Dr. Mohammed Imady – The Birth and Growth of the Damascus Stock Exchange: A Labor of Love
Originally published 24 October 2010
Love is not a word usually associated with stock markets but the conception, birth and growth of the Damascus Securities Exchange (DSE) has been nothing short of a labor of love for Dr. Mohammed Imady, former Minister of the Economy and now Chairman of the Syrian Commission on Financial Markets and Securities (SCFMS).
Imady first proposed the creation of a stock market in the 1970s when the Syrian government began to implement economic and fiscal reform. Thirty six-years later, the year and a half old Damascus Securities Exchange is poised to become an integral part of the Syrian economy.
Imady knows that bringing state of the art public investing to an ancient, vibrant trading culture is an arduous task, and has exerted his considerable influence to develop an environment that will keep the Damascus Securities Exhange, as Caesar’s wife, above suspicion. Emphasis is on controlled growth, a clear hallmark of Imady’s influence of deliberate progress at a slow but steady pace. Imady has also been a vocal advocate for strict regulation of the nascent bourse to monitor its development in a controlled environment.
Imady hails from an old and distinguished family. Their service to their country dates back, by tradition, 600 years and includes numerous judges and scholars. Like his forebearers Imady has been part of the economic development of Syria for most of his adult life. I met with him last October at the Exchange, currently housed on the outskirts of the city and again this spring at his home in the heart of Old Damascus.
While walking home from lunch one day on a lane that snaked through the Old City of Damascus, I saw the true measure of Dr. Imady’s influence on his country’s growth. Our narrow, dusty, cluttered and well-used byway ran close by the street called Straight, built by the Romans. One could imagine Saladin, the great warrior of the Crusades, exiting a heavy, carved cedar doorway, nodding to chattering school children in jeans and T-shirts.
Imady, his wife Elaine and I, were stopped by two gentlemen who immediately shook Imady’s hands and began an animated conversation. Imady turned his full attention to them, giving no impression that he had been interrupted or that he had anywhere more important to be. After a short, but engaged discussion, he bid the gentlemen farewell and said with a smile that they had been making sage comments on the state of the economy.
“Colleagues from the Commission?” I asked.
“No”, he replied, “I have no idea who they were.”
Spend any time with Imady and it becomes clear that the birth of the Damascus Securities Exchange has sent ripple effects out into the greater Syrian economy. According to Imady, investors hope that local liquidity will increase in a new environment that taxes earnings less harshly in exchange for disclosure. Imady and his team anticipate that new disclosure rules will encourage companies to borrow locally as opposed to the current trend to go abroad in search of privacy. Tax revenues will increase as compliance increases. New companies will have incentives to borrow capital and grow, welcoming an investment-savvy younger generation.
WRR: Syria has such a long and vibrant history as a trading nation. Was there an existing exchange that was the germ of the Damascus Securities Exchange?
strong>Imady: Indeed, Syria had an informal, unorganized stock market in the forties and fifties. There were a large number of joint stock companies, but nationalization of these companies, which started in Egypt 1960 under General Abdel Nasser put an end to this. On March 8, 1963 with the Ba’ath revolution, all companies were nationalized.
WRR: At what point did the government begin looking into creating what became the Damascus Securities Exchange?
Imady: As far back as 1974, I proposed to the government a new investment promotion law. It was not accepted then, but, as a result, in 1978 two joint stock companies were created: one is Transtour and the other is the Sham Touristic Hotel Company. Transactions of buying and selling shares were done in the dealing offices of these companies. At the time, I thought that since we have stocks, we should have a stock market. But it was too early for this to be accepted.
In 1986, a year after I returned from six years as an advisor in Kuwait, I again proposed another investment promotion law, but only the agricultural sector of it was accepted it. According to this law, several public/private joint stock companies were established and I renewed the call for a stock market.
In 1991, I proposed a comprehensive investment law and it was accepted. As a result a large number of joint stock companies were established. After this law went into effect, I suggested two alternate proposals to set up a stock market: one managed completely by the private sector and the second completely by the government. Only the second proposal was sent to Parliament, but was neither discussed nor passed.
The present Minister of Finance, Dr. Mohammed Al-Hussein, was, at this time, a member of the Baath Party Leadership, a very important post. In 2005, Dr. Al-Hussein established a committee that drafted the legislation for establishing the Syrian Commission on Financial Markets and Securities. One article of this legislation stipulated that the board had to present a law creating a stock market within one year of its inception.
WRR: You had been retired when you were asked to spearhead the development of a stock exchange. What was your reaction to being called back into harness?
Imady: At first, I had mixed feelings about returning to work because in 2005, I was asked by the Prime Minister to come back as an economic advisor. Since I had been a minister, I found it difficult to return as a mere advisor to the Council of Ministers. I said I would be happy to work from my home and give any advice needed. However, shortly after this, Dr. Al-Hussein, who was now Minister of Finance, called me several times and said, “We need you and your good name to head the soon-to-be-established Commission. You are well-known within the country and in the Arab world and abroad and this will give confidence to the new stock market.”
He said I would be appointed Chairman of the Board of Commissioners and Executive Officer. I refused several times, but then, since this had been my dream for years, I finally thought – why not – and accepted.
WRR: How did you go about gathering the team you worked with? What disciplines did you seek out? What experience did you want your colleagues to have?
Imady: After all my years as minister, I knew many able people in the country and what their strong points were. I picked the best people available for my board: one is a lawyer and a Professor of Law at Damascus University and another is a Professor of Accounting at Damascus University. I chose the Deputy Minister of Economy, the Deputy Minister of Finance and the Deputy Governor of the Central Bank to facilitate coordination with these bodies. The last member of the board is an expert in the Arab Monetary Fund. I also hired two former colleagues: one from the Ministry of Economy who was once my right-hand man in drafting the previously mentioned legislation; and the other, a former minister, is a man who excels in administration. I then held a civil service exam for graduates in law, accounting, management, translation and international affairs, which 650 people took and from which I hired the twenty with the highest marks.
WRR: What was the thought process that you and your team went through to begin the project? Did you personally have some instinctive “must haves” and “must avoid at all cost” from your years of observing the successes and failures of other countries?
IMADY: Since I had drafted several previous stock market legislation, I felt confident that I had some experience in this field. Next, I looked at our Arab neighbors and their experience with stock markets. I found that the Jordanian and Omani stock markets were the most advanced. I then tried to take the best items from all the Arab countries’ legislation in order to organize our commission and to draft the many regulations and the legislation for establishing the Damascus Exchange.
We invited a team from the International Monetary Fund who stayed for a week and gave us their remarks. We incorporated what we felt was beneficial. Finally, we sent all the regulations we had drawn up to the Prime Minister and I was called to defend them in front of the Council of Ministers. All were accepted without any change and we started working as a commission.
WRR: Where does one begin?
Imady: Our first business was to set the regulations for the working of the commission, such as how to license intermediary and brokerage companies; how to accredit accountants; how to authorize IPOs; how to supervise joint stock companies; and how to study the disclosure of the companies. We also set regulations for supervising the operation of the market, the dealing of the market, the working of the brokers, etc.
After the stock market law was passed, we suggested the appointment of the members of the board of directors of the DSE from people who, in one way or another, had experience dealing in stock markets outside the country as well as some important businessmen who had headed some of the chambers of commerce in Syria. The biggest obstacle that faced them was how to get the electronic program for the market. Because we are on the United States Black List, many countries would not sell us the necessary technology.
WRR: How did you resolve the technology issue?
Imady: After the DSE board members were appointed, we had a joint meeting of the Commission Board and the DSE Board. We received bids from countries willing to work with us. To facilitate their work we also gave them the Commission’s expert in electronics and I sent my deputy to be the executive director of the market. I also turned over the Commission’s headquarters to the DSE because the building had a big hall suitable for the dealing room. This meant the Commission had to move and, as it turned out, we moved twice. Even now, we are in a temporary location while awaiting the completion of our new building.
WRR: What were the “must haves” and must avoids in your legislation?
Imady: The draft legislation incorporated certain conditions to ensure the DSE would be an investment market and not a gambling market, a market to help people invest their money in companies and make it easy to buy and sell. I stipulated that no one can buy and sell in the same day and the price of a share cannot rise more than 2% a day. Some people attacked me for this because they said this isn’t a stock market anymore – there is no risk. I took this stand because we are a developing country and we need to encourage the establishment of joint stock companies. We need a new investment initiative and we want people to feel safe to invest in the DSE.
When I was in Kuwait there was a disastrous failure of the Menakh Stock Market and many people lost everything. In Jordan and other Arab countries there have been demonstrations by citizens protesting the loss of their money. Of course, most shocking is the recent world-wide market failure. I have never been a revolutionary and am by nature a cautious person. I take the responsibility of dealing with the money of other people money very seriously. I never forget that what happens to their money will affect their lives.
WRR: As the project progressed, how did your thinking evolve about the approach and the direction you wanted to take regarding your neighbors?
Imady: After some time passed, we passed legislation that allowed citizens of other Arab countries as well as foreigner investors to participate in the DSE. However, the Central Bank stipulated that these investors must keep their money in the market for a year or pay a fine.
Some changes were made in the Commission in the light of a study made by an expert from the IMF. We adopted her suggestion that the Commission should directly impose fines on companies who break the law without having to resort to the courts. This has now been enacted into law.
In 2007, I took part in establishing the Arab Federation of Financial Commissioners on Securities and was elected as the chairman for this year. I signed bi-lateral agreements for cooperation with Abu Dhabi, Iraq, Turkey and Russia; and am in the process of signing with Northern Cyprus and other countries. I brought delegations from different Arab countries to give training courses on financial markets and securities to my employees. We also held several conferences for my employees, under the auspices of the Prime Minister, in which many important experts gave lectures and answered questions.
WRR: What challenges do you see to bringing the next generation of investors into the market?
The challenge is for us to make the stock market successful so as to demonstrate to young investors that it is an attractive option.
WRR: Do you see a trend among young people to expand established concerns or become entrepreneurs?
Imady: Certainly there is such a trend. Young Syrians are primarily interested in starting their own businesses. Investing in stocks is secondary wealth strategy.
WRR: Do you see the younger generation as more willing to consider taking their companies public?
Imady: For the established companies, modifications need to be made in the income taxation laws to encourage this. Also, the rules of going public need to be changed so that companies can add to their value not only the tangible assets, but also the intangible assets from the beginning. However, I feel the basic problem of going public is the fear the owners have of losing complete control of their companies as well as a fear of transparency. They do not want to disclose their finances. On the other hand, for new companies these same fears do not apply and there is hope that they will be willing to go public.
WRR: Do you see the population having the critical mass of disposable income to allow them to consider the stock market as a complement to more traditional means of growing and preserving wealth?
Imady: Yes, but the stock market now with only a few companies, is limited. It must be enlarged before it will attract a large number of investors.
WRR: Do you see that there is the liquidity available to encourage investing?
Imady: Yes, and the proof is the total deposits with banks.
WRR: What is the outlook for more companies becoming listed?
Imady: We are conducting discussions with 12 companies to iron out the obstacles to listing them on the stock market. We also have decreed that all existing public joint stock companies must apply for listing within one month and that newly established public joint stock companies must apply for listing within three months. In addition, we have modified the parallel market so that newly established companies can list their stock there.
WRR: Do you see articles about opportunities in Syria in various American newspapers as a sustainable indication of the interest of the West to reach out to new markets?
Imady: There have been a very large number of Western CEOs who have been to Syria recently. However, it is not westerners who are actually starting businesses here yet although large numbers of Turks and Arabs have already done so. Westerners will not really come to invest here until America lifts its sanctions against Syria.
WRR: Now that the DSE is a year and a half old, what adjustments have been made to its operations? For example, The Oxford Business Group (OBG) in their publication The Report Syria 2010, mentions that trading hours have been extended and that five days a week is expected by the end of 2010. Is this still on track?
Imady: The dealing days are still four a week. Increasing them is under discussion, but there is no hurry for this since it would entail increasing the market prices of the stocks another 2% a week.
>WRR: Articles have expressed the opinion that certain restrictions, such as the 2% cap on daily share price movements, need to be loosened to encourage more risk taking. You have said that the timing was not right for that. What are the general benchmarks you see as key in assessing the appropriate timing for rule changes?
Imady: The World Bank delegation reviewed our system and suggested we increase the 2% to 3% as a first step. We did this and the DSE Executive Director begged us to stop this increase and to revert to the 2% because of limited supply and great demand. This reinforced my confidence that the 2% is correct. Even with the 2% in effect, the market price of the stock of one of Syria’s Islamic banks jumped to five-fold of the nominal price although the yearly return does not exceed 5%. Other companies faced the same situation. People want to get rid of their money and buy stock, but no one wants to sell their stock and the number of stocks is still limited.
WRR: You had mentioned that there has been some easing of the rules governing going public, cutting through the red tape to speed the process. However, you thought that the greatest emphasis still needs to be on companies being well capitalized. Could you please expand on that?
Imady: The Commission made changes in the listing requirements of the parallel market in order to allow all public companies to be listed that have paid up their complete capital and which have more than 50 shareholders. As a result of this, we now have 16 listed public companies. Three more have been agreed upon, but they still must complete certain requirements.
WRR: Solid capitalization of companies and emphasis on reinvestment into infrastructure and job creation has been one of your critical aims. How has this been encouraged?
Imady: The government issued a new law asking banks to increase their capital to $200 million for commercial banks and to $300 million for Islamic banks. The Commission presented a draft legislation to establish investment banks with a large capital in order to carry on infrastructure projects, help create companies and to carry on financing “build, operate and transfer” projects. The government gives a private company the right to build a bridge, for example and to operate it for a time to recover costs and make a profit. After a specified time, the company transfers the project to the government.
WRR: You had mentioned that right now 60% of the companies listed are banks. Clearly more diversification is needed. Articles by OBG and others point out that there have been tax incentives given to encourage companies to “clean house” financially. What other efforts are being taken to urge businesses to meet the standards for listing?
Imady: Unfortunately, banks still constitute the majority of the listed companies. We have suggested certain incentives to encourage family companies to go public, but it seems that whatever we do they are still reluctant for tax considerations. However, we have suggested setting up a committee to study all sides of the problem and to have this proposed committee then submit its recommendations to the Ministry of Finance.
WRR: What innovations is the SCFMS currently focusing on? How is the stage being set for the next year and beyond?
Imady: The Commission has finished connecting electronically to all the licensed broker houses in order to facilitate getting the information and data we need. We made changes in the liquidity requirements and changes in the requirements for accrediting brokers in order to include more Syrians than before. We have organized many seminars on different issues of which the most recent one was on mutual funds. We had been working on introducing changes in the draft system of mutual funds that we outlined a year ago. However, in the light of this seminar and the breaches the experts talked about that occurred in America and other places, we are going to reconsider the whole matter of mutual funds more carefully.
At the beginning of the year, I was elected Chairman of the Federation of Arab Security Commissions for this year. Also, the Syrian Commission joined the International Organization of Securities Commissions during their annual meeting in Montreal and we signed a memorandum of understanding with Turkey, Russia the Emirates and Iraq.
E. E. Whiting brings us onto the floor of the Damascus Stock Exchange: Growing Pains – The Damascus Stock Exchange and Its Second Year.
An attorney by profession, E. E. Whiting has freelanced for several years writing on a variety of topics from estate planning to travel to her personal favourite, food. She currently lives in Princeton, NJ and escapes to odd destinations at the drop of a hat. A native of Maine, she lived in Wales while attending college and frequently returns to visit the places few tourists go. She was introduced to Syria by her friend, the biographer Mary Lovell, whose books on Jane Digby and Sir Richard and Isabella Burton kindled Mary’s own love affair with that country years ago. A graduate of Mount Holyoke College with an MA in Mediaeval Studies, Whiting indulges her fascination with history on all her travels.