A Kinder, Gentler CBI?

By Mark DeWeaver.

On October 16, Prime Minister Maliki removed the head of the central bank, Sinan al-Shabibi, accusing him of mismanagement and currency manipulation. (There’s more on this story here, here, and here.) This move was widely seen as a power grab by the prime minister and a grave threat to the CBI’s independence. Nevertheless, his removal may actually prove to be a positive development for the listed banks.

In recent years, the CBI has implemented two prudential supervision policies that seem to me to have been entirely misguided—(1) requiring all private-sector banks to meet arbitrary capital targets and (2) imposing an impossibly burdensome anti-money laundering (AML) regime.

While capital adequacy is normally measured as a ratio of capital to risk-weighted assets, the CBI has instead imposed absolute levels of capital (IQD 150 billion by the middle of 2012, IQD 250 billion by the middle of 2013) regardless of the size of the banks’ loan books. Given that most of the banks have more cash than loans, there is really no justification for this on prudential grounds. The policy is rather an attempt to force the banks to lend more and to coerce the smaller banks into merging with one another. It is, in other words, an attempt to replace market forces with central planning.

In some cases the CBI’s insistence on capital increases also appears to have led to increases in the quantity of capital at the expense of its quality. Some majority shareholders are said to have used personal lines of credit from their banks to pay for their own rights shares. The problem with this, of course, is that if those shareholders are unable to repay their loans the banks will take a loss and the new capital will have to be written off.

Similarly, the CBI’s AML policy, introduced last February, had numerous unintended consequences. Rather than blocking illicit currency flows, the new rules instead produced a market for Iraqi government-certified manifests, which anyone who needed dollars could use to prove that he was engaged in a legitimate transaction. Instead of stopping dollar sales to Iran and Syria, the CBI did little more than create an opportunity for officials with access to the right government seals to make a quick profit stamping phony documents. In the end the CBI had no choice but to issue new instructions (at the beginning of October) reinstating the original regulations.

Don’t get me wrong. I happen to think, as do most outside observers, that Shabibi is entirely innocent. But prudential supervision during his tenure has been unduly strict, even to the point, in the case of the AML regulations, of being downright Quixotic.

The interesting question for the commercial banks at this point is thus whether or not the next CBI head might take a more lenient line. Will we get a kinder, gentler central bank or more of the same?

8 Responses to A Kinder, Gentler CBI?

  1. Stew 28th November 2012 at 16:58 #

    Great word Mark. Especially in an article that will be read by hundreds if not thousands of dinar investors.

  2. WhiteFeather 28th November 2012 at 18:52 #

    Sad truth is people who were sold Iraqi Dinar were scammed. They were scammed for their lack of knowledge. And the sellers knew exactly what the exchange rate was. They knew exactly what's the potential for this type of investment. And the only potential it has is for them, the scammers, to get rich from selling Iraqi Dinars.

  3. DeWeaver 28th November 2012 at 19:59 #

    Thanks Stew. I was hoping someone would know the word!

  4. Kickabuck 29th November 2012 at 04:34 #

    Mark, your article raises some questions.

    1) With Shabs canned, could there be some merit in the lawsuit between Warka & the CBI, regarding Warka shareholders?

    2) Kurdistan Bank just produced outstanding financials, do you see that bank quickly emerging to the top given their location, or do you see BIG foreign banks entering and controlling the marketplace?

  5. DeWeaver 29th November 2012 at 17:20 #

    Hi Kickabuck:

    These are good questions. The Warka case seems like exactly the kind of thing that would benefit from a "kinder, gentler" line. But unfortunately I really don't know enough about this case to say whether or not Warka shareholders have any new grounds for optimism.

    I believe Kurdistan Bank is already the biggest private bank by some measures. It also has a top CAMEL score from the central bank. (CAMEL scores measure a bank's Capital, Asset quality, Management, Earnings, and asset Liability management.) I don't see that there is much risk of big foreign banks taking away BKUI's market share at the moment. They don't seem all that interested in the Iraq market and in any case there is plenty of business to go around. After all, 80% of Iraqis do not even have a bank account.

  6. nemesis 29th November 2012 at 18:44 #

    Is IQD speculation total lost? Stew?...

  7. Kickabuck 30th November 2012 at 04:28 #

    Thanks Mark, I had no idea the CBI even used a CAMEL score, you're well connected and I appreciate the information you provide.

    Any thoughts as to how a true investment bank like Economy will fare as compared to North Bank that's transaction based? And what is Kurdistan bank, transaction based, or an investment bank?

  8. DeWeaver 30th November 2012 at 05:14 #

    Hi Kickabuck: I think there is so much banking business to be done that just about any type of bank should do well. It's more a matter of the quality of the management than the specific variety of banking involved. As for Kurdistan bank, it is Iraq's largest Islamic bank. One of its biggest businesses at the moment is financing taxi purchases under a scheme known as murabaha where the driver puts up half the money and then repays the rest on an installment basis. The bank makes money because the sum of the installments is greater than half the cost of the vehicle. It is effectively buying a taxi at a low price and selling it at a higher one. The profit thus takes the form of a capital gain rather than interest.