Modern Banking and Finance in Iraq

Introduction

Commercial banking was introduced in Iraq under the British mandate following World War I, and was nationalized in the mid-1960's. There are currently two major state-owned commercial banks in Iraq - Rafidain and Rasheed. They account for about 90% of Iraq's commercial banking assets, and 75% of the branch network. Rafidain bank, earlier established by state decree, operated as a monopoly through the late 1980s. Rasheed bank was born in the wake of the first gulf war - in a climate of economic turmoil, sanctions, currency devaluation, and hyper-inflation.

Four additional state-owned Specialized Banks were created around this time - a Real Estate Bank, an Agricultural Cooperative, an Industrial Bank and a Socialist Bank. Eventually as many as 16 private sector commercial banks were authorized in Iraq, with the most prominent of these being the Baghdad bank, whose deposits, we understand, were sourced in large part from the Iraqi diaspora. In total, that puts the number of chartered banking institutions at 22 -- with Rafidain remaining the largest commercial bank in terms of total assets. By all accounts, these banks appear to have been oriented toward the achievement of political rather than economic aims. Their principal priorities appear to have been channeling resources to state enterprises and the pet projects of the Baath leadership. We understand, at least anecdotally, that the broader population simply ceased to use banks for credit or as a repository for savings. Cash appears to have been the common medium for trade. At the time the UN and World Bank commissioned their Joint Needs Assessment, issued just this past October, the banking system held only the equivalent of about 2 billion US dollars in assets, reflecting the limited role played by banks in the Iraqi economy. Notwithstanding this limited role, banking nevertheless represents the primary component of the Iraqi financial system.

To the extent capital markets existed at all, they were limited to government debt instruments. There was no system of syndicating debt securities, no central exchange for trading debt or equity instruments, or currencies and commodities. The existing state-owned insurance companies appear to have been dormant; consumer or retail credit markets non-existent. In fact, Iraq's financial system appears devoid of the basic physical infrastructure necessary to offer modern banking services. There is no interlinked system for making, clearing or settling payments, and no mechanism to effect electronic transfers. Even cash transfers appear to have been a rather complex and costly proposition. ATM machines are rare. The IT infrastructure to offer on-line banking capabilities, and support credit and management functions is simply lacking. Likewise the bank regulatory framework appears notable for its absence. While the Central Bank of Iraq did have a Control and Auditing unit, it does not appear to have played the traditional role of developing procedures to ensure compliance, monitor behavior, and enforce rules. Finally, the banking system lacks the broader safety net of insurance and reserves to safeguard against failures.

In sum, years of servitude to a ...