A History of Iraq Banking
Historically, banks were owned by the state before Saddam Hussein allowed private banks in Iraq during the late 1990’s (Al Sayegh, 2011, para. 12). Currently, 96% of Iraq’s banking assets are managed by state-owned banks according to the U.S. Department of State (2013).
The first Iraq bank was established in 1941, called the Rafidain Bank. This was a state-owned bank controlled by the Iraqi federal government. For over fifty years, Iraqi people did not bank with anything else – there were no private or foreign financial institutions allowed.
Rafidain Bank presently has numerous branches over Iraq, extending to countries such as Egypt, UAE, Yemen, Jordan and the UK.
In 1988, certain Rafidain Bank branches were re-branded, re-named and madeover by the federal government. This new brand of banks was called Rasheed. The same federal laws applied for both banks.
Iraq Banking: Private Banks
When the Gulf War ended in 1991, the Iraqi government finally allowed private banks to begin business. The first two private banks were established by two of the richest families in Iraq: The Buniyah family started the Iraqi Investment Bank; the al-Hafidh family started The Middle Eastern Bank.
Currently, 96% of Iraq’s banking assets are managed by state-owned banks according to the U.S. Department of State (2013). Both banking models challenge Iraq business growth.
Iraq Banking: Inflation of The Iraqi Dinar
On August 2nd, 1990, Iraq invaded Kuwait. As a result the Security Council of Iraq issued an economic sanction, along with several other countries: George Bush of the United States froze Iraqi and Kuwaiti assets and banned financial and trade relations with Iraq. The USSR suspended military equipment deliveries to Iraq. In response to the global clampdown on Iraq, Iraqi citizens frantically attempted to withdraw their money from the Rafidain and Rasheed banks, fearing economic collapse.
To avoid bankruptcy, Saddam’s federal government refused all requests for full withdrawal of money. Instead, they allowed citizens to withdraw only a small percentage of their funds. The Central Bank of Iraq declared it had the right to withhold the rest of the funds for an indefinitely long period of time.
The official value of the Iraqi Dinar (IQD) before the invasion of Kuwait was 1 IQD = 3 USD. As the sanctions grew worse, the Iraq Dinar declined as well. Within months, 10,000 IQD was worth a mere 200 USD. The rapid inflation was worsened by the Iraqi government’s reckless printing of trillions of dinars. During the American invasion and liberation of Iraq in 2003, the 1 IQD was worth a mere 0.0002857 USD.
Citizen Distrust: Iraq Banking System
Due to the unstable history of the Iraqi banking system, there is much distrust of the financial systems in Iraq by Iraqi citizens. Stories of corruption, bribes and scandals in both the Central and Private banks are consistently circulated. The volatile political situation–corruption, tenuous security, etc.–has made operating private banks especially difficult. Many scandals were related particularly to private banks in recent years, which has affected the overall reputation of the private banking sector.
Although the exact figure is unknown, it is estimated that there are less than 10% of people in Iraq who have and/or use a bank account.
Iraq Banking: E-banking in Iraq
There are few E-banking methods available in Iraq. This has created a major gap within the sector, which has yet to be filled.
One citizen described a Baghdad-based bank, which offered bank account updates via text; however, these updates came at a fee. This service was offered for a matter of months before it was rescinded with no notice to the customer.
Value of Gold
Gold maintains its value through war and sanctions. Iraqi citizens indicate the value of using banks as safes. Money is kept in the bank to avoid being stolen from residences. Some citizens may keep their money at the bank for safekeeping, but other citizens also distrust the banks and keep their wealth as gold.
An additional incentive is the government’s guarantee of deposits at the state-owned banks. During May and June of 2013, results of a study conducted by Sansar Capital Management displayed 89% of public sector deposits and 63% of private sector deposits were controlled by state-owned banks.
Banks close at 12:00 or 1:00 pm. Due to shortened banking hours, people are challenged to leave their work in order to conduct banking transactions. Additionally, the short business hours result in long lines at the customer service windows.
Once customers reach the customer service window, the bank tellers are less than helpful.
Iraqi citizens express a need for trained bank personnel. When customers reach the teller, often he/she is not helpful. Banks do not hire employees who can inform the members about the bank’s basic services. Customers do not receive suggestions from knowledgeable staff who can consult on money management and finances.
Iraq Banking: Transferring Money Outside Iraq
The central bank has issued very strict rules in terms of transaction with USD outside Iraq. These laws make it very difficult to transfer money outside of Iraq.
“Lately, I had to transfer the money to Erbil, and then my friend in Erbil transferred the money to my friend in [the] US.” one Iraqi citizen reported.
Citizens dodge high bank transfer fees by using Western Union, which has a reduced transfer rate in comparison to Private and State banks. The timing of money transfers is also frustrating, as well as the withdrawal. Many people have to wait a period of week to be able to withdraw a transfer due to lack of funds in the bank.
ATMs could ease the services required in person at the bank, but rarely exist as an alternative means to deposit or withdraw money. The ATMs are too few and existing ATMs are not dependable. Customers are required to report problems during the bank’s business hours. The person’s urgent need for money becomes a lengthy procedure to rectify the issue with the bank only to obtain the money days later. Additionally, individuals are unable to withdraw large amounts of money due to a daily withdrawal limit. At times, people use Western Union to conduct rapid and large money transactions. However, the preference is to use the bank due to the expensive fees garnered by Western Union.
Credit and Debit Cards
Credit cards and debit cards could be another means for money transactions or payments, as well. People who travel and conduct business in various countries understand the value and security of carrying credit and debit cards as opposed to cash. In Iraq, ATMs are infrequent, and many local businesses do not own card readers. Therefore, the banks issue few debit and credit cards to customers.
Need of Loans
The banking system challenges daily commerce and long term goals for the individual and businesses. After providing guarantees consisting of documents which show mortgages and property ownership, respondents describe the lengthy process of obtaining loans as bureaucracies. Once loans are approved, the loans pay for a fraction of the requested amount, require a large deposit, high interest, and the loans need to be paid within three years. According to The World Bank, Iraq ranks 180 out of 189 economies on the ease of obtaining credit (2014).
Without the ease of obtaining credit and loans, entrepreneurship is stifled in Iraq. Yet, the challenge has not gone unnoticed. Iraq has partnered with countries such as the U.S.- Iraq Business Initiative (USIBI and Iraq Britain Business Council (IBBC). The partnerships initiate projects to stimulate commerce and trade and are poised to assist the Iraqi nation in a GDP expected to grow 6.% during 2014 (IMF, 2014, para.4).
Islamic Banking in Iraq
In response to the economic growth, Lebanese and Abu Dhabi Islamic Bank (ADIB) private banks will open branches in Iraq to compete with the majority state-owned banks within Iraq. According to the Institute of Islamic Banking and Insurance, Islamic banks follow moral and ethical guidelines based on Islamic law (2014). Iraqi individuals generally do not express a trust of Islamic Banks in Iraq, just as they do not to other Iraqi banking institutions. The issue of loans, and haram, is often brought up in the context of Islamic Banking and philosophies differ between individuals of what qualifies as Haram and what does not (interest rates, etc.).
Islamic Banking appears to be a sensitive issue with the Iraqi public. However, citizens are concerned mainly with intelligent, efficient, easily accessible banking services. Private and state-owned banks need to evolve and adapt to modern banking technologies and services.
Short term and long term goals of banking customers can be more easily achieved with services which increase the speed and reliability of money transactions.