that carries an interest rate of 0.6% with a repayment period of 3 years.

In parallel, the European Union has extended a grant of €1.9m to BDL to subsidize interest rates and prolong the repayment period of energy efficiency, renewable energy initiatives and eco-friendly projects as well as €2.1m to Kafalat, the loan guarantee company established in 1999 to support the activity of SMEs, to cover the risk of qualified projects during the repayment period.

The Lebanese government stated that it plans to raise the contribution of sustainable energy to 12% of its total energy demand by 2020 and intends to leverage more than $100m of investments in the coming five years to meet this objective.

To fulfil this ambitious target, BDL issued Decision 84 on November 25, 2010, instating loans granted for the financing of environmentally friendly projects in the list of loans eligible for a reduction of the bank’s reserve requirements, hence triggering a decrease of their interest rate.

Detailed corporate governance procedures for banks

BDL Decision 9382 of July 26, 2006 paved the way for the application of corporate governance principles to Lebanese banks.

This trend was followed by Decision 255 of April 21, 2011, which requires banks to (i) abide by the principle of corporate governance set by the Basel international committee, (ii) prepare and publish on their website a detailed corporate governance manual including a description of the standards used to determine the remunerations and appraise the performance of board members and upper management in terms of their abiding by corporate governance procedures and (iii) submit yearly report.

Fiduciary agreements 

Law 520 of 1996 introduced the “Fiducie” as the civil law version of the Anglo-Saxon trust institution. Recent reliance by innovative legal practitioners, combined with the banking secrecy, revived fiduciary agreements as an efficient tool for eligible banks and financial institutions to be used in portfolio management, corporate and project finance transactions and Islamic banking operations.

New capital markets law

On August 4, 2011, the Lebanese Parliament finally enacted the long-awaited Capital Markets Law that sets the legal organizational framework of the Lebanese financial markets in line with international norms.

It provides for the formation of the National Council for Financial Markets as a “watchdog” entrusted with a mission of organising, regulating and controlling the capital markets and its participants.  The Council will be headed by the BDL Governor and will consist of seven members, five of whom are appointed from the private sector.  The Council’s functions are similar to those of the SEC with a considerable autonomy in setting its policies. A new law ratified on the same date explicitly bans insider trading.

Will the passing of this important law be the gateway to the renaissance of the capital markets in Lebanon? Only time will tell.

Conclusion

Stringent regulations and supervision of the banking and finance sector by BDL combined with conservative practices by the banks, have proven to be efficient safeguard instruments against the global crisis, which contributed to the mixture of ingredients ascertaining the role of Lebanon as a reliable regional and international business platform.

Carlos Abou Jaoude is the founder and managing partner of Abou Jaoude & Associates Law Firm and heads its Banking & Finance practice group.

Carlos represents major banks in all aspects of their operations and has considerable experience advising on the expansion of a bank’s network through synergies between its commercial and investment banking activities and on a wide range of domestic and international extensions of credit. His expertise is particularly sought after in structured finance and complex cross-border financing transactions involving a broad range of traditional and newer asset classes.

Legal 500 recognized him as a leading individual and Chambers & Partners reported “he has a business mind - he understands exactly what you want from a business point of view and gets you the solution from a legal point of view."

He holds a Master in French and Lebanese Law and is fluent in Arabic, French and English.

Carlos can be contacted on + 961 1 395555 or by email at c.aboujaoude@ajalawfirm.com.