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Banking in Lebanon

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Banking in Lebanon BANKING IN LEBANON A special report by Executive Magazine June 2014 The taxation issue and other concerns faced by the country’s primary financial players in 2014 Tax = Torture? The dominant issue in initiatives which the Lebanese government could add to its count of “accomplishments” in the first quarter of 2017 was not, as hoped at time of this cabinet’s appointment in December 2016, an equitable or at least workable electoral law. What turned out to be the biggest in the government’s doings instead was new taxation measures, in form of increases of existing consumption taxes and corporate income taxes and in form of new taxes, direct and indirect ones that are, however, have not been debated yet to completion in Parliament and ergo not been approved at time of producing this pdf document. What is evident at the end of March 2017, however, is that the tax measures have shocked many, Lebanese citizens and corporations alike. Citizens crowded public spaces in – at times hysteric and near-violent – protest demonstrations. Economic entities, including the banking sector, raised their objections in a more civil, but no less determined matter, arguing about detriments to GDP growth as well as loss of productivity and of already battered competitiveness in the Lebanese economy. Banks, which are set to bear an unenviable part of the new tax burden, have also spoken up in protest about the fairness of the measures and the problem that the measures in their view constitute double taxation, which is incompatible with any notion of fiscal justice. This position of the banks is contrary to the perception of banking sector standpoints which the Ministry of Finance communicated to this magazine earlier in 2017. To facilitate a historic understanding of the fiscal issues faced by Lebanese banks and of the dilemmas that exist from the banks’ perspective, Executive presents this pdf document containing stories from our June 2014 special report on banking. For Executive’s investigation into the potential impact of the purported taxes on our GDP and the disasters that are associated with fiscal policy in Lebanon, we refer our readers to the Aril 2017. We would be delighted if could tell you that its cover story is an elaborate April Fools hoax, but sadly we have to assure you that it is not. Thomas Schellen Editor-at-large This pdf document is based on a special banking report by Executive Magazine from H1 2014. It was researched by the Executive editorial team and published in the June 2014 issue, issue number 179. Lead writer: Thomas Schellen 2 www.executive-magazine.com INDEX 2 Editorial 16 Payment tools • Cards: How banks seek to encourage usage 4 Leader • Online: Lebanon payment gateway course Don’t tax our banks 18 Cross-border banking 5 Overview • Audi Group’s Odeabank: The [not so] little Guarding a fragile future bank that could • Q&A with Bank Audi head of strategy: Size does matter 8 Numbers & Figures • Banking on the future of Iraq: Endeavors of The banking sector in 2010 to 2013 Lebanese lenders • Foreign banks in Beirut: Ambassadors of Citi 10 Q&A with Bankdata’s Dany Baz: Minding the moneylenders 25 Q&A Makram Sader: Defending the banks’ bottom line 12 Debate Should our banks pay more? • YES by Ghassan Dibah: Banks can and should pay more • NO by Nassib Ghobril, Byblos Bank: Tax increases on the banking sector are unjustified and poorly timed 14 Under examination: Credit Bank On the lending prowl 3 www.executive-magazine.com > Leader Don’t kill the banks Not all taxes are created equal In order to fund the proposed public sector wage hike, Lebanon’s Parliament is scrounging for cash. In their desperation, lawmakers have proposed one of the most morally hazardous ideas in public finance: taxing some profits twice. Not only is this an unfair idea, it is fiscally irresponsible and blatantly lacking in forethought. Double taxation is not only bad for the banks who would have to pay twice, but also for the country. Instituting such an economically unsound principle by legislative fiat would leave a very black smudge on Lebanon’s record as an investor-friendly environment — as if it needed yet another. At issue is a 7 percent non-deductible tax on interest banks earn on government-issued treasury bills and certificates of deposit. Currently, banks pay a 5 percent tax on these earnings but are then allowed to deduct them from their year- end corporate profits so they are not taxed twice. Making this tax non-deductable is a clever way to disguise a massive tax hike as a small 2 percent rise. Meanwhile, double taxing profits on government debt could go badly wrong. If investors know they will be taxed more on government securities, they may demand higher returns, sending interest rates higher and making sovereign debt servicing more expensive — the last thing needed in a country with systemic debt-related deficits. But more broadly, double taxation erodes the legitimacy of the taxation system as a whole. What’s to stop a greedy state from double or even triple taxing more bank profits or those of other businesses? Going down this road is dangerous, leaving any company successfully operating in Lebanon fearful that it might be next while deterring businesses looking to expand here in the future. The range of other taxation measures the legislature is considering will cut into banks’ profits — as all such taxes do — but these measures are modest, not deceptively packaged, don’t threaten state finances and steer clear of double taxation. Many bankers are publicly arguing that a hike in corporate taxes from 15 to 17 percent is unacceptable. Further, they argue that they would be hit hardest as they are most transparent about their earnings. It is as if they are being punished for being honest, they argue, and will only encourage tax scofflaws to continue hiding their earnings. This argument has merit; the Ministry of Finance should be much more aggressive in ensuring all companies pay their fair share. However, the 2 percent increase will not break the banks. Bankers also argue that a proposed 2 percent hike in the capital gains tax will likely lead to capital flight. Such a scenario is unlikely. First, a World Bank review of interest rates for depositors shows that in 2013, rates in Lebanon were higher than many other countries in the Middle East and North Africa. Despite a higher tax, attractive rates will likely still lure in deposits. Additionally, no serious amounts of capital flew out of the country when the current 5 percent tax was first introduced. It is doubtful that this increase will have a different effect. Finally, this tax is neutral for the banks themselves as their customers will pay it. Ideally, the state would make no new fiscal commitments, (see next leader) but Lebanon is in an economic emergency. Wages all around are too low, and teachers and civil servants are being particularly deprived of fair pay. The state must act, and act responsibly by both giving its employees a raise and finding a way to pay for it. This is triage, and greater taxation is simply a necessity. Modest new taxes should be swiftly approved by parliament, but the MPs must avoid the double taxation proposal. Despite their protests, the banks can afford to pay a bit more. Tax them — don’t kill them. 4 www.executive-magazine.com > Overview Guarding a fragile future Banks shudder as the government grabs for their profits It could have been a very boring report. In the big picture of Lebanese banking, the classic performance parameters are rather well behaved this year. Assets of commercial banks stood at $166.5 billion at the end of March according to Banque du Liban (BDL), Lebanon’s central bank — up by $1.68 billion from the end of 2013 and up by 7.1 percent year on year. Private sector deposits, which started 2014 with outflows after an atypically high inflow of more than $3 billion in December, returned to a more regularly paced increase of $840 million in March and ended the first quarter at $136.6 billion. This represented 6.6 percent growth when compared with the end of Q1 2013. When widening the view over the previous 12 months, sector data were not staging any alarming deviations from their long-term growth trajectories either, as proven by the full-year data for 2013 (see data spread on the performance of the larger Lebanese banks on page 28). In simple terms, growth of banking assets, deposits and loans did not go AWOL in the otherwise growth-averse economy of 2013. THE BANKS’ GOOD HEALTH Economists of Lebanon’s top banks corroborated the story told by the numbers, describing banking sector growth up to the first quarter of 2014 as satisfactory overall. “The sector has been resilient to regional turmoil, and specifically Syrian turmoil, in terms of growth and financial soundness,” said Marwan Barakat, head of research at Bank Audi, citing growth of deposits in 2013 as 8.5 percent, or $13 billion. This rate of growth was sufficient to meet the needs of Lebanon’s public and private sector borrowing, Barakat explained. “We need for our deposits to grow 5 percent [annually] in order to be able to provide loans to the public and private sector and thus meet the financing needs of the entire domestic economy. Despite the crisis that affected Lebanon for the past three years, deposits growth was above that mark and thus banks have been able to finance the economy while keeping liquidity at a good level.” Not only was deposits growth commensurate with the nation’s financing needs, the lending activity of Lebanese banks was also good, said Marwan Mikhael, head of research at BLOM Bank.
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