Most local banks have been seeking since August foreign investors in order to meet the requirements of the country's new banking law, which requires them to have capital of $5 million by the end of 2004. Two banks are understood to have agreed investments with foreign banks.

The letter, which was sent to all state-owned and commercial banks, states: 'Any agreement before this date is considered cancelled if it does not have the approval of the Finance Committee of the governing council, the Central Bank of Iraq and the Ministry of Finance.'

Under the existing law, banks are only required to have approval from the central bank. Bankers say the letter is the first example of local politicians attempting to control the market. They also claim it contradicts the banking law issued by the Coalition Provisional Authority (CPA) in July 2003.

'This has to be changed,' says a local banker. 'We are in a free economy. I cannot understand this. There is nothing about this in the banking law. It is a kind of additional procedure. The banks are now working to solve this.'

Officials at the CPA, who have been working to attract investment in Iraq's private banks, were unwilling to comment on the decree. But sources in Baghdad say the CPA is 'shocked and angered' by the unexpected move.

'The legality of this is questionable,' says a Baghdad lawyer. 'It is a governing council document but the banks already require Central Bank approval of investors so this is not a justifiable requirement. The message this sends to investors is 'here is your political risk'. And this is before handover. What will happen when you take away the CPA?'