Why haven’t Syrian banks collapsed under sanctions and war?

After years of devastating conflict and crippling international sanctions, the Syrian economy is largely in shambles. However, contrary to the expectations of the United States and the European Union, Syrian banks have largely weathered the storm.

My recent research on disclosures made by publicly listed private banks investigates this resilience. Although the Syrian banks have indeed taken a hard beating, struggling with the shrinking economy, international sanctions, and absence of public and private investments, none of the six state-owned banks have suspended their operations.

Additionally, the 14 private banks — primarily subsidiaries of regional Arab banks in Lebanon, Jordan, Qatar, Saudi Arabia, Kuwait and Bahrain — have decided to stay put until the resolution of the conflict and will likely remain in the country for the long haul. These banks have endured physical destruction of their branches and offices in violence-ridden cities, robberies by gangs and militias on both warring sides, tighter inspection of their foreign-currency operations and embezzlement by some of their own staff.

Understanding this resilience takes us back to the dramatic changes in the country’s banking sector in the decade leading up to the 2011 uprising. The government’s decision to liberalize the banking sector in 2003 following the accession to power of President Bashar al-Assad after his father Hafez al-Assad’s death in 2000 technically ended the state monopoly over the financial system that dated back to the nationalization of Syria’s private banks in the 1960s. This watershed moment for the Syrian economy was part of the government’s plan to move toward a social-market economy, with the vision of eventually adopting capitalist market principles as previously detailed by Samir Seifan.

Bashar aimed to revamp the three decades of populist structure in an ‘authoritarian upgrading’ to pursue neoliberal economic policies, eventually shifting public assets to a network of crony capitalists close to the regime. The abandonment of socialist policies in a post-populist era culminated with the establishment of the Damascus Securities Exchange (DSE) in 2009. The number of firms listed on the exchange has since grown, even after 2011, and currently comprises 23 companies spanning sectors such as transport, media, industry, agriculture, banking and insurance. Publicly listed private banks operating in the country have dominated the exchange’s value and trading activities.

The reform of the financial system was not meant to eliminate the presence of public banks in the country. While there are only six state-owned banks, the Commercial Bank of Syria (CBS) remains the largest in the country in terms of assets, operations and services; CBS’s capital of 7 billion Syrian pounds (SYP) — approximately $1.55 billion in pre-conflict value of 45USD/SYP— nearly eclipses the combined capital of the 14 private banks. This has been largely due to the centralization of government financial transactions and deposits in the bank, providing CBS a monopoly over the budget and revenue of the largest employer and investor: the Syrian state.

The newly established Syrian private banking system redistributed the monopolistic market share of public banks with private lenders, while maintaining a degree of protectionism so the state-owned banks preserved their banking services monopoly. This arrangement was part of what Raymond Hinnebusch termed a ‘middle way’ of allowing the expansion of the private sector while ostensibly reforming state owned enterprises.

The booming private banks attracted politically connected businessmen, including many former politicians and senior security officials, natural partners for foreign institutional investors for whom a 49 percent Syrian ownership was required for an operating license until 2010. A recent report from the World Bank observed intertwined ownership structures and co-investments among crony firms in Egypt. Thorough review of disclosures made by publicly listed private banks on the DSE indicate a similar trend, in which prominent Syrian businessmen— some of whom have been sanctioned for their support to the regime— own a substantial number of shares and even sit on the board of directors in multiple banks. As my research shows, there are at least 23 individual investors whose shareholdings exceed 1 million shares. With more than 36 million shares in aggregate, these individuals make up at least 4.5 percent of overall shares of private banks and 11 percent of total retail investors’ stock ownership.

This is symptomatic of the emergence of a new generation of ‘regime businessmen,’ whose relationship with the state transformed from a de facto alliance since Bashar al-Assad came to power to the central backbone of the regime now. Through joint business ventures and inter-family marriages, this alliance translated into the regime businessmen’s dominance of profitable sectors, including energy, banking and finance, construction, and tourism, and has in turn ensured the regime’s economic survival.

In their effort to isolate the Syrian regime, the United States and the European Union have imposed sanctions on dozens of security officials, politicians, and businessmen, some of whom are shareholders and board members of these private banks. Sanctions were intended to disrupt the close linkages between business and politics in the country and drive a wedge between these closely forged relationships. However, this policy has largely failed. Most of these businessmen have substantial investments in the country that outweighed their overseas assets and commercial interests. Their inextricable connections with the ruling political elite have made them highly invested in the survival of the regime.

More than four years of biting sanctions have not resulted in any critical mass of businessmen abandoning the embattled regime. While very few have decided to divest from these banks, others have actually increased their investments in spite of the severe operational, security and reputational risks. The considerable investments they have made and the need for a privately and internationally funded nationwide reconstruction plan after the end of the conflict will outweigh the prospects for an exit from the country. Ironically, the future rebuilding of the country might rest in their hands, unless a new government decides to confiscate those businessmen’s assets and deal a strong blow to the sector.

This article originally appeared in washingtonpost.com on August 3, 2015 (by Rashad al-Kattan) 

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