Iraqis eye credit to boost economy

Modernizing banks and shifting from cash could hamper insurgency and boost rebuilding, officials say.

Shoppers in Baghdad no longer need to carry plastic bags full of cash, as they did after years of international sanctions reduced the value of a 10,000-dinar note with Saddam Hussein's likeness to less than $5.

A year-and-a-half ago, the Central Bank of Iraq (CBI) began issuing higher-value currency notes. And it is now trying to help stimulate business around the country by reintroducing coins.

But finance officials eager to move Iraq away from a heavily cash-based society have set their sights on a more ambitious goal: developing banking networks that will allow a shift to an electronic, largely credit-based economy.

Doing away with cash as the main form of payment would reduce the threat of highway robbery, which hinders fund transfers within the country, some bankers say. And in turn, a reliable network for electronic transactions would undercut an insurgency eager to deal in cash and spur reconstruction, finance officials say.

"Your money can't really be stolen when you carry it as a credit card," says CBI governor Sinan al-Shabibi.

Credit cards, like electronic fund transfers, are still a largely theoretical concept here. But with the CBI's help, many of Iraq's banks are buying computers for the first time, while staff members are being trained in Dubai and Jordan in global banking practices.

Revamped financial services will be essential for kicking reconstruction into a higher gear at ground level, says Bill Taylor, director of the Iraq Reconstruction Management Office (IRMO).

"The banking system is going to be the key to private-sector investment in this country, after security," Mr. Taylor says.

Contractors on US-funded reconstruction projects - including some US companies - are already turning to the local banking system as an alternative to carrying large amounts of cash on planes, bank executive Munther al-Fettal says.

Through ties to banks in neighboring countries, some Iraqi banks can extend small-scale letters of credit to local investors. But repairing the banking system properly can happen only with major injections of foreign funds and expertise.

"If reconstruction starts briskly, and if the private sector is going to be involved in this, then we will need financial intermediation," Mr. Shabibi says.

The CBI governor, along with Ministry of Finance officials, wants foreign banks to start working in the war-ravaged country. "The mere presence of banks and foreign investment in general will improve the security situation," he says. "What we don't want is to always have the excuse of the security situation."

The CBI has granted licenses to eight foreign banks, none of which has opted to open branches in Iraq under its own name. The insurgency and the rising threat of kidnapping last year prompted foreign investors to reconsider. But local officials threatened to revoke licenses unless foreign banks demonstrated their commitment to the market.

After more than a year of hesitation, the British bank HSBC reportedly signed a partnership agreement last month with Dar Al-Salaam Bank, offering capital in exchange for majority ownership. Other banks have made similar arrangements with Jordanian and Gulf Arab institutions, which wanted a foothold - but also a relatively low profile.

Bankers say the formation of an elected government in April has cleared the way for other limited foreign investments worked out months ago. Shabibi welcomes such partnerships, but says that foreign banks willing to operate in crime-ridden countries such as Colombia or Nigeria should be capable of operating in Iraq.

Taylor, however, says that foreign bankers, like other foreign investors, have every right to be cautious. "It's hard to tell anyone to come in, disregard security, and get things moving. We don't," he says. "Private-sector investment is going to come after private-sector investors feel safe that they can come ... without horrible things happening."

While two debt-ridden state-owned banks dominate the sector, Iraq also has 18 private sector banks, with others due to open soon. The former regime authorized private banks in the early 1990s, as Iraq struggled under sanctions.

Banks have become the strongest earners on the local stock exchange since the invasion two years ago. Speculation about incoming foreign investment has fueled dramatic gains in recent weeks, though shares in "real industries" are in a severe slump, says Mr. Fettal.

Several newly licensed local banks, meanwhile, are planning to expand their reach. The Kurdish family-controlled North Bank, started in Baghdad in 2004, recently opened a second branch in the northern city of Sulaymaniyah. Further expansion is also directed at the Kurdish-dominated north, says Nafie Alais Aboo, the bank's assistant managing director.

The CBI is encouraging other new banks to focus on impoverished areas in southern Iraq, some of which have almost no financial services, Shabibi says.

Meanwhile, as small amounts of coinage filter into the market, some people say they like the reminder of the days before wars and sanctions. But the manager of a Warka Bank office in Baghdad, Jumhouriya Hadi, said she had refused a request from workers at a nearby plant to exchange some new coins for paper money. "We don't want the difficulty of dealing with coins," she says.

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