Emerging Iraqi banks betting on reconstruction

Posted in Iraq | 30-Dec-04 | Author: Borzou Daragahi| Source: International Herald Tribune

Financial industry is creaking to life

BAGHDAD Despite the continuing violence and political uncertainty, Iraq's long-suffering financial industry has begun creaking to life.

The revival is being led by some private Iraqi banks that have begun taking advantage of the country's liberal new economic rules, have harnessed the surge of reconstruction money flowing into the country, and, in some cases, have forged foreign partnerships.

Though the financial environment here is such that businessmen in suits tote revolvers and hire bodyguards just to check their bank balances, "The prospects for banking are good, when they fix the problem of security," said Abdul Muhsin Shansal, chairman of the Iraqi Bureau of Financial and Economic Consultations, a business consultancy in Baghdad.

"We need a complete rebuilding of infrastructure," he said. "We need everything from bridges to roads to dams. That's billions of dollars. We'll need banks for all of this."

Currently, those banks include two state-owned behemoths, with about 160 branches each, and 19 private-sector banks - some with shares listed on the Baghdad Stock Exchange - ranging in size from one to 19 branches. All but one are run according to Western, rather than Islamic, banking principles.

Many analysts say the industry is in a sorry state, a legacy of Saddam Hussein's stranglehold on business and of a dozen years of United Nations sanctions that prevented many technological advances from reaching the country.

At the state-owned banks, the branches are cold, musty, underlit chambers where customers stand in line for hours as employees sit idly at their desks. While the private banks tend to look better, there are no cash machines or online payments in Iraq. Banks handle transactions by hand rather than using the electronic Swift, or Society for Worldwide Interbank Financial Telecommunication, code, the international electronic standard for moving money.

Though most banks use computers, many branches have antiquated equipment. Electricity shortages often render the machines useless.

Moreover, Saddam's policies encouraging reliance on the state continue to shadow Iraq's financial industry. According to a study by Kais al-Badri, an adviser to the Dar es Salaam Investment Bank, a commercial bank in Baghdad, only 16 percent of the $2 billion or so on deposit nationwide resides in private-sector banks. Much of the rest remains in the hands of the two state banks: Rafadain and Rashid.

Still, the fall of Saddam's government has encouraged the private sector.

At least two new banks have opened since April 2003, and eight more have submitted applications to start up. Foreigners have begun venturing in, taking advantage of investment laws that grant non-Iraqis a level of access to the country unprecedented in much of the Middle East. And Iraqi banks, mostly barred from ties with the outside world under Saddam, have been welcoming the foreigners and seeking more as well as venturing abroad themselves.

The Export & Finance Bank, a Jordanian investment bank, has bought a 49 percent stake in the National Bank of Iraq, a publicly held bank based in Baghdad, while the National Bank of Kuwait has bought a majority of Credit Bank of Iraq. Standard Chartered Bank and HSBC Holdings, both based in London, have won contracts to do business in Iraq, though neither has done so yet. Two state-owned Iranian banks, Mellat and Saderat, have applied to do business in Iraq.

The big lure is the reconstruction money - estimated by Shansal, the consultant and a former banker, as at least 400 trillion Iraqi dinars, or $274 billion. And despite the daily litany of bad news here, commercial life continues.

"Business is less than what we hoped for, but economic expansion is still going on," said Saadoon Kubba, chief executive of Commercial Bank of Iraq.

Some analysts say that Iraqi business culture remains problematic, leaving financial transactions too mired in ancient ways.

"There are no real investors," said Raad Omar, chairman of the Iraqi-American Chamber of Commerce and Industry. "To borrow money is very onerous - they have to put up property and they only get 10 or 20 percent of the value. In Iraq they work with cash. They get a loan from another business guy who trusts them and gives them two or three weeks to pay it back."

Indeed, Iraq's tight credit market problem has only gotten worse. According to a study by Citigroup, which has no banking operations in Iraq, nearly 30 percent of the country's banking assets remain uninvested, up from 12 percent in 2001.

But others say Iraqi banks, at least the private-sector ones, will soon be more agile, modern and profitable. Kubba said Commercial Bank had already begun taking steps toward introducing Swift codes, bank machines and credit cards. And most of the banks have invested in computer training either in Iraq or abroad.

Under new rules, interest rate ceilings have been removed and banks have a freer hand in issuing consumer credit.

"Many more changes in the money market, capital market and the banking business are envisaged, and it is now only a matter of time - short rather than long," Mowafaq Mohamad, managing director the Bank of Baghdad, one of Iraq's largest private banks, wrote in a report published by the Arab Bankers Association of North America.

Perhaps more important, said Kevin Woelflein, a former United States occupation adviser working with commercial bankers here, is that Iraq's bankers have become bolder, more willing to stand up to authority as well as to reach out to the rest of the world, and to do so despite the hardships.

The Iraqi Middle East Investment Bank, for instance, took a 500 million-dinar loss when looters ransacked its Mosul and Basra branches last year. But it has since recovered, and has been hiring representatives in 20 foreign countries, including Lebanon and Germany, said Zuhair al-Hadith, the bank's chief executive.

"There is no regulation on moving money inside or outside of the country," he said. "Businessmen who want to work here or abroad can do it without any barriers."

The new laws also aim to make Iraqi banks healthier by increasing their minimum capital to 50 billion dinars by 2006 - a threshold no Iraqi banks now meet. This, said Shansal, the consultant, will force more Iraqi banks to work with foreigners.

Most foreigners, however, are taking a wait-and-see attitude on Iraq as the violence continues.

"I am the person who was supposed to go to Iraq and look at investment opportunities for our company," Elham Mahfouz, head of international banking at the Commercial Bank of Kuwait, said during a telephone interview. "How am I supposed to go to Iraq in this situation?"

Several foreign bank officials declined to comment on their interests in or plans for Iraq, citing security worries.

And many experts speculate that both Standard Chartered and HSBC have yet to fulfill their commitment to open branches in Baghdad because of the violence, which has included a spate of kidnappings of wealthy Iraqis and their families.

Even the simplest financial transaction can be a frightening experience.

Outside the Iraqi Middle East Investment Bank headquarters, guards fidget with their AK-47s as they prowl the perimeter. Well-heeled men, forced by Iraq's intermittent telephone and postal services to do most business in person, look over their shoulders as they surrender their weapons at a checkpoint before entering to visit tellers and get their bank statements, make a deposit or withdraw funds.