Seven years after Lebanon's financial collapse, its banks are still operating, but they are shadows of a once-flourishing sector that turned the country into a regional banking hub and are struggling to survive the ongoing crisis and rebuild.

The sector underwent major operational downsizing and has been stuck in a prolonged interim state, having lost depositors' confidence after the collapse wiped out their lifetime savings.

Who ultimately bears responsibility for the enormous losses caused by the 2019 collapse -- which the World Bank described as a "deliberate depression" and the worst economic crisis globally since the mid-19th century -- is still the key unresolved issue and a major obstacle to economic recovery and justice.

The state, the central bank and commercial banks have been accused of contributing to the collapse.

Yet, Lebanon remains trapped in a vicious circle, with no agreement on how responsibility should be fairly apportioned among them. Each side continues to point to the failures and decisions of the others, leaving accountability unresolved and reforms stalled.

Depositors, who have been blamed for being "lured" by the high interest rates offered by banks before the crisis, still struggle with limited access to their deposits and face the grim possibility that they may never recover them -- or, at the very least, may lose a large portion of their savings and bear much of the cost of the collapse.

The reformist government of Prime Minister Nawaf Salam has sought to break the deadlock with a plan to return deposits of up to $100,000 in cash over four years, while larger depositors would receive the same sum in cash, with the remainder converted into asset-backed securities maturing over 10 to 20 years.

Depositors have strongly rejected the proposal, as they have little confidence in the asset-backed securities and are unwilling to wait up to two decades to recover the remainder of their savings.

Last month, the parliament passed amendments to the bank restructuring and resolution law establishing a framework for restructuring or liquidating troubled banks.

However, its implementation is closely tied to the Financial Stabilization and Deposit Recovery Law, or Gap Law, which remains under discussion to determine how the financial losses are allocated and how depositors are ultimately repaid.

Until it is agreed, the fate of much of the banking sector, which has been severely weakened by the crisis, remains uncertain.

The scale of the contraction is stark.

According to Nassib Ghobril, chief economist at Byblos Bank, banks have posted losses of about $80 billion, while their portfolio of foreign-currency loans to the private sector has shrunk by 87% and loans to the private sector in Lebanese pounds have declined by about 66% since the beginning of 2019.

Bank capital has plunged to just $5 billion at the end of June 2026 from $21 billion in 2019, while the banking sector's liquidity has fallen by about 55% over the same period.

The number of bank branches has also dropped by 40% over the past seven years. But Ghobril said, perhaps the most significant loss has been to the sector's most important asset -- its employees, whose number has fallen to about 12,000 from about 25,000 in 2019.

He dismissed claims that the crisis was "technical in nature."

"It was the result of years of abuse of political power, mismanagement of the public sector, and a lack of governance and transparency," Ghobril told UPI. "That gradually led to a crisis of confidence from 2017 until it came to a head in October 2019."

The alarming indications were all there, but Lebanon and its banking sector assumed they could absorb the crisis, as they had with previous shocks -- from the 2005 assassination of Lebanese Prime Minister Rafik Hariri and the 2006 Israel-Hezbollah war to the 2011 uprising in Syria, which turned into a civil war and triggered large-scale displacement, as well as Lebanon's recurring political turmoil and failure to adopt necessary reforms.

"The problem is that the state was spending more than its income," said Saad Azhari, chairman and general manager of BLOM Bank.

Azhari contended that the collapse could have been avoided if the authorities had applied the necessary reforms and taken the correct measures, including imposing capital controls once the crisis began.

"On the contrary, they did everything they should not do," he said, noting that some reforms, imposing capital controls, lowering interest rates and resolving the acute electricity problem at the beginning of the crisis could have "turned things around and restored confidence."

With the government's fiscal deficit widening significantly, the central bank began to conduct financial-engineering operations in 2015, enabling banks to offer exceptionally high returns to attract or retain deposits, while channeling funds into a banking system heavily exposed to government debt and deepening the links between the banks, the central bank and the heavily indebted state.

Azhari said banks had little choice but to follow the central bank's measures because of their exposure to them, leaving the banks to deal directly with depositors who sought access to their savings.

Depositors remain firm in their stance, holding the banks directly responsible for their losses and demanding the full return of their savings. They contend that the banks largely benefited from the central bank's financial-engineering operations, did nothing to protect their money and became complicit in the practices that ultimately led to the collapse.

What angered them most and eroded their confidence was knowing that some banks had favored politicians, businessmen and other influential people or acquaintances by allowing them to transfer their funds abroad at the expense of the great majority of depositors.

Azhari said he had "resisted great pressures and threats" and refused to make any such transfers.

No official estimate exists of how much money was transferred abroad when the crisis began seven years ago, according to Ghobril.

Regaining depositors' confidence and reviving the banking sector will take years, and some banks may not survive the restructuring process, observers say.

While awaiting the passage of the Gap Law to resolve the issue of legacy deposits, banks continue to operate under severe constraints, providing basic banking and payment services, as well as limited lending.

Most Lebanese individuals and companies have been keeping cash at home, turning to bank mainly for cash withdrawals and transfers.

To Hani Bohsali, president of the Syndicate of Importers of Foodstuffs in Lebanon, banks became "just a channel, a transit account where we put cash in to make transfers to providers abroad."

"Banks have become purely cashiers, getting commissions for their services," Bohsali told UPI. "Only confidence can protect them."

Some confidence appears to have returned, with about $5 billion in fresh deposits entering the banking sector. Ghobril said the money came from companies and individuals who did not want to operate in a cash-based economy or keep their money at home.

Companies with dealings abroad, he noted, also chose to keep their funds in banks to avoid scrutiny over the source of their money and questions about whether it was legitimate.

That, he added, allowed banks to extend between $800 million and $900 million in loans.

"There is some banking activity, but it is nowhere near the billion-dollar scale we saw before," Azhari said, pointing to short-term lending to merchants, small loans such as car loans, the introduction of new credit card products, and cash-based services.

Some of the 46 banks, however, are not even able to provide such basic services, cover their expenses or make even partial monthly payments to depositors authorized by the central bank, raising questions about how many will be able to survive and continue to operate.

"The market got smaller, but market share increased," Azhari said.

He said BLOM Bank is hiring again, with its customer base growing every day and its market share rising to 20% from 11.1%.

"But we have to be realistic; it will take years to get back," he said, referring to the banking sector's pre-crisis levels. "We have the know-how, the experts and the services, but we don't have the capital or the funding capacity."

By the time Lebanon's banking sector recovers and the government hopefully succeeds in implementing the required reforms, the country risks missing major investment, trade and growth opportunities as the region undergoes significant economic and geopolitical shifts.