Domestic Banking

Banking was one of the great strengths of the Lebanese economy before civil strife began in 1975. Between 1920 and 1964, the Bank of Syria and Lebanon, a French private bank and primarily a commercial enterprise, performed the central banking functions of being the sole issuer of notes and the holder of the government's accounts. The bank's charter expired in March 1964.

Until 1964 banks were totally unregulated. There were no special banking laws, no central bank, and no restrictions on the opening of new banks. No rules governed minimum reserve ratios, and banks were not even asked to produce regular balance sheets. This situation led to the creation of many small banks.

In April 1964, the Central Bank was established and given responsibility for controlling the Lebanese pound, for issuing notes, and for acting as the government's banker. Although prohibited from engaging in normal commercial banking, it had the authority to regulate commercial banks.

In 1966 the Lebanese-owned Intra Bank collapsed, precipitating a banking crisis. Intra Bank accounted for about 10 percent of total bank deposits and about 40 percent of deposits with Lebaneseowned banks. (Observers believed that the Intra Bank crisis was brought on by Lebanese politicians who manipulated fiscal affairs to their own gain.)

Intra Bank's collapse was followed by its restructuring, with the Central Bank and the Lebanese government taking major shareholdings. The successor organization, officially called the Intra Investment Company but often referred to as "Intra," became a major shareholder in various institutions, notably Middle East Airlines, the national flag carrier. The main banking arm was Bank Al Mashrek, in which Intra held an 84-percent share following Intra's acquisition early that year of a 42-percent share held previously by the J.P. Morgan Overseas Capital Corporation.

By 1985 the Central Bank held the biggest single share in Intra--27.75 percent. The government of Kuwait held 19 percent; the government of Lebanon, 10 percent; the National Bank of Kuwait, 3.75 percent; the government of Qatar, 3.25 percent; and various private shareholders (many of them from the Persian Gulf), 36.25 percent. The value of the Central Bank and Lebanese government shares in the Intra Investment Company in late 1985 was estimated at more than US$116 million.

Throughout the mid-1980s, however, the Central Bank was engaged in disputes with the Intra Investment Company's management, a wrangle that sometimes appeared to be almost a personal feud between Central Bank governor Naim, a guardian of financial orthodoxy, and Roger Tamraz, arguably Lebanon's most controversial and daring entrepreneur. Tamraz had been elected chairman of Intra following the company's August 1983 general meeting. He had a highly personal managerial style and had engaged in questionable business ventures in 1983 and 1984. The Central Bank became concerned and challenged Intra's policy on foreign bank acquisitions. The Central Bank wanted a new board of directors elected and wanted Intra run by Central Bank representatives and Persian Gulf shareholders. In August 1986, when Tamraz's three-year term was due to expire, the government demanded a shareholders meeting and initiated legal proceedings against him over his chairmanship. Tamraz responded by calling a shareholders meeting for December 29, 1986, the first to be convened since he became chairman.

At the meeting, which was held in East Beirut without representatives from 80 percent of the stockholders or Persian Gulf representatives, a new board was elected, with Tamraz at the helm. The outcome should have been a moment of triumph for Tamraz, but it was not. His tactics aroused concern from Intra's staff and the Central Bank, which claimed that Tamraz had pressured some representatives to miss the election meeting. Two weeks later, Tamraz resigned. In losing his position at Intra, Tamraz also lost much of his official influence with Middle East Airlines. Nevertheless, he did hold onto one very important position: chairmanship of Bank Al Mashrek. Although the events of early 1987 were a major setback to Tamraz in his quasi-public roles, his own business interests remained substantial, and he was still a very potent force on the financial and commercial scene. Tamraz was replaced by Jamil Iskandar, a businessman who had been on Intra's board in 1983.

In the face of the Intra-Central Bank controversy, domestic banks fared poorly and were plagued by nonperforming loans. One local banker claimed that at the end of 1985 nonperforming loans accounted for 45 percent of his bank's total loan portfolio, compared with 25 percent a year earlier. Banking costs rose while fierce competition in a depressed market resulted in excessively high interest rates. In addition, there were more than 50 bank robberies in 1985, entailing known losses of US$800,000.

To overcome the problem, some domestic banks increased their overseas activities. The Intra Investment Company, for example, bought commercial interests of the Paris-based Banque Stern and a small Swiss bank, the Banca di Particepiazioni e Investimenti. In 1986 it also sought to purchase the four Egyptian branches of the local Jammal Trust Bank.

On paper, however, the banks did not appear to be doing too badly. Total assets of the commercial banks rose from about L£100 billion at the end of 1984 to about L£162 billion a year later. About 70 percent of these holdings were believed to be in foreign currency, which meant that in December 1984 assets amounted to about US$11.3 billion and almost US$9 billion a year later.

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The Central Bank

Throughout years of the most appalling political, economic, and social suffering, the Central Bank was the only institution that preserved its reputation for essentially sound management. Since 1964 the Central Bank had been the guardian of the country's financial orthodoxy. It embodied the business beliefs common to a variety of Lebanese citizens, from merchants and bankers to the traditional Christian and Muslim political leaders.

From 1974 onward, successive bank governors constantly had to determine how much the Central Bank should squeeze commercial banks in order to secure revenue for the government through the sale of treasury bills. Securing revenue this way provided the bank with some of its more anxious movements as it saw its share of public debt climb steadily, particularly in the mid-1980s.

The Central Bank's activities eventually became controversial, and key issues needed to be addressed. There was the question of whether the bank should use the country's still considerable reserves for reconstruction and development projects. There was also the issue of the extent to which the bank should continue propping up the Lebanese pound in the face of currency speculation, widely believed to involve leading Lebanese politicians.

Still, the Central Bank functioned with surprising efficiency, despite its location in the middle of the West Beirut battleground and despite the vicissitudes of the 1970s and 1980s. It reported a L£1.2 billion profit for 1984, essentially from domestic lending operations. In 1985 the profits were L£2.6 billion and in 1986, L£4.9 billion. As customary, the bank kept 20 percent of its profits for reserves and sent 80 percent to the treasury. Although profits appeared respectable when measured in United States dollars, they showed that the bank was losing the battle to maintain its own real income or that of the government. Thus profits, calculated at year-end rates, were US$137.5 million in 1984, US$124.2 million in 1985, and just US$56.4 million in 1986.

Although the Central Bank was keeping the government solvent, it eventually reached a watershed in 1986. At the start of the year, public debt totaled L£53.4 billion (about US$3 billion), of which the bank's share was 25 percent. By May, however, its share had ballooned to 44 percent. Bank loans to the state rose by 41 percent in the first 10 months of 1986 to total L£22 billion, compared with L£15.6 billion at the start of the year. Concern over the bank's funding of public debt grew, causing undersubscription of treasury bills. At the same time, the Central Bank imposed new regulations that angered the commercial banks.

Prime Minister Rashid Karami intervened in May 1986 by helping to negotiate a new agreement in which the size of commercial banks' statutory reserves was reduced, as was the amount of deposits that they had to keep in the form of treasury bills. The agreement, unfortunately, came at a time of renewed clashes between Shia Amal militiamen and Palestinians in the southern Beirut refugee camps. The clashes pushed the value of the pound even further at a time when the Central Bank accord with the commercial banks had been expected to strengthen the currency.

The measures negotiated by Karami proved insufficient either to restore faith in the currency or to end the dispute between the commercial banks and the Central Bank. The Central Bank imposed tighter controls in December 1986. It raised the statutory reserve to 13 percent, increased the volume of bank deposits to be kept in treasury bills, and banned loans in local currency to nonresidents (unless they were for trade purposes). The bank also forbade nonresident banks from receiving deposits, providing credits, or opening accounts in Lebanese pounds. Understandably, the commercial banks opposed the new rules. Before the announcement, only nine of the eighty-two commercial banks then operating were in violation of regulations. But under the new measures, sixty-three banks would have to increase reserves and treasury bill purchases to be in compliance.

The commercial banks protested. They believed that the Central Bank's attempts to force them to cover the budget deficit were preventing them from undertaking more profitable activities. In January 1987, the Central Bank softened its position. Its new policy meant that the largest banks were obliged to keep no less than 45 percent of their deposits in treasury bills, on top of the 13 percent required as statutory reserves. This left the banks with limited funds for productive lending.

The Central Bank's actions did little to improve the national currency, boost the economy, or ease relations with the commercial banks. Just a few weeks later, on February 11, 1987, it took L£100 to buy a single United States dollar. The subsequent deployment of Syrian Army units in West Beirut temporarily reversed the situation, improving the rate to L£85 to US$1, but on March 3 the pound lost 20 percent of its value in a single day's hectic trading. The Central Bank accused commercial banks of attempting to hoard foreign currency and of acting in league with speculators. But the Lebanese Bankers' Association blamed the Central Bank for failing to stabilize the market when the dollar began to move and for selling dollars too late.

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International Banking

Many international banks pulled out of Beirut in the 1980s. For example, the First National Bank of Chicago sold its local interests to local investors for US$7.5 million in 1982. But the replacement institution, First Phoenician Bank, ran into liquidity problems in 1984, when the managing director, Waji Muawad, allegedly absconded with US$13 million of the bank's funds. Bank Al Mashrek initiated takeover proceedings in 1985.

In 1985 Bank Al Mashrek also bought two branches of the British Standard Chartered Bank. Banque Libano-Française bought the Toronto-based Bank of Nova Scotia's local operation. The Moscow Narodny Bank closed its branch, handing over its local business to Bank Handlowy for the Middle East, the local subsidiary of Warsaw's Bank Handlowy. The Chase Manhattan Bank and Bank of America both closed their Beirut operations, the former handing over its business to Banque Sabbag et Française pour le Moyen Orient. By the end of 1986, only two United States banks were still operating in Lebanon--Citibank and American Express International.

The British Bank of the Middle East (BBME), the second largest foreign bank in Lebanon, resisted the trend as long as possible. In 1976 the bank's headquarters in Bab Idris had been the target for one of the biggest heists in history. Losses of cash and contents of safe-deposit boxes amounted to about US$24 million. BBME recovered and maintained operations, however, and opened branches in East Beirut as that part of the city became a distinct entity. At the start of Amin Jumayyil's presidency, BBME's future appeared promising. Its assets stood at L£1.3 billion (about US$315 million). But the growing insecurity of 1984, the kidnapping of two senior managers, and a robbery in West Beirut in 1985 prompted the management to close down four of its six branches in the Greater Beirut area at the end of 1985. Thereafter, the bank maintained a single branch in West Beirut, another in East Beirut, and a third in Tripoli.

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_{Source: Federal Research Division - Library of Congress (Edited by Thomas Collelo, December 1987)}