Uncertain path for financial gap law raises pressure on Lebanon’s banks — what’s next?

Report by Bassam Abou Zeid, English adaptation by Karine Keuchkerian

Since the start of the financial crisis, Lebanese officials have repeatedly referenced the “financial gap law.” But what does the law actually mean?

If approved, the law would move depositors closer to recovering at least part of their funds. So why has it not advanced?

The government and the prime minister have been working on it around the clock, hoping to finalize a draft before the end of the year. Once completed, it would be sent to Parliament, where it faces another lengthy process of debate and approval.

According to available information, the International Monetary Fund (IMF) is the main architect of the formula the government is pursuing. The proposal follows 14 drafts submitted to the Fund so far. Its core principle is that the state should not be responsible for covering the financial gap. 

Lebanon has limited resources, and its assets belong to all Lebanese, not only depositors. The IMF also wants assurances that if it lends money to the state, Lebanon will be able to repay it.

In effect, banks would be required to shoulder most of the burden. Banks, however, say they cannot, leaving depositors at risk of absorbing the losses.

For this reason, banks are pushing back against the state and demanding public-sector reforms, which they view as the primary cause of depositors’ losses.

While the central bank says it is contributing part of the funds currently being paid to depositors, banks insist they alone are paying. They also ask how they can continue making payments if the law reduces their capital while requiring them to pay $100,000 to each eligible depositor. 

The total amount needed could reach $22 billion, raising questions about where the funds would come from.

A simple calculation shows that the central bank’s reserves stand at about $11.85 billion as of late November, while banks hold around $5.2 billion abroad. But neither side can use these funds to repay deposits. 

This has prompted banks to suggest liquidating part of Lebanon’s gold reserves. Roughly $10 billion in gains from higher gold prices could then be allocated exclusively to repaying deposits.

These figures point to two conclusions: passing the law will not be easy, and the banking sector may be headed toward significant changes, including the possible emergence of new banks.