Politics will rule in the surreal world of Syrian banking

Reuters/Ammar Awad

On December 5, as Syrian rebel forces closed in on Damascus, Arab Bank Syria made a formal disclosure to the Damascus Stock Exchange that it would be closing its branch in Sahniya, about five miles south of the capital. 

The decision had been agreed with the Central Bank some weeks before. However, the bank said it would continue providing services to customers through its other regional branches. 

Two weeks earlier, the International Bank for Trade and Finance confirmed to the exchange its plans for a capital increase, and the Bank of Syria and the Gulf disclosed its half-year financial statements. 

Amid these almost surreal disclosures, Banque Bemo Saudi Fransi indicated on December 4 that all might not have been well in Syria. The bank said it had been forced to close its branch in Deraa (which by then was in rebel hands) because the electricity supply to the branch had been cut off. 

Fifteen banks are listed on the Damascus Stock Exchange, although some have been dormant for years. 

When the civil war in Syria started more than 10 years ago, there were 20 commercial banks, seven of which were state-owned. The others were joint ventures, usually with Lebanese, Jordanian or Gulf partners.

As the war intensified, most of those overseas partners wrote down the value of their investments to zero and did their best to disengage. 

Before the conflict began, private sector banks had a market share of about 30 percent, although public sector banks almost exclusively undertook lending to public sector companies. 

As the horrors of the Assad regime become apparent, along with the full extent of the physical destruction, does the banking system matter? 

The answer is yes, but we should not expect Syria to have a well-functioning and efficient banking system any time soon. 

Economic development agencies tell us that countries need banks so small businesses can get loans to grow and create employment and general economic activity. And that is true. But in a country as devastated as Syria, the role of banks is, for the moment, more basic. 

Syrians need a safe place to store what little money they have, and they need to be able to make payments to each other, and to government agencies.

Businesspeople need letters of credit to fund imports, and the government needs the banks to be able to handle transfers.

Two conditions need to be fulfilled for this to happen: the banks must be secure from robbery, and electricity and internet connections must be restored.

Those are not financial problems; they are challenges of security and infrastructure that will depend on the ability of the new rulers from Harakat Tahrir al-Sham (HTS) to establish their authority.

Moving beyond the provision of those most basic banking services will entail rebuilding financial infrastructure and strengthening the Central Bank of Syria. In developing countries, strong banking systems and, in particular, bank recapitalisation and reform, are invariably driven by strong central banks. 

Reuters/Ammar Awad

The upgrading of Egypt’s banking system 20 years ago was driven by a team of talented bankers with experience of Western markets, who were recruited into the Central Bank of Egypt. The stability and strength of the Moroccan banking system is due in no small part to the competence of the Bank Al Maghrib and its longstanding governor, Abdellatif Jouahri. 

In contrast, the history of the Central Bank of Iraq provides a cautionary tale for those hoping for rapid developments in Syria. After the toppling of Saddam Hussein’s regime in 2003, new central bank regulations were written by experienced Western advisers, but most of the staff in the central bank had lived through decades during which all financial activity was subservient to the needs of the regime. 

There was no appreciation of how commercial banking had been advancing worldwide. In such an environment, innovation and new ideas were dangerous, while repetition and endless form-filling offered the best chance of safety. 

In such an atmosphere, the well-meaning and incorruptible governor of the Central Bank of Iraq, Sinan Al-Shabibi, could make no impression. 

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Syria has not been shut out of the international financial system for as long as Iraq’s was prior to Saddam’s overthrow, but like Iraq, the Syrian banking system has never known a time when banks were managed as independent companies with a clear appreciation of profitability, risk management and capital adequacy. 

So, is there any scope for optimism about the Syrian banking system? 

Much depends on who decides to enter the market. Turkey played a significant role in overthrowing Assad and has several well-managed banks that operate effectively on the global stage. If we see Turkish banks entering Syria, that will be a positive sign. Saudi and Jordanian banks may try to revive their operations. 

The greatest uncertainty lies in the nature of the new government of HTS. It is naïve to expect that a group that originated in Al-Qaeda and remains rooted in religious fundamentalism will turn out to be enthusiastic advocates for independent, Western style banking (whether sharia-compliant or conventional).

These are early days for the post-Assad era. Until we have a clearer idea of the outlook and culture of the new political rulers, it will be hard to assess the pace at which the banking system will recover and what complexion it will have when it does.

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems