Banking on security in Baghdad

Under the watchful eye of a guard in army fatigues — with badges depicting a dagger through a skull — the meeting of the Iraqi private banks association was like any gathering of mostly fat and balding money men.

Observed by the guard clutching a rifle in the corner, men in suits argued about how to encourage growth in Iraq’s long-moribund finance sector, where the ”green shoots” of security have drawn bankers out from behind the barricades.

”The security now is better than one or two years ago … I go out as an Iraqi citizen because I’m proud of my country, regardless of bombs or terrorism,” said Abdul-Hussein al-Rabaie of Iraq’s Al-Bilad Islamic Bank for Investment and Finance.

Happily for the men at the heavily guarded meeting — bankers are prime kidnap targets in Iraq — their patriotism has coincided with bumper profits.

Bankers at the get-together spoke of a surge in deposits and loans in the past two years as the violence that gripped Iraq after Saddam Hussein’s fall in 2003 began to subside, revenues from record oil prices flowed in and government salaries rose.

Banks are among the top picks on Iraq’s nascent bourse.

Total bank deposits in February — the latest figures available — jumped by half to 36,6-trillion Iraqi dinars ($31-billion) from a year before, and loans surged 65% to 5,1-trillion dinars over the same period, central bank data show.

The figures are tiny by international standards, but even global banking giant HSBC sees bigger things to come in Iraq, home to the world’s third-largest oil reserves and desperate to rebuild after years of war.

”You have a country with an infrastructure largely in tatters, and tremendous potential in oil and gas,” HSBC Bank Middle East Ltd chairperson Youssef Nasr told Reuters by telephone from Dubai.

Through its 70% stake in Dar es Salaam Bank, which has a capital of 50-billion Iraqi dinars ($43-million), HSBC is one of the few foreign lenders with a presence in the country and is considering expanding along oil export routes.

Like other banks, HSBC shut some of its 14 branches after sectarian violence made parts of Iraq no-go zones.

”Now all branches are open or plan to reopen,” Nasr said.

Brave bankers, cowardly capital
Bombings and shootings are still common in Iraq, and in a booth outside Warka Bank for Investment and Finance in Baghdad’s fortified Green Zone a guard routinely asks customers to hand over their weapons before entering.

Administrative chaos is also still evident at Iraq’s two main state banks, Rafidain and Rasheed, where on pension payment days harassed clerks using ledgers and antiquated equipment struggle to restore order to a clamouring crowd.

And if bankers may have found the courage to get back to work in Iraq, capital largely has not. Businessmen bemoan the strict conditions attached to meagre loans from the country’s mostly small, under-capitalised family-owned banks.

”The banking sector here is growing, but everyone knows capital is cowardly, and it will look for safe homes,” said businessman Kareem al-Bakri, minding a sofa store for a friend.

Iraq’s private sector is weak and basic, and for most Iraqis commerce is still cash-based. While the days of businessmen walking through Baghdad airport laden with bricks of $100 bills may be over, credit cards and cash machines are still rare.

Iraq has the potential for a dynamic and liquid capital market, but bankers say the main challenge is prizing more of Iraq’s petrodollar billions from the hands of the state and putting it to work in the wider economy.

Restrictions on the business that government agencies can do with private banks have not helped: the social security administration, for example, only accepts state bank cheques.

”The biggest problem we face are the barriers to government bodies dealing with private banks, due to a decision by the Finance Ministry prohibiting this,” said Hussam Unaybi of the Economy Bank for Investment and Finance.

Cash flow problems
Once completely nationalised, most of Iraq’s banking sector is still run by the state, which controls about 80% of gross domestic product. Only about a third of customer deposits in Iraq are placed with 36 relatively small private banks.

”The Finance Ministry … has cash flow problems. Some ministries have a shortage and others a surplus, and there’s no system to manage this, so it just uses two state banks to know what it’s doing,” said central bank senior advisor Mudher Kasim.

The central bank, ringed by concrete blast walls, is trying to strengthen the banking sector. It plans to guarantee deposits, reduce risk by boosting minimum capital requirements and encourage small private banks to consolidate, Kasim said.

It is also looking at ways to encourage the growth of Iraq’s Islamic banks, for which there is strong demand, by adjusting banking rules to cater for the sector’s prohibition on interest and its focus on profits through investments.

Iraq in recent weeks has begun to clarify property and real estate ownership laws, a prerequisite for mortgage lending, and on June 29 and 30 the country holds its first auction of major oil field contracts since Saddam’s fall.

The auction and Iraq’s oil laws are mired in controversy, but if contracts are awarded and fields developed, the boost in oil revenues for firms supporting the industry and other regeneration projects will likely swell bank coffers.

”This is typical of what we’ve seen of other oil exporting economies in the Middle East. In most of them the big money started in the hands of the government and the national oil companies, then they contract out projects,” HSBC’s Nasr said.

Still, big money has a long way to filter down to Iraq’s legions of unemployed and those just making enough to get by.

”I don’t have a bank account,” said shop assistant Dhiaa Ali. ”Do average Iraqis really have enough spare cash to open one?” — Reuters

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