“Great Expectations: The Damascus Stock Exchange” by Alison Brooks

Alison Brooks, who wrote this fine article on Syria's stock market for Syria Today, allowed me and my family to share her apartment with her in Damascus this summer. Here is a picture from this summer.

 .Alison Brooks and Joshua Landis 2007

Great Expectations
Alison Brooks reports on the preparations for the opening of the Damascus Stock Exchange
Syria Today, August 2007

Observers of Syria’s multifaceted insurance, banking and capital markets reform programme, launched in 2005, are now fixing their gaze on what many hope will be the jewel in its crown: the Damascus Stock Exchange (DSE).

The launch of the DSE is officially set for the first quarter of 2008, but even that may be optimistic given the exacting preparations required by the various would-be market players.

Whenever the opening bell rings, public interest in the new stock market promises to be keen. “We did our own internal study of Bank Audi Syria customers,” says Bassel Hamwi, vice chairman of the DSE as well as head of the Lebanon-based private bank which has been operating in Syria for two years. “We discovered that 72 percent of our sample not only know that a stock market is about to be launched, but also plan to invest in it.” Hamwi points out that Syrians have always been traders: “They are comfortable taking measured risks and they especially like equity-type risks.”

There are currently few investment outlets in Syria, apart from real estate and bank deposits. Many Syrians ignore the banks and prefer to take holdings in companies. This is why most over-the-counter IPOs which have taken place here, both before and after the establishment of a regulator, have been heavily oversubscribed. However, of the hundreds of large and successful – mostly family-owned – companies in Syria, a mere 46 have completed IPOs. The new stock market is therefore expected to absorb large amounts of liquidity, as has been the case with other Arab stock markets.

“Syria is an unusual case,” Hamwi says, “of putting the cart before the horse. Stock markets are typically very organic types of structures, which grow from the ground up – and then comes the regulator. In this country we are doing it backwards. We are starting with the regulator and the regulator is building the market.”

That regulator is the Syrian Commission for Financial Markets and Securities (SCFMS). The commission has now done most of the groundwork, including publication of the licensing regulations and code of practice for financial intermediaries. However, decisions are still being made and goal posts can still be moved.

For example, by early June the commission had issued provisional licenses to six financial intermediary companies, four of which are majority foreign-owned. Then, on June 17, the SCFMS announced that Syrian individuals or corporations would have to be majority stakeholders in all financial intermediary firms. Previously, no percentage had been specified.

This announcement took many by surprise. One of the four foreign-owned firms is Pioneers Syria which, while having some Syrian shareholders, is majority owned by the giant Pioneers Egypt. Says Khaled al-Tayeb, a vice chairman of parent company Pioneers Holdings and board member of Pioneers Syria: “The decision was indeed unexpected. But it is not a problem and we will of course comply with all regulations. What is important for us is to be on the ground from the beginning, contributing our broad experience and know-how to help make Syria’s new capital markets initiative a success.” Pioneers Syria is licensed to carry out the full gamut of services: dealing, brokerage, underwriting, investment management, investment trusteeship and safe custody.

Nationality is an issue which works both ways, however. Mahmoud Sukkar is the CEO of Fortune Financial Consultants, a Syrian company with experience as a broker in online markets for a range of financial instruments. Fortune has applied for a license to offer both brokerage and consulting services. Sukkar personally put together the comprehensive application file required by the commission and was confident that it would meet with approval. While the application was not rejected, Sukkar was told that he needed as a partner a foreign brokerage firm licensed in one of the neighbouring countries which already have a stock market such as the Emirates, Dubai, Jordan, or Egypt.

“I think we should separate ownership from management,” says Sukkar, who has just completed a Masters degree at the Arab Academy of Financial Sciences. “I already had job applications from Jordan, from real experts, PhDs. I had the staff lined up when I made my application. So the commission should have no problem. Why are they asking for foreign ownership?”

Human resources deficit

Clearly, the commission would rather be safe than sorry. With the exception no doubt of Sukkar and a handful of people like him, the level of financial knowledge and expertise among Syrians is extremely low, for the simple reason that no capital markets as such have existed until now. Recruitment and training will both be significant challenges for the DSE itself and for the financial intermediaries on whom the new market will depend. Partnership with an experienced foreign company offers the advantage of a built-in training opportunity for new Syrian staff who can work alongside experienced colleagues and even enjoy a training stint in the partner’s country.

Indeed, much advice and training will be needed even by the Syrian companies hoping to be listed on the new exchange. For starters, almost all of them will have to change their legal status from general partnerships to limited liability companies as an initial step before turning them into joint stock companies. But the greater challenge will be for them to adopt standard accounting practices that not only separate personal and family funds from company funds, but that also truly reflect their financial performance.

“In the past,” explains Hamwi, “companies were structured on a tax-management basis. That was the sole purpose of the company. You have 40-odd years of tax-management practices, to be generous, and you are talking about every kind of tax conceivable. The tax environment was such that people really had to be creative.”

Not one to miss an opportunity, Sukkar has decided that his company, Fortune, will focus initially on providing advice to companies, to help them make the transition. “I don’t think brokers will do great business, at least in the first two years, as the volume of transactions will be insufficient. We think the best business in the beginning will be financial consulting.”

In the new environment, if they want a stock market listing, companies will have to publish balance sheets that truly reflect the state of the business. They will need to increase their stated capital and when they do this, there will be a new and higher tax assessment. However, a new law is expected which will help family companies to make the transition either by levying a nominal flat tax on them, perhaps 1 percent, or by exempting them altogether. In addition to the tax incentives being offered, there are many advantages to having a listing, including ease of exit and entry and enhanced attractiveness to investors, resulting in a better quality of equity.

For these reasons, it is expected that many companies will seek a listing. Others may balk however at the high levels of transparency and disclosure required. If the “carrot” of tax and other incentives fails, it is possible that a “stick” will be employed at some stage, such as making a listing mandatory for certain types of companies.

On the investor side, whether participation in the Syrian stock market will be mainly institutional or mainly retail remains to be seen. Views differ on this question, even among the DSE Board of Directors who are still debating this and other issues. Some see it as almost purely a retail market, envisaging people in the villages buying and trading shares. Others prefer to start with an institutional market where Syria’s banks, insurance companies and new asset managers would be the main investors, and work their way towards a retail market.

Prudence will prevail

Whichever way it goes, there is a clear trade-off between achieving financial market liquidity and efficiency, on the one hand, and achieving economic and financial stability on the other. It is evident by now that both the DSE and the commission are more concerned with the latter than with the former.

Mohammad al-Jlilati is vice chairman of the SCFMS Board of Commissioners. He said that while there was no single model for the DSE, the commission studied the regulations and the legislation applying in all the Arab countries that have stock markets: Abu Dhabi, Saudi Arabia, the Emirates, Dubai, Kuwait, Doha, Egypt and Jordan. “We looked at all these regulations and chose those which best fit our conditions,” he said.

When asked about how the commission would address the problem of insider trading, which contributed to the spectacular collapse of the stock market in the Gulf last year, he explained that monitoring for such activities would be strict: “Any board member or employee or auditor who relates insider information to an investor will face up to three years in prison.” According to Jlilati, when a company is about to release its financial results, the commission will for 10 days monitor the financial dealings of people associated with the company. In addition, if ever the SCFMS is convinced that a deal has been done on insider information, the transaction will be cancelled and the perpetrator prosecuted.” But in the absence of morality,” says Jlilati, noting that similar regulations were in place in the Gulf States, “no law in the world can stop the leaking of insider information. What we have done is take the best international standards and incorporate them into our regulations.”

All indications are that the new stock market will be highly regulated and only allow the “best of the best” companies to be listed on the Big Board. Volatility will be kept in check by means of 2 percent up and down limits. “There may not be a lot of liquidity initially,” concedes DSE vice chairman Hamwi. “But then, over time, you start allowing higher volatility in the market. You start allowing more margin trading. You start allowing leverage, you introduce more instruments, etcetera.”

“We at the DSE need to first prove that we are worthy of the trust of the investors, that we’re worthy of the trust of the commission, that we’re worthy of the trust of the companies who are going to list and also of the brokers and other intermediaries,” he adds.

Two parallel markets

The commission has issued a draft of its proposed listing requirements for comment, but has not yet finalised them. What is clear is that there will be two markets initially: the main stock market and a parallel, alternative market, each with its own listing requirements and trading rules. According to the draft proposals, to be listed on the main stock exchange, a company will need a three-year track record, fully paid-up capital of SYP 300m, and at least 200 shareholders. In addition, it will need to have recorded an average net profit equal to 5 percent of its capital in the previous two years. For the alternative stock market, the requirements are somewhat looser: one year of operation, SYP 100m of capital, and 100 shareholders. However, trading regulations may be less favorable.

“It is not clear yet whether all companies will have to start out in the alternative market,” says Raed Karawani, a partner in the Karawani Law firm, which represents a number of brokerage firms seeking licenses from the commission. “Presumably if a company meets the requirements for the main market, it can be listed there from the outset. But the commission will be very strict with things like disclosure, transparency, and compliance.”

Indeed, very few companies are likely to meet the requirements initially, though Syriatel is mentioned as a possible exception. “The idea,” Karawani says, “is to get as many companies as possible to list their shares on the alternative stock market initially. This will give them time to move up the learning curve in terms of trading regulations and corporate governance, as they also become more aware of the advantages of a listing on the main market.”

An effective and globally integrated financial structure is critical if Syria is to improve economic efficiency, better allocate resources, and foster growth and social prosperity. The Damascus Stock Exchange promises to contribute significantly towards such benefits.

Alison Brooks is an experienced financial trainer with a Masters degree in International Finance from Georgetown University and a licence in Arabic from the Sorbonne Nouvelle. She moved to Syria last year to refresh her Arabic and hopes soon to offer capital markets training here.

Issue: August 2007

Also see the very good article on Syria's Private Universities in the same issue of Syria Today by Phil Sands and Obaida Hamad

University Challenge

Comments (12)


1. norman said:

I hope that the Syrians will not think of the stock market as a sure investment and lose all their saving ,
I am glad the the regulations are their ahead of the stock market , learning from other people mistakes is better than learing only from your own mistakes .

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August 22nd, 2007, 1:57 am

 

2. Innocent_Criminal said:

i dont understand how this stock exchange will function with/without Syrian corruption. i mean we took corruption to a new height where bank clerks wouldn’t even count your large withdraws without a “tip”. This might be tolerated in some situations but foreign investors will be terrified of entering such a sick system

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August 22nd, 2007, 3:47 am

 

3. Alex said:

IC

True, but foreigners who invest in a Damascus stock exchange will be the risk taker types … probably they will hire a full time employee (Syrian) who knows the system… or they will have Syrian firms representing them and managing their investments in Syria at a reasonable cost.

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August 22nd, 2007, 4:14 am

 

4. t_desco said:

As-Safir: Fatah al-Islam – 2003 “MacDonald’s” bombing link (last paragraph). Coincidentally, both had an Australian element. And the latter also involved members of the Dinniyeh group.

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August 22nd, 2007, 9:04 am

 

5. Innocent_Criminal said:

nevertheless you are excluding a huge sector of investors, most notably the non-risk to moderat risk takers who’s money is just as green. corruption exists in most developed countries but in a much more sophisticated way and beneth the system. in syria IT IS the system. guess we will just have to wait and see, i am sure there will be enough intial investors, its the long term vision that i worry about.

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August 22nd, 2007, 12:51 pm

 

6. someone said:

No one talked about why Syria, a country with a rich mercantile and industrial heritage doesn’t have a stock market, while a country like Vietnam and another small African country (I can’t remember its name) have a growing, thriving stock exchange?
President Assad issued a decree for establishing the stock exchange the moment he came to power in the year 2000. Isn’t it strange that almost seven years to the date a stock market haven’t been established?
People at the top used a wide range of pretexts for the delay; from lake of legislation to the lake of companies willing to enter the stock exchange.
From my point of view there are two major reasons for not establishing such an economic land mark.
First, the Syrian capitalism is a crony capitalism. The merchant and industrial elite (the old one and the new one) is living in almost complete freedom.
The old economic elite (the urban middle class) relies on family connections and the clergy to grow their business away from scrutiny. People would put money with some merchant, after consulting with a clergy man (for the halal and haram) and the merchant would give them a slice of the profits at his will. The investors have no say in how the money is invested nor the knowledge of the real percentage of profits. They trust the merchant because of the clergy men’s assurance.
The new elite thrives on corruption they are the agents of the people on top; they are basically laundering money.
The fundamental base for any stock exchange is transparency, so the people who have sound, well organized financial establishments will have no problem in becoming joint ventures and incorporated companies (and they are very few companies in Syria that have such criteria) meanwhile the vast majority of Syrian merchants and industrialist are in shady business, so if a stock market was established people who have invested with the corrupt financial elite will start demanding that their money be turned into shares they can control, this will spell disaster for the economic elite of Syria.
Second, the ruling elite of Syria with its economic elite realizes that establishing a stock market will be the final nail in the coffin of the old system which nurtured them all these years, they don’t want to get rid of the old system; it is their life line.
so, if a stock market was established in Syria, the sequence of events would be the same as in the Gulf.
The first year no one will come near it because no one trust anything new. After a year or less a bobble would start to grow; people would start selling their assets and put it into stock speculation; house prices will plummet, and the system will live in fake economic boom.
Within the third year, you will find every body trading in stocks form street cleaners to doctors, then, one day the Syrians would wake up and discover something called stock market crash; this new invention will wipe out almost half of the savings of any idiot who invested heavily in the stock exchange. Now, people at the top are trying to prevent such a sequence of events, but they have no idea how to prevent it, the only way to prevent such a thing is to have the rule of law and well trained, intelligent honest people at the administration of the stock exchange, and most importantly immune to corruption. Since the whole system is built around corruption, the stock market crash is inevitable.
One final note, no sound minded foreign investor will put a penny in the Syrian stock exchange, for a simple reason, they were burnt in the Asian stock markets, no one is willing to invest in an emerging market without knowing how deep the corruption goes.
P.S:
Hi, Joush I heard you today on NPR radio, it seems you are becoming one of the major sources of information about Syria, but only for the people who want a moderate point of view on Syria.

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August 22nd, 2007, 7:47 pm

 

7. SimoHurtta said:

in syria IT IS the system. guess we will just have to wait and see, i am sure there will be enough intial investors, its the long term vision that i worry about.

There are functioning stock exchanges in several Arab countries. I suppose Syria is not more corrupt than they are. Actually the state owned Dubai exchange is now trying to buy the Scandinavian and Baltic stock exchanges OMX. OMX is a major exchange technology provider.

There are stock exchanges in Communist countries and countries run by dictators.

One final note, no sound minded foreign investor will put a penny in the Syrian stock exchange, for a simple reason, they were burnt in the Asian stock markets, no one is willing to invest in an emerging market without knowing how deep the corruption goes.

Come-on Someone. The Asian stock market collapse has been “buried” long time ago. The investors have returned almost a decade ago to Asian markets. Investors invested eagerly even to Russian stock markets (and have made huge profits), even the Russian economy still is little “chaotic” with rules and corruption. Now money is really flooding to Russia.

Of course both Syrian and outside investors will invest in a Syrian stock exchange. It is a to lucrative change to pass. A stock exchange is in everybody’s (new and old capitalists) interest in making a “price” to the present fortune, collecting capital, buying companies and making profits. Certainly there will be swindles with some listings and problems with regulation and company reporting. But so are in USA and EU. 🙂

Lets remember that there is a stock exchange in Iraq. They seem even to make deals there.

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August 22nd, 2007, 8:42 pm

 

8. someone said:

SimoHurtta
They only returned to the Asian markets after deep reform of these markets.
I advise you to read Thoms l.friedmen’s book “the Lexus and the olive tree” it gives a simplistic idea on how markets work.
As for corruption, let me ask you something; do you find a police man in New York whom you can bribe with 25$ dollars without risking being charged with some kind of felony?
The SEC and the Department of Justice in the US are working day and night to curb corruption, the moment they loosen their grip and allow inside trading and shady deals, people will start pulling their money out and the New York stock exchange will no longer be the Mecca of investors.
Corruption is found all over the world, it is a basic ingredient of human nature, but the percentage of corruption that matters.
For example, if you have ten judges representing a judicial system, there will be huge difference between having only two or three corrupt judges and having seven or eight corrupt judges in the system.
And don’t forget the story of Syriatel, and how someone tried to swallow the whole company, and how wonderful reputation this event gave to doing business in Syria.
Adding to that, haven’t you noticed how the people of the Gulf are trying to clean up their act after their huge losses!!!!!
The people of the Arabian Gulf can afford losing their money, they have their oil wells, the regime in Syria can’t afford such a loss.
It is estimated that the percentage of liquid assets in Syria is 80%, it is one of the highest in the world, the reason for this is the lake of healthy investment tools, the moment the stock exchange opens, huge amounts of liquidity will pour into it, and with out a clear cut economic-judicial system to protect the investors, it will be a disaster waiting to happen.

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August 22nd, 2007, 9:23 pm

 

9. SimoHurtta said:

They only returned to the Asian markets after deep reform of these markets.
I advise you to read Thoms l.friedmen’s book “the Lexus and the olive tree” it gives a simplistic idea on how markets work.

Seems that you have a very simplistic idea and memory of markets. The Asian financial crisis was caused because of their currencies collapsed and a market reaction based on mass hysteria. Not because of corruption. Corruption is still there.

As for corruption, let me ask you something; do you find a police man in New York whom you can bribe with 25$ dollars without risking being charged with some kind of felony?

What has it to do with Syrian stock exchange? 25 dollar to a New York cob as bribes is as to trying to bribe a Syrian cob with 25 cents. Try with 2500 dollars.

And don’t forget the story of Syriatel, and how someone tried to swallow the whole company, and how wonderful reputation this event gave to doing business in Syria.

Russia and most Eastern European states recent economical histories are full of Syriatel cases. Still they have stock exchanges (and corruption). And the US stock exchange history is full of bigger and smaller collapses. Lets not forget Enron and Arthur Andersen.

Adding to that, haven’t you noticed how the people of the Gulf are trying to clean up their act after their huge losses!!!!!
The people of the Arabian Gulf can afford losing their money, they have their oil wells, the regime in Syria can’t afford such a loss.

Clean what act??? The state owns the oil wells not private investors. If you choose wrong companies in a stock exchange for your investment targets you loose in USA, Finland, Turkey, Egypt, Israel etc. And no state will cover your losses.

It is estimated that the percentage of liquid assets in Syria is 80%, it is one of the highest in the world, the reason for this is the lake of healthy investment tools, the moment the stock exchange opens, huge amounts of liquidity will pour into it, and with out a clear cut economic-judicial system to protect the investors, it will be a disaster waiting to happen.

Do you really believe that Syrians will at once put all their liquid assets to stocks. You really underestimate them. Certainly some small investors in Syria will burn their fingers when playing on stock markets. But so did small many investors around the world loose after the dot-com bubble busted (and probably in near future with the housing bubble correction move). There is an old saying of over heated stock markets: “when taxi drivers begin to speak about their stock investments it is time to retreat from the markets”.

Syrians need investment targets for their liquid assets and a system to make investments. Certainly laws to protect the investors and markets are needed, but lets not over exaggerate the difficulties and undermine the benefits. If most of worlds countries (corrupt and less corrupt) can cope with stock exchanges, why would not Syria?

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August 23rd, 2007, 4:43 am

 

10. someone said:

The Asian crash was caused by many factories one of them was the over supply of loans from western financial institutes looking for a quick buck.
If you look at the Asian countries that were able to rebuild their economies after the crash like South Korea, Malaysia, and Singapore all of these had a good educational system, strong judicial system and they enacted and enforced laws to fight corruption in order to restore confidence, while countries like the Philippines are still struggling.
The police man example is about when you have corruption starting from the bottom and going all the way up.

You keep giving the Russian example and you forget that Russia, China, India, Brazil are all huge markets, meaning huge markets always give the opportunity for the small and medium size companies to make a profit along side the big corruptions, meanwhile Syria is a small market, and it will be easily saturated the moment it is opened to the outside world.

The boom in Gulf area is fueled by the high oil prices; do you think the Arabian Gulf has a real economy?
The governments of the Gulf reward huge contracts to local companies generating economic growth, the moment oil prices plummet their economy will plummet, have you forgotten the oil blot of the eighties? So if there is a loss in the market the governments will be there to bail every one out, but in an indirect way.

I don’t know if you are a native Syrian or if you have every lived in Syria for a long time, but have you every heard of pyramid schemes?
This kind of fraud is thriving in Syria where you have a person offering profits of 20% and 30% to lure people. Have you heard of Bsam Khorbotly or the Kalass brothers? The Syrian have been living in a closed subsides economy for so long to the point that they forgot how capitalism works, and there will be a huge price to be paid for such an ignorance.

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August 23rd, 2007, 1:57 pm

 

11. SimoHurtta said:

I don’t know if you are a native Syrian or if you have every lived in Syria for a long time, but have you every heard of pyramid schemes?

No I am Finn and I never have visited Syria, though I have visited several times Syria’s neighbour countries. After Iraq episode I am very cynical about the “western” propaganda what is the real situation in Arab / Muslim countries.

Where are you from Someone? From a bunker around Tel Aviv? You seem not to want Syria to open her markets, develop and do not trust Syrians ability to use their brains. You are only repeating a rather disordered opinions (=propaganda)

The police man example is about when you have corruption starting from the bottom and going all the way up.

Do you really claim that there is no corruption in USA, EU, China, India etc which have a successful economy? There is corruption always around the world. I have paid corruption money sometimes (not very often though) in Finland to get deals and things done. I have taken small gifts and promises of returning a favour if I do “things faster as planned”. Can you say you have not? As said before I do not think that Syria is more corrupt than Jordan, Egypt, Iraq etc. You can claim it is, but can you really prove it?

do you think the Arabian Gulf has a real economy?

Yes they have. Open your eyes and read something else than Thomas Loren Friedman’s The World is Flat. As a Jew Friedman is known to undermine the Arabs.

You keep giving the Russian example and you forget that Russia, China, India, Brazil are all huge markets, meaning huge markets always give the opportunity for the small and medium size companies to make a profit along side the big corruptions, meanwhile Syria is a small market, and it will be easily saturated the moment it is opened to the outside world.

Come-on Someone. Syria is a bigger market by the number of people than Israel, Finland etc. I keep giving Russia as an example, because it also was “reborn” on the ruins of a corrupt one-party system and a had a closed economy. In that way Syria and Russia have equalities and both have considerable potential to a growth. If Arab countries managed to create an economical “Arab Union” Syria will be a part of one of futures leading powers.

but have you every heard of pyramid schemes? This kind of fraud is thriving in Syria where you have a person offering profits of 20% and 30% to lure people. Have you heard of Bsam Khorbotly or the Kalass brothers? The Syrian have been living in a closed subsides economy for so long to the point that they forgot how capitalism works, and there will be a huge price to be paid for such an ignorance.

You bore me Someone, do you really think that there were no pyramid schemes in East Europe after they opened the markets. Bý the way there are constantly pyramid schemes around the world. Even in highly developed economies.

I wonder do you think that Syria should not open her markets? You seem to favour the North Korean economical model.

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August 23rd, 2007, 9:02 pm

 

12. dalia said:

i hope syria will be in the same line with other cities in world in economice and improves that she will have a good exchange stock market

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October 5th, 2007, 5:50 pm

 

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