Private banking system

The private banking law was promulgated in 2001, allowing the establishment of private banks for the first time after 40 years of a state-controlled banking system. Six private banks were established: Bank of Syria and Overseas (BSO), Bank BEMO, Bank Audi, the International Bank of Trade and Finance, Arab Bank, and Byblos Bank. Their combined deposits were estimated at USD 30-50 million at the time of privatisation, which then increased to USD three billion in 2007 (Moubayed,

2007). Initially, there was a restriction on foreign ownership of bank shares. Syrian nationals and companies were required to own 51 per cent of shares in any of these banks. The ruling elites and the commercial bourgeoisie, such as Rami Makhluf, Nader Qalai, Issam Anbouba, and Samir Hassan - rather than competitive market bidders - turned out to be the main shareholders (The Syria Report, 17 January 2010). This 51 per cent ceiling was later relaxed and an increase in the share of foreign ownership was allowed. During the Bashar regime, more than 20 private banks operated alongside the specialised public banks (the Real Estate Bank, the Agricultural Cooperative Bank, and the Industrial Bank).

The activation of private banking was crucial for the state bourgeoisie. It enabled them to manage their bank accounts and easily transfer their money deposits outside the country. Previously, they had to smuggle or transfer their wealth into the dollar and store it in the Lebanese private banks. (IMF, 1975: 102).

Bank loans provided by private financiers remained very limited. Table 6.1 shows that the average credit given out by the commercial private banks during 2008-10 amounted to only 16 per cent out of total local bank credit; whereas that of the public banks amounted to 82 per cent of the total. During the Bashar regime, the private bank credit was limited to usury-like transactions and did not finance industrial and developmental projects.⁷ Loans were given out on the basis of collateral against a new investment project rather than based on the achievements of the project. Because they failed to finance long-term investment, the Syrian private banks proved to be similar to the shallow financial institutions of most Arab countries in the sense that not only are lending operations conducted on a short-term basis, but they require huge collateral and guarantees. Table 6.2 shows that the average of total local bank credit given out to agriculture and industry accounted for

Table 6.1 Distribution of local bank credit according to type of credit in millions of Syrian pounds, 2008-10

Source: Central Bureau of Statistics, 2011.

Table 6.2 Distribution of local bank credit according to type of economic activity in millions of Syrian pounds, 2008-10

Source: Central Bureau of Statistics, 2011.

only 12 per cent and 7 per cent respectively during 2008-10. In contrast, 51 per cent was given out to the commercial sector.

The neglect of productive sectors in state policy in the 1990s and 2000s was accompanied by a shift in state banks' lending operations from development investments to short-term commercial activities (Kanaan, 2000: 128). While the Industrial Bank was literally frozen during 1991-98, the amount of loans provided by the Commercial Bank of Syria to both public and private sectors doubled (Haddad, 2004: 59). The state banking sector was then criticised for its weak banking tools and its inability to finance developmental projects,⁸ while in fact the blame should fall on state policies that were supportive of commercial sectors instead of the productive ones.