Lebanon — A Truly Regional Opportunity

By Fawad Butt

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on 31st March, 2010

The central bank of Lebanon, Banque du Liban (BDL), passed the fi rst Islamic banking regulations in 2004, ushering in the era of fully functional Islamic banks and investment companies. The minimum capital requirement for Islamic banks is US$100 million, but many Islamic banks in the country operate under a special exception that allows the banks to post only US$20 million in capital.

Since the passage of the first law, six additional circulars have been added by BDL to help refine the regulatory environment for Islamic banks. The regulator has provided Islamic financial institutions with guidance on Murabahah, Musharakah, Ijarah, Bai al Salam, Istisnah and Mudarabah.

Current landscape

Demand for Islamic finance in Lebanon is driven by multiple factors — its faith-based appeal to the Muslim population, its ability to provide a socially responsible and ethical financing alternative to standard options, and its assumption of attracting cross-border petro dollar surpluses.

These factors, and the support provided by BDL, have resulted in the first wave of Islamic banks. These institutions have validated the market and are growing their product offerings to service the evolving marketplace. Still, the total number of Islamic banking customers in Lebanon remains low — the size is estimated at under 15,000 customers — and there are five Islamic banks in operation. The total asset size for the industry remains small, estimated to be between US$200 million and US$300 million. The primary asset class for the Islamic financial institutions is real estate, with increased activity in consumer lending.

With a population of four million, Lebanon’s market size is not the smallest in the region. Bahrain and Dubai have smaller populations, at 750,000 and two million respectively. Additionally, the potential for 18 million Syrian customers with a slight preference for Lebanese banks is expected to stabilize demand in the coming years. Because the fully regulated market for Islamic banks in Lebanon is less than 10 years old, the banks are currently engaged in brand and product development cycles.

Growth opportunities

The Lebanese Islamic finance consumer market is expected to grow at a steady rate for the next five years, but may reach saturation point in the future. At the current adoption rate, the market is not expected to sustain a large number of institutions, hence internal consolidation and regional partnerships may provide growth opportunities beyond the local market for these banks.

In early 2010, Turkey and Lebanon signed an expansive bilateral economic development agreement that creates a bilateral strategic higher council. This partnership is expected to result in greater cooperation between Islamic banks in both markets. Turkey with its large Muslim population represents a regional growth opportunity for Lebanese Islamic banks.

High net worth individuals

In Lebanon, the opportunity to attract surplus petro dollars from wealthy GCC neighbors is currently underdeveloped. In the GCC region, the educated and multilingual Lebanese workforce can serve as the intellectual capital for high net worth individuals and family businesses seeking complex investment advice. In this space, Dubai, Bahrain, Qatar and Riyadh represent opportunities for cooperation but also serve as the primary competitors. The Dubai International Financial Centre has attracted many of the Tier 1 banks and fi nancial institutions from Europe and the US, and the development of similar centers in Bahrain, Qatar and Saudi Arabia poses significant challenges for the Lebanese institutions.

ecuritization and secondary markets

The Islamic finance product securitization space is currently underdeveloped globally. Lebanon is ahead of the curve with an existing securitization law on the books. This can serve as a competitive advantage if efforts are made to actively develop the marketplace.

Although the law is not perfect and leaves room for improvement in the areas of taxation and custodianship, it serves as an initial framework for Lebanese institutions to develop solution sets. Sukuk and the development of additional products also represent opportunities for growth. Although Lebanon is currently not well-positioned to take a leadership role in the global, or even the GCC regional, Islamic financial markets, there appear to be significant untapped opportunities for further growth.

Islamic Finance: www.islamicfinancenews.com