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French Version

Banking chief urges government to amend tax on interest measure could deal blow to capital markets (Daily Star)

Banking chief urges government to amend tax on interest measure could deal blow to capital markets - The Daily Star

Chairman of Banking Control Commission warns new charge may hurt flow of liquidity from financial transactions.

The government came under increased pressure Wednesday to amend the 5 percent tax on interest on deposits. Just days after the Association of Banks in Lebanon expressed deep concern about the application of the new tax, the chairman of the Banking Control Commission, Walid Alamuddin, warned that the measure could seriously hurt the flow of liquidity from the management of financial instrument transactions.

"The government should exempt financial instruments from the tax in order to protect the Lebanese capital market," Alamuddin told participants in a one-day economic forum organized by Data and Investment Consult-Lebanon at the Crown Plaza Hotel. He added that the tax should be confined to deposits only and not include instruments and portfolios. Finance Minister Fouad Siniora, desperately trying to meet the projected 25 percent budget deficit, hopes to generate more than LL160 billion from the tax, which the government endorsed in January.

But many bankers have called on the government to exempt non-Lebanese residents and fixed income bonds from the tax, as it would deal a blow to the capital market. They say that the government could easily net LL160 billion a year if the tax was applied on Lebanese depositors only. However, Siniora is not showing any signs of making amendments to the tax.

Alamuddin also criticized what he termed "haphazard banking laws" that could affect financial stability. He added that investors and brokers want a market with stable investment and banking laws. He stressed that banks have already done a lot to help the government reduce the budget deficit and reminded participants that commercial banks have used $4 billion of their deposits to buy two-year Treasury bills or eurobonds with no interest. The move will allow the government to reduce debt servicing by $400 million annually.

Most of the $31 billion public debt is owed to local banks, leaving them exposed to a government default. But banks sighed with relief after Prime Minister Rafik Hariri secured $4.4 billion in soft loans from the donor states that met in Paris in November 2002. Alamuddin also commented on the performance of Lebanese banks. He said that profits of local banks, contrary to the general belief, are ordinary compared the size of their holdings.

Citing an example, Alamuddin said the profits of commercial banks in 2002 represent only 11 percent of the private equity of these banks."These figures are not too high. The shareholders in these banks could have obtained the same return if they deposited their money in the banks instead of participating in them." Alamuddin recommended that the distribution of dividends should not exceed 30 percent of total profits. He added that a 30 percent dividend ceiling will allow the banks to increase their capital and thus meet the requirements of Basel Committee on Banking Supervision. The Swiss-based committee for financial settlements called on all banks to apply new procedures to raise capital and protect depositors.

The head of the research at Banque Audi, Marwan Barakat, said banks may start lending more money to the private sector if the risk elements decrease. He added that profits of banks may drop due to the fall in interest rates. The Central Bank cut interest rates on two-year T-bills by more than 6 percent to help the government reduce debt servicing. Barakat said banks will thus be more inclined to lend to the private sector.

He added that banks achieved relatively good growth last year. Total bank assets increased by $5 billion in 2003, and banks deposits, estimated at $43 billion, are 300 percent higher than the country's gross domestic product."This is considerably high compared to other emerging markets where the ratio is only 123 percent," Barakat said.

Other speakers addressed money laundering and banking supervision, saying that the "Paris II" conference has given Lebanon a reprieve to fix its financial problems.

Beirut 03-03-2003
Osama Habib
The Daily Star

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