|Dark, heavy storm clouds continue to linger over the heads of many bankers worldwide, troubled by the subprime market crisis, fraud, financial havens and the plunging dollar. Lebanese banks have weathered this fiscal hurricane so far, although dark clouds in the otherwise clear skies over Beirut are dampening the sector’s dynamism.|
But while the West wakes up to yet another financial scandal and Beirut’s political impasse drags on, Lebanese banks in Syria have been having a field day since the sector was liberalized in 2001 and the Lebanese pin stripes moved into Damascus.
“Generally speaking all private banks have improved — improved assets, number of branches, liabilities, deposits and turnover — and all have made profit,” said Georges Sayegh, General Manager of Bank of Syria and Overseas, BLOM Bank’s Syrian arm.
Indeed, private banks accounted for over a third of all private sector deposits at the end of 2007, according to the Central Bank of Syria. This has surged from 2004, when the first private banks entered with a 4% share of deposits, and in private sector loans, from 3% in 2004 to 16% in 2007.
Lebanese banks are at the forefront of Syria’s fledgling private banking sector, with Bank Audi Syria, Banque BEMO Saudi-Fransi, Bank of Syria and Overseas (BSO), and Byblos Bank Syria already well established. They are to be joined by Fransabank, Banque Libano-Francaise and the Bank of Beirut.
“The banking sector looks nothing like it did four or even two years ago,” said Bassil Hamwi, Deputy Chairman and General Manager of Bank Audi Syria. “There is a lot more flexibility in the private sector, and we are just at the beginning.”
The sector has certainly come a long way since the decision to open it up was made, amid concerns over the motivation of private banks in a socialist economy.
“I had a role in drafting the law in 2000, and discussion at the table and in society was that private banks would come and take our money. There was not a clear understanding of banks or motivations, but this has improved, and banks’ motivation is more or less clear,” said Hamwi. “The environment is very conducive to banking, and it is increasingly so and the reason for so much interest.”
The initial teething problems common to all liberalizing economies were faced in the first few years of operations, between 2004 and 2006, while the Central Bank has completed 21 out of 30 steps of its financial reform plan.
“As we weren’t the first bank to have opened, the key obstacles were faced by the first entrants at the start, but gradually things are smoothing out, one due to the Central Bank governor being very open and that he listens,” said Semaan Bassil, Vice Chairman and General Manager of Byblos Bank. “Sometimes they study [laws and regulations] for too long, but do make decisions, although we’d like it faster.”
All the Lebanese banks are rapidly rolling out their presence in Syria. Bank Audi Syria has 10 branches, BEMO 20 branches, and BSO 10 branches with 19 slated by year’s end and plans to double the number in the next five years. Byblos Bank Syria has six branches with plans for 20 in the next three years, Fransabank Syria will have two to three branches by the end of the third quarter, and Banque Libano-Francaise’s Bank Al-Sharq plans to have 12-13 branches by 2011.
Such rapid expansion is due to the country’s low banking penetration, with only one branch for 300,000 people, according to Hamwi. “A huge number have no access to banks, and don’t see them enough,” he said.
However, with Syria’s real estate market undergoing a boom, finding suitable locations is proving to be a problem. “It’s difficult to find adequate real estate and prices are quite unbelievable, more expensive than the seafront in Solidere in Beirut,” said Walid Raphael, Deputy General Manager of Banque Libano-Francaise.
Syria’s real estate boom is generating demand for mortgages though, with Byblos the first to offer such services last year, and other banks getting in on the act. Bank Audi Syria is to offer a housing loan within the next four months as a “show-case product.”
“There is huge pent-up demand for housing loans,” said Hamwi. Introducing mortgages has not been a straightforward process however.
“The challenge is not the type of services, but infrastructure,” said Bassil. “To get a mortgage you need to present a bill that the building was legal, but many build outside of regulations, so can’t present a clean bill. Potential borrowers also go to government agencies for paper work, and such bureaucrats have not faced such requests before, so infrastructure and mentality are going to change.”
Banks did not venture into retail banking at first, initially focusing on commercial banking, but that is changing as the sector has developed.
“Retail takes time, otherwise we could have had retail products from the first month, but a cookie cutter approach to meet a huge number of people is not an easy process,” said Hamwi.
The banking sector has, after all, started from a low base, with strong demand for all personal loans, as well as a low base in terms of average income, which is around $150 a month.
“We would be able to sell more loans if disposable income was higher and [there was] more transparency from companies. People in Syria often have a second or third job which they do not declare and thus cannot be easily taking into consideration these revenues versus the available consumer loans we are selling,” said Bassil.
The challenges in ironing out bureaucracy and other related issues with banking services pale in comparison to the high liquidity of the banks due to the lack of a government debt market.
“Banks are flooded with deposits, but the problem is what to do with it. Some banks are even discouraging people from putting in deposits,” said Dr. Nabil Sukkar, Managing Director of the Syrian Consulting Bureau for Development and Investment.
The issue has become increasingly acute over the past year as private sector deposits with the Central Bank have surged, more than doubling in the case of certain banks. Bank Audi Syria’s deposits, for instance, were $42.96 million in December 2006, and $87.93 million by September 2007.
The Central Bank has repeatedly said over the past few years that it plans to issue treasury bills, but just like the stock market was intended to launch in the first quarter of 2008, no one has an idea when this will happen.
Banks do know what kind of return they would like to see on their deposits, with the interest rate currently set at 0% at the Central Bank.
“It is treated like a checking account,” said Hamwi. “We would like a government debt market that reflects sovereign risk. My guess is a minimum of 2.5% to 5%.” Sayegh at BSO suggested 3-4%.
“We need to have treasury bills and they know that,” said Bassil, referring to the Central Bank. “All depends on the market and interest rates. I’d be more cautious about setting the ideal rate, it depends on supply and demand at a specific time, and on the bank, whether it is more or less liquid, and this depends on the lending opportunities linked to foreign investments, economic and political prospects, as well as bureaucracy and red tape for channeling these investments.”
Banks also want the labor law to be more flexible, amendments made to leasing laws, the establishment of a central credit agency, and for foreign exchange laws to be altered for electronic cards.
“Constraints are in issuing electronic cards, as you can’t transfer funds abroad,” said Muhammed Khaled, Retail Marketing Manager at BSO. “It’s an issue for international Visa cards, only linked to transfer accounts, so you are limited to a minority of people that have funds.”
A further issue is the lack of an electronic banking regulator, with most banks using Lebanon’s Creditcard Services Company (CSC), which is on the state-run Commercial Bank of Syria’s network, the rival to the state-run Real Estate Bank network. There are currently some 250 ATMs in Syria, which could reach 500 to 600 by year’s end, according to Khaled. Lebanese banks are also facing pressing human resources issues.
"Lebanese banks face three challenges : one, the brain drain in Lebanon so fewer good people are available and we need the best to set up and manage branches; two, the cost of expatriates; and three, the psychological barrier for some of the highly qualified Lebanese to come and work in Syria,” said Bassil. “There is a high need for expertise, so the Gulf and Lebanon are competing, and the costs are high.”
Free Zones and Extreme Views
The scramble by Lebanese banks over the past few years to get licenses has been recently compounded by the government’s decision to close banks in Syria’s six free zones, which were opened prior to liberalizing the banking sector. Some other banks, such as SGBL, will have to close completely.
Others, such as Banque Libano-Francaise, which is in the final stages of receiving a license for its Bank Al-Sharq, will have to move operations, as will Fransabank, which finished its IPO in March heavily oversubscribed, offering 36% and raising $14 million.
Lebanese banks have been able to retain majority control despite Syria’s requirement that private banks are 51% Syrian owned, through Syrian investors already linked to the Lebanese mother bank. For instance, 10% of Fransabank Syria is in the hands of the Saade Group, and 5% with Ahmed Shehabi from Aleppo, said Nadim Moujaes, Deputy General Manger for Strategy and Development at Fransabank.
For Bank Al-Sharq, which is to offer a 20% IPO, “the signature holders are all shareholders in Banque Libano-Francaise, so we will be in control of this entity,” said Raphael. There is a draft law on the table, however, to increase foreign percentage ownership to 60%, as well as raise capital requirements to $100 million. But such an approach is putting off international banks from entering Syria.
“Go ask a European bank to give a percentage and they won’t accept, but the Lebanese will,” said Sayegh.
Bassil said the expected new high capital requirement may be a penalty for banks and shareholders. “Our French shareholders in the insurance venture, for example, said Syria needs more capital in the future as the economy picks up and the projects start taking place, but why today? From day one, not gradually, say in two to four years. Syria is still growing gradually, and so the challenge is not capital but the ability to deploy it in feasible projects,” he said.
Syria’s status as a ‘rogue state’ in the eyes of Washington is also having its effect on Lebanese and private banks, with bankers believing there is widespread aversion in the Western banking community to deal with Syria, and a reason no big players have entered.
Some banks in Europe have taken an “extreme view” in not dealing with Syria, said Hamwi, citing a leading German bank, while Bassil mentioned “global political issues.”
“I cannot call them major obstacles but there are some banks overseas, whether Arab or Western, that have refused to accept deposits from Syria. Also letters of credit,” said Bassil. “Some banks overseas don’t deal with Syria at all, and don’t want to touch Syria as it becomes a reputation issue — human rights and that they may support non-acceptable states or armed groups. So today the political pressure on Syria is not yet a major issue but could be a potential threat if things get increasingly difficult.”
For the time being, Lebanese banks are enjoying Syria’s clear skies while hoping regulatory issues will be sorted out and treasury bills will be offered sooner rather than later.