Bank Reduces Interest Rates to Encourage Investment

An Iraqi Economist said on Thursday that the Central Bank began to reduce interest rates by approximately six percent for loans and four percent for bank deposits, to encourage investments in the country, after a series of robberies that took place recently on Iraqi banks.

The expert said: "This shift reflects a new policy of the Central Bank that would increase investment by making financers use their money in investment instead of crediting their accounts in the banks."

"The Central Bank has taken a decision in 2007 to lift interest rates to 23% and this rate led the investors not to rush to invest ... deposit banks in that period (2007) were better than investment and risking the money so deposit became the appropriate choice," he said.

Iraqi citizens have recently withdraw a lot of their money from Iraqi banks after a series of robberies on the government banks in the country during the past few weeks.

The last attack on the banks was last Sunday when two car bombs exploded in front of the Iraqi Trade Bank in Maamoon area west of Baghdad, killing 26 people and wounding more than 50 others.

This attack was preceded by a coordinated operation on the Central Bank of Iraq, launched by gunmen and bombers in June 13 on the eve of the first session of the Iraqi Parliament at its second session; 18 people were killed in the attack.

The so-called "Islamic State of Iraq," claimed responsibility for these two attacks. Iraqi officials and experts believed that targeting banks is intended to destroy the emerging Iraqi economy.

ِAl- Rafidain Bank in Mishkab, south of Basra, was robbed by an armed group last May and more than five and half million dollars were stolen.

Another Bank in Zwiya area in Baghdad was robbed on July 28 of last year, where thieves stole about five million U.S. dollars from the bank.

AAIB View:

A spokesman from A.A.I.B. Insurance Brokers, a company that has been operating in Iraq for the last six years, comments: There are two key messages here, firstly that the current risk/reward equation needs to be rebalanced so that more capital flows into investment projects and the potential returns to investors justify this; and secondly, that criminal actions against banks appear to be affecting consumer perception and preparedness to place their funds in banks, so negatively impacting the latter’s liquidity and lending capacity. We don’t know how much funds have been taken out of banks due to recent raids but we do know that it is essential to maintain consumer confidence in the integrity of the banking system and usage of the banking network for deposits.

Looking at the banks and how they can prevent losses of various kinds, adopting a sound, overarching, enterprise-wide risk management philosophy and approach, underpinned by the proper structural and reporting framework, plus clear and robust risk management policies and procedures are all needed. These will help to deter, detect, prevent or minimise various types of losses, including criminal raids on bank premises and on bank cash conveyances, internal staff collusion and theft by customers. Policies and operational procedures would cover all the banks entities, departments and activities. They would range from human resource procedures and training, business development, compliance, physical protections, internal controls, system usage, access protocols, and data protection and electronic security.

However banks may also transfer some risk to insurers, via a “Bankers Blanket Bond” policy. This is a specialist type of insurances issued by the financial underwriting departments of specialist insurers. These policies compensate a bank if funds are misappropriated, criminally redirected or stolen in certain circumstances.

Typically such a policy would cover employee dishonesty or fraud, forgery of cheques or other financial instruments, theft of cash at the bank's premises or whilst in transit, counterfeit currency and counterfeit securities. Bankers Blanket Bond policies will have a certain amount of each claim that the bank will be responsible for, and before issuing a policy, an insurer would need to be reassured that the bank is taking proper precautions to help prevent losses arising at all.

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