This is due to the fact that bank branches are currently executing only limited transactions. Reforms in the sector are and will not only be limited to establishing new banks but also to restructure, revive and privatize already existing banks. Moreover, payment systems, trade finance and retail banking are going to be overhauled. Restructuring the sector is seen as a major objective of the authorities as it plays an important role in the development of the Iraqi economy.
According to latest data from CBI, the banking sector consists of the Central Bank of Iraq and 28 banks, seven of which are state owned. Generally, the banking system centers around two large state-owned commercial banks (Al Rasheed and Rafidian). Other five specialized public banks serve the agriculture, industry, real estate, trade and social sectors. The banking system in the country has a total of 542 branches, 381 of which are operated by the public sector banks.
The banking sector has been reformed through the new banking law. The law allows foreign banks to enter Iraq as branches, subsidiaries, representative offices or through joint ventures with already existing local banks. The law also allows an unlimited number of foreign banks to enter Iraq through the purchase of up to 50% of a local bank. Within this plan, CBI extended licenses to three foreign banks to operate in 2004 namely; HSBC and Standard Chartered from United Kingdom and National Bank of Kuwait (NBK). These were the first such licenses to be granted in 40 years.
On the balance sheet front, CBI data on Commercial banks’ consolidated balance sheet reported total assets had grown by more than 200% CAGR during the period 2001-05. Total assets increased from Iraqi dinar 2,339.5bn in 2001 to stand at Iraqi dinar 206,757bn in 2005. On annual basis, total assets reported 25% annual growth in 2005. As for gross credit extended by commercial banks, it continued to grow over the period 2001-05 at a CAGR of 62.9%. Gross credit has increased from Iraqi dinar 243.8bn in 2001 to surpass the Iraqi dinar trillion landmark standing at ID1,717.5bn in 2005. Generally, extended credit grew at an average of 26% for 2002 and 2003. However, extended credit increased rapidly starting 2003, and more than doubled growing at 112.9% and 108.3% for 2004 and 2005 respectively.
Historically, private sector accounted for major share of the total credit extended by commercial banks. However, high growth for 2005 was mainly due to increased credit to public institutions that grew by 231.7%. Credit to public institutions stood at a new high of Iraqi dinar 631.4bn in 2005 as compared with Iraqi dinar 190.3bn reported the previous year. Credit extended to central government grew more than eight folds to Iraqi dinar 135.8bn up from Iraqi dinar 14.1bn reported for 2004. Such growth in credit to both public institutions and central governments has increased their total contribution to 36.8% and 7.9% of total credit in 2005. Finally credit extended to Private sector maintained the largest share of 55.3% in 2005.