Bank Audi SAL, Lebanon’s second-largest lender, revealed that the World Bank’s private investment arm, the International Finance Corporation (IFC), has filed a lawsuit in the UK, demanding the repayment of $234 million in loans and interest payments.

The legal battle underscores the mounting pressures on Lebanon's financial institutions as they grapple with one of the most severe economic crises in recent history.

The dispute centers around Tier 2 subordinated debt that matured in April. According to a statement from Bank Audi, the institution paid over $66 million in interest on the debt before halting payments in 2020 due to the absence of free profits, a prerequisite for such repayments. The IFC, along with an affiliated fund, is now seeking full repayment through legal proceedings initiated in a London court on July 31.

Bank Audi’s Chief Executive Officer, Khalil Debs, expressed frustration over the IFC’s actions, describing them as detached from the dire realities faced by Lebanese banks.

“An international institution is asking for money, knowing we can’t pay depositors before a restructuring plan, and they’re asking us to pay them first,” Debs stated, highlighting the complexities of the ongoing financial crisis.

The backdrop to this legal clash is Lebanon’s catastrophic financial decline, which began in 2019. The crisis reached a critical point in 2020 when the country defaulted on $30 billion of international bonds. Local banks, including Bank Audi, have since imposed de facto capital controls, severely limiting depositors’ access to their funds.

Adding to the strain, Lebanon’s central bank owes an estimated $70 billion to local banks, a debt accrued through controversial financial engineering practices implemented by the former Governor Riad Salameh. These practices were aimed at maintaining the Lebanese pound’s peg to the US dollar and financing the government’s deficit, but have been criticized by the International Monetary Fund (IMF) as “unconventional.”

The IMF has repeatedly urged the Lebanese government to restructure the banking sector to clarify the scale of the losses and establish a path forward. However, local banks have resisted proposals to repay depositors using their capital, arguing that the responsibility lies with the state.

Bank Audi’s situation is further complicated by the central bank’s prohibition against repaying subordinated debt until a banking restructuring law is in place. Subordinated debt holders, such as the IFC, typically receive payment only after senior creditors in the event of financial distress. Nonetheless, Bank Audi has been forced to settle some claims from clients who have taken legal action abroad. In contrast, within Lebanon, desperate depositors have resorted to bank heists in a bid to recover their savings.

Despite the legal pressures, Debs indicated that Bank Audi intends to continue engaging with the IFC, which is not only a creditor but also a shareholder in both the bank and its Turkish subsidiary, Odea Bank. However, the ongoing legal proceedings underscore the broader challenges facing Lebanon’s banking sector as it navigates an uncertain future amid a protracted economic meltdown.