Since 2003, Iraq has witnessed ongoing political and economic developments and transformations, as well as security and military events, which have had a negative impact on its economic, social and financial conditions. Despite all these developments and transformations, the Iraqi banking sector has been able to withstand and continue to enhance working conditions, develop its activities, services, and products and contribute effectively to development and reconstruction.
However, this sector still suffers from structural, legal and regulatory problems and also faces challenges and market risks due to the instability of the investment environment, which has led to its failure to develop as required and its weak connection to the global banking system. It should be noted that about 80% of the population in Iraq do not have a bank account, in addition to the concentration of most of the bank branches (910) in Baghdad, Basra, Erbil, and in the provincial centers only. According to a study prepared by the researcher, there is a bank branch for every (24,000) people, which is a low percentage compared to the global index, which amounts to a bank branch for every (10,000) people.
Also, the banking sector suffers, as a result of the security, economic and health conditions that Iraq is experiencing, the problem of a large portion of borrowers being unable to repay their debts regularly and on their specified due dates, which confuses the work of banks and reflects negatively on their liquidity and their ability to grant credit to new customers, as it still continues. The capital of Iraqi government and private banks is limited, including unreal capital, as some banks intend to inflate their fixed assets by valuing them at exaggerated prices. Likewise, the legal environment that regulates banking work is the Central Bank of Iraq Law No. (56) of 2004, and the Banking Law. No. (94) of 2004, especially Article (28) thereof, which specifies the activities prohibited for banks, which restricts investments in them, which makes the banking sector’s contribution to economic development very limited and limited to providing services concerned with banking and traditional business only. The other problem is that most Private commercial banks are modern, family-owned banks that lack experience in banking, and other banks that operate according to the Islamic system start with (100) billion dinars and raise their capital to (250) billion within three years, with (50) billion in each year, in addition to Some private commercial and Islamic banks carry out their business with the aim of participating in the foreign currency selling window only and benefiting from its guaranteed profits.
Currently, the Iraqi banking system consists of (78) banks, including (7) government banks, including a newly established Islamic bank, (24) local commercial banks, (29) local Islamic banks, and (18) branches of foreign banks from It includes only two Islamic banks, in addition to three representative offices of some foreign banks, and many other financial institutions carry out some banking activities, including (9) companies for electronic payment services, as shown in Figure (1).
Figure (1) The Iraqi banking system
The banking sector suffers from the concentration of banks operating their branches and services in only (4) governorates (Baghdad, Basra, Erbil, and Najaf), which own (83%) or 753 branches out of a total of 910 branches, the majority of which are in urban areas, leaving rural areas excluded from financial services. And benefit from it, as shown in Table (1).
Table (1) Concentration of bank branches
Percentage of total branches Number of governorate branches
% 56.59 515 Baghdad
% 11.42 104 Basra
% 7.36 67 Erbil
% 7.36 67 Najaf
% 82.73 753 total branches for these governorates
100% 910 total branches in Iraq
It should be noted that the Iraqi government banks operate a network of branches that reached (431) branches inside Iraq and (7) outside it (end of the year 2018). In contrast, the private banks had (433) branches inside Iraq and (4) outside it. Accordingly, they manage... The seven government banks (49%) of the branch network, while the other private banks manage (51%), noting also that Al-Rafidain Bank manages the largest branch network in Iraq (174 branches), followed by Al-Rasheed Bank (158 branches).
In light of the political and economic changes that Iraq has witnessed since 2003, the Central Bank of Iraq has taken many policies and measures aimed at raising the level of performance of banking sector institutions in Iraq, in the field of improving the competitive environment among banking sector units, as the Central Bank of Iraq has granted business licenses to practice... Banking activities of a number of Arab and foreign banks, and other Arab banks worked to enter as shareholders with local banks, which contributed to improving the financial environment and creating competition that would add more efficiency in the work of banks. The Central Bank of Iraq also worked to establish an electronic credit inquiry office and implement a credit information exchange system, and a number of measures aimed at reforming the banking sector, including its decision to raise banks’ capital to (250) billion dinars within a period of three years from the date of the decision of the Board of Directors of the Central Bank. On 2/18/2010, the paid-up capital during the first year was (100) billion, (150) during the second year, and (250) during the third year, and Islamic banks remained established with (100) billion dinars, provided that it reached ( 250 billion dinars within three years, according to the Islamic Banking Law. As for the foreign bank branches, their capital was raised through two stages: the first: reaching (25) million dollars until 12/31/2016 and the second: (50) million dollars until 12/13/2017. In addition to reviewing banking laws and legislation, he worked to amend Central Bank Law No. (56) and Banking Law No. (94), and approve the Anti-Money Laundering and Terrorist Financing Law No. (39) of 2015, and Islamic Banking Law No. (43) of 2015. He also prepared a draft national electronic payments law, establishing the Iraqi Deposit Insurance Company, and the National Payments Council, in addition to strengthening the foreign cash reserve and its gold reserves in order to maintain the stability of the Iraqi dinar exchange rate and enhance confidence in it to attract foreign investments to Iraq.
Despite the presence of a large number of private banks operating in Iraq, their size and activity are still very limited, especially with the high demand for credit such as (consumer and development loans) and the implementation of the nationalization project, which is one of the most important guarantees, and that the seven government banks still enjoy The largest in terms of financial assets, banking activity, number of branches, and spread throughout all governorates of Iraq. For example, according to the Union of Arab Banks, government banks manage about (91%) of the total assets of the banking sector, while private banks manage (8%) of them. Foreigners manage only 1%.
With the size of the banking sector’s capital, the ratio of the banking system’s capital to the gross domestic product reached 5.8% as of December 2019, and private banks own the largest portion of the sector’s total capital at a rate of (78.55%) as of 2018, while government banks constitute a percentage of ( 22.45% of the total capital of the banking system, as a result of the increase in the number of private banks compared to government banks, in addition to the commitment of private banks to raise their capital to a minimum of (250) billion dinars.
Bank capital amounted to (15,351,276) trillion Iraqi dinars as of December 2019, but the ratio of their contribution in granting credit to the private sector to the gross domestic product is still low in Iraq, whether measured with the gross domestic product with oil or without oil, as it reached a year 2018 (8.1%) with oil GDP and (15.2%) with non-oil GDP, which is also low compared to a number of Arab countries, as in 2017, shown in Figure (2), as Iraq came at the end of the list. This is a negative indicator of the extent of the banking sector’s contribution to financing real activity, in addition to the government banks’ acquisition of the largest percentage of cash credit, which amounted to (80.93%) in 2018, while the contribution percentage of private banks was (19.07%) for the same year. Despite their small number compared to the number of private banks, this is a natural result of their network of branches spread throughout Iraq, the ease of access to their services, and their clear role in increasing the credit they provide compared to private sector banks, which means that private banks are still of a conservative nature in granting Credit despite the large size of its capital and the credit capacity granted by its regulations.
Figure (2) Ratio of credit granted to the private sector to the GDP of Iraq and a number of selected countries in 2017
Source: Central Bank of Iraq / Financial Stability Report 2018: p. 20
This requires the Central Bank of Iraq to implement a package of procedures and reforms that ensure greater control and rearrange the papers by raising the minimum capital and organizing and amending the mechanism of the currency sale window, such as linking banks’ shares to the size of their spread, services, and contribution to development projects. Weak banks must follow the rules of growth and merge to form... Strong banking group.
Capital is considered the backbone on which economic units are based when they are established and when they subsequently carry out their work. It is the primary driver for every investment project or business that aims to increase its production capacity. Capital is an essential factor in the economic growth of different countries, as insufficient The capital needed for investment or its decline represents one of the most important obstacles and determinants of this growth. In order for any economic unit to carry out the activity through which it wishes to achieve its goals, it must prepare the necessary funds for that, especially after the gradual opening of the banking sector to international institutions and the entry of international banks as partners with... Iraqi banks and electronic payment companies, which requires them to keep pace with the modernity and competition witnessed in the global banking industry.
Article (16) of Banking Law No. (94) of 2004 specified the minimum capital adequacy index of (12%), while data and studies indicate that the capital adequacy ratio of banks, especially private banks, indicates that banks vary in investing the funds available to them, as there is Banks that are efficient in investing, unlike some other banks that have large idle financial resources. The need for capital is highlighted in:
1. It is the basis upon which the bank is established and the first requirement for the regulatory authorities to approve the establishment. The regulatory authorities, for the sake of the integrity of the financial and banking system, do not grant any license or license to practice the profession unless the bank has a minimum amount of capital, because:
a . It is used to finance investments (fixed assets, equipment and machinery) to operate the bank.
B. It is used to finance lending and investment activities during the first period of the bank’s operation. Due to the difficulty of obtaining funds from other sources such as deposits and revenues from various banking operations.
C. It enhances the confidence of investors and lenders in the bank.
Dr.. Applying international standards such as the Basel Committee standards, which oblige banks to a minimum capital of 8% of the total risk-weighted assets. This is especially necessary in international transactions.
2. The main goal of banks is to increase the return on shareholders’ equity by carrying out various banking operations.
3. In an environment dominated by ambiguity and uncertainty, and in light of the development and globalization of banking operations, strong entry into the market, and internal and external competition, capital is considered necessary for the survival of banks and the continuation of their work.
5. Greater support for the bank in obtaining greater support from the Central Bank when needed.
6. Capital acts as a regulatory restriction on the unjustified expansion of assets, as it regulates bank loans and investments, because lending and investment activities are restricted by the amount of capital owned.
The Central Bank of Iraq is the sectoral authority supervising the financial and banking sector in Iraq with all its governmental and private institutions. Therefore, it has the right to take all measures that would achieve financial and economic stability, achieve economic development plans, and reform the various economic sectors, including the private banking sector, and it has the authority to take All decisions that guarantee the achievement of these objectives are based on the text of Article (40) of the Central Bank of Iraq Law No. (56) of 2004, and one of these measures was the decision to increase the minimum capital of private banks in 2010 in line with its objectives and powers, and the Central Bank relied In his decision at that time, there were a number of reasons that we believe still exist, namely:
Insufficient capital of banks to carry out the tasks required of this sector.
The purpose of issuing the decision is to expand the segment of shareholders and owners of bank shares.
Limited distribution geographically across the different regions of Iraq, as it is noted that the spread of private banking in Iraq or abroad is weak, and the public sector’s acquisition of the largest part of banking activity in Iraq.
Building a solid banking base that enables all banks to compete with the foreign banking sector.
Encouraging banks operating in Iraq to merge with each other because of this role in forming strong banking entities.
Banks remain in a state of financial solvency to maintain their strength and ability to compete locally and abroad, especially with the opening of the local banking market to foreign banks.
Banks maintaining their credit ratings and enhancing external confidence in Iraqi banks, because of this importance in foreign transactions, especially when it comes to opening documentary credits.
Any faltering of the banking system will consequently lead to faltering economic activity in the country, due to the close relationship between the development and stability of the banking system and economic development.
The banks maintain an unexploited cash mass that is not directed to investment for many reasons, some of which are due to the banks themselves and another part due to the investment determinants in the banking law, especially Article (28) of the Banking Law No. 94 of 2004, which stipulates (no bank shall participate in... As an agent, partner, or joint owner in wholesale or retail trade, or in manufacturing, transportation, agricultural, fisheries, or mining operations, or based on an insurance guarantee, or other business activities, with the exception of the activities licensed under Article (27). Notwithstanding the foregoing, a bank may, with prior written authorization The Central Bank of Iraq may temporarily practice or participate in these activities as much as is necessary to pay the dues, and the Central Bank of Iraq may request the bank to stop these activities on a specific date.
The Central Bank issuing a decision obligating banks in the future to raise the minimum amount of their capital (a new raise) according to a plan studied over stages, will achieve expansion of the banks and increase the geographical spread of their branches and their coverage of large areas, in addition to enhancing their ability to compete with Arab and foreign banks, and the decision will also allow them to By expanding the areas of investment, granting credit, and developing their electronic systems, in addition to the fact that the required increase will lead to offering a large number of shares through subscription at a price of one dinar per share in the event that the banks are unable to rotate part of the profits into the reserves account and capitalize them to increase capital, especially since Iraq In the coming years, we need more private sector money to finance development projects instead of keeping it in bank coffers and balances.
The increase in capital will also give the banks operating in Iraq greater credit flexibility and reliability, making them able to keep pace with the requirements of the next stage, by allowing private banks to open credits of large amounts that need high capital to be able to finance these credits. Likewise, the banks’ focus On granting small, consumer, and short-term loans, resulting from the decrease in their capital, and thus increasing capital gives them confidence in using their financial resources to enter into large, long-term investments and projects. We also point out here that one of the most important issues that obstructed the entry of foreign investment companies into Iraq is the inability of local banks (except for the Iraqi Trade Bank) to open credits in large amounts, and their lack of branches in other countries. Indeed, the letters of guarantee granted by those banks It is not recognized by state departments due to the modest capital of Iraqi banks, although part of this is due to central decisions to concentrate credits in the government banking sector exclusively through the Iraqi Trade Bank. It is certain that any sustainable development and any international investments require A flexible banking system with networks of relationships with various banks in the world.
It should be noted that the Bank of Algeria in 2018 issued a new decision forcing private banks to raise their capital from (10) billion to (20) billion Algerian dinars, equivalent to about (150) million dollars, and foreign banks to pay the equivalent of (100) million dollars. To the public treasury in order to continue its activity in Algeria, especially since it is the second time that the Bank of Algeria has issued this decision in a period not exceeding (10) years, and in November 2019, the Governor of the Bank of Lebanon issued a circular according to which he asked Lebanese banks to increase their capital by (20) %) in two stages: the first, i.e. a percentage (10%) before the end of the year 2019 and the remaining percentage in June 2020, with the aim of strengthening its financial capacity. In Egypt also, the new Central Bank and Egyptian Banking System Law No. (194) of 2020 stipulates that the capital shall not be less than The amount issued and paid in full to the bank is five billion Egyptian pounds, approximately (319) million dollars, and the capital allocated to the activity of foreign bank branches in the Arab Republic of Egypt must not be less than (150) million dollars or its equivalent in free currencies. This does not mean imitating others, as each country has its own banking system according to its circumstances. And its economy, but it must be kept pace with the development of central banks in developed countries and in neighboring countries, as increasing banks’ capital will make them trustworthy for their global counterparts, which will reflect positively on their work and prove that they have begun to exercise their role as real banks, in addition to benefiting from the facilities provided by foreign correspondent banks. In the areas of letters of guarantee and bank credits.
In addition to what was mentioned above, we will discuss in the following lines the impact of increasing the minimum capital on several aspects, as follows:
1- The impact of the increase on the investment side of banks
The investment side is one of the most important sources of revenue for banks, and the fact that the Central Bank opened the doors for banks to deposit with it in exchange for obtaining interest and allowing them to participate in treasury transfer auctions, prompted these banks to direct the bulk of their financial resources to invest in them. Because it represents a safe and risk-free investment and the large revenues it receives, which made banks stay away from contributing to investments that could support the economic development process in the country, and this can be seen by tracking the financial statements of banks, when the central bank reduces interest rates On these investments, in addition to imposing taxes on treasury transfers, prompts banks to search for other investment opportunities that generate additional returns.
The concentration of bank investments in overnight investment has prompted banks not to search for alternative investment opportunities for their funds, and therefore the decision to increase capital could have a significant impact on pushing banks to search for investments that support real economic activity in Iraq, if the Central Bank takes Steps to limit overnight investment and treasury transfers.
From this it is clear that increasing capital is not the only way to increase investments, but rather capital management, and how to direct and push banks to search for investment opportunities, has a major role in exploiting the increase in capital in the optimal manner.
2- Reflection of the increase on the credit granted.
Increasing capital works to enhance the classification of banks and gives them confidence in granting various banking facilities because it is the great guarantor of the rights of depositors and those dealing with banks, in addition to increasing their ability to open credits in large amounts and gives them confidence before foreign banks and strengthens their negotiating position with correspondent banks and cooperation with them, as well as their ability to Granting cash credit due to the availability of liquidity and its ability to use its available resources, especially deposits, due to its confidence in the availability of security through capital, while adhering to the instructions issued by the monetary authorities (the central bank) regarding granting credit.
3- Reflection of the increase on the banks’ assets
Banks increasing their capital allows them the possibility of opening new branches and developing existing branches, and increasing their cash account, which has a direct impact on the current assets of banks and enables them to use modern technologies in banking, especially electronic systems for banking linkage between branches and international banks to carry out bank transfers and use cards. Electronic payment processes and mobile phone applications, and increasing the dissemination of electronic distribution outlets such as ATMs and points of sale.
4- Reflection of the increase on deposits with banks.
Deposits of various types (current, savings, and fixed) are among the most important sources of financial resources that banks operate with. It is known that banks are among the financial institutions that operate with depositors’ funds, as these deposits are used to grant cash and pledged credit, as well as investments, and capital is used as a guarantor for these investments. The credit granted is relied upon to a large extent to provide confidence in the bank’s work and protection for depositors’ funds, which leads to an increase in deposits with these banks. It is assumed that this increase in capital will not lead to it remaining locked in the coffers, raising the banks’ idle liquidity ratios, focusing on granting short-term credit and staying away from investment. It is assumed that the increase in investments will be directed to support economic development plans.
In conclusion
We believe that raising the minimum capital for foreign banks and branches in accordance with a solid structure and plans will contribute to overcoming many of the problems and challenges facing this sector, which will raise the level of performance of the banking system, modernize and develop it, and support its competitive capabilities, thus qualifying it for global competition and achieving the country’s aspirations. towards development and economic progress, and does not limit it to providing traditional banking and business services only, and the governance of this device, and increasing banking density and achieving financial inclusion, and revitalizing the stock market, and also leads to building an investment climate that is able to attract investment and stimulates the local investor in particular so that he can absorb Compactness, with the importance of the state gradually withdrawing from the banking sector and it must be careful to provide an element of competition because competition is sufficient to improve the quality of banking services and reduce their costs.
