Staff Report / 12 July 2013

The Iraqi banking sector is set for significant earnings and asset growth over the next decade driven by a strong macro environment, increasing credit penetration and the improving security situation in the country, says a report.
Iraq is a rich market and the investment opportunities are huge as the war-hit nation is modernising its infrastructure and energy industry after decades of sanctions. With the International Monetary Fund (IMF) forecasting Iraq’s gross domestic production (GDP) to grow at a rate of nine per cent in 2013, the banking sector in particular is expected to maintain a steady growth rate over the next few years, according to Sansar Capital Management’s report released here on Thursday.

“Iraq’s banking sector, though certainly on the growth path, is not without its share of challenges. However, what is important to note is that all the challenges and hurdles can be overcome, especially with the combined efforts of the government and private sector,” said Sanjay Motwani, President of Sansar Capital.

According to the central bank’s web site, 15 international banks are operating in the country, competing with seven state banks, 23 private lenders and nine banks operating under Islamic rules. Iraqi officials are in talks with international banks about the opening of offices and branches in the country, and so far they succeffully attracted banking giants like Citigroup, JPMorgan Chase & Co and Standard Chartered, among others. Other banking groups are also trying to expand business in Iraq to cash in on the investment opportunities in the country.

“We believe that the private sector can help improve accessibility to branch networks and services while the government can help level the playing field between the state-owned and private sector banks. Of course, gaining the trust of the population would require efforts from both sides,” Motwani said.

The Sansar Capital Management’s report said the growth in Iraq’s banking sector earnings and GDP, which IEA forecasts will grow 151 per cent between 2011 and 2020 driven by the country’s increasing oil revenues, go hand-in-hand with the improving security situation in the country. As violence declined by over 80 per cent between 2006-2012, Iraqis in many parts of the country enjoyed relative calm and stability.
However, despite the impressive growth, Iraqi private banks will have to overcome some important challenges if they are to continue their growth at the excellent pace witnessed over the last five years.

The report points out that rising credit penetration is also expected to further fuel banking sector growth. The report cites a World Bank study which shows that Iraqi domestic credit to GDP stood at a mere nine per cent of GDP at the end of 2011 as compared to a 55 per cent of GDP average for the Middle East and North Africa (Mena) region. Domestic credit to GDP grew at a clip of 89 per cent CAGR between 2009-2011. Moreover, according to Central Bank of Iraq data, cash credit, such as loans and overdraft facilities, have grown at an impressive CAGR of 50 per cent from 2006-2011.

The detailed report analyses the Iraqi private banking sector through the perspective of five of the country’s largest private banks by deposit. The report reveals that buoyed by strong economic growth and rising credit penetration, these five banks saw their aggregate net income grow by 207 per cent between 2010-2012.
The Iraqi Middle East Investment Bank, the third largest publicly traded bank in terms of deposits, in particular performed well in the past few years, having been able to attract large sums of quality deposits at very low interest rates. In 2012, Iraqi Middle East Investment Bank had the highest return-on-equity and the highest operating profits growth among the large Iraqi banks. Since 2009, the bank has grown profit before taxes by 330 per cent, a CAGR of 63 per cent.

Accessibility is among the biggest challenges facing the country’s banking industry. Access to bank branches or ATM machines remains highly limited to the general Iraqi population. There are approximately 900 bank branches covering a population of 33 million Iraqis equating to just one branch serving 36,000 individuals.
Other challenges include an uneven playing field enjoyed by the state-owned banks and a general mistrust of the banking system. This problem is further exasperated by the lack of any deposit insurance institutions that would guarantee customers their deposits back in the event of a bank failure.