An overview of the Banking industry in Iraq
The invasions of Iraq in the 1990’s the first Gulf war and followed by the economic sanctions thereafter have blocked the Iraqi banking industry to progress with the rest of the world.
Al-Rafidain Bank and State owned Al-Rashad Bank have 90 percent of the Iraqi banking sectors deposits and assets and all the previous regime debts rendering virtually insolvent. Iraq now has 32 banks, including seven from the public sector, 21 traditional banks, and four private Islamic Banks. These private banks serve as the foundation to Iraq’s financial infrastructure and the cornerstone of its newly emerging economy.
The deposits at these banks total $9.8 Billion dollars from private sectors, public sectors, and Iraqi Central Government. The Banks have an overall paid capital of 872.8 Billion Iraqi dinars, equivalent to $587.7 Million US Dollars.
The banking sector in Iraq still faces problems from previous sanctions and since the invasion in 2003. The banking owners and CEO’s have attempted to promote the Iraqi banking industry. However, setbacks have occurred due to the decreasing security situation in Iraq.
This has caused the Iraqi banking industry to fail with obtaining new up to date technology and banking industry standards. The Iraqi banks currently have several weaknesses that are stopping and slowing the modernization of the Iraqi Banks to position themselves in the 21st Century.
1. Lack of technical capabilities.
2. Inability to offer advanced services.
3. Familial domination at most of the banks steeped in suspicion and driven by the desire to maintain a monopoly.
4. Absence of overall strategies and plans brought about by the lack of fresh investment capital.
Each bank location in Iraq currently serves 46,632 persons, before demographic dissection (0 to 16 years old), and yet still a ratio unheard of in the modern world.
A number of Arab and Western banks have obtained licenses from the Central Bank of Iraq (CBI) allowing them to open branches. Several foreign banks have entered into partnerships with local Iraqi banks.
Bahraini Bank owns 51 percent of Baghdad Bank
HSBC owns 70 percent of Dar Al-Salam Bank.
A Bahraini private Bank owns 49 percent of the Iraqi Commercial Bank.
A Qatari Private Bank owns 75 percent of Al-Mansur Bank.
National Bank of Kuwait (NBK) owns 85 percent of Credit Bank.
The Jordanian Import and Export Bank own 49 percent of Al-Ahli Bank (Iraq Civil National Bank).
A Private Saudi/Iraqi owns Tigris and Euphrates Bank.
The CBI is allowing more foreign banks into Iraq pending license review and approval. The CBI has stated in the past that more foreign Banks will be opening branches inside Iraq in the near future granting more favorable status to those international Banks who partner with local Iraqi Banks.
Foreign Banks bring more to the table then start up capital to the intended Iraqi Bank. They bring expertise and knowledge and are able to train the Iraqi counterparts in modern Banking.
Another noticeable weakness when dealing with an Iraqi Bank is the lack of computer Banking skills and the inability to conduct banking business in the English language. Considering the number of potential foreign investors and a large portion who would be English speaking and attempting to invest in either the Banking sector and or the Iraq Stock Exchange (ISX). English speaking bank employees and managers would greatly enhance the banking experience and gain more customers.
The Iraqi Banks are working on training their bank employees in modern Banking technology and learning the English language. This is sometimes published in local media outlets has recent as a few months ago when over 20 employees from one Iraqi Bank attended a workshop learning new Banking techniques in Bahrain.
Other banks are training employees and are not publishing this due to security reasons for their employees and for competitive reasons. Keeping in mind that the security situation dictates the training times and locations. If the Iraqi Bank were able to send their employees out of the country to receive their training then this would leave the bank with limited staff to continue with day-to-day banking operations in Iraq. Very few Iraqi banks are in a position to send employees abroad for training; most training is conducted in country.
It is widely known that Iraqi business owners have suspended their business activities and no longer ask for loans and at the same time Banks hesitate to extend loans as a result of the insecurity in the country and the risk of loans defaulting would be high. Extremely high default rate exists from loans granted to high ranking members of the Baath Party during the tenure of the previous regime.
The interest rates on banking loans are 12% to 14% and most banks deposit their assets in the Central Bank and obtain high interest rates daily and short-term interest rates on unencumbered monies.
Some banks extend personal loans and that the Al-Rafidain Bank has extended 157 Billion Iraqi Dinars in personal loans and also other types of loans are extended to Iraqi’s. Loans are also extended to the Industrial sector and other sectors including the real estate sector. The Real Estate bank has been recently reactivated and is extending loans to Iraqi’s for housing purposes. Though relatively inactive now this newly reorganized government bank should see a significant rise in its lending activities as the Iraqi government disburses newly funded housing grants.
As soon as the new Investment Law is enacted, the Iraqi government will invite international companies to carry out large construction projects. In October last year 11 Iraqi Banks form a company called the Iraqi Bank of Development to extend loans for small and medium projects and is very hesitant to extend loans at this time due to the deteriorating security concerns.
Recently the Central Bank of Iraq (CBI) was considering raising the capital to start a new Bank up from 50 Billion Iraqi Dinars to an undisclosed amount and now has placed this decision on hold. The CBI is attempting to encourage bank mergers between Banks.
Bottom line is that Banking in Iraq is dependent on the security situation getting better so the industry can have the opportunity to be on par with there Arab neighbors. The Iraqi banking sector is ripe for the picking for the investor because the industry is so severely undervalued.