Al-Manea: Lebanon’s New Law on Deposit Recovery is “A Complex Surgery After the Disease Has Worsened”

Written by legal advisor Mustafa Al-Manea: Lebanon’s new law on deposit recovery is “a complex surgery after the disease has worsened,” published on Arabi 21 link.

The financial and banking crisis that erupted in Lebanon in 2019 represents one of the deepest monetary and financial crises in the modern history of developing countries—not only in terms of the scale of losses but also in the way it was managed and the delay in acknowledging it. With the Lebanese government recently approving the draft law to address the financial gap and recover deposits, discussions have centered on the state’s role in protecting the monetary system.

The Lebanese pound has lost more than 90% of its value against the dollar since 2019. From about 1,500 Lebanese pounds per U.S. dollar, the pound rapidly collapsed to between 85,000 and 100,000 pounds per dollar.

First: Roots of the Crisis – When the Banking System Becomes a Tool for Financing Public Debt

The Lebanese crisis was not the result of a sudden external shock but the outcome of chronic structural imbalances, most notably:

1. Intertwining of Public Finance and the Banking Sector
   Commercial banks became the main financiers of public debt, concentrating sovereign risks within the banking system.
2. Unsustainable Monetary Policies
   The Central Bank of Lebanon relied on complex financial instruments to maintain exchange rate stability, effectively using people’s deposits to temporarily support this stability instead of directing them toward investment in production and the real economy.
3. Lack of Transparency and Accountability
   The true scale of losses was not disclosed early, and recognition of the so-called financial gap was delayed, allowing depositors’ rights to erode cumulatively. Bank assets fell from about $217 billion in 2019 to around $104 billion by 2024, while customer deposits shrank from roughly $172 billion to about $88 billion in the same period.

Second: The Deposit Recovery Law Represents a Delayed but Necessary Remedy

The draft law to address the financial gap and recover deposits attempts to provide a legal framework for what was previously managed through norms and unofficial restrictions.

Key economic features of the law include:

• Official recognition of losses and determination of responsible parties (state, central bank, banks).
• Relative protection for small and medium depositors by refunding deposits up to a certain limit within a set timeframe.
• Conversion of part of large deposits into long-term financial instruments, effectively restructuring deposits.
• Introduction of the concept of loss-sharing (Burden Sharing) instead of placing it on a single party.

According to government statements, 85% of depositors may recover their full deposits within four years under this law.

Third: Challenges and Limits of the Law

Despite its importance, the law faces several fundamental issues:

1. Lack of Clear Funding Sources
   Refunding deposits without specifying real foreign currency sources makes implementation dependent on economic growth or the sale of public assets.
2. Prolonging the Crisis
   Long-term repayment may turn immediate losses into a chronic burden, constraining investment and growth for years.
3. Limited Accountability
   Without clear accountability for banking management and monetary decision-makers, moral hazards remain, and risks to reputation and trust are expected.

Amid the ongoing crisis, indicators—though needing verification—suggest that nearly half of deposits have eroded or lost their real value since 2019 due to currency collapse and unregulated revaluation processes.

Fourth: Lessons Learned – What Should Not Be Repeated

1. No Monetary Stability Without Fiscal Discipline
   Lebanon’s experience shows that stabilizing the exchange rate or protecting the currency cannot be achieved by banks alone; it requires disciplined public finance and genuine tax reform.

Lebanon’s GDP has contracted by more than 40% since 2019, reflecting the profound impact beyond the banking sector, affecting the real economy. The issue becomes even more complex when banks are partly responsible for creating distortions and instability in public finance.

2. Deposit Protection is Not Just a Slogan but a System
   The absence of an effective deposit insurance system and weak banking governance made depositors the weakest link. A sound banking system requires:

• Strict risk management rules
• True separation between banks and the state
• Immediate transparency in financial statements

3. Delaying Loss Recognition Multiplies Them
   The most dangerous aspect of Lebanon’s experience is not the size of losses but the postponement of acknowledging them, which enabled capital flight, deposit erosion, and collapse of trust.
4. Legislation Cannot Succeed Without Comprehensive Reform
   Deposit recovery laws cannot succeed in isolation from:

• Reform of the Central Bank of Lebanon
• Restructuring of banks
• Stimulating the real economy (production, export, investment)

Conclusion

Lebanon’s experience should serve as an early warning for any similar practices.

The recent Lebanese law is a delayed but necessary step toward resolving the crisis. However, it reminds us that crisis management is measured not only by legal texts but by their timing, transparency, fairness, and performance indicators.

The Lebanese experience includes financial losses estimated in tens of billions of dollars and a dramatic decline in the local currency’s purchasing power, severely affecting depositors’ ability to maintain their wealth.

When banks become a tool for financing public spending and reform is replaced by postponement, depositors’ funds become the fuel of the crisis, not just its victims.

These are critical lessons for any country seeking to protect its currency, depositors, and economic stability before it’s too late. Lebanon’s new law represents a necessary and complex “surgery” after the disease has worsened.

Author: Legal Advisor Mustafa Al-Manea, a Libyan lawyer and legal-economic expert with over 24 years of experience. He has worked with investment institutions, sovereign funds, and banks worldwide, including Libya. He is an expert for international research centers, has served as an advisor to the Governor of the Central Bank of Libya, chaired several executive teams, sits on the board of the Libyan Investment Authority and the Libyan Foreign Bank, represented Libya at World Bank and IMF meetings, and leads the Prime Minister’s executive initiatives and strategic projects. He has lectured for the American Bar Association, is a certified member of the European Lawyers Association, a member of the Libyan-American Business Council, and has numerous publications and bold opinions on economic and financial transformation.