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Assessing risk key to success of Syrian banks

After several months of operation, Syria's three joint venture private banks have succeeded in attracting deposits. Investing these funds has been a challenge for Syria's banks, however, due largely to risk management factors. Failure to generate good assets soon could adversely affect the banks' profitability during their first year of operation.

Risks are part of everyday life, and the banking universe is laden with them, including credit, interest rate, market, liquidity, operational, and foreign exchange risk, not to mention country, settlement, and performance factors. The most important, credit risk, is the risk of decline in a borrower's credit standing. Coming in a close second is default risk, which concerns assessment of factors that could lead to an inability to repay the loan.

Risk taking is common for financial institutions, given that risk and expected return are so tightly interrelated. Unfortunately, the Syrian market lacks the basic tools for risk management processes. Syria lacks a national customer credit rating system, as the Central Bank of Syria does not have a database listing obligors and cases of default. The Central Bank of Jordan, for example, utilizes a database including all corporate customers whereby any bank may, with permission of the customer, obtain the necessary information about customer facilities obtained from other banks and any case of default.

Even Syria's dominant public banks know little of international risk management practices and use outdated lending procedures and assessments. The fact that the financial resources of these banks is considered public property leads to strict lending criteria that does not tolerate any risk of loss. In the past, the easiest way for the public banks to invest excess liquidity was through the purchase of "certificates of investments" - a kind of treasury bill issued by the Public Credit Bank on behalf of the Syrian Treasury. This practice stopped at the end of 2003 when the Central Bank of Syria, in a step to set the stage for private banking, ordered the liquidation of all certificates of investment and forbid their future purchase by banks. Accordingly, all Syrian banks are now forced to lend in order to generate income.

In other markets, banks normally offset risk through use of collateral - assets such as real estate, securities, commodities and receivables that the lender seizes in case of default. Use of collateral in Syria is problematic, however, as disputes through Syria's legal system take a long time to resolve. At the same time, borrowers are often reticent to put up collateral as well, due to associated taxes, stamp duties and lengthy legal procedures. Today, Syria's public banks depend on collaterals such as real estate guarantees, while regional banks (and their partner Syrian joint venture banks) still rely to a large extent on the borrower's background and reputation.

One solution to ensuring better risk assessment in Syria might be to request customer financial reports based on international standards. Recently, some private banks have started to request customer financial reports audited by international accounting firms - services that many Syrian businesses unfortunately still cannot afford. Raising the auditing bar, however, will require improving Syria' auditing profession, all the while boosting market awareness of the importance and benefits of proper financial reporting.

As Syria's premier supervisory authority, the Central Bank of Syria has a key role to play in improving Syrian risk management. Banking regulatory frameworks set constraints and guidelines that inspire risk management practices, and stimulates the development and enhancement of internal risk models and processes of banks. Regulations promote better definitions of risk, and create incentives for developing better methodologies for their measure. They impose recognition of the core concept of capital adequacy principles and 'risk based capital', which state that banks' capital should be in line with risk and that defining capital requirements implies quantitative risk assessment. A step in the right direction would be for the Central Bank to prepare the platform for implementation of the Revised International Capital Framework (Basel II), which closely links credit risk to capital adequacy.

Abdulkader Husrieh is an international CPA and consultant based in Damascus. He wrote this commentary for The Daily Star.

Beirut,09 06 2004
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