Middle East banks in talks to open branches in Iraq

14 April 2010

Lenders hope to capitalise on Iraq’s massive reconstruction programme

A growing number of private banks are currently in negotiations to open a branch in Iraq in order to capitalise on the reconstruction efforts, which are estimated to stand at $400bn.

“There are currently five to 10 regional banks, which are focused on opening a branch in Iraq,” says James Hogan, chief executive officer of Dar Es Salaam Investment Bank, in which HSBC holds a 70.1 per cent share. “From my conversations with Iraq’s Ministry of Finance and its Central Bank, there are also a lot of big international banks, which are starting their applications and monitoring developments very closely.”

There is enormous potential for banks to finance infrastructure opportunities as part of Iraq’s reconstruction.

Last year, Iraq secured more than $156.7bn in capital commitments from foreign firms, a 241 per cent increase over the previous year, according to data from Washington-headquartered Dunia Frontier Consultants, which provides consulting services to investors and corporations.

But Hogan says that while the Iraqi government has worked hard to make sure that the barriers to entry are fairly low, banks are showing reluctance to invest in the country until there is greater stability.   

“There’s plenty of interest but everyone is waiting with baited breath for the outcome of the current election process before they commit their investment dollars,” says Hogan. “I anticipate that before the end of the year, that situation will start to change.”

In addition to financing new infrastructure projects, Iraq’s retail segment is noticeably untapped.

“A relatively small proportion of Iraqis are confident in the banking system,” he says. “It is extremely common for people to withdraw all their money in cash on pay day.”

There are currently 43 banks licensed to operate in Iraq, 30 of which are privately-owned. However, state-owned banks dominate the sector, accounting for 80 per cent of the sector’s total assets, and of this, Rafidain and Rasheed banks constitute the lion’s share of these assets at around 60 per cent.

According to data from the Central Bank of Iraq, Iraqi banks’ net profit reached ID1.024 trillion ($878m) in 2009. Of this, ID774bn (75.7 per cent) was generated by state-owned banks, with private banks contributing the remaining ID250bn (24.3 per cent).

Iraq’s banking sector is still very much in its infancy, contributing only around 7 per cent of the country’s GDP in 2009, a low figure by comparison to neighbouring countries like Lebanon, Egypt and Jordan where it comprises more than 50 per cent.

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