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History of the Banking Sector in Iraq until 2020

Post By: Mustafa Muayad - Founder & Managing Partner mustafa.muayad@muayadandassociates.com Print Post

History of the Banking Sector in Iraq until 2020

The banking system of any country plays a pivotal role in strengthening the economy. Developed countries have efficient and effective banking systems as compared to underdeveloped nations, including Iraq. Although Iraq is growing economically, the banking sector is still not at par. It remains one of the most underdeveloped sectors in the MENA region. The main driver of economic growth in Iraq’s case is the increase in oil production.

The History of the Banking Sector in Iraq

Tracing back to history, the oldest banks in Iraq are the Ottoman Bank, Eastern British Bank, Bank of Shah of Iran. The Iraqi national banking system began in 1935. It led to the emergence of the agro-industrial bank that was later divided into two banks in 1940 mainly—the Agricultural Bank and Industrial Bank.

A year later, Rafidain Bank was launched. It was established as a single commercial government bank. The establishment of Rafidain Bank led to the surge in banks. Thus, in the late 1940s, Iraq saw a rapid increase in banks:

  • The Central Bank of Iraq was launched in 1947
  • The Real Estate Bank was created in 1948
  • Cooperative Bank and the Bank of mortgages were also established
  • Many of the private banks were formed, including Al-Itimad Bank, United Bank, Rasheed Bank, and foreign banks belonging to Lebanon and Jordan

The emergence of so many banks, including local and foreign, was a strong indicator of economic growth and stability. Moreover, to create a more welcoming, friendly and prosperous environment for business owners and investors to set up their operations or invest in the banking sector, two more laws were passed—the Iraqi Central Bank Law No. 56 of 2004 and the Banking Act No. 94 of 2004.

Under these laws, the interest rates were liberalized while credit plans were abolished. These actions opened the doors for foreign banks to establish operations in Iraq and work or partner with local Iraqi banks. Moreover, the laws put zero restrictions on the foreign bank participation rate or the number of branches in Iraq. Apart from that, foreign banks also had the freedom of foreign exchange and transfer of money except for the law of anti-money laundering and terrorism financing.

Historically, when the country was on the road to a flourishing banking sector, the Iraqi economy unexpectedly crashed and collapsed due to the ongoing wars. Iraq has been at war or in war-related crises for decades. Its past conflicts have had a cumulative economic impact that has sharply restricted its development and divided its economy and income along sectarian and ethnic lines.

Additionally, the impact of violence has created its sub-economies and divisions. Therefore, it became vital to reconsider the banking system’s status and laws in Iraq for smooth functioning and establish banks.

In mid-2014, the country underwent economic and financial crises that resulted from many reasons, such as financial corruption in the country’s economic institutions and lack of government reserves.

  • Falling oil prices in the global market
  • Lack of transparent and strategic approach to the Iraqi economy
  • Lack of coordination between monetary and fiscal policies
  • Failure to develop plans and programs to strengthen economic sectors, including tourism, agriculture, and the banking sector

The good news is that post-war, these issues have been identified and highlighted by the Iraqi parliament members. They stressed the need for the government to support local banks and facilitate the advancement of the investment process through granting loans and money transfers for foreign investors who want to operate and establish operations in Iraq. The goal is to attract new investors and use modern banking techniques and technologies to facilitate work and speed up transactions. It is believed that these actions and steps will be able to develop the banking sector and provide a safe environment for all local and global investors to operate.

The Current Scenario

At present, approximately fifty-four (54) banks are operational in Iraq. Out of these banks, seven (7) are state-owned, while fifteen (15) are foreign and nearly eleven (11) are specialized in Islamic banking services.

In terms of the branch network, the country currently has approximately nine hundred and twenty (920) bank branches located across different governorates. If you are wondering about the banking asset size in Iraq, that reached US $66 Billion in 2011. The current figures are unknown.

Though the Iraqi banking sector is underdeveloped at present, the country is on the road to speedy economic growth because of its oil exports and recent developments in terms of political stability (post-war).

Similarly, the strategy the Central Bank of Iraq took recently in December 2020 to reduce the country’s fiscal deficit from 70 trillion to 30 trillion dinars is commendable. The bank announced the devaluation of the Iraqi dinar to 1,450 to lower the fiscal deficit. Moreover, other Iraqi banks have also undertaken measures to optimize the country’s economy. The government banks intensified calls to locals to deposit their money in the banks and earn through high-interest rates.

Increasing awareness among citizens about the importance of depositing money in banks, opening new accounts, and keeping funds in the bank will ensure a flourishing banking system, strengthening the economy.

The IMF (International Monetary Fund) forecasts Iraq’s GDP to grow at a CAGR of 8.3%, making it one of the fastest-growing economies in the world.

Iraq indeed is an attractive market for both local and international financial institutions. If you want to invest in the banking sector of Iraq or open a branch here in partnership with a local bank, contact us. Let our experienced banking lawyers in Iraq guide you through the process and help you make informed decisions. We can help you establish operations in Iraq in conformance with their legal regulations and laws.

Article written by :

Mustafa Muayad

Founder & Managing Partner
Muayad & Associates