A Damascene stock market has been in the cards for a number of years, gradually taking fruition over the past three years in anticipation of the slated launch in early 2008. With the launch of the bourse, Syria will finally join the regional stock market club that has rapidly expanded over the past decade. Only Syria, Libya and Yemen are absent from this now not-so-exclusive group, with even Khartoum and war-torn Baghdad trading shares.
Establishing a bourse is not without its obstacles, particularly in a country that is slowly opening up economically and with minimal financial market experience — Syria definitely doesn’t want to ride the roller coaster that the fledgling Gulf bourses went on in the past few years, particularly Saudi Arabia, which saw nine million investors stung last year when stock prices plunged.
But the decision to set up a Securities Exchange is considered vital to boosting investment domestically and bolstering Syria’s economic reforms, which were kicked off at the beginning of the millennium.
“There is a need for a regional stock exchange, but a country in transition needs alternative modes of finance and a mechanism for potential privatization,” says Bassil Hamwi, Deputy Chairman and General Manager of Bank Audi Syria and a member of the Executive Board of the Stock Exchange. “Having a local market first makes sense,” he adds.
This will not be Syria’s first foray into the world of stocks and shares. “We had a stock market in the 1960s, but it was closed due to nationalization. It wasn’t official, but was a market,” says Dr Mohammed Imady, Chairman of the Board of Commissioners at the Syrian Commission on Financial Markets and Securities (SCFMS).
The idea of a stock market resurfaced, says the former economy minister of 30 years, in 1987 when a law was issued to establish joint stock companies in the agricultural sector, and again in 1991 when an investment promotion law was issued.
“We prepared a number of drafts but the time was not ripe,” Imady recalls.
In 2005, Law 22 was issued stipulating the establishment of the SCFMS, followed shortly after by a Stock Exchange Act and a decree stipulating fines for violating the commission’s regulations.
The commission looked closely at international stock market regulations to come up with their own rules, borrowing heavily from the Amman stock exchange.
Consultant Dr. Nabil Sukkar, managing director of the Syrian Consulting Bureau for Development and Investment, believes the regulations are up to par, but is concerned about their implementation, particularly in regard to influential political and economic figures.
“The challenge now is to enforce regulations in an efficient, transparent and timely way. It needs political guts to show you have teeth and they have to be careful the sharks don’t do all the speculation and hurt the smaller groups,” says Sukkar.
Dr. Ayman Midani, a finance investment, capital markets and banking consultant, concurs.
“It could be one of the biggest problems facing the SSEC. It’s an empirical question though, and I don’t want to pass judgement ahead of time,” he says.
A fly in the ointment?
Time will tell how far the long arm of the law will truly extend in the case of potential malpractice. Protecting investors should be a primary goal of the SCFMS, in addition to providing enough information to inform investors of the potential risks of trading.
“They need to be tough to not allow speculative, fishy, or fraudulent companies to be listed to protect investors,” says Midani. “Investors are very gullible and can be fooled easily, such as by pyramid schemes.”
A formula to rectify this, suggests Midani, should be a requirement for companies that plan to list to publicly issue financial statements on a quarterly basis. Under the current rules, companies only have to submit statements to the commission.
Disclosure is of particular importance, agrees Sukkar, as many of the larger Syrian companies that might list are family-owned businesses, which have a tendency to underestimate assets declared in income statements to the Finance Ministry.
Hamwi says the commission will ask companies that want to list to have at least seven years of compliance.
To encourage companies to go public, the government is drafting a law to exempt capital gains tax and has reduced income tax on publicly owned companies to 14% under Law 51 in 2006. For companies with shareholders of less than 50%, income tax would remain at 22%.
Insider trading is equally an issue that the commission should keep its eye on.
“What I’m afraid of in this country is price manipulation by insiders. If there is any abnormal price behavior they should start asking questions and look at transactions,” says Midani.
Imady says the commission is prepared for this eventuality. “We are not allowing an increase of a financial paper of more than 2% a day, as a company’s productivity will not increase more than that,” he says. He adds that he faced stiff opposition to include this regulation in the stock exchange act, and that the bouse’s initial aim will be to boost investment for private Syrian companies.
“People think we want a market for speculation, but this is too early. We want a market for investment and cheaper financing than from the banks,” says Imady. As a result the stock market will not aim to attract foreign capital.
Foreign investment is not disallowed by the commission, which has, Hamwi says, adopted a “foreign investment neutral” policy. In line with the law on banks requiring 51% Syrian ownership, the same will apply to the stock exchange, and companies with foreign shareholders will have to be first approved by the prime minister’s office, which should ensure the bourse is not inundated with foreign investors.
Joint-Stock Companies List
An ill-fated marriage?
With the introduction of private banks in Syria in 2003, the banking sector is playing an increasingly pivotal role in the country’s economic reforms. But with high liquidity due to burgeoning assets and few outlets for the cash bar lending, at least until treasury bills are issued some time in the next year, banks are looking to the stock market as another way to diversify their portfolios.
However, observers are wary about the impact banks could have on the bourse, particularly as three of the executive board members are from banks.
“I am wary of the marriage of banks and the stock market,” says Midani. “Lets not pretend to be the great liberal of financial regulation and let banks meddle in the markets, at least in the early stages until investors and the administration get some experience to manage the market efficiently. I say put a high and thick wall between the banks and the stock market, for at least a five-year span.”
Sukkar also has reservations and calls for the Central Bank to introduce regulations on how much the banks can invest in the stock market.
But Hamwi says margin trading will initially be prohibited. “This is extreme in our view, but necessary for confidence. In the future we will definitely see margin trading,” he adds.
Currently some five brokerages have been licensed in addition to the Commercial Bank of Syria to handle IPOs. The commission recently granted preliminary brokerage licenses to Egypt’s Orion Holding, Jordan’s Elite Financial Services and Orouba Stock Brokers, with a further 21 applications pending, all with minimal capital requirements of SYP805 million to carry out all brokerage activities (see box).
Such high minimal capital requirements, based on Amman’s regulations, are considered excessive by some. “The minimum capital requirement for brokerage firms is too high. It is not for investment banks but managing IPOs — it is restrictive,” says Sukkar.
The commission disagrees, and Hamwi says that although brokers would not need such capital to operate, the high requirements are necessary due to the country’s high liquidity.
“It is a barrier of entry to reduce risks in the market,” posits Hamwi.
Location, location
A final bone of contention about the stock market is where it will be located and who is to pay for it. When launched, the stock market will be housed in the same building as the commission, located out in Mezze. Far from an ideal location, stuck out in a residential area and with a trading floor, which will be fully electronic, that currently resembles a disused theater, a purpose built bourse is vital.
However, although several options are on the table the commission is apparently leaning towards an offer from a wealthy Syrian individual living in the UAE to build a bourse out in Yarmouk. This possibility has faced derision by some, particularly as the individual in question is on the same board of directors as Imady at the Arab European University.
“I don’t want private individuals to build it and offer it as a gift,” says Midani. “This is totally unacceptable and I expressed my view on this to the board. The stock market is going to make a hell of a lot of money … it will be a cash printer, so it can borrow money.”
Furthermore, the exchange has the funding of the Finance Ministry, the European Investment Bank, the Islamic Bank and other institutions.
Striking the right balance on this issue will be of as great importance as ensuring the commissions rules are upheld. In the meantime, the commission is struggling to find enough qualified personnel to regulate the bourse and inform the public about the highs and lows of trading, which it is doing through a weekly spread in the daily Thawra newspaper.
