Investment Contextual Report
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Banks versus depositors
The State Council enters the arena
This issue analyses the draft bank reorganisation law after the State Council annulled the May 2022 decision to write off US$60 billion of central bank foreign-currency obligations to banks. It examines the banks' claim that the state owes the central bank about US$16.3 billion, the split into qualified and non-qualified deposits, and the IMF stance, concluding that the bill ignores central bank governance and burdens depositors.
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The Capital Markets Authority: a failure so far
Role, recent history and services to SMEs
This issue assesses the Capital Markets Authority amid the planned suspension of its operations in January 2024. It highlights governance flaws: the central bank governor chairs both the authority and the banking control commission, the board is politicised, and the sanctions committee and capital markets tribunal were never established. Citing the Optimum brokerage case, it argues an effective authority is essential for SME funding, disclosure and investor protection.
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The banks’ association and the depositors: the real deal
This second part on bank restructuring examines the banks' association's campaign against the draft reform law, including its strike after a court ruling against Fransabank. The report expects deadlock for at least two more years, citing a caretaker government, the presidential vacancy and no parliamentary consensus. It estimates losses at about US$75 billion, or 400% of GDP, deems full restitution of deposits unfeasible, and reviews depositor associations' divergent positions.
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Lebanese banks: the origins of the failure
This issue examines the origins of the banking collapse and competing restructuring proposals. It describes an overbanked sector of over 60 banks, heavily dollarised and mismatched, with government securities and central bank placements reaching 66.6% of assets by end-2017 against loans of 29.4%. The report contrasts the IMF's approach, prioritising debt restructuring and loss recognition, with the banks' association plan to preserve shareholder capital, identifying depositors as the principal victims.
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Corporate bonds in the Lebanese market
A restructuring pillar
This issue presents a domestic corporate bond market as a pillar of financial restructuring. Although bond legislation dates from 1933, post-war issuance was dominated by banks; only seven banks issued Eurobonds and only two cement companies, Holcim and Sibline, issued corporate bonds. The report blames bank concentration, overdraft dependence at effective rates of 21% in 2019 and government crowding-out, and recommends independent intermediaries and rating agencies.
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Privatisation in Lebanon: long overdue
A political tool, socio-economic effects and the privatisation commission
This issue argues that privatisation in Lebanon is long overdue, blocked by a political class that treats public institutions as clientelist fiefdoms. Citing EDL subsidies of up to US$2 billion a year and US$40 billion of related debt, it values publicly held assets at US$12–22 billion, including MEA (US$600–740 million) and the central bank's stake in Casino du Liban. It recommends prior deregulation, eight independent regulators and an IMF-backed programme.
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Privatisation: a forgotten dysfunction
This issue examines exclusive agency arrangements as a neglected economic dysfunction. Tracing them to Ottoman-era supply privileges perpetuated under the French mandate, the report argues that exclusive agents, banks and politicians form a triangle restricting competition, illustrated by banks refusing to finance Chinese car imports. This cartel-like structure blocks new entrants, makes antitrust enforcement impossible, and turned the banking sector into a retail lending hub.
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The sovereign rating ceiling
Lebanon’s selective default and a customised rating methodology
This issue examines the limits of bank ratings in a sovereign Selective Default environment. It argues that insolvency has rendered standard methodologies meaningless, that international agencies were slow to downgrade, and that concentration-driven systemic risk was never captured. Noting banks' non-compliance with capital requirements and the 3% correspondent liquidity reserve, the report proposes a customised methodology weighting qualitative factors at 60%, stronger transparency, and compulsory ratings in any restructured sector.
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What ratings are
Definition, importance and the rating process
This issue argues that regulated domestic corporate ratings are long overdue in Lebanon. Regulators never licensed local providers, and international agencies were costly and uninterested in family-owned firms. The report links this gap to SMEs being implicitly capped at the sovereign's Selective Default rating, information asymmetry, de-risking, the absence of a bond market and blanket bank collateral requirements, outlines corporate rating methodology, and calls for regulated local agencies.
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Capital markets and the CMA
This issue argues that equity investment in Lebanon remains viable despite the crisis. It describes the Capital Markets Authority's mandate and the shallowness of the Beirut Stock Exchange, with only ten listed stocks. The report contends that depositors turning into investors, devaluation favouring export sectors and the Electronic Trading Platform's suitability for small IPOs together create conditions for domestic listings, and presents OFS transaction advisory as preparation for equity funding.
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Food shortage
Half the population threatened by food insecurity
This issue examines food insecurity in Lebanon. By December 2021, 53% of residents needed social assistance, while food imports of about US$4 billion a year cover 55% of supply. The Survival Minimum Expenditure Basket rose from LBP1.01 million in October 2019 to LBP7.4 million in June 2022, and average salaries now cover only 24% of it. It attributes this to poverty, inflation, subsidy removal, weak local production and dual pricing.
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Profiling Lebanese SMEs
Constant risk characteristics
This issue profiles Lebanese SMEs through OFS's transaction advisory programme. It identifies recurring weaknesses: family governance, multi-generational succession disputes, overdraft-driven over-indebtedness, single-activity focus and assets long tied up as bank collateral. Arguing that multiple exchange rates make audited accounts unreliable, it shows how the advisory process, spanning investment foundations, risk factors and value creation, lets firms rebuild financial statements and prepare for equity or debt transactions.
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Islamic financing vehicles
Basic principles and an industrial fund
This issue explores Islamic finance as a funding channel for Lebanese SMEs. It sets out profit-and-loss sharing and the prohibitions on interest, uncertainty and gambling, and describes trade instruments (Murabaha, Ijara, Istisnaa, Salam) and equity instruments (Mudaraba, Musharaka). It notes that Lebanon's four Islamic banks focus on Murabaha, constrained by central bank rules and the lack of a bond market, and argues equity structures could mobilise household cash.
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Water: five main priorities
Storage, supply, losses and the public–private question
This issue examines the mismanagement of Lebanon's abundant water resources. The report identifies fragmented governance, a network designed for two million inhabitants, unmetered lump-sum tariffs, contamination and rationing, with agriculture accounting for 60% of demand. It sets five priorities: retaining rain and snowmelt, continuous supply, wastewater recycling for irrigation, hydroelectric dams and export of surplus water, estimating potential state revenue of US$2–3 billion a year through public-private partnerships involving municipalities.
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The need for rural entrepreneurship
This issue makes the case for rural entrepreneurship to curb migration and regional inequality. Citing a 2017 OFS study showing rural median monthly salaries of LBP2.28 million against LBP2.82 million in cities, it identifies scarce funding (55% of Kafalat's portfolio sits in Beirut and Mount Lebanon), red tape, weak infrastructure and lost skills as obstacles. It recommends tax-advantaged industrial parks, energy incentives using underused rural grids and national marketing.
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De-risking
Three types of de-risking and their consequences for Lebanon
This issue analyses whether de-risking threatens Lebanon's access to global finance as it shifts to a cash economy. It distinguishes de-banking, loss of correspondent banking relationships and withdrawal of money transfer operators, with AML/CFT compliance as the main driver. Noting remittances steady at US$5–7 billion a year and unverified implementation of Circular 154 on 3% correspondent deposits, it identifies losing transfer operators as the gravest risk.
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The Lebanese insurance sector
Characteristics of the sector and its exposure to the crisis
This issue examines insurance as a neglected pillar of Lebanon's financial system. With US$1.65 billion in premiums and penetration of 3.5% of GDP in 2019, first in the Arab world, the sector is fragmented across 51 companies, none listed. The report shows that pre-2022 policies compensated in 'Lollars' lost 87% of their value, notes that 62% of the population lacks adequate health cover, and calls for ratings and disclosure.
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Sovereign wealth funds
Characteristics, classes and the Santiago Principles
This issue asks whether a Lebanese sovereign wealth fund would be a burden or a solution. Reviewing the five SWF types and the Santiago Principles, it argues that ownership is the decisive problem: government is divided along confessional lines, the central bank faces a US$60–70 billion loss gap and conflicts of interest, and the finance ministry risks political capture. It proposes structured privatisation of state assets instead.
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Effects of the absence of banking services
A positive paradigm change
This issue examines the effects of absent banking services: a cash economy, a complete credit crunch and halted trade finance, with most of the 65 banks technically insolvent. Expecting banks to remain ineffective for five to ten years, it recommends independent audits, shareholder recapitalisation, new institutional investors and governance rules on politically exposed shareholders, alongside alternative vehicles: factoring, equity recapitalisation, hospitality, renewable energy and education funds.
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Post-default restructuring
Speculative-grade categories and the way out beyond the recovery plan
This issue considers post-default restructuring after the May 2022 elections and the hastily approved recovery plan. Placing Lebanon, in Selective Default since March 2020, at the bottom of the weakest speculative-grade category, it argues that recovery must first address electricity, food security, medication and hospitalisation, and depositors' money. It calls for exchange-rate unification, a renewable energy fund and central bank governance reform as the pound reached LBP38,000.
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The capital control law
The recovery plan versus the IMF staff-level agreement
This issue assesses the draft Capital Control Law and the April 2022 recovery plan. It argues the law comes too late, effectively amnesties banks and grants an unaccountable committee arbitrary powers, noting that capital controls rank last among IMF priorities. It reviews the plan's US$60 billion write-off of central bank liabilities, a bail-in of deposits above US$100,000, a VAT rise from 11% to 15%, and an external central bank audit.
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The crowding-out effect
The Beirut Stock Exchange, SME financial inclusion and a national scoring scale
This issue traces the crowding-out of Lebanese SMEs by decades of bank lending to the state. In 2019 banks held US$190 billion in deposits, of which US$130 billion was owed by government against US$40 billion in private loans. Contrasting today's ten listed securities with the Beirut Stock Exchange's earlier depth, it argues the Electronic Trading Platform can open equity and corporate debt to family-owned SMEs while imposing governance.
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SMEs’ financial flexibility: solutions for a new economy
Banks–SMEs dynamics and alternative financing
This issue examines how Lebanese SMEs can secure funding after the banking collapse. It argues the damage is structural: 64 near-identical banks placed deposits with the state, disregarded concentration risk and left SMEs burdened by overdrafts costing up to 15%. With deposits down from US$187 billion to about US$103 billion, it surveys family-office investors, private funds and the Oxygen trade-finance fund, and proposes recapitalisation, trade-finance, education, energy and hospitality funds.
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