The Lebanese banking crisis: an exploration of the impaired banking system

This chapter discusses the 2019-present Lebanese economic crisis and examines the riskiness of Islamic banks (IBs) and conventional banks during the 2008 global crisis and the 2019 Lebanese crisis, and the likelihood of withstanding the impact of COVID-19 by estimating overleveraging for eight banks in Lebanon for the period 2000-2018. The results in this chapter suggest that excess debt rather than the mere holding of debt was the reason behind the severe financial meltdown in 2008 as well as the 2019 crisis and show that IBs performed better during the 2008 financial crisis as well as the recent crisis, but were subject to the second-round effect of the global crisis. Moreover, the capital and liquidity buffers they built following the crisis will help them overcome their borrowing costs and survive the current dramatic economic disaster. In these circumstances, Islamic banks can provide a viable alternative financial system to the impaired domestic banking system in Lebanon, especially because their product structure is essentially asset-backed financing, whereas conventional banks rely heavily on leveraging.