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Lebanon’s Banking SectorLebanon’s Banking Sector“Turkey Presentation”“Turkey Presentation”

Dr. Muhammad Baasiri Dr. Muhammad Baasiri Vice-Governor of the Banque du Vice-Governor of the Banque du

LibanLiban

Turkey Turkey March 29 - 30, 2010March 29 - 30, 2010

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IndexIndex

• Why Lebanon?Why Lebanon?• Lebanese Banking SectorLebanese Banking Sector• Role of Banque Du Liban (BDL)Role of Banque Du Liban (BDL)• Market Access to Foreign BanksMarket Access to Foreign Banks• How to establish a foreign commercial Bank’s branch in How to establish a foreign commercial Bank’s branch in

Lebanon?Lebanon?• What are the procedures for opening a new branch?What are the procedures for opening a new branch?• What are the Commitments Subsequent to the opening of What are the Commitments Subsequent to the opening of

the Foreign Bank Branch?the Foreign Bank Branch?• What are the restrictions imposed on the foreign bank’s What are the restrictions imposed on the foreign bank’s

branch?branch?• Free Acquisition and Trade in Bank Shares in LebanonFree Acquisition and Trade in Bank Shares in Lebanon• Opening of Foreign Banks’ Representative Offices in Opening of Foreign Banks’ Representative Offices in

LebanonLebanon• Lebanon and Turkey Banking RelationsLebanon and Turkey Banking Relations• Success of the Lebanese Financial and Banking SectorSuccess of the Lebanese Financial and Banking Sector• Success of the Lebanese EconomySuccess of the Lebanese Economy

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Why Lebanon? (1)Why Lebanon? (1)

There are at least 10 reasons to There are at least 10 reasons to invest in Lebanon:invest in Lebanon:

1.1. Strategic Location Strategic Location

2.2. Market-oriented economyMarket-oriented economy

3.3. Liberal financial environmentLiberal financial environment

4.4. Banking SecrecyBanking Secrecy

5.5. Favorable taxation & fiscal Favorable taxation & fiscal incentivesincentives

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Why Lebanon? (2)Why Lebanon? (2)

6.6. Non-discriminatory legal frameworkNon-discriminatory legal framework7.7. Highly qualified and competent Highly qualified and competent

Human CapitalHuman Capital8.8. Low labor costLow labor cost9.9. Strong international networkStrong international network10.10. High tech infrastructure for servicesHigh tech infrastructure for services

All these factors provide investors with the best environment for their businesses to flourish

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Lebanese Banking SectorLebanese Banking Sector

Lebanon is reputed to be the leading Lebanon is reputed to be the leading banking and business center of the banking and business center of the MENA region due to its:MENA region due to its:

Advanced and well structured banking Advanced and well structured banking legal frameworklegal framework

Financially sound and stable banking Financially sound and stable banking industryindustry

Secure financial environmentSecure financial environment Banking Secrecy LawBanking Secrecy Law Corporate governance infrastructureCorporate governance infrastructure

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The Role of BDL in Promoting and The Role of BDL in Promoting and Safeguarding the Lebanese Currency Safeguarding the Lebanese Currency

and the Banking Sectorand the Banking Sector The central bank is mainly concerned with the The central bank is mainly concerned with the

safeguard of the currency as a fundamental safeguard of the currency as a fundamental guarantee for a sustained social and economic guarantee for a sustained social and economic growth. Its basic functions include: growth. Its basic functions include:

Safeguarding a sound Lebanese currency Safeguarding a sound Lebanese currency Safeguarding economic stabilitySafeguarding economic stability Developing the monetary and financial marketsDeveloping the monetary and financial markets Safeguarding the basic structure and the soundness Safeguarding the basic structure and the soundness

of the banking system by safeguarding deposits and of the banking system by safeguarding deposits and preventing defaulting banks from falling down.preventing defaulting banks from falling down.

Banque du Liban (BDL) encourages competition in the Banque du Liban (BDL) encourages competition in the banking sectorbanking sector

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Table: Total Number of Banks in Table: Total Number of Banks in LebanonLebanon

20052005 20062006 20072007 20082008 20092009

Commercial BanksCommercial Banks 5454 5454 5454 4848 4949

Foreign BanksForeign Banks 1010 1010 1010 88 99

Islamic BanksIslamic Banks 11 33 44 44 44

Investment BanksInvestment Banks 1010 99 1212 1212 1212

Total Number of Banks Total Number of Banks in Lebanonin Lebanon

6464 6363 6666 6464 6565

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Market Access to Foreign BanksMarket Access to Foreign Banks

The Lebanese Banking Sector is open to foreigners, The Lebanese Banking Sector is open to foreigners, irrespective of whether authorities in the foreign irrespective of whether authorities in the foreign country allow the establishment of Lebanese banks or country allow the establishment of Lebanese banks or not. Thus, Lebanon, does not apply any reciprocity not. Thus, Lebanon, does not apply any reciprocity treatment (since 1991)treatment (since 1991)

A foreign bank can have a presence in Lebanon under A foreign bank can have a presence in Lebanon under one of two forms:one of two forms:

1- Affiliated bank; Lebanese bank under a joint-stock 1- Affiliated bank; Lebanese bank under a joint-stock company form with foreign ownership of shares. The company form with foreign ownership of shares. The majority of the board members must be of Lebanese majority of the board members must be of Lebanese nationality, but the chairman can be non-Lebanese.nationality, but the chairman can be non-Lebanese.

2- Branch: Branch of a foreign bank which is subject to the 2- Branch: Branch of a foreign bank which is subject to the same regulations imposed on a Lebanese bank.same regulations imposed on a Lebanese bank.

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What are the procedures for What are the procedures for opening a Foreign Commercial opening a Foreign Commercial

Bank Branch? (1)Bank Branch? (1)The establishment procedures of a foreign bank’s new branch in Lebanon are The establishment procedures of a foreign bank’s new branch in Lebanon are simple and not complicated, they include the followingsimple and not complicated, they include the following::

a) License Applicationa) License Application

The establishment procedures are initiated by an application submitted by the The establishment procedures are initiated by an application submitted by the concerned and delegated authorities from the administration of the foreign concerned and delegated authorities from the administration of the foreign bank to the chairman of the Central Council (Governor), requesting a license bank to the chairman of the Central Council (Governor), requesting a license for opening a branch in Lebanon that will engage in public banking activities for opening a branch in Lebanon that will engage in public banking activities according to the provisions of article 121 of Code of money and creditaccording to the provisions of article 121 of Code of money and credit

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What are the procedures for What are the procedures for opening a new branch? (2)opening a new branch? (2)

b) Documents to be enclosed with the license b) Documents to be enclosed with the license applicationapplication

Some documents including foreign bank’s foreign bank’s bylaws, and its registration certificate in the bylaws, and its registration certificate in the home countryhome country should be submitted, in triplicate, along with the license application, duly certified by the Lebanese embassy in the country of the foreign bank and by the Lebanese ministry of foreign affairs

c) Approval of the Central Council of the c) Approval of the Central Council of the BDLBDL

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What are the procedures for What are the procedures for opening a new branch? (3)opening a new branch? (3)

d) Payment of the capital of 10bn L.L d) Payment of the capital of 10bn L.L (around 6.6 million US $)(around 6.6 million US $)

e) Registration at the Ministry of Economy e) Registration at the Ministry of Economy and Tradeand Trade

f) Registration at the commercial Registryf) Registration at the commercial Registry

g) Registration on the List of Banksg) Registration on the List of Banks

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What are the Commitments What are the Commitments Subsequent to the opening of the Subsequent to the opening of the

Foreign Bank BranchForeign Bank Branch??The person in charge of managing the branch should:The person in charge of managing the branch should:

Register each amendment to the bank's bylaws, at Register each amendment to the bank's bylaws, at the Ministry of Economy and Trade, the office of the Ministry of Economy and Trade, the office of Commercial Registry in Beirut, and the Banque du Commercial Registry in Beirut, and the Banque du Liban. Liban.

Submit to the Banque du Liban documents that Submit to the Banque du Liban documents that prove registration of this amendment.prove registration of this amendment.

Submit to the Banque du Liban quarterly and annual Submit to the Banque du Liban quarterly and annual

reports and any special reports issued by the head reports and any special reports issued by the head office of the foreign bank.office of the foreign bank.

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What are the prohibitions What are the prohibitions imposed on the foreign imposed on the foreign

bank’s branchbank’s branch??The foreign bank branch is prohibited from:The foreign bank branch is prohibited from:

Carrying out industrial or commercial Carrying out industrial or commercial activities or any activity other than banking.activities or any activity other than banking.

Participating, in any form, in industrial, Participating, in any form, in industrial, commercial, or agricultural institutions or commercial, or agricultural institutions or any other institution except within the limits any other institution except within the limits of its private funds.of its private funds.

Carrying out, on its behalf, any operation on Carrying out, on its behalf, any operation on derivatives.derivatives.

Reducing the capital assigned for its Reducing the capital assigned for its investment, or buying back any part of it.investment, or buying back any part of it.

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Free Acquisition and Trade in Free Acquisition and Trade in Bank Shares in LebanonBank Shares in Lebanon

Law No. 308 of April 2001, on Issuing and Law No. 308 of April 2001, on Issuing and Trading Bank Shares, does not discriminate Trading Bank Shares, does not discriminate between Lebanese and foreigners with respect to between Lebanese and foreigners with respect to the acquisition and trading of bank shares.the acquisition and trading of bank shares.

No pre-approval is required for the subscription No pre-approval is required for the subscription

or trading in shares, except in the following or trading in shares, except in the following cases:cases:

When the subscriber acquires directly or through When the subscriber acquires directly or through a fiduciary contract 5% of the total shares of the a fiduciary contract 5% of the total shares of the bank or of voting rights, whichever is higher.bank or of voting rights, whichever is higher.

When the transferor or transferee is a member or When the transferor or transferee is a member or member-elect of the Board, no matter what is the member-elect of the Board, no matter what is the number of transferred sharesnumber of transferred shares

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Opening of Foreign Banks’ Opening of Foreign Banks’ Representative Offices in Lebanon Representative Offices in Lebanon

(1)(1)1- Authorized activities1- Authorized activities

The activities of a foreign bank’s representative The activities of a foreign bank’s representative office in Lebanon consist of:office in Lebanon consist of:

Establishing public relations and contacts with Establishing public relations and contacts with other banks, financial institutions, companies, other banks, financial institutions, companies, organizations, public and private institutions, organizations, public and private institutions, with a view to collect all kinds of information with a view to collect all kinds of information that may be useful to the bank’s head office. that may be useful to the bank’s head office.

Undertaking general studies on Lebanon and Undertaking general studies on Lebanon and investorsinvestors

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Opening of Foreign Banks’ Opening of Foreign Banks’ Representative Offices in Lebanon Representative Offices in Lebanon

(2)(2)2- Prohibited activities2- Prohibited activitiesThe representative office is strictly prohibited The representative office is strictly prohibited

from:from:1.1. Dealing with individualsDealing with individuals2.2. Carrying out banking or commercial Carrying out banking or commercial

operations, particularly opening credit operations, particularly opening credit lines, granting credits, receiving deposits in lines, granting credits, receiving deposits in the name or on behalf of the bank, the name or on behalf of the bank, discounting bills of exchange, drafts, discounting bills of exchange, drafts, withdrawals, or any other debt instrument.withdrawals, or any other debt instrument.

3.3. Accepting and signing agreements and Accepting and signing agreements and commitments on behalf of the bank or a commitments on behalf of the bank or a bank’s subsidiary company.bank’s subsidiary company.

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Lebanon and Turkey Lebanon and Turkey Banking Relations (1)Banking Relations (1)

Reinforcing and developing the already-Reinforcing and developing the already-existing banking cooperation between existing banking cooperation between Lebanon and Turkey in many fields, such as Lebanon and Turkey in many fields, such as training, banking supervision, the training, banking supervision, the establishment of a joint payment system, establishment of a joint payment system, control and surveillance.control and surveillance.

Currently only one Lebanese Bank (Bank-Currently only one Lebanese Bank (Bank-Med) has shares in a Turkish bank (T.B. Med) has shares in a Turkish bank (T.B. TURKLAND BANK). There are no branches TURKLAND BANK). There are no branches for Turkish Banks in Lebanon.for Turkish Banks in Lebanon.

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Lebanon and Turkey Lebanon and Turkey Banking Relations (2)Banking Relations (2)

Total Bilateral Trade between Lebanon and Total Bilateral Trade between Lebanon and Turkey reached around 800 Million US $ in Turkey reached around 800 Million US $ in 2009 (Lebanese Imports from Turkey reached 2009 (Lebanese Imports from Turkey reached around 700 million US$ and Exports around 100 around 700 million US$ and Exports around 100 million US $). Bilateral trade is expected to million US $). Bilateral trade is expected to increase after signing the free trade agreement increase after signing the free trade agreement between the two countries.between the two countries.

More than 50,000 Lebanese tourists visited More than 50,000 Lebanese tourists visited Turkey last year, and the number is expected to Turkey last year, and the number is expected to increase in 2010. And it is also expected that increase in 2010. And it is also expected that Turkish tourists visiting Lebanon in 2010 are Turkish tourists visiting Lebanon in 2010 are also going to be more than previous years. (No also going to be more than previous years. (No more visas required)more visas required)

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Success of the Lebanese Financial and Success of the Lebanese Financial and Banking Sector (1)Banking Sector (1)

The Lebanese banking sector has shown The Lebanese banking sector has shown continuous success. The conservative continuous success. The conservative regulation and prudent supervision by the regulation and prudent supervision by the BDL over the last fifteen years largely BDL over the last fifteen years largely insulated the Lebanese Banking System from insulated the Lebanese Banking System from the effects of various crisis including the the effects of various crisis including the global financial crisis. Some of the important global financial crisis. Some of the important policies and measures taken by BDL during policies and measures taken by BDL during the last fifteen years include:the last fifteen years include:

Continuous commitment to the stability of the Continuous commitment to the stability of the Lebanese Pound’s exchange rate against the Lebanese Pound’s exchange rate against the U.S. dollar that played a pivotal role in U.S. dollar that played a pivotal role in maintaining financial and price stability. This maintaining financial and price stability. This stability is crucial for maintaining confidence, stability is crucial for maintaining confidence, achieving economic growth and social achieving economic growth and social stability.stability.

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Success of the Lebanese Financial Success of the Lebanese Financial and Banking Sector (2)and Banking Sector (2)

Regulating structured products and Regulating structured products and derivatives, and forbidding the acquisition of derivatives, and forbidding the acquisition of subprime mortgage debt. subprime mortgage debt.

Tackling the problem of non-performing Tackling the problem of non-performing loans and helping weak banks merging with loans and helping weak banks merging with bigger ones, thus refusing any act that might bigger ones, thus refusing any act that might cause bankruptcies or losses to depositors. cause bankruptcies or losses to depositors.

Maintaining high liquidity levels (Currently Maintaining high liquidity levels (Currently around 30%). Recently in 2008, the BDL set around 30%). Recently in 2008, the BDL set tight ceilings on loans for real estate tight ceilings on loans for real estate projects in order to prevent real estate projects in order to prevent real estate bubble.bubble.

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Success of the Lebanese Banking Success of the Lebanese Banking Sector (3)Sector (3)

Establishing a reliable banking system that strictly Establishing a reliable banking system that strictly abides by international banking and accounting abides by international banking and accounting standards, particularly in terms of capital adequacy, standards, particularly in terms of capital adequacy, good governance, transparency, and the fighting good governance, transparency, and the fighting money laundering and countering financing of money laundering and countering financing of terrorism .terrorism .

Preventing the bankruptcy of any bank even tough it Preventing the bankruptcy of any bank even tough it might be an easy solution, since not only the bank’s might be an easy solution, since not only the bank’s shareholders would be affected, but also its shareholders would be affected, but also its depositors and agents and the banking system as a depositors and agents and the banking system as a whole which will suffer a lack of confidence.whole which will suffer a lack of confidence.

The firm conviction that protecting the economy and The firm conviction that protecting the economy and the market requires a continuous attention and care the market requires a continuous attention and care from the State and the regulatory and supervisory from the State and the regulatory and supervisory bodies, since talking of a free market economy bodies, since talking of a free market economy without any regulations or supervision leads to chaos.without any regulations or supervision leads to chaos.

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Success of the Lebanese Banking Success of the Lebanese Banking Sector (3)Sector (3)

Believing in the independence of banking and Believing in the independence of banking and financial supervisory and regulatory bodies, as financial supervisory and regulatory bodies, as expressly stipulated in the rationale of the Code expressly stipulated in the rationale of the Code of Money and Credit.of Money and Credit.

Banque du Liban has recently issued new Banque du Liban has recently issued new circulars aiming at encouraging lending in circulars aiming at encouraging lending in Lebanese pounds at a lower cost, by setting new Lebanese pounds at a lower cost, by setting new exemptions from obligatory reserves, in order to exemptions from obligatory reserves, in order to finance housing loans, student loans, and finance housing loans, student loans, and finance environmentally friendly projects or any finance environmentally friendly projects or any new investment project. new investment project.

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Success of the Lebanese Success of the Lebanese Banking Sector (4)Banking Sector (4)

The good performance of the Lebanese banking sector in The good performance of the Lebanese banking sector in 2009 can be shown by looking at facts and numbers:2009 can be shown by looking at facts and numbers:

Bank deposits registered an annual growth of more than Bank deposits registered an annual growth of more than 24%, thus exceeding 103 billion dollars at end- 2009, around 24%, thus exceeding 103 billion dollars at end- 2009, around three times of Lebanon’s GDP .three times of Lebanon’s GDP .

The dollarization rate of bank deposits declined from 77.34% The dollarization rate of bank deposits declined from 77.34% at early 2008 to less than 65% at the end of 2009, due to at early 2008 to less than 65% at the end of 2009, due to significant conversions from the dollar into the Lebanese significant conversions from the dollar into the Lebanese pound.pound.

The banking sector continued to provide credit services, The banking sector continued to provide credit services, unlike the contraction tendency that prevailed in numerous unlike the contraction tendency that prevailed in numerous banking institutions in most countries. In fact, bank credits banking institutions in most countries. In fact, bank credits to the private sector in Lebanon rose to USD 30 billion at to the private sector in Lebanon rose to USD 30 billion at end-November 2009, growing by more than 15% since the end-November 2009, growing by more than 15% since the beginning of the year.beginning of the year.

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Success of the Lebanese Success of the Lebanese Banking Sector (5)Banking Sector (5)

Bank’s profits in 2009 grow around 10%Bank’s profits in 2009 grow around 10%

Foreign-currency liquid assets of the Banque du Foreign-currency liquid assets of the Banque du Liban, (excluding gold whose value exceeded 10 Liban, (excluding gold whose value exceeded 10 billion US dollar) rose to USD 29.6 billion by end-billion US dollar) rose to USD 29.6 billion by end-February 2010, a record level sufficient to cover February 2010, a record level sufficient to cover 85% of the money supply in Lebanese pounds. 85% of the money supply in Lebanese pounds. Accordingly, the foreign assets of the Banque du Accordingly, the foreign assets of the Banque du Liban may cover imports for a period of 21 months.Liban may cover imports for a period of 21 months.

Average capital adequacy ratio reached 12%, in Average capital adequacy ratio reached 12%, in compliance with Basle II.compliance with Basle II.

The growing confidence in the local currency The growing confidence in the local currency

generated persistent conversions from the dollar generated persistent conversions from the dollar into the pound, thus boosting the BDL foreign assets into the pound, thus boosting the BDL foreign assets to a new historical high.to a new historical high.

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Success of the Lebanese Economy Success of the Lebanese Economy (1)(1)

There are important indicators that were lately recorded and There are important indicators that were lately recorded and that highlight the confidence generated by the monetary and that highlight the confidence generated by the monetary and banking policies implemented by Lebanon. To name but a few, banking policies implemented by Lebanon. To name but a few, we have:we have:

The achievement of an 8.5% economic growth in 2008, as real The achievement of an 8.5% economic growth in 2008, as real economic growth forecasts for 2009 rose from 4% at the economic growth forecasts for 2009 rose from 4% at the beginning of the year to around 9% now.beginning of the year to around 9% now.

The drop in inflation rate that stood at around 3%, following a The drop in inflation rate that stood at around 3%, following a rise to 8 and 10% in 2008, due to external factors such as rise to 8 and 10% in 2008, due to external factors such as soaring oil and food prices.soaring oil and food prices.

A general decrease in lending rates that reached 5% on A general decrease in lending rates that reached 5% on housing loans and 3% on loans granted to students in higher housing loans and 3% on loans granted to students in higher education institutions.education institutions.

The decline in interest rates on Lebanese Treasury bills and The decline in interest rates on Lebanese Treasury bills and bonds, where yield on the 12-month TBs went down from bonds, where yield on the 12-month TBs went down from 7.53% at early 2009 to around 6% by the end of 2009. 7.53% at early 2009 to around 6% by the end of 2009.

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Success of the Lebanese Success of the Lebanese Economy (2)Economy (2)

Lebanon launched, in December 2009, a successful Lebanon launched, in December 2009, a successful Eurobond issue amounting to USD 500 million, where Eurobond issue amounting to USD 500 million, where subscription requests attained five times the issue subscription requests attained five times the issue global value. The success of this issue stems for the global value. The success of this issue stems for the intensive participation of foreign companies and the intensive participation of foreign companies and the implementation of the lowest interest rates compared implementation of the lowest interest rates compared to previous issues: 5.87% on the five-year portion and to previous issues: 5.87% on the five-year portion and 7% on the 15-year portion. This important issue shows 7% on the 15-year portion. This important issue shows that Lebanese and foreign investors have increased that Lebanese and foreign investors have increased their confidence in Lebanon and the Lebanese their confidence in Lebanon and the Lebanese economy.economy.

Remittances from expatriates recorded US$7bn in Remittances from expatriates recorded US$7bn in 2009, leading to a BOP surplus around US$8bn which 2009, leading to a BOP surplus around US$8bn which is a record number compared to US$3.4bn in 2008. is a record number compared to US$3.4bn in 2008.

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Thank YouThank You