Publications & Resources

December 2017

Why are banks being targeted?

(Published by Lebanon Opportunities)
A university student, who is also a researcher, has written a thesis in Paris, under the supervision of the renowned economist Thomas Piketty, about the flagrant income inequality in Lebanon. It is good research which draws our attention to the painful situation of income distribution in the country, characterized by a very high revenue concentration. Around 15 percent of the population earns 57 percent of the overall income, while 50 percent of the population gets ten percent or a little more. The gap widens as more wealth is concentrated in fewer hands. However, the study is not the subject of this article. What sparked this article was its use in a newspaper accompanied by headlines that are completely unrelated to the study, such as ‘The Mini-State of Banks’ and ‘The Reign of Banks’! The newspaper finds it too easy to use the concepts of ‘mini-state’ and ‘reign’, maybe to divert the readers’ attention away from the real mini-state and from those who are effectively ruling the country.

The banking system is being demonized by some who are opportunistically looking for ammunition in the regulations, laws, and executive decisions that were recently issued and that affect the banking sector. There are, for example, those who are eager to overbid and use populist rhetoric such as one clever and informed journalist who is making appearances on talk shows. This journalist waved a piece of paper when discussing taxes imposed on banks, claiming that the ‘Legislation and Consultations Body’ at the Ministry of Justice has issued a ruling in favor of the banks concerning the controversial ministerial executive decision pertaining to Law No. 64/2017. In fact, this piece of information relates to an old subject that is different from the one currently under discussion. It was certainly not the Association of Banks (ABL) that has submitted an opinion request in this regard!

Leaving aside this tired, tendentious media campaign, and going back to the heart of the matter, which consists of the taxes imposed on the banking sector, these levies have become unrealistic and even damaging to the banking sector, the economy, and the entire country. I will point to some facts to illustrate the prejudice that the banks are being subjected to. The proceeds of corporate income tax, computed on the basis of a tax rate of 15 percent, reached LL1,143 billion ($762 million), according to the Ministry of Finance’s data for 2016. The banks’ share in theses proceeds totaled LL776 billion ($517 million), or nearly 68 percent of the total. The contribution of the banking sector to GDP is only six percent, with bank profits accounting for 4.5 percent, and wages of bank employees at 1.5 percent. Isn’t the GDP the result of the proceeds of profits and wages when it is measured using the income approach? The banks are paying their entire tax dues on their profits. Their accounting records are transparent, published in line with sound international accounting rules. They are also subject to the supervision of international audit firms and to local monetary and regulatory authorities. Why should the banks contribute 68 percent of the entire proceeds of corporate tax, many times their share of the combined profit of companies, including sole traders, corporations, and the self-employed? It is inconceivable that these whole combined businesses account for less than 50 percent of the gross national income, or $26 billion. This combined sector is supposed to provide proceeds of approximately LL6,000 billion ($4 billion) to the Treasury. These figures, on one hand, give an idea of the scale of tax evasion in the country, and, on the other hand, demonstrate the failure of the tax administration to fully collect all the taxes owed to the Treasury. This administration finds it easier to overburden the banks because they are more transparent and more compliant with the law, instead of improving supervision and tax collection, and tapping wide-ranging automation introduced by the electronic revolution over the past two decades. The Ministry of Finance, through the decisions it issued to implement the new laws, has imposed on the banking sector tax burdens, that are rare, if not impossible, to find anywhere else in the world, both in terms of type and size, not only in developed countries, but also in emerging and developing countries.

First of all, yields on Treasury Bills were subjected to a tax on interest rates of five percent that has now been raised to seven percent. The tax range was then expanded to include Certificates of Deposits (CODs) in lira and dollar that are issued by the Central Bank (BDL) and subscribed to by the banks. A third tax was also added. This tax, which is globally unprecedented, was imposed on interbank transactions, whether among banks or between them and BDL. The siege on the banking sector is being achieved by an avalanche of taxes which will end up deducting up to 50 percent from their profits when the 17 percent tax on profit is included. The tax on profit is the only valid tax amid this overwhelming torrent of taxation. The profit tax, in its narrow definition, is the only tax that banks the world over pay on their income. Except in Lebanon!

Law No. 64/2017 includes in its 17th article three basic amendments to article No. 51 of law No. 497/2003. The first amendment stipulates that the tax on banks’ interest rates (currently at seven percent) is now considered a charge that is deducted from income, not a tax that is paid in advance and then deducted from the tax on profit. This amendment has resulted in double taxation, the proceeds of which exceeded LL513 billion ($342 million), according to 2017 data. This is the crux of the problem. The second amendment to law No. 64/2017 puts an end to the exemption from tax on the interests of interbank deposits and to the exemption from tax on the interests of the banks’ deposits with BDL. This leads to an additional cutback on the banks’ profit amounting to nearly LL430 billion ($286 million). If we consider that the tax on profit – the only valid and normal tax – will total around LL460 billion ($306 million) in 2017, this means that the overall proceeds from the taxes on the banks comes to LL1,403 billion ($935 million) or 52 percent of the banks’ combined profit!

With the aforementioned quantitative impact, the application of article 17 of law No. 64/2017 results in outcomes that should be underscored due to the serious risks involved. The profitability of the banks’ capital, which currently ranges between ten and 12 percent will regress to five to six percent. What business activity or sector accepts this level of profitability in a high-risk country like Lebanon? Investors will lose the appetite to invest at such low rates of return. This is happening at a time when the banks need to increase their capital in order to remain able to finance the State and the private sector. The banks’ financing, provided to the public and private sectors, currently stands at more than $92 billion. The private sector’s share amounts to $60 billion, which includes subsidized loans of $14.4 billion and housing loans of $13 billion. Lending to the private sector is the only means to spur economic growth under current circumstances, in light of the atrophy in equity investments and the gap in external payments.

These additional unfair and unbalanced taxes on the banks result in losing the transactional feasibility between the banks on one hand and the State and BDL on the other. The banks have placed funds in the Treasury and BDL at returns that take into consideration the cost of deposits as well as the tax burden. Each new legislation should exclude the financial instruments – bonds, CODs, and deposits with BDL – that were placed before the issuance of law No. 64/2017. The initial law that was ratified by Parliament in 2003 exempted the funds deposited with BDL from the tax on interests. That law also exempted Treasury Bills issued prior to its ratification. Some media incorrectly attributed this exemption to a decision made by former Prime Minister FouadSiniora, who was then Minister of Finance. But the truth is that exemption was actually part and parcel of the law itself at the time. This means that the 2003 legislation was more balanced and showed more respect to the legal principles which Lebanon has been applying for decades.

Finally, looking beyond the double taxation issue, bank deposits at BDL, including CODs and other accounts, have their own rationale. They offer liquidity used by the banks to carry out lending operations and ensure the regularity of internal and external means of payment. They represent a bulwark for the exchange rate of the lira and consequently are a major factor of stability when it comes to people’s income. Also, these deposits are an essential tool at the disposal of the Central Bank to manage banking liquidity and to provide liquidity to the economy to shield it from inflation and recession.

Taxes on the banks’ transactions with BDL and on transactions among banks, in other words interbank taxes, are anomalous. They create a huge and complex predicament in the management of the financial system. This approach does not serve the interest of the State and the management of public funds at all. It is feared that this approach to the management of public finance marks the first step in the destruction of a financial system that serves the national economy and has been providing financial stability for several decades. Let each party shoulder its responsibility. The financial situation is ultimately the joint responsibility of the Ministry of Finance, BDL, and the ABL. We hope to move forward with minimal damage. The ABL, in collaboration with the monetary authority, is seeking to protect the banking sector from the persistent pressures and risks that are coming from abroad. It is working tirelessly, intensively, and at a very high cost to achieve this goal. We have relatively achieved, over the past five years, positive and acceptable results. So why are we seeing aggression from some local parties to cause unwarranted damage, as if they were cohorts of the most vicious external parties, or shall we say, the most loathed enemies of Lebanon?