Life and debt


Seven years ago Leila (a pseudonym) and her husband began their life together. Like most couples in Lebanon, they felt pressured to purchase a home right away instead of renting, so they took out a 30-year housing loan. Their families wanted a big Lebanese wedding, but the young couple could not afford one on their salaries, so they took on a five-year personal loan to pay for the celebration, honeymoon, and some furniture for their new apartment. Shortly afterward, Leila also took out a five-year loan for a car.

Lebanese traditions are becoming increasingly difficult to adhere to. Although they are a double income family, Leila and her husband find it impossible to live on their salaries alone. Now with children, they worry that in the unexpected case that one of them loses their job, they would not be able to keep up with their monthly debt repayments, which would spell disaster. Despite this pressure, Leila says she does not regret their decisions, rationalizing them as the only way her family can live a comfortable life where they can buy and experience the things they want.

In fact, many Lebanese now consider taking on debt as the only way to live. Lebanese American University (LAU) Marketing Chairperson and Associate Professor Maya Farah, who teaches consumer behavior, says that without accumulating debt, many Lebanese put off significant life choices such as getting married. In the past, a young couple may have received financial assistance from their family, but a sinking economy means most people are struggling and cannot afford to help out. Additionally, Farah says that Lebanon is progressively moving from a collective to an individualistic society, so young couples are increasingly on their own when it comes to finances.

Living large

Why this need for huge weddings at all? The Lebanese are known for showing off and living large, and weddings are notoriously “extra.” Last month, Lebanese socialite Alice Abdel Aziz’s wedding photos went viral, amid claims that their wedding cake was of a record-breaking size—she and the groom were pictured physically standing inside the cake.

The following weekend, Prince Harry and Meghan Markle’s royal nuptials were ridiculed by comedians, who laughed about the wedding’s simplicity compared to the local variety, and joked that Markle’s understated makeup was simpler than that of a Lebanese woman at the gym. Some Lebanese even took to social media to voice genuine criticisms of the “plain” wedding, implying pride for Lebanon’s over-the-top traditions and tastes. Farah explains that this is “the nouveau riche effect,” the opposite of which is where the wealthy are comfortable with themselves and do not feel the need to flaunt their riches.

But it is not just weddings—even Lebanese family lunches are sprawling, as are other social occasions. As it turns out, our need for these festive occasions is deeply rooted in the fabric of our society. Hounaida El Jurdi, assistant professor of marketing at the American University of Beirut, explains that, “all humans want to achieve social mobility, or improve their stature in the eyes of their peers.” She says that the part of the world we live in is referred to as a tribal society, where social affairs and get-togethers are very important because they present opportunities to show off possessions, and thus achieve social mobility. This explains why many Lebanese love to dress up—a fancy dress or an expensive watch signal to others that you have wealth.

Farah says that Lebanon is materialistic, which is a typical characteristic of developing countries. “We call it conspicuous behavior, which refers to consumption where people want to display their wealth and status through what they possess,” she says. But what is the price we are willing to pay to feel accepted or even envied by our peers? Jurdi laments that many seek social mobility even if it means getting buried in debt.

A global conundrum

This is not an exclusively Lebanese problem. In the US, total household debt soared to over $13 trillion at the end of 2017, according to a report by the Federal Reserve Bank of New York. By the end of April 2018, consumers in the UK owed $2.1 trillion, according to NGO The Money Charity.

The Lebanese are moving from a culture of saving to credit, as illustrated by Leila, who admits she is living from loan-to-loan. It is hard to measure exactly how indebted the Lebanese really are. While individual banks have records on client debt, no national data exists. In addition, Lebanon has a large shadow economy—unofficial economic activity existing alongside the country’s official economy, such as loan sharks, unofficial deals that merchants offer clients, or even borrowing from family.

Whether you blame advertising for whetting the world’s appetite for consumption, the internet and social media for fueling the fire, or the ease with which we now have access to credit, the entire world is sinking further into debt.

The science of spending

Studies in behavioral economics looking at how human decision-making happens have demonstrated that consumer behavior is rarely rational. In the 1960s, Stanford University’s famous marshmallow experiment claimed that kids who were willing to wait longer for a bigger reward—or demonstrated discipline and practiced delayed gratification—were more likely to succeed in life. Participants in one experiment wanted to punish unfair players so badly that they were willing to take a financial hit themselves to do so. In another experiment by Richard Thaler, famous for the Nudge theory that won him the Nobel Prize in 2017, student grades were adjusted for a maximum grade of 137 rather than 100, which resulted in an irrational higher feeling of satisfaction among the students, despite the fact their grades did not actually change.

Other experiments have looked at body language, eye movements, and neuroscience, such as MRI scans of brain activity and specific regions and subregions that show increased activity in response to specific information stimuli. These findings can be applied positively—like nudging—encouraging behaviors that lead to a good outcome for individuals and societies, or misused by marketers to manipulate consumers into irrational spending that can drive them into debt.

Tugging at emotions

Brands and advertisers know this, and are often accused of manipulating emotions and preying on vulnerabilities to cash in (see Q&A). The methods of doing this are getting more sophisticated, with the most vulnerable more likely to fall into the traps. The young are too inexperienced to understand the cost-burden of their spending. The old may not be savvy to some tricky marketing tactics. Low-wage earners want a taste of the luxury they work so hard to try to achieve.

Pop culture is also perpetuating consumerism, coining phrases such as “retail therapy” to imply relief, and using emotionally charged words, like saying you “deserve” it, to delude the hard-working everyman that they have toiled enough to purchase something. The younger generation has its own set of terms: FOMO (Fear of Missing Out), YOLO (You Only Live Once), and treat yo’self.

When communities were smaller there were less people to impress, but now we are bombarded with (often exaggerated) lifestyles of the rich and insta-famous. Farah says, “Temptation to spend is everywhere, especially with the prevalence of social media where you can’t escape ads and ads are targeted.”

If we give in, we often try to justify our consumption. Farah gives the example of people rationalizing using credit during sales because they think that in the long-run they are saving money by buying items at a discount.

Defining the essentials

Many purchases we make are vital to improve our quality of life—home appliances, cars, and the roofs over our heads are widely considered necessities. In a country where public transportation is often unavailable or inconvenient, we may argue that a car is essential. But where do you draw the line between a “regular” home or vehicle and a “luxury” one? At the very least, we can say that after a housing or auto loan has been paid off, the borrower owns a physical thing. It gets trickier when we talk about non-physical things—like the trend of experience-based spending.

How do you define “essential” and draw the line between a need and a want? Jurdi points out that, “what may be essential for one person may be a luxury for another. Someone may absolutely need to take a vacation for his/her mental and emotional stability.”

If a wealthy individual wants to spend money on ridiculous amounts of luxury items, no one can stop them, but what about those who borrow money to live the high life? Our culture teaches us to live in the moment, except that in the context of easily accessible loans and credit cards what it’s actually saying is that we can spend now and worry about paying later.

Loans for all seasons

Leila’s case illustrates a relatively typical debt cycle that shifts with life’s changing needs. Young people take on debt to get an education, viewing it as an important investment. People buy cars. With marriage they can feel obliged to have large weddings and buy homes. Starting a family involves countless other expenses. Many people get sucked in further and sometimes use debt to cover previous debts at increasingly high costs. (See story on loan offerings, below).

Who’s borrowing what?
Less than essential loan offerings

We all know someone that has taken on a loan that some might call “non-essential,” but who is borrowing, and what for? Generally, according to Elie Abou Khalil, head of the group retail products department at Byblos Bank, 60 percent of the bank’s customers are men and 40 percent women. However, 75 percent of loan takers are men. Hind Fadel, head of marketing at BSL bank says she has also noticed a trend of more men than women. “Women, in general, are more conservative and more risk averse than men, and they usually pay their dues better than men,” Abou Khalil explains.
He reveals that people across all earning capacities have taken on loans. The minimum monthly salary for a borrower at Byblos Bank is $800, and these clients take out the most loans. But he notes that even those with $8000 monthly salaries get loans, though these are larger in amount. Fadel says BSL’s minimum revenue requirement for a loan is $667.
Abou Khalil says banks do not usually lend to those under the age of 20. Choosing his words carefully, he says, “When you’re young, you’re less mature. With maturity you respect commitments more.” At BSL, Fadel says their age cut off is 21, and the borrower must be a maximum of 64 years old at the time of loan settlement.
Interestingly, Abou Khalil notes that they see a lot of repeat clients with personal loans. These non-specific loans address various needs, and most bank require only a general indication of where the money will be spent, without asking for details as a prerequisite to lending. Some of these are marketed as wedding and travel loans, usually with slightly different conditions, but they are essentially the same bank products. The average personal loan amount is $15,000 and Bank du Liban (BDL), Lebanon’s central bank, has set an upper limit of $100,000 beyond which the bank requests collateral.
With the growing popularity of travel among Lebanese, travel loans became increasingly available in the early 2000s. Imane Chaar, head of sales support and quality assurance at BML bank, noticed that with more packages offered by travel agencies, especially affordable ones, consumer demand for travel loans grew. In their experience, the largest segment applying for this loan earn $2,000 per month, and are aged between 25 and 35.
On the other hand, Abou Khalil says Byblos Bank has noticed a decrease in this kind of loan in the past five years, but says it is not because people are traveling less. Rather, they are using other methods, namely credit cards, to purchase their packages from agencies, as well as using the sharing economy and online platforms to make arrangements. This is quicker than applying for loans, even though this type of loan is actually one of the easiest to process since it is a relatively short-term loan (Byblos Bank’s travel loan is limited to seven months). Wedding loans often come as a package that includes a registry and additional benefits.
Lebanese banks are increasingly widening their offerings, with tech loans for the hottest gadgets, a boat loan by BML, and the FNB plastic surgery loan making headlines internationally a few years ago. On the other hand, maybe it is just the marketing that is changing, and the product is essentially the same: debt.

Elie Abou Khalil, head of the group retail products department at Byblos Bank, notes that when it comes to personal loans, there is a tendency to take more than one, which is exactly what happened with Leila. Newlyweds (like Leila) are choosing to celebrate beyond their means, even if that means starting their new life together with a negative bank balance. Of course, there are those that opt out; destination weddings seem to be on the rise because they often end up costing much less for the couple, but are often frowned upon in Lebanon.

Banks have also become more innovative in their offerings, like FNB’s notorious plastic surgery loan from a few years ago. Though many ridiculed this product and by extension Lebanese society, Sarah (also a pseudonym), took out such a loan to get weight-loss related surgery. She has no regrets, saying she is much happier, and maintains she paid for the surgery in a smart way because she used her monthly interest to pay installments.

But today there is an even easier way to spend. More and more people are turning to the credit cards sitting so conveniently in their wallets. This more accessible alternative is also more risky because people are less likely to think about their decisions when using them. Frequently people get a credit card for emergencies only, but then slowly begin to use them for day-to-day activities. Farah cites studies which show that credit cards facilitate the descent into debt as they do not involve the physical act of taking money out of a wallet and seeing bills disappear. Banks also make it very attractive to use cards by offering rewards points, travel miles, and other incentives—all genuinely good payoffs provided you pay off your debts on time.

Responsible lending

Lebanon has a very rudimentary system of credit scoring or assessment of consumers’ credit histories, when compared with US and other developed economies. Abou Khalil says banks use the 5 c’s of credit (see box below) to assess borrowers, but explains ultimately the bank needs to do its homework: “You don’t lend simply because you can get collateral from the borrower. Banks used to do this 40-50 years ago. Today banks are analyzing risk more and are more aware that you should lend based on capacity.”

The 5 C’s of credit
A qualitative and quantitative method used by lenders to evaluate borrowers

Character: refers to credit history, or the borrower’s reputation for repaying debts.
Capacity/Cash Flow: measures the borrower’s ability to repay the loan in question, measured using his or her debt-to-income ratio as well as job stability (as it reflects cash flow). In Lebanon, Banque du Liban (BDL), the central bank, has put a condition that the maximum total payments cannot exceed 35 percent of one’s income, except in the case of a housing loan, where it can be 45 percent of total indebtment.
Capital: shows how much capital the borrower has already put toward the potential investment. A substantial investment of one’s own money generally reflects a higher level of commitment and seriousness. This usually does not apply for personal loans, since there is generally no down payment.
Collateral: refers to the borrower’s assets, including real estate or cars, which the lender could reposses in case of default. For most personal loans this does not apply, unless the loan amount is higher than BDL’s limit of $100,000.
Conditions: describes how the borrower plans to use the loan, including specifics like interest rate and amount of principle.

Jurdi notes that bank loans are often marketed using photos of exotic locations, lavish weddings, and smiling beauties holding shopping bags, preying on the human need for instant gratification. Meanwhile, the copy reads 0 percent in huge font.

However, banks are required, in accordance with BDL Circular 134, to reveal the total cost of products in ads, or the annual percentage rate (APR), which includes all the costs the customer will have to stump up when taking a loan. While this number is required it is usually in the small print and most consumers do not even know what it means.

Hind Fadel, head of marketing at BSL says, “Banks have the responsibility to provide consumers with full disclosure on products details such as terms and conditions, or the total cost (APR) etc., in order for them to make informed decisions.”

BML’s Head of Marketing and Communications Dana Alaywan says their marketing department plays a big role in promoting products, especially since competition in the banking industry is fierce. Less common products need to be communicated to target audiences through special channels.

Fadel adds that they encourage responsible spending: “We advise our customers not to get indebted for ad hoc entertainment, but rather benefit from loans to durably improve their well-being.”

Learning to read the numbers

The problem is most people who fall into debt mean well. They are emotional, vulnerable humans, assaulted with more temptation than they can handle and don’t have enough information to make sound decisions. Financial literacy is vital and it is a global challenge.

Byblos Bank has been promoting financial literacy for years. In a recent survey with people aged 18 to 24, they found that 50 percent have no idea how much they spent in the last month, 47 percent have no savings, 46 percent need additional information about financial products, and 37 percent say their main source of stress is financial troubles, more so than health, family, and career concerns.

One of Byblos Bank’s initiatives is a daily two-minute segment on local TV station LBCI called “Fakker Maliyan” (Think Financially). It addresses a spectrum of topics in fun videos that are also available on their website. These videos, along with regular newspaper articles and the MONEYSMART bootcamp series, teach important principles of banking such as saving, spending, borrowing, and investing. Such information enhances consumers’ ability to make the right decisions and understanding the consequences of bad ones.

Many other Lebanese banks, including Bank Audi, Bank Libano-Francaise, Bank of Beirut, BLOM Bank, SGBL, and Jammal Trust Bank, have had financial literacy programs in partnerships with schools and other organizations across Lebanon, such as The Institut des Finances Basil Fuleihan (a Finance Ministry-run civil service learning center), and the educational NGO INJAZ.

All the experts Executive Life spoke to for this article agree that financial literacy needs to start early on. Schools need to integrate financial literacy into the curriculum, and what little is currently being done is not enough, says Farah, adding that many parents are not aware of the importance of these skills. She is already teaching her six-year-old son about money, giving him a weekly allowance, training him to save, and sometimes borrowing from him, returning his money with interest. “If schools don’t teach financial literacy we will be raising kids with revolving debts,” she says.

Experts also agree that financial literacy needs to be taught on a national level. According to a 2016 report by the Organization for Economic Development and Co-operation (OECD), suggested recommendations include starting financial education early and ideally in school, strengthening basic financial knowledge across the population, encouraging behaviors to improve financial resilience, improving consumer protection, enhancing the pension system, and increasing financial inclusion.

Farah clarifies that “debt is not bad in itself. It is bad when it is badly planned or used for non-essential things, and financial literacy helps you make that distinction.” Ultimately knowledge is power and our only way out of this financial pandemic is to equip ourselves and our children with the skills needed to navigate the consumerist minefield, so we are always ready to make informed, rather than emotional decisions about what to do with our hard-earned cash.


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