BANKING IN BASRAH

UNCLAS SECTION 01 OF 02 BAGHDAD 000435

SENSITIVE
SIPDIS

DEPT FOR EEB/OMA AND NEA/I/ECON

E.O. 12958: N/A
TAGS: EFIN ECON IZ
SUBJECT: BANKING IN BASRAH


1. (U) Summary: Banks in Basrah, Iraq's second largest city,
are a mix of state-owned and private insitutions. Challenges
for Basrah's bankers include low rates of loan repayment and
establishment of "know-your-customer." No international
banks currently operate in Basrah, although five such banks
are operating in Iraq. The total number of operating banks
in Basrah represents seven percent of the total in Iraq. End
summary.

Overview of Banking in Basrah
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2. (U) Basrah's largest banks are the state-owned Rafaidain
Bank and Rashid Bank. There are also the specialized,
state-owned institutions Industrial Bank, Housing Bank,
Agricultural Cooperative Bank, and Trade Bank of Iraq.
Together, these banks have an overwhelming share of Basrah's
banking business. Additionally, there are eight private
share-holding banks and one Islamic bank. Basra has
relatively few bank branches -- just one per 80,000
inhabitants, versus one per 55,000 for Iraq as a whole.


3. (U) The Basrah branch of the Central Bank of Iraq (CBI)
supervises all banking activities in Iraq's southern region.
CBI Basrah enforces banking regulations and has the authority
to inspect and audit any bank's books and records. The
twenty branches of Rafidain and Rashid banks in and around
Basrah mainly handle Government of Iraq (GOI) accounts. They
are located in the city of Basrah and in outlying areas,
including sub-districts such as Dair and Talha tha have a low
population density.

Specialized Banks
--------------


4. (U) A number of specialized, state-owned banks operate in
Basrah under the auspices of the Ministry of Finance. They
are concentrated in the city of Basrah and have no branches
in outlying areas, with the exception of the Agriculture
Cooperative Bank, which has a branch in the Qurna district.
The specialized banks include:

-- Agriculture Cooperative Bank;
-- Housing Bank (funds private housing projects, residential
or commercial);
-- Industrial Bank (funds industrial activities, including
civil works related to industry);
-- Trade Bank of Iraq (supports import-export activities with
letters of credit).

Private Banks and Sharia Banking
--------------


5. (U) Only one private bank in Basrah, the Iraqi Islamic
Bank (IIB),operates according to sharia. There are four
other Islamic banks operating in Iraq. IIB offers checking
and savings accounts that do not bear interest. Instead it
pays returns on time deposits in the form of a partnership,
with the bank and the depositor sharing profits and losses on
an equal basis. IIB makes loans under the provision that
borrowers may not mark up goods by more than 15 percent. The
Iraqi Islamic Bank Basrah lends only to businesses.


6. (U) The remaining eight banks in Basrah are private
share-holding companies. Their shares are publicly offered
on the stock exchange. Non-Iraqis also invest in these
banks. Some are family dominated, despite being publicly
traded. One third of the banks in Basrah Province are
privately owned, the same proportion as for Iraq generally.
Only four private banks in Basrah do business in foreign
currency: Middle East Bank, Warka Bank, Credit Bank and Gulf
Commercial Bank. Private banks are concentrated in the city
of Basrah, though Basrah Investment Bank has a branch in
Zubair district.


7. (U) The following participated in a meeting with USAID and
the Regional Embassy Office: Zuhair Ali Akbar, DG of Central
Bank; Dawood Sakran Hassan, Manager of Trade Bank of Iraq;
Mohammad Haji Kafaji, Director of Agricultural Bank; and Ali
QMohammad Haji Kafaji, Director of Agricultural Bank; and Ali
Salah Al Kadami, Deputy Director of Basrah Bank. Their
comments follow below:

Trade Bank of Iraq
--------------


8. (U) Established in Baghdad in November 2003, the Trade
Bank of Iraq (TBI) opened a branch in Basrah in March 2007 to
support foreign trade. TBI's main activities in Basrah are
letters of credit (L/Cs) and letters of guarantee. Currently

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the greater part of foreign trade in Basrah is done with
money transfers or cash in U.S. dollars. L/Cs take time and
require extensive documentation, so tend to be inconvenient
for private businesses. TBI Basrah's Hassan said that a
program to improve the L/C process and educate private
businessmen would increase the use of L/Cs. TBI also takes
savings deposits. Most loans are for one year and mainly for
trading and reconstruction activities. Fifty percent of TBI
Basrah's loan portfolio is with private firms that do
business with the government.

Basrah Bank
--------------


9. (U) Basrah Bank opened in 1993 and was the city's first
privately-owned bank in the Saddam Hussein era. Basrah bank
is the only bank offering an international VISA credit card
to its customers. It charges interest of ten percent for
dollar-denominated loans and 14 percent for Iraqi dinar
loans. Ali Salah Al Kadami said Iraq's private sector is
still immature. Bankers and private entrepreneurs still view
each other with a certain degree of mistrust, he said. The
private sector's rate of loan repayment ration was low, and
the property repossession law was difficult to apply, because
it takes years in court for cases to be heard. This makes
mortgage lending challenging. Ninety percent of Basrah's
loan portfolio was in short-term loans (up to two years);
five percent in medium-term loans (five years); and five
percent in long-term loans (mostly real estate, up to 25
years). Basrah Bank currently has two branches in Basrah
city, one in Al Zubair and another in the Hadi area.

Agriculture Bank
--------------


10. (U) Most of the Agriculture Bank's loans are short- and
medium-term. Different interest rates apply for two
categories of farmers. If nominated by the Director General
of Agriculture, borrowers pay an interest rate of two
percent. Otherwise, they pay eight percent and need personal
and private guarantees from up to five individuals. Most
loans are disbursed in two installments. The farmers'
repayment rate is 90 percent. One reason for the high
recovery ratio is that when a farmer returns for the second
installment, any outstanding repayment amount is deducted.
Agriculture Bank has 75 percent of its total loan portfolio
in the agriculture sector, mainly with small farmers (up to
20 donum). The bank has expanded its business to include
loans for domestic animals, date palm trees and machinery.
Agriculture Bank has a branch in the city of Basra and
another in Qurna.

Trade Bank Training Request
--------------


11. (SBU) In a subsequent meeting at TBI Basrah on February
2, the branch manager said that wealthy Basrawis did not keep
their money in Iraq, but in Dubai, Jordan or Europe. Income
from oil smuggling was also sent outside the country. Many
bank transactions were still related to public-sector
activity, and the private sector preferred cash transactions.
It is important to facilitate legitimate trade finance with
Iran and other countries via bank transactions. Cash
transactions are not subject to oversight the way bank
transactions are. Dawood said that he would strongly welcome
more training for his staff on L/Cs, managing credit cards,
and automatic teller machines (ATMs). The Treasury Attache's
office in Baghdad is offering three training seminars on
Letters of Credit for the provinces. Central and Southern
provinces will receive the three-day course in Baghdad; the
Northern provinces will receive training in Erbil. The focus
of the training will be to increase the understanding of
Qof the training will be to increase the understanding of
using Letters of Credit by the provinces, however private
banks will be invited to attend and sit in on each of the
workshops. The workshops are scheduled to be held in March,
April and May of 2009.
BUTENIS