Shafaq News/Iraq is set to overhaul its state-owned banking sector in a bid to modernizeservices and address mounting financial burdens, officials said.
Therestructuring comes after years of pressure from the International MonetaryFund (IMF) to reform Iraq’s banking system, dominated by state-owned banks thathold the majority of the country’s deposits. The IMF has long argued that sucha reform is necessary to attract foreign investment and integrate Iraq into theglobal financial system.
RestructuringIraq's Banking Sector
“Therestructuring of banks is in line with the government’s program forcomprehensive banking reform,” said Mudher Muhammad Saleh, economic advisor tothe Prime Minister. “State-owned banks dominate 88% of banking sectorinvestments, leaving only 12% for the private sector. This imbalance hashindered competition and prevented the banking sector from reaching its fullpotential.”
Saleh notedthat the reform will also include private banks, ensuring they meet the samestandards as their state-owned counterparts. He highlighted the need to deepenthe financial sector, pointing to the low ratio of credit to deposits in theprivate banking sector.
“It is hightime to reform the banking sector, both public and private, to create aunified, competitive, and well-governed banking market,” Saleh said.
The Iraqigovernment has already initiated a study on the restructuring of state-ownedbanks following a meeting between Prime Minister Muhammad Shia al-Sudani and adelegation from Ernst & Young. In January 2023, Al-Sudani ordered aneight-month plan to improve the performance of Rafidain Bank, one of Iraq’slargest state-owned banks.
Hurdles?
Thestate-owned banks, particularly the Rafidain and Rashid banks, continue tomajor hurdles in their modernization efforts, according to a former CentralBank of Iraq official.
MahmoudDagher told Shafaq News Agency that these institutions have primarilyfunctioned as government salary disbursing entities rather than full-fledgedbanks. "Their technical capabilities are limited, and they rely heavily onelectronic payment companies for basic operations."
The sheersize of these banks, with numerous branches and a large workforce, complicatesthe reform process. Additionally, international sanctions imposed in the 1990sfollowing the Gulf War continue to restrict their ability to engage ininternational transactions.
"Thereare unresolved international sanctions and court rulings that prove theindebtedness of some state banks," Dagher said. "This isolation hashindered their participation in the global financial system."
He expresseddoubts about the effectiveness of large investments in these banks, arguingthat such expenses would not yield significant results. "It would befutile to spend substantial sums without achieving decisive outcomes," hesaid. "The costs incurred on these banks will not lead to a restructuringthat aligns their operations with the modernization and technologicaladvancements seen in other banks."
The Rafidainand Rashid banks have been subject to international sanctions since the 1990sdue to the Saddam Hussein regime's invasion of Kuwait. These sanctions continueto restrict their ability to conduct international financial transactions,particularly in relation to money transfers.
ModernizationAnd Reforms
Basim JamilAntoine warned in a statement to Shafaq News Agency that these institutionshave been operating under outdated systems and procedures for too long andmajor reforms are needed to align the banks with international best practices.
"Statebanks must evolve to meet the demands of the modern economy," Antoinesaid. "This includes eliminating bureaucratic red tape, investing intraining programs, and offering a wider range of financial services."
Whileacknowledging the vital role of state banks as a safety net, Antoine stressedthat they should not be limited to simply storing cash. They must activelyparticipate in credit provision and other essential banking functions.
The conceptof restructuring Iraq's state-owned banks has been discussed for decades, butprogress has been slow. Antoine highlighted the importance of a stablesecurity, administrative, and operational environment for implementing thesereforms.
Iraq'sMinistry of Finance oversees six state-owned banks, including Rafidain Bank,Rashid Bank, and the Islamic River Bank. Rafidain Bank, established in 1941, isthe country's oldest commercial bank with over 146 branches domestically andinternationally. Rashid Bank, founded in 1988, operates 162 branches withinIraq.