An Article by T. Keyzom Ngodup


In exploring the positive relationship between financial sector development and economic growth, this paper analyzes a variety of indicators among resource-based economies in the Middle East & Africa (MENA) Region. In doing so, this paper will synthesize and recommend key policy areas towards financial sector deepening for Iraq. This paper demonstrates that achieving economic growth requires focus on market frictions which consist of the information and the transaction costs. The key message for Iraq’s financial sector is to move from marginal providers of liquidity to become an engine for economic growth.

About the Author

T. Keyzom Ngodup is co-founder and Executive Director at Ideas sYnergy, a leading Iraq based development consulting company committed to economic and social development through market-based solutions that help build and scale innovative businesses for sustainable and inclusive private sector development. T. Keyzom Ngodup has worked on financial inclusion and economic development initiatives in India, Ethiopia, and Iraq, and across least developed countries in Africa and South-East Asia. She has authored several publications, including “Inverting the Pyramid: Investment Opportunities in India’s Microfinance Sector 2008,” “State of Iraq’s Microfinance Industry 2010,” and “Islamic Microfinance Al-Murabaha: Iraq’s Experience 2010.” At Ideas sYnergy, Keyzom Ngodup launched Iraq Insights, a monthly flagship publication contributing to policy dialogue on issues affecting inclusive economic development in Iraq. She graduated from Cornell University with a B.A. and M.P.A. and also serves on various boards of microfinance institutions in India and advises the Tibetan Government’s Planning Commission.

The Necessity of Upgrading the Iraqi Financial Sector: Role of the Financial Sector in Spurring Economic Development

Iraq, with the world’s third largest oil reserves, is charting a course for a diversified economy towards an inclusive and robust private sector, supporting long-term economic growth and employment generation. “Sowing the oil” to diversify the economy and create competitiveness is a longstanding goal for all natural resource exporters. A select number of economies have successfully prioritized investments, based on competitive advantages, in a range of productive non-oil sectors. Past and ongoing investments in a strong policy environment, including the financial sector, continue to support growth.

Since 2003, the government of Iraq (GoI) and the people of Iraq have embarked on a challenging transition (1) from a unitary state to a developing parliamentary republic system and (2) from a centralized mixed economy to one where the private sector is increasingly recognized as the engine of growth and employment.[1] Many facets of this complex transition have already been successful, including the adoption of a new constitution in 2005, the provincial election in 2009, the parliamentary election in March 2010, and the formation of a coalition government in November 2010. Iraq broke the world record for time taken to form a government.[2] In many ways, however, some of the most vital elements of public administration and civil service required to meet the long-term aims of successful political, security, and socio-political transitions have yet to be adequately conceptualized. Although all major parties and ethno-sectarian groups are represented in the current Iraqi government, there is only a limited consensus among them on major policy issues, such as foreign affairs, internal security, and oil revenue distribution.[3] The ability of Iraq’s government to function well is severely curtailed by political infighting at a time when the United States is shifting to a civilian-led effort in Iraq. The emphasis on a sustainable and well developed financial sector is imperative to Iraq’s economic development and has been the priority of the United States Agency for International Development (USAID), the State Department, the United States Treasury, World Bank (WB), and International Monetary Fund (IMF).

Current conditions in resource-abundant economies (see Table 1) indicate the level of success and failure of measures taken. Kingdom of Saudi Arabia (KSA) and United Arab Emirates (UAE) rank among the highest in terms of ease of getting credit, with over fifty percent private sector credit as a percentage of gross domestic product (GDP). In addition, the financial sectors in UAE and KSA have performed well in terms of depth and breadth of financial intermediation, with steeper rise in GDP per capita and Human Development Index (HDI). KSA and UAE represent success stories in terms of employing a high level of monetary instruments to facilitate credit intermediation and strong prudential supervision of the private financial sector in order to support the development of local enterprises and reduce dependencies on imports. Despite Libya’s high GDP per capita, Libya falls in the category of low success economies due to its low level of private sector credit as a percentage of GDP, its significantly high liquidity to assets ratio, and high Non Performing Loans (NPL). With this in mind, this paper will analyze and recommend policy improvements and pitfalls to avoid for the private financial sector as a means to support the GoI’s diversification strategy. This paper focuses specifically on the banking sector, which accounts for more than seventy-five percent of the Iraq financial sector, in order to communicate targeted recommendations.

Table 1 – Overview of Social & Economic Indicators in Select MENA Resource Abundant Countries[4]


GDP Per Capita (PPP)(2010, USD) Type of Legislation Human Development Index(2010, UNDP) WTO Membership Year Ease of Doing Business Ranking (2011) Unemployment % Income Category
KSA 22,545 Islamic Law .752 2005 11 11.6(2009) HI
UAE 38,089 Islamic & Civil Laws .815 1996 40 12.7 (2008) HI
Libya 16,837(2009) Transition Democracy .755 No N/A 20.7 (2009) UMI
Iraq 3,535 Civil Law .583(1998) No 166 18(2009) LMI


While hydrocarbons account for ninety percent of GoI revenues and 55.3 percent of GDP, the services sector as a percentage of GDP has been rising steadily, from 12.2 percent in 2000 to 39.8 percent in 2009.[5] Simultaneously, the agriculture sector, as a percentage of GDP, rose from 3.6 percent in 2008 to 4.8 percent in 2009;[6] however, its current level is far below Iraq’s potential as the ‘fertile crescent,’ a term coined in the 1960s when Iraq was a large agricultural exporter.

With the oil sector employing less than two percent of Iraq’s large labor force and unemployment at eighteen percent,[7] productive employment is a major goal, as well as the need to diversify assets and income in the long run through private sector development.

Access to finance is impeded by weak financial infrastructure, which needs to be strengthened over time in all areas, including credit registry, the collateral framework, judicial systems, and accounting and auditing skills. When analyzing Iraq’s financial system it is important to keep the general political economy in mind. The difficult security situation imposes costs and constraints, the complex political situation impedes decisive policy action, governance issues linger, and the legacy of prevailing state intervention has not been fully addressed. In addition, Iraq ranks 175th out of 178 countries in Transparency International’s Annual Corruption Index,[8] significantly impeding meaningful development.

Role of Private Financial Sector in Private Sector Development

Developed, well balanced economies have mature financial markets, including a highly active financial sector.[9] Financial sector development is dependent on a multifaceted and multi-discipline process, encompassing not only monetary aggregates and interest rates (or rates of return), but also regulation and supervision, degree of competition, financial openness, and institutional capacity (such as the strength of creditor rights). It also includes a variety of markets and financial products that comprise a nation’s financial structure. An efficient and competitive financial system channels savings and capital inflows to productive investments, stimulating growth and employment. International experience shows that more open and competitive banking systems are associated with better access to finance.[10] Such systems are usually characterized by private ownership of banks (including foreign ownership); strong legal, informational, and financial infrastructure; and regulatory and supervisory frameworks that manage risks and prevent crisis while protecting consumers and ensuring transparency.

The private financial sector reflects a range of services and markets that allow a financial system to fulfill its functions, namely enabling firms and households to raise finance in cost effective ways, mobilizing finance, monitoring managers, and diversifying risk. Financial instruments, the markets, and financial intermediaries are factors of the private financial sector development that can promote private sector development, and subsequently economic growth.[11] Financial sector development indicators have robust, significant, and positive impacts on economic growth, such as the ratio of private sector credit to GDP and the ratio of liquid liabilities to GDP,[12] which are indicators of credit extended to the market. Underinvestment in the financial sector can lead to long-term negative repercussions for economic growth.

Financial sector development is identified as a critical factor in private sector development, and is integral to the advancement of a well-balanced economy. Countries with deeper financial systems in terms of outreach, products, and services, grow faster. According to empirical evidence, the lowest income quintile benefits most from this deepening.[13] Countries with deeper financial systems also experience faster reductions in income inequality and poverty rates. Financial sector development helps industries reliant on external finance grow faster and helps enterprises, especially smaller firms, overcome financing constraints. Focus on private financial sector development contributes positively to the development of the overall structural reforms in the business environment for the private sector through increased competition, improved standards of transparency and governance, and ease of doing business. This focus thereby contributes to inclusive economic growth.[14]

Comparing Iraq to Select Resource Abundant Economies in MENA

In resource-abundant economies, private financial sector development is recognized as instrumental to facilitating economic diversification and private sector growth; however, only those countries above a threshold of institutional development supporting private sector growth as inherent to economic growth are able to reap sustainable benefits from natural resource wealth.[15] The heavy dependence of the financial system on a sound institutional framework, including an effective contractual framework, can hamper financial deepening in countries where natural resource abundance undermines institutional development. Therefore, private financial sector development, and its positive impact on the business environment in itself, can play a pivotal role in mitigating the natural resource curse.

When comparing Iraq to KSA, UAE, and Libya, all of which are resource-abundant economies, it is notable that UAE and KSA have significantly diversified economies and less than fifty percent of GDP is attributed to hydrocarbons, while Libya, at 62.3 percent, represents an economy heavily dependent on its natural resources (see Figure 1).[16] While Iraq’s economy is driven by its hydrocarbon revenues, its economy has been diversifying since 2005.


Figure 1 – Diversification as a Percentage of GDP in 2009

Source: UN Statistics Department

Economic diversification and depth of the financial sector are positively correlated. Financial sector development affects per capita GDP mainly through its efficient resource allocation. Resource abundant economies’ financial sector development differs based on individual country strategies and effective prioritization of the financial sector as pivotal to private sector development. Table 2 below provides an overview of the selected countries’ performance across a variety of indicators.


Table 2 – Financial Sector Performance Indicators (2009)[17]

World Bank Ease of Getting Credit Rank Bank Liquid Reserves to Bank Asset Ratio (%) Private Sector Credit as a % of GDP World Bank Credit Depth of Information Index
KSA 46 14.22% 53.04 6
UAE 72 12.32% 93.02 5
Libya 235.47% 10.89 0
Iraq 168 156.61% 4.08 0

Source: World Development Indicators

Libya, with over eighty percent of financial sector assets controlled by the government, records a decreasing trend in bank credit to the private sector.[18] As of December 2010, the government of Libya still maintained price, credit, trade, and foreign exchange controls; however, there have been some modest reforms recently, including the partial privatization of two banks and slight liberalization of interest rates. While foreign banks have been operating for many years without restrictions in UAE, KSA re-started licensing of foreign banks in 2004, after a long hiatus beginning in 1976. Both countries have long recognized the need for larger and more sophisticated banking sectors due to their respective oil booms. By allowing foreign banks in the country, UAE and KSA have made significant strides in facilitating capital for investing in the banking sector, whether it is by growing branch networks, implementing new technology and alternative delivery channels, or training human resources. The entrance of foreign banks, both from Gulf Cooperation Council (GCC) and other countries, into UAE’s and KSA’s markets has enhanced competition, supported the transfer of technology, improved financial services in all sectors and created employment opportunities in UAE and KSA (see Figure 2).


Figure 2 – Bank Credit to Private Sector (% of GDP)[19]

Source: World Bank

Overview of the Iraqi Private Financial Sector

Iraq’s banking industry was once the pearl of the Middle East. However, it started deteriorating in 1964, after the first Ba’ath regime implemented a policy of nationalization where the Government took over private banks, insurance companies, and a number of industries. The nationalization decree was followed by a series of bank mergers that eventually resulted in two state-owned banks, Rafidain and Rasheed. Private Banks were not allowed to register until 1992, following the Persian Gulf War in 1991, and even then constantly risked being seized by the government if they showed any signs of profit.[20]

Although the banking sector is the main component of the Iraqi financial system, the banks offer few credit facilities, and the credit culture is poor. There is limited extension of credit to the private sector and an asset composition heavily tilted toward government securities. Banks are largely risk averse and lack credit departments, further hampering their lending potential. Additionally, the private banks face interference from Iraq’s Ministry of Finance (MoF), such as the recent ban of government institutions/enterprises doing business with private banks.

As of 2010, there are forty-six banks operating within Iraq, of which thirty-one are private, and seven have significant foreign ownership. In addition, there are eight foreign bank branches.[21] Despite the large number of private banks, the financial sector assets remain controlled by the three state owned banks, Rafidain Bank, Rasheed Bank, and Iraq Trade Bank. However, private bank loans have been growing steadily, representing thrity-two percent of total banks loans in 2008. This growth in the private financial sector contributes significantly to Iraq’s growing diversification of its economy (see Figure 3). For example, Iraq has seen a steep rise in services since 2003, when the private financial institutions began operating.


Figure 3 – Economic Sectors as a Percentage of GDP across Years[22]

Source: UN Statistics Department


With the help of the World Bank and IMF, regulations governing the Iraqi financial sector have improved significantly since 2003. The Central Bank of Iraq (CBI) does not state any upper limit on foreign participation in local private banks, and seven private banks have substantial foreign ownership.[23] In 2010, CBI set a minimum capital requirement for banks at $214 million to be achieved by 2013.[24] The measure is aimed to help the economy handle the anticipated rise in oil and non-oil development projects, and to encourage local private banks to merge with regional and international partners (see Table 3), in order to avoid ‘off-shoring’ of banking transactions. The capital, paid in three phases, aims to develop the monetary structure of the bank and raise the level of its interaction with other banks.


Table 3 – Leading Private Banks with Foreign Ownership   

Private Bank Foreign Stakeholders Ownership
Dar Es Salaam Investment Bank HSBC 70%
Bank of Baghdad United Gulf Bank 49%
Credit Bank of Iraq National Bank of Kuwait and International Funding Commission 85%
National Bank of Iraq Capital Bank of Jordan 49%
Commercial Bank of Iraq Ahli United Bank 49%
Al Mansour Bank National Bank of Qatar 23.2%
Dijla & Furat Bank Aayan Leasing 35%

Source: Iraq Insights, Issue 3, August 2011


The foreign institutions that have already entered the Iraqi market through investments in local banks have not yet scaled up their lending operations. In fact, their loan-deposit ratios tend to be lower than those of their wholly  locally owned counterparts. For example, consider the thirteen Iraqi Stock Exchange (ISX)-listed banks. Four private banks with foreign investors had the lowest loan-deposit ratios. Only one of the five had a ratio above twenty percent, while the subsidiary of global giant HSBC ranked last with a ratio of just four percent. While capital adequacy, which was mandated at twenty-five percent until mid-2010, might be a constraint on lending even for banks with large deposit bases, it does not appear to be the explanation for the poor showing of the foreign-invested banks as they do not tend to have less capital. Foreign banks that are not yet present in Iraq, such as Citibank, offer off-shore services through Dubai because clients choose to minimize cross-border risk and counterparty risk, and opt for greater convenience in terms of real-time payments and access to their capital.

The banking system is highly liquid, with total deposits amounting to $US 33 billion in 2009.[25] Bank liquid reserves to bank asset ratio (i.e. Bank’s total ‘idle’ cash) increased from ninety-eight percent in 2004 to 156.6 percent in 2009, compared to fourteen percent for KSA and 12.32 percent for UAE in 2009.[26] According to CBI, total bank loans amounted to $US 5.8 billion as of June 2010.[27] This figure compares to approximately $US 250 billion for KSA.[28] In 2010, the CBI reduced the required reserve ratio from twenty-five percent to fifteen percent, as well as its key interest rate to six percent in order to facilitate future investment and lending in the economy. Without appropriate regulatory incentives or requirements, however, the Iraqi financial sector may remain reluctant to scale-up lending to support private sector development and economic growth.

A simple indicator of the development of the banking sector is the ratio of money in circulation (M2) to GDP.[29] In 2008, broad money totaled just 31.12 percent of GDP, far below the 71.39 percent of KSA, 83.66 percent of UAE, and 54.96 percent of Libya.[30] Progress has been recorded since 2005, when it was 3.71 percent,[31] indicating that improved conditions in Iraq are restoring confidence and expanding the use of local currency in place of foreign currencies. Nonetheless, bank deposits account for less than half of the broad money supply,[32] indicating that banks still have a very limited role in the transactions system.

Iraq’s private financial sector is expected to play a vital role in the country’s private sector development. In its present form, and in the context of international banking standards, the privately owned banking sector is less than ten years old; however, growth has been strong and private bank lending grew by fifty-two percent since 2008, to over $US575 million.[33] Yet private sector growth has been rising steadily from 3.39 percent in 2005 to 5.32 percent in 2008.[34] In addition, Iraqi private banks have increased their capital from $US 30 million in 2004 to $US 1.6 billion in 2009. The overall growth has been significantly hampered by weak macroeconomic policies and poor management and institutional infrastructure at the banks.

Including the state owned banks, Iraq has 774 branches across the country,[35] of which 383 branches represent private banks’ network. While the branch network has been growing steadily, the level of financial intermediation in Iraq remains low. Very few banks offer loans with more than one year maturity, as most banks lack the expertise to offer appropriate credit facilities or assess risks.

In terms of banking innovation and best practices, Iraq has made positive strides, albeit continued improvements remain critical. Until 2003, the entire banking sector remained isolated from technological advances and new business practices. Iraqi banks had no way of processing electronic payments and were using an outdated system for clearing checks. Even documents and correspondence between branches of the same bank had to be carried by hand between buildings. As of 2010, Iraq has nine banks with full electronic funds transfer (EFT) capability, domestic payments systems, and core banking systems. These EFT capable banks have almost 200 branches throughout the country. ATMs and point of sale (POS) terminals are also being put in place across the country, although they are not widespread. The Iraqi Payment System (IPS) needs improvement and an increase in widespread usage.[36] Checks account for ten to fifteen percent of payments across Iraq, but they are not preferred due to potential delays in clearing and settlement.[37]

Other financial institutions are also relatively small and weak. At the end of 2008, ninety-six companies were listed on the ISX, but market capitalization was only two percent of GDP and the turnover rate on listed stocks was just 0.6 percent.[38] One-third of the listed entities are financial institutions, including twenty banks, four insurance companies, and eight financial investment companies.[39]

In 2010, 156 foreign firms, from thirty-four different countries, announced new investments, service contracts and other commercial activities in Iraq, worth $US 0.66 billion.[40] However, it is important to note that multinationals operating in Iraq typically maintain bank accounts in the country for small-value and regulatory payments. Other payments into Iraq are then managed through offshore accounts. Contrary to popular belief, foreign commercial activity in the hydrocarbons sector ranks fifth, as shown in Table 4 below; therefore, it is imperative that the Iraqi private financial sector support the banking needs of the growing foreign commercial activity.

Table 4 – Sector Breakdown of Foreign Commercial Activity[41]

Sector Million USD % Total
Real Estate (Residential) 14,107 33.1%
Transportation (Infrastructure) 6,733 15.8%
Electricity 6,074 14.2%
Industry 6,040 14.2%
Oil & Gas 5,443 12.8%
Real Estate (Commercial) 1,829 4.3%
Water & Sanitation 1,317 3.1%
Health 757 1.8%
Agriculture 244 0.6%

Source: Dunia Frontiers Report, 2010

The development of Iraq’s private microfinance industry is favorable in the private financial sector, even though all twelve microfinance institutions (MFIs) currently operate as NGOs because there is an absence of clear regulatory frameworks for non-banking financial institutions serving the poor, who represent twenty-three percent of Iraq’s total population[42]. As of December 31, 2010, the twelve MFIs boosted an outstanding loan portfolio of $US 106.4 million and 75,182 clients, growing by 28.4 percent and 27.7 percent respectively since 2009.[43]

An institutional transformation of NGO-MFI into regulated non-bank financial institutions is globally recognized as one of the most effective strategies for achieving significant scale. This is done by offering a wider range of services, accessing commercial sources of capital, and improving operational efficiency through enhanced systems, controls, and transparency in reporting that would result from links to regulators and other banking expertise.

Iraq enjoys two strong advantages: (1) a natural endowment of oil resources; (2) human capital, which reflects a long tradition of education, scientific and commercial skills; and (3) entrepreneurial spirit. As the security situation improves, the development of sound macroeconomic policies and a business environment conducive to private investment are beginning to create growth and jobs. A well-functioning financial sector is critical to promoting this growth. Enhancing the performance of the Iraqi private financial system and improving its capacity to provide efficient financial services is crucial to creating a competitive financial system capable of enhancing macroeconomic growth and prosperity in Iraq.

To develop a sound and stable financial system, Iraq requires well managed financial institutions with well trained staff, strong prudential supervision, and effective competition in the financial system, as well as a business environment that fosters bankable opportunities for private sector development. Only a stable banking sector can broaden access to finance; however, a stable banking system is not necessarily one that provides improved and open access to credit. Government should remove unnecessary regulations and policies that raise the cost of bank lending to enterprises, while requiring sound risk management practices to be followed. Before planning interventions to correct market imperfections, government must establish the fundamental institutions of the financial sector. If the legal framework for collateral does not ensure creditor security, for example, a costly government-backed guarantee system would not raise bank lending in the long-term. Similarly, credit bureaus will not sustainably raise lending levels and reduce borrowing costs if banks are basing lending decisions on criteria other than risk and return.

Recommendations for Scaling-up Iraq’s Access to Finance

Northern Gulf Partners (NGP), one of the few investment and financial advisory firms in Iraq with long-term investment horizon, notes the following: “Iraq currently imports bottled water and other beverages from Saudi Arabia, Kuwait and the UAE—the Biblical ‘Land of Two Rivers’ [i.e. Iraq] forced to bring water from ‘The Empty Quarter.’”[44] This statement signifies the tremendous potential in Iraq which can be realized through the private financial sector. It is widely known that a stable and strong macroeconomic environment, improved business climate, and fast-tracked WTO accession—coupled with a developed financial sector—work symbiotically to create a viable private sector. The first step for economic growth is to focus on market frictions, which consist of the information and transaction costs. Well-developed financial systems reduce the information and transaction costs, and influence saving rates, investment decisions, technological innovation, and long-run economic growth rates. Therefore, GoI stakeholders must strengthen and modernize the private financial sector in order to deploy capital effectively for private sector development.

Broadly, the private financial sector in Iraq needs to exert concerted efforts towards creating a favorable credit market infrastructure. Disclosure and good accounting and auditing practices promote sound credit markets. Financial reports facilitate international commerce, and efficient payment and settlement systems enhance investor confidence in companies and banks’ ability to clear transactions efficiently, whereas proper documentation simplifies tax processes. Good corporate governance frameworks help broaden access while strengthening financial stability and preventing crisis.

Given the Central Bank’s recent successes in managing inflation, remaining major areas of development include its supervisory role, improvements in the coordination and regulatory authority exercised by the Central Bank branches, and data collection. In addition, little progress had been made in the restructuring of the balance sheets of the two largest state-owned banks, Rafidain and Rasheed. This largely reflects a lack of institutional capacity and weak coordination between the various parties involved, including the referenced banks, MoF, and CBI. In addition, MoF has yet to start the process of the aforementioned Banks’ operational restructuring.[45] As noted earlier, significant risk of instability in Libya’s financial systems comes from state-owned banks’ lack of independence and market discipline due to political interference. Such interference often supports insolvent state-owned enterprises, and provides poor services: according to the World Bank surveys, state-controlled banks can take three times longer than private banks to process an application for a line of credit.[46] These countries also have the highest rate of NPLs. This high rate curtails the efficiency of intermediation.

The extent of NPLs is directly related to the prominence of state-owned banks and in some cases connected lending. Historically, governments have maintained state-owned banks to attain socio-economic goals or for connected lending (to state-owned enterprises or to private business with preferential access). The state’s social mandate pushes banks to lend to insolvent borrowers or those likely to default because of their connections or their knowledge of the lack of enforcement. Bank restructuring can claim a sizable share of government budgets. Yet the large outlays to restore financial and operational soundness often do not bring sustained stability to the banking sector due to lack of incentives.

Key Message: Moving from Marginal Providers of Liquidity to an Engine for Private Sector Development

The growth of Iraq’s financial sector has been impressive in the last couple years, especially the positive development of financial intermediaries servicing low-income Iraqis and young entrepreneurs. The following recommendations are integral to the Iraqi financial sector’s capability to instigate private sector growth.

Raising Long-Term Funds [MD1] 

Long-term debt financing remains a critical constraint among the private banks in Iraq. Perceived country risk and weak business environment are major obstacles to both long and short-term lending in Iraq; however, while private banks have short-term lending capabilities and are making strides in the right direction, long-term financing remains weak. Despite strong growth in the telecommunications sector in recent years, Mobile Network Operators (MNOs), including Zain, have difficulty securing long-term financing for their networks from the Iraqi private financial sector. Country risk and a weak business environment are major obstacles to commercial lending. To circumvent those problems, Zain has turned to International Finance Corporation (IFC), the investment arm of World Bank, to help secure alternative financing sources. The $US 400 million long-term debt facility includes a loan of $US 155 million from IFC and an additional $US 245 million loan committed by international banks.[47]

Iraqi internet service provider FastIraq has plans to connect more than 100,000 homes and offices to the internet, following the arrangement of funding with Dar Es Salaam Investment Bank, a subsidiary of HSBC. FastIraq was advised by Northern Gulf Partners, which secured finance based on projected cash-flow.[48] This is a significant departure from the traditional requirement to secure debt against assets. The transaction has widespread implications for other business borrowers in Iraq who seek access to credit, but lack traditional assets such as real estate to provide as collateral for the loan. The loan is historically significant, representing a progressive shift in Iraqi credit culture away from traditional asset-based lending and towards a more innovative, cash flow-based approach to lending.

The Iraqi private financial sector needs to show more commitment to cash-flow-based approach to lending, in both short- and long-term loans; however there are serious concerns with respect to reliability of business and financial data due to lack of internationally accepted accounting standards. Currently, CBI is working on conforming commercial banks to International Financial Reporting Standards. The government, CBI, and donors can play a critical role in leading the way through incentive systems related to advocating long-term financing. Already, the project team and CBI are working together on addressing information asymmetries in the financial sector through the credit information system initiative that will incentivize banks to take informed lending decisions and scale-up access to finance.

Alternative Delivery Channels to Scale-up Financial Intermediary Capabilities

The liberalization of financial markets, the increasing use of new and advanced technology, financial innovation, the change in customer preferences, and the information revolution have put competitive pressure on banking institutions and modified the technology of bank production.[49] Therefore, regulations on mobile banking and Know Your Customers (KYC) norms are extremely important simultaneous developments in the private financial sector.

In June 2010, Amwal Electronic Banking Services entered into a partnership with one of the two largest MNOs with over seventy seven percent penetration rate,[50] Asia Cell, and two Banks (Bank of Baghdad and Ashur Bank) in Iraq and formally launched MobiCash, a mobile banking platform enabling a consumer to purchase airtime directly, buy goods and services from registered merchants, check bank account balances, and make mobile-to-mobile and bank account-to-bank account money transfers.[51] While Iraq’s Central Bank has not issued any regulatory guidelines for mobile banking in Iraq, it is currently in a ‘wait and see’ phase, and has provided Amwal with a ‘no-objection’ letter allowing Amwal to continue operating the mobile-banking platform. In late 2010, Asia cell launched an international payments transfer service, that will enable Iraqis living abroad to send small value transfers to their relatives and friends in Iraq in the form of prepaid top-ups.[52]

Public Credit Registry and Private Credit Bureau to Enhance Risk Assessment Capabilities

While efforts are underway to establish credit financial services in the country through project activities, the pace of dialogue has been mixed mainly due to significant challenges in the broader environment. Experience demonstrates that the Credit Bureau performs better in the private sector, and that the government must play a facilitating role in partnership with the Credit Bureau to scale up reporting. In the absence of a strong credit environment in Iraq, credit histories can serve as a demonstration of a business and/or individual repayment strength. A sound and well-functioning credit market requires better information about borrowers and stronger legal protection for creditors and borrowers, which in turn requires efficient, transparent, and well-governed institutions.

Sharing credit information enhances enterprise access to finance.[53] The extent of information asymmetry is directly associated with increased credit rationing. The amount of credit information available to banks depends on a country’s credit information and payment systems. It also requires institutions such as credit bureaus to collect and distribute credit information,  and ensures that good credit reporting systems promote both financial stability (accuracy of financial institutions’ balance sheets) and access.

Collateral Legislation

Because credit markets have inherent information asymmetries, banks must protect themselves against default risk.[54] International evidence and country-level experience suggest that reform of the legal framework for collateral can improve access to finance by strengthening creditor capacity to take possession of collaterals in cases of default. By reducing the cost to lenders for using collateral (both registering it and subsequently executing claims), the cost barriers to lending to smaller firms can also be lowered. Over-collateralization is explained by creditors’ lack of confidence in the institutions that are supposed to protect their rights, banks’ inability to evaluate credit risks, and creditors’ lack of information on borrowers. Credit guarantee schemes may play an important role, but it is essential to ensure that these schemes are well-designed and cost-effective. Registration and execution of contracts seriously constrains the expansion of access to credit, and countries with a stronger private financial sector adequately protect creditor’s rights, such as in KSA and UAE.

Support Enhancement of Payment Systems – Regulatory and ICT

As mentioned above, Iraq has nine banks with full EFT capability, domestic payments systems, and core banking systems. However, the Iraqi Payment System (IPS) needs improvement and an increase in widespread usage. While banks began to offer Iraq credit cards in 2005, the low growth rate of the Iraqi credit card industry is attributed to lack of infrastructure, including the low number of POS terminals and limited internet connectivity.[55] Credit card products are available only to a very small section of Iraqi citizens, as most people do not qualify for the credit facility. Against this backdrop, businesses such as the popular Iraqi-owned, which has a monthly traffic of over 300,000 unique visitors and people advertising cars to furniture to services, cannot conduct online transactions. Even if was to charge one dollar for each purchase or sale it facilitates over its platform, it cannot monetize its services due to lack of electronic banking and payments infrastructure.

There are tremendous lessons that Iraq can draw upon from the successes and failures of comparable economies’ private financial sectors. The Iraqi private financial sector can grow leaps and bounds, as an astonishing force to support the country’s underdeveloped and underserved private sector. But without a solid legal base and policy packages recognizing private financial sector’s role in stimulating and sustaining diversified economic growth, it will be arduous to create a vibrant and inclusive private sector.



[1] Iraq National Development Plan 2010-2014, Government of Iraq, accessed October 15, 2011,

[2]“Iraq Breaks Record for Time Taken to Form a Government,” BBC, October 1, 2011., accessed October 15, 2011,

[3] Issues & Options for Public Sector Modernization in Iraq, November 2009, Geopolicity, accessed September 20, 2011,

[4] World Bank Development Indicators, World Bank Database, last accessed November 15, 2011,

[5] ibid

[6] ibid

[7] Iraq Unemployment as a Percentage of Total Population, 2009, World Bank Development Indicators, World Bank Database, accessed November 15, 2011,

[8]“Transparency International Annual Corruption Index, 2010,” accessed October 15, 2011,

[9] Beck, Thorsten and Asli Demirguc-Kunt. “Law and Firms’ Access to Finance.” American Law and Economics Review 7(1) (2005): 211-252.

[10] ibid

[11] Levine, Ross, 2004. “Finance & Growth: Theory and Evidence”, accessed November 15, 2011,

[12] Van der Ploeg and Poelhekke. “Volatility, Financial Development and the Natural Resource Curse.” Economic Working Papers ECO2007/36 (2007). European University Institute, accessed October 16, 2011.

[13] Beck, Thorsten and Asli Demirguc-Kunt. “Law and Firms’ Access to Finance.” American Law and Economics Review 7(1) (2005): 211-252.

[14] Van der Ploeg and Poelhekke. “Volatility, Financial Development and the Natural Resource Curse.” Economic Working Papers ECO2007/36 (2007). European University Institute, accessed October 16, 2011.

[15] ibid

[16] Economic Diversification Data, 2009, United Nations Statistics Department, accessed October 17, 2011,

[17] World Bank Development Indicators, World Bank Database, accessed November 15, 2011,

[18] IMF Country Report No. 10/72, 2010, accessed July 20, 2011,

[19] World Bank Development Indicators, World Bank Database, accessed November 15, 2011,

[20] Looney, Robert. “Postwar Iraq’s Financial System: Building from Scratch.” Middle East Policy, Volume XII, No. 1 (Spring, 2005):134-149.

[21] Central Bank of Iraq, 2009, accessed November 3, 2011,

[22] Economic Diversification Data, 2009, United Nations Statistics Department, accessed October 17, 2011,

[23] “Iraq through Investors’ Eyes: Perspectives on Risks and Rewards,” Economist Intelligence Unit, accessed August 10, 2011, Presumably security is not the primary issue for banks that have already entered the market. More likely, reasons can be found in the responses of executives polled by the Economist Intelligence Unit in July 2009, 64 percent of whom said they would not invest in Iraq. In addition to violence and lack of infrastructure, they were deterred by “corruption, the bureaucracy, inadequate contract protection, and credit risks.”

[24] “Bank Capital Increase Deadlines a Red Herring,” Iraq Business News, accessed November 10, 2011,

[25] IMF Country Report No. 10/316, 2010, accessed October 30, 2011,

[26] World Bank Development Indicators, World Bank Database, accessed November 15, 2011,

[27] Annual Report, Central Bank of Iraq, 2010, accessed July 20, 2011,

[28] Annual Report, Suadi Arabian Monetary Agency, 2010,

[29] Represents money and “close substitutes” for money. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 is a key economic indicator used to forecast inflation.

[30] World Bank Development Indicators, World Bank Database, accessed November 15, 2011,

[31] ibid

[32] IMF Country Report No. 10/316, 2010, accessed October 30, 2011,

[33] ibid

[34] World Bank Development Indicators, World Bank Database, accessed November 15, 2011,

[35] Central Bank of Iraq, accessed Data as of December 2009.

[36] Shannon McCafferty, “Iraqi Bank Payment Systems: The Necessity to Upgrade” (paper presented at the USAID Financial Sector Development Project Meeting, Erbil, Iraq, May 16, 2011.

[37] Shannon McCafferty, “Iraqi Bank Payment Systems: The Necessity to Upgrade” (paper presented at the USAID Financial Sector Development Project Meeting, Erbil, Iraq, May 16, 2011.

[38] Iraqi Stock Exchange, accessed October 14, 2011,

[39] ibid

[40] “Dunia Frontiers Report, Foreign Commercial Activity in Iraq, 2010,”

[41] ibid

[42] “Nearly 25Percent of Iraqis Live in Poverty.” Associated Press, June 20, 2009. Accessed October 12, 2011.

[43] “State of Iraq Microfinance Industry Report, 2010,”

[45] IMF Country Report No. 10/316, 2010, accessed October 30, 2011,

[46] “MENA Development Report: From Privilege to Competition: Unlocking Private-led Growth in the Middle East and North Africa,” International Finance Corporation, 2009: 981.

[47] “IFC-Led Financing for Zain Iraq to Improve Telecoms Services, Support Growth in Iraq,” Zawya, March 1, 2011.

[48] “New Financing Arrangements to Help Expand Internet Access,” Iraq Business News, April 19, 2011.

[49] Al-Jarrah, Idries and Philip Molyneux, “Cost Efficiency, Scale Elasticity and Scale Economies in Arab Banking.” Banks and Bank Systems  Volume 1 (3) (2006): 60-89.

[50] Sara Hamdan, “A Big Push to Expand Mobile Service in Iraq.” The New York Times, March 2, 2011. Accessed November 24, 2011.

[51] Mark Sutton, “Asiacell and AMWAL Bring Mobile Payments to Iraq.” ITP, February 17, 2010. Accessed October 6, 2011.

[52] Ian Mansfield, “Asiacell Launches International Airtime Transfer Service.” Cellular News, November 24, 2010. Accessed October 6, 2011.

[53] Djankov, Simeon, Caralee McLiesh and Andrei Shleifer.“Private Credit in 129 Countries.” NBER Working Papers 11078, National Bureau of Economic Research.  Accessed September 16, 2011.

[55] Mona Mahmoud, “For the First Time, Shoppers Will Have Credit.” USA Today, June 2, 2005.  Accessed September 26, 2011.

Written by Benjamin

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