VZCZCXRO5723
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #2489/01 2201555
ZNR UUUUU ZZH
P 071555Z AUG 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 8729
INFO RUCNRAQ/IRAQ COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 BAGHDAD 002489 
 
SBU 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD IZ
SUBJECT: GOI LOAN PROGRAM FOR PRIVATE SECTOR GROWTH FACES 
GROWING PAINS 
 
SUMMARY 
------- 
 
¶1. (SBU) The Ministry of Industry and Minerals, which manages 
over 60 of Iraq's state-owned enterprises, is struggling to 
administer its 408 million USD loan program, targeting 
existing small to medium-sized enterprises.  Loan 
applications are generated on the provincial level, reviewed 
and approved in Baghdad, and returned to local branches of 
the Rasheed Bank, which then distributes the loans.  Rasheed 
Bank has paid out very few of the loans MIMS has approved, 
however, and several problems exist with the program's 
application and distribution mechanisms.  End Summary. 
 
FROM SOES TO SMES: NEW ROLE FOR INDUSTRY MINISTRY 
--------------------------------------------- ---- 
 
¶2. (U) The Ministry of Industry and Minerals (MIM), which 
manages over 60 of Iraq's state-owned enterprises (SOEs), 
administers a 408 million USD loan program, targeting 
existing small to medium-sized enterprises (SMEs).  The loans 
are interest rate-free for the borrower, with MIM paying 4 
percent interest to the state-owned Rahseed Bank, which 
disburses the loans.  The loans feature a one-year grace 
period and four-year payback term.  At its inception, the 
program offered 12,000 - 24,000 USD individual loans. 
However MIM has since raised the amount to 25,000 - 50,000 
USD.  MIM provides 40 million USD for SMEs in Baghdad, 
Ninewa, and Basra provinces and 24 million USD each for all 
other provinces, excluding those in the KRG, which are 
ineligible to participate in the program. 
 
APPROVAL AND DISBURSEMENT PROCESS 
--------------------------------- 
 
¶3. (SBU) Loan applications are generated on the provincial 
level, reviewed and approved in Baghdad, and returned to 
local branches of the Rasheed Bank.  MIM representatives in 
provincial capitals provide and receive loan applications. 
Once an applicant submits the request, MIM provincial 
representatives conduct due diligence on the businesses, then 
forward on the application and any supplemental information 
they collect to MIM in Baghdad.  A technical study group then 
reviews the application for accuracy and cross-checks 
information in a MIM database of registered companies.  The 
application then goes to a four person approval committee, 
consisting of representatives from the Iraqi Industrial 
Union, the legal and internal affairs departments of MIM, and 
the MIM Director General that oversees the program.  Upon 
approval, the committee sends an order to the Rasheed Bank 
head office in Baghdad, which then instructs its local 
Rasheed branch of the approval.  MIM also sends a copy of the 
approval directly to the applicant.  Applicants must visit 
the local Rasheed branch to post collateral and designate a 
guarantor to co-sign for the loan.  According to Rasheed 
Bank, the loans are funded from the liquidity of the bank and 
are not subsidized by MIM (Note: MIM tells us the loans come 
directly from the Ministry of Finance.  End Note). 
 
LIMITED SUCCESS TO DATE 
----------------------- 
 
¶4. (SBU) Rasheed Bank has paid out very few of the loans MIM 
has approved.  As of June 17, 5,421 loan applications have 
been submitted, with 3,190 approved and only 155 paid, 
totaling 1.6 million USD.  Abbas Mhan, the MIM Director 
General for the loan program, blames Rasheed Bank's high 
collateral requirements for the lack of loans being paid. 
"Rasheed is much too strict," he stated.  In Anbar, for 
example, MIM approved 239 projects out of 700, as of June. 
PRT Anbar business development advisers report they have not 
yet heard of a single loan disbursement in the province. 
 
COMMENT 
------- 
 
¶5. (SBU) The MIM loan program is symbolic in that it 
demonstrates the commitment of the ministry and the 
government to private sector growth and aims to fill a 
significant gap in the credit market.  That said, the 
application and disbursement process betrays several 
deficiencies.  For example, it remains unclear how 
effectively MIM determines an "existing business."  At the 
same time, PRTs report that MIM business registries are often 
outdated and do not offer a realistic option for determining 
a business' viability.  In addition, there appears to be no 
follow-up procedure to ensure the borrowers are using the 
capital for legitimate commercial purposes, and it is unclear 
 
BAGHDAD 00002489  002 OF 002 
 
 
about how Rasheed collects payments or handles defaults.  On 
the loan's limited disbursement rate, the Rasheed Bank funds 
and services the loans, which has implications for its 
balance sheet.  A possible way to mitigate this might be for 
MIM to buy the loans from the bank, thereby minimizing the 
bank's reluctance to extend these credits and hold them on 
the books.  Absent a correction of these problems, the MIM 
loan program effectively constitutes a hard-to-acquire grant, 
reflecting the conflict between GOI intent to stimulate 
private sector growth and the state banks' inability to 
execute a subsidized lending program.  End Comment. 
CROCKER