ISLAMIC BANKING IN SYRIA: DESIRED, BUT VULNERABLE

C O N F I D E N T I A L SECTION 01 OF 02 DAMASCUS 005371

SIPDIS

SIPDIS

NEA/ELA; NSC FOR MARCHESE; TREASURY FOR GLASER/LEBENSON

E.O. 12958: DECL: 11/29/2016
TAGS: ECON EFIN EINV SY
SUBJECT: ISLAMIC BANKING IN SYRIA: DESIRED, BUT VULNERABLE

REF: 05 DAMASCUS 01157

Classified By: Classified By: Charge d'Affaires Michael Corbin, reasons
1.4 b/d


1. (C) SUMMARY: Clearly behind the rest of the region in
allowing Islamic banking, the SARG is now prematurely rushing
forward on opening the sector, as it has done with the stock
market and other "economic reforms," to assert that just like
its Arab neighbors, it too has joined the modern global
economy. Moreover, with the recent licensing of the first
two Islamic banks in Syria, the SARG has expanded its efforts
to highlight specifically Islamic enterprises as an important
feature of its broader economic reform plans. Secular
banking contacts agree that Islamic banking will play well in
Syria by encouraging poor and rural Syrians to enter the
formal banking sector and creating an attractive product for
investors. Nevertheless, without first implementing broader
banking reforms, the SARG's push to be "Islam's champion" is
leaving the Islamic banking sector, which lacks the
regulatory structures of conventional banking, particularly
vulnerable to instability and corruption in the Syrian
context. END SUMMARY.


2. (C) SARG HYPING ISLAMIC BANKING: Although Syria is
entering Islamic banking much later than its Arab neighbors,
it is striving to make up for lost time. In May 2005,
President Asad signed Legislative Decree 35, the Islamic
Banking Law, to widespread SARG publicity, and after little
more than a year of development (in contrast to the several
years it took to open the first private commercial banks),
the SARG is now eagerly promoting the recent licensing of the
first two Islamic banks in the government-owned press and at
a spate of government-sponsored financial conferences.
Unlike the avowedly secular regime's rejection of Islamic
propaganda in times past, the SARG has more recently been
shoring up its legitimacy with Islam, and Islamic banking is
just one of numerous recent initiatives it has used to
burnish its Islamic credentials. The recent publicity also
focuses on Islamic banking as a sign of Arab investor
confidence in a "modernized" Syrian banking system and an
improved investment climate, but also emphasizes the broader
potential for Islamic investments in Syria, with two Islamic
insurance companies also recently licensed.


3. (C) ABOUT THE TWO ISLAMIC BANKS: The two Islamic banks
recently licensed are Al Sham Bank, backed largely by Kuwaiti
investors, and the Syrian International Islamic Bank (SIIB),
backed primarily by the Qatar International Islamic Bank.
Islamic banks are required to have a starting capital of $100
million and operate as joint ventures, with a maximum foreign
ownership of 49 percent. The banks are expected to begin
operations in early 2007, but both have already publicly
offered all 51 percent of the shares for Syrian investment.
The Islamic banks are supposed to be different from the eight
private commercial banks, offering all shares publicly and
not reserving a portion for "strategic Syrian partners."
Nevertheless, while the SARG is publicly underscoring the
plebeian benefit of these banks, financial contacts confirm
that the same major players, including the Sabbagh family
from Aleppo, Rami Makhlouf, and others, do control prominent
shares.


4. (C) OPPORTUNITIES FOR ISLAMIC BANKS IN SYRIA: Though some
contacts, like Sultan Al Zuibi, General Manager of the
International Bank for Trade and Finance in Syria, discount a
long-term growing demand for Islamic banking, many of our
contacts believe that Islamic banking has a successful future
in Syria. To make that point, Georges Sayegh, General
Manager of Syria and Overseas Bank, recently told us that the
rate of demand for Al-Sham,s subscription will leave them
ten to fifteen percent oversubscribed. Walid Abdel Nour,
Deputy General Manager of Byblos Bank, summed up the positive
comments of others on the sector when he commented that there
is a strong market for Islamic banks in Syria separate from
the market share for commercial banks, and that these banks
will encourage those who remain leery of public and private
banks, especially in poor and rural areas, to enter the
formal banking sector. Beyond local demand, many in the
financial sector in Syria also argue that there is
corresponding foreign investor interest in Islamic banking,
with Wissam Merhej of Deloitte and Touche reporting that
high-profile Gulf investors are actively appealing to the
SARG for additional Islamic banking licenses.


5. (C) AND CHALLENGES AHEAD: The local and foreign demand
notwithstanding, there are serious challenges facing Islamic
banking in Syria. According to Basel Al-Hamwi, General

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Manager of Audi Bank, and others, the lack of local expertise
in Islamic banking practices and the continued deficiencies
in the Syrian regulatory system leaves Islamic banks
vulnerable to speculation and corruption, particularly as
they operate on a contractual basis. The lack of operational
capacity at the Central Bank to handle Islamic banking issues
was underscored by Raed Karawani, a commercial lawyer
assisting banks with the Syrian licensing process. Karawani
reported that the Central Bank has been rushing to train
staff members and calling in foreign Islamic banking experts
to stand up a system for managing Islamic banks. He further
noted that these bureaucratic concerns have led to a delay in
additional licenses, despite more than ten applications
pending with the Central Bank, including strong requests from
Al-Baraka Bank of Saudi Arabia and the Dubai Islamic Bank.
And in addition to these operational and structural issues,
Hamwi underscored another challenge, commenting to us that
unlike the Syrian commercial banks that use the well-known
names of respected parent banks, Syrian Islamic banks operate
without this benefit and often have multiple foreign
investors that do not necessarily have the same long-term
stake in their success.


6. (C) COMMENT: There is little doubt that there is strong
local demand for Islamic banking in Syria that will help to
generate profits for those investing in the sector. However,
with continuing deficiencies in the broader Syrian banking
sector, Islamic banking, which according to banking experts
requires even greater oversight than commercial banks against
malfeasance, is susceptible to speculation and corruption.
The likelihood for corruption is underscored by the fact that
the usual cronies, like Rami Makhlouf, are already active in
this new sector. Despite its awareness that Syrians may be
negatively affected, the SARG leadership is nonetheless
pressing forward with this initiative, at least in part to
burnish its Islamic credentials and assert that it is
achieving the financial modernization of other Arab states.
Islamic banking also provides a platform for the SARG to
appeal to poor and rural elements in Syria and bring them
into the formal sector, and to appear to be actively
attracting foreign investment, especially from the Gulf. END
COMMENT
CORBIN