Panel Session 2: New Opportunities in the Financial Services Sector

Abdul Kader Husrieh
Ernst & Young
Middle East


The financial system, which consists of various financial institutions and financial markets, is one of the most important pillars of a modern economy.  A key component of the transition from a planned economy to market economy is to reconstruct the financial system to adapt to market economy. 

Money in a centrally planned economy is a certificate of credit in certain form issued by the central bank and used only as means of measurement and tokens of the share of each member of the society in the total output.  The outcome of this conceptual framework about money is that:

  1. Cash and bank deposits are the two major financial assets
  1. Money is passive in that it is used only as a tool for pricing and accounting.
  1. Banks are only considered as the cashier for the state fiscal system.
  1. The bank plays an insignificant role in inter-temporal allocation of financial resources.
  1. Households and individuals are not allowed to participate in any financial activities other than opening bank accounts.
  1. The major source of enterprise financing is fiscal appropriation.

For decades, Syria’s financial system, which was composed of six public specialized banks, and an insurance company, was under strict administrative control, with the typical characteristics of financial repression.  The Central Bank of Syria was characterized by unclear function, out-of date means and financial rules and therefore could not effectively perform its fundamental role in maintaining the financial stability of the currency.  Its main role was to issue the national currency and finance the treasury. Interest rates have been fixed for decades and real interest rate was most of the time negative, and capital resources were not efficiently allocated by the market but by administrative planning.  As a result, economic growth with efficiency and macro- economic stability could not be guaranteed.  The outcomes of these policies were:

  1. The lawful market was hungry for funds and the price for funds was extremely high in the gray market and the black market.
  1. Credit continues to be pre-dominantly centrally allocated and the banking sector is still dominated by public banks.
  1. Syrians had only one financial asset which was cash and bank current and saving accounts. 

The outcome of such financial system was migration of financial resources to other sectors of the economy or abroad whereby the deposits outside Syria were estimated to be between 60  to 80 billion US$.  Therefore, in-depth and substantial reform became imperative.

After several years of reform we have now three regulators supervising the financial system in Syria, the Central Bank of Syria, the Syrian Insurance Commission and the Syrian Securities and Financial Markets Commission.  Syria has enacted several legislations aimed at reconstructing the financial sector, among which the insurance law, the Islamic banking law, the foreign exchange broker law.  The Syrian Prime Minister has formed two committees to draft a mortgage finance law and a leasing law. 

The Syrian banking system has now six private banks, and another which will open at the beginning of next year, around twelve insurance companies which include three Islamic Takaful companies.  Two Islamic banks have been licensed last September and one of them will offer its shares to the public next week while the other will offer 51% of its shares to the public in the coming weeks. 

The reform of the financial system will hold many opportunities for the Syrian household, Arab and foreign financial institutions, Syrian expatriates, the Syrian business sector and the Government.

Syrians will have diversified types of the investment opportunities and financial assets and products including securities which will be provided by the newly licensed private banks and financial institutions.  Accordingly, more financial resources will flow to the financial sector.

Statistics indicate that the Syrian banking sector has around 300 branches.  Accordingly, we have a branch per 54000 inhabitants, against regional average of one branch per 25,000 and one branch per 15000 in emerging markets and a branch per 5000 in Lebanon.  If we take regional standards, then the number of branches has to double and if we take emerging market standards, the number will more than triple.  Accordingly, the Syrian banking sector offer lucrative opportunities for Arab and foreign financial institutions to enter the Syrian market and participate with other Syrian investors in the establishment of financial institutions as strategic partners.  Those institutions will also help the financial sector in Syria to make a badly needed leap.

Statistics indicate that the share of the public sector of the Syrian banking system facilities is 70% while the share of the private sector is 30%.  However, the private sector share of GDP is 70%.  A market survey indicated that approximately 41% of Syrian enterprises depend on off-shore financing in addition to domestic ones.  Accordingly, the private business sector will have an opportunity to  access new financial resources badly needed to upgrade existing establishments and leverage their equity with resources needed to benefit from new opportunities provided by the economic reform and to face the challenges posed by the liberization of the external trade sector.  
The financial sector will offer an opportunity for the Syrian Government to forge a partnership between the Syrian private and public sectors to finance infrastructure projects in energy, electricity and transport through project finance method.  UK has an excellent experience in such partnership.  Globally Project finance proved to be an excellent method in providing the resources necessary for infrastructure projects. 

The mortgage finance law and once it is passed will provide the Syrian financial sector with good assets.  Its market on the asset side will also include Syrian expatriates.  Statistics indicate that Syria need in the coming five years around 500,000 apartments. 

Leasing is a simple method for retail and corporate financing. The leasing law and once approved will offer Syrian banks opportunities to participate in the establishment of leasing companies and for foreign banks a well regulated cross border leasing.  . 

The reform of the financial sector will provide a golden opportunity for Syrian expatriates to come back and participate in the reform of their homeland with their rich expertise and financial resources.

The success of the financial institutions in meshing relations between Syrian expatriates with their homeland, whether through their participation in the establishment of the new institutions or through involving them with their service offerings will be an excellent opportunity for the Syrian market to more than double its size and will allow the flow of financial resources into the Syrian economy.
The insurance sector will have various products to invest its excess liquidity.

The following are the success factors for the reconstruction of the financial sector:

  1. The reform has to be comprehensive to cover public banks to allow the sector to play the role of financial intermediary.  This role, which is dictated by market economy, will help allocate resources by market mechanism rather than administrative decisions.
  1. A major reform of the public finance, the public debt structure, and government financing methods in general.
  1. Issuing a new legislation for foreign exchange control which should be transparent and clearly reflect the policy of the Syrian Government towards such an issue which is of vital importance for any foreign investor.
  1. A real reform of the public sector which benefits from the experience of other countries which have made successful transformation from centrally planned to social market economy.  Such reform should aim to ease dependency on funding through the public budget, foreign debts and assure investors that the maladies of out of control public finance, especially inflation will not creep to the Syrian economy. Inflation is very harmful and intervenes with the mechanism of market economy. 
  1. Putting the public and private banks at equal footing to compete freely for the benefit of the Syrian economy and to end all types of monopolies which distort the economy.
  1. Reforming the auditing profession.  Success in reform will assist the financial sector in its lending activities and to manage its risks and to generate good assets.  This reform will also help investors make informed investment decisions and allow the investors to know the real performance of their investments which will lead to financial resources to flow to the most successful and make businesses mindful of performance.   It will also mitigate the risk of failures in this sector that other countries have experienced.
  1. Establishment of a Government sponsored institution to guarantee loans for SMEs.  Such institution will encourage financial institutions to extend lending to productive sectors of the Syrian economy.
  1. The success of the monetary authority in developing the tools of open market operations necessary to conduct monetary policy aimed at stabilization and realizing economic growth.
  1. Developing the arbitration institution which should start by enacting legislation based on international best practices.
  1. Issuance of treasury bonds to finance the treasury and offer a benchmark for an interest rate reflecting supply and demand on funds.  This step should be with the reform of the public sector to avoid crowding out in the financial sector.

The futuristic vision of this sector as per the Tenth Five Year Plan is based on an achieved reform of its institutions and infrastructure during the first phase so that it can meet the internal needs of the national economy and, later, on identifying the strategic position of this sector with respect to the Arab region in general, in a way that enables the Syrian financial markets to play a regional role in the future and to be linked to other Arab financial markets, which may enable Syria to attract the surplus cashes in the Region and invest them in the development plans of the national economy.

The extent of the openness of the Syrian economy and the good performance of its administration are among the determinant factors as regards what one might expect from this sector, taking for granted the stability conditions of the region. The other important determinant factor in this respect is the volume of the Syrian economy and its capacity to absorb and invest the financial resources.

The motto of this conference is integrating Syria into the global economy.  The success of the Syrian Government in setting a clear strategy for reconstructing the financial system as well as the public finance will be the most important opportunity for the Syrian economy to integrate into the global economy.


Other Speeches

Plantium Sponsor:
Said Holdings Limited

Gold Sponsors:
BLOM Bank Group
Fouad Takla Company
Banque Bemo Saudi Fransi
Federation of Syrian Chambers of Commerce
Syria Gulf Bank / Syria Kuwait Insurance Company
Members of the KIPCO Group
MAS Economic Group
Syria Shell Petroleum Development B.V.

Silver Sponsors:
ASSIA Corporate
Al Baraka Group
Sham Bank
Inana Group
International Bank for Trade & Finance
Yazigi & Company
Arab Advertising Organization
Al Iqtissadiya





Bronze Sponsors:
Khwanda Group
The Arab Orient Insurance Company