The Gap Law: A legal black hole in Lebanon

After more than six years of economic collapse and the effective freezing of depositors’ savings, Lebanon’s government has advanced one of its most consequential and controversial financial reform proposals to date: the draft Financial “Gap Law.” Approved by the Cabinet in late 2025, the legislation seeks to formally define the vast losses incurred by the banking system since 2019 and establish a framework for repaying depositors.

To assess the proposal’s implications, The Beiruter reviewed a detailed analysis published by the Leaders Club, a research and policy platform affiliated with the Beirut-based firm InfoPro. As outlined in the report “Gaps in the Gap Law,” government officials frame the legislation as a necessary step toward financial recovery and renewed engagement with international partners, particularly the International Monetary Fund. Critics, however, argue that the law risks entrenching injustice, diluting accountability, and converting years of informal dispossession into a legalized settlement that shields powerful interests while transferring losses to ordinary citizens.

Defining the Losses

At its core, the gap law attempts to legally recognize and allocate an estimated $70 to $80 billion shortfall between banks’ liabilities to depositors and the assets available within the financial system following the collapse. Since 2019, depositors have endured informal capital controls, withdrawals at below-market exchange rates, and prolonged restrictions on access to savings, all in the absence of a formal legal framework.

The draft law seeks to resolve this ambiguity by codifying how losses will be distributed. Under the current proposal, depositors would be eligible to receive up to $100,000 in cash, in installments over a four year period, with remaining balances converted into long-term bonds backed by assets of the Central Bank. The cap applies per depositor rather than per account, meaning individuals with multiple accounts would still face the same ceiling. Banks, meanwhile, would be responsible for covering only 40 percent of withdrawals, with the remainder effectively shifted onto public or quasi-public mechanisms.

The Case for the Law

According to the Leaders Club report, supporters of the gap law present it as a long-overdue exercise in legal clarity. After years of ad hoc restrictions imposed by banks and regulators, proponents argue that formalizing loss distribution is essential to restoring predictability, limiting litigation, and rebuilding a baseline of trust in the financial system.

A second pillar of the government’s argument is the protection of smaller depositors. By prioritizing cash payouts up to $100,000, officials contend that scarce resources are being directed toward those most exposed, rather than larger depositors with diversified assets. In official rhetoric, the measure is framed as one of social equity.

The law is also portrayed as a prerequisite for international engagement. Lebanese authorities argue that without formally acknowledging the scale of losses and outlining a repayment mechanism, Lebanon cannot credibly negotiate IMF support or advance broader banking reforms. Officials emphasize that the legislation is not intended as a final solution but as an initial step after years of paralysis.

Organizing a crisis, not resolving it

The analysis of Leaders Club offers a more skeptical assessment.

One of the most consequential critiques concerns the law’s retroactive character. By redefining the legal status of deposits after the fact, the draft effectively penalizes depositors who acted in compliance with the regulatory framework that existed before 2019. Such retroactivity, the analysis warns, raises serious constitutional concerns and could expose the law to legal challenges.

This concern is echoed by Ramzi El Hafez, Publisher of Lebanon Opportunities magazine, the organizer of Leaders Club. In an interview with The Beiruter, El Hafez argues that legislation reallocating losses retroactively to citizens who complied with existing laws would face intense scrutiny in any functioning judicial system. For him, the issue reflects a deeper failure of governance rather than a technical flaw.

Losses shifted downward

The report also stresses that depositors are being made to shoulder losses stemming from unresolved disputes between the authorities and the banks over interest-rate setting, loan restitution, and the legality of overseas transfers. If the courts ultimately determine that the banks were at fault, then depositors, who acted in good faith and within the law, should not be the ones burdened with those losses.

In El Hafez’ assessment, Lebanon’s post-2019 crisis management has followed a clear pattern: successive governments recycling modified versions of the same rescue plans while gradually transferring losses downward. Treating the banking sector in isolation, he argues, without a comprehensive economic plan has produced a circular process that sacrifices depositors while leaving structural failures unaddressed.

Retreat from earlier commitments

The Beiruter’s research reveals another major point of contention: the sharp divergence between the current proposal and earlier restructuring plans. Proposals discussed in 2020 under former Prime Minister Hassan Diab envisioned cash payouts of up to $500,000 per depositor. The current $100,000 cap represents a significant rollback, raising questions about the extent to which political delay, rather than financial constraints alone, has shaped the law.

Both the Leaders Club analysis and El Hafez argue that prolonged inaction has compounded the damage. Depositors who withdrew funds early on at deeply discounted exchange rates remain uncompensated.

Accountability left aside

Another consequential omission is the law’s failure to embed meaningful accountability. While it outlines mechanisms for repayment, it does not mandate forensic audits, investigations into insider lending, or penalties for regulatory and managerial failures that preceded the collapse.

At the heart of the crisis, El Hafez argues, lies not a shortage of legislation but a lack of political will. Existing accountability mechanisms, before, during, and after the collapse, have remained largely dormant. The result, he says, is a normalization of impunity that continues to erode public trust and undermine any credible recovery.

Equally damaging is the absence of an official state narrative explaining how Lebanon reached this point. Despite years of public debate, the state has yet to issue a comprehensive account of the default, the accumulation of losses, or the safeguards required to prevent a recurrence. Without such a narrative, El Hafez warns, losses cannot be distributed commensurately with responsibilities.

Financing without a road map

The opacity extends to the government’s financing assumptions. Appeals for IMF support are made without clear explanations of how new borrowing would be serviced or how interest obligations would be met. Meanwhile, Lebanon’s Eurobond liabilities, estimated at more than $31 billion excluding accrued interest, remain largely absent from official reform discourse despite their centrality to the debt equation.

From a social perspective, El Hafez argues that the gap law lacks a coherent social policy. It fails to account for disparities between depositors who absorbed losses early and those who did not, and it does not articulate priorities related to poverty alleviation or social protection.

A defining choice

Supporters of the law argue that imperfect action is preferable to continued paralysis. Critics counter that this presents a false binary. As El Hafez contends, a third option remains available: the development of a comprehensive economic plan spanning the short, medium, and long term, grounded in realistic cash-flow projections and accompanied by reforms to public administration, social security, labor regulation, and the legal framework.

Without such a plan, efforts to close a financial gap approaching $70 billion lack credibility. Ultimately, El Hafez stresses, no economy and no currency can function without trust. Liquidity injections alone are insufficient. Absent governance, discipline, and confidence, any funds entering the system will exit just as quickly through imports or capital flight.

Lebanon’s fiscal gap law may mark the first serious attempt to legally confront the consequences of the banking collapse. Whether it becomes a foundation for recovery or a symbol of another missed opportunity will depend on whether lawmakers are willing to confront the deeper failures the law, as currently drafted, leaves untouched.