Has The Central Bank Destroyed The Private Banking Sector In Iraq Forever?

 
A dysfunctional banking sector in an oil country  July 17, 2025 Last updated: July 17, 2025
 
Al-Mustaqilla / Investigative Report / - Although Iraq possesses vast oil wealth, its banking sector remains primitive, lacking depth and reliability.  This is clearly demonstrated by the weakness of financial inclusion,  with only 19% of citizens owning a bank account,  one of the lowest rates in the region.

This weakness reflects a profound structural flaw in the relationship between citizens and banks and 
raises fundamental questions about the effectiveness of  monetary policies and  banking supervision
in Iraq.
 
Controversial Monetary Policies
 
In recent years, the Central Bank of Iraq has pursued erratic monetary policies, most notably uncontrolled monetary expansion.
 
The money supply increased     from 46 trillion dinars     to more than 100 trillion dinars     in just two years,     without corresponding real economic growth.
 
This led to inflation exceeding 7.5%,prompting the Central Bank to raise interest rates to 7.5% before later reducing them to 5.5%, a move that had no tangible impact on the market.
 
Furthermore, a large gap remained between the interest rate on loans,     which exceeds 10%, and 
the interest rate on deposits,  which barely reaches 7%, deepening citizens' reluctance to deposit and weakening banks' ability to provide financing.
 
Out-Of-System Criticism And Loss Of Trust
 
The problem lies not only in policies, but also in the grim reality that the vast majority of cash in circulation is outside the banking system.
 
This massive leakage   weakens banks' ability to perform their role as financial intermediaries and reflects  a genuine crisis of confidence between citizens and banks.
 
Following banking bankruptcy scandals, the     dominance of partisan figures in some private banks,
     declining services, and the  absence of any effective deposit insurance system, citizens have come to view banks as a threat rather than a refuge.
 
Consumer Loans Without Real Development
 
One of the most notable failures is that most of the loans granted by banks in recent years have been  
     directed toward consumption,  not production.
 
Car financing, personal loans, and installments for recreational purposes have gone unmet,
with no real focus on supporting productive projects or small businesses.
 
This has led to increased speculation in the  real estate market and  rising land prices,
without any real production or job creation.  Instead, it has led to population growth and urbanization without a corresponding economic structure.

Government Monopoly And Administrative Laxity
 
The Iraqi banking sector revolves around Rafidain and Rashid Banks, which control most of the sector's assets.
 
However,
     their performance is weak,
     their administrative structures are clearly lax, and
     their branches are not electronically connected and lack a modern technical infrastructure.

International Sanctions Indicate A Defect
 
Beginning in 2022, the United States began imposing a ban on a number of Iraqi banks from dealing in dollars due to suspicions of suspicious transfers and money laundering.
 
The list was later expanded to include new banks,
     disrupting a significant portion of foreign trade and remittance operations and
     negatively impacting the Central Bank of Iraq's credibility with international institutions and correspondent banks.
 
Banking Licenses Without Clear Controls
 
In recent years, the Central Bank of Iraq has granted unprecedented numbers of new banking licenses,
     bringing the number of private banks to over 70,
     without any economic justification or genuine assessment of market needs.
 
This quantitative expansion has come
     at the expense of quality and oversight,
     contributing to the fragmentation of the banking market and the
     creation of fragile entities, both financially and administratively weak,
often exploited as fronts for partisan agendas or foreign interests.
 
Negligence Of Banking Sovereignty
 
Although the Private Banking Law clearly sets a maximum foreign ownership limit in Iraqi banks,
     not exceeding 25%,  the Central Bank has unjustifiably overlooked this restriction.
 
Foreign financial institutions have been allowed to own significant stakes in a number of banks,
     either directly or through local front companies.
 
This has
     led to an imbalance in the ownership structure and
     created external financial dependency that
     threatens Iraq's economic decision-making and
     undermines the independence of the national banking system.
 
Bleeding Profits Abroad Without Investment
 
In a dangerous precedent, the Central Bank allowed bank managements—most of which are owned by foreign institutions—to transfer more than 75% of their annual profits abroad in the form of dividends, without requiring them to reinvest a portion of these profits within the Iraqi market.
 
This behavior
     violates the most basic rules of development banking and
     should have been countered by clear measures
          compelling these banks to
          develop their services,
          strengthen their capital, or
          contribute to national investment projects, 
rather than becoming mere channels for transferring hard currency abroad.  

Urgent International Advice For Reform
 
Several international institutions, including the  US Treasury, the     International Monetary Fund, and the     World Bank,  have made clear recommendations.
 
Prominent among them are:
     stricter compliance with anti-money laundering and counter-terrorism financing laws,
     enhanced transparency in dollar transactions,
     strengthened internal and external oversight of banks,
     reviewed asset quality, and      modernized the sector's digital infrastructure.
 
These institutions also called for raising minimum bank capital and merging or liquidating distressed banks  to create a more robust system.
 
Direct Responsibility Of The Central Bank
 
The Central Bank is not only a neutral supervisory body; it is also a genuine partner in the crisis.
 
It has
     allowed the currency window to continue despite its risks,
     failed to require banks to adhere to international governance standards,
     been lax in enforcing controls on foreign ownership, and
     failed to establish an effective legislative framework to protect depositors or regulate the banking structure.
 
Its responsibility is not merely technical, but also ethical and institutional in the face of an economy being drained.
 
The Opportunity For Reform Still Exists.
 
Despite the bleak outlook, there is still a chance to save the Iraqi banking system.
 
This requires
     political and professional will, beginning with legislative reform,
     imposing strict oversight,
     enhancing  transparency, and
     cooperating with international institutions to restore confidence.
 
There can be no real development without a strong banking sector,
     and no successful banking sector without an   independent and effective central bank that understands that it   is not just a guardian of liquidity,  but also a stabilizing force.      
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