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Cablegate: Iraqi Banks Move Electrons Instead of Paper

VZCZCXRO2845
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #1946 1771330
ZNR UUUUU ZZH
P 251330Z JUN 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 7981
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS BAGHDAD 001946

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN IZ
SUBJECT: IRAQI BANKS MOVE ELECTRONS INSTEAD OF PAPER

1. Summary: While Iraq's economy remains predominately
cash-based, the banking system has begun a shift toward
electronic payments. From December through April,
Iraqi-owned banks more than quadrupled the monthly value of
transactions they direct through electronic funds transfers
(EFT). Private banks lead the way, with 60 percent of their
branches EFT-capable, while no state-owned banks offer
domestic EFT services to the public. The USG sparked this
modernization, first through assistance to the Central Bank
of Iraq (CBI) and then through an emphasis on electronic
payments by the Joint Contracting Command - Iraq (JCCI). As
banks and businesses gain experience with the speed, safety,
and low cost of EFT, we expect it to slowly displace the use
of cash in wholesale transactions. An important side benefit
of progress in this area is that use of EFT may accelerate
GOI budget execution. End summary.

2. In 2004 the U.S. Treasury Department contracted with New
York-based Montran Corp. to build a modern payments system in
Iraq through an $18-million program to deliver equipment,
technical assistance, and training to the CBI. By 2006 the
new system offered both real-time gross settlement (RTGS) and
automated clearinghouse (ACH) services. The ACH service,
which is designed to process low-value, high-volume retail
and payroll transactions, remains unused for now. But for
RTGS, which is designed to process large inter-bank
transfers, monthly transaction value has more than doubled
since December 2007.

3. The expansion of EFT in Iraq is a reflection of the
increasing importance of privately owned banks. While the
seven state-owned banks hold 80 percent of non-GOI deposits
in the system, the 32 private banks operate more than a third
of the 726 bank branches in the country. About 60 percent of
the branches of private banks offer EFT services, while no
branches of state-owned banks are EFT capable. The private
banks' modern capabilities are helping them expand their
business.

4. The USG played a role not only in building Iraq's EFT
infrastructure but also in promoting its use. In particular,
the Department of Defense Task Force for Business Stability
Operations (TFBSO) sought to direct more USG payments through
Iraq's EFT system. In October 2007, with help from TFBSO,
JCCI established a new policy to use EFT for all contract
awards of $50,000 or more. This created a snowball effect in
subsequent months. By May the volume of RTGS transactions
was more than triple the volume in October. The aggregate
monthly value of RTGS transactions is now more than twice as
high as in the first six months of 2007. Now TFBSO is
working with Iraq's private banks to promote the use of ACH
for retail payments.

5. Comment: Iraq's economy still runs mainly on cash, but
with "plumbing" installed by Treasury and "pump priming"
engineered by TFBSO and JCCI, Iraq's banking system has taken
a big step forward. There will be greater gains when EFT
moves into the retail sector with ACH services. Among other
effects, EFT can begin to replace the state-owned banks'
creaky, corruption-prone, cash-based system for distributing
wages, pensions, and other benefits for the GOI and
state-owned enterprises -- once the GOI develops the
political will to implement EFT for its own transactions.
More immediately, EFT may also prove to be another way of
easing bottlenecks that hamper GOI budget execution. Iraqi
banks without EFT can take up to three weeks to process a
payment. With EFT, the same transaction can be completed in
less than a day.
CROCKER

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