Lebanon’s banking reform hits a constitutional roadblock

Lebanon’s efforts to reform its banking sector have entered a new phase of legal and political uncertainty after President Joseph Aoun challenged Article 3 of the amended law on bank restructuring before the Constitutional Council.

The move has reopened debate over the balance between financial reform requirements, the independence of the Central Bank, and the role of state institutions in managing one of the country’s deepest economic crises.

Reform timeline and the IMF dimension

The presidential challenge has generated concerns among political and financial circles over its potential impact on Lebanon’s reform commitments, particularly in relation to negotiations with the International Monetary Fund (IMF).

In August 2026, IMF Regional Director Ernesto Ramirez described the approval of the banking restructuring law as “a very positive step” reflecting Lebanon’s commitment to aligning its legislation with international standards. The IMF welcomed the law as part of broader efforts to restore confidence, strengthen financial governance, and create mechanisms for dealing with distressed banks.

However, economic expert Antoine Farah stated to The Beiruter that the challenge should not necessarily be viewed as an immediate obstacle to reform. According to him, the law cannot effectively be implemented before the approval of the financial gap law, which is required to determine how accumulated losses will be addressed.

Farah noted that the current legal dispute could instead represent an opportunity to clarify responsibilities and improve Lebanon’s negotiating position with the IMF. He argued that Lebanon needs a unified position in its discussions with the IMF, adding that disagreements between Lebanese institutions have contributed to uncertainty during negotiations.

“The amendment of the banking restructuring law should be an opportunity to unify the Lebanese position in negotiations with the IMF,” Farah said, stressing that reform should respect both international requirements and Lebanon’s constitutional and legal framework.

Why Article 3 became the focus of the dispute

Article 3 represents a central provision of the legislation because it defines the general objectives of the restructuring framework. It states that the law aims to strengthen financial stability, address banking failures, protect deposits during restructuring and liquidation processes, and limit the use of public funds to rescue troubled banks.

At its core, the debate concerns the limits of Banque du Liban’s authority and the relationship between the central bank’s powers under the Code of Money and Credit and the broader role of the government and Parliament in restructuring the banking sector.

The dispute surrounding Article 3 highlights a wider discussion over the role of central banks in financial crises. Under Article 70 of the Code of Money and Credit, the central bank is responsible for maintaining monetary stability, safeguarding the banking system, and supervising financial institutions. Its independence, however, does not eliminate the need for coordination with government authorities.

The challenge reflects the difficulty of finding a balance between ensuring effective restructuring of failed banks and preserving the institutional framework governing monetary policy; including clearly defining the division of responsibilities between the central bank, the executive authority, and Parliament.

Supporters of the law argue that restructuring is necessary to rebuild confidence, protect depositors, and restore the banking sector’s ability to finance economic activity. Critics, meanwhile, warn that unclear divisions of authority could create legal conflicts and weaken the role assigned to the central bank under existing legislation.

From approval to constitutional review

The law on “reforming the status of banks and their restructuring” was approved by Parliament on 14 August 2025, and published in the Official Gazette on 21 August of the same year after extensive discussions in parliamentary committees, particularly the Finance and Budget Committee, with the participation of government representatives and officials from Banque du Liban.

However, its adoption did not end controversy. Several lawmakers challenged the legislation before the Constitutional Council, which issued its decision on 3 October 2025, adding a constitutional dimension to the debate surrounding the future legal framework of Lebanon’s banking sector.

In 2026, the legislation returned to Parliament for further amendments. The Finance and Budget Committee examined changes to several provisions while discussions continued over related legislation, particularly the financial gap law and the recovery of depositors’ funds. After several meetings during June and July, the committee approved an amended version, which was later adopted by Parliament on 12 August 2026.

The latest presidential challenge has once again placed the law under judicial review, with Article 3 becoming the center of the dispute.

The evolution of Lebanon’s banking model

Lebanon’s banking sector has historically been one of the foundations of the country’s economy. During the period between independence in 1943 and the outbreak of the civil war in 1975, Lebanon developed a liberal, service-oriented economic model that attracted Arab and foreign capital. Banking secrecy, financial openness, and limited restrictions on capital movement helped transform Beirut into a regional financial center.

The sector experienced major challenges over the decades, including the collapse of Bank Intra in 1966, which represented one of the country’s earliest major banking crises. However, previous interventions mainly involved individual bank mergers or liquidations rather than a comprehensive restructuring of the entire banking system.

Following the end of the civil war and the Taif Agreement, Lebanon’s economic model increasingly relied on attracting foreign currency deposits, maintaining a fixed exchange rate, and financing public debt through the banking sector. The Lebanese pound remained officially pegged at around 1,507.5 LBP per dollar from 1997 until 2019, while banks became major holders of government debt.

In 2019, this model collapsed as dollar liquidity shortages exposed deep structural weaknesses. Banks imposed informal restrictions on withdrawals and transfers, the Lebanese pound lost most of its market value, and the financial sector accumulated massive losses. The government later defaulted on its Eurobond debt in March 2020 for the first time in its history.

The crisis left depositors unable to access their savings, weakened the banking sector, and created the need for a comprehensive restructuring framework. The 2025 banking restructuring law represented the first nationwide attempt to reorganize the sector in a modern legal sense, but its repeated revisions and constitutional challenges demonstrate the complexity of resolving Lebanon’s financial collapse.