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Iraq banks its future on Qi Card

Financial technology, or Fintech, is rewriting the rulebook of the financial sector by streamlining traditional methods through the adoption of technologies such as smartphones for mobile banking and the use of artifical intelligence to provide investment, insurance and lending. 

In the developed world, it is transforming the competitive landscape for the benefit of the consumer, through lower costs and greater choice, while in the developing world it is creating the opportunity for people to enter into the world of financial services, bypassing severe infrastructure obstacles, and in the process allowing the unbanked to carry out financial interactions.

In Iraq, the introduction of these services has been made possible due to the rapid adoption since 2003 of mobile phones, followed by the internet, although there has been a slight dip in mobile phone penetration since 2014 due to the occupation of a third of the country by the Islamic State group.

The growth of mobile phone sales has been accompanied by a steady lowering of access costs and a rise in internet speeds. Both are essential requirements for Fintech to be ubiquitous.

In Kenya and China, the uptake of mobile phones has enabled people lacking access to a bank to use ‘mobile wallets’ for money transfers over the internet. This service has been provided by M-Pesa in Kenya and by the duopoly of Alipay/WeChat Pay in China. In Iraq, the way forward has been paved by the adoption of Qi Card, the product of a home-grown company, International Smart Card (ISC).

By winning the contract to distribute government salaries, pensions and social security payments, ISC was able to enrol about seven million people who use its biometric Qi Card for the receipt of funds at state banks, selected private banks or ISC’s network of 14,000 agents. 

This has replaced the previous cash-based process that was cumbersome and prone to abuse. 

Of these recipients, five million are active users of Qi Card. ISC has almost completed the enrolment of civilian government employees but is yet to enrol those in the armed services, although it begun signing up members of the Popular Mobilization Forces.

Qi Card, through innovative use of biometrics for the registration and identification of customers, leapfrogged the outdated chip and PIN structure. It has also provided an effective solution to Iraq’s identity fraud plague.

While Qi Card comes with both an online and a mobile app for viewing account statements and balances, it is not a mobile wallet or mobile money provider. 

Two companies, AsiaCell Hawala and Zain Cash, were licensed as mobile phone money providers in late 2015 and early 2016 and are regulated by the Central Bank of Iraq. While both are much smaller than Qi Card, reaching only about 5 to 10 per cent of mobile phone users, all three operate in similar ways and dwarf all other players in their respective markets. They also provide potential for the future inter-operability of mobile money across platforms.

As in Africa, the first step towards financial inclusion is the use of the technology to receive salary or benefits in cash. The simplest form is to use the ‘cash out’ feature, which involves taking all the funds in cash and ignoring the card or mobile wallet until the next cycle. 

The next step involves the use of a biometric card or mobile wallet as an e-payment tool for a wider variety of goods or services. But this can come up against cultural resistance and a major challenge is winning the confidence of those who provide goods and services. Just as the US dollar bill carries the phrase ‘In God We Trust’, small businesses live by the mantra ‘Everybody Else Pays In Cash’.

One way to overcome such doubts is to significantly increase the number of outlets for the use of the card or the mobile wallet. While online shopping is growing in Iraq through local e-commerce outlets such as Miswag, an online shopping platform that sells a range of products from clothing to electronics, it still is more common to pay in cash on delivery for goods bought online. 

The Iraqi government, as it did when it started paying salaries and benefits through Qi Card, can play a leading role in the uptake of cashless transactions if it allows electronic payment of utility bills and fees for government services that arise in almost every transaction in a state-dominated economy. But rather than create market-based incentives for cheaper cashless transactions, the state’s bureaucracy seems to have opted to impose adoption only through coercion. A more insidious obstacle is the transparency that comes with the adoption of Fintech. 

Each transaction leaves a paper trail and this meets resistance from the country’s corrosive culture of corruption and tax avoidance. Corruption is a prime beneficiary of a cash-based system. Businesses, whether legal or those operating in the shadow economy, would benefit from the lower operating costs of Fintech, yet it will reveal their true sales and expose them to higher taxes and the vagaries of rent extraction that arose in the post-2003 decentralized corruption.

Despite the many challenges, Iraq has come a long way towards financial inclusion over the past few turbulent years – as seen from the World Bank 2017 Global Findex Database. The number of Iraqis with bank accounts grew from 11 per cent in 2014 to 20.3 per cent in 2017. And this growth took place during the financial contraction of 2014-2017 in which many banks went through a crisis of confidence. The fact that 19.1 per cent of the population has received a digital transfer is promising, especially in comparison to the region’s uptake. 

Perhaps more importantly, Qi Card’s innovative credit evaluation and approval process as provided by the country’s largest state bank, Rafidain, has led to the issuing more than $2 billion loans in 2018, its first year of operation. The loans ranged from about 1 million to 10 million of Iraqi dinars ($840-$8,400), with rates of about 9 per cent, payable over 60 months, of which more than 60 per cent went to start-up businesses. 

The figure of $2 billion, while small in absolute terms, compares favourably with the $17 billion in total credit paid out to Iraq’s private sector in 2018 as measured by the Central Bank. It shows the potential for loan growth once the country’s maddeningly archaic and costly credit evaluation and approval process is transformed by Fintech. Source