Total rebuild: Reconstructing Iraq's banking system starts from scratch

Global Finance, Nov 2003 by Platt, Gordon

"I would be surprised if US banks rush into the Iraqi banking business," says Stewart, who specializes in Islamic finance. "The legal vacuum in Iraq is a problem. You need to have security on the money you lend. And I have to wonder if the retail banking business will be all that profitable," he says. Banks involved in Eastern Europe could have an advantage in Iraq because of their experience with transition economies, he says.

Getting a banking license in Iraq could prove to be difficult, Stewart adds. "There are 170 other small private banks in the country, although some of these are likely to merge, as happened in Eastern Europe," he says.

"Iraq is a relatively secular country, but its people would prefer to deal with Islamic institutions," Stewart says. US treasury department officials say they endorse the objective of Iraqis having access to financial products and services based on Islamic principles.

Most of the international banks seeking to play a role in Iraq have Islamic windows or separate organizations that offer Shari'a-compliant products. Australia and New Zealand Banking, a member of the trade-bank consortium, established a Global Islamic Finance unit in London in 1989 to handle cross-border Islamic financing. Over the past decade, Islamic finance has developed into a mainstream source of funding for development projects. ANZ says terms of its involvement with the Trade Bank of Iraq are confidential, but that there will be no risk to the bank's staff, because there will be no on-the-ground presence in Iraq.

"None of the participating banks are commenting on the operations of the Trade Bank of Iraq," a spokesperson for JPMorgan Chase says. The New York-based bank adds that it is too early to make a decision about opening any branches in Iraq.

Other US banks are similarly coy. "Obviously we would like to help in any way we could," William Rhodes, senior vice chairman of Citigroup, said at an extraordinary meeting of the World Economic Forum in Shuneh, Jordan, in June. "There are discussions for Citigroup to do something in Iraq," Rhodes said. "I think it's fair to say we are interested in helping, and leave it at that."

No Boundaries

Iraq's new finance minister, Kamel al-Gailani, created a stir at the annual meeting of the World Bank and International Monetary Fund in Dubai in late September. He announced a series of new laws to create a "free and open market economy" in Iraq that he said would be unprecedented in the Arab world.

The measures, approved by the CPA and the Iraqi Governing Council, would allow up to 100% foreign ownership in all sectors except natural resources and provide for national treatment of all foreign firms. International banks will be permitted to enter Iraq as branches, subsidiaries, representative offices or through joint ventures with local banks. Six foreign banks will be allowed to purchase up to 100% of local banks within the next five years, after which there will be no limitation on foreign-bank entry.

There will be a 'fast-track entry' process for the first two of these six banks, which will be selected in part on their commitment to make prompt and substantial lending, according to the finance minister. There will be a $25 million capital requirement for foreign majority-owned subsidiaries, but no specific capital requirements for branches. An unlimited number of foreign banks will be allowed to purchase up to 50% of local banks.