Banking in Lebanon used to be seen as a status symbol. It was home to solid banks with good reputations that offered customers stability (and banking secrecy) in a shaky part of the world.
But banking in Lebanon is changing. In Beirut, banks recently shutdown for two-weeks. They cut-off access to customer accounts and blocked any transactions, claiming it was due to protests across the city.
Following the shutdown, banks imposed controls on the movement of money. For instance, only allowing account holders to withdraw US $1,000 and only allowing outbound transfers in US dollar for personal “emergencies”.
But this isn’t the first time that Lebanon has had protests, violence, or uncertainty.
In fact, during Lebanon’s 15-year civil war from 1975-1990, the banks stayed open almost uninterrupted for the entire period amidst the chaos.
When the fighting got bad, bank employees just came in late or missed a day of work. And if the fighting made it too dangerous to get to work, staff transferred to a branch closer to home.
So why then, in light of recent protests, did banks shut down and impose controls?
Generally, banks only shutdown or impose restrictions on account holders when the government has told them to or doing so is critical to the bank’s own survival.
Had the central bank of Lebanon imposed exchange controls, it would have caused even more panic, capital flight, and instability.
So instead, the government said that it was “up to the banks” to impose whatever restrictions they felt necessary.
This step by Lebanon is a stark warning for account holders in all countries – banks and governments can use social, political, and economic reasons to mask underlying issues in the banking sector to restrict access to your money.
The result? Unofficial capital controls.
Imagine you’re standing in line and you need to send money abroad… do you think your reason for wanting to transfer dollars is more valid than the next guy?
In that scenario, it’s the banker that gets to decide if your reason for transferring money is warranted, not you. At least when the government imposes controls you know which hoops to jump through.
Simply put, Lebanese banks now get to determine who gets to transfer dollars, how much, and when. And, if you’re reason isn’t “good enough”, you’re out of luck.
Lebanon already has a shortage of dollars and is the third-largest debt to GDP level in the world. So, if there is a massive exodus of dollars from the country, it could cause a run on the banks and be even more disastrous for Lebanon’s banking sector.
But the average account holder just wants access to their money. So not surprisingly, account holders in Lebanon are infuriated. Many of them are choosing to hoard cash at home instead of depositing it.
In fact, sales of at-home safes are skyrocketing around Beirut. And while it might be the only choice for people inside Lebanon right now, keeping all of your money locked away in a safe isn’t practical.
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Forward-thinking Lebanese nationals who saw the writing on the wall already opened bank accounts overseas and moved their money abroad.
Because they had money outside of Lebanon they were able to avoid restrictions imposed by the Lebanese banks.
Likewise, offshore banks are not imposing unofficial capital controls or restricting the movement of money. So even in times of unrest at home, those who have accounts abroad can access their cash no matter what.
Similarly, people who opted to open accounts at Lebanese banks…but opened accounts at their overseas subsidiaries in foreign countries also avoided the restrictions and were able to keep their funds safe.
That’s the beauty of internationalizing your financial assets. Having accounts in different jurisdictions allows you to diversify political, economic, and social risks that could impact your money.
But not all places are suitable for banking. And when you’re looking for a jurisdiction to bank in, you need stability, security, and the confidence that banks aren’t going to start restricting access to your money.
Lebanon actually has a strong banking history. In fact, there are a handful of banks in Beirut that, until recently, offered interesting products and services. And in certain instances, foreign subsidiaries still offer interesting products with good returns.
Even before the unrest began, banks in Lebanon offered attractive interest on deposit accounts offering up to 14% on the Lebanese pound. US dollar fixed deposits often fetched up to 6.5%.
But higher interest rates come with increased risk. And countries with the highest interest rates have higher political and economic risk. So, tread carefully.
There’s nothing wrong with banking in a less stable jurisdiction, as long as you understand the risks and you’re making an informed decision.
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