Iraq’s Finance Industry – The Last Frontier?
Middle East based consultancy Dunia Frontier has called the Iraqi finance sector the last frontier for investors interested in oil and gas based financial services. That’s probably true given that Iraq has the 4th largest proven reserve of oil and the rest of the top 10 oil producing countries already have established, mature banking, trading and insurance industries in place.
But oil and gas finance isn’t the only market in this country…far from it.
Spending on reconstructing infrastructure has been fast and furious and will top $200 billion in the next 10 years. Iraq has a faster growing GDP than China. New investments in roads, rail and a deep water port will make Iraq’s “land bridge” an irresistible transshipment route for Middle East ports. In short, the Iraqi economy is poised for tremendous growth offering investment opportunities in every economic sector but none as great as the woefully underserved financial services arena.
- There are 43 banks licensed to do business in Iraq. Seven are state owned and the remaining 36 are privately owned by both domestic and international banking firms. Combined these 43 banks operate only 200 branches to serve a population of over 30 million.
- 80% of Iraqis have no bank account.
- Nearly 90% of the country’s SMEs have never taken out a bank loan.
- Bank credit management is excessively restrictive and loans are rarely extended for periods of greater than a year. Consumer loans are almost unheard of.
- The Iraqi Stock Exchange (ISX) switched from chalk boards to computers in April of 2009 but only 5 of the hundred plus companies traded are capable of being bought and sold electronically. And if you want to buy or sell you have to do it during the six hours that the ISX is open each week.
- 30% of Iraqis work for the government or a State Owned Enterprise (SOE) and are relying on a state pension that is poorly managed and in dire need of an overhaul.
Now consider this. The central government expects to earn $100 billion from oil sales in 2012. Roughly 40 % of that revenue will be paid out to contractors involved in the reconstruction of the nation’s infrastructure. The question is…where will that money end up?
Sadly, Iraqis who receive part of that reconstruction money will probably put it in a metal box and hide it in the back yard. Banks and banking services are simply not part of the Iraqi tradition.
Priming the Pump for Meaningful Economic Growth
For Iraq, expanding and improving access to banking services is the key to an accelerated economic recovery. Currently Iraqi businesses who want to grow, who want to compete for a bigger piece of the reconstruction pie, are limited because they operate on an essentially cash basis. There are no lines of credit for supplies or the purchase of new equipment. Without the ability to grow to meet market demands the small and medium sized businesses are missing out on a once in a lifetime opportunity, an opportunity that can be the basis for establishing a strong and sustainable national economy.
Commercial and consumer credit, or the lack of it, is a chokepoint in the development of the Iraqi economy. In 2011 credit extended represented 10% of the GDP compared to 55% GDP for countries in the Middle East and North Africa (MENA). However, the condition is improving and in 2010 credit jumped nearly 75% with the state owned banks nearly doubling the amount of credit extended.
That’s progress but it still isn’t anywhere near what is needed to fuel the economy. Thanks to the efforts of the Central Bank of Iraq (CBI) the private banks all now meet minimum reserve requirements so the cash is there to lend. The two biggest hurdles to executing loans are incredibly basic.
First, the public simply doesn’t know how to apply for a loan. Only 20% of the population has bank accounts. Banking simply isn’t a part of everyday Iraqi life…yet. The second obstacle is the lack of a credit bureau that can provide data essential to evaluating credit worthiness. There is a discussion now among government officials regarding the establishment of a credit bureau but talks are stalled over what organizational shape the bureau should take…an independent organization or a function of the CBI.
Why Citibank and Others are Exploring Iraq.
While the banking and investment sectors are primitive by modern standards, the lure of oil dollars and the potential for a strong diversified revenue stream is attracting the attention of global financial services. Citibank, who does a $1 billion in business throughout the Middle East, is rumored to be very interested in Iraq’s potential for double digit growth and its immediate need for sophisticated financial infrastructure and procedures. HSBC saw the potential in 2005 and purchased 70% of the private Dar Essalaam Investment Bank and has turned a profit since day one.
Two technical breakthroughs, one of which has the potential to change the very way the average Iraqi handles his money, have poised the banking system for significant growth.
At a conference held in Turkey the CIB and USAID’s Iraq Financial Development Project announced that a “central switch” will connect the nation’s 300 ATMs and open the way to more cash machines and Point of Sale terminals.
ATMs will now be able to process transactions regardless which bank card is used. Point of sale terminals will eliminate the need for Iraqi consumers to carry blocks of currency to make a purchase although it is uncertain how well the machines will be received by merchants who prefer cash.
The second announcement involved the implementation of the Iraqi Interoperable Mobile Payment System (IIMPS) which will allow Iraqis to “pay by phone.” Interestingly, 80% of Iraqis don’t have a bank account but 80% do have a cell phone. Iraqis will now be able to make deposits at a branch bank or at a retail shop acting as an agent for the bank and then pay anyone, anywhere by phone. This could be a huge game changer for the consumer banking market.
World Bank Provides Blueprint
A 2011 study completed by the World Bank with the assistance of Ernst and Young identified the strengths and weaknesses of the Iraqi banking system. The organization used the results of the analysis to provide the government with a “blueprint” to bring the banking and investment sectors into compliance with international standards. While cautiously optimistic, the World Bank expressed real concerns about the commitment on the part of the government to provide the resources and hands off relationship with the CIB.
There are internal challenges to a market based financial system and some of them could prove significant. If you’d like to learn what these are and how they can be avoided please feel free to contact us today.