Iraqi Dinar Hoarding "Has Reached Critical Levels"

ERBIL, Kurdistan Region - Nearly 90 percent of Iraq's money supply is held outside the formal banking sector, largely hoarded in homes, a senior financial advisor to the Iraqi premier told Rudaw. The vast “leakage" of cash poses a serious challenge to the country's financial stability and long-term economic growth.

Mazhar Mohammed Salih, advisor to Prime Minister Mohammed Shia’ al-Sudani, stated that the hoarding of cash, while historically common, has reached critical levels, with leakage rates between “87 to 90 percent.”

He explained that a large portion of the currency in circulation is held outside banks.

“If, for example, we have approximately 100 trillion dinars [approximately $714.3 million] in total currency in circulation today, around 91-92 trillion dinars [approximately $657.15 million] are currently outside the banking system,” Salih elaborated.

According to senior financial advisor, the exceptionally high rate of cash held outside banks is largely driven by public distrust in financial institutions.
Other reasons include religious and cultural factors – including the fear of engagement of usury (interest) that is prohibited in Islam – and the general unfamiliarity with banking services, Salih added.

Pointing to the unbalanced financial landscape, Salih noted that "while the economy has ample liquidity, banks themselves are liquidity-poor. The government faces similar challenges, and meanwhile, the public holds large cash surpluses that are effectively idle.”

To reintegrate these hoarded funds into the formal economy, Salih stressed the need for strategic reforms. These measures include strengthening deposit insurance through broader advertising and clearer public communication to reassure Iraqis that their bank deposits are fully insured against any bank failures, the financial advisor suggested.

He also advocated encouraging investment in government bonds with strong, clear, and sovereign guarantees, and implementing digital payment solutions that would encourage individuals to maintain bank accounts via electronic cards, thereby fostering digital financial inclusion.

The senior financial advisor underscored that a leap in digital financial inclusion is crucial to break the detrimental social habit of hoarding that is disrupting the income cycle and hindering economic investment and growth.

Bringing more funds into the regulated financial system, Salih said, would strengthen the overall economy. 

"The more funds there are inside the banking system, the better the situation is than when they are outside the banking system."

However, the issue of cash hoarding is just one symptom of deeper systemic problems in Iraq’s banking sector.

At its core, the sector suffers from a lack of modernization and persistent structural weaknesses. Most Iraqi banks rely heavily on the Central Bank of Iraq’s foreign currency auctions to generate profit, rather than engaging in productive investments that stimulate economic activity. This is further exacerbated by corruption, with repeated allegations that banks are complicit in smuggling money out of the country. 

Customers often face rigid withdrawal limits - sometimes only allowed in installments - and risk theft not just from criminal actors but potentially from within the banks themselves.

Compounding the problem is a weak legal framework. Laws to protect deposits are either lacking or outdated, and restrictive regulations discourage long-term investment and reinforce a dependence on government-linked financial operations. 

As a result, Iraqi banks offer limited services by international standards and remain largely tied to state-driven “rentier” activities such as currency exchange, letters of credit, and the distribution of public sector salaries.

Although there is a growing interest in digital banking and the Central Bank has launched initiatives to support digital enrollment, progress remains slow due to the absence of essential regulatory frameworks.

The infrastructure for electronic payments is still underdeveloped, and most Iraqis continue to convert their digitally paid salaries into physical cash—reinforcing the long-standing “cash-is-king” mindset that continues to stall the country’s financial modernization.