Lebanon's cabinet to discuss 'imperfect but fair' draft banking law

Proposed law faces resistance from banks and politicians over loss-sharing plan

Lebanese Prime Minister Nawaf Salam announces the draft law. Lebanese Government Press Office / AFP

Lebanon’s Cabinet is set to discuss a draft banking law on Monday that would redistribute the nation’s financial losses – borne overwhelmingly by ordinary Lebanese since 2019 – between commercial banks and the state.

Prime Minister Nawaf Salam last week described the draft law, which places most of the financial burden on the state and commercial banks, as “a roadmap to getting out of the [financial] crisis”. He called it “imperfect but fair”.

The law would be a major step towards unlocking international financial assistance – the International Monetary Fund (IMF) has made any bailout conditional on Lebanon implementing long-delayed structural reforms, including reforms to the banking sector. But the draft law must still overcome several hurdles – it must first pass Cabinet before being sent to parliament for approval, amid criticism from multiple sides.

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Since taking office in January, Mr Salam and President Joseph Aoun have pledged that necessary reforms and legislation will be put in place.

Lebanon’s financial crisis erupted in 2019, when the Lebanese pound rapidly devalued and banks imposed de facto capital controls, locking depositors out of their funds in a bid to stem the outflow of dwindling US dollar reserves. The World Bank has described the economic collapse – driven by fiscal mismanagement, financial engineering and political corruption – as one of the worst financial crises in modern history.

Under the draft law, depositors would be able to retrieve up to $100,000 of their funds over four years. Around 84 per cent of depositors fall below that threshold, according to Mr Salam. Medium and large depositors would instead be compensated through long-term, asset-backed securities.

The IMF, which closely monitored the drafting of the bill, has repeatedly stressed the need for authorities to recognise and allocate losses, restore the banking sector’s viability “consistent with international standards”, protect small depositors and ensure public debt sustainability.

The Associations of Banks in Lebanon (ABL) criticised the draft law last week in a strongly worded statement, saying the bill contained “serious flaws” with provisions that would “seriously undermine the banking system and its sustainability, and prolong economic recession”.

“Instead of holding the state – as the primary party responsible for the losses resulting from its mismanagement with the Central Bank of Lebanon – accountable, it unfairly places the burden of these losses on commercial banks in Lebanon. It is unacceptable for the state to evade its responsibilities and shift them on to the banks,” the ABL said.

In April, Lebanon's parliament adopted a bank-restructuring law, as the previous legislation was believed to have allowed a flight of capital at the outbreak of the 2019 crisis, when ordinary depositors were deprived of their savings.