It is not an overstatement that Lebanon's banking sector forms the backbone of the country’s economy. Banking activity contributed, from the 1950s to the 1970s to its economic prosperity. Even during the darkest hours of the civil war that tore the country apart and hindered its economic development, funds continued to flow into Lebanese banks that benefited from a policy of banking secrecy, which embodied its free economy and gave it an important advantage over others. 

In the post-war years, the sector played a pivotal role in the reconstruction process, despite the great difficulties, errors that were committed and opportunities that were lost. Lebanese banks took it upon themselves, as a result of an unspoken understanding between them and the Rafik Hariri-led cabinet at the time, to finance government projects by subscribing in treasury bonds pursuant to a central bank monetary policy predicated on maintaining the stability of the Lebanese pound’s exchange rate.

These banks reaped substantial profits through this equation, but they also had to take on significant risks that revolved on their over-investment in government bonds, at the expense of portfolio diversity, which is considered a main tenet of good governance. This choice led to high interest rates of 8-10% that hampered the development of the private sector, the main driver of growth, which has always distinguished Lebanon from other countries of the Middle East.

From this perspective, critical voices rose against the central bank’s policy, accusing it of artificially buoying the currency and condemning the existing understanding between banks and the government, which came at the expense of the interests of citizens and the economy. This campaign was not devoid of some degree of politicization. Such a monetary policy could be costly because it was not complemented by governmental reform policies that addressed the economy’s structural imbalances and lacked the measures needed to control wasteful spending and corruption. In addition, interest rates could have been better manipulated to accommodate the requirements of growth.