A Central Bank For the Economic Development of Lebanon. by Anthony Nicholas Asseily. Thesis submitted to the University of London in partial fulfilment of the requirements for the Ph.D. degree in Economics. June 1966 ProQuest Number: 10731246 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a com plete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. uest ProQuest 10731246 Published by ProQuest LLC(2017). Copyright of the Dissertation is held by the Author. All rights reserved. This work is protected against unauthorized copying under Title 17, United States C ode Microform Edition © ProQuest LLC. ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106- 1346 2 . Abstract This study is an analysis and appraisal of the newly established central bank in Lebanon. The Charter granting the privately owned Banque de Syrie et du Liban the privilege of note issue in Lebanon expired on 51st March 1964 and was not renewed. A state owned institution, the Bank of Lebanon, was created to take over the functions of the Issuing Department of the Banque de Syrie et du Liban and was given central banking powers. This was the most important development in Lebanese banking history since the Banking Secrecy Law of 1956. When a central bank is newly established in a developing country, there is always the danger that it will be domihated by traditional notions of central banking, and insufficient regard paid to the particular characteristics of the economy in which it is to operate. The result may well be the establishment of an ineffective central bank. The problem considered here is whether in Lebanon there was a need for a change from the old system, that is whether or not the Banque de Syrie et du Liban was adequate for the requirements of the country, and if not what sort of a change was required. The development and working of the Lebanese banking system is analysed with speiial reference to the role that might be required of a central bank. Particular emphasis is placed on the significance of the foreign banks and the very active money market which traditionally provided an effective lender of last resort* The problems of economic development in the Lebanon are outlined and in the light of these problems, of the nature of the economy and of the Government!s economic plans, the important functions that could well be served by a central bank are discussed. It is concluded that the Bqnque de Syrie et du Liban, essentially an Issuing Bank, was not adequate for the requirements of the economic development of the country, and that a central bank was needed. But the Bank of Lebanon, as actually constituted will only marginally help in the economic development of the country. 4* Acknowledgements The main difficulty I have encountered in writing this thesis has undoubtedly been the collection of adequate and reliable statistics* Official Lebanese sources being particularly dry on the subject and the new Central Bank, which collects very detailed information from commercial banks, being secretive and over cautious, X have often had to rely on private information supplied by Lebanese and foreign bankers who wish to retain their anonymity and to whom X am indeed grateful. I owe much to Mr. 0. Corm of the Ministry of Finance who provided me with valuable material used in Chapter III and discussed some of the points with me* I also wish to thank Elisabeth Whaley for the painstaking work of typing the first draft of the thesis and to Mrs* J. Bruce and Miss F. Knight for typing the final work. I am very much indebted to my supervisor Professor Edith T* Penrose without whose severe criticisms and constant guidance this thesis would not have appeared in the present form. Last, but by no means least, I must acknowledge the general support and encouragement of my parents without whom all this would have been impossible. 5* 1* Table of Contents Page# CHAPTER Is INTRODUCTION 6 . X* The fashion* of Central Banking B# II# The Bank of Lebanon 33# Appendix: The Importance of Banking Secrecy as seen by the Association des Banques du Liban 41* CHAPTER II: COMMERCIAL BANKING IN LEBANON 47* I* Development of Commercial Banking in Lebanon 47* 1* Laissez faire 54* 2* Geographical position of the country 56# 3# Abundance of capital 57* 4# Internal developments encouraging the growth of banks 59* II* The Balance Sheet of the Banking Sector 60* 1# Liabilities 61* A* Capital 61* ,B# Deposits 62. a# Demand deposits 62* b* Savings deposits or accounts 67# c# Time deposits 69# d. Foreign currency deposits 71* e. Banks and Correspondents 73# f* Miscellaneous Creditors 80# 5* ii* Table of Contents - 2* page* 2* Assets 80* A* Cash 81* B. Liquid Assets 82* C* Advances 86 . D* Portfolio Securities 92* E* The Discount Rate 93* III* Other Features of the Banking Sector 94. IV* Appraisal of the Banking Sector 96* 1* Nature of deposits 97 * A* Savings deposits 97 * B* Demand deposits 98* a* Interest rate policy 101. b* Banking Secrecy 102* c* Social causes 10% d* Lack of alternative safe liquid assets 10% e. Business deposits 104* 2* Liquidity Ratio 107* Appendix: Movements of the Market Discount Rate 110. CHAPTER III: THE LEBANESE ECONOMY AND THE FINANCIAL IMPLICATIONS OF THE FLANS FOR ITS DEVELOPMENT 122. I* The Lebanese Economy 122, 5. iii. Table of Contents - 3. Page* II. Plans for the Economic Development of the Country 135# 1 * Agriculture 140. 2 . Industry 144. 3* The Public Sector 154# A* State Expenditure 156. a* Ordinary Budget 157* b. Development Budget I58 . B* State Receipts I64. 4* The Services Sector 165# CHAPTER IV; FINANCING THE ECONOMIC DEVELOPMENT OF LEBANON 168* I* The Potentialities of the Lebanese Banking Sector 168. II. Financing the Industrial Sector 187* III.Financing the Agricultural Sector 205* IV. Financing the Public Sector 213. V. General Implications for a Central Bank 223# Appendix: A Case for Lower Deposit Rates 245# CHAPTER V: THE BANQ.tJB DE SYRIE ET DU LIBAN AND THE BANK OF LEBANON 250. I. The Banque de Syrie et du Liban 250. 1 . Activities of the BSL 251* A* Bank of Issue 251* B. Government B^nk 256. C. Bankers* Bank 258. Table of Contents ~ 4. Page, D. Commercial Bank 261. 2. Appraisal of the BSL with Reference to what it was supposed to do 263. A. Bank of Issue 264. B. Central Banking Activities 268. C. Commercial Banking Activities of the BSL 273 . 3# The BSL and the Post 1964 Conditions 276 . II. The Bank of Lebanon 281. 1. Nature of the Institution 282, 2. The BL and the Non Bank Private Sector 284. 3. The BL and the Public Sector 288. 4. The BL and the Services Sector 290. 5. The BL and the Banking Sector 292. CONCLUSION 295* BIBLIOGRAPHY 297* 6, LIST OF TABLES Table no. Description. Page* I Deposits in Lebanon: 1950-1963* 64* II Deposits since April 196*f. 66. III Deposits, advances and discounted bills in foreign currencies. 75 • IV Extracts from the banks* assets. 83 . V Advances and discounted bills in Lebanese Pounds 1955-1962. 84 . VI Distribution of advand^s and discounts. 88 . VII Average market discount rate. 95* VIII Turnover of demand deposits: 1950-1963* 100. IX Claims on the private sector. 112* X Total Currency Issue in Lebanon* 113* XI Effective State revenue and expenditure. 114. XII National income of Lebanon. 115. XIII The Balance of Payments of Lebanon. 126* XIV Comparison of employment in industry, 136. commerce and agriculture. XV Industrial census for 1955 Lebanon. 159* XVI Estimates of medium and long-term credits needed by the agricultural sector. 142. XVII Age distribution of industrial firms. 145* XVIII State expenditure in the five years plan 158 . 196^-1968 . LIST OF TABLES - 2. Table no* Description* P a g e . XIX Treasury advances. 160. XX Development Plan project, 1964-1968: Plan of public expenditure including 161. Treasury advances. XXI Development Plan project, 1964-1968: Plan of public expenditure including 162. Treasury advances in vertical percentages XXII Development budget: Finance Ministry1s estimates of approved projects* 165. XXIII Expected State receipts on basis of Planning Commissions recommendations, 166. 1964-1968* XXIV Changes of the Reserve Fund. 215. XXV Total Currency issue. 267. 9. CHAPTER I INTRODUCTION I’he purpose of this chapter is to provide a background for a discussion of the problems associated with the establishment of a Central Bank in the Lebanon, which is described in the latter part of the chapter. I# The fashion1 Of Central Banking “A central bank is not a natural product of banking development. It is imposed from outside or comes into being as the result of govern- 1 ment favour*11 “It is an institutional arrangement that may be made to serve any one of a number of •purposes1 its essence being11..* the 2 discretionary control of the monetary system11* The tasks of such an institution “or any other human institution, are surely to respond to 3 the needs of the environment in which they exist.11 However, “looking back, it is impossible to resist the statement that the foundation of central banks has been partly a matter of fashion11.^ ^he fashion of central banking has by no means been uniform and does not go much 1* Smith, V. C, The Rationale °f Central Banking, London, King, 1956, p.