Of Money and Policymaking: Examples from the Banking Sector

Ali Noureddine

This article was translated from Arabic.

Commercial banks have played a significant role in shaping the structure of the authorized banking and financial systems, notably in Syria and Lebanon, throughout the history of the Arab Mashriq (East), particularly from the days of the Ottoman Empire until the French mandate.

These banks have been crucial in determining the composition of exchange systems and the structure of central banks’ roles, as well as affecting the quality of economic policies implemented in Middle Eastern nations in the years after their independence.

In Lebanon in particular, the role of the Association of Banks in Lebanon has grown, transforming over time to become the group with the most influence on the country’s financial policies, whether before the start of Lebanon’s civil war in 1975 or after its end in 1990, due to the growing size of the banking sector as well as the growth of the interest groups linked to this sector.

Following the financial collapse of 2019, the Association of Banks in Lebanon had the means to derail huge financial plans as well as Lebanon’s understandings with the International Monetary Fund at one stage.

However, the expansion of the role of active pressure groups, which represent this sector, particularly the Association of Banks in Lebanon, did not emerge from a vacuum. It was rather the product of a long process that started not only before Lebanon and other countries in the region gained their independence from the Mandate authorities, but even prior to the Mandate era.

Since then, convergences of interests between political regimes and the financial sector have grown stronger and more defined. This crystallization has cleared the way for financial and banking pressure groups’ interests and orientations to influence monetary, financial, and economic policy developments.

It is perhaps peculiar that this accumulation began after the banks entered the markets of the Arab Mashriq in 1856 with foreign capital, in light of the state of deficit from which the Ottoman Empire was suffering, thus sowing the seeds that gave this sector a major role in shaping the region’s various economies.

Contrary to common misconceptions, capital and banking interests entered the domain of public policy decades before countries of the region gained their independence, and since that time the interests of bankers and the influence of prominent countries in the Arab Mashriq have since coincided.

In 1863, the Ottoman Empire was suffering from a stifling financial crisis due to escalating levels of debt that resulted from the Ottoman-Russian war. It was for this reasons that the Ottoman Empire was forced conclude an agreement that same year with the English and the French that established what was known as the Ottoman Imperial Bank, with English and French capital and ownership. The first branch of this bank in the Arab Mashriq was opened in Beirut’s Ain al-Mreisseh area.

In theory, this bank was intended to be a private bank whose profits would go to foreign investors. In practice, however, the treaty between the Ottomans on the one hand, and the English and French on the other, afforded the bank great privileges that included playing the role of “the state’s bank,” lending to it and managing its debts, in addition to issuing money on its behalf.

The privileges enjoyed by this bank also included acquiring agencies and employees of the Ottoman Bank, which was established several years prior to the agreement to play precisely these roles. In short, the Ottoman Empire had relinquished its monetary policy and financial management to foreign interests, as result of its dire need for funding during its wars with Russia, and its need for European support in this conflict.

However, Ottoman Imperial Bank’s ties to politics were not limited to the amount of privileges it attained given its advent with European capital, but also included the roles it later played in economic activity in the Middle East.

The Ottoman Imperial Bank quickly became – according to the documents available – a financing source for huge economic projects, such as the construction of railways, factories and ports, besides becoming a major creditor to the Ottoman Empire itself. Consequently, the bank’s influence in economic and financial policies expanded beyond managing local monetary policy through the issuance of currency.

With its branches growing in number, it ultimately expanded its influence to include all the states of the Ottoman Empire without exception.

Following the lead of the Ottoman Imperial Bank, which in practice represented Western investment interests, other Western banks expanded their branches throughout the Levant region. Thus, the French Bank of Credit Lyonnais opened its first branch in Beirut in 1875, followed by the German-Palestinian Bank in 1889, while the Rothschilds group opened the Anglo-Palestinian Company in 1902 and the East German Bank began opening its branches throughout the Mashriq in 1906.

During this expansion, foreign banks were capitalizing on the lack of liquidity in the Mashriq region resulting from its high trade deficit at the time, its reliance on imports, and its need for foreign capital to expand investment activity. However, foreign lenders’ expansion in the local banking sector did not come without a price, as it later became clear that these banks’ influence on the local economies was increasing.

With Lebanon and Syria entering the French mandate era in 1919, the French quickly assumed control of the Ottoman Imperial Bank’s assets in the region and transferred the concession to create cash to the Bank of Syria and Lebanon, a private lender. The French subsequently imposed the connection of the new currency – the pound issued by the Bank of Syria and Lebanon – to the French franc, and imposed the circulation of this new currency throughout the two countries.

It should be noted that during the era before the Battle of Maysalun, the Syrians tried to create a new currency independent of the Mandate authorities, but the control of foreign capital over the entire banking sector prevented them from achieving monetary independence.

It was here in particular that the impact of private banks on monetary policies ensued, and the margin of maneuvering that the authorities have in this matter became clear. In practical terms, at the time no authorities could impose the circulation of a currency throughout the territories under their control without the support of the prevailing financial sector.

As a result, the Syrian attempt failed, and the Bank of Syria and Lebanon – which was under French direction – regained control of the region’s monetary policies and the creation of its currencies.

With Lebanon gaining its independence in 1943, the country was supposed to establish its own central bank in order to set an appropriate monetary policy for the country independent of the interests that sponsored the Bank of Syria and Lebanon as a private lender.

However, the banking elite which at that time dominated the country’s economy, and which was often connected to foreign capital, began to resist the idea of ​​establishing a central bank following Lebanon’s independence.

The establishment of the central bank was meant to regulate banking activity, put in place regulatory policies that would facilitate the work of local banks, and devise monetary policies based on clear priorities set by the bank. Yet, despite the country’s independence in 1943, and the establishment of a bank secrecy law in 1956, neither the law on money and credit nor the establishment of the Central Bank materialized until 1963. As for the Central Bank, it was not until 1964 that it was finally established in order to form an independent monetary policy for the country.

In any event, Lebanese banks at that time succeeded in postponing the establishment of the Central Bank until 1963, and during those years they waged a tough battle to impose their priorities within the monetary and credit law on which the bank was founded.

Among the issues for which the banks negotiated for years, the most important one was maintaining the principles of bank secrecy, and preventing the opening of bank accounts before the supervisory and tax authorities. The banks also negotiated in order to keep their margin of independence, and to limit the degree of BDL interference in solvency, liquidity and reserves rates. It was clear that the lenders were able to impose all their priorities in this law after delaying it for as long as possible.

The stated objectives of the establishment of the Association of Banks in Lebanon in 1959 included focusing on cooperation among local banks in order to develop a common vision for the sector’s higher interests. These declared goals also state that the association seeks to organize the sector, represent and defend the profession, and highlight the positive image of the sector before the local populace and the international community. However, despite all the declared goals, it was clear that the purpose of establishing the association was only to form a strong pressure group capable of protecting the interests of the sector when it came to setting public policies.

Indeed, the association was able to play an exceptional role in this regard as a result of the growth of the banking sector and the expansion of the interests it represents. For example, after the financial collapse in 2019, the Diab government’s approved financial plan that resulted from its negotiations with the IMF was dropped in Parliament after the Association of Banks in Lebanon mobilized the lobby that works in its favor within the assembly.

The main reason for dropping this plan was the association’s rejection of provisions that provided for the write-off of bank capital in order to deal with part of the accumulated losses in the sector. Since that time, banks have objected to all financial transactions that involve provisions of this type, and in the process have obstructed all proposed solutions to date.

For more than a century and a half, the banking sector in the Arab Mashriq has been a model for the convergence of money, politics and wealth. It is the sector that resulted from the entry of Western countries to exploit the crisis of the Ottoman Empire in order to obtain the privilege of creating currency in the region.

It is the sector that benefited from the infrastructure renaissance, which was financed by Western capital and investments during the Ottoman Empire’s period of atrophy. And finally, it was this sector that imposed the adoption of the pound issued by the Bank of Syria and Lebanon, in addition to being one of the main reasons for putting off the establishment of a Lebanon’s central bank until well after independence.