The reality of the banking system in Iraq

The reality of the banking system in Iraq

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The Iraqi banking system to pass through several stages  started from 1867, and  the oldest were the Ottoman Bank ,  Bank of the Shah of Iran , eastern British Bank, and then  the  Iraqi national banking stage was started in 1935 , which saw the creation of the agro – industrial bank that became after 1940 two banks: the Agricultural Bank , industrial Bank.
In 1941 , Rafidain Bank was established as a single commercial   government bank and commercial single, then the Central Bank of Iraq in 1947, the Real Estate  Bank has been established  in 1948 , Cooperative Bank and the Bank of mortgages, and many of the Iraqi private banks as Al-Itimad Bank   and United Bank and Rasheed Bank, in addition to branches of foreign banks , which exceeded the 15 bank , mostly belonging to the Lebanese banks, and Jordan.

At the present time the Iraqi banking system consists of 54 banks , including 7 – governmental organization, and one newly established Islamic bank , and 23  special commercial banks , 9 Islamic banks and 15 branches of foreign banks. As well as a representative office of  one foreign bank . There are many institutions that do some banking, of which 34 money transfer company, and about 2,000 exchange company affiliated  to banks , with the  loan guarantee  company and the company for   financing of small and medium enterprises, and the two companies for  electronic  banking services  and smart card, in addition to about 800 branch belonging to the banks and spread over All of Iraq ‘s provinces.
To understand  the  work  of banking system deeply  , it is required to identify the fiscal and monetary policy and the functions of the Central Bank, The functions of the bank are coined and printed the national currency and to support the national currency and the consolidation and install the internal and external value, in addition to strengthening the cash cover, and the management   of State’s  reserves of foreign cash and set up and administration of  the monetary policy to preserve  the stability of prices  and the prices of exchange and encouraging  the financial system growth and ensure its safety  and keep an eye on commercial  banking and banks  and workers  with currencies exchange works.

Fiscal policy is the approach  made of the government  in   its expenditure and revenue planning. As monetary policy is the process by which the government can control the supply of money, often targeting the rate of inflation, and interest rates to ensure price stability and public confidence in the currency, which contribute to economic growth, reduce unemployment and maintain the exchange rates that could to predict with other currencies. It can be noted that monetary policy is an  expansionary or deflationary  process; as the expansion increases the overall policy listings of money in the economy   which is  greater than the usual fast, and regarding the  deflationary is  expanding the money supply more slowly than usual; that it is shrinking, although expansionary used to combat unemployment in the recession by reducing the interest rates in the hope that the ease of access to loans will entice companies to expand,

The  monetary policy  owns   executive decisions in the hands of  authority such as  the  fees  of the currency coin  , and determine the price of gold and silver, the price of the local currency against foreign currencies.
After the Iraqi Central Bank Law No. 56 of 2004 and the Banking Act No. 94 of 2004, according to the  approach of the  market economy , the interest rate was   Liberalized , and the abolition of credit plans, opening the door to work for foreign banks either through participation in local banks, without putting any limits on the participation rate or open branches in Iraq, without specifying the capital, in addition to the possibility of opening offices to represent them, and the launch of freedom of foreign exchange and the abolition of restrictions on the transfer of money, except for the requirements of the law  of anti – money laundering and terrorism financing ,  and ensure that all banks, including  specialized banks to one law  that take care for  the commercial banking activity only.

After April 2003 the Iraqi economy collapsed and the banking system is underdeveloped in all administrative, financial and service areas, because of the wars , economic blockade and the militarization of production, and the involvement of government banks in  external and internal financial ‘s relationships that are complex and confusing to it , in addition to Iraq disruption and its economic  activities for global developments in all intellectual, scientific and material fields . Which led to the weakness of international confidence in Iraqi banks, and the weakness of the Iraqi role in the economic activity and development activity.
Hence the need to reconsider the status of the banking system in Iraq, and  the laws organizing  its work , and improve its performance, and  activates its role in the economic and development activity and the strengthening of international relations.

Since mid-2014 , Iraq is going through an suffocating economic  and financial crisis  that  began to escalate  and worsen  for  objective  and subjective reasons  , including financial mismanagement  and financial corruption  in the country’s  economic  institutions  and  random and non-planned  manner   for  oil revenues  achieved  in previous years and the lack of government  reserves and falling of oil prices  in the global market by 65% from the prices    and the costs  and requirements  of the war on terror  and the occupation of Daesh in the range  of 40% of the area of Iraq and the lack of   clear aproach or strategy  to the Iraqi economy  and the lack of  clear visibility and coordination  between  fiscal and monetary policies  and rely  entirely  and exclusively  on oil resources  and the failure  of successive  governments to develop plans and programs  to diversify resources and encourage  other economic sectors , such as agriculture , industry , tourism and other sectors  .

And not to apply the strategies drawn up by the committees and bodies of  advisers in the Cabinet and in collaboration with the UN and international organizations, of which there were up to 16 strategy which  have not been put into practice as they are not supported  at  the days of financial abundance of oil revenues, and not to go towards building and  secure infrastructure  and sponsoring and supporting institutions  to the Iraqi economy and Iraq enter into agreements and contracts for the long – term with an aim of developing the oil industry, but the reality of the situation confirms the great damage they would have by  these contracts, for example licensing rounds  contracts ,  they are  service contracts ? How to be  service contracts  its  duration of 20 years? And  how the oil – producing fields , one of the most important fields of Iraq  , are given to foreign companies? And why Iraq has signed contracts and   originally does not suffer at the time from the funding restriction ?
Is Iraq really can produce of what was guessed  for it  in the 2017 budget? And if  Iraq  was  able to produce this amount  ,  could  export it ? If Iraq managed to export it  ,   would it affect the price of oil? What The impact of these contracts on OPEC? Could Iraq reach the required level of production  or not  , and The Central Bank’s insistence on the use of the mechanisms and methods previously adopted in the monetary policy applications, including the continuation of  the auction of foreign currency sale and sell up to $ 200 million a day.

Central Bank of Iraq  authorized the establishment of non-solid  banks   and the granting of licenses for the shareholders and owners’ capital do not understand  something about the economy and the banking  as important  for the bank’s capital  to have not less than 250 billion Iraqi dinars, and  a large part  from currency traders and money changers were turned to be  the heads of the boards  and  directors and members of the boards and  they brought commissioners managers and   incompetent banking leaderships   and started  from the concept that the bank is to implement their own business and have forgotten that there are rights of shareholders and specific economic  objectives  to the banking business and is contributing to the gross domestic product and thus be for the banks an important and essential role in sustainable economic development and provide the best of modern and technical services to customers and the development of a culture of saving among the public which  the statistics and indicators in 2015. confirm the savings rate reached 23% and the proportion of compactness reached 77%. this indicates a lack of public confidence in the banking sector of Iraq . And maintaining the application of laws that do not fit with the reality of the Iraqi economy, which was brought by US civil administrator Paul Bremer in 2004, including 94 Banking Act of 2004 and the Central Bank Law 56 of 2004 and the law of Iraq Stock Exchange 74 for the year 2004.

These laws are governing the banking and economic work in Iraq in addition to the illegal investment and money laundering laws, which had been making modifications to them, and that the banking sector (financial sector and investment), which should play the desired role in the economic development  is weak and is threatened with the  collapse of the Iraqi economy, especially as the price of oil does not exceed $ 30 a barrel while the budget for the year 2016, adopted a price of $ 45 a barrel, so we think it should be on the Council of Ministers and the Committee of Central Bank of Iraq to stop and review, analyze, and diagnose the causes.   The Iraqi market characterized of a lack of the number of citizens who have a bank account, which allows the banks a substantial margin to attract thousands of customers who are looking for an integrated banking service, and despite the diversity of Arab and foreign banks operating in the country, but most of them do not have much capital and work is limited to speculation in the currency auction to achieve quick profits which will reflect negatively on the reality of the local market which  have been recorded cases of smuggling Of capital outside the country in the civil and foreign banks by dealing at the central bank auction, which should set strict economic laws to the work of banks,

Central Bank pointed out  of the most prominent  problems of the Iraqi banking sector   by the decline of  the banking bloc, which is supposed to be a bank for every 10,000  people , but the existed one  are    much less, where there is a bank for every 32,000 people and this is  little compared to international standards, and the absence of active banking strategies and  annual detailed plans for the majority of banks provided for by the banks law Article 26 , and  banking services do not fit with the requirements and directions of the Iraqi economy to a market economy, where the number of services of the banking Act Article 27, amounted  more than 50 banking service either actually made the 20 service, in addition to the weakness of banking technologies means ( Home banking services, for example) to see a customer revealed remittances account, pay bills for gas, electricity, phone,

Who is at home  and this service  was first used in Britain   in 1983   while in Iraq ,it has  only used in a very narrow range.

And  the administrative structure suffers in many banks, especially government ones from sagging banks, in addition to the government’s policy of discrimination in dealing with private banks, which is to prevent the state departments and companies   from the deposit of  their money in those banks and non-acceptance of certified and regular instruments and letters of guarantee issued by it, but within certain limits, nor allow competition with other banks, and the absence chock institutions such as the deposit insurance Corporation and the insurance on loans and study the market risk, traditional routines  procedures adopted by the office of  Registrar of companies  and the delay of  ratification on  the decisions taken by the General Administration of banks, including the increase of capital, holding its general assembly meetings, delaying the re traded of the  private banks shares  on the current trading sessions in the Iraq market for Stock Exchange, which causes damage and losses to shareholders and investors, and  the government banks and some private banks are  delayed in  the acquisition of comprehensive banking systems or networks to link their branches with communications networks  with its Public management  and non-application of the electronic banking.

a number of Iraqi parliament members specialists in the economic sphere pointed out  that “the failure of local banks made the Iraqi market in need of investment for foreign banks, and the reason for their decline in the country is the failure of the Iraqi banking sector, the fact that the foreign investor is looking for a safe and advanced banking environment to facilitate his work and keeps his money.” .

They stressed the need of the Iraqi market to the global banks with an investment character  that  help  to attract investment companies and transfer of expertise to local banks, and the advancement of the process of investment through the granting of loans and money transfers, and the use of modern banking techniques that to facilitate the  works  and speed up the completion of transactions.

Member of the Committee on Economy and Investment MP / National white bloc  / Aziz Mayahi, said, Iraq needs foreign banks with investment character to support the investment process in the country, adding that local banks lacked not extend technologies that work with the Universal, and that investment needs to be a solid legal environment  and  the political and security stability  and developed banking sector, to enable companies to come to invest,  because they are looking for   a safe environment in which the rule of law and modern systems.

He explained that the Iraqi environment need sophisticated foreign banks with high capital  with  an investment  nature  for  the support of the investment process and economic development in the country, plus they will be able to create a competitive atmosphere between them and the local banks , and therefore will develop the banking sector.
He added: There is the difficulty of handling the banking due to the fact that the Iraqi banking sector  lags behind and is working with old systems and legislation  that  do not keep pace with   the world ‘s development, noting that most of the Iraqi banks limited their work to  deposit  the money and selling foreign currency, so they need to issue letters of guarantee to attract investors.

MP / coalition of Kurdish blocs / Sheriff Soliman, called to encourage  solid international banks to open branches in Iraq to attract foreign investment and to support the reality of investment in the country.

Sulaiman said that one of the most important obstacles to the process of investment in the country is the lack of a sophisticated banking system, where Iraq has  economic elements  and international companies have the desire to invest, but they are surprised by a lot of obstacles when they came to Iraq.

He added that the process of the advancement of the investment requires the presence of sober  and sophisticated international banks , and the development of foreign relations, and the enactment of laws for working to meet the need for companies and push forward the wheel of investment.

And banking expert Mohsen Ali stressed , on new legislation for banks that the applied   law is not conducive to the development of the banking sector and does not attract international banks to operate in the country.

He explained that the local banks are not able to fulfill the requirements of the investment process in the country due to lack of their capital, and that the government and private banks do not  meet   the investment  and the requirements of economic development process  such as   grant  loans  due to the limited  physical potential and technology  ..

In spite of the Investment Law No. 13 of 2006 had excluded the investment in the banking sector from its provisions , but that the investment in the banking sector takes legal framework based on the legal central bank No. 56 of 2004, banks No. 94 of 2004,
and  the banking expert Muwaffaq Hassan Mahmoud, attributed  reasons  for the failure of Iraqi banking sector with its current structure , to many factors , including the “weakness and confusion in  a number of the instructions  not few  issued by the Central Bank of Iraq between now and then, and withdrawn or modified days later. The decline in bank supervision efficiency and professionalism , but lack of seriousness. ”
He said that the supervisory methods on banks have not kept pace with the evolution of central banks in developed countries and in neighboring countries, including preventive controls, in addition to the lack of the banking system to the corporate governance rules needed to monitor the performance of boards of directors and, and validation of the commitment of the laws, regulations and instructions, and the lack of sector of the culture of banking risks and ways evaluation and management and ways to mitigate or reduce them. Also it included reasons, according to Mahmoud  the emergence of the boards of management and   banking managements   which are  non – professional   that   have no experience nor knowledge of banking work, and lack of qualifications and  only had  a sudden financial fortunes  that  suspicions  hovering about their sources.
He pointed to another problem facing the banking sector «The faintly funds  of capitals that do not meet the needs of development , as well as other sources of financing».
And  economist Ahmed Alobreha saw , that “a manifestation of failure in Iraq is  the inability of  the government  to enforce the law, as the central bank is unable alone to impose censorship and evaluate the banking performance level.”
Financial Advisor to the Prime Minister  , Mudher Mohammed Saleh emphasized , the banking market «is homogeneous under the attraction  of State – banks to  capital and deposits , which had  owned   90% of them, to keep   10% for the special ones . He explained that ” the  government banks are  backward and the private ones  operate according to the nineteenth century systems.” And he declared that «adults who get a credit  of 12 percent, and with each failure  there is a banking transaction and due to  the  tripping    32 transactions were withdrawn     since the private banks are very conservative and the government one are on the contrary, and that  it  is evident from the large size of loans granted by the  government.

Salih said the currency auction file is  «important and necessary» , and asked « could  they create a bank to the private sector  that its duty will  be the opening credits of the centrality  and shift gradually to cover imports?».
The banking expert Samir Nasiri warned against the “collapse of the banking system in Iraq soon in the event of problems faced during this year did not address.” He stressed that its collapse means the collapse of the economy. He pointed out that research and studies and the results of indicators do not receive the attention evidenced by the decline in deposits recorded by the five largest banks in Iraq, as well as the low liquidity and operational, credit and capital investment and profits, without losing sight of the impairment of assets. He stressed that these indicators are dangerous.
The MP Mehdi al – Hafez described  the  control which is supposed to be exercised by the central bank for the weak and confused, and announced that the sale of dollar by the central bank process represents a sensitive issue for the citizen, it is assumed that the process of converting   amounts    to be ordinary and easy   as they are in other countries. He stressed the lack of separation between what exists  in the   transactions of the banking sector and    the central bank , and the corruption that exists in the state.

The tax policy:

The government should take advantage of the taxes and customs duties imposed Since all countries of the world imposed it  and regards it as a way to achieve a number of economic, developmental, financial and social objectives and to protect local products from foreign competition and the expansion of domestic production and  development of export , as well as the creation of the financial resources of the public budget to cover government expenditures as well as facilitate the task of monitoring and controlling the volume of imports for processing trade balance problems.
In countries that do not have , for example  the important natural resources such as the Hashemite Kingdom of Jordan , they rely almost entirely on taxes and fees to finance public expenditures and budget. In Iraq, the lack of development vision  and the  appropriate economic policies and the rampant financial and administrative corruption  in all aspects of the state has deprived the country to take advantage of this important resource and that such a big problem for the Iraqi economy.

The impact of this  has clearly emerged after falling world oil prices , as happened since mid – 2014 and so far , which led to the confusion of the government ‘s accounts and the difficulty in securing staff and retirees ‘ salaries and cover the war against the terrorist al Daesh  and work on the growing budget deficit caused very largely by the low cover expenses of oil export earnings  .
To face these consequences the government was forced to apply a number of ways to address the situation, including reducing the number of ministries and the reduction of the three presidencies salaries, deputies and senior staff, as well as deducting a percentage of salaries of employees, retirees and some other actions , lending from the International Monetary Fund and the imposition of taxes and customs duties and increase some of the other ones as well impose or increase fees for certain services provided by the State to the citizens who do not have to afford the taxes and fees or its increase at a time the state is still spending huge amounts of money to remuneration and deputations and incidentals on the  ministers and MPs and senior grades as if there is no state of austerity suffered by junior staff and the lower classes of the people.

One of the problems facing the application of taxes and fees that  they lead to higher prices for imported goods subject to taxes and fees in the local market ,  and this to burden on citizens, including the lack of efficiency and fairness of the administrative body responsible for guessing  and the collection as the  money  collected  from these taxes do not all go back to the public  budget and even go into the pockets of some parties and individuals and corrupt mafias in various departments and state agencies noting that there are  in the the tax collection  devices   some  estimators haggling citizens to pay a certain amount in exchange for reducing the amount of tax dramatically and tempting  , which encourages citizens to bow to this demand and lead to the public treasury deprived of a lot of this money.
There are a lot of doubts about the fate of the money collected from the border outlets and citizens, including a trillion and two hundred billion dinars that  had been  collected from citizens in the past year as a result of the rampant corruption in the state apparatus .therefore, to achieve the goal behind taxation of citizens requires that be coupled with the means  to ensure   ruling out  the impact of corruption on this process and  making sure of its  collection  accurately  and deliver it to the competent financial authorities .

Regarding the extent of corruption at border crossing points, the central bank governor stressed that the border crossing points for a country that imports everything under the current circumstances is assumed that this process should be the highest degree of organization, competence and integrity, not  only for financial reasons , but also for  environmental and health reasons  and safety of citizens. The materials reach and penetrate the border crossing points and the enter   our cities which lacked the specifications or forged or  date of   its expire was changed  , referring to the border crossing points remain , however in the hands of the  corrupt , and in the hands of those who  are dominant on  it, and that the custom brokers of goods in the border areas and some workers are getting more than   the state.

The bottom of the above, the economic reforms  are necessary  to minimize the suffering of the Iraqi people of all groups and its components resulting  from the lack of honorable living  and poor services , unemployment and poverty, which are  a reflection of the poor economic  conditions   and on the forefront  the corruption  of banking  sector , where the unemployment rate has risen to more  than 25% between  youth groups and graduates who are able to act as the poverty rate rose , according to the official data of the ministry of planning and development cooperation  and the ministry of Labor and social Affairs .

Shatha Khalil 

Translated by : Mudhaffar Alkusairi


Sources:
concept and what fiscal policy Http://www.mouwazaf-dz.com/t523 –
Http://mawdoo3.com
Http://almothaqaf.com
CBI / General Directorate of Statistics and Research
tomorrow Press
Baghdad (news)
economist Network Iraqis / Nabil Jaafar Abdul Redha
d. Sinan Mohammed Rida al – Shibibi
Medhat al – Quraishi

Rawabet Center for  Research and Strategic Studies