Just five years ago changing dollars in Syria was a tricky process – either wade through mounds of paperwork and bureaucracy at a state bank to change foreign currency at an exceedingly bad rate or wander the streets waiting for a man to idle up to you and whisper, “change money.” Back then, any Syrian seen with greenbacks poking out of his wallet would have been paying a trip to the local police station.
Today, it is another story. You can change money pretty much anywhere, withdraw from an ATM or go to one of the numerous private banks newly established in the last three years.
Syria’s banking reforms, kicked off in 2001 with amendments to the law allowing the entry of foreign banks, has been the harbinger of this change, boosting the private sector and slowly altering attitudes to banking and financial services.
“We are moving in the right direction, setting up private banks and the stock market,” said Dr Nabil Sukkar, Managing Director of the Syrian Consulting Bureau for Development and Investment.
Role reversal: Enter the Lebanese
Lebanese banks were the first to enter this essentially virgin market, which had seen no private banks since nationalization took place in the 1960s. This had forced Syrians to either operate through the moribund state banks, bank in Lebanon, the Gulf and elsewhere, or adopt the seemingly highly popular option of shoving money under the floorboards.
“After nearly 50 years of public banks, people are gradually starting to trust banks, taking money from their cushions. This will bring liquidity into the market, and act as a different cushion for the economy,” said Jean Bassil, Assistant General Manager of Byblos Bank Syria.
A lot of money seems to have been pulled out of cushions and from under the floorboards, with banks doubling assets in the first two years of operations. That initial surge is not likely to be as impressive this year however. “We won’t double assets this year. The number of private banks has increased tremendously – seven banks now, two Islamic banks and the third on its way. But the cake is so big in Syria that whoever comes to operate will have enough cake,” said Georges Sayegh, General Manager of the Bank of Syria and Overseas (BSO), part of Lebanon’s BLOM group.
The growth of private banks in Syria is evident not only in deposits and credits doubling year on year, but the number of branches mushrooming around the country – from 25 in 2005 to 43 last year (BEMO Saudi Fransi, BSO, International Bank for Trade and Finance, Audi, Arab Bank, and Byblos). By comparison there are only 271 branches for the country’s six state-owned banks, roughly one branch for 432,000 people according to Bassel Hamwi, Deputy Chairman and General Manager of Bank Audi Syria.
“I hope to see it come down to 10,000,” said Hamwi.
Byblos plans to open new branches in Tartus, Latakia, Hama and the north over the next three years, while BSO plans to open three to four branches this year.
Meanwhile, other Lebanese banks are gagging at the bit to enter Syria, with Bank Libano-Francaise and Fransabank recently granted licenses, and First National Bank to enter with an 8% stake in the Syria Gulf Bank in June. The Lebanese Canadian Bank is also reportedly in talks about entering the fledgling market, and the Bank of Beirut has applied for a license in partnership with the Qatar National Bank and the Emirates Bank of Dubai. BLC’s Shadi Karam said they were waiting for a change in the law to open a subsidiary. “The law is still not friendly enough for me,” he said.
An increasingly diverse sector
Bankers are enthusiastic about the entrance of Islamic banks into Syria, believing the globally growing Islamic financial sector will help diversify the sector and attract deposits from Syrians that have been hesitant to deal with commercial banks.
“Product differentiation is key. I was happy that Islamic banks are coming in, as they are not trying to take market share but broaden the market,” said Hamwi.
The two Islamic banks currently in operation – one Kuwaiti, the other Qatari – are to be joined by Bahrain’s Global House Group, which has launched a new Islamic bank with a capital of $500 million, and the Dubai Islamic Bank, which has also received approval to launch. Three other Islamic banks are reportedly in the pipeline.
“I think a lot of people will move money to these banks,” said Sukkar. “Deposits will grow fast, but to make money will be difficult until people learn about Islamic financing. Islamic banks will do well, but not at the beginning,” he added.
There is also a draft law under review to increase capital requirements for Islamic banks from the current $100 million to $200 million. This same draft law, if passed, will raise maximum foreign ownership from its current 49% to 60% to attract international banks.
The government, however, is dragging its feet to implement the law, adopting a wait and see approach to monitor how the current banks fair, and of equal importance, how state-run banks adapt to the new banking environment.
If passed, the government would likely raise the capital requirement from the current $30 million to $100 million, which would ward off smaller regional players and potentially attract the big players.
However, international banks might hesitate before entering the Syrian market, concerned about Damascus’ politics, the US ban on the Commercial Bank of Syria along with economic sanctions, and due to overly rapid expansion by top players in recent years. Indeed, a Citibank manager admitted as much last month, saying the bank had become too unwieldy in its worldwide operations.
Regardless of whether the law will change, the 51% ownership of banks by Syrians is widely viewed as a façade, with the foreign banks handling overall management. This is reflected in one of the biggest challenges for banks: manning new branches. “We are targeting Syrians educated outside, and then repatriating them,” said Bassil. Top management at the Lebanese banks is typically Lebanese, with middle to lower management a mix of Lebanese and Syrian.
A few more bridges to cross
Attracting new talent is not the only concern of private banks. Attracting suitable clients is equally problematic.
“Approaching a client is difficult as financial education is minimal, as well as transparency and auditing. Few companies have financial managers, and it is difficult for banks to lend due to the risk,” said Bassil. The same applies to attracting foreign investment.
The Gulf is keen to utilize its high liquidity by investing in the likes of Syria, but legislation still needs to be amended to improve the free flows of capital.
An amendment to the law in February – allowing the export of capital by foreign firms – has eased some of these concerns, but the modernization of the legal system is still moving at a snail’s pace. Legal issues over ownership still need to be addressed, taxation needs to be overhauled, and a culture of transparency needs to be introduced. There is also a noticeable gap in the market for investment and merchant banks, alongside other financial institutions to cover all the financial bases for Syria to really excel.
The Central Bank is working to address these issues however, currently taking on two advisors from the Bank of England, and the European Union funding reform of the Finance Ministry.
But most pressing for the sector is what to do with the deposits flooding into their vaults.
“Banks are awash with money and need new products [to sell], but don’t know much about the economy, market and society,” said Sukkar.
However, that said, banks are offering mortgages, credit cards and car loans, as well as altering more traditional approaches to banking to appeal to more clients. “Before, Byblos was into trade finance, but we now offer medium- to long-term facilities,” said Bassil. “We are also trying to gradually bring retail products to Syria as we believe it is a lucrative market,” he added. Indeed, if governmental statistics are accurate, Syria’s exports spiked from $6 billion in 2005 to $10 billion last year. As this rise is attributed to the growth of the private sector – Syria’s oil sales are rapidly dwindling – further money could enter the system.
Nonetheless with more money entering the system, and inevitably the banking sector, banks are appealing for alternative outlets for their deposits.
“We first and foremost need some kind of liquid investment, a treasury bill of some sort to ease distortion in the sector – bank institutions take rates fixed by the regulator but have no place to deposit on a short term basis,” said Hamwi.
Liquidity was originally deposited in a bank-specific colored vault at the Central Bank at 0%, and as of December raised to 1%. Banks want that rate to be raised.
“At least give us a chance to get pennies on our liquidity,” said Sayegh.
The problem of what to do with such inflows of cash could be addressed in the next six months with the launch of the Securities Exchange and the issuance of treasury bills.
Stock market dreams
The securities exchange, slated to open by year end in Yarfour, is being financed by a Syrian investor in the UAE as a gift to the government. Sukkar thinks the bourse will not be opened to foreigners initially, despite regulations that allows foreigners to do so, as the system will take time to adequately handle flows of capital in and out of the country – factors that led, in part, to the financial meltdown in South-East Asia in 1997.
The prospects for Syrian investors looks good, however, with bank IPOs heavily subscribed when released over the last few years.
More compelling for the banks will be the introduction of treasury bills sometime in the next year. “We certainly need it, as a non-inflationary way of providing for the budget,” said Sukkar. “But I hope banks don’t do what they did in Lebanon by buying the bulk of treasury bills as a way to make money. This is possibly why the government is postponing it, to make banks fund the real economy.”
Hamwi thought this wasn’t necessarily the case, however. “This is unlikely given a number of things, such as the ability to borrow multi- and unilaterally as Syria has low international debt and no rating.”
Ultimately, no matter how much the financial sector is reformed and all the corresponding knock-on benefits boost the economy, other sectors need serious investment for there to be viable economic progress.
“We’ve done more on tourism and reform of the financial sector than agriculture and manufacturing – there is a lopsided focus. We shouldn’t forget these sectors need to be restructured in parallel,” suggested Sukkar.
