In order for Iraq’s banking system to develop, the first steps must not come from private enterprise but from government. The majority of Iraq’s banks are privately owned businesses. There are a few government owned enterprises. Rafidain, Iraq’s largest bank which was established over seventy years ago is owned by the state. Also, Trade Bank of Iraq, a commercial bank that writes letters of credit for the central government’s purchases and setup by Paul Bremer is owned by Iraq’s Ministry of Finance. The problem that exists today is that the few state-owned banks hold over eighty percent of Iraq’s bank assets. Putting it plainly, the government controls what the banking sector looks and feels like.
The government should not be in the bank-owning business but in the bank-regulating business. With the right legislation in place, Iraq could create a law which governs Iraqi banks and also international banks that operate inside Iraq. Chartered banks, rather than state-owned financial institutions could begin to operate with confidence and serve Iraqis.
This law would not be complete without the creation of a deposit insurance corporation. This corporation is common in western countries and helps alleviate the fears that the public may have about depositing their funds at a financial institution. In the United States of America the deposition insurance corporation will insure an American’s deposit at a bank for up to $250,000 USD should the bank holding the funds go under. In Canada the figure is $100,000 CAD.
One of the issues addressed in Part I was the need to provide Iraqis education on financial literacy. In addition to increasing their knowledge, they will also need the assurance that if they save their hard-earned money in a bank, it will not disappear should the bank fail. If the deposit insurance corporation is structured correctly and managed properly, it can also act as an independent institution with oversight responsibilities.
With government oversight and deposit insurance in place, the final piece will be a couple of the most important acronyms in retail banking which are AML and KYC. Chartered banks are required by law to be on the lookout for money laundering and terrorist financing. This is why Anti Money Laundering and Know Your Customer rules are strict yet help both the financial institution and the individual complete transactions.
These policies are in place to make it a straight forward process for an individual to create an account at any chartered bank. If these institutions want Iraqis to deposit their savings in accounts, they will need to make the process of creating and maintaining an account easy to understand while complying with international banking standards to avoid money laundering and terrorist financing. The last thing Iraqis need is more bureaucracy. But if these are privately owned businesses and not state owned institutions, then the problem of bureaucracy and needing an endless number of forms and stamps to do something basic like open a bank account should be diminished.
Finally, Iraqis will need convenience to go along with their new financial products. As things stand, an Iraqi can only complete transactions at the branch that s/he opened the account. This includes simple transactions such as deposits and withdrawals. If Iraqis are to go from carrying wads of cash in their pockets to a single debit card that can access cash at any branch and even competing banks, then the infrastructure needs to be implemented by chartered banks that will allow such transactions to take place.
Iraq is becoming an increasingly powerful economic player in the region and the global oil market. In order for Iraqis to reap the rewards of this economic relevance, they must demand change from their government and their financial institutions. With the right legislation, oversight and regulation, Iraq’s banking system can finally begin to serve the general public and not the government.
Hassan Hadad is an economist and works in retail & small business banking at one of Canada’s largest financial institutions. The views expressed here are solely his own and do not reflect those of his employer. You can follow him on twitter (@Abufellah).