A sovereign sukuk and foreign-led reconstruction are about to widen the credit gap for Syria’s small firms

Rebuilding on thin capital: Syria’s private banks hold about USD 795 mn in combined equity — less than 0.4% of the USD 216 bn the World Bank says reconstruction will cost. And they are being asked to fund three things at once: A sovereign sukuk, Syria’s small and medium-sized firms (SMEs), and the rebuild itself. But something has to give — and the SMEs that make up most of Syria’s economy are first in line to lose.

The state’s call on bank liquidity is likely to come first, the four bankers and analysts we spoke with expect. If the first domestic sukuk soaks up what little banks will lend, the small firms that drive Syrian output get crowded out of the credit queue just as reconstruction demand builds, while the biggest reconstruction projects will have to be financed from abroad.

Not everyone thinks that’s the right call. “You’re asking a question of speed, but there’s also one of capacity,” Haddon Barth, director of the Network for Syrian Legislative Studies, tells EnterpriseAM. “Syria’s domestic banks don’t have the capital to fund large-scale reconstruction projects nor to play a significant role in financing the budget, but they do have the capital to lead SME funding in Syria.” He sees that the easier path of lending to the state crowds out the one role banks are actually equipped to play.

IN PERSPECTIVE- Total shareholder equity across all private Syrian banks is roughly the size of a single mid-sized bank in Jordan, Egypt, or Tunisia, Benjamin Fève, founder of The Syria Dispatch, tells us. State-owned banks dominate the system’s assets, and private-sector credit is marginal — the sector-wide picture is thin before you reach the question of who banks can lend to at all.

The state gets first call

Sovereign debt is the easiest ask. The government plans to finance its USD 1.8 bn 2026 deficit mainly through bonds and sukuk, with the first domestic issuance expected no earlier than 4Q 2026. Everyone we spoke with agreed it is the easiest to execute — though Barth doubts banks have the capital to do it at scale. REMEMBER- Syrian banks are putting together a syndicated Islamic sukuk package to fund state-led development projects. The package is being arranged by Al Baraka Bank Syria, QNB Syria, and the state-owned Commercial Bank of Syria, with sovereign backing from the Finance Ministry and the Central Bank of Syria. The details are sparse, with the package size, its interest rate, and tenor not disclosed.

Syria has tried this before, and banks lost money on it. “Banks were paying to hold the issuance,” Issa Chami, chairman of Alpha Capital and a board member at QNB Syria, tells EnterpriseAM. Under former president Bashar Al Assad, state banks took more than 90% of treasury issuance by his estimate, at rates below 10% while inflation ran at roughly 60-70% a year.

The bigger risk now is that banks get comfortable with high exposure to state debt. “Banks possess book liquidity, but it is not free liquidity,” Ibrahim Kochaji, an independent Syrian banking expert, tells EnterpriseAM. Withdrawal ceilings and reserve requirements tie that liquidity up, and buying sukuk “will crowd out the private sector,” he says. “If a safe sovereign yield is available, banks have even less reason to build capacity,” Fève tells us.

And heavy bank participation would itself be a bad signal. “The state might want domestic banks to act as anchor buyers, but it’s a weak signal of attractiveness, and wouldn’t bring in new capital,” Barth says. The mix of buyers will tell investors how much of the demand is real, he adds.

Damascus is also looking beyond local banks. Finance Minister Mohammed Yisr Barnieh told Asharq Business that the government is studying an international sovereign bond issue next year and has opened preliminary talks with international banks.

Small firms wait

SMEs should not be treated as a side quest. They made up about 95% of Syrian enterprises and provided livelihoods for roughly 70% of the workforce before the war, according to the UNDP’s estimate. Today, SMEs account for as much as 85% of the country’s economic activity, the SME Development Authority’s director Ihab Zakour said in August.

Yet historically they have received less than 4% of total credit, Chami tells us. That gap is widened by the state’s crowding-out of lending.

Private banks are sitting on cash they do not lend. By the end of 2024, cash and balances with the central bank and other banks accounted for roughly 80% of private-bank assets, while financing represented just 10% of conventional banks’ assets and 12% of Islamic banks’ assets, Barth tells us.

Unlocking that cash takes stability and someone to share the risk. “Lending in an unstable environment turns into non-performing loans and reproduces the crisis instead of solving it,” Kochaji says. He puts NPL ratios between 45-55% at public banks and 25-35% at private ones. Private-sector credit, by his count, is 6-9% of GDP — among the lowest in the region.

Fève sees credit guarantees as the most promising near-term lever. Syria’s Loan Risk Guarantee Corporation signed a cooperation agreement with Jordan’s Loan Guarantee Corporation in July that is a form of cooperation that could produce a useful technical model, but guarantees only scale if Arab development funds or international lenders carry part of the risk.

ICYMI- The Saudi Fund for Development is expected to sign a USD 406 mn financing package imminently to fund projects in energy, health, housing, roads and services delivery — the opening phase of up to USD 1.5 bn in Saudi-funded projects. The Kuwait Fund for Arab Economic Development is also mulling a return to the Syrian market, after a hiatus of more than 10 years in which it limited its financing to internationally-backed humanitarian operations in Syria.

While recapitalization and guarantees has been hailed as a possible fix for lending liquidity, Barth thinks they won’t be enough. “There is a tendency in conversations here to assume that expanding the pool of finance will be sufficient — that if foreign banks enter and capital becomes available, credit will naturally reach smaller businesses,” Barth argues. The problem has always been lending to borrowers with poor documentation and unconventional collateral and more capital in the system does not solve that on its own.

The remedy? Dedicated SME lending facilities backed by partial credit guarantees, and reformed public banks that can take on borrowers that commercial banks will not.

Who gets credit is also a political question. “Firms that have cultivated ties to senior government officials will likely fare best, whether in the banking sector or elsewhere,” Steven Heydemann, professor of Middle East studies at Smith College, tells EnterpriseAM. Chami disagrees — “that era of crony capitalism is gone,” he says.

Big-ticket goes offshore

Big-ticket projects are beyond local balance sheets, and the best Syrian banks can do is join on syndicated financing. Fève expects Gulf investors, development funds, and offshore syndicates to finance them, “with a Syrian bank acting as a junior partner at best.” The biggest reconstruction financing reported so far — a USD 7 bn package for power and airports projects led by Qatar-based Power International Holding — is being arranged by JPMorgan, QNB, and Abu Dhabi Commercial Bank.

GO DEEPER- We walked through the Shahba Bank acquisition and the foreign-capital pipeline in our May Lede on Syria’s banking recovery.

Where do we go from here

Gulf strategic money is the route that has started moving. Estithmar Holding’s financial arm completed its purchase of 48.68% of Shahba Bank in September. Most private banks are joint ventures with a regional strategic partner, Chami says, and those partners are also his answer for reconstruction: Project finance “requires a much larger capital and this is where the strategic partner could come in.”

Private banks could add capital fastest, if conditions allow. Kochaji sees local shareholders, Gulf inflows, or hybrid instruments such as convertible bonds as the banks’ best shot. “This path is faster and part of it can be achieved within 12-18 months if monetary stability is present,” he says. In contrast, the capital market route is not expected to deliver. Fève sees little appetite from local shareholders for rights issues, and Chami says banks need a new minimum capital rule — replacing a legal floor of about USD 1 mn — with “a realistic number and timeline” to plan their raises.

State-bank restructuring is the slowest route, but the most critical long-term. Oliver Wyman’s Qatar-backed review of the six public banks has finished only its first phase, Fève tells us. Options recommended by the US-based consulting firm include joint-stock conversion, privatization, and partnerships with Arab or foreign banks. Among them, Barth favors joint-stock conversion: “That lets the state preserve ownership and maintain the bank’s development mandate.” The specialized banks, he says, “were created to finance producers whom commercial lenders overlook.” Kochaji would move bad loans into a separate portfolio and inject capital “from the state or through sovereign debt instruments.”

Some restructuring is already underway: The Syrian government issued Decree 70 in March, waiving interest and penalties on defaulted state-bank loans. Barth reads it as a debt-recovery measure, adding that it could help clean up bank balance sheets. What it won’t do, however, is that “it won’t jump-start lending, because it neither injects fresh capital nor resolves the pre-war weaknesses in borrower assessment and lending practices,” he adds.

What’s next: The first domestic sukuk, due in 4Q 2026 but possibly slipping to 2027 according to Fève, will show whether buyers beyond state banks turn up — and heavy bank participation would itself be the warning sign, not the fix. Also watch for a decision on the state banks and a new minimum capital rule. Until banks are recapitalized and their liquidity freed, Kochaji warns, they “remain spectators of the economy rather than its financiers.”