With confidence restricted to private sector, banks ought to lead the way

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There is no dispute over whether Lebanon has been cursed with the worst political leadership ever known to mankind or not.

by Mohammad Ibrahim Fheili -Source: Annahar

In this Friday, Aug. 7, 2020 file photo, people remove debris from a house damaged by the Aug. 4 explosion that hit the seaport of Beirut, Lebanon. (AP Photo)

If the crisis which followed the August 4th blast in the seaport of Beirut proved anything, it proved that the private sector of Lebanon, individual households and firms, have a million times the ethics, strength, endurance and determination their own government has.

There is no dispute over whether Lebanon has been cursed with the worst political leadership ever known to mankind or not. However, you begin clocking corruption depending on who you support. Some start as early as 1990, when others start later on in 2005. Does it really matter?! No, because today, in 2020, they all are guilty as charged: opportunists, corrupted, thieves who neglect Lebanon and its people. They all have done enough damage; they all must be held accountable; and they all must be brought to justice for what they did not do. Yes, I worry more about what our shadows of statesmen did not do than what they did; they did not serve and protect Lebanon!

Their lack of action left the country and its citizens in total despair. However, there must be a light at the end of this dark tunnel! As the country battles a political impasse, there is much the private sector can do to get up, dust off, and move forward. The private sector has done wonders in the absence of any government interventions. In fact, in most countries, governments bail out the private sector, except in Lebanon the private sector has always come to the rescue when the government is in trouble. The most productive economic private sector is the Banking Sector. Banks operating in Lebanon cannot sit helplessly and wait for things to happen; they need to make things happen. They have done enough damage with their silence!

So much needs to be done! If we ever hope for a healthy economic recovery in Lebanon, we need a system which we can trust and allows us to warehouse our surpluses of funds and finance our spending deficits. That is, we need a banking system we can trust; not this or that bank! No one in his/her right mind would want to keep surpluses of funds in a safe box at home, nor anyone wants to step over to his/her neighbor or relative to borrow to finance a spending deficit. Therefore, banks need to focus on two main things:

 

  1. Restore trust because only if and when households trust banks, banks will have their money,
  2. Secure the operational capacity to serve the economy, and organizational resilience since Lebanon is overwhelmed with crisis.

Banks operating in Lebanon have always been adequately capitalized; so claim local regulators! However, the noted adequacy turned obsolete with:

✔ the government’s disorderly default and how this irresponsible action echoed through the local economy affecting mostly financial institutions,

✔ the political impasse which caused a delay in the much needed rescue plan and rendered negotiation with the International Monetary Fund (IMF) fruitless,

✔ the COVID19 pandemic (more of an endemic now) which forced a shutdown of two third of the local economy, and

✔ the Beirut’s blast – the fourth largest known to mankind – which topped it all!

All of these factors literally crippled the banking sector in Lebanon. Financial institutions, big and small, indiscriminately felt helpless in front of their clients’ heavy demands – on the asset side, banks experienced serious delinquencies in the repayment of loans, and alarming increase in default due to fast deterioration in credit risk circumstances as a result of negative shocks to both aggregate demand and supply. On the liability side, banks confronted high and volatile demands for foreign currency cash withdrawals which has been nothing short of a total run on deposits. As a result, no bank can be considered adequately capitalized today, and banks recapitalization is no longer optional; it is a prerequisite for survivability and sustainability of any financial institution! The public at large and policy makers are not, and must not, be concerned about the health of any one financial institution. However, the concerns of the public can be summed up in one item which is no loss of deposit; and policy makers must work on finding ways to secure smooth, by choice or by force, mergers and/or acquisitions, when and if needed, between two or more financial institutions.

Banking industry recapitalization is necessary, but not sufficient for a healthy recovery of the system. To date, there are no signs that banks will be getting any help from a failed government, and I do sincerely hope bankers are not expecting it, especially after the slap in the face they received with the irresponsible disorderly default in March of 2020. Therefore, the plan to recapitalize will have to be designed such that they, banks, are doing it on their own! With that in mind, adequate recapitalization of the industry requires:

  1. First, an accurate assessment of the losses sustained by each financial institution, and how much of these losses can be immediately absorbed by the existing and ready capital. This task must have been already completed by any responsible bank, and it only makes sense when it is updated daily because this is how fast credit risk circumstances have been changing.
  2. Second, how much capital is needed to strengthen the institution enough to carry on with its strategic objectives, and how much capital can be immediately raised! One very important strategic objective should be to seriously explore the possibility of mergers and acquisitions (i.e., acquire or be acquired) to boost the capacity of the entire banking sector so it can serve its raison d’etre. This may not be easy since bankers are too stubborn to let go and accept being acquired and voted out of the sector. In fact, it is that ego which is responsible for the mess we’re in today. Here there is an important role for the regulatory authority to play. There are no endangered species of banks; weak banks must not be protected and, equally critical and important, no bank is too big to fail and let go of as long as depositors’ funds are protected.

After all this is done, it does not matter how many banks are left, or how many employees lost their jobs as a result; what matters is how good are the banks that survived the crisis, and will they be able to help Lebanon move forward!

Over and above the drive to adequately capitalize, banks should agree to a course of self-imposed corrective actions. No one knows a bank’s true and evolving risks more than its own management. Banks ought to, sooner rather than later, embark on the following major reform actions:

  • Accurately assess the true volume of non-performing and fast decaying assets. Ask: what went wrong? Where did we go wrong? If there are no escaping losses, how can we improve collections, and minimize losses?
  • Ensure proper and timely identification and assessment of all risks. After what banks have been through in the very recent past, the emphasis should be on effective risk management; and this is where the bulk of resources ought to be deployed. We all agree that bankers have been depending on the regulator to size their risks; and they have been content with compliance as a proxy for risk management. That is not healthy banking!
  • Design an effective communication strategy to put clients’ concerns at ease, and minimize the extent of their dissatisfaction. An effective communication strategy helps the bank reduce reputational risk. There is nothing that could be more relevant and more urgent nowadays than to restore trust.
  • Freeze the payment of bonuses and dividends until capital is adequately restored. Capital must be adequate enough to absorb mounting losses, to guard the institution against market volatility, and support strategic initiatives.
  • Consolidate, downsize, and/or merge! What is important at this juncture is the health of the financial sector, and not the health of any one particular financial institution.
  • Reassess the capacity of key management positions to deliver. This includes Corporate Banking, Chief Financial Officer, Chief Risk Officer, Treasury, Chief Internal Audit, and Branch Network. Retain only those who are capable, productive, dependable and deserving.
  • Reassess the Composition of the Board of Directors and the competencies of its sitting members. The capacity of each member of the board to deliver as expected and required must be subjected to performance evaluation. Retain only those who ethically serve and are deserving,
  • Limit the period of engagement between the financial institution and external auditors to no more than six-year term subject to annual evaluation & assessment.
  • Cleanse your institution from all political contamination, and detach from dependency on politically exposed persons.

And I am sure that there must be much more to be done.

Being preoccupied with the supply of fresh funds, frustrated with the official rates of exchange, or convinced with the need to wait for the Central Bank and/or the government to act will only push banks deeper into hell hole! The time to act has already passed, and the clock is ticking. There is much more to healthy banking than just recapitalization and the extra fresh fund. For you, the Banker, TRUST is all you need to work for and have; everything else shall follow! Hundreds of millions of dollars will be channeled to Lebanon’s NGOs and private sector entities to financially assist Lebanese after the Beirut blast. The obvious reluctance by international doors to hand the fund over to the government of Lebanon is clearly attributed to the total loss of trust in the public sector. Therefore, trust is essential and your failure to plan to restore that trust is in itself a plan for failure!

There is little doubt that 2020 will not be the most financially rewarding year for many bankers. With the right perspective, however, it just might turn out to be one of their most personally rewarding. Under normal circumstances bankers see their customers during some of their best and most challenging days. Front-line bankers empathetically assist customers when they are confused or distressed. Could you just imagine the reward if you can go back to doing all that especially at these hard and challenging times! ACT NOW…

Mohammad Ibrahim Fheili is a Risk, Capacity Building, and Organizational Transformation Specialist

 

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