Cablegate: Prt Salah Ad Din: Private Banks Developing


DE RUEHGB #3460/01 3041205
R 301205Z OCT 08



E.O. 12958: N/A


1. (U) This is a reporting cable from PRT Salah ad Din.

2. (SBU) Summary: It is difficult to imagine a provincial business
or economic sector that has more fully exploited the vastly improved
security environment than has the private-banking sector within
Salah ad Din. The calculated exploitation of security gains by
private bankers is evidenced by the fast pace of recent bank-office
construction and openings as well as by the adoption of
technologically-advanced financial platforms and products, and
aggressive strategic plans for growth. Some of the strategic plans
incorporate innovative solutions. A more complete and thorough
mining of the opportunities available to the private-banking
community awaits the development, at the national level, of monetary
policies, institutions, regulations and laws that might collectively
form the robust foundation of a consumer-finance industry. In the
absence of these foundational supports, private banks will be
stymied with respect to providing credit to individuals within Salah
ad Din Province. END SUMMARY.

3. (SBU) As recently as 3/31/08, Al Mosul Bank was the only private
bank operating within Salah ad Din (SaD) province, from its single
office in Tikrit. It was soon joined by upstart and now industry
leader, Al Warka Bank, which opened branches in Tikrit and Bayji
between 4/30/08 and 7/31/08. More recently, additional private-bank
capacity was provided by the August 2008 opening in Tikrit of a
branch of Ashur Bank. These three private banks will soon be joined
in Salah ad Din by a fourth: the Tigris and Euphrates Bank is
expected to open its first provincial branch, in the Bayji Oil
Refinery compound, by 12/15/08. Prior to 4/30/08, there were no
ATMs in place in the province. Currently, Al Warka Bank operates and
owns all 5 functioning ATMs within Salah Ad Din.

4. (SBU) While the recent pace of private-bank infrastructure
investment has been rapid, this is expected to accelerate over the
course of the next six months. This acceleration is primarily
associated with the seemingly inexorable execution of Al Warka
Bank's strategic plan. This bank will open five new branches in
Salah Ad Din over the next 3 months. Two of them will open in or
adjacent to large U.S. military installations. The other three will
be located in Samarra, Ad Dawr and Al Alam. Another four Al Warka
Bank offices are scheduled to begin operations before 3/31/09,
serving Dujayl, Tuz, Balad and Sharqat. The nine prospective Al
Warka branches described above represent a significant portion of
that bank's intermediate-term goal of locating 17 banking offices in
Salah Ad Din province before end 2009. If historical Al Warka
ATM-to-branch ratios prevail, then it is reasonable to assume that
these 17 new branches will engender an additional 42 ATMs throughout
this province by late next year.


5. (SBU) Private banks in SaD rely almost exclusively on fee income
for revenues and profits. They derive very little income from the
net-interest margin spread typically associated with lending
activity. The private-banking sector's emphasis on
fee-income-sourced revenues underscores a deeply-rooted aversion to
credit risk. The private-bank sector's specialized, low-risk
business model incorporates a focus strategy that depends heavily on
its ability to efficiently move funds and to exact transactions fees
for money-transfer services rendered. Service charges are typically
levied to transfer customer funds within a branch, between branches
of the same bank or between offices of different banks.

6. (SBU) Private banks further augment their fee-based income
streams by providing international wire transfer services as well as
by issuing letters of credit. Al Warka Bank has leveraged its
growing ATM network to generate fees associated with cash
withdrawals and with the use of its proprietary debit and credit
cards. The VISA cards issued by Al Warka Bank do not incorporate
credit risk: they are essentially cash-debit cards. Credit risk is
eliminated by requiring the card holder to fully fund the assigned
credit limit prior to card issuance. The final major source of
fee-based income for private banks is derived from their
currency-exchange activities. Not all of the currency-exchange
transactions (mostly US Dollar - Iraqi Dinar) are associated with
the needs of commerce. For example, soon after the April opening of
Al Warka's Tikrit office, the resident manager noticed significant
currency speculation among his customers. At that time, these
customers made non-consensus bets in favor of a relative
strengthening of the US Dollar. (Since May, the American currency
has appreciated roughly 20 percent versus the Euro.)

7. (SBU) Private-sector banks have invested heavily in technology
platforms that facilitate money transfers and that support their
fee-based business model. There is reason to believe that this
focused investment has created a permanent fee-income-based service
niche for the private-bank sector within the broader provincial
banking market. Accordingly, it may already be too late for
state-owned banks to mount a serious competitive challenge to the
dominance of private-sector banks in the area of fee-based revenue

8. (SBU) The following facts provide broad support to the notion
that private banks have committed heavily to their technology
platforms. All Al Warka Bank provincial branches are EFT capable
and are computer linked in real time by satellite linkage to this
financial institution's other 120 offices in Iraq as well as to the
outside banking world. Within two months, Ashur Bank's new Tikrit
office will adopt the British Core-Bank technology platform, which
will link the Tikrit office in real time with Ashur's other offices
in Sulaymaniah, Syria, Jordan, Kuwait, Turkey and Egypt. In a
similar vein, when the new office of the Tigris Euphrates Bank opens
in Bayji, it will be integrated into that institution's modern
technological base. Only Mosul bank, among operating private-sector
banks in Salah ad Din, does not offer EFT or a modern technological

--------------------------------------------- ---

9. (SBU) Private-bank sector growth within Salah ad Din has
accelerated over the course of the last six months despite
formidable obstacles:

(A) Obstacles to orderly branch expansion:

- Limited access to land: Only three of the six Al Warka branches
slated to open over the next three months in SaD had their site
locations procured in the conventional way; two sites were provided
by American military installations, while a third was provided by
the Samarra Pharmaceutical Complex. Similarly, the Tigris Euphrates
Bank secured for its future Bayji branch a site provided by the
Bayji Oil Refinery. The difficulty in acquiring branch locations is
rooted in the more general problem associated with securing clear
title to real estate.

- Shortage of skilled workers: The skilled-labor shortage which
slows the pace of private-sector, bank-office expansion may seem odd
against a backdrop of bloated employment roles among state-owned
banks. However, the skill-set of state-owned bank employees is not
transferable to a fee-based business model that is leveraged on a
relatively sophisticated technology platform. This reality has
prompted Al Warka Bank to train its staff for up to 6 weeks before
scheduled branch openings. Smaller private banks like Ashur Bank
and the Tigris Euphrates Bank will staff new branches by
transferring key personnel from operating offices to form the
critical employee core of new offices.

(B) Obstacles to normal credit extension: At the Central Office
level in Baghdad, corporate directives to extend credit to
private-sector borrowers in the provinces are all but non-existent.
This is in part because the Central Bank of Iraq (CBI) has
throughout the year pursued a tight, anti-inflation monetary policy
in accordance with the Stand by Arrangement (SBA) which the GOI
signed with the IMF. Accordingly, up to 35 percent of a
private-bank's liquid assets can be invested with the CBI at a high,
risk-free rate that has not been lower than 16 percent year-to-date.
The appeal of extending provincial credit is low, because there is
little demand for loans at a 22-25 percent risk-adjusted rate. At
the grass-roots level, there is a lack of a broad-based and varied
institutional framework in support of credit extensions:

- There is no credit bureau that provides the credit histories of
prospective borrowers.

- The insurance sector is not sufficiently developed to provide
lenders the policies that can mitigate the risk attendant to the
theft or destruction of tangible collateral.

- There is no equivalent of the standard American Department of
Motor Vehicles which can register/attach/ release and/or administer
liens on vehicle titles. Accordingly, private banks do not believe
that motor-vehicle titles have any intrinsic value in the
credit-extension calculation.

- Beyond the absence of important institutional pillars in support
of loan generation, certain cultural conventions also impede credit
growth: tribal customs militating against repossession of collateral
are so well entrenched that loan officers rightly fear for their
personal security in the event of collateral repossession. It goes
without saying that there is no such thing as a "repo man" in this

--------------------------------------------- ----

10. (SBU) As a general rule, managers of the various private banks
do not view each other as competitive threats. For example, the
manager of Al Warka Bank's Tikrit office provided help and counsel
to his nephew, the newly-designated manager of Ashur Bank, when the
latter was mired in the logistics of establishing and opening that
bank's Tikrit office. Similarly, private-sector bankers generally
do not view the established state-owned banks as adversaries. For
instance, during a recent cash-shortage at state-owned Al Rafidain
Bank, Al Warka Bank's Tikrit manager was proud to have helped his
counterparts at the state-owned institution by cashing the checks of
pensioners who could not access cash from the then liquidity-short
Al Rafidain Bank. There also appears to a deeply-seated sense of
patriotism and community among private-bank managers. For example,
during a two-hour interview with Mosul Bank's Tikrit office manager,
PRT staff were continually praised for their efforts "to help the
Iraqi people." In a similar vein, Ashur Bank's young manager
lamented the fact that he was not positioned to provide financing
for all the motor vehicles "that the people wanted."

11. (SBU) Like much of Iraqi society, the private-banking sector
appears to have a strong predisposition to accept, without
significant challenge, the directives that emanate from central
offices. For instance, the manager of the Tikrit office of Al Warka
took no action to leverage a national advertising campaign conducted
by headquarters, and seemed surprised at the idea - suggesting that
even local initiative in direct support of a central program might
be viewed as disloyal.


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