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Skip Navigation LinksHome :: Back Issues :: Unloved banks look to reform

July 2001

Unloved banks look to reform


Syrians don’t trust domestic banks. Many would rather deposit their cash in Beirut than entrust it to the locals. Reform has a long way to go. Meanwhile the government, undaunted by the weak financial infrastructure, is proposing the establishment of a stock exchange.




       
Damascus: faces competition from
Lebanon in financial services
It is often said that for financial services Lebanon is to Syria what Hong Kong has been to China. The Syrian government might not like it, but it is self-evident that Beirut is the financial centre of choice not just for Syrian businesses but also for thousands of Syrian individuals who simply don't trust the domestic banking industry.
"Theoretically," says one economist, "it is illegal for Syrians to have bank accounts in Lebanon. But if you believe the unofficial figures saying that only 5% of Syrians actually have bank accounts in Syria, it is pretty obvious that the vast majority of those that do have accounts have them in Lebanon. The government tends to turn a blind eye because if Syrians are to have overseas bank accounts, the authorities would much rather they had them in Lebanon than anywhere else."
Quite how much Syrian cash is channelled through the Lebanese banking system, which is an attractive home for deposits because of the country's bank secrecy laws, is a matter for speculation. But as one economist points out, total assets in the Syrian commercial banking system amount to about $12 billion in a country with a population of 17 million. In Lebanon, which has a population less than a quarter of the size of Syria's, total bank assets amount to some $44 billion. Not all of the deposits sitting in Lebanese banks, of course, are Syrian in origin. But many of them are.
It is not just trust in the domestic banking system that is lacking in Syria. Nabil Sukkar, managing director of the Syrian Consulting Bureau for Development and Investment (SCB), points to other shortcomings, such as the absence of a bank secrecy law and the woeful inefficiency of the banking sector. "Nobody wants to spend two hours waiting in a bank queue to cash a cheque," he says.
Inevitably, the reluctance of local depositors to use the banking system has filtered through into a dearth of credit provided by the seven government-owned banks. These are organized in a system evocative of pre-1990 Comecon economies, with each bank responsible for lending to a specified economic sector and lending at interest rates determined by the government.
The inevitable result, say economists, is a private sector desperately starved of credit. "The banking sector's main responsibility is quite obviously to bankroll the public sector," says one. "If you're in the private sector and you need a loan, or if you're an individual, you go to your neighbour, or to the local souk, or if you're lucky to a Lebanese bank. You don't go to a Syrian bank."
Central bank governor Bashar Kabbarah dismisses this sort of observation as nonsense, and says that it is in any event a "minor" problem. "We have access to the figures and we know that there is plenty of liquidity in the system," he insists. Nevertheless, it is clear that the government recognizes that the shortcomings of the banking system in the form in which it has existed for the past three decades are a serious hindrance to economic progress and reform.
Ending the government monopoly
Kabbarah says that extensive reforms are now being made in the banking system, starting with reform at the central bank itself, although to an external observer some of these seem unclear and curious, even downright irrelevant. At the unclear level, for example, Kabbarah insists, enigmatically, that a new central bank law will make the bank entirely independent of the government. He says that this will give the bank "complete independence over monetary tools". It is difficult to imagine how a central bank in a single-party state can hope to exercise anything like independence.
At the curious level, Kabbarah says that core reform of the central bank has included such initiatives as opening new buildings, enlarging existing ones and printing new banknotes, alongside much more relevant developments such as the launch of a computerization programme that is helping to eliminate backlogs going back in some cases as far as 30 years.
Of far more importance, as far as the prospects for the economy are concerned, has been a recent change in the law allowing for private banking to challenge the long-held government monopoly. Before the passage of this law (No 28), in March 2001, a limited number of Lebanese institutions operating in the free trade zones were the only private banks.
Syria's new law on private banking, on which it took advice from Lebanon's central bank, allows for private investment in existing and new banks. Under this law, foreign investors will be permitted to own a stake of up to 49% in Syrian commercial banks, and one observer in Damascus reports that by the beginning of June the government had received no fewer than 52 expressions of interest from overseas institutions, the bulk of which are presumed to be from Lebanon and the Gulf.
       
Central Bank of Syria: a new law will give it complete
independence over monetary tools, the governor says
Other provisions in the new banking law, according to Kabbarah, dictate that privately owned banks with a minimum capital requirement of S£1.5 billion (about $33 million) can be 100% owned by Syrian investors, and "mixed banks" (joint ventures between the public and private sectors) will be subject to maximum government ownership of 25%. In no case will an individual investor be permitted to own more than 5% of any bank's capital. Additionally, according to a rudimentary translation of the law, all commercial banks are required to "deposit in a blocked account with no interest at the Central Bank of Syria the amount of 10% of its subscribed capital and this is considered an element of its fixed assets to be returned to it after the liquidation of its business."
Kabbarah insists that the procedure for granting new banking licences to private sector investors, be they local or international, will be entirely fair and open. "We don't want Syria to be over-banked," he explains. "What we are interested in is attracting the best and the most sound banks. All applications will be measured by the same objective criteria, and equitable treatment will be given to all applicants."
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