Change expected in Iraqi banking sector (08/01/05)

Iraq's financial and banking sector is expected to witness a significant change during next two years following the restructuring of banks which includes updating of technology, providing technical assistance and capacity building of the financial institutions.

This was stated in National Development Strategy (NDS) for Iraq during 2005-07. The NDS has identified immediate and medium-term priorities during the next two year. The basic aim of the strategy is to create an effective operating structure for the central bank to provide services and supervision of the banking system.

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As per details, the financial sector will see upgrading and modernising the country's non-cash payments system, which will including inter-bank clearing and settlement services, establishing electronic settlement facilities at the central bank and its regional branches.

The restructuring will also see the Central Bank in view of the state management law, while addressing the status of state owned banks and insurance companies to encourage the process of consolidation and privatisation.

Since 2003, the financial sector in Iraq has witnessed an introduction of new currency and its exchange rate was stabilised through foreign exchange auctions.

During the same period, the interest rates were liberalised and capital base of private banks was increased and foreign banks were allowed to open their branch offices and could enter into joint ventures with private Iraqi banks. The Central Bank was made independent and monetisation of government deficit was ceased. The inflation decreased from an average of 40-50 per cent annually to roughly 2-3 per cent in 2004, according to the the NDS paper.

At present, other than the sale of government debt instruments, capital markets are virtually non-existent. The stock exchange began operations in July 2004 and has a very small capitalisation. State owned and private insurance companies are very weak. The banking system has very low credit facilities and a weak payments system.

In addition to the Central Bank, it consists of 24 licenced banks, including six public and 18 private commercial and investment banks; in aggregate, the banking sector has only $2 billion in assets. The banks are marginal in the economy as providers of liquidity. The Central Bank of Iraq supervises the banking. Overall supervision is very poor and needs significant improvement in capacity building, organisation, technology and in providing operational manuals, regulations and a legal framework.

During the past year, an independent Central Bank law, a new securities law and a new banking law were adopted. Further interest rates were completely liberalised, new currency notes have been issued and the exchange rate has been stabilised through frequent foreign exchange auctions by the Central Bank, stated the NDS paper.

Source: Khaleej Times