In the aftermath of Rafik Hariri’s assassination, newspapers in Syria were filled with stories of Syrian capital fleeing Lebanese banks for the safety of Damascus and Amman, leading to renewed speculation about just how much Syrian money was deposited in Lebanese institutions.
It always was a hazy number. When the UN Security Council passed Security Council Resolution 1559, Hariri’s money man, Fouad Siniora stated on national television that Syrian-related deposits amounted up to 50% of those in Lebanese banks. This figure stood in sharp contrast to “official” estimates by Lebanese bankers, which put Syrian deposits anywhere between 8 and 13%.
Whatever the true number is, it a reflection of the inability of Syria’s five new banks –the Bank of Syria and Overseas (BSO), the International Finance Corporation (IFC), Banque Bemo Saudi Fransi (BBSF), Banque Européene pour le Moyen-Orient (BEMO), and the International Bank for Trade and Finance (IBTF) – to move easily through the basic banking functions and despite fanfare surrounding the opening of private banks in Syria, these institutions have remained pinned back by Syria’s decrepit regulatory environment.
It is a system defined by tight margins, due to Syria’s complicated interest rate system, high “stamp duties” – fiscal charges on common financial or commercial transactions – and perhaps most importantly, the lack of a Central Bank interest bearing facility for banks’ excess liquidity – standard anywhere else in the world – are squeezing Syria’s private sector banks. Both factors are also complicating common banking practices and the scope of services private banks can offer their customers. Lebanese institutions, therefore, are likely to keep their Syrian depositors – whatever their size – for the moment.
Modern banking is a complicated business, but its basis is simple. Depositors entrust their money with the bank in return for the best interest rates and services available. In Syria, however, the process is not so easy.
Before the opening of private banks, the country’s premier public sector bank, the Commercial Bank of Syria, was successful in attracting depositors by offering high interest rates, around 7% on savings and 3% on current accounts. It became one of the largest banks in the Arab World in terms of assets through very stringent lending policies based on “official paper” – income individuals or business could demonstrate in writing. This suited many but not all Syrian borrowers and many looked to the private banks as an easier source of financing.
In anticipation of privatisation, Syria ‘s Credit and Monetary Council (CMC), the body responsible for setting interest rates for public banks, cut rates on savings to 4% in December 2003 in order to allow the new banks to compete.
As interest rates had not changed in 22 years and with the private banks not yet open, Syrians quite rationally began pulling their deposits en masse out of the Commercial Bank. Alarmed by the move, the CMC readjusted savings rates to 5%, with a possible additional margin of 1%.
Thus when the private banks finally opened their doors, they were forced to offer deposit rates of 5-6% in order to attract customers away from the Commercial Bank. And it worked. Syrians quickly opened accounts with private banks in the hope of getting a balance of better services and easier terms on loans.
Customers say they find the services at private banks markedly better, including efficient teller windows and ATM machines, but in terms of loans, the private banks are legally and professionally bound by international risk management criteria. Risk, or the quantifiable likelihood of loss or less-than-expected returns, among other things, is offset by a variety of factors, including charging borrowers a higher interest rate. In Syria, however, civil code forbids lending at over 9%, leaving margins tight and forcing the private banks to look elsewhere – factories, real estate, and other personal property – to secure loans.
While bankers indicate most Syrians were willing to put a lien (a charge upon real or personal assets to satisfy a creditor) on their property, they were much more reluctant to pay the “stamp duties,” or transactional taxes assessed by the Ministry of Finance, that go along with it. Duty on mortgages, constitution and release, is around 6 per thousand. Stamp duty on promissory notes is 6.24 per thousand, three times that of Lebanon. Even personal guarantees, which are not subject to duty anywhere in the world, are assessed a rate 6.24 per thousand in Syria.
Comparatively high stamp duty is not only affecting customers, but also the private bank’s willingness to increase their paid-in capital – or capital received from investors for stock, equal to capital stock plus paid-in capital. When entering the Syrian market, each private sector bank was required to form with an initial minimum capitalisation of $30m, which was assessed a stamp tax rate of 1%.
When BSO announced in May 2004 that it would increase its capitalisation by another $30m, the bank was surprised to find the second capitalisation would be assessed a much higher rate – 3.12%.
In spring 2004, private bank managers say they collectively met with the Central Bank of Syria on the problem of Law 1 of 1981, which governs stamp tax assessment. Little progress was made until after Hariri’s assassination, when Syrian financial institutions had to deal at least with the spectre of Syrian deposits flooding into Syria from Lebanese institutions. On May 8, Law No. 42 was passed, which reportedly reduces stamp duties “significantly”. Today, the Syrian market is waiting for the Ministry of Finance to issue its executive instructions, which will outline specific fees for each transaction. According to banking sources, stamp duties on capital increases will be around 1%.
By summer 2004, the problems facing private banks began to compound. Most banks realised deposits in the first year would far exceed their expectations. For example, one private bank that estimated deposits in year one at $80m attracted $290 million.
While this came as great news for those promoting Syria ‘s economic “potential”, massive deposits were a mixed blessing to the private banks, in part because of their short-term nature. In Syria, most deposits are for only between three and six month. As liquidity piled up, the banks ability to “match” deposit periods with loans became more difficult.
Then, in January 2005, things got a bit more complicated. The CMC issued Decree 101, which stated all banks in Syria could not loan more than 20% of their equity to more than one entity. The decree was designed to help bring Syrian banks into compliance with the International Convergence of Capital Measurement and Capital Standards, otherwise known as Basel II. The accord is being adopted by banks throughout the world as part of the Bank of International Settlement’s effort to improve credit and operational risk.
While Decree 101 limited the bank’s exposure to risk, it also constrained their ability to loan to larger and viable Syrian business concerns. In the case of BBSF and BSO, which are partially owned by Lebanese banks, this meant expanding their lending activities beyond their Syrian clients with whom they had a long history in Lebanon. Suddenly, the credit departments of both banks were thrust into a much more uncertain environment where the International Bank for Trade and Finance (IBTF), which has no Lebanese involvement, had found itself for most of 2004.
Liquidity problems: As deposits have continued to pour into private banks, lending opportunities remained restricted or slow going. Thus, dealing with excess liquidity quickly became the major issue confronting Syrian banking.
Most countries have facilities where banks can entrust excess liquidity, including Central Bank interest bearing facilities or Treasury Bills. Both are non-existent in Syria , however, albeit for “Investment Certificates” – a treasury bill issued by the Public Credit Bank on behalf of the Syrian Treasury – which banks do not have access to. In the first few months of operation, private banks placed their excess liquidity in interest bearing accounts with the Commercial Bank of Syria (CBoS). After a few months, however, the CBoS stopped paying interest because private bank deposits in the CboS surpassed their “quota”. The government said it did not want to turn the CboS into the treasurer for private banks to store their excess liquidity. Instead, the private banks were instructed to place their liquidity with the Central Bank.
The problem is that the money is simply placed in a vault and gains no interest. Given inflation and other factors, the deposits therefore actually depreciate in value, which are in turn recorded as losses for the private banks.
The private banks lobbied the Central Bank to ease restrictions or open facilities to deal with the worsening excess liquidity issue, but with limited success. An early, major concern dealt with regulations governing the banks use of foreign currency deposits. Syria’s foreign currency regulations discriminate between “investment dollars” – hard currency that is transferred into the country and can be transferred back out again – and “cash dollars” – hard currency deposited in Syrian banks that cannot leave the country.
By early 2004, the private banks were struggling to deal with hard currency “cash dollar” deposits, as private banks were forbidden from transferring the hard currency outside Syria. After extensive lobbying by private banks, the CMC issued Decision 65MNB4, which permitted private banks to transfer “excess foreign currency banknotes” to correspondent accounts in Lebanon and Jordan, where they could make money but following Hariri’s assassination, Syrian private sector banks reportedly withdrew their hard currency deposits in correspondent accounts in Lebanon. The exact amounts of these withdrawals are unknown.
In terms of Syrian Pound deposits, the prospects for solving the excess liquidity issue remain unclear. Analysts say the Central Bank is a long way off from introducing modern monetary policy, where its interest rate on deposits would determine interest rates in Syria; like the Federal Funds Rate used in the United States .
Recent changes in Syria’s stamp duty law promise to be a major shot in the arm for the country’s private sector banks. Nevertheless, just how long it will take the Ministry of Finance to issue its executive instructions remains unclear. Defining other reform legislation has taken up to six months. Given the slow pace of reform in Syria, it will be years before Syrian institutions are able to break even while servicing the needs of its clients. For the time being, Lebanon remains Syria’s piggy bank. If there is a silver lining for Syrian money it is that with financial services expanding in neighbouring Jordan, Syria’s cash rich economy should options like never before.
Andrew Tabler is currently a fellow with the Institute of Current World Affairs, and consulting editor for Syria Today.
