Despite with all that is happening in Iraq one thing is for sure and that is the Banking sector is slowly but surely getting better however, it still has a long way to go to get anywhere near or as close to your local bank in the western world.
Last month in Amman Jordan a Banking Conference was held and over 200 banking owners and representatives attended the event. A variety of topics were discussed and a plan was developed to get the Iraqi banks on the path to the 21st century.
The Iraqi Banking industry is currently dominated by seven State owned banks and included is the two largest commercial banks the Rafidain and Rasheed. The other five State owned Bank are Real Estate Bank, Agriculture Bank, Industrial Bank, Iraq Bank, and the Trade Bank of Iraq. All these banks control 90% of the total banking assets in Iraq.
It has been reported the two large State Banks during the Iraq war had suffered the most. Rafidain lost an estimated $300,000,000 to looters and many of it’s branches were completely looted and burned. The Losses at Rashid Bank totaled $69,000,000. Many of the private banks transferred their bank-notes to the vault at the Central Bank of Iraq before the war and avoided the heavy losses that were incurred by both State Owned banks.
Adding to the looting and as if that was not enough for the banks to endure the Iraqi banks had a few more problems, the damage to the banking industry and the loans to bank customers prior to the war. Banks made efforts to assist customers to have their loans out of past due status and become current. The Iraqi banks had a problem with accurately recording what accounts were past due and by how much in total loans outstanding.
With the war going on and the heavy damage to over 200 State Owned Enterprises (SOE) the only banks that could loan money to these SOE’s were the State banks Rashid and Rafidian. The private Iraqi banks were forbidden by law to create loans to SOE’s which turned out to be a good thing for them. As all the SOE business were either extremely damaged or destroyed and render the plants useless the Coalition Provisional Authority (CPA) had removed all assets and liability from the two State Owned Banks. The State owned banks were now free and clear to a point.
The banking industry began to piece there operations slowly and gained more deposits from Iraqi’s looking to deposit there money in a safe place. The Iraqi banks would accept the deposits from customers and then would deposit the cash at the Central Bank of Iraq (CBI) earning 20 percent interest. The bank owners felt depositing the banks money in the CBI had great benefits. It allows the bank owner to somewhat sleep good at night knowing his banks assets and deposits are safekeeping at the CBI. Security is very good and he’s not paying for it. Plus knowing that your earning 20 percent guaranteed on your money is not bad.
When the CBI started the 20 percent interest to encourage banks to increase their frequent deposits to the CBI it had created a liquidity problem. When bank customers would place a withdrawal of there deposit the bank would not have it at the branch which would be a common problem with most of Iraqi banks. Bank officials would advise the customer come back at a later date and at times would site security problems as to why the bank has no money to fulfill the customer needs. After the customer left it would be a week or two when the same customer would come back depending on the security at the time the customer returns.
If a roadblock or maybe a checkpoint stops the customer from proceeding further as he is making his way to the bank to make that withdrawal the customer would just give up and return home not wanting put himself in any danger.
Before the war there were 18 private banks and all opened just about in the 1990’s and as of late 2006 there were 25 private banks licensed by the Central Bank of Iraq. After the initial invasion of Iraq and things started to settle down as settle down gets in a War zone there was an expectation of bank mergers would begin from larger more technology wise western and Arab banks. The feeling was that this would encourage competition and rise in technology know how in the poorly structured Iraqi banks.
The private Iraqi banks that have partnered and have direct foreign investment are:
Commercial Bank, 49% owned by al-Ahli United Bank of Bahrain (through an Iraqi holding company)
Bank of Baghdad, 49% owned by the United Gulf Bank of Bahrain
National Bank of Iraq, 49% owned by the Export and Finance Bank of Jordan (renamed as Capital Bank)
Credit Bank of Iraq, 75% owned by the National Bank of Kuwait and 10% by the International Finance Corporation (IFC)
Dar as-Salaam Bank, 70% owned by Hong Kong and Shanghai Corporation (HSBC)
Economy Bank, 49% held by the A’aya Company of Kuwait
Mansour Bank, 60% owned by the National Bank of Qatar
To date no bank mergers have taken place. The following banks have started operations.
Tigris and Euphrates Bank
National Islamic Bank
Bank Audi (Lebanon)
There are an additional 17 applications pending at the Central Bank for new banking licenses.
Two foreign banks have been licensed by the CBI. The T.C. Ziraat Bankasi of Turkey (the state agriculture bank) and the Arab Banking Corporation. The Arab Banking Corporation just maintains an office in Baghdad and it is not a retail-banking store.
The Central Bank of Iraq has approved licenses for the following banks however none have opened any bank branches in Iraq. Most likely waiting for more stability and calmer days before opening any banking facilities.
Bank Melli (the national bank of Iran)
Al-Ahli United Bank (Bahrain)
Commercial Bank of Kuwait
Housing Bank for Trade and Finance (Jordan)
Arab Bank Ltd. (Jordan)
In Northern Iraq the Emerald Bank and the Kurdistan Investment Bank are operational. The Audi and Byblos Bank both from Lebanon will be opening soon, along with the Intercontinental Bank. The western bank Standard Chartered Bank has an office in Erbil.
Interest Rates on a one year Iraqi Dinar Loans:
Middle East 14%
Dar as-Salaam 15%
Even with these rates the loans out to the banks customers are low. The CBI one-year ID loan is 14.6% from the CBI web site. The average interest rate paid to banks depositors is 7.3% and a lot of the deposits are in non-interest bearing accounts. If you are trying to develop and grow a lending industry it makes it tough when the CBI currently pays 19% on 14 day deposits and 20% for 30 day deposits. You can’t blame bank owners for depositing the banks funds at the CBI and not pursuing a good lending service to the average working Iraqi or businessmen. The bank owner is incurring no risk with the banks money. Not a bad deal. Let’s hope within the next 90 days new rules will help to get money down to the average working Iraqi.
More to Follow.