a variety of savers and then loan these funds to investors at a premium. This interest rate spread is often used as an indicator of how efficient is the banking system in performing its task of collecting funds and then making them available to entrepreneurs and investors. The size of the spread changes from one bank to another and from one region to another but in general it is an accepted principle that the wider the spread the more profitable are the banks and the more expensive it is to raise capital by the growing businesses whose need for financial resources is often indirectly related to the cost of funds. The lower the interest rates charged by banks then the greater is the demand for investment funds and the higher is the cost of capital then the lower is the demand for loanable funds.
The commercial banking sector in India is currently operating under an interest rate spread of 3.75% and that is considered to be the second highest in Asia. But such a spread would be considered low by many of the Lebanese banks who have become used to spreads that at times go above 5.5%. No wonder that the Lebanese banking sector has shown relatively high and stable rates of increase in its profitability. They have become accustomed to high and relatively safe rates of return by gorging themselves at the expense of the poor Lebanese citizen.
What is unfortunate about all of this is that it is done with the explicit knowledge of the Lebanese state. The Lebanese finance minister, Mr. Shatah, is proud of the fact that his cabinet was able to arrange , recently, to roll over around $2.25billion of Lebanese national debt denominated mainly in US dollars but partially in Euros. The debt was reissued to carry an interest rate of 7.5 % for the three year bonds and 9.0% for the 8 year bonds. The comparable rates on US treasuries were 1.36 % and 2.45% while those on both the British debt and the German debt sold at a slightly higher yield of around 1.4% and 2.6% respectively. It is true that Lebanon does not enjoy the high credit ratings of these countries but the UAE issued its $20 billion 5 year bonds two weeks ago at 4%.
The announcement by Mr. Shatah did not specify who were the buyers of these newly issued Lebanese sovereign debt. Yet it is not difficult to conclude that the majority of such debt is usually held by Lebanese banks. Actually if one was to deduct the interest income earned by the Lebanese banks on their Lebanese treasury holdings then most would not have shown a profit. If the average interest rate that is being paid on three year dollar denominated savings account is around 2.5-3% then these banks are operating with an interest rate spread of almost 5 percent.
Let me be clear about this, the banking sector is not doing anything illegal by taking advantage of an investment opportunity. It is the combination of a the lack of transparency in government finance, the failure of the elected representatives to ask the right questions, the total inability of the press to perform its only function of investigating inefficiencies and reporting on them and the banking systems' willingness to act as an accomplice in fleecing the poor Lebanese citizen. This neferious practice must stop.
Please send your comments to wp.karam@gmail.com
Tags: Banks., Interst Rate, Lebanon
