January 1, 2012

Iraqi Banking's Great Leap Forward

Last month the Central Bank of Iraq co-hosted a conference with USAID’s Iraq Financial Development Project on “Integrating the Banking and Financial Services Sector in Iraq.” This event, which was held in Istanbul from November 18-19 covered two upcoming changes to the payments system that have the potential to revolutionize Iraq’s banking sector.

The first is the introduction of a “national switch” for processing credit card and ATM transactions. The switch—essentially a router and some specialized software—will connect all of Iraq’s ATM machines and credit card point-of-sale scanners to a common platform. At present, each card-issuing bank operates its own system. Because not every point of sale is connected to every system, no one card will work everywhere. Little wonder that almost everything is paid for in cash.

The second is the establishment of the Iraq Interoperable Mobile Payments System (IIMPS). This system will reach out to people who do not have a bank account by making it possible to bank by mobile phone. Users will open accounts by calling a number and speaking with a representative. They may then make cash deposits and withdrawals either at branches or at venues such as retail shops that the banks will designate as their agents. Making a payment will require nothing more than a phone call to transfer funds to the payee’s account. There will no longer be any need to pay for anything with “blocks” of hundred dollar bills.

Both systems are supposed to begin operations in 2013. Of the two, the mobile system seems particularly promising. Even with the national switch in place, merchants may be reluctant to accept credit cards because of the associated fees and the paper trail they leave for the tax authorities. The IIMPS, however, should be readily adopted by anyone with a mobile phone. That’s a lot of potential new customers for the banks. By an interesting coincidence, it turns out that mobile phone users and people without bank accounts both account for about 80% of the Iraqi population.