A merger between Mosul Bank for Development and Investment and Union Bank of Iraq will be the first on the Iraqi Stock Exchange (ISX) if it goes ahead.

“We are still in the initial stages, once we have the general assembly meeting on 25 May we will make the big decision,” says Karim Yusuf Tilo, chairman of Union Bank of Iraq.

The move comes after a decision made by the Central Bank in October 2010 to increase the capital of banks in the country to ID100bn ($85m) by the end of June this year.

Mosul Bank has a market capitalisation of ID54.3bn and Union Bank’s is ID50bn.

The merger would enable both banks to reach this threshold, but one of the main problems is working out the ratio share for the shareholders. Mosul Bank is slightly more profitable and bigger by assets than Union Bank and its shareholders are likely to ask for larger shares.

This is one of the details due to be discussed during the meeting in May.

“What these two banks are doing is revolutionary for Iraq, but while they have announced they would merge, things move slowly in the country,” says Shwan Ibrahim Taha, chairman, Rabee Securities, a brokerage firm based in Baghdad.

If the deal goes ahead, it will pave the way for more merger and acquisition (M&A) activity on ISX. Currently 15 of the 21 private banks listed on the exchange have less than ID100bn in capital. There is little appetite to raise capital alone, so a merger is an easier solution, but as yet, no other deals have been announced.

Iraq’s banking sector is dominated by state-owned banks, which held more than 97 per cent of the sector’s total assets in 2009. Given the security situation of the country, the finance sector has been slow to grow, but the outlook is promising. The Central Bank expects the banks to increase their capital to ID250bn by June 2013.

The ISX was established in 2004 with 59 companies listed. It now has 85 companies, trading five days a week with volumes surpassing $1m a day.