Iraqi banks might offer huge growth opportunities in the future for investors willing to take some risks but the industry needs to consolidate first and change its business model, analysts and investors say. With violence ebbing from the peak of sectarian warfare in 2006/2007 foreign firms and banks are putting out feelers to the major oil producer, which was isolated for 20 years due to UN sanctions, wars and violence since the 2003 US-led invasion. Iraq has signed multi-billion oil contracts, plans huge infrastructure projects and hopes to diversify the economy, opening the door to plenty of deals for banks if security improves further. But officials say that Iraq first needs to overhaul a banking sector dominated by seven state banks and some 36 tiny private lenders with little interest in the overall economy. “It's painful when we look at international private banks and then our banks. The difference is huge in terms of performance, the size of deposits,” said Dhiyaa Al Khayoon, advisor for banking affairs at the Iraqi finance ministry. To create more competitive lenders the central bank has asked private banks, which tend to have little contact with the outside world, to increase their capital to 250 billion dinars ($214 million) by 2013, according to a memo. “We hope that this measure will force them to find a foreign partner,” Khayoon said. Anticipating mergers, foreign investors have started buying into Iraqi banks, said Salam Smeism, analyst and Iraqi bourse board member, citing the example of Bahrain's Ahli United Bank raising its stake in Commercial Bank of Iraq to 49 per cent in June. “I do expect many mergers among private banks,” she said. Foreign frontier market funds also are positioning themselves. “We like the banking sector as it is a good proxy for the Iraqi economy. Their earnings will increase tremendously as Iraq is being rebuilt and oil revenue is increased,” said Henrik Kahm at asset manger FMG, which has a fund dedicated to Iraqi stocks. “The newly formed, licensed banks are very competitive and gaining market share. We think there will be consolidation and a few might falter,” Kahm said. Other foreign gainers would be Jordanian banks operating in Iraq such as Arab Bank, said Daniel Broby, chief investment officer at UK fund manager Silk Invest, which owns Iraqi bonds and is now mulling entering the Baghdad bourse. At least 10 foreign banks have been licensed in Iraq, mostly from neighbours such as Kuwait, Iran, Turkey, Lebanon, Bahrain or Jordan, according to the central bank. A prominent example is HSBC, which is active through its Dar Es Salaam unit. “With a population of 30 million and increasing projected GDP per capita growth over the coming three to five years, the Iraqi banking sector offers attractive mid to long term prospects,” said James Hogan, chief executive of HSBC Iraq. With non-oil sectors, such as services and real estate, developing slowly, bankers see opportunities to get financing deals or help foreign firms looking for local business partners. Among others, Dubai-based builder Arabtec is considering Iraq, said chief financial officer Ziad Makhzoumi. While Iraq is rich in oil, its banks are underdeveloped. They were mostly state-controlled before 2003, offering just basic services. Bankers say not much has changed - only two or so offer credit cards, while many deals are paid by checks. Analysts say the private banks will have to broaden their business if they want to attract foreign partners. So far few offer all services - some focus on retail banking, deposits or serve only firms linked to their family owners. “They think it's a family project ... they don't realise that the issue is deeper and they can play a role,” said Smeism. In total, 43 banks have outstanding loans worth 6.8 trillion dinars ($5.8 billion), of which two-thirds come from state banks, said Mudher Kasim, a senior central bank advisor. That is small compared to Jordan where banks' total loans were $20 billion in June, while in Saudi Arabia, the biggest Arab economy, banks had total claims worth $250 billion in June. One of the larger private banks, Credit Bank of Iraq, had capital of $100 million and $311 million assets in 2009. Owner National Bank of Kuwait has a paid-up capital of $1.1 billion and $45 billion assets, company and bourse data says. “In 2003 we had a capital of only $1 million,” said Fouad Mustafa, Credit Bank's managing director, adding that the planned $214 million capital should be only a first step for banks. As bombings still occur regularly, banks are reluctant to set up nationwide branch networks or electronic systems such as ATMs - only 40 per cent of Iraqis use the local banks which have fewer than 800 branches, while many keep their money under mattresses. “Someone comes at night or even during the day and empties it (the ATM),” said Mustafa, sitting in his office with armed guards roaming the headquarters located in central Baghdad. Many Iraqis prefer state banks they have known for a long time, while the new private banks are often reluctant to lend in the absence of an efficient court system which can settle disputes. “Private banks make a lot of demands before they lend. It's complicated,” said Abdulrahman Al Mashhadani, an economist at Al Mustansiriya University in Baghdad. But bankers hope for change over time. “There is increasing evidence that Iraqi consumers are becoming more comfortable, albeit selectively, with privately-owned banks,” said Hogan.
