BANKING in Lebanon is not a particularly complicated business. Deposits pour in, mainly from abroad, treasury bills are purchased, and customers receive short-term dollar loans at 5 percentage points over the London interbank offered rate (Libor). The total assets of the 78 Lebanese banks have more than trebled in local currency terms since 1991, and dollar deposits alone have risen from $4,250 million to almost $8,000 million in the same period. The top 10 banks, accounting for some 80 per cent of total assets, have prospered handsomely.
But this cosy way of doing business is out of step with Lebanon’s need for banks to play a more active role in project finance and investment. The problem is starting to be addressed, as the few investment banks that do exist are expanding their operations, and banks are preparing to boost their capital base through the issue of bearer shares.
One of the best established investment banks in Beirut is J Henry Schroder & Company, affiliated to London-based Schroder Asseily & Company. ‘The local banks are just not equipped for major project finance,’ says Schroder’s Tony Asseily. Schroder itself arranged a pathfinding $50 million eight- year loan for a leading local cement company (see page 15), and is managing the sale of a $30 million stake in the New City property development scheme in east Beirut. It is also working with one of the bidders for the project to build a toll road from Beirut to the Syrian border.
Another investment bank making an impact is Lebanon Invest, a new venture set up in 1994 by local and international interests with capital of $26.25 million. Shareholders include London-based Capital Trust Group and Banque Audi. Its first substantial deal involves raising $75 million in equity and loans for the reconstruction of the Phoenicia Hotel, on the Beirut seafront. It is also working on a scheme to increase the capital of Byblos Bank by $20 million.
The recapitalisation of Lebanon’s banks is a prerequisite for commercial banks becoming more adventurous in their lending policies. Most banks have now managed to adhere to Cooke ratios for their core capital, but the total investment capital of banks is only $400 million, or less than 3 per cent of total assets. Byblos is one of the few institutions to have sought fresh sources of capital by bringing in new shareholders through a private placement. In the process, the controlling interest of the Bassil family is to be reduced from 65 per cent to 51 per cent.
The central bank is now studying a proposal for allowing bank shares to be traded on the stock exchange when it reopens later in the year. This is expected to entail an initial phase whereby banks will be allowed to issue bearer shares representing 20-25 per cent of capital. Only the bearer shares will be traded, not the entire share capital of the bank. ‘The central bank appears to be concerned to stop banks falling into the wrong hands,’ says Asseily.
The lack of long-term sources of funds means that commercial bank lending is oriented almost entirely to the short-term. ‘We cannot take on the risk of a transformation of maturities,’ says Joe Sarrouh of Fransabank to explain why most of the bank’s lending is for one year or less. Fransabank has been able to provide some long-term loans through being a party to the two $45 million International Finance Corporation (IFC) credit lines. These allow customers to borrow for seven years, including two years’ grace, at six-month Libor plus 75 basis points. The bank has also set up a highly successful leasing venture in partnership with Credit Agricole and the IFC. ‘We budgeted for providing $10 million in the first year, but applications have been treble that amount,’ says Sarrouh. The venture gives customers the chance to lease equipment for four years, with the option to buy with depreciation factored in. It is capitalised at $5 million, but has been able to raise a further $21.5 million in international markets, says Sarrouh.
But these exceptions to the norm are rare. Banks are obliged to keep 40 per cent of their deposits in treasury bills, and a further 13 per cent in special reserve funds with the central bank. They are also instructed to keep no more than 60 per cent of deposits in dollars. However, many banks routinely exceed this limit. Credit Libanais deputy general manager, Michel Khadige says some banks are paying excessive rates, of up to 800 basic points over Libor, on the interbank market to secure dollars. ‘They are hurting themselves, creating a distorted market, they cannot now go back to normal rates,’ he says.
One of the only Beirut banks active in project finance is the local arm of Amman-based Arab Bank, owned by prominent Palestinian families, including the founders of the Consolidate Contractors International Company (CCC), and by Rafiq Hariri, represented on the board by his son Bahaa since 1993. Arab Bank is exceptional, in that it is backed by substantial resources outside Lebanon. It is financing the reconstruction of the Commodore Hotel in west Beirut, and participated in $50 million of financing for the contract with European Gas Turbines to build four small power stations.
But most banks are remaining cautious, following the example of Banque du Liban & d’Outre Mer, the largest Lebanese bank in terms of assets. General manager Fadi Osseiran says the effective maturity of its deposits is about one-month. Under these circumstances, there is little prospect of the bank providing substantial long-term lending.