CENTRAL BANK CONSIDERING COMMUNITY BANKS IN IRAQ

UNCLAS BAGHDAD 002754 SENSITIVE SIPDIS STATE FOR NEA/I/ECON E.O.12958: N/A TAGS: ECON EFIN EAID IZ SUBJECT: CENTRAL BANK CONSIDERING COMMUNITY BANKS IN IRAQ REF: BAGHDAD 2514 SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY. ¶1. (U) SUMMARY: As existing Iraqi banks mature, open new branches nationwide, and focus on their wealthiest customers, accessible community banks may provide a viable option for low- to middle-income villagers. The Central Bank of Iraq (CBI) is considering a proposal to create second-tier "community" banks, which would have lower capital requirements and be limited to only one office per town. These community banks would formalize some of the financial intermediation going through traditional "hawala" schemes and could provide Iraq's first private-sector microfinance loans. END SUMMARY. PRIVATE BANKS MATURING ACROSS IRAQ ¶2. (U) While Iraq's public banks are still restructuring, some private banks are maturing relatively quickly (reftel). Since June 2008, private bank lending has increased by 83 percent to over one billion USD. Nine private banks have adopted electronic funds transfer technology across 161 branches nationwide. Visa and Mastercard credit and debit cards are available to their most sophisticated customers and more than 300 credit card readers have been installed in shops. The best Iraqi private banks want to be regional players in the Middle East and beyond. However, they are not paying much attention to many of the potential customers in their own backyard. CBI RAISING CAPITAL REQUIREMENT TO WEED OUT NON-PERFORMERS ¶3. (U) Currently, the CBI requires a nationwide private bank to have statutory capital of 50 billion IQD ($42.7 million). Most private banks have met that requirement and those that have not are either looking to merge with another bank or applying for a specific extension. Within the next twelve months, the CBI intends to raise the statutory requirement to 250 billion IQD ($213.6 million) to weed out non-performers and ensure that banks keep capital proportional to the size of their growing businesses. COMMUNITY LEVEL FINANCIAL INTERMEDIATION NEEDED ¶4. (U) As successful private banks look to expand with wealthy local customers, there is a growing niche for financial intermediation for working and middle class Iraqis. Nationwide private banks are reportedly not making small loans as it is not cost efficient to manage them. In response, the CBI Board of Directors formed a Board sub-committee to explore creating a second tier of "community" banks. Such banks would require less statutory capital and be limited in operations. Some possible parameters for community banks include: - Geographic limit to one office in one city or village outside of Baghdad. - Loans restricted to private individuals or private companies within that community. - Deposits limited to less than 10,000 USD. - Partner with a first-tier bank that will perform international transactions on behalf of their customers. BENEFITS OF COMMUNITY BANKING ¶5. (U) These private-sector second-tier banks could provide increased opportunities for access to credit given the limited outreach to date of donor-funded microfinance organizations. The banks could also formalize some of the financial intermediation going through traditional Middle Eastern "hawala" schemes, in which money is transferred through money brokers without a paper trail. Representatives of PRTs throughout Iraq have indicated that Iraqis would be more receptive to opening accounts at banks that invest in their communities rather than putting their deposits in a branch of a Baghdad-based bank. COMMENT ¶6. (SBU) Community banking has the potential to further Iraq's development, especially in outlying communities. Community banks' Qdevelopment, especially in outlying communities. Community banks' capacity to develop wealth at the lower socio-economic levels by promoting entrepreneurship in a sustainable fashion has proven effective in many other emerging market economies. Donor assistance to CBI to develop the legal and regulatory framework, combined with on-the-ground PRT assistance in the near term, may be a way to leverage untapped private sector financial resources. HILL