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Banking in Iraq – The Need for Change

In Iraq “cash is king”. Whether you are buying a shirt or a house, chances are you will be doing so in cold, hard cash. Is this because of collective personal preference that Iraqis have? Unfortunately it is due to necessity as there are no alternatives. Iraq’s banking and financial sectors are not only lagging, they are crippled.

Iraq is different from its neighbours in many ways. The financial sector helps set Iraq apart from other countries. While credit cards grew in popularity during the 1980’s in most countries, Iraq was preoccupied with the Iran-Iraq War. As credit and debit card usage became mainstream during the 1990’s, Iraq was suffering from severe sanctions imposed by the United Nations. By the time the regime of Saddam Hussein was toppled in 2003 most Iraqis’ savings and investments were depleted and hardly anyone claimed to own a bank account.

This history of war and sanctions has left many Iraqis financially illiterate. As things stand, there aren’t hoards of people demanding different financial services or products from Iraqi banks. Iraq’s history has also caused the financial and banking sectors to mature at a snail’s pace post-invasion. This lack of supply and demand for modern banking, among other reasons, is what is keeping Iraq from progressing.

For example, recently there was uproar in Iraq over a proposal by the government to change the ration system. The thinking was, rather than provide each individual a monthly amount of staple foods (worth about $5 USD) each Iraqi would receive 25,000 IQD (roughly $20 USD). Countries with efficient welfare systems tend to hand out their benefits with money. Whether a cheque is sent in the mail or funds are electronically sent to recipients via direct deposit, the individual and the state do not have a reason to meet face-to-face as the transaction is seamless.

Such a welfare system is not viable at the moment in Iraq as people cannot cash cheques (never mind the fact that the mail service is so unreliable that the cheque wouldn’t arrive to begin with) nor do many have bank accounts with which to receive direct deposit. Given the backlash against this proposal the Iraqi government shelved it, only kicking the can further down the road.

This is unfortunate for a couple of reasons. The existing method for distribution of the food rations is highly susceptible to corruption and inefficiency. The food distributors are known to holdback a family’s rations unless a bribe is paid or they skim off the top of their food allocation. Also, the need for Iraqis to go to a neighbourhood food distribution center and transport the rations home is tiring work. Had the monthly welfare stipend been implemented, these are two issues that would have been eliminated.

For Iraq to emerge from its crippling past, construct a stable economy and emerge as an economic powerhouse, it must tackle the incredible undertaking of building its banking system. As it does, it can start educating its people on the importance of personal banking, saving and even investing.


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).


6 Comments on “Banking in Iraq – The Need for Change”

  1. ABS December 19, 2012 at 12:21 pm #

    Just a thought rather than criticism: we all wish for Iraq to be economically mature and stable. However the model you propose seems an imported one from a typical European/Western system. My main issue is that no economic system is value-free. The banking system has developed over centuries organically and in line with many significant changes to the social and political institutions in Europe and the West, with its own distinct identities and values. I’m not at all saying that because it’s from the West it’s inherently wrong, however will Iraq and its people, with their own unique religious/ethical values, really benefit from its full implementation? The banking system you propose is the life-blood of a typical capitalist model, and one of the unique features of capitalism is its non-attachment to ethical norms. Profit and margins are the measure of all things. In addition, it had developed in a highly secularised region of the world (this is not meant to be a critique of capitalism and I’m not dismissing it entirely; I’m only mentioning those features that are relevant within this context). Yet Iraq has a strong Islamic as well as ethnic (Arab/Kurd) identity. If your model was implemented in its ideal fashion, it will certainly influence the social dynamic of the country profoundly. However I can’t help but suspect that its distinctly secular character will cause many forms of tension in Iraq.

    Rather than directly import a model, this could be a real opportunity for politicians/economists to develop an economic system that is more suited to the ethnic identity and values of Iraq. This is certainly a challenge and it requires a level of creativity to come up with a more viable model. However this is a critical time for Iraq’s future and long term prospects – the institutions that steer a nation’s direction are being formed, albeit slowly. Non-economic consequences of a direct import of a distinctly Western model should not be dismissed at all or taken lightly. Thinking short term only, or looking for a quick-fix solution can be detrimental to its future – not just economically, but on many levels.

    • Ali Al-Saffar December 19, 2012 at 12:37 pm #

      Interesting thought ABS, I just had one comment on the opportunity to develop an economic system that is suited to Iraq’s identity. This is certainly needed; at the moment the country is stuck in a purgatory between socialism and capitalism, taking the worst aspects of both systems. The state is the provider of all a lion’s share of jobs and almost all services, and at the same time, foreign goods flood the market and foreign companies develop the hydrocarbons resources without a knowledge/skill transfer that usually accompanies these things.

      The problem is, what incentive is there for real reform to happen? The oil revenues are coming in and are keeping the system sufficiently greased. I feel this debate will only be really be had once oil prices dip enough for things to start to become uncomfortable.

    • Hassan Hadad December 19, 2012 at 3:11 pm #

      ABS, you ask a great question about Iraqis benefiting from Western style reforms. Iraqis did not benefit from a socialist system during the Ba’athist era nor are they benefiting now from a quasi capitalist-socialist system, as Ali mentioned.

      As for the non-attachment to ethical norms, I will let part two of my article address that issue when it is posted soon, as I believe that unencumbered capitalism isn’t the answer. Independent oversight with political clout to be an effective watchdog must be a part of the equation.

    • Seerwan December 25, 2012 at 1:01 am #

      “Iraq currently has around one bank branch for every 60,000 people; Saudi Arabia has one branch for every 3,500 citizens.” – http://www.niqash.org/articles/?id=3002

      Brother/sister ABS, in-depth discussions re socialism, capitalism, etc. are not particularly necessary. Socialist European nations have banks to easily facilitate the exchange of money from one group to another. The UAE, Saudi, Kuwait, Bahrain, etc. all have established banking systems which do not particularly affect Islamic sensibilities.

      No one is talking about a grand vision atm. Having a basic current account will do just fine and allow the country to develop immensely.

      You need electricity for banks to function and enterprises to be able to accept debit and credit cards and to run the computers required for modern banking at the tellers, etc. and of course computer-literate banking staff.
      Finally and fundamentally a severe cutting down of bureaucratic hurdles to allow private banks to develop.
      Iraq currently lacks all the above.

      Good post brother Haddad.

  2. karachi2baghdad December 19, 2012 at 1:07 pm #

    Money in banks is not safe, the first money >100K I deposited in Kut’s CBI is never paid back to me , its total fraud, cheating to steal money. Thanks to American dictation, Iraq is following western system of legalizing corrpution. Iran learnt a lot and it still survives by bribing Standadrd Chatered Bank of Britain and done 300 billions of dollars of transactions.

  3. Ali December 21, 2012 at 3:00 pm #

    Interestingly, I came across an advert on Iraqi state TV the other day encouraging people to invest in local companies through the Iraqi Stock Exchange. Perhaps a little premature.

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