Iraqi banks might offer huge growth opportunities in the future for investors willing to take some risks, but analysts and investors say the industry needs to consolidate first and change its business model, according to a report from Reuters.
With violence ebbing from the peak of sectarian warfare in 2006/07, foreign firms and banks are making tentative approaches 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 dollar oil contracts, plans huge infrastructure projects, and hopes to diversify its 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 ($214m) 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 percent 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, licenced 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 considering entering the Baghdad bourse.
At least 10 foreign banks have been licenced 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 cheques.
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.