PART 1: SYRIA'S CHANGING FINANCIAL LANDSCAPE -

S E C R E T SECTION 01 OF 05 DAMASCUS 000327

SIPDIS
NOFORN

DEPT FOR NEA/FO, NEA/ELA
NSC FOR SHAPIRO/MCDERMOTT
TREASURY FOR U/S LEVEY/HAJJAR/CURTIN
COMMERCE FOR BIS/CHRISTINO
PARIS FOR WALLER
LONDON FOR TSOU

E.O. 12958: DECL: 03/25/2019
TAGS: EFIN ETRD ETTC PGOV PREL LE SY
SUBJECT: PART 1: SYRIA'S CHANGING FINANCIAL LANDSCAPE -
PUBLIC BANKING

REF: A. DAMASCUS 189

B. 08 DAMASCUS 735

C. 08 DAMASCUS 727

D. 08 DAMASCUS 742

E. DAMASCUS 307

Classified By: Charge d'Affaires Maura Connelly for reasons 1.4(b,d)

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Summary
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1. (C) Nearly 40 years after Syria's banking industry was
nationalized, Law No. 28 of 2001 authorized the
re-introduction of private banking. Eight years on, Law No.
28 has had the most visible impact of President Bashar
al-Asad's many economic "reforms," and has generated
significant spinoff legislation. Although Syria's expanding
banking market is still dominated by six state-owned public
banks, U.S. sanctions against the Commercial Bank of Syria
(CBS) and internal political resistance to reform are eroding
their position in an increasingly competitive industry.
While the absence of publicly-available audited financial
statements makes judging the public banks' performance
difficult, informed contacts report that only Real Estate
Bank (REB) earns a profit. Prime Minister Utri recently
instructed CBS to sell its stake in REB in an attempt to help
REB open an account in a U.S. bank for processing U.S. dollar
transactions, presumably to improve REB's competitiveness.
While market trends gradually shift toward private banking,
some regime elements are driving the expansion of public
banking, such as the Syrian-Iranian Commercial Bank. End
Summary.


2. (SBU) This is the first cable in a four-part series
examining Syria's financial sector. It should be read in
conjunction with septel cables on moneychangers, private
banks, and the Central Bank of Syria.

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Banking Sector Getting Crowded
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3. (U) Nearly 40 years after Syria's banking industry was
nationalized in the Ba'athist revolution of 1963, Law No. 28
authorized the re-introduction of private banking in 2001.
The most visible of President Bashar al-Asad's economic
"reforms," Law No. 28 sparked an industry boom -- despite
restricting foreign ownership of private Syrian banks to 49
percent. In 2003, Bank BEMO Saudi Fransi (BBSF) became the
first private bank to open in Syria, followed in quick
succession by Bank of Syria and Overseas (BSO) and the
International Bank for Trade and Finance (IBTF). Decree 35
of 2005 established Islamic banking in Syria, and by 2009
some nine traditional private banks and three Islamic banks
were in operation. By mid-2009, seven more prospective banks
had applied to the Central Bank of Syria (CBoS) for licensing.


4. (C) Against this backdrop, six state-owned public banks
continue to operate in Syria. Contacts report that Syria's
public banks are structured as closed joint stock companies,
with the Ministry of Finance holding majority ownership and
other government entities holding minority positions. The
largest of the six is the Commercial Bank of Syria (CBS),
which was designated by the Treasury Department in 2004 under

DAMASCUS 00000327 002 OF 005


Chapter 311 of the USA Patriot Act as an institution of
primary money laundering concern. CBS is reportedly a
minority shareholder in four of the five other public banks
-- the Agricultural Cooperative Bank (ACB),founded in 1888;
Industrial Bank, founded in 1959; Popular Credit Bank,
established in 1966; and Savings Bank, established in 2000.
Until December 2008, CBS also held shares in Real Estate Bank
(REB),founded in 1966, but Prime Ministerial Decision No.
5533 facilitated the sale of CBS's 0.2 percent shares (worth
about USD 63,025) to the Syrian Public Insurance
Establishment -- a maneuver designed to try to shield REB
from the stigma of U.S. sanctions (see paras 10-12).

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Public Banks Losing Ground, but Still Dominant
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5. (C) According to a 2008 survey conducted by the private
business intelligence and consulting firm Strategic Axis
Advisors (protect),Syria's private banks have taken a
significant bite out of the public banks' market share in a
relatively short period of time. Since 2004, the public
banks' share of total Syrian banking desposits decreased from
100 percent to 75 percent, and their share of private sector
deposits decreased even further to 64 percent. Public banks'
share of foreign exchange deposits decreased from 92 percent
in 2004 to just 25 percent in 2007 -- primarily due to the
311 action against CBS.


6. (C) Despite their loss in market share, public banks
maintain a dominant position with an estimated USD 28 billion
in assets (80 percent of total assets),USD 15 billion in
deposits (75 percent of total deposits) and USD 12 billion in
credits (89 percent of total credits). CBS alone has the
greatest market penetration across Syria, with over 100
branches and some 170 ATMs. CBS also benefits from a virtual
monopoly on government business, as all institutions and
public companies almost exclusively bank with CBS.

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Despite Sanctions and Reputation for Corruption
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7. (C) Contacts say CBS's dominance is primarily attributable
to its brand recognition and market penetration after a
40-year industry monopoly, despite its reputation for abysmal
customer service and corruption. In one recent anecdote, a
CBS loan officer in Aleppo demanded a USD 5,000 bribe from a
local textile producer to approve a USD 75,000 loan to
complete the financing for an Italian-made weaving machine on
which the textile factory owner had already paid a USD 25,000
deposit. When the machine arrived from Italy some six months
later, the factory owner went to collect the loan and learned
that his loan officer had been fired. After explaining his
situation, the new loan officer refused to honor his
predecessor's commitment unless the customer paid him a USD
10,000 bribe. Unable to afford the second bribe, the factory
owner raised the needed capital by selling his warehouse --
where the machine was to be installed -- and borrowing from
his competitors. He now rents time on the weaving machine to
repay his competitors.


8. (S/NF) According to Raed Karawani (strictly protect),
whose law firm was hired in 2007 to conduct a feasibility
study for restructuring Syria's public banks, the Industrial

DAMASCUS 00000327 003 OF 005


Bank is the most corrupt public bank in the country.
Karawani said that Industrial Bank's officers over the last
20 years were reknowned for approving any size loan for a 10
percent bribe. In his audit of the bank's books, Karawani
saw numerous bad loans on the bank's ledger that -- instead
of being written off -- had been repeatedly rescheduled over
the last 10 to 15 years until the interest on them now far
exceeds the principal.


9. (C) Although Treasury's 311 action cut CBS off from the
U.S. financial system, contacts report that CBS is able to
offer letters of credit (L/C) in Euros. To finance trade
with external partners in U.S. dollars, CBS reportedly issues
the L/C in Euros and offers same-day settlement to avoid
penalizing customers for exchange rate fluctuations.

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Real Estate Bank - A Regime Cash Cow
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10. (S/NF) Karawani and Dr. Shadi Karam (strictly protect)
separately told us that the only profitable Syrian public
bank is Real Estate Bank (REB),which reportedly earns over
USD 110 million annually -- largely from its monopoly on
processing credit card and ATM transactions. A
Lebanese-French citizen who recently became CEO of Syria's
second largest private equity company, Karam said the SARG
had hired him in 1996 to bring a credit card transaction
processing capability to Syria. According to Karam, he chose
to establish the credit card business inside REB instead of
CBS because then-President Hafez al-Asad's brother-in-law and
economic advisor, Muhammad Makhlouf (father of Specially
Designated Nationals Rami and Hafiz Makhlouf),had been on
the REB board of directors. Realizing his task would require
cutting through reams of SARG red tape, Karam said he
correctly assumed he would need someone of Muhammad
Makhlouf's influence as a partner. Karam negotiated an
arrangement between REB and FransaBank of Beirut --
reportedly still in use today -- whereby REB operates all
credit card point-of-sale units around the country but
FransaBank actually facilitates the external transactions
with Visa and MasterCard.


11. (S/NF) Karawani added that REB also has a "near monopoly"
on public banking ATM transactions. In addition to REB's own
estimated 140 ATMs, REB reportedly operates and processes
transactions for CBS's 170 ATMs. As debit cards become
increasingly popular in Syrian society, Karawani says REB is
positioned to collect even more ATM fees and continue to
"make money out of air."

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REB Wants Out from Under 311 Action
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12. (C/NF) In early March 2009, a Dutch consultant to REB
asked Post how U.S. sanctions might affect REB's plans to
open an account in a U.S. bank in order to "execute U.S.
dollar transactions." In response to our inquiry about CBS's
relationship with REB, REB Treasurer and Foreign Relations
Manager Kamel Adla provided copies of a request from REB to
the Minister of Finance dated July 23, 2008, for permission
to "terminate CBS's contribution of SYP 3 million (USD
63,025),or 0.2 percent, of REB's SYP 1.2 billion (USD 25.2
million) capital." Adla also provided a copy of the SARG's

DAMASCUS 00000327 004 OF 005


response -- Prime Minister Muhammad Naji Utri's Decision No.
5533 of December 15, 2008 -- which transferred CBS's shares
in REB to the Syrian Public Establishment for Insurance.
(Note: We do not know if REB was successful in finding a U.S.
correspondent bank after ridding itself of CBS ownership.
End note.)


13. (S/NF) American Express representative Kamal Abu Shaar
(strictly protect) told us that Rami Makhlouf is employing a
similar strategy to try to free his OFAC-blocked chain of
duty free stores, RAMAK. Makhlouf's attorneys are reportedly
filing a legal petition with OFAC arguing that RAMAK should
be "un-blocked" because Makhlouf recently sold his shares in
the company. Shaar said that about USD 100,000 in pending
AmEx transactions with RAMAK had been frozen after the duty
free chain's 2008 Treasury designation, which Makhlouf hoped
to recoup by removing himself from RAMAK's ownership.

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Politics Thwart Attempt to Restructure Public Banks
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14. (S/NF) Karawani said Deputy Prime Minister for Economic
Affairs Abdallah Dardari had been frustrated by Ba'ath Party
political resistance to external recommendations to (a) close
Industrial Bank, (b) merge the minimally active Agricultural
Cooperative Bank into CBS, (c) make all public banks offer
the same general services rather than specialization, and (d)
lay off hundreds of bank employees. CBS, whose payroll is
said to number around 5000, is, however, reportedly
considering a proposal to "absorb" 1000 of its existing
employees by implementing a two-shift workday, from 0800-1400
and 1400-2000.

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In Need of a Technical Partner
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15. (C/NF) General Manager of Bank Audi Syria Bassel Hamwi
(strictly protect) remarked that CBS's performance is
difficult to assess because -- unlike Syria's private banks
-- no independent analysis of CBS is publicly available. He
described Syria's entire public financial sector -- the
Central Bank, Ministry of Finance, and the aforementioned
public banks -- as in desperate need of a "technical partner"
to build the necessary capacity for operating in the modern
era. Hamwi explained that different public banking entities
had, at times, worked with various European technical
consultants funded by the World Bank, EU, and development
agencies, but the lack of a government-wide strategy and a
consistent partner limited the programs' effectiveness. He
surmised that Syria would always be too suspicious of U.S.
intentions to accept American assistance, if any were ever
offered.

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Bilateral Trade Banks
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16. (S/NF) While market trend lines gradually shift towards
private banking, some regime stakeholders are driving the
expansion of public banks -- ostensibly to facilitate Syria's
expanding trade relationships with Iran, Turkey and Iraq.
The most oft-reported example of this effort is the
Syrian-Iranian Commercial Bank (SICB). As reported in refs B

DAMASCUS 00000327 005.2 OF 005


and E, SICB is a joint venture primarily between Bank Saderat
of Iran and the Commercial Bank of Syria, with additional
capital to be provided by the Saderat subsidiary Ghadir
Investment Company, Syrian businessman Khalil Sultan al-Abed,
and yet to-be-determined public shareholders. Over the past
two years, Syrian trade delegations to Baghdad and Ankara
have publicly announced SARG support for a Syrian-Iraqi
Commercial Bank and a Syrian-Turkish Commercial Bank as
evidence of Syria's deepening economic relationships with
both countries, although Post is unaware of any significant
progress towards opening either bank. (Comment: We doubt
that either Turkish or Iraqi banks are eager to partner with
CBS. End comment.)

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Comment
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17. (C) Syria's dingy concrete public bank buildings, with
long customer lines and unmotivated employees, stand in sharp
contrast to the turqoise, purple, red and glass private bank
branches that now dot the brown Damascus cityscape. To a
society hungry for technology and education, the public banks
seem like vestiges of a waning era that are unable to evolve
in this increasingly competitive sector of the economy. As
the famously thrifty Syrians become more sophisticated
banking consumers, the public banks will rely even more on
government patronage and transaction monopolies to survive.
CONNELLY