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The
suffering of the people of Palestine is being graphically illustrated on our
television screens and in our newspapers and we hear daily examples of the
stress, trauma and tragedy that has become the norm for so many Palestinians.
Conscious of the concerns of Arab Banker readers and their desire to do
what they can to help the people of Palestine the Arab Bankers Association has
established the ABA Emergency Palestine Relief Fund. All monies donated
to this fund will be distributed on an equal basis between the following
well-respected UK-registered charities that work in Palestine. • Action around Bethlehem Children with Disability • Foundation for Al-Quds University Medical School • Friends of the Spafford Children’s Centre • Interpal • Medical Aid for Palestinians • St John Opthalmic Hospital If you would like to donate to this group of charities please contact the ABA or click here to download a Pdf file containing the donation form (Requires the Adobe Acrobat reader) |
Restoring Iraq's banking sector
Amidst the violence and turbulence in Iraq, the Coalition Provisional Authority’s (CPA) efforts in restructuring the shattered banking system seems to be a top priority in its agenda to advance the economy in Iraq. Following the fall of Saddam Hussein’s regime on 9 April, 2003, violence and looting occurred all over Iraq. People looted banks, museums, hospitals, ministries and many more. According to reports in the international media* around US$ 400 million in cash, gold and other valuables were looted from Iraqi banks and their branches. Only a quarter of Baghdad’s banks escaped the looting, by one estimate. However, the recent looting is just one of the many ailments of the Iraqi banking sector, suffering for years from state domination, war and close to 13 years of embargo. The banking sector in Iraq dates back to the mid-1930s when the Iraqi government decided to establish banks in order to make credit available to other sectors of the economy. Branches of foreign banks and private Iraqi banks were opened as the economy expanded. In 1964, Iraq consolidated and nationalised private banks into what is known today as the Rafidain Bank, the largest state-owned bank in Iraq. In the 1980s, the banking sector’s assets grew to record levels mainly because of its role in meeting the government’s financial obligations. The Rafidain Bank and, later the Rashid Bank, made large profits from financing the state treasury by acquiring state treasury bills. However, the banking system took a major hit when the UN economic sanctions were imposed in 1990. The banks started to finance the Iraqi military and the then ruling party. State control The government opened its banking sector to local private banks in the early 1990s to spur business and help offset the impact of sanctions imposed after the Gulf war. Following that, 16 private banks were established. By the year 2000 there were 21 state-owned and private banks operating in Iraq with a total number of 493 branches. This means that in Iraq there is one bank branch for each 48,000 Iraqis approximately, which is self-evident of the limited reach of banks. The private sector banks had a deposit base of ID 89.4 billion as of 2000 and a market share of around 6.6%, indicating that state-owned banks controlled over 93% of the deposits. The private sector banks had extended ID 46.3 billion in loans as of 2000, which represents a high market share of around 21% in loans extended as compared with their share of deposits. The credit deposit ratio for the private sector banks was around 52%. The net profit of the private sector banks in 2000 was ID 4.16 billion, proving that banking was one of the most profitable businesses in Iraq. The future of the Iraqi dinar The Baghdad Stock Exchange is expected to open in 2004. Fifteen private banks are listed on the Baghdad Stock Exchange with an aggregate net profit of around ID 6.4 million in 2001. Private banks were able to maintain acceptable return on investments even with the negative economic and political environment. The return on equity of listed banks ranged from 0.4% case to 205% and averaged at around 30%. The banks with the largest authorised capital include the Middle East Bank, the Commercial Bank and Dar As Salam Investment Bank, with the largest capital of any listed bank not exceeding ID 2,400 million (roughly around US$1.2 million). The banks in Iraq are suffering from various problems today, including the uncertain security situation in Iraq, the instability of the Iraqi dinar, the lack of adequate capital markets, the outdated banking regulations, and the lack of transparency. The situation is made worse by the fact that local banks have limited capital bases, limited customer reach, outdated technologies, and inadequately trained human resources. The first step towards restoring the banking sector has already been taken. A new series of Iraqi Dinars will soon be circulating in the market. The Iraqi Central Bank will allow for the exchange for a period of three months, starting from 15 October to 15 January, 2004. The new Iraqi dinar will be hard to counterfeit, more durable and has more denominations. Other currencies circulating in Iraq are the US dollar and the Kuwaiti dinar, which are being exchanged in the open market. As for the ordinary consumers they are paying for goods in the Iraqi dinar but their salaries are being paid in US dollars. Trade Bank start-up The Governing Council in Iraq and the CPA seem to be committed to the restoration of the banking system in Iraq. The CPA recently awarded a consortium led by the US based J P Morgan Chase & Co the tender for operating the Trade Bank of Iraq. The Consortium consists of 13 banks representing 14 countries including Standard Chartered PLC of the United Kingdom, National Bank of Kuwait, The Bank of Tokyo-Mitsubishi, Ltd, and Royal Bank of Canada, among others. The Trade Bank of Iraq’s start up capital is US$100 million, US $ 5 million from the CPA and US$ 95 million from the United Nations reconstruction fund made up of oil revenues. The Trade Bank of Iraq will provide letters of credit for the Iraq government to purchase heavy equipment and goods. Initially, the purchases may average around US$ 100 million a month but the bank’s overall business may reach up to US$ 500 million a month after Iraq’s oil industry booms, according to US estimates. The Trade Bank of Iraq is expected to start issuing letters of credit soon. The bank is planned to operate for 12 months but may continue for another two years. Restructuring ahead On the same front, the CPA is also tendering the restructuring of Iraq’s two largest state owned banks, namely the Rafidain Bank and the Rashid Bank. For the banking sector to be revitalised, it will have to be opened up for the private sector. Some state owned banks may have to be privatised and the existing private banks consolidated and restructured. It is also inevitable that the market will witness the entry of foreign banks and financial institutions. As per the new law, the Iraqi Governing Council will permit foreign banks to enter Iraq. The Council will allow the entry of six foreign banks to purchase up to 100% of local banks within the next five years. The Council also allows an unlimited number of foreign banks to purchase up to 50% of local banks. After five years, there will be no restrictions on foreign bank entry. A US $25 million capital requirement will be placed for a foreign majority-owned subsidiary. Private banks The Iraqi private sector is already active on the banking sector front with one party reportedly working on obtaining a license for establishing a private bank in the North of Iraq and a few others working on the acquisition of existing private banks. Foreign banks have already expressed their interest in Iraq by participating in the tender for the Trade Bank of Iraq and others have been closely monitoring the situation in Iraq and assessing the possibilities for investment in the war torn country. The Iraq Holding Company (IHC) is one example of such private sector initiative. Established by Global Investment House, the leading investment bank in Kuwait, IHC has a capital of US$ 200 million which it plans to invest in the financial, services, industrial, health, education and other sectors in Iraq in partnership with Iraqi and foreign partners. IHC has already signed agreements with various partners to establish projects in Iraq and is closely monitoring the developments in the banking sector. How long it would take to restore the shattered Iraqi banking system is unclear; yet it is certain that much of the private sector contribution to the restoration process would primarily depend on the security situation, the general investment climate as well as macroeconomic developments of pertinence to the banking sector. * These reports included one entitled, ‘Iraq’s banks struggle under fire,’ by John W Schoen, MSNBC Senior Producer Omar El-Quqa is Executive Vice-President, Treasury and Corporate Finance Departments, Global Investment House, Kuwait. He obtained his MBA, with a major in finance, from the Sul Ross State University in Alpine, Texas. |
