Keynote Speech: Economic Overview

Sir Gavyn Arthur
Lord Mayor 2002 - 2003
City of London


It is said that we can only take advantage of the present and prepare for the future if we understand the past.

And so I am going to take us back – not very far back – but back just two-and-a-half years, to late May 2004 when the British Syrian Society organised the first Banking Liberalisation Conference here in Damascus. Just two-and-a-half years ago, but in terms of Financial Services, Syria was a very different country then. The Presidential Decree starting the whole process had not been in force for long.  The penetration of the non-state banking sector was minimal: just 5 or 6 banks, with capitalisation limited to $30,million and all from immediate neighbours. Moreover there were strict limitations on the number of branches permitted.

There was a real fear that what we were seeing was tokenism, just a few unimportant and superficial changes which looked impressive but which would actually change nothing. There was a real fear, and a genuine frustration that, despite the excellent initiatives, resistance to change would prevent any real opening up of the banking sector.

I well remember these worries erupting in the conference hall in a lively debate where all sides exchanged views in a highly animated and impressive and mature manner. I remember coming away from the room afterwards and wondering – would modernisation win or lose?  Would Syria be able to deliver banking liberalisation?  Were the changes to be merely cosmetic and grudging?

Well Ladies and Gentlemen my question has been answered:  Syria has begun to deliver in a real, substantial and meaningful way.

Two-and-a-half years on, the financial services landscape of Syria looks very different.  Many banking licences have been granted and to banks from the Gulf as well as to immediate neighbours such as Lebanon and Jordan.  Two Islamic banks have received licences.  New licenses are at a far higher capitalisation than before. Limitations on the numbers of branches have been lifted – all over Syria new branches of new banks are opening. There is a genuine and impressive penetration across the country of the previously closed retail-banking sector.

So congratulations – Syria has delivered impressively. Modernisation of the new banking sector is here to stay.

Two hundred years ago Napoleon called the English “a nation of shopkeepers”.  We were proud to be called that because trade and commerce has always been in our blood.  But we are humbled in the face of Syria, a nation which invented the very concept of trade and business. 

There is nothing we can teach the Syrians about business. What has happened in recent decades is that the City of London has grown to be the international financial centre of the world. We have welcomed the best of all nations in the world to our financial institutions, including many Syrians. As Lord Mayor of London my advisory team on financial services included Syrians - advising not on Syria, but on issues of global finance.

So when I speak about the future of financial services in Syria I speak with humility in the face of your history and also to express the views of not a country but an international pool of talent, which happens to have chosen London as its operating base.

So what of the future here in Syria?

Well, Syria can take a moment or two to put itself on the back, but it cannot afford to be complacent.  What we have seen is a start, an excellent start, a start that has gone as well as it could possibly have gone – but still just the start. There is still a long way to go - and now is the time to turn the attention to the next stages.

What Syria has seen so far is the penetration of retail banking. That is good but, as it has operated so far, it has not really addressed the need for inward investment and the development of capital markets here.

Let me make some general remarks:

Every country in the world needs inward investment – whether vast like China or India or Russia or the US or whether small and energy-rich countries like Qatar or Kuwait – every country needs and seeks international investment. Syria is not immune from the realities of the world.  Like any country it needs investment for infrastructure and other projects. But Syria has a unique financial asset, which needs to be supported and developed. Its SMEs, small and medium sized enterprises, are Syria’s lifeblood.  The innovative and entrepreneurial skill of your people and the keen business sense developed over thousands of years are assets which are the envy of the world.

But by their very nature, SMES will not qualify for direct foreign investment – they are simply too small.

Great things are being achieved by the SEBC, andI congratulation it on its work, but inevitably it cannot meet the demand and provide the funding that all the Syrian SMES deserve.  Traditional lending from within the family and from friends is not sufficient to enable SMES to expand to reach their true potential. And unfortunately, but inevitably, they cannot realistically obtain the full investment they need from the retail banking sector, as it now exists in Syria.

I am not criticising the retail-banking sector. By its nature it is risk averse. The depositors expect the guardians of their money to be risk averse. So what can be done to encourage investment?

I believe there are five activities which should be considered - and considered very seriously:

Firstly, it may well be that to harness the unique talents of Syria’s business, financial incentives need to be offered to the retail-banking sector to encourage lending to SMES – tax incentives are the obvious and simple example of this.

The process needs to be carefully regulated of course, so that tax breaks are not offered for conventional lending. There must be limits on the amounts that can be lent. But with careful regulation I believe that the existing retail banking sector here can be encouraged to increase dramatically its lending to SMES and to make the risk inherent in all business investment worthwhile for them.

In addition, Syria should now move on to attract other financial institutions, which are prepared to take risks.  Not rash risks of course, but calculated risks, the sort of risk, which is necessary in the world of business. And by these institutions I mean, of course, foreign investment banks and, even more importantly, foreign retail banks. Of course, a great investment bank will traditionally focus on huge projects: roads, airports and the like, but equally traditionally they should and do usually earmark 10-15% of their funds for SMES. That is what Syria needs.

But let us not fool ourselves. The demand for foreign investment is vast. When I was Lord Mayor two years ago I travelled to 27 countries around the world pointing out that the international investment pool for the City of London was approximately 2.8 trillion dollars at any time but even that pool was insufficient to meet the needs of countries around the world.  There is simply not enough to go round.

The result is that all the countries of the world are in competition with each other for foreign investment. And of course, as is often said, capital is a coward and capital is lazy. It will go where the rules are clear and simple and transparent – where it is made to feel welcome.

Worryingly the trend in the MENA region regarding international investment is not good.  Between 1978 and l998 the MENA region attracted less than 1% of global foreign direct investment.  In 2000, that figure had dropped to just 0.4% and that is for the region as a whole.  Syria suffers from the additional disadvantage of its geographical situation, where the political realities of the region and the security problems of neighbouring countries do not appeal to investors.

These disadvantages can be overcome, but, in order to do so, Syria has to be especially welcoming. Remember, Syria has no right to investment. This is a small country when compared with others.  The UK is a small country too.  Too many obstacles and investors will simply pass the UK and Syria by and turn their attention to the next country, where a more welcoming reception awaits.

So the investment and retails banks to which I have referred MUST find Syria commercially attractive. The City of London believes that this should be the priority now for you.  How is this to be done? Well, regional problems cannot be solved by Syria alone, but some welcoming steps can be taken. The international investment and retail banks are big players. They are simply not interested in setting up subsidiaries. They are only interested in setting up branches. Therefore Syria should move quickly to allow this to happen.  I have recently spoken to the chief executives of two global banks whose representatives have each visited Syria.  Each expressed an interest in operating here but have made it clear to me that they are not interested in subsidiaries – only in branches. That is the reality of the way global capital markets work.  No country, neither the US, China or India or Syria, is able to change that reality.

Thirdly, there should be consideration given to a rapid move towards convertibility of the Syrian pound.  Syria has huge resources; it has the ability to cope with convertibility.  These days non-convertibility sends a message that the country has no confidence in its own economic success; it is a real barrier to foreign investment.  Many other countries, some less blessed than Syria, have taken this route and the expertise is out there in the world waiting to be used.

The World Bank, the IMF, the European Union all have advised countries across the world about convertibility and all would be willing to assist Syria if asked to do so. I repeat, it is essential for Syria, as it is for any country, which wants to be taken seriously by investors.

Fourthly, I turn to the law.  Of course, whatever else the state does, it will achieve little if it doesn’t meet its international obligation to keep the national legal infrastructure in order.  Where there is banking, where there is investment, there will also be disputes, often involving international companies. Any very often these will have to be resolved by the courts or by arbitration.  We should never forget the courts are the ultimate protector of the investor, of the shareholders, of the stakeholder.  So it essential that there should be a modern commercial code of law which reflects the codes used by foreign global institutions and commerce.  It must be up-to-date and be flexible to reflect new financial products and new investment structures.

A strong independent panel of commercial judges is vital in any country. They must first of all be paid sufficient to render them immune from exploitation and paid to reflect their expertise and their services.  There must also be a separate panel of judged dedicated to and expert in common law.  One of the great advantages of the City of London is the existence of our Commercial Court and our Commercial Court judges. They are not generalists, but experts in their field. They work closely with the financial sector in keeping up to date with new business methods.  Sometimes countries cannot produce home-grown judges with all the commercial expertise in every field.  There is no disgrace in this.  Hong Kong, Dubai, even the UK when it comes to arbitration – all seek expertise from other countries when necessary.

Syria will therefore need to look very seriously at establishing a separate panel of commercial judges – Syrian if possible but using expertise from a panel of international experts if necessary – to provide a legal system in which there is absolute international confidence. The nationality of the panellists is irrelevant – it is individual excellence and reputation which is essential.

My fifth and last step is to urge you to continue the good work of the Central Bank, as its modern and progressive steps will be of great benefit to the country.

Do not, I pray you model yourselves on the history of England where it took more than 250 years before our Central Bank – the Bank of England – became independent! (It was only nine years ago in fact).  Syria can do much better than that in moving to Central Bank independence. But because our experience in London is so recent, the expertise that the Bank of England team has given to your Central Bank is, I believe, of great help, and continued cooperation between the two central banks will, I am sure, be of great benefit to Syria.

Ladies and Gentlemen, there are other matters I could mention, such as the development of the insurance market, and the stock exchange, but I have spoken for long enough and there are others who will follow later in this conference whose expertise is far greater than mine in these fields.

What I have done is, I hope, to give an overview from the City of London of the situation here in progress in Syria.  If I seem to give advice, it is only because we in the City of London have made mistakes and we have learned from them.  Syria can profit from our sometimes painful experiences and avoid making the mistakes we have made.

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