IslamicFinance.de

A muscular banking sector will make or break whether Iraq is to rebuild and prosper.

Iraq's financial architecture to support a growing, privatised economy is a bottom-up operation. The country remains a cash economy with a thriving black market. Private banks are thin on the ground, lending is sparse and there is no ingrained credit culture.

Local focus

In terms of commercial banking in the country, the landscape is principally local Iraqi banks and joint-venture banks. Products offered are in four main areas: remittances/cash transfers and some foreign exchange; trade finance; commercial lending; and securities and stockmarket trading. Activity in all of these areas is fairly limited.

Lending potential

Iraqi banks do very little lending overall, including commercial lending, preferring instead to invest customer deposits in treasury bills issued by the Central Bank of Iraq, which for quite some time was earning them more than 18% a year and was deemed a safer bet than providing loans. That may begin to change given that the central bank has lowered the interest rate to just under 7%, but it remains to be seen whether the loss of that attractive arbitrage will incentivise the banks to lend commercially and whether the shareholders of the banks, having seen the returns plummet, will put pressure on the bank management or support the management to begin lending.

Private banks that do lend to companies typically do so for a term of up to one year maximum, and only if real estate is put up as collateral (which they value very conservatively); charges can be upwards of 20% a year. Commercial lending, in any case, is a loose term in Iraq as commercial, corporate and private banking tend to be intertwined.

Opportunities knock

Since 1992, 37 private banks have been established in Iraq: 30 commercial banks and seven Islamic organisations. Three foreign banks have representative offices: Standard Chartered Bank (in Erbil), Arab Banking Corp and TC Ziraat Bank (both in Baghdad). The central bank has given preliminary approval to other foreign banks - including Bank Melli Iran, Commercial Bank of Kuwait, Arab Bank of Jordan, Housing Bank for Trade & Finance Jordan and Ahli United Bank of Bahrain - but it is not thought likely that these would open 'independent' operations in Iraq in the immediate future. It was recently announced that the government of Syria is also working on a joint-venture bank in Iraq. Lebanon's Byblos Bank and Bank Audi have presences in Kurdistan.

Making a play

Given the high level of investor interest in Iraq and the increasing levels of capital inflows, an influx of banking players and the introduction of new financial products in a range of areas is a near certainty. The stock market is attracting growing regional interest and investors are seeking ways to enter the equity market through the Iraqi Stock Exchange, which now trades in 39 listed companies in banking, insurance, investment, manufacturing, industrial, hotel and service sectors.