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Committee for the Modernization of
Banking and Financial Laws
The financial sector is a major sector of the Lebanese
economy. It absorbs a sizable fraction of the labor force and makes a significant, direct
and indirect (by providing finance), contribution to GDP growth. It also plays an
important role in attracting resources from the rest of the world through international
financial markets, which would help meeting the financing requirements of reconstruction
in Lebanon. The development of modern and effective financial markets, however, requires
the establishment of a proper institutional, legal and regulatory framework, in addition
to support facilities and services.
In accordance with Article 70 of the Code of Money and
Credit, the Banque du Liban has established, in collaboration with the Ministry of
Justice, "the Commission for the Modernisation and Development of Financial and
Banking Laws", in order to contribute to the development of money and capital
markets. The functions of this Commission are:
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to revise laws and regulations that govern the banking and financial
sectors;
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to adopt relevant international norms and standards;
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to protect investors;
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to ensure market liquidity, transparency and integrity;
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to take into account the creation of new financial instruments (e.g.
derivatives) and other innovations; and
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to regulate financial markets in Lebanon.
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I- Projects completed:
To date, the Commission has prepared a number of draft
legislations, of which two have been adopted by Parliament:
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On June 6, 1996, the Lebanese Parliament has voted into law a draft
bill proposed by the Banque du Liban. This law allows Lebanese banks to issue, up to 30%
of their equity capital, stocks and bonds to be traded on financial markets. Simplifying
the trading of bank shares, it also allows the expansion of bank ownership beyond the
presently prevailing family pattern, and encourages banks to issue bonds in all
currencies. In addition, it fosters the development of financial markets in Lebanon,
through the listing of company shares from the services sector, thus opening this
important sector to foreign investment.
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While enhancing financial deepening, this legislation is
expected to change the traditional role of the banking sector and to facilitate its
integration in international markets.
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On June 6, 1996, the Lebanese Parliament has voted into law another
draft bill proposed by the Banque du Liban. This law regulates fiduciary operations and
accounts, by allowing banks and financial institutions to invest fiduciary funds in
various fields on behalf of their customers and on their own responsibility, that is to
undertake off-balance-sheet transactions on fiduciary accounts under the supervision of
the Central Bank. Thus, investors would be able to operate with confidence and
transparency. On the other hand, banks and financial institutions that receive funds from
an investor through a fiduciary account cannot invest these funds in securities issued by
companies in which the fiduciary account’s holder has a particular interest.
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The fiduciary law is expected to contribute to the
development of portfolio investment in Lebanon, including investment through Islamic
banking.
Moreover, upon proposal by the Commission, the Central
Bank issued Circular No.1445 to organize and regulate the operations of financial
intermediaries, including money dealers and dealer/broker firms. After being licensed by
the Central Bank, money dealers are allowed to deal only with currencies, traveler checks
and precious metals, depending on their classification category, while dealer/broker firms
are allowed to deal with all types of securities and financial instruments. In order to
conduct such business, local and foreign firms must be licensed by the Central Bank. These
firms, however, are exempted from the capital gain tax.
II- Projects under preparation:
The Commission has also prepared several draft
legislations on various topics, the majority of which are still under examination They
include:
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A draft law to set up an independent body to regulate and supervise
capital markets. “The National Council for Financial Markets in Lebanon" would
organize, regulate and control these markets, the participants and the trading of
securities. This agency would enjoy a large degree of autonomy in setting its policies and
its functions would be similar to those of the U.S. Securities and Exchange Commission
(SEC), in parallel to those of the Banque du Liban regarding monetary control issues.
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A draft law on the dematerialization of securities and financial
instruments. This piece of legislation gives "Midclear" (the company established
by the Central Bank to be responsible for settlement and clearing operations on the
financial market) the role of central depository. In order to ensure efficient and secure
trading, and a proper settlement of securities accounts, all financial intermediaries
would be required to finalize their settlement and clearing operations through Midclear.
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A draft law on leasing to encourage medium- and long-term credits as
a means of financing reconstruction projects.
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A draft law to regulate mutual funds. This would allow companies to
set up and manage mutual funds under strict supervision by the Central Bank, with clearly
defined prerogatives of the various parties. As an encouragement, mutual funds would be
granted a special tax treatment.
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The purpose of this legislation is to increase liquidity
in the financial sector, expand portfolio management, and introduce mutual funds as an
important vehicle to attract foreign investment to Lebanon.
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A draft law to regulate portfolio management. Portfolio managers
would have to strictly adhere to the provisions of contracts that bind them to investors,
who would receive all relevant information on potential investment.
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A draft law on securitization to allow, through a Special Purpose
Vehicle, the transformation of loans and other claims into tradable securities.
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A draft law to regulate the use of credit cards and electronic means
of payments.
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All these regulations, legislations and draft laws would
eventually create an adequate legal framework conducive to the organization and
development of financial markets, in tune with international standards and norms. In fact,
well-functioning and transparent capital markets would be a powerful tool for Lebanon to
share in the expected benefits of globalization.
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