Banks to slash interest rates on deposits in 2020
Salameh expected to launch series of circulars to define new mechanism
BEIRUT: Central Bank Gov. Riad Salameh is expected to introduce a new mechanism to slash the interest rates on dollar and Lebanese pound deposits and loans in 2020, in coordination with the Association of Banks in Lebanon, bankers said Monday.
Salameh discussed the new measures with President Michel Aoun, the caretaker finance and economy ministers as well as ABL last Friday at Baabda Presidential Palace, the bankers added.
“Salameh is expected to issue a series of circulars probably this week to define the mechanism to cut the interest rates on dollar deposits and lending. Once these circulars come into force, I expect the interest rates on U.S. dollar deposits not to exceed 5.5 percent even if the amount of money is in the millions of dollars,” one banker told The Daily Star on condition of anonymity.
Political paralysis and the failure to implement reforms and combat corruption, as well as the 47 day anti-government protests, have exacerbated Lebanon’s financial and monetary problems.
Over $4 billion in deposits has been withdrawn from commercial banks since September, though some experts fear the figure could be much higher.
However, most of the withdrawals appear to have stayed in Lebanon, bankers have said.
The crisis has triggered a run on the dollar, which has been trading at exchange houses between LL1,900 and LL2,200.
Banks have placed limits on the withdrawal of dollars, causing more concern among depositors.
“We are already freezing some dollar accounts at 5 percent to 5.5 percent for one year to one year and a half at the request of our customers. We have been doing this for over two weeks. The days of high interest rates on the dollars are over,” the chairman of one bank told The Daily Star.
The banker added that lenders couldn’t reduce the interest rates on dollar deposits until they matured.
Interest rates on deposits have skyrocketed in the past few years, with some lenders offering up to 12 percent or 14 percent interest on dollar deposits that exceed $1 million.
The chairman dismissed the possibility of an interest rate war among banks to lure more funds in hard currency.
“I don’t think the interest rate on dollars will go up again. Where can they get dollars? The flow of dollars to the country has dropped drastically over the past few months,” they added.
The banker expected Salameh to introduce a mechanism to stop commercial banks from hiking interest rates on dollar deposits.
“Now we are in a state of emergency. A 5.5 percent interest rate on dollar deposits is still higher than other countries, where the rates do not exceed 1.5 percent on dollar deposits,” they said.
Bankers said that conversions of Lebanese pounds to dollar accounts had reduced the circulation of the local currency in the market.
“The dollarization in our bank, for example, has jumped from 71 percent to over 82 percent now. I expect the interest on the lira to drop also,” the bank chairman said.
Some bankers expressed shock at the extent of the rush on the dollar in the past few weeks.
“It was a madhouse. People insisted on withdrawing their dollar deposits despite all the assurances that their deposits are safe,” one banker said.
“Some of our customers have bizarre excuses to withdraw their money. One customer came to our bank saying that four of his children have been enrolled at Harvard University and he needed the money to pay for their tuition. He printed four Harvard applications to prove his point but we did not see the acceptance from the university.”
One financial analyst also expected the interest rates on Treasury bills and Eurobonds to drop once the new Cabinet introduced a reform program that would satisfy the market.
“First thing, we need a Cabinet that wins the support of the international community. We definitely need to cut the fiscal deficit through a series of measures,” the analyst said, adding that banks might be willing to make some sacrifices if they saw clear evidence that the new Cabinet would implement reforms across the board.
The analyst did not rule out the possibility that the International Monetary Fund could step in and help Lebanon at the request of the new Cabinet. “The IMF may be willing to lend up to $3 billion to Lebanon with an interest rate of not more than 3 percent. This cash injection will encourage other investors to bring their money back to Lebanon,” he added.