The role and challenges of Iraqi banks in economic development

The role and challenges of Iraqi banks in economic development

1-20-2024

The role and challenges of Iraqi banks in economic developmentThe Iraqi banking sector plays a crucial role in shaping the country’s economic landscape. Institutions such as the International Development Bank, the National Bank of Iraq, the Bank of Baghdad, the Rafidain Bank, Al-Rasheed Bank, and the Commercial Bank of Iraq constitute essential components of the financial infrastructure in Iraq. Although they contribute significantly to financial intermediation, investment and development financing, challenges remain, hindering their full potential.

The banking sector in Iraq is diverse, and includes private entities such as the International Development Bank and the Bank of Baghdad, along with state-owned giants such as the National Bank of Iraq, Al-Rafidain, Al-Rasheed, and the Commercial Bank of Iraq. Each institution plays a unique role in the economic ecosystem, contributing to financial stability, growth and development, and despite their critical role, Iraqi banks face enormous challenges that limit their effectiveness. Sectarian and partisan quotas within the banking system, in addition to administrative and financial corruption, have restricted these institutions. The Commercial Bank of Iraq, which was established in 2003 under coalition authority, faces restrictions primarily related to lending to the government.

In addition to the obstacles to financial facilitation, although the Trade Bank of Iraq is able to open credits, it imposes strict requirements on commercial banks, which hinders their ability to facilitate trade. High guarantees of up to 110% create obstacles for local companies and limit their participation in international transactions. Transparency issues and the demand for specialized staff increase the complexity of the process, creating disparities in the treatment of local and international clients.

As for the World Bank and local loans, despite the efforts made to strengthen local financing, the World Bank’s success in obtaining less than 5% of small projects through Iraqi local loans raises questions. The high efficiency required by Iraqi banks, especially in investment projects, conflicts with international standards, which may hinder economic development in the country.

The challenges faced by Iraqi banks extend to the public, affecting citizens’ confidence in the banking system. Memories of looting and theft during the 2003 invasion still linger, causing reluctance to deposit money in banks. World Bank figures reveal that only 23% of Iraqi families have accounts in financial institutions, reflecting a broader lack of confidence in the banking sector.

This sector suffers from the dilemma of dollarization, and according to economists, the contradiction between official rhetoric and reality is very clear, and while the state encourages depositing savings in banks, legal reforms and basic services are still absent. Ghanem points out that Iraqi banks do not allow deposits in dollars for savings, which leads to large losses in hard currency. Many Iraqis prefer to store their savings in dollars at home, which erodes confidence in local currencies.

To address these challenges, a comprehensive approach is necessary. Reforms aimed at reducing corruption, improving transparency, and simplifying banking operations could enhance the efficiency of Iraqi banks. Encouraging financial education and digital payment methods can also contribute to rebuilding public confidence. Striking a balance between regulatory measures and facilitating economic growth will be necessary for the Iraqi banking sector to play a stronger role in the country’s economic development.

Economic Studies Unit, North American Office,
Rawabet Center for Research and Strategic Studies

rawabetcenter.com