In Lebanon, financial intermediation institutions are governed by a specific law. They are supervised by the Banque du Liban (BdL) as is generally the case for banks and financial institutions.
More than 20 authorised financial intermediation companies are currently operating in Lebanon, all of which are in the form of Lebanese joint stock companies.
Despite the fact that the number of intermediation companies has increased in the past few years1, banks continue to handle a considerable portion of the financial intermediation transactions in Lebanon2.
A Comprehensive Legal and Regulatory Framework Governs the Establishment of Financial Intermediation Companies
The establishment of a financial intermediation institution in Lebanon is mainly governed by Law No.234/2000 and by the BdL’s Basic Decisions No.6213/1996 and No.7551/2000.
In Lebanon, financial intermediation is a monopoly for banks, financial institutions registered with the BdL, and financial intermediation institutions licensed by the BdL.
Only such institutions may, in the ordinary course of their business, manage portfolios and undertake, for their own account or on behalf of their clients, transactions that relate to negotiable financial instruments and securities.3
Main Requirements for the Establishment of a Financial Intermediation Institution
The main requirements that are applicable to the establishment of financial intermediation institutions are meant to secure their creditworthiness.
- Any financial intermediation institution must be incorporated as a joint stock company (société anonyme libanaise–SAL) or as a branch of a foreign financial intermediation entity.
The auditing and publishing requirements that apply to all joint stock companies contribute to securing the compliance of the intermediation institutions with a number of basic standards of accountability and transparency.
Contrary to the provisions that govern joint stock companies, all of the shares of a Lebanese financial intermediation institution must be nominative shares4. In addition, any assignment of shares that leads to the acquisition by a person or entity of more than 10 per cent of the company’s shares is subject to the prior approval of the BdL. Such monitoring of ownership is customary in Lebanon where banks and financial institutions are involved5.
- A financial intermediation company is required to have a minimum paid-up capital of one billion Lebanese pounds.
This is significantly more than the 30 million Lebanese pounds required for an ordinary joint stock company6.
- Finally, the founders, managers and persons employed by a financial intermediation company should not be under any incapacity as detailed in article 127 of the Code of Currency and Credit.
This provision mainly aims at setting aside individuals who were formerly convicted of certain criminal offences or of a breach of the Banking Secrecy Law, as well as individuals who have been the subject of bankruptcy proceedings.
The same requirements apply to founders and managers of banks.
A Sector Open to Foreign Investment
In 2006, restrictions on foreign ownership of financial intermediation institutions were lifted: the former provisions that required that a third of the shares be held by Lebanese nationals or Lebanese entities were repealed.
This development is in line with the reforms that have opened up the banking sector as well as Beirut Stock Exchange brokerage firms to foreign investment7.
The only restriction to foreign participation in financial intermediation institutions that still stands is related to their management and stems from the general provisions that apply to all joint stock companies: under Lebanese law, the majority of the members of the board of directors of a joint stock company must be Lebanese8.
It is worth noting that Lebanese financial intermediation institutions and branches of foreign financial intermediation institutions are generally subject to similar standards and rules.
Main Steps Required for Establishing a Financial Intermediation Institution
To establish a financial intermediation company, the company must obtain a BdL licence, and must comply with general steps and procedures that apply to the establishment of companies and branches of foreign companies in Lebanon.
- An application for licence must be presented to the BdL. The BdL’s Central Committee has authority to award such licence and has discretionary power to dismiss an application where it deems that accepting it would not serve the public interest.
The BdL usually takes two to three months to process an application.
The documents that must be produced by applicants are listed in the BdL’s Basic Decision No.7551/2000. These documents differ slightly depending on whether the application relates to the establishment of a Lebanese intermediation company or to the establishment of a branch of a foreign company.
This information is essentially required in order to assess the creditworthiness of the institution. It notably includes a feasibility study and data related to the organisation of the company, to the founders, representatives, shareholders and managers as well as to the company’s existing relationships with other entities or groups.
- Upon being granted a licence by the BdL, the applicant must register the financial intermediation company with the commercial registrar9. This is a general procedure that applies to all companies. It allows the general public to access information relating to the companies that conduct business in Lebanon10.
Registration with the commercial registrar is a standard administrative procedure that does not afford any discretionary power to the registrar.
A set of documents must also be produced at this stage. They notably include the licence delivered by the BdL, the articles of association stamped by the BdL, a receipt establishing the payment of the paid-up capital at the BdL, the minutes of the shareholders’ meeting related to the establishment of the company in accordance with the law, as well as the minutes of the board of directors in relation to the appointment of the chairman of the board and the general manager of the company.
The branch of a foreign intermediation company must register with both the commercial registrar and the Ministry of Economy and Trade.
The commercial registrar delivers a certificate of registration upon completion of the registration process.
- The applicant needs to produce the certificate of registration as well as a set of documents stamped by the commercial registrar in order to be included on the BdL’s list of licensed intermediation companies.
The BdL publishes this list in the Official Gazette. The company may not operate in Lebanon until its name is published in the Official Gazette as a financial intermediation company.
Licensed institutions must start their activity within six months of being awarded a licence. If they fail to comply with this requirement, the BdL may remove them from the list of authorised intermediation companies.
Other Important Authorisations Required to Operate an Intermediation Company
The following authorisations are not related to the establishment of the intermediation institution as such, but may be required in order to operate it.
- Before engaging in transactions via electronic means, an intermediation company must provide the BdL with prior notice of establishments and comply with the provisions of Basic Decision No.7548/2000 on electronic banking and financial transactions.
- A Lebanese intermediation company may not open a branch in Lebanon or abroad or relocate an existing branch without obtaining the prior approval of the BdL.
- A branch of a foreign intermediation company may not open or relocate a new branch in Lebanon before obtaining the BdL’s approval.
Once established, financial intermediation companies must comply with a set of rules that aims to secure the sustainability of their creditworthiness and to safeguard the best interest of their clients.
Although they do not fall under the scope of the Banking Secrecy Law11, financial intermediaries are required to observe professional confidentiality. They are bound by anti-money laundering laws and regulations and are subject to a set of requirements related to reporting, accounting, record-keeping and auditing. Financial intermediation institutions are also subject to the provisions of Law No.520/1996 (Law on financial markets and fiduciary operations) and to its regulations.
In addition, funds and securities deposited in clients’ accounts are not included in the assets of the intermediation company. Contracts entered into with clients are strictly regulated by the law. The financial intermediary must also duly inform its clients of the risks that the proposed transactions carry.
The BdL closely monitors the banking and financial sector and may impose disciplinary sanctions on financial intermediation institutions for any failure to comply with the laws and regulations in force.