In a move that has sent shockwaves through Syria’s already fragile financial sector, the Central Bank of Syria issued a directive on 22 September 2025, compelling commercial banks to fully provision for losses tied to Lebanon’s ongoing financial collapse. The directive, leaked to the public via a Reuters report on 21 October, orders Syrian banks to reclassify their frozen deposits in Lebanon—totalling over $1.6 billion—from balance sheet “assets” to outright “losses”.
Banks have been given six months to submit restructuring plans or raise fresh capital to cover the impairment. Institutions that fail to comply face the threat of regulatory sanctions, including forced liquidation or bankruptcy.
This development arrives at a perilous moment for the Syrian economy, which remains burdened by the legacy of civil war, crippling international sanctions, and a recent political transition following the fall of the Assad regime. With total assets of Syria’s private banking sector valued at roughly $4.9 billion, the exposure to Lebanon represents more than one-third of the sector’s worth—underscoring the profound financial interdependence between the two neighbours.
Historical Context: A Long-Standing Economic Symbiosis
The roots of this crisis lie in the entwined economic histories of Syria and Lebanon. For decades, Lebanon functioned as Syria’s “external financial pocket”, offering a route around Western sanctions and acting as a haven for Syrian capital. Under the Assad regime, Syrian banks channelled billions into Lebanese institutions, drawn by access to dollar liquidity and relative financial stability.
This dynamic deepened during Syria’s civil war (2011–2024), as Syrian financial institutions lost direct access to global systems. Lebanese banks became an indispensable conduit for trade, remittances, and capital storage. By some estimates, Syrian holdings in Lebanese banks reached as much as $30 billion by 2019. Much of this was held informally, complicating efforts to quantify the full extent of exposure.
However, Lebanon’s own financial collapse—sparked in late 2019 by unsustainable debt levels, corruption, and a central bank-fuelled Ponzi-like scheme—upended this arrangement. The collapse resulted in a sovereign default, stringent capital controls, and the freezing of deposits. Syrian funds, many denominated in US dollars, were either trapped or forcibly converted into Lebanese pounds at deeply unfavourable rates—a process dubbed “lirafication”.
The repercussions for Syria were immediate and severe. Lebanese capital controls triggered liquidity shortages inside Syria, fuelling inflation and accelerating the devaluation of the Syrian pound. Businesses dependent on cross-border operations faced collapse, while poverty deepened in a country already reeling from years of conflict.
The Directive’s Impact: A Blow to Bank Balance Sheets
The Central Bank’s latest directive mandates that banks treat their exposure to Lebanon as fully impaired, removing such assets from balance sheets and recognising them as expenses. The effect on capital adequacy ratios could be catastrophic. As one Syrian banker told Reuters, the directive could force institutions to “increase capital or restructure their balance sheets”—a daunting task in a country where investor confidence is scarce.
Critics argue this move is far from a routine regulatory correction. Rather, it represents a significant redefinition of financial liability, potentially infringing on property rights and undermining shareholder interests. Forced capital increases could dilute equity and compel asset sales, weakening an already undercapitalised sector.
Regulatory Overreach? Questions Mount
The directive has also raised concerns over the scope of the Central Bank’s authority. In most jurisdictions, central banks regulate monetary policy and ensure financial stability, but mass debt resolutions—particularly those involving international liabilities—typically fall within legislative competence. Syria’s Central Bank appears to have circumvented this process, issuing the order without parliamentary debate at a time when the country’s transitional legislative institutions remain embryonic.
By comparison, even crisis-hit Lebanon has refrained from such blanket measures. A proposed “Financial Gap Law” aimed at addressing banking losses remains stalled in Beirut’s parliament, highlighting the political sensitivities involved. In Syria, however, $1.6 billion has effectively been written off “with a stroke of the pen”, transferring losses from the state to the private banking sector.
The decision is particularly contentious given Syria’s past encouragement of Lebanese banking exposure. For years, the state tacitly endorsed this strategy, portraying it as a pragmatic response to sanctions. Now, banks must shoulder the fallout alone—while the state absolves itself of responsibility.
With Syria eyeing post-war reconstruction and potential engagement with international bodies such as the European Bank for Reconstruction and Development (EBRD), such unilateral financial interventions could prove detrimental. Reconstruction needs are estimated at $216 billion by institutions like the World Bank, yet investor trust is fragile—and this directive may only erode it further.
Hidden Agendas? Suspicions of a Broader Deal
The timing and opacity of the directive have sparked speculation over a possible quid pro quo. Issued in late September but leaked nearly a month later, the move coincided with high-level Syrian visits to Beirut focused on economic cooperation. Some analysts suggest a “loss-swapping” deal may be at play: Lebanese banks clear their books of bad debts, while Syrian authorities present a cleaner balance sheet in preparation for international engagement.
What Syria may have received in return—possibly eased border trade restrictions or informal debt concessions—remains unknown. The lack of transparency has only deepened suspicions. Syrian banks, typically vocal during financial shocks, have remained conspicuously silent. The lone comment to Reuters came from an anonymous source, fuelling speculation of gag orders or pressure from regulatory bodies.
A Financial Earthquake in the Making?
If left unchecked, the directive could trigger a seismic shift in Syria’s banking landscape. Smaller banks may collapse, consolidating power among larger players while restricting credit access for households and businesses. In a country where private sector capacity has been devastated by war and sanctions, such a contraction could stall economic recovery.
Above all, the directive lays bare the fragility of Syria’s post-conflict economy—and the dangers of unchecked executive decision-making in financial governance. For reform to take root, Syria needs transparency, institutional oversight, and equitable distribution of burdens. Otherwise, actions like this risk undermining trust, deepening divisions, and delaying the path to stability.
Marco Olabi is a Syrian economist
This article was translated and edited by The Syrian Observer. The Syrian Observer has not verified the content of this story. Responsibility for the information and views set out in this article lies entirely with the author.
