Identifier
Created
Classification
Origin
06DAMASCUS2632
2006-06-06 12:13:00
CONFIDENTIAL
Embassy Damascus
Cable title:  

NON-PERFORMING LOANS IN THE PUBLIC BANKS- ANOTHER

Tags:  ECON EFIN EINV SY 
pdf how-to read a cable
VZCZCXRO9306
OO RUEHAG RUEHBC RUEHDE RUEHKUK
DE RUEHDM #2632/01 1571213
ZNY CCCCC ZZH
O 061213Z JUN 06
FM AMEMBASSY DAMASCUS
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9425
INFO RUEHEE/ARAB LEAGUE COLLECTIVE IMMEDIATE
RUCNMEM/EU MEMBER STATES COLLECTIVE IMMEDIATE
RUEHTV/AMEMBASSY TEL AVIV IMMEDIATE 1052
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RHMFISS/HQ USCENTCOM MACDILL AFB FL IMMEDIATE
RHEHNSC/NSC WASHDC IMMEDIATE
C O N F I D E N T I A L SECTION 01 OF 02 DAMASCUS 002632 

SIPDIS

SIPDIS

NEA/ELA
TREASURY FOR GLASER/SZUBIN/LOEFLER
NSC FOR POUNDS/SINGH

E.O. 12958: DECL: 06/01/2016
TAGS: ECON EFIN EINV SY
SUBJECT: NON-PERFORMING LOANS IN THE PUBLIC BANKS- ANOTHER
ECONOMIC WEAKNESS

REF: A. DMS 1696


B. DMS 2504

Classified By: Charge d'Affaires Stephen Seche, reasons 1.4 b/d

C O N F I D E N T I A L SECTION 01 OF 02 DAMASCUS 002632

SIPDIS

SIPDIS

NEA/ELA
TREASURY FOR GLASER/SZUBIN/LOEFLER
NSC FOR POUNDS/SINGH

E.O. 12958: DECL: 06/01/2016
TAGS: ECON EFIN EINV SY
SUBJECT: NON-PERFORMING LOANS IN THE PUBLIC BANKS- ANOTHER
ECONOMIC WEAKNESS

REF: A. DMS 1696


B. DMS 2504

Classified By: Charge d'Affaires Stephen Seche, reasons 1.4 b/d


1. (C) Summary: The SARG's public banking sector is hamstrung
due to the fact that its six public banks are carrying a
large number of non-performing loans. Contacts suggest that
many of the loans may be held by the SARG, which borrows from
the banks to finance public spending, or lost to the
corruption of regime officials. While the SARG is said to be
considering an audit to determine the true size of the
problem, it lacks the tools to resolve the issue without
structural change, and contacts worry that the problem is
growing due to a recent upsurge in public sector lending.
End summary.


2. (C) Contacts involved in the banking and financial sectors
state that Syria's six public banks are carrying a sizable
portfolio of non-performing loans, which some have estimated
may comprise as much as 50% of the public sector's lending.
Contacts suggest that the banks with the worst lending rate
are the Popular Credit, Industrial, and Agricultural banks,
as well as the Commercial Bank of Syria (CBS). Adding to the
potentially destabilizing number of non-performing loans,
contacts state that there was a 40-45% expansion in credit
from the public banks during 2005, particularly from the
Popular Credit and Real Estate banks. The size of the public
sector lending also was noted during a recent visit by an
International Monetary Fund (IMF) delegation.


3. (C) There currently is no publicly available information
on the recipients of the loans or the dollar value of those
that are non-performing, contacts contend. The banks have
not been audited according to international standards for
years. A contact at the European Investment Bank (EIB),
which is funding capacity-building programs for the public
banks and the Central Bank, stated, for instance, that the
Central Bank has not been audited by Syria's own Central
Organization for Financial Control since the 1970's.
Contacts indicate that the public banks suffer from abysmal

management and accounting practices through isolation from
the international financial system since the SARG
nationalized its banking sector in 1965.


4. (C) Despite the lack of reliable statistics or lending
records, contacts state that the SARG may hold a large
portion of the non-performing loans, since public banks are
forced to cover subsidy spending and annual budget deficits.
Contacts report that the Agricultural Bank covers the cost of
price supports for cotton production, for which the SARG has
no budget line item (ref A). The CBS also allegedly has made
a significant number of loans to the Office of Cotton and
Wheat that have not been repaid, but continue to show up on
the bank's balance sheet as assets. The Real Estate Bank
faces a similar problem, contacts report, due to its
financial support of housing cooperatives and the General
Organization for Housing. In addition to its public sector
lending, contacts say that the Agricultural Bank has a high
default rate on its many small loans to farmers, who can
receive up to $2,000 a year in fertilizer or seed against
their expected harvest. Contacts say that the bank has no
mechanism to collect on the loans except through public
sector organizations that have been established to purchase
each particular crop, which farmers allegedly avoid by
selling their crops to middlemen for cash.


5. (C) Contacts also contend that many of the outstanding
non-performing loans resulted from corruption, through which
government officials and those with close ties to the regime
have been able to amass fortunes despite their low public
salaries. In one of its occasional and cosmetic attempts to
combat corruption, the SARG arrested the former head of the
CBS, Mahmoud Nadim Methqal, in 2002 for transferring millions
of dollars into a foreign bank account. More recently, the
Minister of Finance fired the Director General of the
Industrial Bank, Ali Kanaan, at the end of 2005 for financial
misconduct. Problematically, contacts say that loans from
the Industrial Bank increased tenfold during his tenure.
Walid Abdel Nour, General Manager of Byblos Bank, which
recently entered into a partnership with the CBS and the EIB
to provide loans to small and medium-sized enterprises (SME),

DAMASCUS 00002632 002 OF 002


stated that the CBS long has made its project loans based on
the influence and contacts of the recipient as opposed to the
quality of the project. He said that he already has received
two SME project files from the CBS that contained no risk or
project analysis, forcing his staff to start the application
process over again from scratch.


6. (C) Contacts report that the SARG is aware of the problem
and is considering options of how to proceed. The EIB and
European Commission (EC) are recommending that the Ministry
of Finance conduct an audit to determine the financial
position of the public banks. Contacts at the EC Mission
state that the Ministry of Finance is expected to make its
decision regarding the audit by mid-June. Other contacts
suspect that the SARG may be unwilling to submit to an audit
conducted according to international standards because of the
political risks that it would disclose weaknesses in the
SARG's fiscal position and uncover corruption among its
officials. Contacts further state that the SARG presently
has no tools to deal with the problem even if an audit is
completed. There is no institution that could securitize the
bad loans, and no bond market through which the government
could finance the recapitalization of the banks. Although
some contacts suggest that the Central Bank is the most
logical institution to assume responsibility for the
non-performing loans, most independent Syrian economists and
bankers state that the Central Bank suffers from its own
mismanagement and would be incapable of taking on a role of
this complexity (ref B).


7. (C) Comment: The potential number of non-performing loans
that were issued to finance the SARG's deficits and subsidies
belies regime claims that the SARG's short-term fiscal
position is sound. In addition, if the estimates are true
that half of the banks' loans are non-performing, then the
SARG faces a potential crisis in its public banking sector
for which it lacks the tools to manage in any effective way.
The issue is one that the SARG ignores at its own risk. Even
though the costs of exposing the corruption that has weakened
the banks will grow with time, it seems doubtful that the
SARG will move decisively to address this problem until the
contaminate economic costs of continued inaction compel it to
do so.
SECHE