Iraq - Banking and Finance

Banking and finance

When Iraq was part of the Ottoman Empire, a number of European currencies circulated alongside the Turkish pound. With the establishment of the British mandate after World War I, Iraq was incorporated into the Indian monetary system, which was operated by the British, and the rupee became the principal currency in circulation. In 1931, the Iraq Currency Board was established in London for note issue and maintenance of reserves for the new Iraqi dinar. The currency board pursued a conservative monetary policy, maintaining very high reserves behind the dinar. The dinar was further strengthened by its link to the British pound. In 1947 the government-owned National Bank of Iraq was founded, and in 1949 the London-based currency board was abolished as the new bank assumed responsibility for the issuing of notes and the maintenance of reserves. The National Bank of Iraq continued the currency board's conservative monetary policy, maintaining 100 percent reserves behind outstanding domestic currency.

Initiated during the last years of Ottoman rule, commercial banking became a significant factor in foreign trade during the British mandate. British banks predominated, but traditional money dealers continued to extend some domestic credit and to offer limited banking services. The expansion of banking services was hampered by the limited use of money, the small size of the economy, and the small amount of savings; banks provided services for foreign trade almost exclusively. In the mid-1930s, the Iraqi government decided to establish banks in order to make credit available to other sectors of the economy. In 1936, the government formed the Agricultural and Industrial Bank. In 1940, this bank was divided into the Agricultural Bank and the Industrial Bank, each with substantially increased capital provided by the government. The government established the Rafidayn Bank in 1941 as both the primary commercial bank and the central bank, but the National Bank of Iraq became the government's banker in 1947. The Real Estate Bank was established in 1948, primarily to finance the purchase of houses by individuals. The Mortgage Bank was established in 1951, and the Cooperative Bank in 1956. In addition to these government-owned institutions, branches of foreign banks and private Iraqi banks were opened as the economy expanded.

In 1956 the National Bank of Iraq became the Central Bank of Iraq. Its responsibilities included the issuing and the management of currency, control over foreign exchange transactions, and the regulation and supervision of the banking system. It kept accounts for the government, and it handled government loans. Over the years, legislation has considerably enlarged the Central Bank's authority.

On July 14, 1964, all banks and insurance companies were nationalized, and, during the next decade, banking was consolidated. By 1987 the banking system consisted of the Central Bank, the Rafidayn Bank, and the Agricultural, Industrial, and Real Estate banks.

In the 1980s, the Rafidayn Bank was in the contradictory position of trying to maintain its reputation as a viable commercial bank while acting on behalf of the government as an intermediary in securing loans from private foreign banks. With deposits of more than US$17 billion in 1983, the Rafidayn was reportedly the largest commercial bank in the Arab world. It managed to maintain a relatively sound commercial reputation for the five years of the war, and in 1985 its total assets stood at about ID10.4 billion and its total deposits, at more than ID9.5 billion--both figures having tripled since the Iran-Iraq War began in 1980. This huge increase in deposits was attributed to increased saving by the public because of the scarcity of consumer products. Profits of ID290 million in 1985 represented an increase of nearly 50 percent over 1980 levels. By 1985 the Ralidayn had established 215 branches in Iraq, 104 of which were in Baghdad; according to the Iraqi government, it also had seven branches abroad. In 1986, however, the bank started to delay payment of letters of credit owed to foreign exporters, and its failure to make installment payments on a syndicated loan of 500 million Eurodollars, forced rescheduling of the debt payments. In 1987, with the exception of the Baghdad office of a Yugoslav bank, the Rafidayn was Iraq's only commercial bank. In this same year, the government ordered the Rafidayn Bank to double its capital to ID100 million. This increase was to enable the bank to improve and to extend its commercial services, so that it could tap the public for the increased deposits that would enable the bank to offer more loans. To the extent that new loans could bolster the emerging private sector, the move appeared consistent with other government efforts to make state-run operations more fiscally efficient.

The other three banks in Iraq were so-called special banks that provided short- to long-term credit in their respective markets. Since its establishment in 1936, the Agricultural Bank had grown to forty-five branches, of which four were in Baghdad. In 1981, its capital stood at ID150 million and its loans totaled ID175 million. The Agricultural Bank had also started a project whose objective was to encourage rural citizens to establish savings accounts. Meanwhile, the Industrial Bank had grown to nine branches and offered loans both to private and to public sector industrial and manufacturing companies. The Real Estate Bank was composed of twenty-five branches and provided loans for construction of housing and tourist facilities. The Iraq Life Insurance Company, the Iraq Reinsurance Company, and the National Life Insurance Company conducted the nation's insurance business. Post offices maintained savings accounts for small depositors.

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