The Iraqi banking sector has witnessed remarkable growth in recent years, reflecting significant efforts to modernize the financial system and enhance economic stability. This growth is evidence of the progress Iraq has made in improving the financial infrastructure and increasing confidence in the banking system, which has contributed to a significant increase in bank assets. The latest analysis of the development of Iraqi banks’ assets over five years shows a discrepancy in growth rates between banks that have correspondent accounts with the United States and those that focus on local or regional transactions, as well as banks that carry out external financial transactions.
In this context, this analysis examines the factors driving this growth and the challenges that may affect it, in addition to reviewing the potential economic opportunities that may arise from this banking expansion, as mentioned in recent approved economic reports
Economic Analysis of the Development of Iraqi Banks’ Assets
1. Strong Growth in Banks with Accounts in US Correspondent
Banks Banks with accounts in US correspondent banks have seen significant growth, with their assets increasing by 240.4% from 2019 to 2024. This category now represents 34.5% of total bank assets in 2024.
This growth reflects the increasing integration of Iraqi banks into the global financial system, particularly with US financial institutions. This may be a result of improved regulations, increased confidence in Iraqi banking operations, or increased demand for international transactions facilitated by correspondent banking relationships.
Potential Economic Impact: Enhanced international banking relationships can support trade and investment, making it easier for Iraqi companies to conduct cross-border transactions. This may boost foreign direct investment (FDI) and stimulate economic diversification by facilitating access to foreign capital and goods.
2 Moderate growth in banks without US correspondent accounts
Banks without US correspondent accounts have seen steady growth of 78.7% over six years, with an annual growth rate of 7.1%.
This steady growth reflects these banks’ reliance on local or regional clients rather than international partnerships. These banks may serve sectors of the economy that are more focused on the local or regional market.
Potential economic impact: Although these banks are significant contributors to the financial system, their limited international exposure may limit their growth potential and access to foreign capital. However, they still play a vital role in supporting local businesses and consumers, promoting financial inclusion within Iraq.
Growth in offshore banks slowed
as offshore banks saw a significant increase in assets from 2019 to 2023, but declined in 2024 with a negative annual growth rate (-11.8%).
Impacts: The sudden slowdown in growth in these banks could indicate regulatory challenges, geopolitical changes, or a decline in offshore transactions. It could also reflect a cautious approach to offshore transactions in the face of international sanctions or currency restrictions.
Potential economic impact: The decline in offshore transactions could impact Iraq’s financial connectivity to the global market, potentially affecting sectors that rely on imports or exports. If this trend continues, it could signal a tightening of capital flows, which could limit access to international markets and hamper economic growth.
Overall growth in the Iraqi banking sector
: The total assets of Iraqi banks doubled from IQD 15.6 trillion in 2019 to IQD 31.8 trillion in 2024, representing a growth of 104.6% over six years, and an annual growth rate of 9.6%.
The overall growth reflects increased financial activity, and may be driven by economic reforms, government support, and efforts to modernize the banking sector. This growth is in line with the broader economic goals of diversifying Iraq’s economy and reducing its dependence on oil revenues.
One of the economic impacts of a stronger banking sector is that it can provide critical support to economic development by enhancing the availability of credit to businesses and consumers. This growth also reflects increased public confidence in the banking system, which is essential for long-term economic stability. Furthermore, increased banking assets could support Iraq’s ambitions to attract foreign investment and strengthen its non-oil sectors.
Key Economic Considerations and Future Outlook
1. Need for Regulatory and Infrastructure Support: To sustain this growth, continued improvement in regulatory frameworks, information security, and anti-money laundering measures is required. Strengthening regulations and transparency will help boost confidence among international partners and attract more foreign investment.
2. Strengthen External Relationships for Diversification: The significant growth in banks with US banking relationships suggests that expanding international partnerships could benefit the sector. Strengthening relationships with banks in other regions, such as Europe or Asia, could reduce reliance on a single market and diversify economic risks.
3. Potential Risks of Geopolitical Tensions: Iraq’s banking sector remains vulnerable to regional unrest and international sanctions. A proactive approach to diversifying external partnerships and reducing exposure to high-risk areas could help mitigate these risks.
4. Focus on Financial Inclusion: While growth has been significant, ensuring that banking services reach all segments of society, including underserved rural areas, is essential. Financial inclusion initiatives can support small businesses, which are essential for job creation and economic diversification.
5. Addressing the decline in offshore banks: The negative growth trend in offshore banks in 2024 should be investigated to understand the underlying causes. Policy adjustments or strategic shifts may be needed to effectively reintegrate these banks into the offshore financial network.
In conclusion, the growth in Iraqi banks’ assets reflects a positive trend for its financial sector, supporting broader economic goals. To maintain this momentum, Iraq must strike a balance between strengthening international relations and promoting domestic financial inclusion. By navigating geopolitical challenges and building a resilient financial system, the banking sector can play a pivotal role in Iraq’s path towards a diversified and stable economy.
