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What are the principal governmental and regulatory policies that govern the banking sector?
The following governmental and regulatory policies constitute the underlying principles of the banking sector in Lebanon:
- ensuring that banking activities in Lebanon are regulated and supervised by the Banque du Liban (BDL), the Lebanese central bank;
- protecting the banking sector from systemic risks by preserving the solvency of Lebanese banks; the governor (the Governor) and central council (the Central Council) of the BDL, along with the banking control commission (BCC) are vested with the greatest regulatory powers to such effect;
- upholding banking secrecy instituted by the Banking Secrecy Law of 3 September 1956 (the Banking Secrecy Law), which is at the core of the Lebanese banking system and plays a key role in attracting funds to Lebanon;
- applying anti-money laundering (AML) best practices, procedures and regulations;
- encouraging Lebanese banks to broaden their regional and international presence through fiscal incentives and other measures; and
- adhering to various sets of internationally recognised treaties and conventions and maintaining a harmonious balance between the preservation of the banking system and the progressive implementation of international regulations and standards (such as Basel III).
Primary and secondary legislation
Summarise the primary statutes and regulations that govern the banking industry.
The primary laws and regulations governing the banking sector in Lebanon are:
- the Code of Obligations and Contracts enacted on 9 March 1932;
- the Code of Commerce enacted on 24 December 1942, which governs the corporate aspects of banks and prescribes certain formalities applicable to them (the Code of Commerce);
- the Code of Money and Credit enacted on 1 August 1963 (the CMC) which establishes the BDL and sets the general rules governing the banking industry;
- the Banking Secrecy Law, which compels all financial entities regulated by the BDL to absolute secrecy with respect to their clients’ personal and account-related information and provides that banking secrecy can only be lifted in very limited circumstances;
- Law No. 318 of 20 April 2001 on Fighting Money Laundering (the AML Law), which provides for increased reporting obligations and the establishment of the Special Investigation Commission (SIC), whose mandate includes investigating suspected money laundering offences and deciding to lift banking secrecy;
- the recent amendment to the AML Law, namely Law No. 44 of 24 November 2015 on Fighting Money Laundering and Terrorist Financing, which expands the sources of illicit funds, broadens the definition and scope of money laundering activities, increases the kn0w-your-customer, monitoring, and reporting duties for banks and financial institutions, and imposes similar duties on legal professionals;
- Law No. 42 of 24 November 2015, which sets reporting obligations with respect to international transfers of funds;
- Law No. 43 of 24 November 2015 on the obligation for banks and financial institutions to exchange tax information, which was enacted in the context of compliance with the Foreign Account Tax Compliant Act (FATCA) regulations;
- other specific laws pertaining to the banking industry, such as Law No. 520 of 6 June 1996 on Developing the Financial Market and the Fiduciary Contracts Regulations, and Law No. 308 of 3 April 2001 on Banks’ Shares;
- regulations (in the form of circulars) issued primarily by the BDL, but also by the BCC and the Ministry of Finance;
- international banking rules and standards, namely those resulting from the Basel Committee on Banking Supervision and the Financial Action Task Force (regarding AML) to the extent that such rules are adopted by the BDL and mirrored in the circulars issued by the latter; and
- Basic Circular No. 144 of 28 November 2017 imposed on Lebanese banks and financial institutions to set general policies and adopt technical measures and procedures relating to cybercrime prevention, such as:
- to allocate the necessary funds and budget in order to set and implement cybersecurity policy, systems, and rules, to prepare insurance contracts that cover cybercrime risks; and
- to adopt a minimum two-factor authentication technique, particularly to check the right of outside users to access the system of the bank or financial institution and to use an end-to-end, high-grade encryption for crucial data, to avoid loss and tampering of such data.
Which regulatory authorities are primarily responsible for overseeing banks?
The BDL is the watchdog of the banking sector and is the entity principally responsible for overseeing banks in Lebanon. Its mission encompasses:
- ensuring the solvency of banks;
- protecting the stability of the economy and the Lebanese currency;
- developing the monetary and financial markets; and
- structuring and organising means of payment.
The BDL’s core prerogatives are vested in its governor and central council (which includes the governor, his four deputy-governors, and the general directors of the Ministries of Finance and the Economy).
The Central Council is in charge of:
- defining the monetary and credit policy of the BDL;
- setting the regulations implementing the provisions of the CMC;
- determining the discount and interest rates of bank deposits with the BDL; and
- issuing supervisory and regulatory measures applicable to banks’ activities.
The Central Council is also in charge of issuing banking licences.
The BCC was established by Law No. 28/67 of 16 January 1967 (Law 28/67) as an independent regulatory body not subject to the BDL’s supervisory authority. The BCC monitors the regulatory compliance of banks, and may request information from the banks or from the BDL accordingly.
The AML Law established the SIC, which operates under the umbrella of the BDL and is presided over by the governor. The SIC’s main mission is to investigate and combat suspicious matters and acts involving money laundering. The SIC may impose sanctions, including imprisonment and hefty fines, on the indicted persons or entities.
Law 28/67 also instituted the higher banking instance (the HBI). The HBI is a judicial body within the BDL hierarchy. It is in charge of delivering administrative sanctions against the banks that do not comply with the applicable laws and regulations, ranging from simple warnings to removal from the BDL’s official list of authorised banks.
In addition to the above-mentioned regulatory authorities, the Association of Lebanese Banks (ALB) is a professional association formed of representatives of the banks licensed by the BDL. It is in charge of efficiently coordinating the activities of banks in areas of common interests, optimising the quality of banking activity and, above all, protecting and defending the banks and their interests. The ALB makes decisions relating to the structuring of banking operations and transactions related to the banking business on a microeconomic level. The ALB also supervises the relationship between its members and settles disputes through an arbitral body composed of experts appointed by its board. The ALB may also initiate lawsuits in order to defend the interest of the profession or intervene in ongoing litigations for the same purpose.
Law No. 161, dated 17 August 2011, established a Capital Markets Authority (CMA) to ensure the protection of savings invested in financial instruments, encourage the capital markets in Lebanon, and coordinate between the various concerned sectors. Its functions namely include setting the framework and organising professional activities of the persons who perform operations on financial instruments, while monitoring their compliance with professional ethics, and supervising licensed stock exchanges and the persons who provide deposit, clearing or settlement services. In addition to setting the general regulatory framework for listing financial instruments and approving their trading on stock markets, the CMA is empowered with a sanctioning power with regard to violations of the provisions of the law on capital markets.
Government deposit insurance
Describe the extent to which deposits are insured by the government. Describe the extent to which the government has taken an ownership interest in the banking sector and intends to maintain, increase or decrease that interest.
The BDL is a public entity that has administrative and financial independence. Its initial capital was allocated by the Lebanese state. The capital can be increased through allocations by the state or by adding reserves to the capital by virtue of a decree of the council of ministers taken upon the request of the BDL and proposal by the Minister of Finance.
The National Institute for the Guarantee of Deposits (NIGD), established by virtue of Law 28/67, acts as the insurer of deposits. Its capital is composed of nominal shares owned by the Lebanese state and all Lebanese banks. All banks are required to contribute to the NIGD by paying an annual fee and the state contributes an annual fee equivalent to the sum of the fees paid by the banks. The NIGD indemnifies depositors for up to 5 million Lebanese pounds per depositor. The NIGD is managed by a board of seven members designated by decree.
The Lebanese state owns 20 per cent of the shareholding of the Housing Bank, which was established by virtue of Law No. 14 of 17 January 1977, as amended, by Law No. 283 of 30 December 1993. The private sector owns the remaining 80 per cent of the bank’s shareholding. The main purpose of the Housing Bank is to grant loans to Lebanese citizens wanting to purchase, construct, renovate, complete, or revamp real estate property in Lebanon.
Transactions between affiliates
Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an ‘affiliate’ for this purpose? Briefly describe the range of permissible and prohibited activities for financial institutions and whether there have been any changes to how those activities are classified.
There is no unified legal definition of an ‘affiliate’ in the Lebanese banking laws and regulations. The meaning of ‘affiliate’ is addressed differently in various circulars depending on the purpose of the circular in question.
For example, BDL Circular No. 34 of 24 April 1997 distinguishes between three types of control exercised by banks over their affiliates and provides for a different accounting treatment for each type, as follows:
- exclusive control: effective control by the parent company of the financial and operational policy of the affiliate (when the parent company directly or indirectly holds the majority of the voting rights in the affiliate and is entitled to appoint or revoke the majority of the affiliate’s board members);
- joint control: joint control of the affiliate by the parent company and other partners by virtue of a joint venture agreement related to the management of the company, without any partner having any majority stake in the affiliate; and
- participation interest: the parent company directly or indirectly holds at least 20 per cent of the voting rights in the affiliate.
Moreover, BDL Circular No. 141 of 16 August 2007 governs the relationship between Lebanese banks and their affiliates abroad and provides for a set of reporting obligations applicable in relation to banks and financial institutions established abroad in which the parent company holds, directly or indirectly, at least 40 per cent of the voting rights or whose management is effectively controlled by the parent company regardless of the latter’s equity stake.
There are no limitations applicable to transactions between a bank and its affiliates other than the usual conflict-of-interest limitations set out in the CMC and the Code of Commerce, namely that granting loans to, or conducting other transactions with, board members, major shareholders or their family members is subject to the prior approval of the bank’s general assembly and to the provision of sufficient collateral if applicable.
Legislative Decree 50/83 of 15 July 1983 established a summa division between commercial banks and specialised banks (investment banks). On 11 February 2004, Law No. 575 introduced Islamic banks in Lebanon as a new category.
Article 121 of the CMC defines a bank as ‘an institution whose main purpose is the usage of funds it receives from the public for its own account in lending operations’. This definition applies to commercial banks, often described as ‘conventional banks’. Generally speaking, commercial banks are entitled to carry out the broadest set of activities related to commercial banking.
Legislative Decree No. 50/83 of 15 July 1983 establishes ‘specialised banks’, more commonly known as investment banks.
The purpose of specialised banks is limited to using their resources in:
- medium- and long-term loans;
- direct investment;
- purchase and sale of financial instruments for their account or for the account of third parties; and
- the issuance of guarantees for medium or long-term operations against adequate collateral.
Specialised banks are in principle prohibited from receiving deposits from the public for a term shorter than six months. Investment banks may also manage collective investment funds and carry out fiduciary activities in accordance with applicable laws.
Intermediate Circular No. 437 of 8 November 2016 stipulates that all bank accounts opened with commercial and investment banks and relating to the following should be subject to the supervision of the CMA:
- issuance, purchase, sale or promotion of financial instruments directly offered for public subscription or purchased or sold to public accounts; and
- trades in financial instruments and financial rights listed or traded in regulated financial markets and licensed by the CMA.
In addition, the circular provided that only financial intermediary institutions and specialised banks (ie, investment banks) have the right to carry-out operations on financial instruments and products.
Law No. 575 institutes Islamic banks, which are defined as ‘banks whose articles of association comprise an undertaking not to contravene, in the operations they carry out, the provisions of Islamic law (sharia), particularly with the prohibition to pay or receive interest’. It is worth noting that sharia law prohibits fixed or floating payment or acceptance of specific interest or fees (known as riba, or usury) for loans. Unless otherwise specified in Law No. 575, Islamic banks are governed by all legal and regulatory provisions in force in Lebanon, particularly those related to banks, including without limitation, the CMC, the Code of Commerce and the Banking Secrecy Law. Islamic banks are specialised in sharia-compliant operations such as mudarabah, musharakah, ijara and so on, which are tailor-made financial operations structured to be sharia-compliant. A sharia board often issues a scholarly opinion to evidence compliance of a particular instrument or product with sharia precepts.
What are the principal regulatory challenges facing the banking industry?
The principal regulatory challenges facing the banking industry are twofold:
- regulating an increasingly complex banking industry, taking into account growing supranational regulations focused on AML or otherwise (Basel, FATCA, etc), while preserving the specificities of the Lebanese banking sector (including, without limitation, banking secrecy, which is a principle inherent to the country’s history); and
- safeguarding the immunity of the Lebanese banking system from the risks of overspill from the conflict in neighbouring Syria and domestic security challenges.
Are banks subject to consumer protection rules?
Consumer Protection Law No. 659, dated 4 February 2005, includes banks within its scope of application. However, the provisions of the Consumer Protection Law on the treatment of contracts concluded between banks and consumers are enforced without any prejudice to the provisions of the specific laws and regulations applicable to the banking sector, especially circulars issued by the BDL.
It is in that sense that the BDL remains the most important safeguard for consumer rights in the banking sector. Over the past few years, the BDL issued several consumer-oriented circulars, the latest of which is Circular No. 134, dated 12 February 2015, which sets communication guidelines for products and services offered by banks and financial institutions to their clients and imposes information obligations to raise the awareness of clients and clarify their rights regarding the products and services in which they are interested.
In what ways do you anticipate the legal and regulatory policy changing over the next few years?
In the light of the severe volatility in global financial markets, the policies and guidelines that have secured the resilience of the Lebanese banking sector to the global financial turmoil of 2008 are likely to be pursued by the BDL, in order to ensure the limitation of systemic risk, the increase of the Lebanese banking system’s competitiveness, and the progressive implementation of international banking standards.
The existing framework is being continuously strengthened to give supervising authorities new powers to monitor banks and impose extensive reporting duties; namely in an effort to comply with international AML standards while preserving the principle of banking secrecy, so that the required actions, decisions and sanctions are taken in a timely fashion and that banks abide by their regulatory obligations.
Extent of oversight
How are banks supervised by their regulatory authorities? How often do these examinations occur and how extensive are they?
Pursuant to Law 28/67, the BCC plays a major role in overseeing banks in Lebanon and assists the BDL in its mission of overseeing the banking sector. The BCC is vested with the authority to conduct investigations ex officio and to require any information directly from the banks or from the BDL.
The BDL and the BCC are vested with the necessary authority to:
- control the monetary and financial policies of the banks;
- control the compliance of the banks with the applicable rules and regulations;
- require any information, including but not limited to the financial statements of banks; and
- carry out off-site and on-site monitoring.
The BCC is entrusted with the task of monitoring banks on a recurring basis and has extensive powers when performing its tasks. Such powers may even go beyond the monitoring powers granted to the BDL under the CMC and which include, without limitation, reviewing documentation, requesting information and clarifications, the performance of an audit, etc.
In practice, the BCC’s controllers carry out off-site and on-site monitoring and communicate to the banks any corrective actions that should be implemented. The BCC often solicits the governor’s opinion and intervention as may be required.
How do the regulatory authorities enforce banking laws and regulations?
The BDL uses the broad powers granted to it by the CMC to ensure compliance by the banks with banking laws and regulations.
The BDL issues instructions, notes and circulars destined to clarify the requirements imposed on banks. Following off-site monitoring and on-site inspections, the BDL regularly sends follow-up letters to banks, outlining the main flaws and discrepancies and the corrective actions that should be taken. The BDL may opt for any of the following actions:
- sending a cautionary notice to the bank’s management requiring an explanation for the failure to observe an applicable regulation;
- providing the bank with a recommendation as to the necessary measures that must be taken to ensure compliance with the applicable rules and regulations; and
- issuing an order to the bank requiring that certain measures be taken within a designated time frame.
The BDL is entitled to impose a wide range of sanctions on banks. These sanctions range from a simple warning or a prohibition to engage in certain operations or activities, to the removal of the infringing bank from the list of authorised banks and its subsequent liquidation.
What are the most common enforcement issues and how have they been addressed by the regulators and the banks?
The most common enforcement issues relate to transparency in business dealings, suitability and efficiency of information systems and compliance of the banks with the BDL’s circulars, especially those related to the limitation of systemic risk, AML or CFT procedures and corporate governance practices.
The BDL and the BCC ensure that adequate measures are taken in a timely manner to sanction violations and to ensure compliance with the regulatory framework and best practices.
In what circumstances may banks be taken over by the government or regulatory authorities? How frequent is this in practice? How are the interests of the various stakeholders treated?
Law No. 2/67 of 16 January 1967, Law No. 1,663 of 17 January 1979 and Law No. 110 of 7 November 1991 address different aspects of the regime applicable to insolvent banks.
Pursuant to the CMC and the laws referred to above, a bank may be seized and thereafter liquidated if it ceases to pay its debts as they fall due.
The introduction of these measures was triggered by the financial difficulties faced by Bank Intra in the 1960s. Since then, the effective application of Law No. 2/67 to a bank facing difficulties has occurred only once (Al Madina Bank in 2004). This is partly because of the stringent preventive control exercised by the BDL and its tendency to encourage alternative solutions, such as merger with, or absorption by, another bank in case a bank suffers difficulties, with the ultimate aim of preserving the reputation of the Lebanese banking sector.
Law No. 110 of 7 November 1991 entitled ‘Reform of the banking sector’ instituted a special banking court whose competence extends to all cases of bank insolvency. In the event a bank is officially declared insolvent, it is deemed ‘seized’ and all its assets and rights are automatically transferred to the NIGD.
The bank’s employees enjoy the first privilege on the bank’s assets and take precedence over, respectively, the creditors and the shareholders.
What is the role of the bank’s management and directors in the case of a bank failure? Must banks have a resolution plan or similar document?
Before the bank is seized, the court appoints a management committee (see question 19), which is vested with the powers of the board of directors and, if need be, those of the general assembly.
After the bank is seized, the NIGD will be in charge of establishing the liquidation’s final inventory. At the end of this process, the NIGD will transfer the ownership of any remaining assets to the BDL.
Basic Circular No. 141 of 18 September 2017 imposed on Lebanese banks the obligation to prepare a recovery plan to be approved by their respective board of directors in order to restore stability to their financial situation and to cope with any future difficulties in times of crisis. This plan must be written and adapted to the bank’s size, its level of expansion abroad, and the degree of complexity of its activities and operations. The plan should also be updated annually. Furthermore, Lebanese banks and the branches of foreign banks operating in Lebanon should submit their recovery plan to the BCC for its review and assessment.
Are managers or directors personally liable in the case of a bank failure?
The assets of the chairman or general manager, board members, auditors and all persons having signatory authority on behalf of the bank during the 18 months before the bank’s failure shall, de jure, be put under precautionary seizure until their respective liability is determined by virtue of a final judicial order.
The managers and directors are hence personally and civilly liable. They are also prohibited from partaking in boards or in any other positions in banks in the future. Their criminal liability may also be invoked in the event they have committed fraudulent or collusive acts.
Describe any resolution planning or similar exercises that banks are required to conduct.
The Recovery Plan referred to above must contain the following key elements:
- the Recovery Plan internal governance, which includes:
- the parties responsible for preparing, managing, and implementing the Recovery Plan, and those responsible for monitoring the indicators that necessitate the Recovery Plan’s activation; and
- the mechanism of communication between the Recovery Plan’s various stakeholders; and
- the Recovery Plan indicators, which signal any deviation from the bank’s business plan, and which may include indicators of quantitative and qualitative nature, provided the following minimal conditions are met:
- to take into account the bank’s various financial soundness indicators, including liquidity indicators, capital indicators, asset quality indicators, and profitability indicators, in addition to market-based indicators and macroeconomic indicators;
- to determine the set of early warning indicators that the bank will adopt to identify emerging risks;
- to use progressive metrics in relation to the Recovery Plan indicators, until they reach a threshold that triggers the mandatory activation of the Plan; and
- to consider forward-looking prospects when determining the calibration of the Recovery Plan indicators; and
- the stress tests adopted to determine the recovery options, and which should contain:
- systemic scenarios, scenarios specific to each bank (idiosyncratic), and both together; and
- stringent assumptions that prompt the activation of the Recovery Plan.
Moreover, the Recovery Plan shall be prepared and applied at two different levels:
- the Lebanese bank; and
- each main subsidiary of the Lebanese bank abroad, including its branches overseas.
Also, Lebanese banks must promptly provide the BCC with their adopted Recovery Plan, and any amendment to it. In this respect, Circular No. 294 of 28 December 2017 issued by the BCCL details the required sections that should be included in the Recovery Plan, as follows:
- business plan;
- Recovery Plan indicators;
- stress tests; and
- recovery options and impact assessment.
Describe the legal and regulatory capital adequacy requirements for banks. Must banks make contingent capital arrangements?
Given the importance of maintaining a highly solvent and well-capitalised banking sector, the BDL has adopted several regulatory measures to ensure that banks preserve a sound capital adequacy level.
BDL Circular No. 6,939 of 25 March 1998 defines the total capital ratio as the aggregate of tier 1 capital (composed of common equity tier 1 and additional tier 1 capital) and tier 2 capital.
On 30 September 2016, the BDL amended Circular No. 6,939 by issuing Intermediate Circular No. 436 pertaining to the increase of the minimum capital adequacy ratios for banks in Lebanon to 15 per cent, from the previous 12 per cent, and capital conservation buffers from 2.5 per cent to 4.5 per cent so as to comply with the new capital requirements under Basel III and the new International Financial Reporting Standard 9 accounting standard, which will come into effect in 2018. The increase in minimum capital adequacy ratios will be gradual, as banks have to meet a minimum capital adequacy ratio of 14 per cent by the end of 2016, 14.5 per cent by the end of 2017, and 15 per cent by the end of 2018.
In detail, Intermediate Circular No. 436 requires banks to comply with a minimum common equity tier 1 ratio of 8.5 per cent at the end of 2016, 9 per cent at the end of 2017 and 10 per cent at the end of 2018, compared with a ratio of 8 per cent prior to these amendments. The Circular also requires banks to comply with a minimum tier 1 ratio of 11 per cent at the end of 2016, 12 per cent at the end of 2017 and 13 per cent at the end of 2018, compared with a ratio of 10 per cent prior to these amendments.
How are the capital adequacy guidelines enforced?
Pursuant to the BDL Circular No. 43 of 25 March 1998, banks operating in Lebanon are required at the end of June and December to report their solvency ratios to the BCC and to the Statistic and Economic Research Department at the BDL.
BDL Circular No. 104 of 1 April 2006, the purpose of which is the implementation of the Basel II Capital Adequacy Accord, provides that all banks operating in Lebanon must, inter alia:
- implement the Basel II Accord in a diligent and progressive manner, in order to compute the solvency ratio on an individual or consolidated basis, starting 1 January 2008;
- implement the standardised approach to compute credit risks and the basic indicator approach to compute operational risks;
- compute market risks, as of 31 August 2007, and include in the solvency-ratio calculation capital requirements to cover market risks, as of 1 January 2008;
- obtain the approval of the BDL to switch from the implementation of both aforementioned approaches to more advanced approaches; and
- prepare an action plan for the implementation of the foregoing to be discussed with and approved by the BCC.
The BCC requires banks operating in Lebanon to initiate an internal capital adequacy assessment process in accordance with the second pillar of Basel II. Lebanese branches of foreign banks registered in countries that implement the Basel II Accord must submit to the BCC the annual reports issued by their foreign head office on capital adequacy, irrespective of the approach applied by the head office to the said branches in Lebanon.
BDL Circular No. 118 of 21 July 2008 provides that the BCC shall periodically ascertain the banks’ capital adequacy and shall review and evaluate the qualitative and quantitative components of the capital adequacy assessment process, in accordance with the requirements specified in such Circular and the regulations and implementation rules issued, or to be issued by the BCC and the BDL.
The qualitative components include the review of and assessment of the banking governance system, the risk-management system and the internal audit and control systems, while the quantitative elements include the calculation of required capital level.
What happens in the event that a bank becomes undercapitalised?
Pursuant to BDL Circular No. 118 of 21 July 2008, the BCC may request the bank to increase its own funds, in case it detects weaknesses or deficiencies in the qualitative or quantitative components. However, such increase does not relieve the bank from the obligation to address these weaknesses.
Pursuant to article 134 of the CMC, Lebanese banks must ensure that their assets exceed their total liabilities by at least the value of their capital. If a bank suffers a loss, it must recapitalise within a period of one year. This time frame may be extended by the BDL for additional periods not exceeding one year on aggregate, provided the bank offers sufficient guarantees as to its ability to reconstitute its capital.
What are the legal and regulatory processes in the event that a bank becomes insolvent?
Law No. 2/67 provides for specific provisions applicable to defaulting banks operating in Lebanon.
In the case a bank ceases to pay its debts as they fall due, the governor shall promptly request the competent court to start applying the provisions of Law No. 2/67 and inform the Minister of Justice and the Minister of Finance of the insolvency. Defaulting banks as well as their creditors may also request the application of the provisions of Law No. 2/67 by the court.
Within 48 hours of the date of the request, the court must temporarily appoint a director having banking and financial expertise to manage the ordinary operations of the bank, and whose role ends upon the appointment of a managing committee, composed of six to 10 members and a president (the management committee).
Following deliberation and after consulting with the governor and hearing the defaulting bank’s representative, the court delivers its decision confirming the payment cessation. As a result of such decision, the board members of the defaulting banks are dismissed. The same applies to the local management of defaulting foreign banks operating in Lebanon.
As long as the bank is not seized, the management committee represents the creditors of the defaulting bank and takes the necessary measure to safeguard the interests of the right holders.
The role of the management committee encompasses the management of the bank’s branches in Lebanon and abroad. Within six months, if the management committee deems that the bank is able to continue its activities, it notifies the competent court, which delivers a decision to convene the general assembly of the shareholders to elect a new board of directors thus ending the role of the management committee. If on the contrary, it appears that the bank is unable to resume its activities, the court may decide, upon the request of the management committee, to liquidate the bank.
Law No. 1,663 of 17 January 1979 considerably enhanced the prerogatives vested in the NIGD after a bank is seized. Such prerogatives comprise the automatic transfer of the banks’ seized assets and rights to the NIGD.
Recent and future changes
Have capital adequacy guidelines changed, or are they expected to change in the near future?
As indicated in question 16, the BDL is aiming at strengthening the banks’ capital funds in order to attain a capital adequacy ratio of 15 per cent by 2018. The BDL is attempting to increase this ratio as a prudential measure to exercise better control and protect the banking sector through positive signals to the international community.
Ownership restrictions and implications
Describe the legal and regulatory limitations regarding the types of entities and individuals that may own a controlling interest in a bank. What constitutes ‘control’ for this purpose?
The set of documents to be presented to the BDL as part of the application for a new bank licence comprise signed declarations by the founders which include their curriculum vitaes (degrees, experience and other relevant information), as well as an overview of their financial standing.
Law No. 308 of 3 April 2001 grants the Central Council the authority to ascertain the financial and moral aptitude of the bank’s founders, as well as the subscribers to the bank’s shares and is entitled to object to any transfer of a Lebanese bank’s shares that may cause, directly or indirectly, the loss of effective control by any shareholder or economic group over the management of the bank or the voting rights. The Central Council enjoys broad discretionary powers in this regard, for the purpose of upholding the public interest.
There is no legal definition of ‘control’ per se. BDL Circular No. 47 of 4 June 1998 provides for specific obligations on ‘holding companies’, defined as companies that own more than 5 per cent of the shares of a bank. Pursuant to Law No. 308 of 3 April 2001, subscribing to and trading in the shares of Lebanese banks is subject to the prior authorisation of the Central Council (see question 26).
Are there any restrictions on foreign ownership of banks?
There are no restrictions on foreign ownership of banks in Lebanon. Law No. 308 of 3 April 2001 abolishes previous restrictions regarding the ceiling on the ownership of shares by foreign nationals. However, the Lebanese Code of Commerce requires the majority of the board of directors of joint-stock companies (which is the form under which all banks in Lebanon are incorporated) to be Lebanese nationals and said requirement should hence be reflected in the composition of a bank’s board of directors. All the bank’s shares must be in the nominative form.
Implications and responsibilities
What are the legal and regulatory implications for entities that control banks?
A direct implication for such entities is an increased exposure to the scrutiny of the regulatory authorities overseeing the banking sector and the obligation to abide by certain duties and responsibilities as detailed in question 24.
What are the legal and regulatory duties and responsibilities of an entity or individual that controls a bank?
BDL Circular No. 47 requires holding companies registered in Lebanon to comply with the following obligations:
- preparing non-consolidated detailed annual financial statements according to the forms issued by the BDL and organised in accordance with International Accounting Standards (IAS) that do not contradict the regulations in force in Lebanon;
- preparing annual consolidated financial statements of the companies within its group (including banks and financial and non-financial institutions related to it and registered in Lebanon or abroad), in accordance with the consolidation guidelines set by the BDL;
- using the templates for the balance sheet and the profit and loss accounts adopted by the BDL for the preparation of annual consolidated financial statements;
- organising its internal accounting in compliance with IAS regulations that do not contradict the regulations in force in Lebanon;
- establishing an internal control unit that operates in accordance with the regulations applicable to Lebanese banks;
- providing the BDL and the BCC on annual basis and within the timetables applicable to Lebanese banks, with the detailed personal and consolidated financial statements, yearly bulletin, auditors’ report, and the yearly minutes of meetings of the general assembly and the board of directors;
- using IAS 14 as a guideline for the disclosure of financial and non-financial information related to the group companies;
- publishing consolidated and non-consolidated financial statements on a yearly basis (in accordance with the rules applicable to Lebanese banks) and provide the BDL and the BCC with evidence of such publication;
- appointing the same auditors as for its related banks and financial institutions; and
- providing the BCC, before the end of July and December of each year with a detailed statement of all its shareholders, identifying their nationalities, share proportions and the class of shares they own (if existing), along with information regarding the companies participating in the holding companies and any amendment to such statement and a detailed statement of about the shares held by the holding companies in companies located in Lebanon and abroad.
All the shares of the holding companies registered in Lebanon must be in the nominative form.
What are the implications for a controlling entity or individual in the event that a bank becomes insolvent?
Law No. 2/67 and Law No. 110/91 do not expressly refer to the controlling entities or individuals. However, it is common in Lebanon that board members are themselves owners of equity stakes in the capital of the bank (controlling or non-controlling), and therefore suffer the same consequences referred to above applicable to board members of an insolvent bank.
Changes in control
Describe the regulatory approvals needed to acquire control of a bank. How is ‘control’ defined for this purpose?
There is no legal definition of ‘control’ per se.
Pursuant to Law No. 308 of 3 April 2001, subscribing to and trading in the shares of Lebanese banks is unrestricted in principle, subject to the prior authorisation of the Central Council:
- if the subscriber or the transferee acquires directly or indirectly more than 5 per cent of the shares or the voting rights of the bank, whichever is higher;
- if at the time of the transfer of shares, the transferor holds 5 per cent or more of the shares or the voting rights of the bank, whichever is higher; and
- if the transferor or the transferee is a board member of the bank, irrespective of the number of shares held or transferred.
Any legal action that aims at enabling an assignee to acquire shares of a Lebanese bank in violation of Law No. 308 of 3 April 2001, as amended, shall be null and void.
The governor has the authority to suspend the trading in such shares and the exercise of the voting rights related to it. His decision shall be notified to Midclear, the central custodian and clearing centre of the banks’ shares, with a request to sell the said shares, by auction or through the organised financial market.
Specific requirements apply to the transfer of the shares of a bank listed on the financial market, namely, the prior authorisation of the BDL should be sought in case the purchaser or the seller is an employee who is part of the ‘upper management’ as such term shall be defined in the circulars issued by the BDL, or already has or acquires in aggregate more than 1 per cent of the bank’s total shares.
The content of the BDL authorisation and the details of the contemplated operations should be immediately communicated to the body overseeing the financial market.
More generally, Law No. 308 provides that the Central Council may object to any transfer of shares of a Lebanese bank which may directly or indirectly lead to the loss by a shareholder or an economic group of ‘effective control’ (even if such loss of control is relative), with respect to the administration of the bank or the voting rights related it. Control is not defined in this particular context and its determination is left to the discretion of the Central Council on a case-by-case basis.
Are the regulatory authorities receptive to foreign acquirers? How is the regulatory process different for a foreign acquirer?
The regulatory authorities are generally receptive to foreign acquirers. The regulatory process for a foreign acquirer is not substantively different but may take longer in instances where the approval of the Central Council is required, considering the assessment to be made of the prospective foreign acquirer. It remains that Law No. 308 does not comprise restrictive or specific provisions applicable to foreign acquirers.
Factors considered by authorities
What factors are considered by the relevant regulatory authorities in an acquisition of control of a bank?
Law No. 308 provides that, in all cases where the approval of BDL is required, the Central Council shall ascertain the financial and moral aptitude of the founders, subscribers and transferees of a bank’s shares.
The Central Council will take into account other informal criteria in order to ascertain that the relevant persons possess the necessary experience and track record in the banking industry, as well as sufficient financial capabilities to take part in the bank’s activities.
Describe the required filings for an acquisition of control of a bank.
An application should be filed before the Central Council describing in detail all elements of the acquisition operation for which the approval of the Central Council is sought. This application must comprise the contractual documents corresponding to the proposed share transfer. The Central Council may request clarifications, additional information or amendments.
Timeframe for approval
What is the typical time frame for regulatory approval for both a domestic and a foreign acquirer?
The length of the process depends on the level of scrutiny required to give comfort to the Central Council and approval of applications by foreign acquirers are likely to take a longer time frame.
In practice, informal preliminary discussions are held with the BDL to evaluate the feasibility of the transaction prior to filing an application. The effective filing usually takes place after an informal favourable opinion is granted, which explains why rejected applications are rare and result mostly from adverse developments originating after the filing.