BEIRUT: While some Western banks are thinking about setting up shop in Iraq, Lebanese banks have been on the ground for the past five years – and more are lining up to get in.

Coming from a country with a long history of banking and conflicts, Lebanese have done well in hazardous business environments, both at home and abroad. As a result, Lebanese banks are often the first ones to enter a war-torn country, as was the case in Sudan.

Today, Lebanese banks are leading the foreign entry into Iraq. Unlike some other new arrivals, Lebanese banks are easing into the country by starting out in the much safer Kurdish north and then later opening in the capital of Baghdad once they’ve established strong ties in the country.

“Americans don’t tend to split the risk between Erbil and Baghdad, but we’ve managed to differentiate between Kurdistan and the rest of Iraq,” says Ramzi Dib, chief of international banking division at Intercontinental Bank of Lebanon (IBL), the first major foreign bank to begin operations in Iraq in 2006, with a representative office in Erbil, the provincial capital of Iraqi Kurdistan, where they established a full-fledged branch a year later. 

Their minimum capital requirement for an initial branch was $7 million and then $500,000 for the second branch. Dib says their deposits total approximately $40 million, but he expects that to increase significantly in the coming months, as their Baghdad branch, established in late 2010, is still relatively new.

“We went to Erbil first for security reasons. When we saw the situation was greatly improving in Baghdad, we chose the right moment to open there. Now we want to expand to Basra.”

Following their success in Erbil, both IBL and Byblos banks opened branches in Baghdad in 2010. Bank of Beirut and the Arab countries (BBAC) opened its first Iraqi branch in Erbil in 2010. At least three other Lebanese banks are currently looking to expand into Iraq: Credit Libanaise, Fransabank and Banque Libano-Francaise.(BLF)

Other foreign banks to have opened in Iraq include the Bahrain-based Arab Banking Corporation, the Turkish Agricultural Bank, Bank Melli Iran, and the Abu Dhabi Islamic Bank, all in Baghdad; while the Bank Al Baraka Turkish Solidarity Contribution has a branch in Erbil. This means that if the three prospective Lebanese banks move in, then Lebanese banks would constitute the majority of foreign banks in Iraq.

“We go out of Lebanon to diversify, and we see a lot of potential for return,” says Mona Khoury, head of the international division at Fransabank, which has applied for a license to open branches in Erbil and Baghdad, and which has expanded in recent years to Syria, Algeria and Belarus.

She adds that Iraqis welcome Lebanese banks because “we do business there the way we do business here – conservatively.”

Fransabank’s decision to enter Iraq came after years of doing business with Iraqis in Lebanon and learning about their banking sector. “We had discussions with Iraqi banks about partnering with them, but in the end we decided to open our own branches,” Khoury said.

To date, no Western bank has opened a branch in Iraq, even in Kurdistan, whose scenery and stability has made it an emerging tourist destination for foreigners. Instead, the London-based HSBC, one of the world’s largest financial institutions, owns a 70 percent share in Dar Es Salam, a private Iraqi investment bank. Qatar, Kuwait, Jordan and Bahrain own large shares in Iraqi banks.

“For the time being Western banks seem content to enter Iraq indirectly, via equity stakes in local Iraqi private banks or through a consortium with the state-owned Trade Bank of Iraq,” says Geoffrey Batt, a New York-based fund manager who has been doing business in Iraq since 2008.

“Westerners are more likely to have a distorted sense of the security situation, and I am certain security concerns figure prominently in their decisions. The financial crisis had deep and far reaching psychological consequences –Western banks are much more risk averse, and Iraq is on the extreme end of the risk spectrum.”

Meanwhile, the Lebanese are no strangers to adversity – a quality that has taken bankers and entrepreneurs to some of the least developed and secure parts of the world to do business, where they not only serve local customers but also the large Lebanese diaspora communities. 

In Iraq, among the major Lebanese businesses are the Rotana Hotel, Dar Al-Handasah, Cimenterie Nationale and Khatib & Alami.

	"There’s a certain affinity between Lebanese and Iraqis, more so than other Gulf countries," says Assem Seifeddine, associate dean of the business school at the American University of Beirut.

“Now, Lebanese banks are full of liquidity and they don’t know what to do, so there’s pressure to go outside,” he said, adding that Lebanese banks were driven “by business opportunities, not politics. It doesn’t take a genius to know the difference between Baghdad and Erbil. Yes, it’s one country, but they’re very different environments.”

But the caution of many international banks might be justified, especially when it comes to opening up branches in Baghdad. Even with the fall of Saddam and the subsequent opening of Iraq’s economy, bankers still complain of poor infrastructure – including poor phone lines, slow Internet and restrictions of movement outside Kurdistan – and lack of legal protection.

“It’s not straight forward to have recourse,” says Walid Kazan, head of the international network division at Byblos Bank. “The laws although in place are difficult to enforce in the current prevailing situation."

Ian Bremmer, founder of Eurasia Group, a political risk consulting company, said: “Unlike financial institutions in emerging markets, Western banks are particularly sensitive to security risks. For a few years operational risk in Iraq was unacceptably high but security has improved across the country.”

“Banks are beginning to reconsider and Citi[bank] has recently decided to set up operations in Iraq; others are starting to reconsider. This will be an incremental process. International banks don’t face substantial restrictions, but corruption remains a significant issue.”

Still, banking in Iraq has come a long way in a short period, thanks in large part to Lebanese banks, which have raised the banking standards in the country in a relatively short period.

“We’re trying to educate them about making good decisions about their money so that they keep it in Iraq,” says Atira Abdel Kader, the Iraq country representative for Byblos Bank, which has been instrumental in reforming Iraq’s Central Bank through workshops and training seminars.

In fact, Lebanese banks were already engaged in Iraq just over 10 years ago, when the government of Saddam Hussein started a limited privatization process while still under sanctions. Lebanese banks acted as a correspondent to Iraqi banks that didn’t have direct access to the outside and also opened accounts for their Iraqi clients in Beirut, giving them a 10-year head start on most other banks now contemplating entry into Iraq.

“There’s a certain affinity between Lebanese and Iraqis, more so than other Gulf countries. We’re both cultured and educated,” said Seifeddine, the AUB business dean, recalling a time when both countries were known more for their cultures than their conflicts.

“If you go back to the 1950s, most of the tourists in Lebanon were Iraqis. We go back a long way.”