This dissertation assesses the role of the banking sector in the Lebanese economy throughout the country’s history with respect to its linkages with the real sector. I thereby focus on the credit market. It is shown that various external and internal factors have led to a credit market development on the supply-side that is not conducive to real sector growth. In particular, the period before the Lebanese civil war is characterised by funds flowing in from other Arab countries, which were not channelled into domestic long term investment but accrued to the trade and services sector or went abroad. Throughout the war and afterwards the share of the private sector in total credit declined substantially as the government crowded out private demand. It is concluded that only a shift of policy with a clear focus on the real sector’s needs can bring about the required economic development.
Contents
I. Introduction
II. A Political Economy Approach to Finance and Banking
Information-theoretic approaches
The political economy perspective
Hypothesis and Implications
III. Credit Market Development in the pre-War period
Spontaneous Emergence of Banking
The Banking Sector as a Generator of External Rents
Implications for the Process of Capital Accumulation
IV. Endogenous Impediments to Credit Market Development after the War
The Impact of the Civil War on the Banking Sector
Endogenous Rents: The Government enters the Credit Market
The Effects: Crowding Out and Opportunity Costs
V. The Demand Side of the Credit Market
Firms’ Demand for Credit
Other Sources of Finance: Internal Funds & Remittances
VI. Conclusions and Policy Implications
Research Objectives and Themes
This dissertation examines the historical role of the Lebanese banking sector and its evolving relationship with the real economy. It aims to determine why the financial system has failed to effectively support domestic productive sectors, focusing on credit market dynamics and the impact of institutional policies.
- The divergence between banking sector growth and real sector development.
- The impact of internal and external rents on credit allocation.
- Political economy factors versus conventional information-theoretic approaches to banking.
- The structural consequences of government debt and crowding out on private investment.
- Structural impediments to credit access for small and medium-sized enterprises.
Excerpt from the Book
The Banking Sector as a Generator of External Rents
After independence in 1943 the banking sector experienced its famous boom, as Lebanon became the financial centre of the region. Although, still in 1945, there were only nine formal commercial banks of which six were foreign owned, in subsequent years, the domestic banking sector expanded dramatically. By 1967 the number of banks had increased more than tenfold to 93 of which 18 were foreign. Even after the collapse of the Intrabank in 1968 and the subsequent process of consolidation in 1970, there were still 70 banks of which 23 were foreign.
Of these, the proportion of foreign currency deposits grew tremendously over time, reaching over 68 percent in 1974. Most of these deposits were of regional, i.e. Arab origin. They entered the Lebanese banking sector to be channelled into profitable investment in European and US capital markets. In fact, the ratio of assets to liabilities never dropped below 1.6. This indicates that Lebanon did indeed serve as a financial entrepôt for the region.
Summary of Chapters
I. Introduction: Outlines the fragility of the link between politics and economics in Lebanon and defines the research scope regarding the banking sector's role in the real economy.
II. A Political Economy Approach to Finance and Banking: Contrasts conventional information-theoretic views with a structural political economy framework to better analyze the historic evolution of Lebanon's financial system.
III. Credit Market Development in the pre-War period: Examines how the banking sector emerged spontaneously during the silk trade era and later transitioned into a generator of external rents from regional capital inflows.
IV. Endogenous Impediments to Credit Market Development after the War: Analyzes the structural shifts during the civil war, highlighting how government borrowing led to crowding out of private sector credit.
V. The Demand Side of the Credit Market: Explores the characteristics of Lebanese firms—predominantly small and family-owned—and why they often rely on internal funds rather than bank credit.
VI. Conclusions and Policy Implications: Argues that the current rentier-based banking model is unsustainable and calls for a policy shift toward supporting domestic productive sectors.
Keywords
Lebanon, Banking Sector, Credit Market, Political Economy, Real Sector, Capital Accumulation, Rentier Economy, Civil War, Crowding Out, Financial Intermediation, Treasury Bills, Economic Development, SME Finance, External Rents, Structural Analysis.
Frequently Asked Questions
What is the core focus of this dissertation?
The research focuses on the historical performance of the Lebanese banking sector and its failure to act as an effective financial intermediary for the country's real, productive sector.
What are the primary themes discussed?
Key themes include the impact of foreign capital inflows, the role of external and endogenous rents, the effects of the civil war on banking, and the structural constraints on credit access for local industries.
What is the main research question?
The study asks what role Lebanese banks played in the country's economic process and why their contribution to real-sector growth has been consistently limited despite the sector's expansion.
Which methodology is employed?
The author employs a political economy approach, which considers historical, social, and institutional factors, moving beyond conventional information-theory models of finance.
What does the main body cover?
It covers the evolution of the banking system from pre-war "spontaneous" banking through the boom years to the war period, and finally the post-war reliance on government debt.
Which keywords best characterize the work?
Essential terms include banking sector, credit market, rentier economy, capital accumulation, and crowding out.
How did government policy affect credit distribution?
Government borrowing through high-interest treasury bills crowded out private credit, favoring safe government debt over risky but productive investments in agriculture or industry.
Why are Lebanese firms reluctant to use formal credit?
Firms are often small and family-owned with short planning horizons; they prefer internal funds to maintain independence and avoid the transparency requirements of formal banking or stock market listing.
What is the author's conclusion on the system's sustainability?
The author concludes that the current system of "rentierism," where banks profit primarily from government debt rather than private investment, is unsustainable and threatens future political stability.
- Quote paper
- MSc Development Economics Marco Rettig (Author), 2004, The role of the banking sector in the economic process of Lebanon before and after the civil war, Munich, GRIN Verlag, https://www.grin.com/document/81223
