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A curious sort of bank

May 2009
Damascus and Tehran create a new financial institution with no apparent purpose
Politics can make for strange bedfellows, but also curious financial deals. The granting of a preliminary license by the Syrian government last month to establish a joint Syrian-Iranian commercial bank, Banki or "My Bank," has raised eyebrows.

Both of the banks behind the joint venture, Bank Saderat (BS) and the state-owned Commercial Bank of Syria (CBS) , are under United States (US) sanctions. Saderat, the Iranian export bank, has faced sanctions since 2006 for the alleged transfer of hundreds of millions of dollars to Hizbullah and other "terrorist" organizations. CBS has been listed under US Patriot Act Section 311 since 2004 as a "money laundering concern."

It's a curious deal. Bilateral trade between Syria and Iran is estimated at a mere $200 million, a figure that would seemingly not warrant more than a correspondent bank, much less a new institution.

"Iranian investments are very limited. They don't go beyond the $150 million mark," said Jihad Yazigi, editor of financial publication The Syria Report. "Each time Iran and Syria meet they say $1-to-$2 billion in trade, but trade is only around $200 million."

"You can count the number of investments on a single hand. And the Iranians don't have a cash surplus, while the Syrians don't invest abroad. Both economies are not complimentary and have no real added value," he said.

Yazigi said that there are no Iranian investments in the banking, real estate, tourism or manufacturing sectors, other than the Iran Khodro, the largest automobile manufacturer in Iran, and SAIPA car assembly plants.

"Many of the projects here are government tenders, so if you look into the details it's not investment," he said.

Growing, but still small
Bilateral trade has increased over the years however, from $67 million three years ago to $105 million in 2007, and to $130 million by 2008. This figure could reach $500 million in a few years, "but you don't need a joint bank for that," said Yazigi.

The minimal trade volumes could explain why the set-up capital for the bank is the minimum requirement of SYP 1.5 billion ($32 million). But what other motivations are there for setting up such a bank?

"It is a small venture and a way of avoiding scrutiny if they deal with each other and not through international channels," said Yazigi. Given the reputation of the two banks and their alleged financial links to Hamas and Hizbullah, that makes sense.

But according to a well-placed banking source, the real motivation is political, with the project being a joint commission between the two countries. Tehran has allegedly been pressuring Damascus to create the bank, with the preliminary license pushed through faster than expected. The Syrian prime minister reportedly even stepped in to say the bank is to be licensed despite all the relevant papers still being collected by the Central Bank. Meanwhile, CBS is supposedly not happy about the project, having been strong-armed into the venture as they realize that such a partnership is not good for their reputation.

"I'm sure CBS could've found a good Lebanese bank to partner with, as CBS is the largest commercial bank in the country with around 60 percent of all banking assets," said Yazigi. "Who would be willing to partner with a bank if it's under sanctions?"

The Mahdi connection
The shareholders give an indication. The Commercial Bank of Syria and Bank Saderat each have a 25 percent stake, while 27 percent is to be divided up between Ghadir Investment Company, a BS subsidiary, car manufacturer SAIPA , and Khalil Sultan al-Abid, the Syrian representative of Iran Khodro.

Al-Abid came late to the deal, according to the banking source, as Iranian and Syrian Shiite investors already involved were selective regarding the other investors.

"It [wasn't about] business but solidarity," the source said, as the bank is for all intents and purposes a partnership between Shiites in Iran (which is predominately Shiite, ) and Shiites in Syria (which has a small Shiite minority). "Effectively it will be looked at as a Shiite bank," said the source.

But while Banki appears to be bypassing the usually lengthy registration process, the initial public offering (of 23 percent) could take longer as other banks are already in line at the Central Bank. As a result, the source said the bank is unlikely to be operating before mid-2010.

How well the bank will be received, commercially and internationally, will have to be seen. A senior source at a Middle Eastern Central Bank said it would be logical for Banki to be put under the same US sanctions as the parent institutions.

Unless Washington's relations with Tehran change, the bank will likely face more than a slap on the wrist if it engages in activities the US disapproves of, unlike LloydsTSB in January. The British bank was fined $350 million under US law for falsifying wire transfers from Sudan and Iran, having completed more than $300 million in transfers for Iranian banks Melli, Sepah and Saderat. A further nine EU banks are also being investigated.

© Executive 2009