[Marxism] "The Economist" on Iraqi bank capital

Jurriaan Bendien andromeda246 at hetnet.nl
Tue Jul 20 15:40:08 MDT 2004

America's Treasury Department estimates that Iraq's banks' assets amount to
just $2 billion, or only 10% of GDP, a "low ratio by any comparison". (...)
Transactions are limited to deposit-taking and infrequent loans-for which
banks require collateral worth up to four times the credit. Many bank
processes (such as cheque clearing, which can take as little as three days
or as long as three weeks) are still done by hand. Electronic links among
bank branches, let alone to the outside world, are rare, although this is
changing. Until recently, the Coalition Provisional Authority (CPA) paid
Iraqi army pensions by (well-armed) couriers. (...)

[The CPA] has drawn up a framework of laws and rules for the new banking
system. A law that came into effect in March established the CBI's
independence and laid down its procedures for everything from the management
of foreign reserves to bank supervision. A new commercial-bank law governs
the functioning of Iraq's 17 private banks, which were legalised by Mr
Hussein in the early 1990s in response to a cash crunch following UN
sanctions. A huge training effort has been going on. Advisers from America's
Treasury and bank regulators have given classes on subjects ranging from the
use of Microsoft Word to the basics of Basel 2, a new treaty on bank
supervision. (...)

The creation of a single currency has permitted the CBI to carry out a basic
monetary policy. The central bank carries out daily currency auctions,
receiving about a dozen bids a day according to the CPA. The new dinar has
appreciated by 25% or so since its launch, and has traded steadily at around
1,450 to the dollar since January. Inflation has been kept in check, no
small thing given that hyperinflation often occurs during and after wars.
Encouraging as all this is, it still amounts to little more than the
rudiments of monetary policy and a banking system.

Without going much further it is hard to see how the Iraqi economy, which
currently depends heavily on American grants and subsidies, can be put on a
self-sustaining path. The six state-owned banks, which comprise most of the
banking sector, are still in a sorry state. The four smallest of these,
which between them hold 5% of Iraq's bank assets, are "without a doubt
insolvent", according to a CPA official. Four-fifths of their loans are
non-performing. The two biggest banks, Rafidain and Rashid, which together
account for roughly 85% of the system's assets, may be no better off. They
are thought to have lost $100m in the looting. Rafidain was the biggest
commercial bank in the Arab world before the first Gulf war, with assets of
$47 billion. If its estimated $24 billion of off-balance-sheet borrowing
from abroad on behalf of Mr Hussein's regime were factored into its books,
it would now be bust. (...)

Until the extent of Iraq's debt is resolved, the state banks cannot do
business abroad. Trade is funnelled through the Trade Bank of Iraq, run by a
consortium of 13 international banks, which provides letters of credit for
everything from medicine to the services of forensic accountants. It is
hoped that Iraqi banks will one day take this over. Perhaps the best hope
lies with the 17 private banks, which are unencumbered by the worst of the
old regime's cronyism and unburdened by its debts. But they are tiny,
holding just 5% of all bank assets, although their share is growing. None of
them has a country-wide presence. Bank of Baghdad, the biggest, has 20
branches; currently, Rafidain and Rashid have almost 300 branches open.

This would seem to be a suitable case for foreign investment to bring in the
needed know-how and technology. In January, the CBI granted bank licences to
three foreign banks: Britain's HSBC and Standard Chartered, and the National
Bank of Kuwait. The new commercial-bank law permits other foreign banks to
buy up to 49% of existing Iraqi private banks. At least one-third of the
private institutions are already in discussions with other Middle Eastern
banks. All well and good. But so far none of the three licensed foreign
banks has entered the Iraqi market. Security is an obvious concern,
outweighing, for now, the risk that licences may be revoked if branches are
not set up within a year. And who can be sure that what has already been
achieved will not be undone?

Some observers worry that once the guiding hands of American advisers have
gone, the CBI will become politicised and print money to pay off state
debts. It is also possible that the new bank laws will one day be overturned
altogether, because of nationalistic bias against foreign ownership or their
lack of reference to Islamic teaching. And important as the state of the
banking system might be, Iraq's economic health is sure to rest, in the
final analysis, on political stability. The future, in other words, is still
in the balance.

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