Lebanon’s “Gap Law”: A Step Towards Restoring Financial Stability
After enduring one of the most severe financial crises globally for six years, Lebanon’s government has taken a significant step by approving a draft law aimed at facilitating the return of depositor funds. The financial upheaval began in 2019 when the Lebanese Lira started to plummet, leading banks to restrict access to deposits. Now, with the proposed “gap law,” there is hope for depositors to recover some of their lost assets.
Understanding the “Gap Law”
The “gap law,” pending approval from the Prime Minister and the President before being debated in parliament, comes as a crucial move in addressing the dire financial situation in Lebanon. Here’s a closer look.
Benefits of the Law
One of the most positive aspects of the law is that it allows depositors to reclaim a portion of their funds. Those who have deposits of up to $100,000 are expected to receive reimbursement within four years, a marked improvement over previous proposals that would have stretched repayments over more than a decade. However, earlier plans proposed by the former Prime Minister Hassan Diab’s government indicated that depositors could have received restitution for amounts up to $500,000.
“This was probably the biggest lost opportunity; it was done to protect the banks,” stated Fouad Debs, a lawyer and member of the Depositors Union.
Additionally, the law is set to include a comprehensive financial audit. Prime Minister Nawaf Salam highlighted that this forensic review would require banks to clarify all their operations, including dividends and executive bonuses. Debs emphasized the importance of an audit, citing discrepancies between bank statements and government reports.
Concerns Regarding the Law
Despite its merits, the draft law has significant drawbacks. The $100,000 reimbursement cap applies per depositor rather than per account. This means individuals with multiple accounts exceeding the cap will only receive $100,000 back in cash, while any excess will be compensated through bonds issued by the Central Bank.
Who Benefits, Who Suffers?
The current iteration of the draft law primarily favors bankers, their institutions, and the politicians allied with them, while placing much of the financial burden on the state. Banks are only required to cover 40% of the withdrawals, even though they played a substantial role in the financial crisis.
Despite some improvements, bankers are actively campaigning and lobbying parliament to make the law more favorable to them. Critics argue that banks should be held to a higher financial standard given their critical role in creating the crisis. “Depositors should be last on the list to have to pay,” Debs remarked.
The State’s Financial Obligation
The state is expected to fill the gap between what the banks owe depositors and what the Lebanese financial system can actually pay. Current estimates suggest a staggering $70 billion deficit.
Bankers’ Stance on Accountability
Bankers have shifted the responsibility onto the state, claiming they entrusted funds to the Central Bank, which then mismanaged them. Critics contend that many banks circumvented depositor consent when placing funds with the Central Bank, benefiting significantly in the process. “They put all their eggs in the same basket … and the banks knew this very well,” Debs added.
Potential Solutions and Challenges
Should the law pass, public funds will effectively be used to clear debts to depositors, with any remaining balances converted into bonds backed by state assets, including Lebanon’s gold reserves. This raises concerns among critics who argue that existing bonds were sold to foreign investors, meaning state assets might be used to reimburse large depositors instead of aiding the general populace.
The IMF’s Perspective
Interestingly, the International Monetary Fund (IMF), typically associated with austerity measures, appears aligned with public sentiment on this issue. “The IMF is questioning how depositors can be made to pay before the bankers,” Debs noted, characterizing the situation as indicative of the greed prevalent among Lebanon’s ruling elites.
Conclusion
Lebanon’s “gap law” represents a critical, albeit challenging, step toward reclaiming lost depositor funds amid a prolonged financial crisis. While it offers reassurance to some, many remain wary of the implications for broader accountability and long-term financial stability.
- The “gap law” could facilitate partial reimbursement of funds for depositors.
- Individuals with deposits up to $100,000 may receive their money back within four years.
- The state may bear a significant financial burden due to the estimated $70 billion shortfall.
- Critics demand greater accountability from banks and their stakeholders concerning the crisis.