Iraq’s Banking Changes could Unleash Economic Potential

By Sherif Salem, of Invest AD.  Iraq’s banks are quietly on the move, and the consequences for the economy could be powerful and far-reaching.   The country has 49 banks, and although lending has increased in the last couple of years, the loan-to-deposit rate still stands at only 44%, compared to around 80-90% for other banks in the Middle East.   However, we can now expect faster loan growth, and probably industry consolidation, because of action taken by the central bank.   Commercial banks have prospered by taking deposits and parking them at the central bank, earning interest rates as high as 15-20 percent as recently as 2009. But with inflation waning, the policy rate has been slashed to 6 percent, effectively cutting off this income stream.   At the same time, a requirement for lenders to increase their capital to at least 250 billion Iraqi dinars ($214 million) by mid-2013 is likely to result in mergers for those who struggle to reach the target.   To thrive and attract capital, Iraq’s banks will now need to expand their loan portfolio by taking on greater calculated risk, increasing returns and offering competitive interest rates to attract deposits.   Iraq’s economy is currently growing at a rate of nearly 10%, mostly due to high oil prices, but the benefits are only slowly improving standards of living. So huge investment is needed immediately, particularly in manufacturing, and this is where commercial banks should be stepping up.   The coming shake-up could be disruptive for the banking sector in the short-run, but it is an important step if Iraq is to unleash its full potential.