Iraqi banks can fuel vital non-oil growth

by Sherif Salem

May 30, 2012 3:09 pm

Iraq’s banks are quietly on the move, and the consequences for theeconomy could be powerful and far-reaching.

In the next two years we can expect mergers and strong loan growth, and ultimately the emergence of a healthier banking industry that can fuel desperately needed growth in the non-oil sector – everything from light manufacturing to housing and retail.

The country has 49 banks, including seven that are state-owned – too many for the scale of existing business. Although lending has risen in recent years, the average loan-to-deposit rate for Iraq’s listed banks remains only 44 per cent compared with 80-90 per cent for other banks in the Middle East.

Banks have survived, and even prospered, by taking deposits and parking them with the central bank, earning interest rates as high as 15-20 per cent.

But with inflation waning, the central bank has given local banks a jolt by slashing its policy rate to 6 per cent. At the same time, to further separate the strong from the weak and encourage consolidation, the central bank is requiring commercial banks to increase their capital, in progressive steps, to a target of ID250bn ($211m) by the middle of next year.

To survive, Iraq’s banks will need to perform like lenders anywhere else in the world. Only those that expand their loan portfolio and achieve attractive returns will be able to offer competitive interest rates to attract further deposits. And only successful businesses will attract capital.

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