Over the past few years, political and security conditions in Iraq have improved significantly, which led to significant growth of the Iraqi economy, driven mainly by increase in oil production. The International Energy Association (IEA) forecasts Iraq to provide 45% of the global incremental oil supply in this decade. Moreover, by the 2030s, it estimates that Iraq will be the second-largest oil exporter in the world. 

As a result, the IMF forecasts Iraq’s GDP to grow at a CAGR of 8.3% through 2018; making it one of the fastest growing economies in the world. Despite the economic growth Iraq achieved in the past years, banking system in Iraq remains one of the most underdeveloped systems in the MENA region.

Currently, 54 banks operate in Iraq, of which 7 are state owned, 15 are foreign and 11 are specialized in Islamic banking services. As for branch network, Iraq currently has around ~920 bank branches across different governorates. In 2011, the size of banking assets in Iraq reached US $ ~66 Billion. Overall, the Iraqi banking sector is underdeveloped, which, combined with Iraq’s project economic growth, makes it an attractive market for regional and international financial institutions.

Iraqi Banking Sector is mainly characterized by low penetration, high asset concentration, and small branch/ATM network

Low Sector Penetration: Iraqi banking sector is significantly underpenetrated compared to MENA countries. With 2011 total asset size of only US$ ~66 b, Iraq has an asset to population ratio of US$ 2,000 per Capita, compared to average of US$ 23,000 for the MENA region, and an assets to GDP ratio of only 58%, compared to a MENA regional average of 122% (see figure 1).

Iraq is also lagging behind MENA region in loans and deposits penetration. With total loans size of US $ 11.0³b in 2011, Iraq loans to GDP ratio is only 10%, compared to MENA average ratio of 55%. The main reasons for low loans penetration in Iraq are the highly strict lending criteria, with some banks requiring collateral equivalent to over 200% of the loan value, and the significantly high spread between lending and borrowing rates, which was 67% higher than the MENA average in 2010 (see figure 2). Moreover, despite the improvement in the economic and security conditions in Iraq over the past 5 years, real interest rates on loans in Iraq increased over the same period from 6% in 2008 to 9% in 2012 (see figure 3) 

For deposits, the 2011 total deposits size is US$ 35.6³b, thus Iraq’s deposits to GDP ratio is only 31%, compared to MENA average ratio of 75%.

High Assets Concentration in state-owned banks: With 54 banks currently operating in Iraq (7 state and 47 private), Iraqi banking sector is highly concentrated, with 84% of the banking assets managed by state banks and 77% by the top 3 state banks Trade BANK OF IRAQ (TBI) BI, Al Rafidain and Al Rasheed (see figure 4)..

For deposits, state-owned banks control the majority of deposits in Iraq, with 100% of public sector deposits and 63% of private sector deposits. The situation for cash credit is not very different, with state-owned banks controlling 100% of public sector cash credit and 67% of the private sector’s cash credit.

There are several reasons that led to the domination of state-owned banks in Iraq, mainly the following

• Only state-owned banks can serve state-owned enterprises and government agencies.
• Payments to the government cannot be made by checks drawn on private banks.
• Deposits in state banks are implicitly perceived as government guaranteed.
• Private banks are held to a strict capital requirement whereas rules are less strict for state-owned banks.

• Small Branch/ATM Network Size: With only ~920 bank branches in 2012, Iraq is significantly lagging behind MENA countries in branches to population ratio. Iraq has3 branches per 100,000 capita compared to 11.6 for the MENA region (see figure 5). Moreover, bank branches in Iraq are concentrated in Baghdad, where ~40% of Iraq bank branches are located (see figure 6). 

For ATM machines, Iraq has the smallest ATM machine network in the MENA region, with less than 1 ATM machine per 100,000 inhabitants, compared to 32.7 as a regional average (see figure 7). Also, , most AMTs machines are not yet connected to a national switch, which makes it accessible only to the customers of the same bank only.

Iraq has currently 54 banks that fall into three categories; state banks, private local banks and foreign banks

State Owned Banks: 7 banks, who altogether manage 84% of banking assets in Iraq (US $ ~56 billions) and have 43% of bank branches in Iraq. The top three state banks are TBI, Rafidain and Rasheed:

Trade Bank of Iraq (TBI): Established in 2003, with headquarter in Baghdad and 2011 paid-up capital of IQD 500b. The bank currently manages US$ ~19b of assets (28% of the total assets), through 16 branches located in 9 governorates and with about 840 employees.

Al Rafidain Bank: Established in 1941 as the first bank in Iraq, with headquarter in Baghdad and 2011 paid-up capital of IQD 25b. The bank currently manages US$ ~17b of assets (26% of the total assets), through 161 branches located in 15 governorates and with about 7,800 employees, being the bank with largest branches network and number of employees.

Al Rasheed Bank: Established in 1988, with headquarter in Baghdad and 2011 paid-up capital of IQD 2 b. The bank currently manages US$ ~15b of assets (23% of the total assets), through 137 branches located in 15 governorates and with about 7,000 employees.

Other state owned banks include Agricultural Cooperation Bank, Real Estate Bank, Industrial Bank of Iraq and Al-Iraq Bank, who altogether manages US $ ~4.5b of assets (7% of the total assets)

Private Local Banks: Iraq has 32 private local banks, the largest ones are North Bank, Bank of Baghdad, Dar Essalaam Bank, and Warka Bank.

North Bank: Established in 2004, with headquarter in Baghdad and 2011 paid-up capital of IQD 175 b. The bank currently manages US$ ~0.8 billion of assets, through 17 branches located in 13 governorates and with about 640 employees..

Bank of Baghdad: Established in 1992, with headquarter in Baghdad and 2011 paid-up capital of IQD 112.9b. The bank currently manages US$ ~0.7b of assets, through 30 branches located in 15 governorates and with about 785 employees. 

Dar Es Salaam Bank: Established in 1999, with headquarter in Baghdad and 2011 paid-up capital of IQD 106b. The bank currently manages US$ ~0.7b of assets, through 15 branches located in 8 governorates and with about 350 employees. 

Foreign Banks: The main foreign banks operating in Iraq are either GCC banks, e.g. Abu Dhabi Islamic Bank (UAE) and Al-Baraka Bank (Bahrain), Iranian (e.g. Bank Melli Iran) or Turkish (e.g. Ziraat Bank, Vakif bank and Esh bank). The majority of the foreign banks in Iraq focus on the Kurdish Region. 

Top Iraqi private banks generate most of their revenue from trade related activities and net interest income

In 2011, Trade related activities (e.g., letters of credit and wire transfer) and net interest income constituted the major source of revenue for biggest private banks in Iraq, both together generating between 77% and 98% of a bank’s total revenue (see figure 8

For trade related services in Iraq, FX spread and wire transfer commission are the major source of revenue. For Example North Bank generated up to 84% of its trade related revenues through these services (see figure 9). 

Compared to top private banks in the region, top Iraqi private banks have better capital structure

Iraqi’s top private banks have a better capital structure than regional average, which makes them able to withstand any losses or deterioration of assets. While top private banks in the region have a capital adequacy ratio that ranges between 14 and 22%, top Iraqi private banks have the ratio between 29% and 67% (see figure 10). Capital adequacy ratio (CAR) for Iraqi private banks is expected to increase significantly, due to the increase in the minimum paid up capital, as requested by the central bank, from IQD 100b to IQD 250b by 2013.

Top Iraqi private banks have asset quality that is comparable to top private banks in the region

Although private banks in Iraq have higher non-performing loans to asset ratios than the MENA big players, the lower loans-to-asset ratio for Iraqi bank results into comparable non-performing loans to total asset ratio (see figure 11). 

Compared to top private banks in the region, top Iraqi private banks have similar/higher earnings

Several of Iraq’s private banks have higher earnings, measured in their returns on assets (RoA), than most of the private banks in the MENA, as shown in figure 12. Moreover, the earnings of Iraqi private banks have experienced a healthy growth over the past 4 years, with Median RoA for top 4 private banks growing from 2.4% in 2009 to 3.5% in 2012, (see figure 12). 

Private banks in Iraq are highly liquid compared to MENA, with the cash for some banks reaching 90% of their total liabilities

Several private banks in Iraq are highly liquid, which makes them better able to meet their short-term liabilities. While cash-to-total-liabilities ratio for MENA top private banks ranges between 14% and 50%, top Iraqi private banks have the same ratio between 60% and 90% (see figure 13). 

With several successful entry cases for global and regional banks, Iraq private banking sector is promising

With some estimates that 80% of the Iraqi population have no access to banking services, the current sector penetration level and the projected economic growth in Iraq, driven mainly by improving political and security conditions; make private banking in Iraq a major opportunity; which is backed up by the satisfactory and consistent performance and asset quality of top private banks in Iraq.

Over the past few years, several global/regional banks have been involved in the Iraqi market, either via acquiring shares in existing banks or establishing their own legal entities. Those banks included, but not limited to, the following:

HSBC: In 2005, the bank acquired 70% of Dar Es-Salam Investment Bank

Standard Chartered Bank: The bank plans in 2013 to expand operations through opening branches in Baghdad, Basra and Erbil.

Citi Bank: In 2011, the bank signed an agreement with Bank of Baghdad to manage global client cash management requirements. In 2011, Citi  established correspondent banking network of more than 100 branches in Iraq with key banks.

QNB: In April 2012, the bank increased its share in Mansour Bank from 23% to a majority stake (51%)

Abu Dhabi Islamic Bank: In July 2012, ADIB opened its first branch in Baghdad, being the first UAE bank to operate in Iraq

Several Turkish Banks: In 2011, İşbank, Vakif Bank and  Ziraat Bankasi opened their first branches in Erbil, with plans to open branches in Baghdad.

Bank Melli Iran: In 2007, Bank Melli Iran opened its first branch in Baghdad.

Burgan Bank: in 2010, The Kuwaiti bank increased its share to 50.6% in Bank of Baghdad.

Ahli United Bank: In December 2005, the Bahraini bank acquired 49% of Commercial Bank of Iraq.

Capital Bank: In 2004, the Jordanian bank acquired a majority stake of 72% in National Bank of Iraq.

Expected significant improvements to Iraqi banking infrastructure will significantly enhance accessibility to banking in Iraq

Over the next few years, Iraq will experience significant improvements to its banking infrastructure, which will dramatically improve the system accessibility. Two prominent initiatives currently underway are the establishment of the ATM national switch and the introduction of mobile payment systems.

ATM national switch: Currently, most ATM machines in Iraq are not connected to a national switch, i.e. ATM machines of a bank can only be used by the customers of that bank, thus limiting access to ATM machines. With the help of USAID’s Iraq Financial Development Project, the national switch would connect all the existing ATM machines and point of sale terminals to one central communication network, which would allow customers of one bank to use the ATM network of other banks.

Mobile Payment System: Leveraging the high cellular phone penetration in Iraq (~80%), customers wishing to make payments at retail stores would be able to transfer money from their bank account to the retailers simply by the use of phones. Also banks would assign certain retailers as agents where customers can go to deposit and/or withdraw money with confirmations sent straight to their phone, thus saving the costly and time consuming process of building out a vast network of ATM machines.

Management Partners is a top-management consultancy advising leading private and public sector institutions in Europe and the Middle East, with a particular regional focus on the UAE, Saudi Arabia and Iraq. The consultancy’s focus is assisting clients in areas such as designing growth strategies, implementing operational performance measures, indentifying cost improvement levers, reshaping organization structures, and managing outsourcing deals