PRT SALAH AD DIN: PRIVATE BANKS DEVELOPING

UNCLAS BAGHDAD 003460 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: EFIN ECON PGOV IZ SUBJECT: PRT SALAH AD DIN: PRIVATE BANKS DEVELOPING SENSITIVE BUT UNCLASSIFIED; PROTECT ACCORDINGLY. ¶1. (U) This is a reporting cable from PRT Salah ad Din. ¶2. (SBU) Summary: It is difficult to imagine a provincial business or economic sector that has more fully exploited the vastly improved security environment than has the private-banking sector within Salah ad Din. The calculated exploitation of security gains by private bankers is evidenced by the fast pace of recent bank-office construction and openings as well as by the adoption of technologically-advanced financial platforms and products, and aggressive strategic plans for growth. Some of the strategic plans incorporate innovative solutions. A more complete and thorough mining of the opportunities available to the private-banking community awaits the development, at the national level, of monetary policies, institutions, regulations and laws that might collectively form the robust foundation of a consumer-finance industry. In the absence of these foundational supports, private banks will be stymied with respect to providing credit to individuals within Salah ad Din Province. END SUMMARY. PRIVATE BANK INFRASTRUCTURE GROWTH -------------- ¶3. (SBU) As recently as 3/31/08, Al Mosul Bank was the only private bank operating within Salah ad Din (SaD) province, from its single office in Tikrit. It was soon joined by upstart and now industry leader, Al Warka Bank, which opened branches in Tikrit and Bayji between 4/30/08 and 7/31/08. More recently, additional private-bank capacity was provided by the August 2008 opening in Tikrit of a branch of Ashur Bank. These three private banks will soon be joined in Salah ad Din by a fourth: the Tigris and Euphrates Bank is expected to open its first provincial branch, in the Bayji Oil Refinery compound, by 12/15/08. Prior to 4/30/08, there were no ATMs in place in the province. Currently, Al Warka Bank operates and owns all 5 functioning ATMs within Salah Ad Din. ¶4. (SBU) While the recent pace of private-bank infrastructure investment has been rapid, this is expected to accelerate over the course of the next six months. This acceleration is primarily associated with the seemingly inexorable execution of Al Warka Bank's strategic plan. This bank will open five new branches in Salah Ad Din over the next 3 months. Two of them will open in or adjacent to large U.S. military installations. The other three will be located in Samarra, Ad Dawr and Al Alam. Another four Al Warka Bank offices are scheduled to begin operations before 3/31/09, serving Dujayl, Tuz, Balad and Sharqat. The nine prospective Al Warka branches described above represent a significant portion of that bank's intermediate-term goal of locating 17 banking offices in Salah Ad Din province before end 2009. If historical Al Warka ATM-to-branch ratios prevail, then it is reasonable to assume that these 17 new branches will engender an additional 42 ATMs throughout this province by late next year. PRIVATE BANK BUSINESS MODEL AND CULTURE -------------- ¶5. (SBU) Private banks in SaD rely almost exclusively on fee income for revenues and profits. They derive very little income from the net-interest margin spread typically associated with lending activity. The private-banking sector's emphasis on fee-income-sourced revenues underscores a deeply-rooted aversion to credit risk. The private-bank sector's specialized, low-risk business model incorporates a focus strategy that depends heavily on its ability to efficiently move funds and to exact transactions fees for money-transfer services rendered. Service charges are typically levied to transfer customer funds within a branch, between branches of the same bank or between offices of different banks. ¶6. (SBU) Private banks further augment their fee-based income streams by providing international wire transfer services as well as by issuing letters of credit. Al Warka Bank has leveraged its growing ATM network to generate fees associated with cash withdrawals and with the use of its proprietary debit and credit cards. The VISA cards issued by Al Warka Bank do not incorporate credit risk: they are essentially cash-debit cards. Credit risk is eliminated by requiring the card holder to fully fund the assigned credit limit prior to card issuance. The final major source of fee-based income for private banks is derived from their currency-exchange activities. Not all of the currency-exchange transactions (mostly US Dollar - Iraqi Dinar) are associated with the needs of commerce. For example, soon after the April opening of Al Warka's Tikrit office, the resident manager noticed significant currency speculation among his customers. At that time, these customers made non-consensus bets in favor of a relative strengthening of the US Dollar. (Since May, the American currency has appreciated roughly 20 percent versus the Euro.) ¶7. (SBU) Private-sector banks have invested heavily in technology platforms that facilitate money transfers and that support their fee-based business model. There is reason to believe that this focused investment has created a permanent fee-income-based service niche for the private-bank sector within the broader provincial banking market. Accordingly, it may already be too late for state-owned banks to mount a serious competitive challenge to the dominance of private-sector banks in the area of fee-based revenue generation. ¶8. (SBU) The following facts provide broad support to the notion that private banks have committed heavily to their technology platforms. All Al Warka Bank provincial branches are EFT capable and are computer linked in real time by satellite linkage to this financial institution's other 120 offices in Iraq as well as to the outside banking world. Within two months, Ashur Bank's new Tikrit office will adopt the British Core-Bank technology platform, which will link the Tikrit office in real time with Ashur's other offices in Sulaymaniah, Syria, Jordan, Kuwait, Turkey and Egypt. In a similar vein, when the new office of the Tigris Euphrates Bank opens in Bayji, it will be integrated into that institution's modern technological base. Only Mosul bank, among operating private-sector banks in Salah ad Din, does not offer EFT or a modern technological platform. OBSTACLES CONFRONTING PRIVATE-BANK SECTOR GROWTH -------------- --- ¶9. (SBU) Private-bank sector growth within Salah ad Din has accelerated over the course of the last six months despite formidable obstacles: (A) Obstacles to orderly branch expansion: - Limited access to land: Only three of the six Al Warka branches slated to open over the next three months in SaD had their site locations procured in the conventional way; two sites were provided by American military installations, while a third was provided by the Samarra Pharmaceutical Complex. Similarly, the Tigris Euphrates Bank secured for its future Bayji branch a site provided by the Bayji Oil Refinery. The difficulty in acquiring branch locations is rooted in the more general problem associated with securing clear title to real estate. - Shortage of skilled workers: The skilled-labor shortage which slows the pace of private-sector, bank-office expansion may seem odd against a backdrop of bloated employment roles among state-owned banks. However, the skill-set of state-owned bank employees is not transferable to a fee-based business model that is leveraged on a relatively sophisticated technology platform. This reality has prompted Al Warka Bank to train its staff for up to 6 weeks before scheduled branch openings. Smaller private banks like Ashur Bank and the Tigris Euphrates Bank will staff new branches by transferring key personnel from operating offices to form the critical employee core of new offices. (B) Obstacles to normal credit extension: At the Central Office level in Baghdad, corporate directives to extend credit to private-sector borrowers in the provinces are all but non-existent. This is in part because the Central Bank of Iraq (CBI) has throughout the year pursued a tight, anti-inflation monetary policy in accordance with the Stand by Arrangement (SBA) which the GOI signed with the IMF. Accordingly, up to 35 percent of a private-bank's liquid assets can be invested with the CBI at a high, risk-free rate that has not been lower than 16 percent year-to-date. The appeal of extending provincial credit is low, because there is little demand for loans at a 22-25 percent risk-adjusted rate. At the grass-roots level, there is a lack of a broad-based and varied institutional framework in support of credit extensions: - There is no credit bureau that provides the credit histories of prospective borrowers. - The insurance sector is not sufficiently developed to provide lenders the policies that can mitigate the risk attendant to the theft or destruction of tangible collateral. - There is no equivalent of the standard American Department of Motor Vehicles which can register/attach/ release and/or administer liens on vehicle titles. Accordingly, private banks do not believe that motor-vehicle titles have any intrinsic value in the credit-extension calculation. - Beyond the absence of important institutional pillars in support of loan generation, certain cultural conventions also impede credit growth: tribal customs militating against repossession of collateral are so well entrenched that loan officers rightly fear for their personal security in the event of collateral repossession. It goes without saying that there is no such thing as a "repo man" in this province. PRIVATE-BANK MANAGEMENT MINDSET AND POINT OF VIEW -------------- -------------- ¶10. (SBU) As a general rule, managers of the various private banks do not view each other as competitive threats. For example, the manager of Al Warka Bank's Tikrit office provided help and counsel to his nephew, the newly-designated manager of Ashur Bank, when the latter was mired in the logistics of establishing and opening that bank's Tikrit office. Similarly, private-sector bankers generally do not view the established state-owned banks as adversaries. For instance, during a recent cash-shortage at state-owned Al Rafidain Bank, Al Warka Bank's Tikrit manager was proud to have helped his counterparts at the state-owned institution by cashing the checks of pensioners who could not access cash from the then liquidity-short Al Rafidain Bank. There also appears to a deeply-seated sense of patriotism and community among private-bank managers. For example, during a two-hour interview with Mosul Bank's Tikrit office manager, PRT staff were continually praised for their efforts "to help the Iraqi people." In a similar vein, Ashur Bank's young manager lamented the fact that he was not positioned to provide financing for all the motor vehicles "that the people wanted." ¶11. (SBU) Like much of Iraqi society, the private-banking sector appears to have a strong predisposition to accept, without significant challenge, the directives that emanate from central offices. For instance, the manager of the Tikrit office of Al Warka took no action to leverage a national advertising campaign conducted by headquarters, and seemed surprised at the idea - suggesting that even local initiative in direct support of a central program might be viewed as disloyal. CROCKER