Lebanon’s decision to increase deposit guarantees is positive step, but more reform is needed to protect small businesses

LondonThe decision of the Lebanese government to increase guarantees on bank deposits from 5 million to 75 million pounds is a positive step, says ImpACT International. However, the organization notes that during the country’s current financial crisis, small and medium-sized businesses are in particular need of protection and the amounts deposited in their accounts ranges up to 151 million LBP ($100,000).

Increasing deposit guarantees is crucial to minimizing damage from the Lebanese financial crisis and restoring depositors' confidence and trust in the banking system, which faces the risk of massive withdrawals

Increasing deposit guarantees is crucial to minimizing damage from the Lebanese financial crisis and restoring depositors' confidence and trust in the banking system, which faces the risk of massive withdrawals, explains ImpACT International.

The new Lebanese law, n°110/1991, mandates that the National Institute for the Guarantee of Deposits (NIGD) insure up to LBP 75 million, including foreign currency deposits, in commercial banks, regardless of the type of account. The capitalization of the NIGD is estimated by some sources to be about $800 million, while others say it’s as high as $3 billion, some which is invested in treasury bonds; the rest is deposited in the Bank of Lebanon.

Statistics show that 92% of the depositors own just 15% of bank deposits in the country—illustrating the breadth of small businesses. ImpACT adds that to restore confidence in the banking sector, depositors also must know they can obtain their money within a short, specified period of time, will be compensated if any harm is incurred. Since confidence in the Lebanese pound is low, it should be tied to the U.S. dollar and steps should be taken to restore trust in the local currency.

ImpACT International lays the blame for the lack of public trust in the country’s banks on the financial institutions themselves, after they closed for two consecutive weeks following October's mass protests. The inability of depositors to withdraw their money when needed rendered them unable to pay their monthly bills and triggered a lack of liquidity, commercial traffic and economic stagnation.

The behavior of the banks undermined the confidence of depositors and other clients by tying up funds and restricting transactions,” says ImpACT International. This raised doubts about the ability of the private sector to revive economic activity in the country.

ImpACT International recommends an end to the government’s austerity policies, thus creating liquidity for Lebanese banks. The existing high interest rates also should be re-evaluated.

The organization further urges the restructuring of the banking system, including reducing the large number of banks, which the Association of Banks in Lebanon says currently totals 65. This large number reflects a close relationship between the favored political classes and bank ownership; instead, specialized banks that are dedicated to creating a productive economy should be incentivized.

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