No love stories today, I’m afraid – but I do have a fairly interesting article on money to share (and we all know how closely connected love and money can be. Oxford Business Group’s latest report on Syria focuses on its banking sector, which has been slowly but steadily liberalizing, and which still has great potential for continued expansion.
I remember when the first banks began to appear in Damascus – the first banks other than the various branches of the Syrian commercial bank, I mean. And I remember when the first ATMs appeared – or at least, the first ATMs that would accept a foreign bank card. They reminded me of my attempts to use the local ATMs when living in Morocco in the late 1990s. I would stop by the ATM every day – not because I was so desperate for cash, but because the ATMs response to my US bank card varied so dramatically. One day I would be able to take out 400 dirhams; on another, I would be able to take out 10. And on a third, the ATM would reject foreign cards altogether.
The Syrian ATMs weren’t quite that erratic – with them it was all or nothing: either I could take out money, or I couldn’t. And when I couldn’t take out money, it was often because the ATM had run out of money. This was often heralded by a literal snowfall of white papers on the ground around the ATM: evidently, the restocking took place fairly infrequently, and would-be customers had no interest in taking the paper receipts that the cashless machine faithfully printed out. Lots of litter, not so much cash.
At any rate, I think that a liberalized banking sector is a benefit to Syria, although the tightened Syrianization law and the banks’ excess liquidity to me are signs of its fragility. It will be interesting to see how banks develop in the next few years.
Less than a decade into Syria’s financial liberalisation efforts, banking is proving to be one of Syria’s fastest-growing sectors and an increasingly important pillar in the overall transformation of the economy.
Since the government began issuing licences in 2001, 11 private conventional and three private Islamic banks have set up in the country, with another two planning their initial public offerings (IPOs) and expected to be operational by year-end. Current legislation limits foreign ownership to 49%, and all of the private banks established to date are subsidiaries of either Lebanese, Jordanian or Gulf-backed institutions. While private banks account for just under 20% of the market, they are experiencing impressive growth (86.2% in 2008), and most have been able to turn a profit within their first two years of operation.
While the sector has liberalised dramatically in a relatively short period of time, and boasts some of the most advanced legislative frameworks for Islamic banking, microfinance and anti-money laundering in the region, it remains tightly regulated in comparison to neighbouring Jordan and Lebanon. Although this strict oversight has been credited with helping to insulate the country from the volatility that has plagued other markets. Further reform is needed to strengthen the sector’s maturation and performance.
A decree issued by the Ministry of Labour in July, stating that financial service firms (including banks and insurance companies) must reduce their volume of expatriate staff from 10 to 3%, has also prompted some reflection by local institutions, given that foreigners often hold key management and technical positions.
Khalid Wazani, the chairman of Arab Bank – Syria, told OBG “Our bank, even prior to the announcement, has been working hard on training in order to lower our dependency on foreign staff. In every country we operate, we would like to employ as many nationals as possible. Even so, staffing decisions should not be based on meeting percentages, but about having the right mix of required experience and expertise. Even in Amman, where we have our head office and have operated for over 79 years, we have to hire expats to fulfil certain technical areas of expertise.”
The impressive growth of private banks has been generated largely by deposits, rather than lending, resulting in excess liquidity in the market. World Bank’s “Doing Business 2010” report ranks Syria as 181st of out 183 countries in terms of access to credit, and according to the IMF, credit to the private sector has stood at around 15% of GDP since 2005, versus figures of 75% for Lebanon and around 100% for Jordan.
This can partly be attributed to the fact that the more established state banks are better positioned to service government clients, forcing private banks’ to rely on smaller business borrowers for whom financial records are harder to come by. Strict regulations and a lack of financial infrastructure also inhibit the expansion of credit, as an absence of a treasury-bill market or certificate of deposit system means that money deposited at the Central Bank accrues no interest.
The government, on their part, is proactively working to accelerate financial reforms, with Abdullah Dardari, the deputy prime minister for economic affairs, telling OBG, “We realise that access to funding is a major issue and the central bank is undertaking a number of measures to ease banks’ willingness to lend.”
Adib Mayaleh, the governor of the Central Bank, echoed this sentiment in an interview with OBG, “We want private banks to start financing big projects, whether public or private, and will introduce a certificate of deposit guarantee that should encourage them to do so.”
The government is also working on introducing treasury bills by year-end, as well as a new mortgage and leasing law that is expected to make easier the foreclosure and recovery of assets for non-performing loans. “We are also setting up a mortgage finance corporation to supervise mortgage lending as this is an area that needs more support,” said Dardari.
A positive offshoot of the increased returns on deposits will be a greater willingness to spend internally, with the expansion of bank branch networks a major focus. As banks are already constrained by qualified staffing shortages and complicated zoning laws that make finding a suitable location difficult, investing in new branches is a challenge. Bassel Hamwi, the deputy chairman and general manager for Bank Audi, told OBG, “Without the issuing of treasury bills, we as banks cannot invest and make money on our deposits. And if a bank cannot make money on its deposits, why should they bother aggressively expanding their branch network?”
As of June 2009 there were 414 branches in the country, up from 374 at the end of 2008. While branch penetration is growing, at an estimated one branch per 47,700 people, Syria has far fewer branches per head than its regional neighbours; a figure that is compounded when considering that most branches are concentrated in the major urban centres.
The Central Bank is preparing a new requirement for private banks to increase their paid-up capital to $200m-$300m, up from a current minimum of $30m. While banks will have a three-year window of preparation, some have expressed concern that this measure would place even further pressures on shareholders. Governor Mayaleh, however, explained the move to OBG, stating that, “We are raising minimum capital requirements to encourage bigger banks to operate in the market. We want our banks to be of international size and standards. Bigger banks sustain the economy.”
Overall, while the past 10 years have seen major advances in banking services and infrastructure, the country is still considered under-banked, and there remains much to do before achieving full sector modernisation. Add to this some uncertainty from the banking community over the future direction of government reforms, and banking presents itself as one of the more challenging, if opportunistic, areas of the Syrian market.