The man behind banking reform in Syria is now focused on preparing the financial sector to support the country’s $90bn investment programme
Educational background: Adib Mayaleh
1991 Doctorate in international economic relations, Aix en Provence University, France
1985 Diploma in applied macroeconomics, Aix en Provence University
1983 Diploma in money, banking and finance, Aix en Provence University
1981 Bachelor’s degree in economics, Damascus University
In little more than half a decade, the name Adib Mayaleh has become synonymous with banking reform in Syria. Governor of the Central Bank of Syria since early 2005, Mayaleh has overseen an impressive number of changes, including the introduction of private banks, the liberalisation of currency controls, and the dropping of the dollar peg. Now the challenge for Mayaleh is to help prepare the banking and finance sector for the largest investment programme in the country’s history.
Banking reform champion in Syria
When Mayaleh took the reins at the central bank, a degree of reform momentum had already been generated. The first private banks in the country were authorised in 2004, just before he became governor, and, during his first year at the helm, Islamic banking was also authorised.
Mayaleh has nurtured the fruits of this legislation and encouraged an acceleration of reform elsewhere in the banking sector. Having attracted more than a dozen private banks to do business in Syria to date, Mayaleh is now focused on bringing larger international banks to the country. Current and capital account regulations have been relaxed, and in January, legislation was introduced giving foreign banks the right to take a majority stake in local banking ventures for the first time.
Under the new rules, the 49 per cent limit to foreign ownership of banks operating in Syria has been scrapped and replaced with a 60 per cent threshold, subject to government approval. This limit can be raised to 75 per cent as long as the government owns at least 15 per cent of the total capital.
The new legislation also raises the minimum capital requirement for conventional banks from £Syr1.5bn ($32m) to £Syr10bn, and that for Islamic banks, from £Syr5bn to £Syr15bn, a move that Mayaleh believes will both bolster the strength of the sector and favour large international institutions. Banks will have three years to comply with the new rules, which, according to Mayaleh, will inject £Syr100bn into the Syrian economy.
We have abolished currency controls, enabling importers to finance imports via local banks
As chairman of the government’s money and credit council, Mayaleh speaks proudly of the monetary liberalisation over which he has presided. “We have abolished currency controls for import finance, enabling importers to finance imports through local banks,” he says. “This was not allowed before and had led to the creation of a parallel economy for black market imports. We also allow investors to transfer their capital or the profits on their capital outside Syria and let them borrow from foreign banks in dollars and pay off the debt in local currency. This is done through Syrian banks, who use their foreign currency to repay the foreign banks.”
The decision to open up to private banking has led to considerable growth in the size of the sector in Syria, admittedly from a small base. By 2009, annual deposits reached £Syr1,200bn, almost double the £Syr669bn deposited in 2004. In August, Iran’s Bank Sadarat became the latest bank to be granted a licence to operate in the country, and several other applications are under review, says Mayaleh.
Monetary control in Syria
Alongside the development of private banking and regulatory liberalisation, Mayaleh has also overseen a major shift in monetary control.
In 2006, Damascus responded to inflationary pressures caused by the sliding value of the dollar by announcing it would drop the peg tying its currency to that of the US and replace it with one to the euro. The process took longer than had been hoped, but, by July 2006, the central bank had converted half its foreign currency reserves into euros. In July 2007, it adopted a basket of currencies comprising the dollar, euro, Japanese yen and UK pound.
We’re working step by step to achieve the normalisation of the banking sector
Although Mayaleh denied it at the time, there was also a political element to dropping the dollar peg. US allegations of support for terrorism in Syria had led in 2004 to the introduction of the Syria Accountability Act, prohibiting the export to Syria of most goods containing more than 10 per cent US-manufactured components.
A series of presidential executive orders had also been issued denying certain Syrian citizens and entities access to the US financial system in response to allegations of involvement in the proliferation of weapons of mass destruction or association with regional terrorist or militant groups.
In 2006, the US Treasury went further, barring American banks and their subsidiaries from maintaining correspondent accounts with Commercial Bank of Syria, the country’s largest state-owned bank, saying the bank was of “primary money laundering concern”. Under the circumstances, it is understandable Damascus distanced itself from a currency that was not only struggling, but belonged to a country that was imposing such restrictions on Syria’s financial sector. But it was a bold move nevertheless.
Central Bank of Syria: Independent authority
Equally bold has been Mayaleh’s campaign to break the link between the central bank and government finance. In 2002, the bank was given independence from the Economy and Trade Ministry and its governor was made answerable to the prime minister alone. But Mayaleh wants to take this delinking further.
Concerned that the government has automatically turned to the bank to finance its annual fiscal deficits, rather than leveraging mounting liquidity in the wider banking sector, Mayaleh has campaigned for the introduction of treasury bills (T-bills) to help fund government spending.
According to Mayaleh, foreign currency deposits have increased by a factor of eight since 2005, and local currency deposits by two and a half times. While lending has increased four-fold, it has not been enough to drain liquidity from the sector.
“It’s important to have a tool to absorb the excess liquidity in the banks and to have a benchmark for debt,” he says. “T-bills would provide that.”
Mayaleh has found the introduction of legislation on treasury bills to be far from easy. Speaking to MEED in July 2006, he said that a decision to issue T-bills by the end of that year had “already been taken”. Four years later, the bills, which would enable the government to sell off debt to local banks or private citizens, have still to see the light of day. Mayaleh insists they are getting closer and the first bills will be issued by the end of 2010, but there is a lingering frustration that progress has been so much slower than he had hoped.
“In order to ensure we’re ready to issue these bills we’ve held experimental auctions with the banks, which have been successful,” he says. “There are still a few arrangements yet to fulfil because it is the first time. The central bank has put a lot of pressure on the government to issue T-bills, but the Finance Ministry isn’t ready.”
In the meantime, banks have been using their liquidity to provide the country’s first private finance, another breakthrough during Mayaleh’s tenure. In 2010, foreign currency loans from local banks have been used to fund the $50m acquisition of new planes by Syrian Arab Airlines (SAA). The banking sector has also provided local currency loans to the wheat industry, explains Mayaleh. “There are more projects for SAA and for the Electricity Ministry that will be financed by public and private banks,” he says.
Mayaleh’s next challenge is to transform private financing into the rule, rather than the exception. The government plans to invest $90bn in infrastructure development in 2010-14, with half the funding to come from the government and the other half from the private sector.
The success of this programme will depend on a robust regulatory framework and an effective banking sector. “Encouraging investment in Syria is not just the role of the central bank, it’s the role of the government,” says Mayaleh. “They have to provide the right framework and conditions for this to happen.” A draft law on public-private partnerships (PPP) is under preparation and will be issued “very soon”, says Mayaleh, adding the measure is “crucial to facilitating foreign investment”.
Creating a new regulatory framework for private investors is a major challenge. But even if it can be successfully negotiated, the problem of finding sufficient funding will remain. US sanctions mean American banks cannot participate in financing the planned raft of projects, and Mayaleh admits that there is “no sign” of the sanctions being lifted.
European banks have so far been discouraged from entering the Syrian market due to a combination of US attitudes and the country’s poorly developed banking sector. But they are “investigating the market” and have been indirectly involved through shares in local private banks, says Mayaleh.
Despite opening up significantly in the past five years, Syria’s banking sector is still in its infancy and remains highly conservative. Another new regulation was introduced in July facilitating the establishment of investment banks and Cairo-based EFG Hermes has already stated its intention to set up a branch in Syria.
However, economists say the £Syr20bn minimum capital requirement included in the regulation will discourage most interested parties from entering the market.
Retail caution in Syria
“The high minimum capital requirement is one of the lessons from the global financial crisis,” says Mayaleh. “We want to encourage banks who are cautious in managing their net wealth, and to prevent banks who are not responsible from coming to Syria.”
The governor has a similarly cautious approach to retail lending. During the economic downturn, the central bank increased banks’ reserve requirements from 5 per cent to 10 per cent of their lending portfolio.
In recent months, it decided to restore the threshold to 5 per cent, but only for banks funding projects in certain sectors. “It is designed to encourage investment in the environment, industrial development and social projects,” says Mayaleh. “We don’t want to encourage consumer borrowing, but we do want to encourage investment in the economy.” Such differentiation has been criticised by the International Monetary Fund, which says it could tempt banks to make lending decisions based on the type of project rather than its viability.
Mayaleh is confident that despite the remaining limitations of Syria’s banking sector, it is well-equipped to support the planned state spending programme. In this, he might be accused of optimism, but he does not deny that the process of modernisation is a continuous one. “We’re working step by step to achieve the normalisation of the Syrian banking sector to international standards,” he says. “But we still have more steps to take.”