Revival of banking sector in Iraq and the Kurdistan Region

By Shwan Zulal:

The Kurdistan Region and Iraqi economists were convinced that Iraq was immune from the recent banking crisis in the world after Lehman’s collapse on Wall Street. The Kurdish banking sector was close to non-existent at the time, and therefore it was thought that Iraq would not be affected: but the reality was far from it. Looking at the investment figures for the last couple of years and comparing it with this year’s can be a testament because investment in Iraq and Kurdistan is on track to double as the world economy recovers. It is needless to say that the security situation in Iraq has improved which has also contributed to improving investors’ sentiments.

Traditionally Iraq has had a private banking sector that was nationalised in the mid-1960s and ever since the state-owned banks have dominated the market. Although, in the last two decades, there has been a revival of the private sector , so far they have not won the public’s trust and their business is on the margins and largely consists of retail deposits. However, it has to be said that these banks are the main staple diet of the Iraqi stock exchange and they have attracted foreign investors in droves, as the potential for growth is enormous.

The Kurdistan Region has been running its own affairs for more than 20 years now and the banking problems are even greater than Iraq’s. This is partly due to the fact that the Kurdistan Region remains part of Iraq and never had fiscal and financial regulatory independence. However, the other portion of the blame can be directed at the KRG’s polices because it has failed to grasp the need for a sound banking sector in the Region.

There are more than 50 private banks operating in the region, mainly from Middle-Eastern countries like Lebanon, and they have somewhat filled the gap in the market. However, economists believe they have not added much value to the Kurdistan Region’s economy.  Moreover, there are Kurdish private banks in the Region but they remain largely unnoticed with limited operations.

In the latest development this week, Iraq, Iran and Turkey agreed to establish a bank as a joint venture with an initial capital of $200 billion, Fars News Agency reported. This bank would give businesses in Iraq and elsewhere access to much-needed financing but it remains to be seen if the Kurdistan Region’s business will have similar access to the funds.

The Kurdish public is very sceptical about the local banks due to a lack of rigorous regulation and proper financial authorities to give the banks heath checks. The lack of regulation and historically weak banking culture has promoted a cash economy, which has hindered the investments and funding needed to re-build the country. The failure of policy and lack of political will to revamp the banking sector in the Region has had a significant impact on the pace of development.

Many Kurdish officials complain that, despite having very lax regulation frameworks and generous tax incentives for foreign investors, they are still struggling to attract the number of investors they would like to come to the Region. The absence of effective banking has undoubtedly contributed to the lack of appetite by foreign investors.

Establishing a strong banking sector is a key to a successful economy. It would help the government in measuring and quantifying economic activity in the Region.  Relying on a cash economy may be convenient for some businesses, but it makes the KRG almost blind as to how to target investment and tackle fiscal challenges on a macro-economic level.

Banking and the introduction of fiscal planning must take priority if the KRG intends to become a credible political force in the region and a government that investors can trust. Investors like certainty and do not want to invest in an environment where the rules and regulations are not clear.  Failing to recognise the need for a strong banking sector and ignoring the need for the Region to enter the world financial markets would only contribute to its exclusion from the much-needed financing and investment.

This article first appeared on Kurdish Views