Lebanon: Banks take low-income housing hostage

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Al-Akhbar Management

The headquarters of BLOM Bank, which retains the largest share of housing loans. (Photo: Al-Akhbar)

By: Mouhamad Wehbe

Published Wednesday, August 20, 2014

The crisis between the Public Corporation for Housing (PCH) and the banks are a cause of concern for the low and middle-income segments of the population, as it threatens to eliminate one of the main support mechanisms for home loans. However, most people are not aware of the deficit faced by the PCH nor the demands of the banks or the context of the ongoing crisis.

The PHC received a treasury loan worth 30 billion Lebanese Liras (LL) ($20 million) to cover outstanding payments to the banks. According to those involved in the case, payments to the banks will resume early next week. However, neither side promised that this crisis would not be repeated or fabricated like the current one.

The loan only alleviates the problem temporarily. The financial deficit of the PCH will not be solved in the next few months, leading to several questions. Did the PCH take any actions against banks who failed to apply the protocol signed related to providing subsidized loans? Are banks allowed to put a stop to such loans? How will the PCH deal with the banks who stopped providing its loans? Why did the banks decide to provoke a crisis with the PCH? Are they hoping to modify the protocol or purchase the PCH's [financial] portfolio? Do they want to raise interest rates? Or do they have other objectives?

There are many concerns. However, the information revealed by the crisis has raised an important question for PCH's Chairman and General Director Roni Lahoud. Why is the crisis being talked about now, although it began more than 18 months ago? Why did some banks continue to grant loans while others declined? And what is the context in which the crisis erupted?

According to industry sources, the crisis began after 15 years had passed on the protocol between the banks and the PCH. This meant that customers who received subsidized loans in the first year of the protocol are beginning to close their accounts in the banks, which already collected the whole premium from borrowers, while the PCH paid the accumulated interest on their behalf. The second part of the loan is between the customers and the PCH, which will begin to recover the interest it paid.

The timing of the crisis also falls within the context of amendments to the protocol, which was agreed upon between the PCH and the Association of Banks in Lebanon (ABL) concerning interest on outstanding payments, reducing bureaucracy, digitization and the possibility of going online, and other issues proposed in the letters sent by Lahoud to the ABL before the crisis began.

Prior to the crisis, the ABL had proposed to purchase the PCH's portfolio at a price lower than its actual value by 30 percent. This way, the banks would begin recovering the premiums and their accumulated interest and would receive the second part of the loan payments (the interest paid on behalf of the customers) for free.

The banks are treating [the housing loans from the PCH] as help provided by the state to limited-income segments, due to its contribution in granting loans at reduced interest rates (rates for PCH loans are between 4 and 5 percent, depending on each bank and its marketing policy). Thus, they expect the state to accept this barter and offer them profits of up to LL 54 billion ($36 million) a year, or 30 percent of the LL 180 billion ($120 million) paid annually in interest by the PCH.

The banks are taking things even further. In a recent article, ABL Secretary General Makram Sader complained about the limited profits from housing loans provided through the PCH. Sader explained that interest rates on those loans are at 5.068 percent, which is barely equivalent to the average interest on bank deposits, which is at 5.86 percent.

Based on those figures, Sader wanted to refute all the claims made about banks profiting from the escalation of the crisis with the PCH. "In the entire process, bank profits are very limited due to the factor of [having] compulsory reserves," he claimed.

Based on Sader's own calculations, however, banks receive a huge payoff from housing loans. They are able to free themselves from part of the compulsory reserve by reinvesting in certificates of deposit or treasury bonds. This lead to an actual increase in profits from housing loans by more than a percentage point and could reach 1.5 percentage points, meaning that actual revenue earned from housing loans could reach up to 6 or even 6.5 percent.

Banks themselves approach all types of loans in a comprehensive manner and this is what they compete for on the sidelines. Housing loans demand that borrowers begin paying a commission equivalent to 1 percent of the loan (for example, a commission of one million liras to open a file for a loan of 100 million). It also imposes on borrowers to buy two insurance policies (life insurance and damage insurance). Thus, as many banks own insurance companies, these policies are sold inside the bank, in clear violation of the loan, since the banks would be imposing their own insurance companies on the customer.

Moreover, housing loans are turning borrowers into long-term hostages of the banks. The majority are forced to deposit their salaries in the bank throughout the loan period. They also force borrowers to have guarantors, who are also taken hostage. Based on this process, the banks try to sell them personal loans, car loans or credit cards in small amounts to entice them to borrow at interests rates of up to 20 percent a year.

Thus, the 70,000 families – recommended to the ABL – who received housing loans through the protocol with the PCH could be considered customers of the banks, for at least 15 years. And as the banks continue to make profits, the [interest rate] subsidy is shouldered by the state, the central bank, and the treasury.

The crisis erupted when the PCH failed to make payments of LL37 billion ($25 million). However, some observers believe that it revealed something about the aspirations related to the portfolio of the PCH loans. Ultimately, banks are not charities; their only aim is profit. The state, on the other hand, is supposed to provide some sort of social welfare [for its citizens].

Several banks are competing to expand their loan portfolios in any way possible, especially that such loans have a very low default rate, which is around 0.8 percent. The largest of those is BLOM Bank, whose share of housing loans reached 17 percent, surpassing that of Credit Libanais by a tiny margin. However, BLOM Bank is the only bank out of those who stopped offering the loans, and attempted to force customers into signing papers increasing the interest rate to 11.8 in case the PCH fails to make payments.

Most establishments that stopped selling public housing loans were either small banks trying to keep up with the decisions of the ABL or those who would benefit from pressuring the PCH into selling its portfolio and have nothing to lose from the decision to stop. Remarkably, some major banks did not stop granting housing loans, such as Bank Audi. On the other hand, Byblos Bank, headed by the chairman of the ABL, stopped for only two days, then quickly retracted and went back to competing over housing loans. Other banks stopped providing the loans, even though the PCH owes them nothing.

Sources in the PCH stressed that payments to banks will now be based on different criteria, especially for banks in breach of their obligations according to the protocol. The banks continuing to provide the loans will have the priority in payment and those who stopped giving them out will not have this “privilege.”

The PCH has already received a treasury loan of LL30 billion ($20 million) and collected more than LL17 billion ($12 million) in the past period, which means that its deficit has been covered for the time being and maybe even for the next period. PCH loans remain the only products capable of creating new borrowing cycles at the banks and free copious amounts of their compulsory reserves.

However, all indicators show that crisis will reappear in the future, unless the imbalance between the revenue and commitments of the PCH is solved. The sources of revenue include a portion of the premium deposited in the institution's account, in addition to a share from building fees, construction taxes, and so on. This should be enough to cover the accumulated deficit in liquidity in the future or at least until it rebalances its financial accounts, anticipated between 2016 and 2017. Although the crisis has been alleviated by the treasury bond, it has the potential to erupt again.

Fourty-six percent of the market

The PCH loans are meant to target the low and middle-income classes. It is a way to channel support to these segments, allowing them to own a residence in Lebanon despite their humble capacities, in light of the rentier system and quick profiteering at the expense of a social vision for the economy.

According to the article by the head of the ABL, Makram Sader, published in ABL's monthly bulletin, the volume of loans subsidized by the PCH rose to LL3.8 billion (~$2.5 million) or 28 percent of the total worth of housing loans at [Lebanese] banks, representing 46 percent of total borrowers.

The total value of the housing loan portfolio in the banks reached LL13,688 billion ($9.13 billion) at the end of May 2014 to the benefit of around 106,000 borrowers. Housing loans make up 17 percent of total loans provided by commercial banks in Lebanon. Loans by the PCH are those which benefit low and medium-income households, who cannot afford to live in their own country.

This article is an edited translation from the Arabic Edition.

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