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country report
Lebanon
By Rita Ghanem
Lebanon: Unfulfilled potential
Lebanon first opened its financial market for Islamic finance
in 2004 with the enactment of Law number 575 dated 11 th
February 2004 which established Lebanese Islamic banks.
Though Lebanon was a welcoming market with high growth
potential, Islamic finance has still not witnessed the boom
that it has been witnessing all over the world.
Lebanese Islamic banks still do not hold a significant place in
the domestic banking market. Only five full-fledged Islamic banks
are currently operating, three of which are fully established in
Lebanon- an extremely small number compared to 66 full-fledged
conventional banks. This small proportion is also reflected in the
breadth of their operations. According to the semi-annual data
on the 31 st July 2012, Islamic banking operations accounted
for merely around 0.6% of the total number of loans granted by
Lebanese banks. The most common product by far is Murabaha
which accounts for 86% of all Islamic loans. Further, Sukuk
and Islamic collective schemes are virtually non-existent in the
Lebanese market.
In spite of their scarcity, Islamic banks have been slowly but steadily
growing since their inception in 2004. They have however hit a
standstill in 2012 while still maintaining a positive outlook for 2013.
2012: A standstill
Amid the volatile security situation and political unrest in Lebanon
and its neighbouring countries, in addition to an unfavorable
legal and regulatory climate, Islamic finance in Lebanon is at a
stalemate. The industry continues to struggle behind conventional
banks as it still needs to overcome various legal and financial
impediments.
Islamic banks operating in Lebanon still suffer from excess of
liquidity which burdens their balance sheet with excessive money
costs. Pursuant to article 1 of Law number 575/2004, Islamic
banks have to comply with all the regulations and directives
issued by the Central Bank for both conventional and Islamic
banks including applicable regulations on investing bank liquidity.
These regulations fail to take into consideration the specificities
and requirements of Islamic banks. The products available to
Islamic banks to invest their liquidity are restricted to Shariah
compliant products, yet Islamic banks are still bound by the same
limits on investments and margins imposed on conventional
banks.
Furthermore, the Lebanese legislation still lacks tax incentives
for Islamic finance. Most importantly, the legislation has yet to
address double taxation issues encountered in most Islamic
finance products specifically the real estate registry fees in Ijara
operations. The extra cost incurred due to double taxation is
significantly maximizing the cost gap with conventional banking
operations and preventing Islamic banks in Lebanon from
benefiting from a cost-efficient competitive edge.
The challenges hindering the growth of Islamic banks are not
only external, some are also internal. The Lebanese Islamic
financial market still lacks the sufficient level of knowledge and
understanding of Shariah compliant products. Though the retail
banking consumers in Lebanon are aware of the existence of
Islamic banks, they are still not familiar with the products and
services offered. This has significantly affected Islamic product
development and innovation due to the lack of demand.
All these factors have hampered the ability of Islamic banks to
offer competitive rates and products as compared to conventional
banks. Islamic banks are thus primarily dependant on religiouslydriven
investors and fail to attract the profit-driven local or foreign
investors, specifically investors from GCC countries.
2013: Moving forward
Considering 2012 did not bring any major legal or regulatory
reform, much effort needs to be exerted in 2013 to mainstream
Islamic finance. Islamic banks need to appeal for the enactment
of a law that introduces fiscal stimulus and rebalance tax costs.
They should also lobby for key improvements in the regulatory
environment that would favor Islamic banks and deal with the
issues that they face, especially that of excess liquidity.
Finally, Lebanon has issued a law establishing a capital markets
regulatory authority in 2011 (Law 161 dated 17 th August 2011).
The Capital Markets Authority (CMA) is beginning to take shape
and will be effective in the second quarter of 2013. The CMA’s
first order of business will be to review all the existing laws and
regulations related to the financial market in order to either
amend them or fill in any legal gaps. Hopefully, this process will
include regulating the Sukuk market. This regulation, if enacted,
will encourage Sukuk issuance in Lebanon and boost the place
of Islamic finance within the Lebanese financial market.
In the end, despite all the hurdles, the Lebanese Islamic banking
market possesses great potential to play a pivotal role in the
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Disclaimer: The views and opinions expressed in this article
are those of the individual author and do not reflect the official
policy, opinion or position of any other related person, entity or
institution to which she is affiliated. The material available in this
article is for informational purposes only and not for the purpose
of providing legal advice.
Rita Ghanem is the legal counsel at the Central Bank of Lebanon.
She can be contacted at rghanem@bdl.gov.lb.
32 February 2013