Iraq presents an ideal opportunity for well-capitalised local banks with strategic links with foreign financial institutions.

The country is on the verge of a massive expansion of its oil and gas industry. The government is also planning $150bn-worth of new infrastructure developments, including affordable housing schemes. This will create demand for credit and should ensure strong growth for banks that are able to leverage international support, such as Mansour Bank.

Although Mansour Bank began operations just five years ago, it did so with the distinct advantage of a significant minority shareholding from QNB, offering the Qatari bank’s state-of-the-art technology. Gulf-backed banks have a head-start in Iraq on international banks, such as France’s Societe Generale, Germany’s Deutsche Bank and the UK’s HSBC, and are seen as better placed to roll out branches at a faster pace than competitors from the West.

Mansour Bank is not the largest of the private Iraqi banks, but can be considered to be firmly in the middle of the pack of commercial banks. Iraq’s first private bank, Warka Bank for Investment & Finance, is the largest private lender and has 120 branches across the country, giving it a clear advantage in servicing the retail market.

Although Mansour Bank has raised capital to ID75bn, it is still not yet in a position to undertake large financings and must therefore be selective in its lending activities. However, recent cuts in interest rates - reduced by the Central Bank of Iraq in early April to 6 per cent - will help to support increases in the size of its deals. Chairman Mehdi al-Rahim says targeted capital increase to ID250bn, expected by 2013, will help the bank to participate in larger financings.

There are other obstacles facing commercial banks in Iraq. One is the poor quality of credit officers and the lack of experienced senior management. The relationship with QNB will enable Mansour Bank to improve staff training, but the learning curve is still steep.

The bank needs to increase lending, but to do this, it needs to carry out rigorous analysis of local companies’ credit-worthiness. Until now, lending in Iraq has been on the basis of assets, but banks are starting to establish the infrastructure for credit-based lending. This will be one of the bank’s main priorities.

Mansour Bank is confident of increasing profits next year, although a 34 per cent decline in investment revenues in the first nine months of 2009 will take a bite out of full-year net income. The bank’s profits are likely to remain satisfactory rather than spectacular in 2010. However, Mansour Bank still has much in its favour. It has no bad loans on its books because of conservative lending policies, a strategy it is likely to continue in good times as well as bad.