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The June 2022 issue examined the consequences of a banking sector that had ceased to intermediate: a complete credit crunch, no trade finance, selective and illegal capital controls, depleted equity and an economy that had become cash-based, with the attendant money-laundering and reputational risks. It traced the collapse to the post-Taef model of retail banks funded by non-resident deposits at inflated rates and concentrated on a single borrower, the state, with a severe maturity mismatch.
The authors set out a restructuring agenda: audits of the 15 largest banks by international firms and of smaller banks by the Banking Control Commission, recapitalisation by existing shareholders from their own wealth, stricter governance on politically exposed shareholders, a merger programme reducing licences from 65 to at most 15, specialised licence categories and a less concentrated central bank governance. They expected banks not to be efficiently operational for another five to ten years.
For the interim, the issue argued that the crisis had produced a positive paradigm shift away from expensive overdrafts, and proposed a master fund combining factoring and reverse factoring (FRF) for trade and working capital with a recapitalisation fund injecting fresh equity into SMEs, with insurers as natural domestic institutional investors.
Key findings
- Pre-crisis SME funding relied on revolving overdrafts at 18% to 21% a year, often rolled back-to-back across banks.
- Remittances of an estimated US$7 billion a year flowed through money transfer institutions and stayed outside the banking system.
- Insurers were holding excess liquidity in non-remunerated fresh-dollar accounts, which the issue linked to premium increases of around 15%.
- The issue argued that an FRF facility could stabilise prices, as importers were pricing the dollar at about LBP33,000 when the market rate was LBP28,000.
- It reported strong interest from institutional investors and family offices in such funds, provided they had strict governance and were not bank-owned.
Archive: written in Jun 2022; figures and assessments reflect conditions at the time of writing.Summary of the paper; the full analysis is in the PDF.