Cablegate: Mobile Banking - Great Potential in Iraq, but Obstacles

DE RUEHGB #0518/01 0590311
R 280311Z FEB 10




E.O.12958: N/A



1. (SBU) This cable contains substantial input from Treasury's
Office of Technical Assistance (OTA), DoD's Task Force for Business
and Stability Operations (TF BSO) and USF-I, J-6 (Communications and
Information Systems Directorate).

2. (SBU) SUMMARY: With two cell phones for every three Iraqis, it
appears great market potential exists for "mobile banking" --
allowing Iraqi subscribers to use mobile phones to view account
balances and make electronic payments and funds transfers.
Significant impediments -- none insurmountable -- stand in the way
of quick growth in Iraq's mobile banking sector: a general mistrust
of banks by the population; existing Iraqi laws and regulations;
lack of electronic core banking systems in the state-owned banks;
and the need to further develop the switch infrastructure. Mobile
phone companies and others are enthusiastic about pushing ahead with
one model or another in the near term. The Central Bank of Iraq
also seems positive about the inevitability and promise of mobile
banking, though it is wary of "mobile wallet," whereby the cell
phone accounts themselves store value. DOD's Task Force for
Business Stability Operations (TF BSO) is coordinating with the
Iraqi electronic banking consortium AMWAL and AsiaCell on a pilot
mobile banking project for 300 of both entities' employees. The
other major cell phone provider in Iraq, Zain, is considering
providing a more limited mobile phone-based money transfer service
that would run through credit and banking institutions outside Iraq.
For the time being, however, the only large-scale functioning
e-payment system used for mass distribution of salaries and pensions
is the Iraqi government's "Smart Card," operated through two state
banks. (Private banks are offering smaller-scale services.) END

3. (SBU) COMMENT: Getting the necessary regulatory, technical, and
consumer protection infrastructure in place for mobile banking
obviously will take some time. Delays, however, could lead the
private sector and public to find more immediate workarounds, which
may lead to prudential and security vulnerabilities. Once
operational, the attractiveness of mobile banking may spur many more
Iraqis to move their money into the formal financial system, a boon
to economic development. Iraq's private banks (who have a
technological and service advantage over the state banks) may also
stand to gain as they are better able to offer these services.
Despite these advantages, however, growth of the private banking
sector will be limited as long as Iraqi government entities are
forbidden from doing business with private banks - the government
accounts for approximately 60 percent of employment and GDP. As
Iraq inevitably presses ahead with some sort of mobile, electronic
transaction mechanism, we should look to ensure that these
developments keep with global best practices, efficient use of
appropriate technology, and safeguards against fraud, money
laundering and other abuses. END COMMENT.

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

4. (U) With more than 19.5 million mobile phone accounts in Iraq -
and more people signing on every day - tremendous market potential
exists for mobile banking here. [NOTE: Given Iraq's population of
approximately 30 million, this implies a penetration rate of 63
Qapproximately 30 million, this implies a penetration rate of 63
percent. This likely overstates the case, however, as many
subscribers have two or three phones from different companies to
overcome lack of roaming and gaps in coverage. END NOTE.] New
mobile banking technologies such as point-of-sale phone payments at
retail shops, mobile phone bill payment, and electronic funds
transfers via text would undoubtedly be very popular here. These
types of transactions would also allow Iraq to "leap frog" over some
of the traditional fund transfer mechanisms (such as checks, which
are often counterfeited here). Moreover, this potential market is
expected to grow with the arrival of several international oil
companies, who have already expressed the desire to use the latest
banking systems for their internal operations and employees,
possibly on a large scale.

5. (SBU) One particular advantage of mobile banking for Iraq's
smaller, self-employed entrepreneurs is that the point-of-sale
transaction function means that they would not have to invest in
expensive point-of-sale credit card readers or pay hefty transaction
fees. Similarly, families wanting to send funds to relatives via
bank transfers in Iraq sometimes pay exorbitant fees (up to $95 per
transaction) to wire money domestically within the same bank, and
the payment is often delayed. A mobile phone transfer would likely
take less time, at a fraction of the cost. Next, mobile banking has
allowed other developing countries to invest in fewer ATMs, which
are expensive to operate. Many merchants in other countries also

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offer cash back with a mobile banking purchase, which saves them the
risk and expense of carrying their cash to the bank. Finally, many
Iraqis currently have only one option if they want to know their
account balance: wait in a long line (sometimes for hours) for a
teller to look it up. Mobile banking would give account holders the
option of viewing their balance almost instantaneously.


6. (SBU) The Department of Defense's Task Force for Business
Stability Operations (TFBSO) is already coordinating a pilot mobile
banking project with 300 users with the AMWAL consortium of 13 (out
of 36) Iraqi privately-owned banks and the cell phone provider,
AsiaCell. The project will help assess the feasibility of a larger
mobile banking system throughout Iraq. So far as we know, it is the
only such project in the country.

The pilot project allows participants to:

- Check their account balance,
- Top up their cell phone credit automatically,
- Send money from one person to another electronically, and
- Pay merchants directly from their account instead of using a debit

Although the project is still relatively small, the partners plan to
expand it over the coming year, perhaps to university students. The
project is also technologically simple: no account menu is
displayed on the phone, and users text codes into the system
depending on the task. AMWAL hopes that the project will move past
its pilot stage and go "live" this spring. [NOTE: This project in
its current phase cannot be used as a mass-payroll system. The
electronic switch does not work in a way that can "push" thousands
of payments to various accounts instantaneously. Each payment must
be texted individually, which could lead to errors. The lack of a
simple menu on the phone also demands some texting savvy on the part
of the user. END NOTE.]


7. (U) Despite the great potential of mobile banking in Iraq, much
work lies ahead. The general population remains severely
under-banked; only nine percent of Iraqis have bank accounts.
Because of cash shortages during government pay periods, robberies,
corruption, and a lack of deposit insurance, many Iraqis do not view
banks as a safe place to keep money. Instead, they generally keep
cash at home and use the traditional "hawala" money transfer system.
In total, Iraq has only 853 bank branches for a population of more
than 30 million. By comparison, to achieve the same bank
branch-per-capita ratio of Jordan, Iraq would need more than 3,000
branches. In order for mobile banking to take hold on a large
scale, more Iraqis would first have to open bank accounts and link
them with their mobile phones. (See comparison of "mobile banking"
and "mobile wallet" in paragraph 11.)

8. (U) State-owned banks, other private banks, or foreign investors
may launch competing mobile banking projects in the future. All of
the private banks together still make up only a tiny fraction of
Iraq's total banking market - three percent of total assets.
AMWAL's consortium currently includes only four of the top ten
privately-owned banks, so its total market share remains exceeding
small. Iraqis in the past have been especially skeptical of private
banks, and it may take time before AMWAL's market share grows.
Since state-owned banks currently make up 97 percent of the total
banking market (by assets), helping the state banks offer mobile
Qbanking market (by assets), helping the state banks offer mobile
banking would help boost the total number of mobile banking
customers in Iraq, though it also would bolster the comparative
advantages the state banks already enjoy over private banks.


9. (SBU) Iraqis' wariness about banks is only one obstacle to
achieving broad-based mobile banking in Iraq. Several Government of
Iraq legal hurdles exist as well, including lack of legal validity
for e-transactions, GOI strictures against government agencies using
private banks, and banking regulators' resistance to cell phone
companies performing bank-like functions. Opening the legal
environment for mobile banking might require new legislation passed
by the Council of Representatives (COR), and changes to Central Bank
of Iraq (CBI) regulations and Ministry of Finance (MOF) policies.
Some GOI officials are very enthusiastic about mobile banking, so we
could possibly see movement on regulatory changes in the near term.


BAGHDAD 00000518 003 OF 004

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

10. (SBU) CBI Director for Banking Supervision Walid Eidy has told
EmbOffs he is excited about mobile banking and would be happy to
meet with investors interested in bringing that technology to Iraq.
However, he expressed concern that the technical and legal
foundations for such a system did not yet exist. He said one of the
biggest difficulties is that electronic signatures (including those
from texts, email, and computer programs), photocopies, and scans
are not considered legal as evidence to be used in a court of law --
thus mobile transactions would be hard to defend in court. He said
that before mobile banking could work on a large scale, the COR
would have to pass a law that specifically made such "documents"
legal for use in court instead of paper originals. Eidy also said
95 percent of the Iraqi population was "electronically illiterate,"
and professed concern they could be taken advantage of without the
right consumer protections. (Comment: The U.S. Treasury Office of
Technical Assistance (OTA) is advising the CBI on a regulatory
platform on electronic signatures and other consumer protection
issues. End comment)


11. (SBU) The Central Bank makes a distinction between "mobile
banking" and "mobile wallet" and remains steadfast that only "mobile
banking" will be allowed in Iraq for the time being. Mobile banking
is when all customers have both a cell phone and an established bank
account in a licensed bank. The mobile banking interface merely
allows the customer to access his/her account via the cell phone,
and all transactions take place through the banking system. "Mobile
wallet" (as the term is used by the CBI) is when the phone itself
can store value and payments can be linked to an individual cell
phone account. (For example, in some East Asian countries, one can
purchase from a vending machine using money stored on the cell
phone.) CBI opposes mobile wallet because the cell phone companies
would act as banks in facilitating transactions and would be more
difficult to supervise against money laundering and terrorism
finance. For the time being, the CBI will require all Iraqis
wanting mobile banking to first get a bank account that can be
linked to their cell phone. (Comment: Treasury's OTA is
extensively advising the CBI on bank regulation issues. The GOI
will need to carefully weigh the potential economic benefits of a
more loosely regulated mobile banking sector with the prudential and
security concerns inherent in a proliferation of non-banks (telecoms
companies) providing bank-like services. End Comment.)


12. (SBU) For a mobile banking system to work, all participating
banks must plug into an inter-operable electronic "switch" (a kind
of sophisticated server) that will clear their transactions in a
timely manner. Several different bankcard switches already are in
operation. The AMWAL consortium of 13 private banks in Iraq has a
switch located in Amman, Jordan through which the consortium offers
Visa, Mastercard, and other electronic banking services. Warka Bank
(private), Rafidain (state-owned), Rasheed (state-owned), and the
Trade Bank of Iraq (state-owned) all have their own switches, too.
Treasury's OTA is helping the CBI with the new architecture of their
payments system, which will include a new "national bankcard switch"
Qpayments system, which will include a new "national bankcard switch"
and a "national mobile banking switch," that would act as umbrella
switches over the various other switches, making them
inter-operable. The Central Bank will require these switches to be
physically located in Iraq. Treasury's OTA indicates that the two
switches could be up and running within the next year.


13. (SBU) Before the state banks can be involved in mobile banking,
they all need to install a "core banking system," an integrated
computer system handling a bank's basic operations, such as
recording transactions, interest calculations on loans and deposits,
customer records, payments, and withdrawals. A core banking system
allows customers with an account at one branch to access their
account seamlessly at any other branch of that bank.

14. (SBU) Treasury's OTA is helping the state-owned banks
restructure and modernize. With OTA's help, Rafidain and Rasheed
Banks both now have computer systems at their Baghdad headquarters
and at each branch, but they are not interconnected. Rafidain is in
the process of rolling out a core banking system at its headquarters
and 160 branches, and could be finished within a year. Once the
state-banks' systems are up and running, the goal would be to
connect them to a national bankcard switch. According to Treasury
OTA, the state banks could also offer a mobile banking interface.

BAGHDAD 00000518 004 OF 004

(Comment: USF-I, J-6 (Communications and Information Systems
Directorate) assesses that limited national information
infrastructure and lack of a terrestrial communications backbone
will prove a major challenge to this initiative. However, it
appears the core banking systems are intended to run through
satellite links, which may reduce this limitation. End Comment.)


15. (SBU) The Ministry of Finance (MOF) has long had a policy
limiting GOI entities (e.g., ministries, provincial governments, and
state-owned enterprises) to using state-owned banks, with very few
exceptions. The Minister of Finance recently released a letter
allowing self-funded state-owned enterprises (the ones that do not
receive any funding from the federal budget) to use private banks as
soon as the CBI releases relevant guidance. CBI Director of Banking
Supervision Walid Eidy told us January 13 that his team was writing
guidance for the CBI Governor to approve shortly. (Comment: During
the week of February 14, the Council of Ministers reportedly issued
official "instructions" to all government entities (including
self-funded SOEs) that they are prohibited from doing any business
with private banks. End comment.)


16. (SBU) Given that the MOF only allows GOI entities to use
state-owned banks, and that the state-owned banks are still working
on their core banking systems (and have still not connected into a
national switch), it appears unlikely that GOI employees could be
paid via mobile phone in the short-term, even if "mobile wallet"
were allowed. Meanwhile, an electronic payment scheme for GOI
employee salaries and pensions already exists: the "Smart Card"
system through Rafidain and Rasheed Banks. If the goal of a project
were to find a way to quickly set up an e-payment scheme directly
and transparently on a larger scale, the existing "Smart Card"
system would appear the way to go. Treasury's OTA provided guidance
to the GOI's "Smart Card," project, in which over one million
individuals currently receive their pay electronically on a special
card. This system appears to be working well, as many provincial
governors are eager to have their province join. The Smart Card
system itself may develop a mobile phone interface in the next
couple of years, according to Treasury OTA.


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