BELIEF, Bank Restructuring, Banking Crisis, Economic Update, Economic Growth, Security Situation

Banking Reform Debate Interrupted by War

12:12 | 31 January 2026LIMS output
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banking

Lebanon’s paralyzed banking sector has been the main obstacle to economic recovery since late 2019. This paralyze accelerated the shift toward a cash-based economy which complicated the Financial Action Task Force (FATF) compliance and contributed to the country’s placement on grey list for money laundering and terrorism financing. The U.S. Treasury has warned that informal networks, including Al‑Qard Al‑Hassan, are exploited to finance Hezbollah.

In January, the central bank governor announced reforms to strengthen anti–money laundering standards and cooperate with European judicial authorities. The announcement follows the government’s submission in December of the long-awaited Financial Gap Law aimed at addressing financial sector losses and unlocking the banking paralysis. Before the war erupted, these reforms were at the center of national debate. Depositors criticized bail-in provisions in the gap law, while bankers opposed potential requirements to repatriate funds transferred abroad during the crisis. Questions about accountability were also raised.

LIMS explained that the proposed law represents a significant improvement for depositors. It would raise deposit insurance coverage from roughly $800 to $100,000. The deposit portion exceeding that threshold would be converted into central bank–issued asset-backed securities (ABS). LIMS notes that while withdrawals currently face an 85 per cent haircut, the ABS discount should be smaller, as it avoids the risk of bank liquidation. The ultimate recovery value will depend on fiscal discipline and broader public finance reforms. For the banking sector, the law would transfer part of the liabilities from commercial banks to the central bank, helping to clean up bank balance sheets and potentially allowing them to resume financial intermediation. Restoring the credit cycle would enable businesses and households to access loans after six years of financial paralysis.

LIMS argued that resistance to the proposal reflects, in part, the interests of bankers who profited from financial engineering operations or transferred funds abroad after 2019 and now face potential clawbacks. Similar concerns apply to depositors who received exceptionally high interest rates or profited from trading banking cheques during the crisis. At the same time, some political actors are advocating the liquidation of the central bank’s gold reserves to repay deposits. LIMS warns that such a move could expose the reserves to political spending pressures and risk repeating the fiscal mismanagement that contributed to the crisis.

On the regulatory front, LIMS welcomed the central bank’s announcements as stronger anti–money laundering standards and cooperation with foreign courts are necessary to rebuild credibility and pursue terrorism financing cases. However, monitoring remains difficult in an economy dominated by cash transactions. Restoring a functioning banking sector is therefore essential to bring economic activity back into regulated financial channels.

The Financial Gap Law has been delayed for years, and the prolonged paralysis has deepened economic contraction while entrenching poverty and distrust in public institutions. Passing the law would be politically contentious but economically necessary, particularly at a time when Lebanon faces mounting uncertainty and growing financing needs amid regional conflict.

  • Why Do Some Oppose the Financial Gap Law Even Though It Is the Key to Exiting the Crisis? January 7, 2026: VDL, Audio interview (AR)
  • Why Does the Financial Gap Law Represent a Better Option for Depositors? January 8, 2026: Aljoumhouria, Op-ed (AR)
  • How Does the Financial Regularity Law Return Depositors’ Funds? And Why Do Bankers Oppose It? January 8, 2026: Al-Manar, Video interview (AR)
  • Saïd Launches Internationally Required Reforms from the Central Bank of Lebanon: Will He Be Able to See Them Through? January 9, 2026: Lebanon Debate, Article (AR)
  • Six Years of Waiting: The Financial Regularity Law Restores Banks’ Operations and Kickstarts the Economy. January 12, 2026: Radio Ehden, Audio interview (AR)
  • The Financial Gap Law: The Best Available Option to Restore Deposits and Revive the Economy. January 20, 2026: Beirut 24, Video interview (AR)