Revitalizing the Financial System
A pragmatic approach to market-based solution beyond politics

Riad Obegi and Claude Khayat

The current financial situation in Lebanon is unsustainable. Depositors have very limited access to their life savings, banks are unable to support economic activity, and the cash economy dominates. Structural imbalances, sluggish capital flows, and an almost complete lack of credit are stifling economic momentum and threatening long-term stability. Despite various discussions and temporary relief mechanisms, no lasting or practical solution has yet been implemented to restore confidence and revive the banking sector. It is now clear that Lebanon cannot afford to wait for a political consensus or a boost from international financial institutions to act.

Problem: Bank deposits at BDL have been frozen for over five years
Today, banks hold nearly $80 billion at the Central Bank (BDL) that are frozen, unusable for transactions, and generate minimal or no return. Depositors, in turn, have large sums frozen in banks that they cannot use for essential needs or investments. The real economy is now facing a severe credit crunch. This paradox—excessive liquidity trapped in non-usable, non-productive placements—is creating long-term, deeper systemic inefficiencies.

A Market-based mechanism: Transforming BDL deposits into tradable instruments
We propose an immediate, apolitical solution: convert all central bank fund deposits held by Lebanese commercial banks into tradable Certificates of Deposit (CDs), bearing interest (to be determined) and listed on the local stock exchange.
The CDs would:
• Be issued by the Central Bank against the deposits of commercial banks
• Be fully tradable in the secondary market
• Carry an interest rate reflective of market conditions
• Have scaled maturities
• Be allocated to banks in proportion to their existing deposit levels at the Central Bank
• Stimulate greater activity in the local stock market.

This mechanism would ‘unlock’ stagnant liquidity, enabling banks to trade these instruments, offer them to clients, or use them as collateral to obtain market-based financing. It would also introduce a dynamic yield curve, deepen the local capital market, encourage broader investment participation, and improve monetary transmission—thus restoring confidence in the economy.

Key Advantages
• Liquidity Activation: Dormant funds become usable, strengthening bank balance sheets without requiring direct monetary expansion.
• No Political Roadblocks: The Central Bank can implement this mechanism independently, bypassing lengthy political negotiations.
• Market Transparency and Discipline: Public trading ensures that pricing and interest rates reflect actual supply and demand, enhancing transparency and discipline.
• Investment Vehicle: Institutional and retail investors gain access to new, low-risk, interest-bearing instruments that are transparent and accessible. Through market dynamics, these CDs will help restore trust in the BDL while promoting greater discipline in its operations.
• Some CDs could potentially be backed by guarantees.

Implementation Framework
The process is straightforward and relies on existing infrastructure:
1. Assessment and Allocation: Each bank’s deposits at BDL are known. BDL can organize a bidding process among banks to improve terms and conditions
2. CD Issuance: BDL issues CDs equal in value to the banks’ deposits, with standardized maturities (e.g., 1, 2, 5, and 10 years)
3. Listing and Trading: The CDs are listed on the national stock exchange for trading
4. Market Support: Authorized dealers support a secondary market to ensure liquidity.

This monetary crisis demands urgent, innovative, and politically neutral solutions. Converting idle central bank deposits into tradable, interest-bearing instruments is one such solution. It is simple to implement, relies on market mechanisms, and can unlock liquidity without distorting fiscal or monetary frameworks.

It does not preclude pursuing accountability against those responsible. It does not prevent broader reforms. It is not a cure for all our problems. It is simply a step toward reducing severe inefficiencies and injustices.

Inaction is no longer an option, nor are hasty measures that disregard the foundations of the financial ecosystem. This step could serve as a catalyst for a more functional and responsive financial system — one that meets the needs of the economy while ensuring the stability of the banking sector.

Riad Obegi is Chairman of Banque Bemo
Claude Khayat is a board member of Banque Bemo