Syria’s private banks continue to shake up the country’s long stagnant banking sector. Four years after the first private banks entered the market, nine now operate, including the country’s first Islamic firms, on top of the existing five state-run institutions. A further nine have received preliminary licenses to operate in the market which, up until 2004, had been strictly the domain of the state. International credit cards, phone banking services, wider ATM access and tailored personal loans for laptops and automobiles have all been launched over the past 12 months to a public which remains heavily under-banked by regional and international standards. Business is good, with all newcomers again posting strong double digit growth figures. Indeed, Syria’s banking pastures are green enough to have seen every private bank turn a profit by the second year of their operations, a year ahead of industry standards.
“There are few countries in the world, if any, where the private banking sector has been able to generate a positive return on equity in their first or second year of operation,” Bassel Hamwi, general manager of Bank Audi Syria, said. “Syria stands out. What’s more, the growth that the sector has experienced has been overwhelmingly organic. It’s not growth that private banks are deriving from the deposits of Syrians at public banks. It’s coming from money that was under the mattress and is making its way into the formal economy.”
By the numbers
Overall, total banking sector assets rose by 12% in 2007, ending the year at $34.3 billion, up from $30.6 billion at the end of 2006, according to the most recent figures released by the Central Bank of Syria. Public bank assets rose by 4.8% to hit $28 billion, up from $26.7 billion a year earlier. State-owned banks held 81.5% of the country’s banking assets at the end of 2007, slightly down from 87% in 2006. Private bank assets almost doubled over the same period, rising from $3.9 billion to $6.3 billion. No bank, public or private, had released first quarter figures for 2008 by the time of this publication.
Three new private banks have opened to the public in the past 12 months, including the country’s first two Islamic firms. The newcomers include Syria Gulf Bank (SGB), a $65 million joint-venture between United Gulf Bank of Bahrain, Al Fotouh Investment Company of Kuwait, Global Investment House of Kuwait, First National Bank of Lebanon and other several local investors. SGB was licensed at the end of 2006 but, in practice, operated only in the second half of 2007.
The first Islamic bank to open to the public was Cham Bank which launched its services officially in August last year. Cham is a $108 million joint venture between a number of key investment firms from the Gulf — Kuwait in particular — and Syrian investors. The country’s second Islamic institution is the Syria International Islamic Bank (SIIB) which opened its services to the public last September. The bank is a $108 million joint-venture between several Qatari financial institutions, including Qatar International Islamic Bank.
A further nine banks have received preliminary licenses to open. These are the Bank of Jordan, Qatar National Bank, Dubai Islamic Bank, Noor Financial Investment Company, Tadhamon International Islamic Bank, Bank of Baraka-Syria, Global House Group of Bahrain, Lebanon’s Fransabank and Banque Libano-Française, the latter of which will operate under the name of Orient Bank.
Four years after opening her banking sector to private investment, Syria has still been unable to attract the attention of any bank from outside the Arab world. The damage to the country’s business reputation brought about by a heavy US sanctions regime — particularly the targeting of the country’s largest bank, the state-owned Commercial Bank of Syria — as well as provisions in the law which impose an ownership ceiling of 49% on foreign investors are widely held as being responsible for the lack of interest outsiders have shown in the Syrian market. The government has been considering increasing the foreign ownership ceiling to 60% since early last year — giving foreign stakeholders a controlling interest — but just when this will take place remains anyone’s guess.
In other industry indicators, total deposits increased by close to 15% last year, rising from $17.4 billion at the end of 2006 to $20 billion at the end of 2007. Deposits held by state-owned banks — this includes the Commercial Bank of Syria, Agricultural Cooperative Bank, Popular Credit Bank, Industrial Bank, Real Estate Bank and Savings Bank — grew by around 6% in 2007, rising from $14.3 billion to $15.2 billion. Over the same period, deposits held by private banks increased by 54.5%, from $3.1 billion to $4.8 billion. At the end of last year private banks held 24.39% of all deposits, up from 18% at the end of 2006.
Syria’s private sector had deposits of $14.2 billion in the local banking system at the end of 2007, up from $9.7 billion at the beginning of 2005. The private sector is increasingly choosing to do business with private banks and around one-third of all private sector deposits are now held by non-government banks. Government institutions and companies still, however, deal almost exclusively with state-owned banks, although nothing in the law forbids them from working with private banks.
The total loan portfolio of the country’s banking sector grew by around 26%, ending 2007 at $13.4 billion, up from $10.6 billion a year earlier. Loans extended by state banks increased by 20%, rising from $9.9 billion to $11.9 billion over the same period. Loans extended by private banks increased by 94%, rising from $760 million to $1.5 billion.
Holdings of Syria’s top banks (figures in $ billion)
Source: Cental Bank of Syria
Loans market still weak
Despite the near triple-digit growth rate in the loan portfolios of private banks, Syria’s credit lines remain weak and government dominated. While it had been hoped the introduction of private banks would be the catalyst in transforming the country’s lending market, state-owned institutions accounted for 89% of all loans undertaken by Syrian banks last year.
Complicated lending procedures and weak internal banking practices at the country’s major public lenders, the lack of proper financial records among potential borrowers and the absence of key market instruments such as treasury bills and bonds all make accessing and extending credit in Syria a difficult proposition. The overwhelming majority of deposits at Syrian banks, particularly private banks, are short term in nature (three to six months) which further limits their ability to provide long term loans. A legal environment which holds public bank staff — the major lenders — personally liable for the loans they sign off on should they go bad also acts as a disincentive for granting credit. A lack of legislation regarding repossession rights and mechanisms for solving potential disputes such as conflicting land ownership claims has also been cited by industry players as reasons they have stayed away from providing long term credit, particularly in the form of home mortgages.
“It’s a big issue,” Hamwi said. “We were able to provide long term project financing early on and we take pride in the fact that we have done it for several projects, but it is an area plagued with problems.”
Syrian authorities are, however, moving to create a more favorable lending environment. The introduction of treasury bills and bonds this year should, in theory, provide banks with the tools they need to carry out long term lending. Decree No 174 passed in September 2007 further permitted private banks to offer credit rate margins of plus or minus two percent, instead of the previous half percent either side of the Central Bank rate. The move is expected to decrease lending rates by around 1.5% and stimulate competition among the banks.
The government is also presently drafting a set of laws which will clarify repossession rights and other key issues, as well as pave the way for mortgage financing companies to enter the market. According to the plans, mortgage finance companies will be able to make loans and then sell on packages of customers’ repayments as bonds to other financial institutions — increasing the companies’ access to finance and spreading the risk of default loans among a wider pool of investors. Such companies are not without risk, however, and were largely responsible for the subprime mortgage crisis in America.
Skilled staff in demand
As with other areas of Syria’s rapidly expanding financial services sector, a lack of suitable potential employees continues to be an obstacle to growth, particularly given all new private players are working to expand their branch network coverage. Syrians are increasingly taking over the reigns at the country’s banks, however, and the sector has made it a policy to target expatriate Syrians. “Specifically, we are targeting the Gulf, the United States and Canada,” said Issam Nashawati, Syria Gulf Bank general manager. “Bringing back expatriates from Europe is more difficult as they are generally more settled.”
Financial training inside Syria remains poor — with no training in Islamic banking products provided — and all private banks have commenced internal training programs. “We are bringing in graduates and providing them with considerable internal training,” Nashawati said. “We are focusing on Syrians because they are the future. There is an understanding of this across the industry.” An industry wide ‘gentleman’s agreement’ not to poach staff has generally been upheld by new entrants to the market.
Increasing the number of branches remains the primary key to growth. The number of branches operated by private banks in Syria presently sits at 68, up from 43 in 2006. Banque Bemo Saudi Fransi (BBSF), the country’s largest private bank both in terms of market share and coverage, accounted for close to one-third of all private bank branches with 20 branches presently operating in Syria. BBSF continues to lead the expansion of the private banks into rural and remote areas, opening branches in Hassakeh, Qamishli, Deir el-Zor and Deraa. The International Bank of Trade and Finance follows with 13 branches, up from 10 at the end of 2006. Bank Audi Syria saw the largest relative increase in its network over 2007 and presently operates 10 branches up, from five at the end of 2006. Over a third of private bank branches are located in Damascus, while the balance is mostly spread through Syria’s other large cities of Aleppo, Homs, Tartous, Lattakia and Hama.
