Foreign net buying of ISX-listed shares has been waning since the middle of last year. After rising from about IQD 900 million for all of 2010, average weekly net buying by non-Iraqis rose to over IQD 4 billion in the first half of last year but then declined to about IQD 2.8 billion in the second half. As of January 20, the year-to-date average is negative IQD 111 million.

You might think that foreigners are being scared away by the political situation. The chart tells a different story, however. The current drama in Parliament only really started in December. That was almost six months after the foreign net buying peak in early June.

The foreign pullback actually corresponds more closely to the drop in world markets occasioned by the start of the European crisis last summer. It is also noteworthy that the record IQD 17.2 billion in net foreign selling during the week of October 21 occurred just two weeks after the S&P 500 hit its low for the year.

Perhaps all that really matters for foreign inflows is the likelihood of another global financial meltdown. Too bad that scenario is still not really “off the table.”

Last month the Central Bank of Iraq co-hosted a conference with USAID’s Iraq Financial Development Project on “Integrating the Banking and Financial Services Sector in Iraq.” This event, which was held in Istanbul from November 18-19 covered two upcoming changes to the payments system that have the potential to revolutionize Iraq’s banking sector.

The first is the introduction of a “national switch” for processing credit card and ATM transactions. The switch—essentially a router and some specialized software—will connect all of Iraq’s ATM machines and credit card point-of-sale scanners to a common platform. At present, each card-issuing bank operates its own system. Because not every point of sale is connected to every system, no one card will work everywhere. Little wonder that almost everything is paid for in cash.

The second is the establishment of the Iraq Interoperable Mobile Payments System (IIMPS). This system will reach out to people who do not have a bank account by making it possible to bank by mobile phone. Users will open accounts by calling a number and speaking with a representative. They may then make cash deposits and withdrawals either at branches or at venues such as retail shops that the banks will designate as their agents. Making a payment will require nothing more than a phone call to transfer funds to the payee’s account. There will no longer be any need to pay for anything with “blocks” of hundred dollar bills.

Both systems are supposed to begin operations in 2013. Of the two, the mobile system seems particularly promising. Even with the national switch in place, merchants may be reluctant to accept credit cards because of the associated fees and the paper trail they leave for the tax authorities. The IIMPS, however, should be readily adopted by anyone with a mobile phone. That’s a lot of potential new customers for the banks. By an interesting coincidence, it turns out that mobile phone users and people without bank accounts both account for about 80% of the Iraqi population.

Annual inflation in Iraq is now 6.3%, according to government figures. It is likely this is due to rising commodity prices.

Government receipts for oil in the last quarter were up 19% to US$20bn, the highest since before the Iraq War began.

The dinar was unchanged versus the dollar during the quarter.

The International Monetary Fund congratulated Iraq for its fiscal and monetary policies.

It appears that prime minister Nouri al-Maliki is taking a hard line to cut corruption in the financial industry, in order to get lending to businesses going. Maliki sacked the chairman of a major state-owned bank, the Trade Bank of Iraq, last quarter and announced an investigation into corruption.

(Source: Government of Iraq statistics; IMF)

 By T. Keyzom Ngodup, co-founder and Executive Director at Ideas sYnergy, an Iraq based private sector development consulting company.

IRAQ INSIGHTS, published by Ideas sYnergy, aims to consolidate and build intellectual capital on private sector development, empowering stakeholders to address issues of access and structural reforms on a diverse range of topics impacting inclusive economic development in Iraq.                            

IRAQ INSIGHTS                 June 2011, Birds Eye View: Iraq’s Performance 

•  “Sowing the Oil”: Positive Trends in Economic Diversification
• 2011 “better” or “worse”?
• Access to Finance: Are Banks Bankable to Scale-up Intermediation?
• Transparency, Corruption & Media Freedom: A Deteriorating Trend
•  Foreign Commercial Activity in Iraq: 2010 Year in Review by Dunia Frontier Consultants 

 Iraq Insights by Ideas sYnergy_June 2011 Issue I

T. Keyzom Ngodup is co-founder and Executive Director at Ideas sYnergy, an Iraq based development consulting company committed to economic and social development through market-based solutions that help build and scale innovative businesses for sustainable and inclusive private sector development.

Recently ISX CEO Taha Ahmed Abdul Salam told reporters that foreigners now hold 19% of ISX-listed shares. (See this link.) This seems like a big percentage but in fact reveals that foreign institutional participation in the market remains quite limited.

As of the end of last month, strategic shareholders in the eight foreign-invested banks held 328 bn shares. (See Table. Figures for total shares are from the May ISX monthly report.) This number is 17% of the total for the whole market. (Doing the same calculation by market cap you get 22%.)

These investors are not really market participants. Most are large banking groups like HSBC, which owns 70.1% of BDSI, or National Bank of Kuwait, which owns 75% of BROI (the IFC owns another 10%). Their Iraqi bank holdings are not short-term punts but rather form part of a long-term business strategy. They are generally unlikely to trade and their holdings cannot be thought of as part of the free float.

The remaining share of only 2% for all other foreigners is actually a more interesting number than the 19% cited by the CEO. If this is also their share of total ISX market cap, their holdings would only be worth about US$ 76 mn. Considering that US$ 20 mn in assets under management is often cited as the minimum threshold for a viable fund-management business, it seems there can be no more than a handful of small foreign funds in the market so far.

On June 7, HSBC announced that it would be subscribing in full to Dar Es Salam Bank’s (BDSI) 46.9% rights issue. The “world’s local bank” will be buying 23.7 bn new BDSI shares at IQD 1 each for the equivalent of about US$ 20.3 mn. (See this link for the announcement .)

The HSBC subscription will enable BDSI to meet the Central Bank of Iraq’s June 30 deadline for all private sector banks to increase paid-in capital to IQD 100 bn. Added to BDSI’s existing capital of IQD 72 bn, HSBC’s new shares will bring the total to IQD 95.7 bn, virtually assuring that the target will be met.

This will be the first time HSBC has injected capital into BDSI since it acquired its 70.1% stake in 2005. (Subsequent capital increases all took the form of bonus share issues.) Based on BDSI’s year-end 2005 capital of IQD 25 bn, that initial investment must have been something like IQD 17 bn—only about US$ 12 mn at the then prevailing exchange rate of around IQD 1470 = US$ 1.

The banking giant’s decision to put in more money, while not unexpected, can be seen as an important vote of confidence not only for its subsidiary but also for the Iraqi banking sector as a whole. There may also be a nice profit for investors when BDSI’s shares resume trading. On an adjusted basis, BDSI was up on the first day of trading following all four of the capital increases it has done since the beginning of 2005. The average first-day gain was 17.3%.

In March ISX-listed Qimma Financial Investment (VQUF) announced that Warka Bank’s majority shareholder, Saad Al Bunnia, had appointed it to “begin a formal auction process following a due diligence report carried out by Price Waterhouse Coopers.” The announcement, which was posted on Qimma’s website, went on to say that Mr. Bunnia was “interested in entertaining offers” from banking groups “such as Russia’s Alfa Bank or UK-based Standard Chartered.” (Hat tip to “Kickabuck” for sending me this link.)

It’s hard to know what to make of this. For starters, while the one-paragraph announcement is worded like something copied from a news agency, it does not appear to have appeared anywhere else. Oddly, it also does not even explicitly say what Mr. Bunnia is selling, though presumably this would be a majority stake in the bank. And if an auction were being organized, you’d think that Warka itself would have made some official statement to this effect.

The mention of Alfa Bank as a possible buyer gives the story a ring of truth however. It seems a funny thing for someone to make up—why not just claim that Citibank might bid? And it’s also easy to believe that the Russian lender would be interested in an Iraqi acquisition. With cash and book equity both over USD 3 bn at the end of 2010, it shouldn’t be hard for it to take up the unsubscribed shares from Warka’s failed rights issue. (There’s more on the rights issue here and here.) Its owners should also have little trouble seeing opportunity in a country that, like Russia in the 1990s, has huge unexploited oil reserves and is in the midst of becoming reintegrated into the global economy.

Another point in favor of the story: Alfa Bank is not without Iraqi connections. It has a close relationship with Russian natural gas giant Gazprom, which leads the consortium that won the Badra oil field concession in 2009. In 2002, the two companies entered into a strategic cooperation agreement including, among other things, “the implementation of joint projects,” “provision of short-term financing to Gazprom,” and “the participation of Alfa Bank in project financing schemes for Gazprom.”

For over a year, rumor had it that Standard Chartered would be taking over Warka. After such a long time, however, you have to wonder if perhaps the British bank isn’t really that interested after all. Could a Russian bank turn out to be a better match?

Private banking reform is needed in Iraq, but iPhones may help.

Abu Talib Al-Hashimi, chairman of Gulf Commercial Bank, is critical of the state stranglehold on banking in Iraq, reports Aswat Al-Iraq.

By holding government deposits at government banks only, “This situation made the private sector banking system paralyzed and lacking its flexibility as private banks”, he said.

Iraq has recently put on hold its plans to re-organize the financial system and develop the private banking system until 2013.

But a major step in encouraging economic development is to get banking to the masses, and Dr. Sinan al-Shabibi, governor of the Central Bank of Iraq, told journalists that banking will soon come to the population by cellphone.

Over the next 12 months or so, expect that Iraqis, the majority of whom have cellphones but no bank account, will be able to open up a private account and carry out transactions while they are on the go.

(Sources: Aswat Al-Iraq; Central Bank of Iraq)