Lebanon’s economy has shown a remarkable degree of resilience through a two-year period of political and social upheaval, demonstrating throughout that the banking sector is well equipped to overcome widespread complications and compete on a global basis. The challenge for the country’s banking industry today, however, is to expand upon what qualities it has already, boost the country’s lacklustre economy and assert its place in the global market for financial services.

“We, as Lebanese bankers, are quite proud of the resilience that the Lebanese banking sector has proven to have over the last 10 years – throughout which we’ve actually witnessed a series of domestic, regional and international shocks,” says Antoun Sehnaoui, Chairman and CEO of one of Lebanon’s leading banks, SGBL. World Finance spoke to Sehnaoui about the various ways in which the economy has changed of late, and what opportunities and challenges there are for those in the Lebanese banking sector.

Lebanon’s economy
Although the banking sector has withstood a number of challenges in recent times, the social and political unrest in the region has not come without consequence for Lebanon’s economy. For example, the services sector, of which tourism constitutes the biggest part, has suffered as a result and weighed heavily on the country’s economic wellbeing.

The real estate sector, which represents something of a driving force for Lebanon, has also suffered for the same reasons. And whereas historically, residential demand among expats and investors has been strong, momentum has slowed over the past two years or so against a backdrop of regional turmoil. Still, real estate prices have remained more or less stable, and although there is evidence of some market correction, the country’s capital boasts some of the highest real estate prices in the region, both on a residential and commercial basis (see Fig. 1). To again underline the resilience of Lebanon’s housing sector, some recent statistics even go so far as to show that the sector as a whole is actually picking up.

The conflict in Syria has seen a huge number of refugees cross the border into neighbouring Lebanon – 1.2 million at last count – which has caused a spike in demand for public services and infrastructure. The surge has weighed heavily on Lebanon’s economy, stretching the country’s public expenditure thin and raising its fiscal deficit. One study conducted by World Bank in September 2013 estimated Lebanon’s economic losses as a result of the Syria conflict would come to somewhere in the region of $8bn over the three-year period stemming 2012 through 2014.

On the other side of the coin, Lebanon has welcomed a number of wealthy Syrian households who have invested in housing and offices, thus boosting the national economy. “Aggregate demand was also driven by an uplift in consumption as the country’s population grew significantly,” says Sehnaoui. Still, the influx of Syrian workers into the labour market has dragged average wages down and boosted the unemployment rate among some Lebanese citizens.

Lebanese exports have also suffered at the hands of the Syria conflict, given that traditionally exports transit by land through Syria to Jordan, Iraq and the GCC – Lebanon’s primary export destination. As a result of the conflict, insurance costs and substitute routes via air or shipping have forced costs upwards and compromised Lebanon’s global competitiveness.

Policy preparations
“Unfortunately, little has been done to robustly support the Lebanese economy and pave the way for recovery. Given the size of the needs generated by Lebanon’s open border policy and the influx of refugees, international aid earmarked for Lebanon to date has not been sufficient to bring appropriate support, whether to the refugee populations or to the hosting country,” says Sehnaoui. “From a security viewpoint, the Lebanese authorities have been putting in huge efforts to maintain security across the country in order to maintain confidence, reassure tourists and mitigate investors’ concerns.”

Not content with the steps taken so far by policymakers, Sehnaoui believes there are a number of areas still in need of improvement. “The overall business environment in Lebanon requires more robust strategies as well as bold public initiatives and programmes to strengthen public finances and structural reforms to rationalise expenses and boost revenues through fiscal adjustments. In the medium term, the country should be looking ahead and aiming for sustainability, both at the level of growth and of fiscal balance.” The election of a new president should bolster the government’s reform programme however, setting the groundwork for improved governance, overturning the public deficit and rising debt, and restoring state finances back to a healthy complexion.

“On a positive note, at the banking sector level though, the Lebanese Central Bank has proven very judicious and efficient in setting up mechanisms, in cooperation with banks, to stimulate the economy by fuelling loans,” says Sehnaoui. “These initiatives have been encouraging investment in productive sectors and supporting consumption.”

Although some aspects of the economy have been hit hard by recent crises in the region, the Lebanese banking sector has come through relatively unscathed, regardless of a challenging economic environment. “Banque du Liban, Lebanon’s Central bank, has played a major role in monitoring the situation closely and setting the prudential mechanisms to keep the banking sector afloat and relatively immune,” says Sehnaoui. “International sanctions have been rigorously implemented and stringent AML regulations have been enforced across the sector. We believe that the Lebanese banking sector is not anymore exposed to Syrian risk, as all of the relevant risks have been adequately provisioned.”

Bank equity has been reinforced in line with Basel III requirements, although the local target ratio has been set at 12 percent by the end of 2015, as compared with the eight percent international standard. It is this strict enforcement of an ambitious regulatory framework that has garnered the attention of local and international depositors and investors. And indicative of the regime’s effectiveness is that in only the last three years bank deposits in Lebanon have increased by 28 percent.

Elsewhere, MENA markets still offer opportunities for those in the banking sector in that much of the population is unbanked or underserved, therefore leaving a lot of room for enterprising players to occupy a precious share of the market. In addition, there are practically no language barriers for Lebanese banks entering Arab countries or those on the African continent, which gives those in Lebanon a competitive edge ahead of rival players.

A number of further challenges still remain, not least technological advancement, which has impacted everything from retail customers to corporates, and demanded that banks invest in IT and R&D if they are to keep pace with the rate of change.

From a commercial and marketing perspective, banks in Lebanon have come up against far greater demands to remain competitive, namely continued innovation and technological progress. The global banking environment has also grown increasingly challenging for banks in that regulatory pressures have grown and issues such as money laundering, cybercrime, security and compliance have forced their way into the spotlight.

“Some of the challenges are stimuli for bringing about change and grabbing new opportunities,” says Sehnaoui. “Regarding Lebanon specifically, we believe that, against all odds, Lebanon is still perceived as a regional banking hub. Lebanese banking has long since gone regional and even global. Major banks have opened subsidiaries and branches in Europe, as well as in Turkey, Iraq, Jordan, the UAE. There is room for Lebanese banks to grow in the MENA region, thanks to their assets and strengths.”

Ripe for growth
Although the Lebanese banking market is ripe for growth, there are some, including Sehnaoui’s SGBL, that are seeking opportunities outside of Lebanon. As one of the country’s largest banks, SGBL boasts a retail network of 69 branches that span the entirety of the country, as well as a proven reputation in the business of SME and corporate finance. “Still, we believe there is room to grow on our primary internal market,” says Sehnaoui. “For instance, we are working on optimising our retail network coverage in Lebanon as new residential and commercial areas develop.”

The bank is currently keeping a watch on growth opportunities in Europe, in particular in the business of private banking and asset management. “We believe that there is room to develop cross-business between European investors and the Arab world, as well as between Arab investors and European markets,” says Sehnaoui. “SGBL’s ambition is to be such a matching platform for opportunities to meet and materialise.”

For the time being, SGBL has sizeable banking subsidiaries in both Jordan and Cyprus, and is currently working on strengthening its position in both markets. Jordan, for instance, is a burgeoning banking market that offers, aside from its domestic market, a way into the promising Iraqi market.

“As our banking business lines cover all of retail, SME and corporate, private banking and investment banking, our strategy is to continuously upgrade our offerings so as to answer the market’s needs, and better yet, create demand,” says Sehnaoui. “This approach underlies our business development initiatives both in Lebanon and abroad. It also encompasses SGBL’s non-banking business lines, one of which is insurance, which we are actively seeking to grow beyond Lebanese borders, in an area of the world that is severely under-insured.”