Cash only: Why the messy banking sector
endangers Iraqi development
By Shwan Zulal
Over three quarters of Iraqis do not have bank
March 2, 2012
Iraq could be one of the richest countries in the
world. Yet over three quarters of Iraqis do not have
bank accounts. So where do they keep that wealth?
And can the Iraqi banking system be dragged into the
The banking sector in Iraq reflects the economic
mess that the country is in. Basic modern banking
practices – like electronic funds transfers for
payroll or other banking needs - are almost
non-existent and credit facilities are hard to come
by. Automatic teller machines remain a novelty while
mortgages and loans are a rarity.
Iraq has only a few banks with the ability to
transfer funds electronically and the number of
branches able to undertake this sits at around 240.
Transferring funds directly to Iraqi banks remains a
patchy process and it is more often done through
other banks in the region, such as more reliable
sister bank in Jordan or the United Arab Emirates.
Latest research estimates that around 80 percent of
Iraqis do not have a bank account or even access to
one. The public's trust in the Iraqi banking sector
remains low. Which is why most banks in Iraq simply
act as a glorified safety deposit box.
Meanwhile Iraq is on track to become one of the
wealthiest countries in the world, with the fourth
largest oil reserves in the world and the potential
to be one of the globe's leading oil exporters,
eventually matching, or even surpassing, Saudi
Arabia, currently one of the largest oil exporters
in the world. But despite incoming revenue and the
potential for growth, economic progress remains slow
- and this is partly due to dysfunctional banking
sector. There is talk of sector reform and new
electronic banking systems - yet this vital sector
is still underdeveloped.
The financial sector in Iraq is still in its infancy
and a lack of understanding of it, by the political
elite and economically illiterate policy makers, has
Politicians in Iraq keep failing to grasp the
importance of this vital part of the economy, a part
that could transform the country's dated economic
structure and bring it out of the cash economy and
further toward the modern world of finance.
Iraq’s banks were nationalised in the mid-1960s, in
line with the government’s nationalist and socialist
policies of the time. Before then there had been a
privatised banking system. In the early 1990s,
former Iraqi leader Saddam Hussein’s regime tried to
kick start private banking again but two decades
later not much progress has been made.
According to the website of Iraq’s National
Investment Commission, the minimum capital required
to set up a bank in Iraq is IQD100 billion (around
US$85 million). Currently there are 49 banks with
licenses to operate – 42 of these are private banks,
including 11 Islamic banks and foreign banks. The
rest of the licensees are state owned banks like the
giant Rasheed and Rafidain banks,www.ekurd.net
which account for the vast majority of banking
business in Iraq. There has also been a surge in the
numbers of financial and investment firms, with
around 40 such licences issued to date.
Interestingly, despite the capital requirement of
IQD 100 billion though, some of the private banks
have yet to comply with that regulation.
Iraq currently has around one local banking branch
for every 60,000 people. Compared to other countries
in the region, this is very low: for example, the
average in Saudi Arabia is around one branch for
every 3,500 citizens. Which means that despite the
growth needed in the banking sector and the
emergence of many small, boutique-style banks and
investment houses, the population still has little,
or no, access to banking facilities.
Most Iraqis rely on relatives and friends to borrow
money. But obviously this can cause social problems.
There are also small organizations that provide
loans for start up businesses but the amount that
these schemes can lend is usually minimal.
There is also the issue of trust in the banking
system. In a recent banking scandal in the
semi-autonomous state of Iraqi Kurdistan, local
businessmen, most of them based in the city of
Sulaymaniyah, lost around US$500 million. This was
due to the drop in value of Iranian currency, after
US and European sanctions were imposed, which led to
the failure of a small but active Iranian “bank”.
The so-called bank had been operating as a middleman
transferring funds to and from Iraqi Kurdistan,
Dubai and Iran.
Incidents like this do not reinforce public trust in
the banking sector; most Iraqis remain very
sceptical about local banks due to a lack of
rigorous regulation. And the weak banking culture
simply encourages the current cash economy. All of
which has stalled foreign and local investment
needed to rebuild the country. It has also
encouraged local businesses to be apathetic about
taxation or social responsibility.
Another major issue plaguing Iraq’s banking sector,
and for that matter, the private sector too, is the
prevailing ideology of top-down politics and big
government. Many Iraqi politicians, including Prime
Minister Nouri al-Maliki’s ruling party, are
suspicious of the private sector; they prefer to
stick to what they know best, which is having the
state control almost all economic activities -
including the banks.
Looking around the world, it is clear that a strong
banking sector is essential to a successful economy.
Apart from helping the private sector and small
business grow by providing financing, the government
can also measure and quantify economic activity.
Once the banking sector flourishes, and transactions
are recorded and regulated, money laundering and
corruption is automatically reduced.
Meanwhile on the positive side, the Iraqi stock
exchange has been growing faster than any other
index in the region, the main stocks being traded
involve banking and projections for the stock
market’s growth are very optimistic. This is a big
vote of confidence in the future of the banking
Additionally there have been talks of banking sector
reform, which has included the introduction of
electronic banking. While only 20 percent of Iraqis
have a bank account, around 80 percent have a mobile
phone and phone banking was a hot topic at the
“Integrating the Banking and Financial Services
Sector in Iraq” conference held by USAID and the
Central Bank of Iraq last November.
However modernising Iraq’s banking sector will not
be achieved solely by introducing new technology.
Modernisation needs to start by opening up the
markets and bringing in competition. As long as the
public banks remain the dominant players in the
market, there is not much chance of improving the
current situation. Privatising the major banks would
be a quick way of revolutionising the Iraqi banking
sector. Having said that, this move seems unlikely
given the current government record of maintaining
At least some of the problems Iraq has could be
healed by a strong economy and more prosperous
nation. And the long road toward this begins with
better financial structures and a stronger banking
sector, complete with all the regulations required.
A free market and the equal right of all consumers
to participate in it, has helped to bring
communities together. The failure of Iraqi
politicians to grasp the urgent need to revamp the
banking sector, and to understand the basic
economics of growth, has had a significant impact on
the pace of development in the country. The failure
to carry out needed reforms – and not just those in
the banking sector – is one of the major reasons
that, as was reported recently, around 23 percent of
the population in resource-rich Iraq are living
below the poverty line.
Shwan Zulal, is a
political and security analyst. London &
Kurdistan/Iraq. oil and gas sector, specialising in Kurdish PSCs
and Hydrocarbon Law and advising investors in the
Kurdistan Region and Iraq with legal background.
Zulal is a regular contributing writer for ekurd.net.
He also runs a blog on to the same subject
This article first appeared on niqash.org
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