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Cablegate: Central Bank Considering Community Banks in Iraq

VZCZCXRO8742
RR RUEHBC RUEHDA RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHGB #2754 2861607
ZNR UUUUU ZZH
R 131607Z OCT 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 5059
INFO RUCNRAQ/IRAQ COLLECTIVE
RHEHNSC/NSC WASHDC

UNCLAS BAGHDAD 002754

SENSITIVE

SIPDIS

STATE FOR NEA/I/ECON

E.O.12958: N/A
TAGS: ECON EFIN EAID IZ
SUBJECT: CENTRAL BANK CONSIDERING COMMUNITY BANKS IN IRAQ

REF: BAGHDAD 2514

SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY.

1. (U) SUMMARY: As existing Iraqi banks mature, open new branches
nationwide, and focus on their wealthiest customers, accessible
community banks may provide a viable option for low- to
middle-income villagers. The Central Bank of Iraq (CBI) is
considering a proposal to create second-tier "community" banks,
which would have lower capital requirements and be limited to only
one office per town. These community banks would formalize some of
the financial intermediation going through traditional "hawala"
schemes and could provide Iraq's first private-sector microfinance
loans. END SUMMARY.

PRIVATE BANKS MATURING ACROSS IRAQ

2. (U) While Iraq's public banks are still restructuring, some
private banks are maturing relatively quickly (reftel). Since June
2008, private bank lending has increased by 83 percent to over one
billion USD. Nine private banks have adopted electronic funds
transfer technology across 161 branches nationwide. Visa and
Mastercard credit and debit cards are available to their most
sophisticated customers and more than 300 credit card readers have
been installed in shops. The best Iraqi private banks want to be
regional players in the Middle East and beyond. However, they are
not paying much attention to many of the potential customers in
their own backyard.

CBI RAISING CAPITAL REQUIREMENT TO WEED OUT NON-PERFORMERS

3. (U) Currently, the CBI requires a nationwide private bank to have
statutory capital of 50 billion IQD ($42.7 million). Most private
banks have met that requirement and those that have not are either
looking to merge with another bank or applying for a specific
extension. Within the next twelve months, the CBI intends to raise
the statutory requirement to 250 billion IQD ($213.6 million) to
weed out non-performers and ensure that banks keep capital
proportional to the size of their growing businesses.

COMMUNITY LEVEL FINANCIAL INTERMEDIATION NEEDED

4. (U) As successful private banks look to expand with wealthy local
customers, there is a growing niche for financial intermediation for
working and middle class Iraqis. Nationwide private banks are
reportedly not making small loans as it is not cost efficient to
manage them. In response, the CBI Board of Directors formed a Board
sub-committee to explore creating a second tier of "community"
banks. Such banks would require less statutory capital and be
limited in operations. Some possible parameters for community banks
include:

- Geographic limit to one office in one city or village outside of
Baghdad.
- Loans restricted to private individuals or private companies
within that community.
- Deposits limited to less than 10,000 USD.
- Partner with a first-tier bank that will perform international
transactions on behalf of their customers.

BENEFITS OF COMMUNITY BANKING

5. (U) These private-sector second-tier banks could provide
increased opportunities for access to credit given the limited
outreach to date of donor-funded microfinance organizations. The
banks could also formalize some of the financial intermediation
going through traditional Middle Eastern "hawala" schemes, in which
money is transferred through money brokers without a paper trail.
Representatives of PRTs throughout Iraq have indicated that Iraqis
would be more receptive to opening accounts at banks that invest in
their communities rather than putting their deposits in a branch of
a Baghdad-based bank.
COMMENT

6. (SBU) Community banking has the potential to further Iraq's
development, especially in outlying communities. Community banks'
Qdevelopment, especially in outlying communities. Community banks'
capacity to develop wealth at the lower socio-economic levels by
promoting entrepreneurship in a sustainable fashion has proven
effective in many other emerging market economies. Donor assistance
to CBI to develop the legal and regulatory framework, combined with
on-the-ground PRT assistance in the near term, may be a way to
leverage untapped private sector financial resources.

HILL

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