Focus on Syria Investment and Business Opportunities in a Transformed Market Getting Established in Syria Insights on the Banking Sector London, November 7th 2007 BANK AUDI SYRIA

Contents BANK AUDI SYRIA  Economic Performance  Current Banking Conditions  Potential for Growth in the banking sector

BANK AUDI SYRIA Economic performance  GDP has grown 18% the last couple of years,it reached $35.5 billion at the end of 2006,  Inflation has grown 10% last year from 4.4% in 2004; real GDP growth rate ranged between 5% and 7% with non-oil GDP growth ranging between 6%-7%.  Private investment growth :20% per year  50% of the loan portfolio of local banks went to the private sector in the last two years

BANK AUDI SYRIA Current Banking Conditions  Syrian banking sector was distinguished by the presence of one commercial bank, and other specialized ones.  Efforts from the Central Bank of Syria (CBS) to develop the banking sector have taken place to create the appropriate environment for the operating banks and to facilitate their expansion  The banking sector reforms set the path for development by focusing on: 1.Opening up to private sector, 2.Building regulatory and supervisory capacity 3.Using a participatory approach, especially in planning financial sector reforms.

BANK AUDI SYRIA Current Banking Conditions Market Structure In $ billionTotal AssetsDepositsLoansShare Capital Totals State Banks Private Banks Market Share State Banks93%88%91%81%96%93%84%93% Private Banks7%12%9%19%4%7%16%7%

BANK AUDI SYRIA Current Banking Condition Banking Sector’s Size Banking Sector’s Deposits  Banking Sector’s growth : 6.7% from 2003 to  Private sector total assets reached $29 billion at the end of this period,  Public sector total assets by the end of 2006 stood at $25.2 billion  Customers’ deposits increased : 9% from 2003 to 2006 reaching $2.7 billion up form $1.3 billion. Deposits in public banks were lower in 2006 than at 2005 falling from $12.6 billion to $11.9 billion, a decrease of $0.7 billion or 5%.

BANK AUDI SYRIA  Total loans : $9 billion by a notable 32% on average, every year from 2003 to  In less than three years public banks credit portfolio has witnessed an increase of around 50% to reach $8.2 billion in 2006 from only $5.5 billion in  Private banks lending’s has gone up to $700 million in 2006 from $300 million in Current Banking Condition Banking Sector’s Lending

BANK AUDI SYRIA Current Banking Conditions Banking Sector’s Liquidity & Investment Opportunities  97% of The total balances of liquidity, are placed in local currency.  The Syrian market suffers limited lending and investment opportunities.  Certificate of deposit (CDs) have emerged as the only opportunity for banks to invest its excess liquidity with efficient returns.  Banks incur heavy costs in managing SYP liquidity.  Minimum capital requirement in an environment of limited lending opportunities and increased competition, which may lead to excessive risk taking or encourage further dollarization.  A new market for T-Bills has recently past with banks being the only participants in the bills’ primarily market  Allowing public banks to participate in the primary market of the T- Bills undermine utilizing the full benefit of the T-Bills from the private banks point of view.

BANK AUDI SYRIA Current Banking Conditions Bankarization ratio  Syria has a branch per 57,000 inhabitants,  Total number of branches managed by private banks reached 44 at the end of This is more than a 75% increase from the previous year level of 25.

BANK AUDI SYRIA Current Banking Conditions Dollarization ratio Deposits’ dollarization rate, defined as the ratio of deposits in foreign currencies to total deposits increased from 13.1% in 2005 to 19.5% in 2006 indicating an increase in FC deposits larger than that of local currency deposits. Private banks’ dollarization stands at 55% on average and it is expected to further increases as a result of the lack of SYP deployment opportunities and increased competition

BANK AUDI SYRIA Current Banking Conditions Employment  Data available for private banks (excluding the two Islamic banks) indicates an increase in the number of employees for this segment of the sector from 700 to 1094 employees.

BANK AUDI SYRIA Potential for Growth in the banking sector  The Syrian banking sector is expected to reach $36 billion by 2009 in term of its total assets, an average rate of 8%.  GDP is expected to grow in nominal terms by a faster pace. A rate of 17% on average is expected to be materialized in the coming three years.

BANK AUDI SYRIA Potential for Growth in the banking sector  Number of factors is promising a positive impact on the sector: 1)The new law amendment allowed for majority of foreign ownership (up to 60% from 49%) facilitating entry of non-Syrian players. 2)100% foreign ownership of banks is also being discussed among major stakeholders and regulators 3)The introduction and development of Islamic finance is another channel to draw in large inflow of money and attract a pool of investors. 4)The extension of the period given to shareholders to pay the full value of their capital subscription from six months to three years

BANK AUDI SYRIA Suggested areas of reforms  Clear policy guidelines for public banks need to be established  The future status of the CBS, pressured by US sanctions on its international operations.  The supervisory process in the Syrian banking system needs to be reformed.  The outdated tax system also needs to be efficiently corrected. Despite recent reforms and simplification of the tax system, massive tax evasion and lack of disclosure and inadequacies remain.  The country payment system need to undergo a real and rapid development process

BANK AUDI SYRIA Conclusion We have presented some insights to the elements of success as well as obstacles facing the Syrian banking sector in general and private banks in particular. The growth of private banks is not surprising yet it is still in its infancy in many aspects, they are yet to make a significant impact on the Syrian economy. The challenges have not been completely abolished, but they are well recognized and clear. The key to overriding these obstacles and get easily into the Syrian market are already in place, and with the open dialogue between the private entities and public authorities.

t BANK AUDI SYRIA Thank You We have presented some insights to the elements of success as well as obstacles facing the Syrian banking sector in general and private banks in particular. The growth of private banks is not surprising yet it is still in its infancy in many aspects, they are yet to make a significant impact on the Syrian economy. The challenges have not been completely abolished, but they are well recognized and clear. The key to overriding these obstacles and get easily into the Syrian market are already in place, and with the open dialogue between the private entities and public authorities.