Banking sector faces turning point in Iraq’s reform drive
Shafaq News- Baghdad
Iraq’s banking sector faces a “critical crossroads” after years of weak management, oversight failures and declining public confidence have limited its ability to attract savings and finance investment and development, the prime minister’s economic adviser told Shafaq News on Saturday.
Mudher Mohammed Saleh said building an efficient banking system could no longer be delayed, particularly in an economy heavily dependent on oil for foreign currency. “Restoring confidence requires stronger governance, supervision and compliance, strict anti-money laundering and counter-terrorist financing standards, restructuring troubled banks, addressing weaknesses in their financial positions and raising capital in line with risk levels and modern banking requirements.”
Technology is another key part of the overhaul, Saleh said, calling for improved digital systems, cybersecurity and risk management, along with secure and reliable electronic payment services. Such measures would reduce reliance on cash, expand financial inclusion and bring more people into the formal banking system.
However, technology and oversight alone would not restore confidence. Banks also need greater transparency, stronger depositor protections, clear deposit safeguards, faster complaint handling and the ability to protect customers’ money, according to the advisor.
He called for banks to shift from traditional services and liquidity management toward financing the real economy, particularly small and medium-sized enterprises and productive agricultural, industrial and service sectors.
“A bank that does not finance productive economic activity remains a financial intermediary with limited impact,” he said, adding that institutions capable of mobilizing savings, managing risks and financing production and investment can become partners in development.
Read more: Iraq turns to borrowing to cover salaries amid oil-revenue collapse
From Cash to Credit
International economics professor Nawar Al-Saadi told Shafaq News that banking reform had become essential for moving Iraq from a cash-based economy toward one driven by financing. He said the Central Bank of Iraq’s (CBI) program offers banks several paths, including remaining in business, merging or leaving the market, alongside tougher governance, compliance and risk-management requirements.
Rebuilding confidence requires sound governance, solvency and transparency rather than campaigns to attract deposits, Al-Saadi said. He called for resolving the status of banks unable to continue operating, strengthening the capital of viable institutions, improving disclosure and independent auditing, and holding boards and executives accountable for violations.
Depositors should find banks “safer and easier to use” than keeping cash, he added. This would also require greater lending to small and medium-sized businesses and productive sectors, as well as effective credit-scoring systems instead of excessive reliance on traditional collateral.
Read more: Iraq’s private banks: Capital Growth and the structural credit gap
Protecting Deposits
Economic expert Ahmed Al-Janabi said reform required a comprehensive package beginning with restoring confidence and protecting depositors’ money, noting that many Iraqis remain reluctant to place their savings in banks.
He noted that the reform program involving global consultancy Oliver Wyman was developed against the backdrop of restrictions on several Iraqi banks. Seven institutions subsequently entered an initial phase allowing them to resume transactions and transfers in foreign currencies other than the dollar, while further reforms remain underway.
Al-Janabi estimated that currency issued by the CBI totals around 103 trillion dinars, while about 20 trillion dinars remain outside the banking system, much of it “hoarded in homes.”
Economic expert Ahmed Abdul Rabbo said the reforms undertaken with Oliver Wyman were important for rebuilding the banking sector, improving its efficiency and strengthening its links to the global financial system, calling for faster implementation.
He welcomed the decision allowing seven banks to conduct foreign transfers in currencies other than the dollar but said the priority should be enabling them to gradually resume broader operations. Reform should also extend beyond those institutions, he said, with other banks assessed and allowed to conduct foreign transfers once they meet the required standards.
The Central Bank has been working with international firms to overhaul the banking sector and address compliance problems that had cut several Iraqi banks off from dollar transactions. On July 18, the CBI reached an agreement with the US Treasury Department allowing seven eligible banks to resume foreign correspondent banking in currencies other than the dollar. Access to dollar transactions remains subject to further compliance, governance and relicensing requirements.
Read more: Exchange offices expand in Iraq: Cash economy outpaces banking sector
