The Government of Iraq in cooperation with UNDP Iraq, USAID-Tijara and the Consultative Group to Assist the Poor organised the Iraq Micro-Finance Forum in Erbil.

The Forum’s key objectives were promoting synergy between the Government’s poverty alleviation and job creation efforts and the existing microfinance industry, enhancing service delivery by microfinance institutions to micro-small and medium enterprises, enhancing access to financial services to the Iraqi people who currently have limited or no access to microfinance, with a focus on youth and women.

“Limited access to institutional finance is found to be one of the key constraints to private sector growth in Iraq” said Peter Batchelor, UNDP’s Country Director. “A stronger private sector, able to provide jobs for the Iraqi people will ultimately contribute to Iraq’s welfare and poverty alleviation” he added.

The combination of poverty and lack of formal job opportunities is increasing the already high demand for microfinance in Iraq. The Government has placed job creation high on its development agenda and aims to transform from direct lending it has previously engaged in to becoming a partner in sustaining and supporting the microfinance industry as a vehicle for private sector growth and job creation.

The Forum featured experts and speakers from Iraq, Yemen, Jordan, Lebanon, the UAE, Italy, Poland and Pakistan. A shared vision for the microfinance sector in Iraq was formulated where opportunities for growth and challenges were identified, support activities explored and stakeholders’ roles operating in the sector were agreed upon.

Participants in the Forum included representatives of the government from the Prime Minister’s Advisory Board, Ministry of Labour and Social Affairs, Ministry of Industry and Minerals, Kurdistan Regional Government, The Central Bank of Iraq, NGOs, microfinance institutions, academia and the private sector.

The participants agreed on basic principles for supporting the development of the microfinance sector in Iraq to be formulated in policy recommendations and will be shared among participants for comments prior to finalisation and submission to the Task Force for Economic Reforms for endorsement.

By Sherif Salem, of Invest AD.

Iraq’s banks are quietly on the move, and the consequences for the economy could be powerful and far-reaching.

The country has 49 banks, and although lending has increased in the last couple of years, the loan-to-deposit rate still stands at only 44%, compared to around 80-90% for other banks in the Middle East.

However, we can now expect faster loan growth, and probably industry consolidation, because of action taken by the central bank.

Commercial banks have prospered by taking deposits and parking them at the central bank, earning interest rates as high as 15-20 percent as recently as 2009. But with inflation waning, the policy rate has been slashed to 6 percent, effectively cutting off this income stream.

At the same time, a requirement for lenders to increase their capital to at least 250 billion Iraqi dinars ($214 million) by mid-2013 is likely to result in mergers for those who struggle to reach the target.

To thrive and attract capital, Iraq’s banks will now need to expand their loan portfolio by taking on greater calculated risk, increasing returns and offering competitive interest rates to attract deposits.

Iraq’s economy is currently growing at a rate of nearly 10%, mostly due to high oil prices, but the benefits are only slowly improving standards of living. So huge investment is needed immediately, particularly in manufacturing, and this is where commercial banks should be stepping up.

The coming shake-up could be disruptive for the banking sector in the short-run, but it is an important step if Iraq is to unleash its full potential.

Sherif Salem is portfolio manager at Abu Dhabi-based asset manager Invest AD. He manages the Invest AD Iraq Opportunity Fund, as well as helping to manage other equities funds investing in the Middle East and Africa.

The International Monetary Fund (IMF), in its latest World Economic Outlook, makes the following forecasts for Iraq:

The report sees strong growth continuing, with a figure of 8.8% projected for 2017.

AKnews reports that the Iraqi Ministry for Women’s Affairs has granted about 10m dinars’ worth of bank loans for women.

Ministry spokesman Mohammed Hamza said the loans are part of the project submitted by the Ministry of Labour and Social Affairs for women who are unemployed and registered with the ministry.

Priority for awarding the loans will be given to women who support their families. The value of the loans will increase according to the number of children but on the condition that the children attend school, explained Hamza.

The loans have an interest rate of three percent payable in 1m-dinar payments each year.

(Source: AKnews)

Iraq’s Cabinet has approved the establishment of a first state-owned Islamic bank in the country, said Mudher Saleh, deputy governor of the Central Bank of Iraq. This will bring to 12 the number of Islamic banks in Iraq.

Two of the country’s six state-owned banks, Rafidain Bank and Rasheed Bank, opened Islamic banking units earlier this year, Saleh told Bloomberg.

Minister  of State Ali al-Dabbagh (pictured), the official government spokesman, said the new Two Rivers Islamic Bank will start with capital of 25 billion dinars ($21.5 million).

(Source: Bloomberg)

Iraq has decided to hold off on a plan to knock three zeros off the nominal value of bank notes of its currency because it does not believe the economic climate is suitable, reports Reuters.

The central bank said last August that it planned to redenominate the Iraqi dinar to simplify financial transactions in an economy that is still heavily centralised and dominated by oil, and where deals are often carried out in cash.

The proposal to restructure the dinar to bring more liquidity into the market has been awaiting parliamentary approval since last year.

On Thursday, a statement on the website of the cabinet secretary said the cabinet had decided to halt all procedures relating to the redenomination of the dinar “until further notice”.

“The economic committee discussed this issue and so did cabinet … There is a possibility that it could cause some problems in the economic situation. Besides that, this operation is so big that cabinet sees circumstances are not right to control this,” cabinet secretary Ali al-Alaq told Reuters.

“We have more than 30 trillion dinars in circulation. To withdraw this amount from the market and then to examine them and to dispose of them is a huge process. Even the technical and the monetary capabilities to control a process like this, we consider as insufficient and it is not seen as a priority currently,” Alaq said.

The central bank says Iraq’s large foreign reserves, which have risen to a record $60 billion on the back of high oil prices, will shield it from any damage to its financial system on the national level.

(Source: Reuters)

The finance committee in the Iraqi Council of Representatives warned on Wednesday about the deterioration of the Iraqi economy due to the low exchange rate of the dinar to the US dollar, assuring that proposals are underway to get the country back on its feet, reports AKnews.

According to AKnews, the Iraqi dinar hit its lowest exchange rate in three years against the US dollar, at a selling rate of 1290 dinars per dollar on Tuesday. On the othe hand, some online sources still show it trading in the range 1160 to 1165.

Committee member Shawrash Mustafa said the committee began to study the deterioration of the Iraqi dinar exchange rate and put in place several proposals to halt the crisis. He did not say what these proposals were, but that they will be delivered to the Ministry of Finance and Iraqi Central Bank (ICB).

The ICB has issued strict regulations on its sale of dollars, due to restrictions on trade with both Iran and Syria.

Azzaman reports that the dinar’s depreciation has prompted the Central Bank to intervene by increasing supply of dollars and withdrawing dinars from the market. The operation is supported by estimated foreign currency reserves of $62 billion, which Central Bank Deputy Governor Mudher Saleh said is sufficient to cover 120% of the value of local currency in circulation at current exchange rate.

The Financial Times reports that Iraq’s central bank has tightened its clampdown on its sales of dollars, amid fears that buyers are using them to launder money and skirt international sanctions on neighbouring Iran and Syria.

The bank unveiled new rules on Monday to force customers to prove their identities by supplying tax records and import licences. Its deputy governor, Mudher Salih Kasim, told the FT, “Iraq is liberal and the two countries next door are under sanctions. You can see the consequences are very bad: this is spillover.”

The Iranian rial is now trading at 16,000 to the dollar, versus 12,500 in December.

Demand for dollars is as high as $400m and $450m a day, more than double some estimates of the legitimate need, may be due to criminality and Iraqi middle men settling debts on behalf of clients in Iran and Syria.

The new rules will compel all commercial buyers of dollars at the central bank’s near-daily auctions to produce tax clearance certificates and, from 30th June, papers to prove they are allowed to import the goods they say they are using the money to buy.

In February, the central bank asked dealers to submit cheques rather than cash, in order to identify currency buyers, but this largely failed because purchasers were simply hiring third parties such as “porters from the street” to open bank accounts on their behalf.

One currency dealer told The National, “I don’t have the right to ask my client what he is going to do with the dollars when he takes it from my shop. It’s almost impossible to track where the money is going, because the currency has been taken to the street.”

(Sources: Financial Times, The National)