Shadow banking is
still small in Lebanon

Awareness is needed for a sound financial system

Shadow banking is a system in which financial intermediaries outside the banking sector are involved in facilitating credits to clients, and whose members are not subject to regulatory oversight. It is still limited in Lebanon, but banking authorities are warning against its risks.

Shadow banking intermediaries are private entities that provide loans and operate outside the mainstream financial sector, as they are not regulated by public authorities. “Shadow banking in Lebanon is restricted to some activities and services, which cannot be supervised by regulators like the Central Bank (BDL) or the capital Markets Authority (CMA), said Joseph Torbey, Chairman of the World Union of Arab Bankers (WUAB). “However, we need to raise more awareness to ensure the stability of a sound financial system,” he said.

Shadow banking flourished worldwide after the financial crisis, through hedge funds, private equity firms, venture capital firms, finance companies and brokers. The size of this sector is estimated to exceed $70 trillion, worldwide, according to the International Monetary Fund (IMF).

“No estimates yet about the size of this sector in Lebanon, but we cannot ignore its risks,” said Torbey. “Incubators, private equity firms, or venture capital firms are licensed and supervised by authorities, thus no fear from their activities,” he said.

Concerns arise from financial intermediaries active in shadow banking that may be officially licensed by local authorities and therefore operating legally or unlicensed and therefore illegal, according to Wissam Fatouh, Secretary General of Union of Arab Banks.

“The problem is that the source of these funds provided as loans is unknown in the absence of any regulatory supervision,” he said. “Loans are also provided without any good risk management related to the client, unlike the bank that has a risk management policy and coordinates with regulators about credit market size, interest rates, and other issues,” he said. Loans are diversified including, housing loans, personal or business loans, according to Fatouh. “A mismanagement of housing loans by such institutions may lead to a crisis in the real estate sector and later in the economy as a whole,” he said.

If shadow banking is not controlled, it may bring many risks. “It may affect the size of lending in markets, which would increase fluctuations of the economic cycle,” said Torbey. “In time of economic prosperity, shadow banking may increase the supply of loans, and thus increase liquidity which increases the price of assets. In time of economic slowdown, shadow banking may reduce the supply of lending and decrease demand on assets along with the lack of confidence of investors,” he said.

However, if properly implemented under the supervision of government regulators, shadow banking could be beneficial to the economy as an alternative to traditional lending and could support the economy.