Is the central bank serious this time?

By the end of next month, the Central Bank of Iraq (CBI) is requiring all private-sector banks to increase capital to IQD 100 bn. The banks were originally supposed to have reached this target by the end of last year but so few could have managed it that the CBI had to give them an additional six months.

With this deadline now fast approaching, 15 out of the 21 ISX-listed banks, accounting for 46% of total ISX bank-sector market cap, are still shy of the mark. (See table.) Of these, eight have announced rights/bonus issues and are already suspended from trading. Another two—BMFI and BUOI—are considering a merger. (See my last post.) The remaining five, so far as I know, have yet to announce anything.

In many of these cases, satisfying the CBI shouldn’t be too difficult. To the extent that there are retained earnings to be capitalized, capital increases don’t even require any new money. And five of these names—Economy, Mansour, Dar Es Salam, Commercial, and National—are partly owned by foreign institutions that will presumably be able to come up with the needed funds.

The interesting question, however, is what's going to be done about banks that have insufficient retained earnings, lack deep-pocketed controlling shareholders, and have no real prospect of attracting new investors. While the CBI might like them to merge into larger entities, there does not appear to be anything in the Banking Law allowing the central bank to require this. Cancelling their licenses is an option, of course, but then does the CBI really have the administrative capacity to wind them up?

The easy way out, of course, would be to let them slide again—either by formally extending the deadline, say for another six months, or simply doing nothing once it has passed. That's what happened last time. Will this time be different?

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