The impact of COVID-19 on the banking industry in Lebanon

04/23/2020

COVID-19 is nowhere near vanishing as the world is still trying to figure out its extent of threat, causing even further disruptions by the minute on all day to day operations and industries, one of which includes our finances and the banking industry. Albeit Lebanon has been going through major economic downfalls, COVID-19’s appearance has not made it easier, rather even more challenging. With the coronavirus contributing to the country’s recession, this article will focus on discussing the challenges that COVID-19 has imposed on the Lebanese financial sector as well as recommendations that should be taken into consideration.

Here are a few instances on how COVID-19 has impacted or will impact the banking sector globally:

  • Lower income as business and consumer transactions decrease;
  • As stock prices decrease, financial sector’s both profits and stability become critical;
  • A negative liquidity impact since governments will be faced with financial deficits, thus less liquidity;
  • As people fear visiting the bank, utilization of several bank branches will drop leading in fewer transactions as well;
  • Job losses with all revenues being affected;
  • The need to convert to cash preserve capital;
  • Delayed payments form customers as all sectors are affected, reducing demand;
  • Mortgage plans impacted;
  • Less money spent on cards and personal loans;
  • Central Banks lower interest rate which affect interest margins.[1]

To limit the economic impact of the pandemic on Lebanon as much as possible, here is a list of fiscal measures that the Lebanese government have announced to border its implications:

  • The Lebanese government has established a fund in the name of ‘national solidarity’. The purpose of this fund is to receive any financial contributions in the form of donations.
  • The Ministry of Finance has declared that all deadlines linked to the payment of fees and/or taxes shall be extended.
  • In collaboration with the following Ministries: finance, economy, defense, information, agriculture, labor and interior, the Ministry of social affairs has begun the enactment of a plan to financially assist families in Lebanon who have been highly affected by the spread of the coronavirus.[2]

With respect to monetary and macro-financial issues, the Central Bank of Lebanon (BDL) has issued regulations as well such as:

Circular 547 has been issued by the Central Bank of Lebanon stipulates that those who already encompass credit facilities but incapable of meeting their obligations such as expenses due in the months of March, April and May of 2020 (which are the months the most effected by COVID-19) shall be granted an extension of five-year zero percent interest rate loans. In other words, Lebanese banks shall re-engineering their loans to facilitate payment going forth and increase loan period without increasing interest. The Lebanese Central Bank shall cover the bank’s exposure to the loss of revenue from interest and for exposing themselves to additional credit risk.[3]

Recommendations

Having stated all possible scenarios that the banking sector is or may undergo amid COVID-19, here are a few steps that the banking industry should consider in order to ensure a brighter future:

  • Prioritize the industries that are the most affected by the crisis in order to make proper risk decisions. In times of crisis, banks are obliged to make quick and responsive decisions which may sometimes lead to vulnerability. Therefore, using a prioritizing system to identify and monitor data more efficiently will be of great help to the banking sector and the economy as a whole-This process is also called ‘stress test’.[4]
  • It would also be helpful for banks to shift their thinking to a hypothetical type of thinking which would involve the analysis of the worst-case scenario that could take place in order to understand how to deal with such a hit, such as the coronavirus.
  • Building macroeconomics scenarios is also a helpful attitude that banks should adapt, however macroeconomic scenarios strictly around the virus and not just a general scenario which may or may not apply to the current situation. Measures should be developed accordingly to the specific problem.
  • It is crucial for banks to observe their performance based on models that are already existent. However, in certain situations or sudden crisis, some models may not be as effective and it is important for banks to realize that the models used to analyze performance fits best with the crisis.[5]

 

 

By: Lana Fadel

Source picture: https://www.freepik.com/free-vector/loans-isometric-flowchart-composition-with-isolated-banking-equipment-images-electronics-money-pictograms-with-text-captions_6850224.htm#page=1&query=banking%20industry&position=32

 

 

 

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