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Published in February 2022 as the first issue of the Orion Financial Solutions Investment Contextual Report, this paper examined how the structure of Lebanon's banking system had constrained small and medium-sized enterprises and what funding alternatives were emerging after the 2019 crisis. It argued that the damage banks inflicted on the economy was structural: 64 banks offered near-identical products and balance sheets, placed deposits with the government and central bank at high margins, and left SMEs carrying revolving overdrafts, over-collateralisation and cash flows absorbed by debt service.
The report described a locked system in which the bank-government dynamic dried up alternative funding, suppressed fixed-income and equity markets, and left the Beirut Stock Exchange with a handful of listings. At the time of writing, it observed a shift on both sides of the market: family businesses opening to outside shareholders, preferably institutional ones; depositors seeking to move savings out of banks into productive companies; and family offices, diaspora investors and specialised funds beginning to fill the gap.
For investors and policymakers, the paper identified import substitution, export-oriented and essential-goods producers as the sectors most in need of capital, and made the case for dedicated recapitalisation funds and a domestic market for SME debt and equity.
Key findings
- Deposits fell from US$187 billion at the end of 2019 to an estimated US$103 billion by the end of 2021, while the exchange rate peaked at LBP35,000 to the US dollar in December 2021.
- 0.2% of bank accounts held 37% of deposits, while 82% of accounts held 4.4% and suffered a de facto haircut of up to 80%.
- A new class of 'bank refugees', holding accounts of US$100,000 to US$5 million, was seeking to redeploy deposits into SMEs it judged less risky than the banks.
- Companies had largely repaid bank and fiscal liabilities, benefiting from a positive haircut of around 90% between the official and parallel exchange rates.
- With diesel at US$850 per tonne, fuel was the largest cost after raw materials, underscoring the need for sustainable energy sources.
- The report argued that corporate bonds would find ready subscribers among insurers, bank-refugee depositors and possibly some banks.
Archive: written in Feb 2022; figures and assessments reflect conditions at the time of writing.Summary of the paper; the full analysis is in the PDF.