Forging A New Era: Private Banks Back To Syria

By Abdul-Salam Haykal

December 2000

Although banks existed in Syria while still under the Ottoman rule, the Syrian pound was first issued in 1920, as a derivative of the French franc. Then, Syria and Lebanon, not already separated, had a customs union and held mutual monetary facilities. Well after independence, the banking activity in both countries was dominated by European firms. The Bank of Syria and Lebanon, a French bank founded under the auspices of the Imperial Ottoman Bank and Paribas, was the first commercial bank and responsible of issuing the currency and other central-bank functions. Upon achieving her independence in 1946, Syria joined the International Monetary Fund (IMF) and established a par value of SP2.19 against US$1. However, it was not until two years later that Syria broke the link to the franc, and introduced for the first time a multi-tier exchange rate. One year later, the customs union with Lebanon was dissolved, bringing the expansion of already existing banks and the establishment of new mainly Arab banks. The legislation establishing a central bank and controlling the banking activity in the country did not come about until 1953, and three years passed before the central bank was actually formed in 1956.

The Central Bank of Syria was responsible of issuing currency, controlling money supply and controlling commercial and credit banks. The bank itself was under the control of the Council of Money and Credit, a group of senior financial and economic public servants. That did not prevent the overall banking system to be flexible, reliable and profitable. The first signs of trouble for private banking surfaced in 1956 after the Suez War during which France, Britain and Israel attacked Egypt in revenge to the nationalization of the Suez Canal. French and British banks were appropriated being enemy assets. Under the union with Egypt in 1958, the state began the process of “Arabizing” foreign commercial banks, but moving at least 51% of their stock to Arab shareholders. Shortly before the dissolution of the union in 1961, it applied the policy of limited nationalization to the banking sector, in a way that the state’s Syrian Economic Establishment will own a minimum of 35% of the shares. All banks, among other commercial and industrial establishments, were nationalized in 1963 in the wake of the Baath Party takeover of power.

In 1966, the government merged all existing foreign and Arab commercial banks into a consolidated Commercial Bank of Syria, and by this it became the owner of commercial banking in the country. Four other already established state banks provided deposit and lending service to specialized sectors; the Agricultural Cooperative Bank, Real Estate Bank, Popular Credit Bank, and the Industrial Bank. The Post Savings Fund provided savings accounts to the population. The lending of each bank was limited to the sector designated in its title. The philosophy of the state was that the banking sector should be an agent of its economic policy. Accordingly, the public sector received more than 70% of the credit. Most banks accounts held by citizens were demand and saving deposits. Banking played only a small part in the economy, and although the money supply increased rapidly, it was mainly money in circulation. Over the years, even the basic services offered by the banks started to deteriorate, with the deficiency in qualified staff, required technology, and modern practices and regulations that govern the commercial and financial operations. Although the government made plans for economic and social development, things went on in the same manner more or less until 1990.

Many reasons account to this situation. In addition to the low income of the largest segment of the Syrian population, the state banks were inefficient, unprofessional, offered low interest on saving accounts, bureaucratically delayed letter of credits and lacked more convenient offices and branches. Harsh import regulation also contributed to the ineffectiveness of state banks. Importers were forced to use their own funds to pay for their imported goods. In a place where strict currency rules prevailed, importers preferred non-state banks to conduct their commercial transactions, either fearing tax collectors or legal persecution. And since the funds of the undercapitalized bank were taken either from the Central Bank or from deposits, lending was mostly for short- and medium-term transactions. That increased the resort to Lebanese banks in towns next to the borders. It also increased the resort to the underground black market for currency exchange and transactions, which played a more active role in the economy.

The unmatched political stability that Syria witnessed from 1970 to 1980 contributed to a strong and stable Syrian pound. However, following regional and internal instability in the early 1980s, and over the next six years the pound depreciated to less than one sixth of its value from SP4/US$1 to almost SP25/$1, forcing Syria into rigorous retrenchment. That was still not reflected in the official price. In 1986, the Syrians pound to US dollar exchange rate averaged from 18 to 23 in contrast with the official rate of 3.9. In the peak of the economic crisis, the government launched a campaign to fight black market money changing by decreeing heavy sentences up to 25-year imprisonment. Trying to stop the depreciation of the pound, and attract remittances from Syrians outside, the government had also to revise exchange rates and it introduced a multi-layer exchange rate that floated against major international currencies. Today there are at least three rates: the “neighboring countries rate” of 46 Syrian pounds to the US dollar, which makes more than 75% of the country's transactions, the official rate of 11.2 pounds to the dollar, and the customs rate of 23 pounds to the dollar.

The banking system was no exception to the severe economic situation in the late 1980s. Political changes after the Second Gulf War, the opening of the peace process in Madrid, and the establishment of the uni-polar World New Order after the collapse of the Soviet Union, all urged the government to embark on economic reform. The argument was that Syria must modernize and develop its economy so that it will be able to compete with Israel whenever peace is achieved in the Middle East. The first time in years that the private sector backed by certain governmental departments started to talk about the need of private banking and a stock market in Syria was in 1991, after late President Hafez al-Assad issued the famous Investment Law No. 10. To many investors, the law included several minor economic measures clearing some bureaucratic complexities and giving more incentives to local and foreign capitals, but that was but a part of what they hoped for. They asked for banks with more financial and commercial services, better efficiency, lower commissions, extensive credit capabilities and flexible interest rates. They also wanted financial institutions to finance their projects, especially that international banks refused on many occasions to finance Syrian projects due to the lack of familiarity and distrust of the Syrian regulations. It was clear that the existing state-banks would not be able to meet the needs and expectations of local and foreign capital. The government tolerated the harsh criticism of its banking system, giving a signal that eventually joint venture or private banks would be allowed in the country. Political challenges in the region and the stalled peace process delayed any decision concerning more openness and transparency in the system, including private banks, the stock market, and a unified rate of exchange.

That came with the rising role of Dr. Bashar al-Assad, an ophthalmologist with keen interests in the Internet, in public and political affairs, and his emphasis on economic reform and modernization in the country. In 1998, the state allowed Syrian citizens to open bank accounts in the Commercial Bank in foreign currency, no questions asked about the source of the funds. A remarkable point in the modernization process can be seen in the inaugural address President Hafiz al-Assad gave in commencement of his fifth term in 1999. He urged the state banks to seek modernization and enhance its efficiency and effectiveness in order to meet the demands of the coming challenges. Two years later in early 2000, Law No. 8 that introduced the severe monetary restrictions in mid-1980s, was cancelled and more relaxed regulations were issued. In 2000, President Assad issued a decree allowing private banks to operate in the Free Trade Zones, under the supervision of the Commercial Bank. Four Lebanese banks were granted licensees including Banque du Liban et d’Outre-Mer, Banque Europeenne pour le Moyen Orient, Fransabank and Societe Generale Libano-Europeenne de Banque Socitie, with the latter starting its operations this week. Shortly after, the investment law was amended taking into considerations the flaws of the previous law and clarifying ambiguities. With the amendments came new and recurring urges for a modern banking and monetary system where the private sector employing Syrian funds deposited in foreign banks can play a major role.

The issue became more serious when President Bashar al-Assad assumed office last July. In his inauguration speech he emphasized that gradual yet firm reform was needed to remove obstacles to the flow of internal and external funds. In this respect, he lately issued a decree establishing the Investment Bank, an institution to facilitate the transactions of investors and their projects. He also commissioned a committee to work on transforming the Post Saving Fund, which provides saving accounts for citizens, into a full-fledged bank. However, the issue of private banks remained subject to give and take in economic circles, governmental departments, and the unusually free media. The People’s Assembly asked parliamentary committees on constitutional and legislative affairs and financial regulation to prepare the necessary studies on the establishment of private banks and a stock market, including the pros and cons of each. They came out with a conclusion downgrading the vitality of this step at this time. The issue gained momentum after the International Economic Forum held in Damascus last month, in which well known Syrian, Arab and international figures in the world of business and finance named banking and foreign exchange as sectors most in need of reform. Furthermore, in their meeting in Damascus two weeks ago, the Syrian and Lebanese premiers agreed that for a conclusion in this respect should be reached soon in order for Lebanese banks to extend their activities to the Syrian market and establish branches there. The decision of the Regional Command of the Baath Party last Saturday to allow establishment of banks (private, joint-stock, or jointly owned by government and the private sector), ensure banking privacy, and adopt free market rates of exchange was not unexpected. But taking the previous too cautious pattern, it was quick and bold.

No specific date was given for private banks to start operating. Surely it will take some time to achieve application and to see results. But in the short-term, it will help the lack of liquidity in the country, a problem that has not reached this severity before. It will also provide for a competent private sector that is capable of attracting local, Arab and foreign capitals to a healthy atmosphere for investment. According to the Syrian Minister of Economy Dr. Mohamed Al-Imadi, the private banks will not replace state-banks but will complement them. He also stated that the minimal credit base for the new private banks would be SP1.5b ($30m), where foreign investors will be allowed to hold up to 49% of the stock. The remaining 51% will lie in hands of Syrian shareholders and not necessarily held by government. No individual investor is allowed to hold more than 5% of the bank. It is expected that specialized economic and monetary committees will start preparing immediately the laws and regulations to cover the activities of private banks. The law, expected to be issued soon, will specify the qualification of the bank’s directors, the method and procedures of lending, and the guarantees needed from the founders to take responsibility for the deposits. The Central Bank is to monitor the lending process with constraints that guarantee money outflow to be within the frame of laws and correct percentages.

Priority will be given to the Syrian private sector to engage in the new activity of banking, followed by Arab private sector. However, in Lebanon, where there is a rising tone against the presence of Syrian troops in the country, banks are expected to pioneer in getting licenses for operation in Syria. Although it would take some time for Syrian businessmen to drop off their cautious reaction to reform measures, Lebanese banks, already faced with recession, will not like to lose their Syrian customers, who in the absence of trusted and efficient banking system in Syria traveled to Lebanon to deposit their foreign funds and conduct their financial and commercial transactions. It is estimated that Syrian nationals account for more than 15% of the $38b deposits in Lebanese banks today. Further, the Lebanese Minister of Finance Mr. Fouad Sanyoura said that the decision would enhance the commercial relationships between Syria and Lebanon, and would increase the exchange of good between the two countries in a way that would benefit both economies. He said that this is an occasion to raise the Lebanese investment in Syria and to establish joint venture projects between Syrian and Lebanese businessmen. This relation will probably be affected by the Lebanese government’s decision to cut custom duties on manufactured and imported goods.

The decision was accompanied by official calls to enhance the service of state banks, to change their management system, and to hire able and competent staff in order for the banks to survive. Officials say that state banks have to offer competitive incentives and packages to their existing employees so that they do not “escape” to private banks. However, and although Syria lacks professional banking experts, demand for staff currently employed by the state banks will not be high since they still required to be qualified to incorporate into the modern standards and practices of the industry. While they agree that levels of deposits and commercial transaction through state banks will decline, they argue that private banks will not be “stealing” customers from state banks, because most of those who deal with private banks are actually outside the circle of state banks. On another level, the Central Bank has to find and institute the needed systems and qualified teams to monitor the operations of the new world-standard banking institutions and to prevent any misuse of the newly introduced facilities. Officials fear that any defect in the system may lead to catastrophic results and the loss of citizens’ deposits especially that Syria does not posses the required experience in this field, nor in the fields of customer protection, conflict of interest and quality control. To these officials, the fall of the Asian Tigers is an experiment still alive in their minds. That is why there is much hope and dependence on Syrian expatriates to provide the human resources for the new banks. The last Investment Forum witnessed the largest gathering of Syrian businessmen and professionals who are leaders in the industry in the Arab Gulf, USA, Switzerland, France and England, meet and discuss with much passion and high feelings the ways to put their experience and education at the service of their country. However, they fear a clash between officials constituting the executive body responsible of the application of the new directions and the new atmosphere. These officials are the same executives of the old system, and they will have to set action and business plans for the new system. If for nothing but clash of egos, this will probably hinder the process of modernization by putting useless constraints, unless these officials are given straight and clear orders of how they should implement the new decisions.

This preliminary decision is by far is the most dramatic step towards economic reform, and the strongest signal that change is coming to the Syria’s decayed command economy. President Bashar promised economic as well as political reform. Although he seems to prioritize the first one, he released almost 600 political prisoners earlier this month in a step to relax the political atmosphere in the country. In a highly symbolic move, he also ordered the shutting down the Mezza prison, once the address of many high ranking political prisoners, and its renovation into an institute for historical research. Also, in a recent meeting with the National Progressive Front, the forum of political parties in the country, he gave way for each party to set up its own newspaper and establish branches in the various Syrian provinces. This will serve to “activate the public life” in the country and to bring life to the state-controlled media. President Bashar also called for a revision of the 1949 Press Law, so that the media can reflect and follow up the expected modernization and advancement in the country in a way that “respect the readers’ and viewers’ minds”. Another major decision was taken canceling the exclusive right of the state’s General Organization of Cinema to import and show movies, and allowing the private sector to invest in the field of visual entertainment. The government is in the process of amending many laws including the General Trade Law and the Customs Law.

Syria today is breathing new air. The moves taken by President Bashar al-Assad and his administration are invitations to all, public and private sector, residents and expatriates, to come and lend a hand to the modernization and advancement of their country, a place often described as the cradle of civilizations.

Abdul-Salam HAYKAL, A Senior political science student at the American University of Beirut.