Damascus is pushing through banking reforms with the aim of capturing business from Syrians who now feel uncomfortable about doing business with banks in Lebanon.

Syrian business people have become accustomed over recent years to using Lebanese banks that are more sophisticated than their counterparts in Syria for a variety of purposes, including foreign-currency letters of credit (L/C) servicing.

Tense relations

Tension between the two countries has been high since last month's assassination - widely believed to have been sponsored by Damascus - of former Lebanese prime-minister Rafik Hariri and international pressure for Syrian forces to withdraw from Lebanon.

These and other factors have disturbed relations between the two countries established during 29 years of Syrian control over its tiny neighbour. In this time Syrians have become accustomed to see Lebanon as an engine of wealth, a source of employment and a place where world-class business services, including banking, can be found.

Foreign currency L/Cs

One of Syria's responses to the current tensions according to chairman of the Syria's state planning commission, Abdullah Dardari, has been to bring forward changes already in the pipeline since Damascus set about reforming its banking sector several years ago.

Recent changes announced by Syria's Money and Credit Council now permit banks to lend each other money and they have been given permission to offer importers L/Cs in foreign currency against collaterals to be decided by them.

Attractive rates

State-owned Commercial Bank of Syria - private banks only started operations in Syria in 2002 - is to start making commercial loans.

Syrian investors with an estimated US$7 billion in Lebanese banks are being enticed to domestic banks offering increased long-term interest from 6 to 7 per cent.

Limited appeal

Despite Syria's moves, analysts expect Lebanon's banks to hold on to a good deal of Syrian business and reforms do not go far enough. "What is needed is a complete overhaul of the system from a centrally planned one to a market economy," according to Nabil Hchaime, the Lebanese general manager of Banque Bemo Saudi Fransi, one of the first new private banks in Syria.

Andrew Tabler, a Damascus-based fellow at the Institute of Current World Affairs and consulting editor for Syria Today, says Lebanese banks service the majority of the foreign-currency L/Cs that facilitate Syrian imports, partly because such services do not exist in Syria and partly because going through Lebanon is a good way round US sanctions imposed by the US on Syria in 1979 and strengthened last year.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.