Iraq's banking sector eyes growth as violence falls

By Mohammed Abbas
BAGHDAD (Reuters) - Iraq's banking sector is showing signs of growth as violence has dropped to a four-year low, with lending, deposits and electronic transfers up sharply in recent months, U.S. embassy statistics show.
The volume of loans issued by private banks in February jumped by almost half to $755 million compared with October, and the value of letters of credit outstanding in March more than doubled to $189 million versus October.
"The improved security situation has made business, trade and activities possible that weren't possible before," Charles Ries, a senior U.S. official at the embassy who is tasked with helping Iraq revamp its economy told Reuters.
The embassy's statistics included data collated from a range of Iraqi sources. The central bank and Iraq's finance ministry have not responded to requests for data and bank officials, including at private banks, were not available to comment.
The figures are tiny by international banking standards, but are significant for a country trying to rebuild its financial sector and boost investment after years of war and sanctions.
Ries has helped some Iraqi banks adopt the SWIFT system of international electronic bank transfers, a crucial step for integration into the global banking system.
About half of the 41 banks licensed to operate in Iraq now have SWIFT, the embassy said. Some of these banks are foreign.
Many large transactions in Iraq are still conducted in cash, and businessmen and contractors often fly into Baghdad laden with bricks of dollar bills. Continued...

The U.S. military, a major spender in Iraq, now insists any transaction of over $50,000 be made electronically.
In the Iraq central bank's daily auction for dollars, the amount traded in cash has remained stable for almost two years, but there has been a steady increase in transfers.
"That's evidence of a more normal, more internationally orientated banking system," Ries said in a recent interview.
BUDGET EXECUTION
Swelled by record oil prices, Iraq's cabinet recently proposed raising the 2008 budget to $70 billion -- up from $41 billion last year.
Budget execution is crucial to reviving Iraq's economy, and the departure of many experienced technocrats since the fall of former Iraqi President Saddam Hussein five years ago has made the effective expenditure of state cash difficult.
Iraq's parliamentary economic committee said some 55 percent of last year's budget set aside for investment was spent, with initial indicators showing it could rise to 70 percent in 2008.
"Iraq needs to continue to improve budget execution ... It's very hard to spend that much money reasonably, and so there's an enormous effort that needs to be made," Ries said.
Despite signs of increased activity in private sector banking, over 90 percent of bank deposits -- of which more than 60 percent are from the government -- are held by the two largest state-owned banks. Continued...

But while these banks pay pensions and salaries, more Iraqis are turning to private banks for commercial needs, Ries said.
"The private banks take care of a farmer wanting to buy a tractor, the furniture guy paying some bills -- that's what we want ... customers are using bank accounts rather than keeping everything in cash, and that promotes economic activity."
Private banks have begun to expand their operations to branches outside of Baghdad and take more risk on their loan portfolios, the U.S. embassy said. http://www.reuters.com/article/GCA-GCA-iraq/idUSL214165820080723?pageNumber=3&virtualBrandChannel=10179