Being a banker in Iraq can be a challenging and dangerous occupation.
In the first place, there are the obvious security threats. This year alone, the central bank and the government-owned Trade Bank of Iraq have been targeted by suicide bombers. A single movement of cash in Baghdad can cost $5,000 to $6,000 because of security requirements. “I would say [security] probably costs $1m to $2m, in terms of our cost base per annum,” says one banker.
Then the banks find themselves working in a predominantly cash-based economy with little transparency and outdated infrastructure. The first ATM was only introduced in 2005 and the machines remain scarce. Credit cards are an alien concept.
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At the institutional level, there is no credit bureau or established auditing system and the private sector lacks sophistication in terms of disclosure and providing business plans.
The result is banks have to rely only on the reputations of the companies with which they do business and loan-to-deposit ratios range from negligible percentages to the low-20s at best, says the banker, who did not want to be identified for security reasons.
Trade Bank, which was set up in 2003 to facilitate foreign trade after the US-led invasion, at the end of last year had total loans of $2.4bn compared with deposits of $11.4bn.
In spite of the challenges, bankers still talk up the potential of a country that has some of the largest proved oil reserves in the world and massive development requirements. But the banking sector is also in dire need of faster reform, the bankers say.
There are 43 banks in Iraq with the sector dominated by seven inefficient, outdated state-owned institutions, while the private sector accounts for just 10-15 per cent of deposits. In a country of 30m people there are only 700-800 branches.
Private banks were permitted in the late 1990s under Saddam Hussein in a sector that had been nationalised since the 1960s. But many are small, family-run entities that do limited business.
Hussein al-Uzri, chairman of Trade Bank, says both private and state-run banks need to develop. “State-owned banks stopped improvements and modernisation from the late 1980s after the war with Iran started and then the sanctions [against Iraq] came and nearly killed them,” he says. “They need to modernise not just their infrastructure, but also their systems, their employees, their banking practices and enact credit policies and risk management.”
Mr Uzri says private banks need to expand beyond fee-paying business to providing loans and project finance.
The hope is that new capital requirements will bring consolidation, increased investment and more interest from foreign banks, he says. The central bank wants the current minimum requirement of ID50bn ($43m) raised to ID100bn by the end of June, ID150bn by the end of June 2012 and ID250bn 12 months later.
Some foreign banks have already acquired stakes in Iraqi institutions. HSBC owns 70 per cent of Dar es Salaam Bank, and National Bank of Kuwait has a 75 per cent stake in Credit Bank of Iraq. They hope to benefit if the country stabilises sufficiently to allow genuine development.
Foreign investment has been trickling in, but has been focused on the oil and energy sectors and is meagre compared with the needs and potential of the country. In 2008, foreign direct investment reached a high of $1.8bn, nearly four times that of 2005, but dropped to $1bn last year, according to the UN – less than in neighbouring Syria.
The political crisis has further stalled development and damaged fragile investor confidence. The next government will be crucial for the nation’s prospects. Nouri al-Maliki, prime minister, was asked to form a government within 30 days at the end of last month.
But given the bitter wrangling between rival parties there are concerns about how effective the next administration will be.
“I think the fundamentals are still there and we were very encouraged by some of the oil sector activity that we saw over the last two to three months,” says the banker who did not want to be identified.
But, the banker adds, “there was a lot of credibility lost in the last couple of months and what happens over the next 30 days is quite critical”.
After elections in 2005, cabinet posts were divvied up along political lines, resulting in, bankers say, unqualified ministers and conflict plaguing a government of rival parties. The fear is that history could be repeated.
“This looks like it’s going to be a very weak sort of compromise government and all the noises we are hearing are that it will be nonstop consensus building,” the banker says. “It will be very difficult to see whether any firm process can be taken in the short term.”