The Iraqi banking sector is witnessing radical transformations as the government seeks to restructure and reform the economy and develop the financial infrastructure.
In this context, the Iraqi government announced ambitious plans to restructure government banks, led by Al-Rafidain and Al-Rashid Banks, with the aim of transforming them into more modern and efficient financial institutions capable of meeting the needs of the growing Iraqi economy.
The Iraqi Council of Ministers also decided, in its session held on January 13, 2025, to establish a completely new bank, based on the latest digital banking technologies, and aims to provide integrated banking services to individuals and companies, whether inside or outside Iraq.
This new bank was named “First Rafidain Bank,” and will start with an initial capital of 500 billion Iraqi dinars (about 381.8 million dollars), with a goal of reaching one trillion Iraqi dinars (about 763.7 million dollars) as a final capital. The state’s contribution to this capital will be 24%.
At the same time, the Council decided to maintain Rafidain Bank as a basic government institution for carrying out government transactions, while working to structure and develop it in cooperation with the consulting firm Ernst & Young.
The Council also decided to transform the Industrial Bank into a private joint stock company, while seeking to find a strategic partner for it. As for the Agricultural Bank, the Real Estate Bank, and the Housing Fund, it was decided to keep the situation as it is at the present time.
To facilitate the process of establishing the new bank, the Central Bank of Iraq was assigned to contract with a specialized consulting company to provide support in all stages of establishment.
A committee was also formed, headed by the Governor of the Central Bank, to follow up on this project and coordinate with the consulting company.
A new banking entity in Iraq
Mazhar Muhammad Salih, the economic advisor to the Prime Minister, revealed plans to launch a new banking entity in Iraq, aiming to meet the government’s needs exclusively, explaining that this entity will serve as a unified treasury account, which will contribute to organizing cash flows for public finances.
Saleh explained in an exclusive interview with Al Jazeera Net that while private (private) banks – which number more than 64 banks – account for the lion’s share of banking capital at a rate of approximately 78%, their role in financing and deposit operations is very limited, as it does not exceed 20% of the total of these operations.
He said that, in contrast, the Rafidain and Rasheed government banks control about 80% of financing and deposit operations, although their combined capital is much less than the capital of private banks.
This contradiction, as Saleh points out, reflects the presence of a sharp disconnect within the banking market, which calls for fundamental reforms within the government’s economic program. Most of the Iraqi banking system relies heavily on the government financial system, which limits its ability to generate added value to the national economy.
He noted that as a result, the banking sector’s contribution to the GDP does not exceed 1.5%, which is a very small percentage.
Muhammad Salih stated that in an attempt to address this imbalance, in August 2023, the Central Bank of Iraq issued directives to increase banks’ capital to 400 billion Iraqi dinars ($305 million) in 3 successive installments.
The goal of these increases, as Saleh emphasized, is to enhance financial stability and increase the ability of banks to provide more effective banking services, which contributes to supporting the national economy.
He explained that the ongoing studies include evaluating the legal status of the two current banks, and studying the possibility of partnering with international financial institutions to develop the banking services provided, indicating that the goal of this reform is to enhance the integration of the two banks in the local market, and enable them to expand in global financial markets, with a focus on providing Modern services such as digital payments.
Saleh stressed that this new entity will work to enhance transparency and governance in the Iraqi banking sector.
Factors that weakened the two banks
For his part, member of the Parliamentary Finance Committee, Jamal Kujar, confirmed that the restructuring of Al-Rafidain and Al-Rashid banks will represent a qualitative shift in the Iraqi economy.
Cougar explained in an interview with Al Jazeera Net that this step will make the two banks essential partners for the government in creating new job opportunities and supporting the private sector. It will also work to increase citizens’ confidence in these two banks, encouraging them to deposit their money in them instead of keeping it at home.
Cougar pointed out that the Iraqi banking system has not witnessed fundamental changes for years, and that the government has contributed to its weakening through repeated borrowing from it, adding that this continuous borrowing has led to a decline in the performance of Al-Rafidain and Al-Rasheed banks, which calls for the necessity of developing them and restructuring their policies.
Regarding the services provided by the Rafidain and Rasheed Banks to the investment sector, Cougar stressed that they are good, but need greater support from the government.
He explained that the government, due to its continuous borrowing, was unable to provide sufficient support to these two banks, which negatively affected their ability to provide advanced investment services, calling on the government to support these two banks instead of relying on them as a source of borrowing, in order to enable them to play their role in creating job opportunities. And new investments in the country.
auxiliary banks
Economist Salah Nouri revealed the details of the government plan to restructure Al-Rafidain and Al-Rashid banks.
Nouri explained in an interview with Al Jazeera Net that this step comes in the context of efforts made to address the accumulated problems in these two banks, which are mainly represented by the presence of bad financial assets, most of which are old loans granted before 2003.
He stated that these troubled assets had led to a deterioration in the credit ratings of the two banks, making it difficult for them to deal with international financial institutions.
He added that the restructuring plan includes the establishment of new banks, called “back-up banks”, to contain the bad financial assets currently located in the Rafidain and Al-Rashid banks. In conjunction with this, the sound assets will be merged into a new banking entity, which will lead to the separation of the sound parts from the troubled parts.
The economic expert confirmed that this step aims to achieve several goals, including enhancing confidence in the Iraqi banking sector, improving the performance of banks, and attracting foreign investments, adding that it will contribute to developing banking services provided to citizens and companies, by taking advantage of the latest technologies such as artificial intelligence.
Nouri pointed out that the restructuring process requires significant financial support, as the new bank, which will consist of sound assets, needs to increase its capital, stressing the importance of determining the entity responsible for providing this financial support, whether it is the government or other financial institutions.
Radical solutions to chronic problems
As for the economic expert, Omar Al-Halbousi, he said that the previous Iraqi banking system was a major obstacle to development, as it obstructed the work of the banks and made them a heavy burden on the state and the citizen, adding that these banks were absorbing large monetary masses without benefiting from them effectively, which necessitated the necessity of conducting a comprehensive study and structuring. Government banks.
Al-Halbousi indicated in his conversation with Al-Jazeera Net that the idea of structuring government banks is not new, but rather began since the period of Haider al-Abadi’s government, but it was delayed until last year, indicating that a specialized international company was assigned to study how to merge the two large government banks, so that this merger results in a bank. One bank provides integrated and advanced banking services, and another bank specializes in state and institutional account services.
Al-Halbousi explained that this step comes in light of the US sanctions imposed on private banks, which have caused great damage to the Iraqi banking sector.
Merging the two government banks and transforming them into a private joint-stock commercial bank will fill the gap in banking services, improve the standard of living for citizens, and stimulate economic growth and investment, according to the same spokesman.
Al-Halbousi stressed that this step will contribute significantly to controlling the exchange rate and reducing the fluctuations witnessed by the Iraqi dinar. It will also help in combating financial crimes and achieving international standards in the field of combating money laundering and terrorist financing.
Al-Halbousi concluded his speech by emphasizing that this step represents a qualitative shift in the Iraqi banking sector, and will contribute to developing other economic sectors and providing better banking services for individuals and companies.
