Lebanon banks have had a terrible few days recently. Do you remember those cowboy movies where gun-trotting guys on horses would attack banks and run away with lots of cash? Well, this is happening in Lebanon, only that this time people seem to be tired of making withdrawals using ATM cards or checks.
According to Aljazeera and other channels, one woman armed with a gun and accompanied by some associates walked into BLOM Bank in Beirut and demanded their deposits. They are reported to have left with more than $13,000 cash from her account. This is according to a source from a depositors’ advocacy group. It emerged later that she had used a toy gun and that the funds were to be used to treat her sister with cancer disease. Yes, she went to withdraw her money using a toy gun.
This was not enough. Shortly afterward, another armed man entered the BankMed branch and managed to withdraw part of their savings before surrendering to the authorities.
This is an emerging trend that also happened last month when a man held another Beirut bank to withdraw funds from to treat his sick father.
Lebanon’s banks have locked most depositors out of their savings since an economic crisis took hold three years ago, leaving much of the population unable to pay for basics.
Lebanon Banking Problems
The problems apparently started in 2019 when depositors (mainly importers) reported difficulty in withdrawing US dollars from their accounts. Two weeks of protests then led to banks closing down for two months in October 2019.
Banks in Lebanon put limitations on transfers outside the nation when they reopened. Challenges have persisted until today because of dollar shortages. The problems have not really affected withdrawals from Lebanese pound deposit accounts. The only challenge is that the Lebanese pound has depreciated massively over the years.
People with US dollars in their accounts have been avoiding converting their money to local currency due to the loss of purchasing power mentioned above. Business people who trade internationally prefer to hold onto their dollars to settle their import obligations. Trouble starts when they go to the bank and ask for their dollars.
The dollar shortage is so severe that banks can not honor withdrawal requests. But in some cases, such as that of BLOM Bank, the money was required for a medical emergency. We know you must be asking, “Are Lebanon Banks Facing Failure?”
What is a bank failure?
Bank failure happens when they fail to meet their obligations. All the obligations are important and must be met. But one obligation that quickly sends banks to the grave is failing to meet withdrawal requests from customers. Other obligations are set by regulations to safeguard the banking industry. Lebanon Banks are regulated by Banque Du LIban.
Are Lebanon’s banks facing failure?
Our views are that the problems are beyond individual banks. Rather, the problem has affected the whole country because of the difficulties facing the economy.
That said, let us discuss the challenges facing banks and hopefully, the problems facing Lebanon banks do not spill over to many countries.
Key Challenges Facing Banks
Banks all over the world are facing digital transformation that has come with both opportunities and challenges. Some claim that banks have been slow in adopting technological changes, giving way to new entrants such as Fintechs into the dining table.
Traditional banks have played the role of intermediation between depositors and borrowers. Their business model has been geared towards aggregating deposits from individuals and companies, with a promise of safe keeping and interest payment to some of them. Lebanon banks, like other banks, have the same operating model.
The deposits are then invested mainly in loans. Loans are priced at the cost of attracting deposits plus a margin. Interest charged on loans depends on the risk profile of the borrower. Low-risk borrowers are charged lower interest rates. High-risk borrowers have to pay higher rates of interest because banks have to factor in probable losses. You need to understand how to get approved for loans, and overcome some barriers to borrowing from banks.
After loans are issued to customers, excess money is then invested in other areas instead of lying idle. In most cases, the funds are invested in government treasury bills and bonds. Banks even lend to each other for short periods of time.
Banks also offer non-lending services where they charge commissions or transaction charges. These services include trade finance services, payment services, advisory services, custodial services, and more. Lebanon’s banks also offer these non-lending services.
This has worked well for banks and, by extension, the financial system. But they are now faced with new challenges, including competition from fintech companies and, to some extent, crypto projects. You must be wondering how this relates to Lebanon banks.
The success of the banking system relies on its ability to mobilize cheap deposits and deploy them in the most efficient way possible by maximizing the return while minimizing costs. Lebanon banks must face the above challenges on top of the ones coming from the economic challenges the country is going through. But what will keep you coming to the bank continuously to deposit your funds? This is the magic question for the survival of the banks.
Why do people deposit money in banks?
There are two main reasons,
#1 Security: You don’t want cash stashed away in your room or under your bed. A fire accident can wipe out your life savings. Someone could steal your money. In a bank, your funds are safe, and you do not need to worry about theft or losses. If the bank loses your money, they have to pay you because they have insurance.
#2. Interest Income: Banks will pay you interest on some types of deposit accounts. This is because your money is used to run other bank activities, such as lending to other people. The interest you receive also reduces the impact of inflation which keeps eroding the purchasing power of your deposit.
Read about how staking crypto is creating passive income.
What causes bank failures?
With the world in financial uncertainty following the COVID-19 Pandemic, ensuing supply chain challenges, and the Russia-Ukraine conflict, this question has never been more important. Some are predicting very tough times all the way to 2024. The situation is worsened by the effects of climate change. Bank failures all over the world, including Lebanon banks, will remain a key risk to monitor.
We discussed “what bank failure is” earlier. Now, let’s discuss why banks fail.
Reasons why banks fail
- Runs on banks: A run on a bank happens when many depositors demand their money all at once, making it difficult for the bank to honor their request.
- Bad loans: When cash flows are not coming to the bank to repay the loans, the bank will find it hard to honor obligations.
- Bank Funding: Bank treasurers lend money by balancing short- and medium-term depositors. They do this in the expectation that they can easily refinance certain assets to cover requirements as they fall. Failure to get these funds that depend on economic conditions can create liquidity issues as well.
- Regulatory non-compliance: when banks don’t meet regulations set to protect the industry, they get possible punishment by the regulator.
- Investment in non-core activities: when banks invest in non-core activities such as real estate, funds can be stuck there, forcing them to run into liquidity problems.
- Bad employees: rogue employees can cause problems for banks through fraud losses and carelessness in operations.
- Insider loans: These are loans issued to staff and companies related to the shareholders of the banks. If these loans don’t perform, they can cause major problems for the bank as they are challenging to collect. Luckily, regulators have placed a low threshold for such loans.
There you go. We have discussed what is happening in Lebanon banks and the operations of a functional bank. You have also seen that economic conditions in a country affect banking sector stability. We would like to know what you think about what is happening in Lebanon.
