Bank deposits important to finance Lebanon

A working paper by the International Fund on the determinants of deposit inflows to Lebanon indicated that both domestic and external factors are important to the continuous growth of deposits to the Lebanese banking sector, as reported by Lebanon This Week, the economic publication of the Byblos Bank Group. It said that bank deposits are particularly important to the financing of the Lebanese government, as local banks hold a large part of the public debt. As such, the banks’ continued funding, mainly from resident and nonresident deposits, is an important indicator of the viability of the Lebanese financing model given the high level of government debt.

Therefore, the determinants of deposit demand help determine the outlook for the country’s ongoing financial stability.

It said that higher economic growth, an increase in inflation, and a higher differential between the Lebanese pound and US dollar interest rates are key domestic drivers, while the business cycle in advanced economies and real GDP growth in the GCC are major external factors and tend to be associated with stronger deposit growth.

Further, the report indicated that economic activity and inflation tend to have a more significant impact than interest rate differentials among domestic factors, while external variables tend to have a bigger impact on deposit growth than domestic variables.

In parallel, the report found that bank-specific factors play an important role in explaining the demand for deposits at the bank level. It said that banks that are more stable as well as those with a higher loan exposure are associated with higher deposit growth.

Moreover, a bank’s perceived level of risk tends to affect deposit growth. It noted that the liquidity situation of the bank also plays a significant role in determining deposit growth, while a higher loan-to-asset ratio suggests that banks with a higher degree of financial intermediation have higher deposit growth rates.

It also found that a bank’s net-interest margin is correlated to deposit growth. In parallel, it found that banks’ profitability and size in terms of assets have an insignificant impact on attracting deposits.

The report warned that the importance of external factors in attracting deposits reflects a key vulnerability in Lebanon. It noted that Lebanon cannot influence the external variables, so a sufficiently adverse convergence of these factors might negatively affect deposit inflows and could substantially tighten financing conditions.

As a result, it called for a substantial adjustment in fiscal policy that would help reduce the large fiscal deficits and the debt-to-GDP ratio, thereby gradually eliminating the dependence of the Lebanese system on deposit inflows. In parallel, it considered that monetary policy should maintain a sufficient interest rate differential to the US dollar to continue supporting deposit growth at comfortable rates.

Furthermore, it called for financial sector policies to continue focusing on the soundness of the banking system in order for the bank-specific factors to continue supporting deposit growth.

– The Daily Star