LONDON, 4 April 2006 — Lebanon is the latest country planning to encourage a prosperous Islamic banking industry in its efforts to develop its financial market and subsequently to boost its economy. Dr Ahmad Jachi, first vice-governor of the Banque Du Liban (Central Bank of Lebanon), during a visit to London last week confirmed that he expects the Lebanese market to have about six to seven Islamic banks in the short term. “We have licensed three Islamic banks so far, of which two have started operations and the third will commence business in the Summer,” he said.
Blom Bank, Lebanon’s largest conventional bank, was the first local bank to launch an Islamic bank. Credit Libanie recently launched the Lebanese Islamic Bank. Arab Finance House, promoted by Qatar Islamic Bank, was launched last year. AlBaraka Bank (Lebanon) was launched as an Islamic merchant bank-cum-finance company a few years ago.
The Central Bank of Lebanon plans to have an integrated financial system, which includes fully-fledged conventional banks and fully-fledged Islamic banks. “We are not allowing Islamic banking windows at conventional banks. Nor will we follow a dual system of banking. Our vision is not to have an Islamic niche banking sector nor a dual system whereby an Islamic system operates side-by-side a conventional one. We prefer an integrated financial system. We want to come to a solution where Islamic banking is part of the financial system; and where we can integrate the Lebanese financial system with the global system. We are in talks with a number of Lebanese banks who wish to launch dedicated Islamic banks,” explained Jachi.
The Lebanese Parliament passed an Islamic Banking Law in February 2004 and gave the Central Bank of Lebanon the responsibility to license, regulate and supervise Islamic banks. The current market size of the Lebanese Islamic banking sector is “very hard to estimate” according to the Central Bank, but the target for the next three to five years is 5 percent to 10 percent of the total financial market in Lebanon.
Lebanese Islamic banks, although they have universal banking licenses, are mostly retail banks concentrating on consumer finance.
“Many investors in the Gulf Cooperation Council (GCC) states are investing in real estate and in banks. In the last couple of years, there has been healthy interest in the Lebanese market. The oil price boom has seen abundant liquidity in the market in the Gulf region. We believe that adding new products such as Islamic banking products and services, which is more geared toward venture capital, will add value to Lebanon as a market and investment location,” stressed Jachi.
The banking sector in Lebanon is growing - the total assets of the sector at $60 billion is three times the size of the economy and is growing at 10 percent per annum. The Central Bank remains undeterred by suggestions of political risk due to potential instability in the country such as the assassination of former Prime Minister Rafiq Hariri. In terms of investment in the country over the last decade, the Central Bank maintains that it has managed to have a stable exchange rate and monetary policy, from which many investors profited. As such, it does not see any reason why this should change.
The Central Bank of Lebanon is working closely with the Kuala Lumpur-based Islamic Financial Services Board (IFSB) to see how it can apply Basel II provisions and how it can make appropriate assessment of risks associated with Islamic banking. Islamic banks, according to Jachi, have some instruments, which are similar in nature to conventional ones and others, which are different. As such in some cases the International Accounting Standards (IAS) will be applied and for other instruments both IAS and those of AAOIFI (Accounting and Auditing Organization of Islamic Financial Institutions).
As far as Shariah compliance is concerned, the Central Bank does not plan to appoint a National Shariah Council for the Islamic banking market. Instead it will leave this function up to individual Islamic banks. However, a pre-requisite for an Islamic banking license is that the promoters must submit the names of a “credible Shariah Board” and the procedure for Shariah advisory to ensure proper governance. Beyond this, there will be no interference from the Central Bank.
Jachi also confirmed that the Central Bank was looking at ways in which Islamic banks can hold their foreign exchange reserves with the bank in a Shariah-compliant way. Some developments in this respect are expected soon. However, the government has no immediate plans to launch Islamic bonds or Sukuk, despite the fact that Islamic banks cannot invest in current interest-bearing treasury certificates.