- With 80% of population without a bank account, Iraq has one of the least developed banking sector in the MENA region.
- The banking sector reform, which started in 2006, has provided solutions, in terms of new capital, but the implementation has been very slow.
- Increasing the dialogue between the Iraqi authorities and the banking system, associated with the restructuring process, in terms of human resources, audit framework, accounting and performance is vital for the sustainability and solidity of this sector.
The reform of the Iraq banking system is a challenge, in the light of political and security environment issues, but the evidence from recent years has shown that the results are consistent and many of the solutions have already been implemented.
The banking sector of Iraq is the most underdeveloped banking system in the Middle East North Africa. According to the statistics, more than 80% of the population does not have a bank account (Sansar Capital, 2013).
Accounting for 75% of the financial system, in terms of assets and 77% of GDP, the Iraqi banking system is dominated by the state-owned banks (7) (IMF, 2013). The main issues of this segment are related to low capitalization, especially in the case of Rafidain Bank and Rasheed Bank. The banking sector reform, which started in 2006, has provided solutions, in terms of new capital, but the implementation has been very slow. The private banks (50) are small and their activities are short-term orientated to retail trade and wholesale. The professionalism of private banks is questioned by the Central Bank of Iraq officials, in regard to their real potential in supporting economic growth.
The regulation related to capital requirements, which must be met by the private banks favours public banks to monopolize the banking sector. The decision has the role to protect private banks funds but in the same time will slow down the activity. Also, forcing large banks to lend more and small banks to merge with other financial institutions is an attempt to implement central planning.
Additionally, the effectiveness of banking supervision is questioned and the audit standards are lax. The general mistrust of the banking system is driven by the lack of deposit insurance, the bankruptcy case of Warka bank and the losses registered by the two main banks in the system. There is a real need for transparency and reliable financial media.
Other internal issues experienced by the Iraqi banking systems can be stated as follows:
- Gaps in data collection on banking transactions in the northern region (Iraqi Kurdistan)
- Party transactions role and actions – the majority shareholder family are using bank funds for projects of their own
- Low financial infrastructure associated with shortages of skills and technology (The World Bank, 2012).
According to the Iraq Banking Reform Strategy – Action Plan (2008-2012), the actions designed to improve the overall situation are orientated to organizational structure, IT infrastructure, risk management and banking supervision. Increasing the dialogue between the Iraqi authorities and the banking system, associated with the restructuring process, in terms of human resources, audit framework, accounting and performance is vital for the sustainability and solidity of this sector.
We consider that the reform towards a modern banking system has to change the mentalities as well. The traditional way of holding cash at home becomes a real challenge for the banking development. The restrictions imposed on government agencies, state-owned companies and employees, to deal with private banking represent a drawback of growth.
However, we truly believe that the restructuring of the banking system of Iraq has determined positive results not only in terms of numbers, but also in the general perception over the role and potential of the banking activity on the economic growth. Many steps in overcoming the actual problems have been made. …Because adaptation to the internal and external conditions is crucial for the future.