Banks that can’t even cash a check slow Iraq economy

A man uses an ATM machine at a bank in Baghdad March 4, 2012. (REUTERS/Mohammed Ameen)

BAGHDAD: An Iraqi businessman, trying to cash in on the billions of dollars pouring into the country from lucrative oil contracts, complains that his biggest headache is not bomb attacks or sectarian politics but primitive banks.

“Where are the credit cards?” said the businessman, who represents a foreign automobile company in Iraq and declined to be identified because of his dealings with the government. Elsewhere in the Gulf, he noted, credit cards are widely used. “How far away are we from this development?”

His frustration is typical of investors dealing with Iraq’s underdeveloped, bureaucratic and sometimes corrupt banking system, where it can be difficult to perform even the simplest of banking tasks: clear a check.

The lack of efficient banking is holding the country back as it rebuilds its economy after the underinvestment of the Saddam Hussein years and the turmoil that followed the 2003 U.S.-led invasion. Without banks that are integrated into the global financial system, foreign investors outside the oil sector are likely to continue hesitating to commit large sums to Iraq.

The weaknesses of the banking sector are twofold: the dominance of state-owned institutions, which lack modern banking systems, and a plethora of small, privately owned banks that in ways are more akin to family vaults than national financial institutions.

Among Iraq’s more than 45 banks, seven are state-owned and control 85 percent of bank assets or about 42 trillion dinars ($36 billion), said Abdul-Aziz Hassoun, executive director of the Iraqi Private Banks’ League.

“And what do they do? They do not invest the money in the market, they don’t do any banking operations,” he said. “The Iraqi banking system is still suffering from the same problems of 10 years ago. The handful of government banks are just like safes for the government’s accounts, nothing else.”

A report last November by Iraq’s Dar Es Salaam investment bank said Iraq had only about 900 bank branches for a population of about 30 million. By contrast, neighboring Jordan, with a fifth of the population, had over 600 branches, it said.

Bank lending in Iraq amounted to a mere $5.8 billion in the first half of 2010, the report said, citing the latest publicly available data from the central bank, compared to $20 billion for Jordan. The World Bank estimated that banks extended $8.1 billion of credit to the economy in 2010, or 9.8 percent of gross domestic product compared to an average of 55 percent for countries in the Middle East and North Africa.

Most banking activities are conducted by two state institutions, Rafidain and Rasheed. Privately owned banks were nationalized in 1964; they were permitted to operate again from the 1990s, but their business remains mostly limited to deposit services and personal lending.

Deputy central bank governor Mudher Kasim said the state banks’ biggest weakness was their lack of internal networks connecting their branches. They have also struggled with electronic check clearing because they lack an electronic link with the central bank’s payments system, he said.

“These two banks have a monopoly of about 83 percent of Iraq’s banking activities. If we take all the government banks, that figure goes up to 90 percent and their technological abilities are zero,” Kasim told Reuters at his office in central Baghdad.

The Iraqi businessman representing an automobile company said Rafidain had refused to cash his check at a branch other than the one where it had originated. Returning to the original branch would have meant a six-hour car journey. In desperation, he canceled the check and asked for payment in cash.

But carrying suitcases stuffed with cash is risky in a country where bombings, kidnappings and shootings still happen daily. The central bank and Finance Ministry have been hit by bomb attacks in recent years and remain targets. To reach Kasim’s office, journalists had to be dropped off beyond blast walls and barbed wire and go through three checkpoints, pat-downs and bag searches, leaving their mobile phones behind.

“In the end I was obliged to open the company account in a Turkish bank in Irbil,” the businessman told Reuters. Irbil is in the Kurdish north of Iraq, which has enjoyed an investment boom because it is the only part of the country to have largely escaped the violence of the past decade.

A World Bank report said Rafidain and Rasheed banks were “inefficient and both suffer from the legacy of past losses, as well as from performing quasi-fiscal operations” – that is, activities linked to the government’s spending policy rather than their own business interests. The government needs to clean up banks’ balance sheets, boost supervision of the financial system and level the playing field for competition from the private sector, the World Bank said.

Infighting and political wrangling among government agencies makes it uncertain whether the state banks will reform any time soon, however.

“Corruption is rampant in government banks, their activity is weak ... all the wretchedness is there,” said Kasim, whose institution supervises the banking sector. “And nobody can touch it because it’s the government – they are sacred.”

Officials of Rafidain were not available to comment, despite several attempts to contact them.

Privately owned banks tend to be outfitted with more modern technology such as ATM machines and equipment to handle credit cards. But they are generally small, family-oriented outfits that do not have large amounts of capital to handle a wide range of business or expand across the country.

The central bank laid out a three-stage program in 2009 for banks to raise their capital; by June 2012 each bank will need to boost its capital to $128 million, and a year later to $213 million.

In a sign that some banks may have difficulty reaching the minimum capital requirements, the central bank said this week that it had placed privately owned Warka Bank under guardianship to supervise it through an insolvency process.

However, most banks are likely to raise the necessary capital quite easily, often by using retained earnings, bankers said. The World Bank said late last year that while “several banks have questionable financial strength,” most banks including Rafidain and Rasheed had plenty of cash and the banking system as a whole did not seem to face major risks.

The gradual entrance of foreign banks into Iraq may help to develop the industry. Since early 2006, several foreign banks have acquired stakes in local banks, including British-based HSBC in Dar Es Salaam Bank, Qatar National Bank with Mansour Bank and National Bank of Kuwait with Credit Bank.

Banks from Lebanon and Turkey, both of which have strong trade ties with Iraq, are due to start operating in the country by this June, Hassoun said. These are Fransabank, Banque Libano-Francaise, Lebanon & Gulf Bank and Turkey’s Isbank, he said.

The hope is that the foreign presence will increase Iraq’s access to international markets, luring more foreign investors and banks. “That strengthens financial integration with the world, strengthens trade, the investment environment,” Kasim said.

He said the central bank was in the early stages of reforming banking laws to include separate legislation on Islamic banking, as well as a clause that would impose mergers on institutions that did not hold a minimum amount of capital. Islamic banking, which operates under religious principles such as bans on interest and monetary speculation, did not exist under Saddam; Islamic banks now operate in Iraq, but there is no specific law governing them.

“The banking law has to be improved because as it stands now, it’s for a previous era,” Kasim said.

This is a lofty goal, however, since Iraq’s legislature has been paralyzed due to squabbling among rival political parties, hindering the passage of much legislation.

And even if banking laws are reformed, state banks are restructured, many foreign banks enter Iraq and small, privately owned banks merge into bigger ones, it may take some time to create a truly service-oriented culture in Iraqi banks.

A version of this article appeared in the print edition of The Daily Star on March 08, 2012, on page 5.




Your feedback is important to us!

We invite all our readers to share with us their views and comments about this article.

Disclaimer: Comments submitted by third parties on this site are the sole responsibility of the individual(s) whose content is submitted. The Daily Star accepts no responsibility for the content of comment(s), including, without limitation, any error, omission or inaccuracy therein. Please note that your email address will NOT appear on the site.

Alert: If you are facing problems with posting comments, please note that you must verify your email with Disqus prior to posting a comment. follow this link to make sure your account meets the requirements. (

comments powered by Disqus



Interested in knowing more about this story?

Click here