Enab Baladi – Mohammad Kakhi

The Central Bank of Syria has issued instructions obliging commercial banks to fully cover their losses arising from the financial collapse in Lebanon, and to submit “credible” restructuring plans within a period not exceeding six months.

According to a report published by Reuters on 21 October, the directive issued by the Central Bank on 21 September requires banks to recognize 100% of their financial exposure to the Lebanese banking system, where Syrian banks had deposited a large portion of their funds during the war years.

Central Bank Governor  Abdul Qader Hasriyeh told Reuters that the government aims to double the number of commercial banks operating in Syria by 2030, and that some foreign banks have expressed interest in entering the Syrian market, without providing further details “due to the confidentiality of the process.”

Hasriyeh said that Syrian commercial banks’ exposure to Lebanon exceeds 1.6 billion US dollars.

Based on Reuters’ calculations drawn from the 2024 financial statements of all 14 commercial banks in Syria, published by the Damascus Securities Exchange, this exposure represents a large share of total deposits in Syria’s commercial banking sector, which amount to 4.9 billion dollars.

Financial exposure is the volume of funds that are frozen or at risk with other banks, and that must be covered or treated as potential losses.

Full recognition of losses, why now?

Benjamin Fève, senior researcher and lead analyst at Karam Shaar Consulting, believes the Central Bank aims through this decision to restore transparency and credibility by cleaning up balance sheets after years of delayed loss recognition. This, he says, creates a clearer starting point for recapitalization, attracting international investors such as investors from Gulf states and Turkey, and reshaping ownership structures away from traditional Lebanese shareholders.

According to Fève, this measure is a first step within a broader reform agenda that could include, for example, tightening provisions for domestic non performing loans, conducting stress tests, imposing new capital requirements, licensing new foreign banks, and laying the groundwork for a more diversified and better capitalized banking sector by 2030.

Economist and financial adviser Ali Mohammed says that Syria currently needs a strong banking and financial sector capable of facilitating investment and reconstruction, both of which require funds to be transferred from abroad into Syria.

In return, part of this revenue and profit will be transferred out of the country, and all of this requires a strong banking and financial system.

Mohammed told Enab Baladi that Syria’s return to the international payments system (SWIFT) and to global financial bodies are all important factors for establishing a genuine path toward banking reform in the country.

Solvency under pressure, banks on the brink

Central Bank Governor Abdul Qader Hasriyeh told Reuters that banks will be required to provide the Central Bank with a credible restructuring plan, and that they are able to find different ways to do so, including via sister banks in Lebanon or by partnering with other international institutions.

Three bankers told Reuters that some of the most affected banks are in early stage talks with Arab financial institutions, such as banks based in Jordan, Saudi Arabia, and Qatar, regarding potential acquisitions.

Economist and banker Ibrahim Kochaji believes that the Central Bank’s demand has direct implications for banks’ solvency and capital in the short term. Many banks, he says, will discover that their losses exceed their capital, placing them in the category of insolvency, and some banks, particularly those with large exposure to Lebanon, may face the risk of collapse or forced mergers if they are not supported by serious restructuring plans or new capital injections.

Despite the importance of this step, it is painful and may lead to the collapse of some banks if not backed by serious restructuring plans, according to Kochaji .

Solvency is the ability to pay, and refers to a company’s capacity to meet its long term financial obligations when they fall due. A lack of solvency eventually leads to bankruptcy.

By contrast, Benjamin Fève sees a sudden collapse of banks as unlikely, because the Central Bank is pushing banks to accelerate recapitalization, attract foreign investors, and pursue mergers, and because some banks with links to Lebanon had already built provisions of between 60 and 100% before this directive.

This is what Enab Baladi observed from the disclosures published by private Syrian banks on the website of the Syrian Securities and Financial Markets Authority.

However, Fève notes that weakly capitalized banks that lack an external backer face a real risk that may force them into mergers or phased resolution if they cannot increase their capital once the Central Bank’s deadline expires.

The six month challenge

Some Syrian bankers interviewed by Reuters criticized the short period granted for complying with the directive to build provisions. One banker said, “The decision itself is justified, but the deadline is not.”

Enab Baladi attempted to contact some of the banks covered by the Central Bank decision, but they declined to comment on the issue, and some did not respond at all by the time this report was prepared.

In his comments to Enab Baladi, Benjamin Fève, senior researcher and economic analyst at Karam Shaar Consulting, said that a six month deadline is extremely short, since preparing a credible restructuring plan requires updated audits, stress tests, negotiations with shareholders, and in some cases talks with foreign investors, all of which can take a long time given the current context in Syria.

According to Fève, some of the bankers he spoke to described this period as very short and somewhat harsh. However, the goal does not appear to be for banks to complete recapitalization within six months, but rather to force them to disclose their real financial position early. Through that disclosure, the Central Bank can identify which institutions have a viable path forward, so several banks will need the deadline to be extended or will require phased plans.

Economist and banker Ibrahim Kochaji believes that this period may be sufficient for banks with limited losses to rearrange provisions, attract new shareholders, or enter into partnerships. For banks whose losses exceed their capital, however, six months is practically not enough, since these institutions need more time for a comprehensive restructuring that includes revaluation of assets, treatment of non performing loans, and possibly acquisition or merger deals.

According to Kochaji, this short period may push some banks to submit purely formal plans that do not reflect their true financial situation, which requires strict oversight by the Central Bank to ensure serious implementation. The success of these plans depends on the Central Bank’s ability to impose rigorous supervision and provide a legal environment attractive to investment, so that the crisis becomes an opportunity to rebuild a more robust and transparent banking sector.

The Central Bank of Syria did not respond to Enab Baladi’s questions about the specific criteria it will use to judge banks’ compliance with restructuring plans over the six month period.

For his part, economist and financial adviser Ali Mohammed told Enab Baladi that there must be some flexibility in the Central Bank’s handling of the deadline it has given to banks, especially since these institutions will immediately begin forming provisions in compliance with the Central Bank’s decision, and will work to find solutions to cover their exposure.

There may be cooperation, Mohammed adds, between Syrian and Lebanese banks where the funds were deposited, as well as between the Central Bank of Syria and Banque du Liban, and even between the Syrian and Lebanese governments, because the issue is larger than Syrian banks’ exposure to Lebanese banks and requires treatment at the highest levels between the two governments.