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Middle EastDecember 5 2005

Crisis speeds up banking reforms

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The political crisis that followed the assassination in February of Lebanon’s former prime minister Rafik Hariri has thrown all the weaknesses and contradictions that make up Syrian political life into stark relief. With the next phase of the UN investigation into the Hariri killing set to question the most senior members of the Syrian security elite, the country’s political future – and that of its 40-year-old president Bashar al-Assad – is in question.

Hopes were high

Advocates of accelerated economic reform for Syria’s stodgy economic system – few countries have hung onto the institutional and corporate baggage of old Soviet-style economies as tenaciously as the Syrians – had placed high hopes in ‘Dr Bashar’, a London-trained eye surgeon. He reluctantly became president on the death of his father, Hafez al-Assad, one of the Middle East’s most adroit political performers.

Despite some changes – pushed by recent appointees such as Abdullah al-Dardari, the deputy prime minister for economic affairs who is shaking up key sectors such as banking – and a public emphasis on technology, Mr al-Assad has disappointed his more liberal supporters due to a failure to deliver on promises of real change.

Ironically, probably as a result of this crisis, more accelerated change does now seem likely. The Damascus political and administrative classes are alive with talk of further government reshuffle, which is expected to bring in much-needed new blood.

Meanwhile, long-promised reforms to banking and other key sectors seem finally to be reaching the implementation stage. Mr Dardari has raised the prospect of innovations – for Syria – such as the introduction of treasury bills and a managed float of the Syrian pound. A new investment law would improve the terms by which investors repatriate their profits. An attempt will be made to revive the Syrian stock exchange by widening the investor base.

Much fanfare has surrounded the announcement of plans to scrap laws that insist on Syria’s 49% foreign ownership limit. In early November, Rateb Shallah, president of the Syrian Chamber of Commerce, said: “The amendment to get an exemption to set up new banks with ownership that exceeds 50% is expected soon… it will open the opportunity for foreign banks to set up branches in the country.”

Mr Shallah is also chairman of the Bank of Syria and Overseas (BSO), which became the first privately owned bank to operate in Syria in 40 years when it set up in January 2004. BSO is the model of the new generation of banks to have emerged in Syria during the past two years.

Regional banks – particularly Lebanese institutions, which have been swimming in liquidity – have come in following legislation passed in 2002 aimed at attracting international banks and foreign investment, and moving away from the domination of the sector by the state-owned monolith Commercial Bank of Syria.

BSO’s creation, opening Syria’s first private sector bank since nationalisation in 1961, involved a large Lebanese institution, Blom Bank (with a 39% stake and management control), the World Bank’s International Finance Corporation (with 10% for a $3m equity investment) and Syrian investors. BSO now has five branches, with a target audience of local small and medium-sized firms.

Lebanese contradictions

In late October, Blom chairman Saad Azhari said his bank was looking for more expansion in Syria. This is into an economy that offers huge untapped potential, but where further sweeping reform is essential.

A report on the Syrian economy, released by Bank Audi in October, summed up what many investors feel about Syria. The Beirut-based bank acknowledged that while the economy had benefited from rising oil prices and a regional post-Iraq war boom, which translated into larger inflows of workers’ remittances and tourist receipts, “widening political uncertainties and the relatively slow reform process… continue to dampen growth performance”.

Despite these worries, Bank Audi opened three branches in Syria in October. Freddi Baz, adviser to the bank’s chairman, says: “The economic potential in Syria is huge despite the turbulence the country is facing now.”

Other Arab investors are looking at a range of opportunities. The Islamic financing market is untapped, but this summer Albaraka Banking Group (ABG) received in-principle permission from Central Bank of Syria to establish a new bank with paid-up capital of $100m. Under this arrangement, ABG will take a 49% stake in the new bank, with Syrian investors holding the rest.

It has also been reported that Qatar Islamic International Bank – whose board is heavily dominated by Qatar’s ruling al-Thani family members – has completed all requirements that will allow it to open a bank in Syria, also with $100m capital.

This interest from the Gulf reflects Syria’s potential for aligning itself more closely with the wealthier oil economies to the south. This is reflected in the real estate sector, where after a period of doubt, billionaire Saudi investor Prince Alwaleed bin Talal al-Saud has implemented several major investments, notably a new Four Seasons hotel in Damascus. The Emaar property company, that has taken a lead in developing its dynamic home market, Dubai, has decided to follow with a project to develop several malls.

Diversification away from oil remains a key to economic recovery. One apostle of reform, Abdullah al-Dardari, says: “The structure of our exports and gross domestic product [must shift] away from oil towards added value services and products.” Mr Dardari wants “an open, competitive economy that attracts investment,” capable of registering 7%-8% annual growth by 2009-10.

This is essential for an economy unable to create sufficient valid jobs for its large youthful population. Even with higher oil prices and transfers, growth is only forecast at 3.5%-4% in 2005.

The problem is linking this into the political framework. Syria has high hopes for its tourism industry, with talk of a possible 7.5 million tourists per year by 2010, up from around 3 million now, mainly pilgrims and other Middle Eastern visitors. But the threat of international sanctions looms over the Hariri affair, and international discussion of the role of the Syrian power elite does nothing for the country’s image.

Liberal limitations

Even liberals have to maintain limited goals. “Growth today does not permit privatisation because it would increase unemployment,” Mr al-Dardari told an interviewer in August: “When growth reaches 7% or 8%… then this part which prevents us from privatisation at least would have receded.”

But political risks and the threat of international sanctions continue to discourage Western investment. The release on October 20 of the initial UN report on its investigation of the Hariri assassination linked senior members of the Syrian and Lebanese security services to the murder; speculation over a high-level Syrian connection raises the prospect of sanctions. But this risk is nothing new and, as is often the case with Syria, investors will continue to tread cautiously.

Bankers have long complained about the slow pace of banking sector reform but former economy and foreign trade minister Ghassan Al-Rifai, who pushed the law that allowed private sector banks to enter Syria, has responded that speed is not of the essence. “We realise the difficulties that stand in the way of the launch of the banking industry in our country and we are working on overcoming them. It is our duty as we push the Syrian banking forward to apply caution,” he said.

Still, banking reform is gradually going ahead and was seen to have picked up pace this spring in an attempt to capture capital from Syrians returning from Lebanon in the wake of the Hariri assassination. Inter-bank lending was allowed and banks were permitted to offer importers letters of credit in foreign currency against their choice of collateral.

Even then some bankers remained unimpressed. The general manager of Banque Bemo Saudi Fransi, Nabil Hchaime, was quoted in the Financial Times as saying: “Reforms? That is a very big word for what has been done so far …what is needed is a complete overhaul of the system.”

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Read more about:  Middle East , Syria