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Iraqi Banks Struggle with Limited Services and Capital

Reuters reports that it’s a tough road ahead for Iraqi private banks required to raise their capital to boost business as they battle against decades of state dominance to win a slice of the asset base from government-run enterprises. It blames a poor credit culture, the lack of a modern banking system, and the dominance of state banks, for slowing development in the financial sector. Many Iraqis remain do not have bank accounts, and there are concerns that most business in the country is done through direct cash dealings, which have security implications.

Economist Salam Smeism commented:

“We still have the remains of a central management which is still forcing government offices and ministries to deal with government banks exclusively, and consequently all the deposits are going into state banks.

“Where is the benefit in having the money go from the government to the government? We need to develop the private sector.”

Executive director of the Iraqi Private Banks League, Abdul-Aziz Hassoun, said Iraq nationalised its private banks in 1964, paving the way for dominance of the financial industry by the country’s state banks. After the U.N. imposed economic sanctions in 1991, private banking once again opened up in Iraq. The OPEC country has seven state-owned banks, 23 private banks and eight Islamic private banks, according to the central bank website.

But much of the private banking activity is limited to deposit services and personal lending. Its two main state banks, Rafidain and Rashid, have a virtual monopoly of most assets. Both are undergoing restructuring to eliminate debt racked up following years of war and economic sanctions, according to Reuters.

Hassoun, whose banking league is an independent organisation to support private banks, said government banks held 87% of the country’s deposits while private banks had 13%. He said state banks’ government sector deposits amounted to 30 trillion Iraqi dinars and private sector deposits were at 11 trillion Iraqi dinars. Private banks have 6 trillion Iraqi dinars.

According to Iraq’s central bank, there is no law forbidding the private banks from financing government projects whether through loans or through the purchase of government bonds. The finance ministry two years ago prohibited government institutes from dealing with private banks as a way to curb corruption and misuse of funds, but the central bank considered the move an “injustice” against the private sector, said Mudher Kasim, a central bank advisor.

“The government institutions should have the right to choose the good private bank, but not to boycott all private banks. There are good private banks,” Kasim said.

The finance ministry is now in talks to help bring the private banks deeper into the financial system in response to demands from the World Bank and the International Monetary Fund.

“They want us to direct our attention to the private sector. So our plan is how to support the private banks in all fields.” said Fadhil Nabi, the deputy finance minister.

In 2006 Iraq decided to revamp its financial system, particularly through a restructuring of Rafidain and Rashid, re-organising the central bank’s supervision department and developing the private sector. Both the World Bank and the IMF agreed in 2009 to help advise and implement the plan although progress has been slow. Rafidain bank has $28 billion in external and internal debts, while Rashid has debts of $1 billion. Most external debts were racked up by the government during Saddam’s time.

Part of the plan is a capital-raising scheme for private banks to boost capital for each institution to $213 million by June 2013, which is also expected to spur some consolidation within the sector. However, industry officials say while raising capital will aid private banks, more needs to be done to modernise Iraq’s financial system to open up banking for private banks.

“Our banks are lagging other banks and they cannot deal with the international and world banks because we do not have a full electronic system,” Nabi said.

Only eight private banks offer ATM machine and credit card services. Interbank and international payments do not exist, a worry for foreign firms seeking to invest in Iraq and help with its reconstruction.

The central bank is working with the U.S. Agency for International Development (USAID) to create a single gateway for interbank and international payments.

“Imagine a foreign investor coming to Iraq and carrying money in a suitcase,” said Smeism. “We should have a developed banking system to ensure capital flow and movement operates in the same way as the rest of the world.”

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