IRAQ: PRIVATE BANKS' LOANS SURPASS CAPITAL

UNCLAS BAGHDAD 002514 SENSITIVE SIPDIS AIDAC DEPT PASS USTR STATE FOR NEA/I/ECON AND EEB/IFD/OMA E.O.12958: N/A TAGS: ECON EFIN EAID IZ SUBJECT: IRAQ: PRIVATE BANKS' LOANS SURPASS CAPITAL REF: BAGHDAD 1728 ¶1. (U) SUMMARY: For the first time since 1964, Iraqi private banks' total lending has surpassed their total capital. The relationship between banks and their customers is maturing, with both sides gaining confidence in the financial system. If private bank lending and deposits continue to grow at current rates, much of the cash held by Iraq's "mattress millionaires" may find its way into the economy and help spur private sector development. END SUMMARY. LENDING SURPASSES CAPITAL -------------- ¶2. (U) Iraqi private banks hit a major milestone in June 2009, when total loans of IQD 1.71 trillion ($1.46 billion) surpassed bank capital, IQD 1.64 trillion ($1.40 billion),for the first time since ¶1964. (Note: Capital refers to shareholder investments in the banks versus depositors' accounts at the bank. End note.) Capital grew 28 percent while lending grew an impressive 83 percent over the past twelve months. Private bank lending had accelerated previously (reftel),but banks had been reluctant to lend beyond their capital reserves given Iraq's lack of a money market, credit bureaus, deposit insurance, and a system for recording liens. MATTRESS MILLIONAIRES STARTING TO PUT MONEY IN BANK -------------- -------------- ¶3. (U) Consumers are gaining confidence in the banking system, and especially in private competitors to the large state-owned banks. The rapid growth in bank deposits over the last year is a marked change from the centuries-old tradition of keeping currency at home. The infusion of this cash into the larger economy through bank deposits will allow for more formal financial intermediation. BANKS BECOMING SLIGHTLY LESS CONSERVATIVE -------------- ¶4. (U) The growth in private bank lending indicates a more mature relationship between banks and their customers, especially as banks gather more information about their depositors' income and spending habits. That said, bank managers still demand excessive collateral, often up to five times the value of the loan. Banks sometimes demand less if the collateral is possessory (e.g., depositing gold in the bank's safe until the loan is repaid). COMMENT -------------- ¶5. Although Iraqi private banks are still largely risk averse, they are starting to conduct financial intermediation in Iraq (i.e., lending out a portion of consumer deposits). Iraqi private banks' aggregate loan-to-deposit ratio has risen from 31 percent in March 2009 to 36.6 percent in June. (Note: In an emerging market economy, a loan-to-deposit ratio of 50 percent would provide a healthy balance of financial intermediation against risk mitigation for depositors. End Note.) As private banks develop a greater appetite for risk, they should develop the capacity for financial intermediation services (i.e., a wider variety of lending products) needed to modernize Iraq's economy and fuel private-sector expansion. The GOI can help this effort by improving the legal infrastructure for lending, particularly related to moveable and real collateral, and establishing a system for recording liens, credit ratings, and deposit insurance. END COMMENT. Note: Graph is available at: http://baghdad.state.gov/sites/ ECON/Shared%20Documents/ Private%20Bank%20Lending.pdf HILL