In Iraq, years of economic and political instability have created an environment of mistrust that is leading many to avoid depositing their money in banks. The preference is to store cash at home. This tendency has undermined Iraq’s ability to develop its banking system, which is already hamstrung by insufficient legal and regulatory frameworks and the influence of the country’s oil rentier model.
But even though cash remains king in Iraq, some people are looking beyond the traditional banking system for opportunities in digital banking. They argue that this will expand the Iraqi public’s access to financial services and aid economic development.
Cash remains king
Iraq is home to seven government banks, over 50 local private banks, some 40 commercial banks, and more than a dozen foreign private banks. The majority of these actors rely heavily on the Central Bank of Iraq’s (CBI) foreign currency sales to secure a profitable balance sheet, rather than traditional investments. Corruption is also a major concern. Banks have been accused of helping to smuggle major sums out of the country since the 2003 US-led invasion.
Mistrust of banks—including government-owned banks—extends to state employees. 51-year-old Mus’ab Abdullah, who works at the Ministry of Oil, told Amwaj.media that “the thought of depositing money in banks is very worrisome.” Abdullah flat out declared, “I prefer hoarding cash at home.”
The scale of the problem should not be underestimated. Speaking on condition of anonymity, an official at a state-owned bank estimated that of the approximately 76T IQD (58.46B USD) in cash circulating in Iraq, only about one-fifth is deposited in banks. Hoarding of savings at home presents a risk since paper currency could be damaged, lost, or stolen.
Iraqi economist Haidar Al-Shaheen agrees that keeping cash at home stems from a lack of trust in the country’s banking system, describing it as underdeveloped compared to neighboring countries. For example, Iraqi banks do not allow depositors to withdraw their funds all at once, instead forcing them to withdraw smaller amounts in installments. There have also been documented incidents where bank owners or criminals have stolen depositors’ money and fled the country.
Local banks are “not able to work with Iraqis in establishing an economic infrastructure due to the poor banking system and [are] not fulfilling their commitments towards clients,” Shaheen charged, lamenting that “Iraq still lacks a legal act that guarantees deposits in banks.”
The government should develop a plan to develop the banking sector and implement reforms in coordination with a campaign to educate the public about the benefits of depositing their money, argued Ali Da’doush, an economist and instructor at the University of Baghdad.
“A good environment to encourage investment ought to be created and insurance for the funds ought to be put in place by adopting laws that protect investors, especially local investors,” Da’doush told Amwaj.media. “Services, such as tax exemptions and discounts, or the provision of protection and security to investors” would contribute to combating cash hoarding, he added.
This would still leave Iraqis standing in line at the bank waiting to deposit their money, a practice that much of the world has left behind.
Prospects for the rise of digital banking
Some economists and banking experts hope that Iraq will think bigger and take steps towards establishing a vibrant digital banking system. They argue that this would provide consumers with better access to tools like e-payments and improve service provision.
Unlike traditional banks, digital banks do not have a store-front presence but use the internet to serve clients through mobile phone applications and online platforms.
“Digital banks contribute to expanding people’s access to and provision of banking and finance services remotely, without any constraints,” said banking researcher Maysam Abd Al-Karim. Speaking to Amwaj.media, she argued that “the transition towards digital banks has become an urgent necessity that cannot be ignored. Moreover, the growing trend of consolidating financial industries with modern technologies will create new products that drastically change how banking and finance institutions work.”
Abd Al-Karim believes that a transition to digital banking will alter the behavior of both companies and consumers in a “holistic” way.
For banks, she explained, the changes will result in better customer services, reduced operating costs, and improved efficiency. It would also bring in new local, regional, and international clients. Once banks decide to offer new ranges of digital services, the banking researcher elaborated, the public will start using these new products.
“It also alters how enterprises offer their services and products to clients in a faster and more seamless manner that goes in line with customer behavior and answers their wants and needs. It allows clients to adapt to the new digital and technological trends,” Abd Al-Karim said.
However, these platforms are just in their infancy in Iraq. To aid their progress, the government must put in place new regulatory frameworks to govern digital banking.
Waiting for e-payments
In early 2021, the Central Bank of Iraq launched the Digital Banking Enrollment service. According to the CBI, the program is an “integrated digital financial system” that enhances independence from traditional systems. This will “turn Iraq into a country less dependent on cash, which enables the state to fight corruption, evasion, and bureaucracy,” a statement by the central bank added.
A necessary part of any digital banking system is the ability to make e-payments. At present, the most common form of such transfers experienced by Iraqis is actually the government’s use of smart cards to distribute public sector salaries. Nevertheless, most people end up withdrawing their salaries as cash, taking the money out of the digital banking system.
Banking expert Qais Al-Khafaji told Amwaj.media that most Iraqis use smartphones for communication, gaming, and social media. While consumers around the world also use their devices for financial transactions, there is a limited opportunity for Iraqis to follow suit because banks and retailers do not yet use e-payments.
In Khafaji’s view, adopting digital systems would encourage the public to make use of online financial services. He argued that the government could institute electronic payments for power and water bills and other basic utilities, or even offer tax exemptions to promote the adoption of electronic transfers.
Yet, this is easier said than done. Iraq’s banking and financial legislation is outdated and cannot accommodate modern digital systems.
Mazhar Muhammad Salih, a finance advisor to the Iraqi prime minister’s office, believes that the “rentier nature of the public and private banking system is one of the key hurdles hindering the development of a modern banking culture.”
For example, Banking Act No. 94/2004 outlines a number of “prohibited activities” that cause banks to shy away from making significant, long-term investments for fear of losing cash liquidity. This has encouraged consumers to instead use banking and money services sanctioned by Islamic law.
As a result, Salih told Amwaj.media that most banks have a smaller range of operations that they can offer to their customers compared with foreign counterparts. These include the CBI’s foreign currency sales window, issuing letters of credit, and settling salaries.
“Most of these instruments are directly connected to the government’s rentier activity and its direct and indirect impacts,” he said.
All in all, despite tantalizing possibilities on the digital horizon, Iraq’s banking system is likely to remain in the cash era for the foreseeable future.
https://amwaj.media/article/will-digital-banks-lure-out-cash-under-iraqi-mattresses
