The State-owned Banks
There are seven state-owned banks in Iraq which together account for 91% and 89% of the banking sector assets and deposits, respectively.12
Of the seven state-owned banks, three banks account for the vast majority of all assets and deposits. Two of those banks, Rafidain Bank and Rasheed Bank, are a legacy of the old regime and sit on very large sums of losses. The third bank is the Trade Bank of Iraq (TBI) which was established to deal with trade related credit activities.
Both Rafidain and Rasheed bank are currently undergoing restructuring by the Iraqi government with the help of The World Bank.
THE WORLD BANK is CURRENTLY undergoing RESTRUCTURING.
The two banks sit on large sums of valuation losses on borrowing and lending activities that were structured under the previous regime when 1 USD was equivalent to 0.33 IQD as compared to the current official rate of 1 USD to 1,179 IQD. To put this in context, the World Bank estimated that in 2010, Rafidain Bank had 257 trillion IQD of valuation related losses on an asset base of 302 trillion IQD.13
NOTE: 1 USD WAS EQUIVALENT TO 0.33 DINAR ($3.03 to the DOLLAR!! I will take it!! )
The Iraqi government has been slow to recognize these losses.
We, however, have seen some progress as total assets for the two state-owned banks declined by 68% from 2010 to 2011. 12
HEADING IN TE RIGHT DIRECTION. SLOWLY BUT SURELY!!
We believe there may still be room for a further write-down of those assets. In 2010, the World Bank estimated the fair market-value of the assets for the two banks at 39.4 trillion IQD as compared to the 103.9 trillion IQD reported in 2011.13 It is worth noting that even after the write-down, the state-banks still have significantly more assets than the private sector banks.
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The state-owned banks play a less dominant role when it comes to private-sector lending. In 2011, the state-owned banks had a 67% share of cash-credit to the private-sector. Their share of cash-credit to government remained 100% as state-owned enterprises and government institutions can only borrow from state-owned banks.
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Even before recognizing valuation related losses, Rafidain and Rasheed are significantly undercapitalized. As a result, the Iraqi authorities laid out a plan to recapitalize Rafidain banks with 400 billion IQD and Rasheed bank with 300 billion IQD.12 The plans for this recapitalization have been in place for several years now and the Ministry of Finance has been slow to implement this.
WELL THEN FIRE THE FINANCE MINISTRY!!! ALL OF THEM!! LOL
We believe, even after this round of capital injection, the two banks will remain undercapitalized with a limited ability to compete, on a relative basis with private banks, in extending credit.(a)
Turning our attention to deposits, the state-owned banks control 89% of total deposits and 63% of private sector deposits. We believe much of this can be attributed to the uneven playing field between state and private sector banks. The state-owned banks enjoy implicit government guarantee on deposits and state-owned enterprises are required to maintain their deposits with state-owned banks.
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The other state-owned bank of significance is the Trade bank of Iraq (TBI). The bank was established in 2004 to carry out trade financing activities as Rasheed and Rafidain banks were prohibited from participating in those activities. The operations of TBI are generally viewed as opaque and there is a general lack of information about the bank.
For the remainder of this paper we will focus our attention on private Iraqi banks as the state-owned banks are not publicly traded and do not offer investors a way to participate in the macro growth story. Furthermore, given the limited lending capacity of the state-owned banks, we believe that, going forward, the private-sector banks will play an increasingly bigger role.
(a) With total 700b of equity capital the two banks could extend maximum credit of 5.6t IQD (700b x 8). In 2011 total credit for the two banks was 11.6t IQD or double the lending capacity available to the banks after the capital injection