TBY talks to Saad Azhari, Chairman and General Manager of BLOM Bank, on the banking sector both at home and abroad, and central bank policy settings.
TBY How has the Lebanese banking sector been able to transfer its success in the domestic market to the international sphere?
SAAD AZHARI The Lebanese banking system is no stranger to international competition, having had foreign and Arab banks in its midst since before the country’s inception. This proved to be a valuable learning experience for Lebanon’s domestic banks, an experience that was augmented by the lessons learned operating under tough political, economic, and security conditions during the Lebanese civil war of 1975-1991, and which taught Lebanese banks the virtues of being cautious and conservative. After the end of the war, Lebanese banks did not stand still. They first developed their services to surpass those of strictly commercial banking to areas encompassing private investment and Islamic banking, in addition to asset management, brokerage, and insurance services. Secondly, they embarked a few years ago on a process of foreign expansion, especially in regional markets. Given the operating background and the increasing sophistication of Lebanese banks, this process proved to be highly successful, made easier by the fact that Lebanese banks could replicate the success they have had in their domestic market to nearby markets with a similar culture and language. This certainly has been true of BLOM Bank, which is the leader in retail banking in Lebanon, and now is the number one bank in car loans in Jordan and is among the top retail banks in Syria and Egypt. BLOM Bank also has had tremendous success in asset management, having launched mutual funds in Lebanon, and then in Egypt and Jordan, and soon in Saudi Arabia. To note, BLOM Bank currently operates in 12 countries—Lebanon, Syria, Egypt, Jordan, the UAE, Qatar, Saudi Arabia, France, Switzerland, England, Cyprus, and Romania—providing universal banking services through more than 155 banking and financial units in these countries. Other Lebanese banks have had similar experiences. In that regard, the major banks in Lebanon have developed enough to not only be successful in the local market, but also to move their success to nearby markets.
Do you think that Beirut is slowly re-evolving into a financial capital for the Middle East and Mediterranean region?
It is difficult to go as far as to say that it is becoming a major financial capital right now, as certain security and stability issues remain. The banks have, yes, been successful in going abroad, and the system here has definitely proven to be strong and resilient, but challenges remain. When the political and security situations stabilize, I believe Beirut can regain its role as a major center in the region.
What is your assessment of the policy settings of the Banque du Liban (BDL), which have been labeled as highly conservative?
I think the line the BDL is taking is right, and it has to be conservative. It has kept the Lebanese banking system immune from the international financial crisis by prohibiting investments in complex, “highly rated,” yet highly risky investments. It has also kept it well capitalized, liquid, and with little leverage. Although Lebanese banks operating abroad follow the regulations of their host countries’ central banks, they have largely adopted the conservative strategies nurtured by BDL regulations, which proved very effective in sparing Lebanese banks the economic upheavals seen in places like the UAE and the current political upheavals in Syria and Egypt. BDL regulations have also enabled Lebanon to avoid a real estate bubble. This is because banks cannot provide credit above 60% of the value of a project, with 40% demanded from shareholders. At BLOM Bank we rarely provide more than 50%. This is to protect the bank from downturns and against becoming over-leveraged. To sum up, the prudence of BDL regulations put in place have really proven to be beneficial in protecting the banking system, and we are lucky to be operating within this environment. This banking management culture has really helped. In addition, there is a strong level of coordination between the BDL and the Association of Banks in Lebanon. Before regulations are issued, they are sent to the Association of Banks for review, and we can suggest changes. In addition to strong regulations from the BDL, we also undergo monitoring from the Banking Control Commission (BCC). Monitoring occurs onsite and offsite, and reports are also submitted. There are also regular high-level meetings between chairmen, general managers, and BCC officers regarding our strategies and plans.
What levels of growth have been observed in the mortgage sector?
Housing loans have grown considerably, increasing by 40% in 2010, and currently are close to $4 billion out of a total loan portfolio of $36.8 billion at Lebanese banks. The mortgage sector has been helped by BDL directives that exempt banks from keeping required reserves equal in amount to new loans extended in Lebanese pounds (100% of required reserves in the case of subsidized loans, 60% otherwise). In fact, the exemption relates to all new loans extended to productive sectors in the economy (industry, agriculture, tourism, education, and the environment), not just housing—a policy that has helped credit provided to the private sector to increase by an average of more than 20% in the last two years.
There has been an incredible amount of capital inflows over the last few years. What do you do with this excess liquidity?
It is a way to encourage and grow the economy. For the past few years, there have been hardly any increases in government spending in Lebanon, since that would cause deficits to increase further and debts to spiral. In a way, the economy grew strongly over 2008-2010 at about 8% annually mostly because of increases in consumer and private investment spending powered by the available liquidity, unlike in other countries, where most of the growth came from fiscal stimulus.
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