Banking sector reform and its role in restructuring and correcting the Iraqi economy

Dr. Ahmed Salih Al-Akaishi
Faculty of Engineering / University of Kufa

The Iraqi economy, that relies mainly on oil, suffers from many problems and stumbles, with the most recent of which happened after the sharp decline in oil prices due to the lack of global demand as a result of the Coronavirus pandemic. Iraq’s budget for 2019 was about $111.8 billion, half of which goes as allocations and salaries for government employees, retirees, and welfare benefits at about $52 billion. The price of a barrel of oil was based on $56 at the time the barrel was sold at $63 (1). After the sharp drop in oil prices and reaching below $30 per a barrel, the Iraqi budget and economy are at stake. The government may not be able to pay the wages and salaries until the end of the year without reducing or borrowing from internal and external sources. So, where did that money for the previous budgets go? Is it possible that they were evaporated?!.
The Director of the Central Bank of Iraq, “Ali Al-Alaq”, refers to the raise in financial hoarding phenomenon outside the banking system in Iraq to dangerous levels, where about 77% of the currency circulated outside the framework of the banking system was recorded and is in a state of hoarding (2). The phenomenon of the lack of movement of cash money is an unhealthy phenomenon, in addition to that it reduces economic activity, it gives a kind of ambiguity on the amount of cash that actually exists, which affects any process of deleting zeros or exchanging a currency.

There are many reasons behind the high raise of hoarding in Iraq, the most important of which is corruption that involved in many sectors in the country, including banks. The other issue is that many citizens do not trust banks. From previous experiences, depositing money in some banks is risky. The government has put some banks in a position of distrust when it delayed or failed to pay the dues of many categories of the private sector, such as farmers and contractors for many years (2).
Rawabet Centre for Research and Strategic Studies has identified many other reasons that lead to the reluctance of citizens to deposit their money in banks, including: 1- A loss of about 5% of the value of the dollar when depositing it in the bank and withdrawing it. 2- Problems with private banks, as some banks do not have sufficient liquidity to pay customers ’dues, and some have closed their doors and fled without warning and without account (3). What happened with the banks of Al-Warka, Basra, Dar As-Salaam, the economy and others is a good example, as depositors still demand their money after bankruptcy of banks through demonstrations that they periodically organize in front of the buildings of financial institutions such as the Iraqi central bank.
Two important steps were taken in recent years to prevent the deterioration of the Iraqi banking system and the economic situation in the country in general: The Salary Settlement Project of Iraqi Employees including pensioners and welfare benefits in banks and the second step is the establishment of the Iraqi Company of Deposit Guarantee.
The Salary Settlement Project of Iraqi Employees
The main goal of the salary settlement project is to keep citizens out of hoarding and spread the cashless culture in the Iraqi market (4). Where it is expected to open bank accounts for more than 7 million citizens in government and private banks for the purpose of settling their salaries and allocations. In return, these banks offer specific services to clients that differ from one bank to another, such as loans, advances, smart cards, and others. Did salary settlement achieve its primary goal in preventing hoarding?!
What is happening today is the process of transferring salaries and dues from the accounting departments in different ministries and departments to banks after taking banks (commission) that is deducted from the salary. That is, the salary is delivered in cash after deducting the amount of banking services, so where is the anti-hoarding process for that? Yes, the bank may deduct additional amounts in case that there is a loan or advance and this process is conducted in the interest of the bank only not the customer.
The digital transformation of banks has become an urgent necessity to meet the needs of customers, especially in the current circumstances generated by Coronavirus. To display a number of banking services that are provided by many international banks free of charge to their clients for the purpose of encouraging Iraqi banks to provide such services in order to enhance customer confidence:
1- Opening bank account with no fees.
2- Issuing and renewing electronic cards free of charge.
3- The ability to withdraw and inquire about the balance from any ATM of any other banks free of charge.
4- Having enough ATM machines.
5- Issuing Contactless Cards free of charge.
6- Possibility of paying water, electricity, and other services fees via bank card and without fees.
7- The possibility of using the bank card for direct shopping or electronic shopping without fees.
8- Activate Internet Banking.
These are the most important points that make many employees who settled their salaries trust in banks and do not withdraw all the salary amount at the beginning of each month. Rather, they keep it in their bank account and spend via bank card or via the mechanism of remote payment using the card or a smartphone. These banking procedures are designed to reduce the cash hoarding ratio to a reasonable rate.
The Establishment of The Iraqi Company of Deposit Guarantee.
In 2019, the Central Bank of Iraq announced that the Iraqi Deposit Guarantee / Mixed Shareholding Company obtained the incorporation certificate with a capital of 100 billion Iraqi dinars and the contribution of 42 government and private banks (5). The company aims to protect and secure bank deposits in Iraqi banks, which enhances citizens’ confidence in banks and reduces the phenomenon of cash hoarding. According to Article 13 of the Law of the Iraqi Company for Bank Deposits Guarantee, the amounts less than one hundred million dinars will be the compensation rate 51%, while the amounts that are more than one hundred million dinars will be the compensation rate 25% (6). It is worth noting that the amount of insurance deposit on bank deposits varies from one country to another, as the percentage of insurance in Turkey reaches 100%, and in Bahrain it reaches 75% depending on the economic situation of the country and other determinants(7).
If we go back to the salary settlement project, the segment of citizenship whose salaries will be the largest among the depositors in banks and by more than 7 million depositors in various banks. How can this segment be urged to keep their salaries or what is left in the banks at a time when there is a guarantee that only half of what they save in banks will be guaranteed by the Iraqi Company of Deposits Guarantee. Raising the percentage of compensation for bank deposits that are less than 50 million dinars to 100% will increase the confidence of the citizens to keep their salaries and dues in banks and give a great incentive to not cash hoarding.
Conclusion:
The phenomenon of hoarding and the non-circulation of cash flow is one of the major problems that affect economic growth when it increases beyond normal limits. As it is not possible to restructure the Iraqi economy without controlling the money stock and knowing its true size. To restore confidence between citizens and the Iraqi banking system, the Iraqi government has taken two important steps. The project of localizing the salaries of Iraqi employees and establishing the Iraqi company to guarantee bank deposits. And because the largest target segment within this framework is the segment of Iraqi employees, retirees and those who are entitled to social welfare, who number more than 7 million bank customers, some observations were suggested:
1- Improving the banking services provided to the customers especially salary settled employees by increasing free services and including the bank electronic services. Which encourages the salary settled employees not to withdraw all their dues in one payment.
2- Increasing the percentage of the guarantee provided by the Iraqi Company of Deposits Guarantee for small deposits that do not exceed 50 million dinars, to be 100%, which guarantees the salary settled employees when saving part of their dues in the bank.

References
1- https://www.france24.com/ar/20190124-العراق-يصوت-على-موازنة-عام-2019-التي-تعد-بين-الأكبر-في-تاريخه.
2- https://yaqein.net/economy/98380.
3- https://rawabetcenter.com/archives/64330
4- http://awajelpress.com/%D8%A7%D9%84%D8%B1%D8%A7%D9%81%D8%AF%D9%8A%D9%86-%D9%8A%D9%88%D8%B6%D8%AD-%D8%A7%D9%84%D9%87%D8%AF%D9%81-%D9%85%D9%86-%D8%AA%D9%88%D8%B7%D9%8A%D9%86-%D8%B1%D9%88%D8%A7%D8%AA%D8%A8-%D8%A7%D9%84%D9%85/
5- https://alsabaah.iq/15402/%D8%A7%D9%84%D8%B4%D8%B1%D9%83%D8%A9-%D8%A7%D9%84%D8%B9%D8%B1%D8%A7%D9%82%D9%8A%D8%A9-%D9%84%D8%B6%D9%85%D8%A7%D9%86-%D8%A7%D9%84%D9%88%D8%AF%D8%A7%D8%A6%D8%B9-%D8%AA%D8%AD%D8%B5%D9%84-%D8%B9%D9%84%D9%89-%D8%B4%D9%87%D8%A7%D8%AF%D8%A9-%D8%AA%D8%A3%D8%B3%D9%8A%D8%B3
6- https://www.aljazeera.net/news/ebusiness/2019/12/8/%D8%A7%D9%84%D8%B9%D8%B1%D8%A7%D9%82-%D9%8A%D8%B7%D9%84%D9%82-%D8%B4%D8%B1%D9%83%D8%A9-%D9%84%D8%B6%D9%85%D8%A7%D9%86-%D8%A7%D9%84%D9%88%D8%AF%D8%A7%D8%A6%D8%B9
7- https://dif.gov.ly/?p=1160