VZCZCXYZ0000
RR RUEHWEB

DE RUEHGB #3460/01 3041205
ZNR UUUUU ZZH
R 301205Z OCT 08
FM AMEMBASSY BAGHDAD
TO SECSTATE WASHDC 0158

UNCLAS BAGHDAD 003460 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV IZ
SUBJECT: PRT SALAH AD DIN:  PRIVATE BANKS DEVELOPING 
 
SENSITIVE BUT UNCLASSIFIED; PROTECT ACCORDINGLY. 
 
¶1. (U) This is a reporting cable from PRT Salah ad Din. 
 
¶2.  (SBU) Summary: It is difficult to imagine a provincial business 
or economic sector that has more fully exploited the vastly improved 
security environment than has the private-banking sector within 
Salah ad Din. The calculated exploitation of security gains by 
private bankers is evidenced by the fast pace of recent bank-office 
construction and openings as well as by the adoption of 
technologically-advanced financial platforms and products, and 
aggressive strategic plans for growth. Some of the strategic plans 
incorporate innovative solutions. A more complete and thorough 
mining of the opportunities available to the private-banking 
community awaits the development, at the national level, of monetary 
policies, institutions, regulations and laws that might collectively 
form the robust foundation of a consumer-finance industry. In the 
absence of these foundational supports, private banks will be 
stymied with respect to providing credit to individuals within Salah 
ad Din Province.  END SUMMARY. 
 
PRIVATE BANK INFRASTRUCTURE GROWTH 
---------------------------------- 
¶3.  (SBU) As recently as 3/31/08, Al Mosul Bank was the only private 
bank operating within Salah ad Din (SaD) province, from its single 
office in Tikrit. It was soon joined by upstart and now industry 
leader, Al Warka Bank, which opened branches in Tikrit and Bayji 
between 4/30/08 and 7/31/08.  More recently, additional private-bank 
capacity was provided by the August 2008 opening in Tikrit of a 
branch of Ashur Bank.  These three private banks will soon be joined 
in Salah ad Din by a fourth:  the Tigris and Euphrates Bank is 
expected to open its first provincial branch, in the Bayji Oil 
Refinery compound, by 12/15/08.  Prior to 4/30/08, there were no 
ATMs in place in the province. Currently, Al Warka Bank operates and 
owns all 5 functioning ATMs within Salah Ad Din. 
 
¶4.  (SBU) While the recent pace of private-bank infrastructure 
investment has been rapid, this is expected to accelerate over the 
course of the next six months.  This acceleration is primarily 
associated with the seemingly inexorable execution of Al Warka 
Bank's strategic plan.  This bank will open five new branches in 
Salah Ad Din over the next 3 months.  Two of them will open in or 
adjacent to large U.S. military installations.  The other three will 
be located in Samarra, Ad Dawr and Al Alam.  Another four Al Warka 
Bank offices are scheduled to begin operations before 3/31/09, 
serving Dujayl, Tuz, Balad and Sharqat.  The nine prospective Al 
Warka branches described above represent a significant portion of 
that bank's intermediate-term goal of locating 17 banking offices in 
Salah Ad Din province before end 2009.  If historical Al Warka 
ATM-to-branch ratios prevail, then it is reasonable to assume that 
these 17 new branches will engender an additional 42 ATMs throughout 
this province by late next year. 
 
PRIVATE BANK BUSINESS MODEL AND CULTURE 
--------------------------------------- 
 
¶5.  (SBU) Private banks in SaD rely almost exclusively on fee income 
for revenues and profits. They derive very little income from the 
net-interest margin spread typically associated with lending 
activity. The private-banking sector's emphasis on 
fee-income-sourced revenues underscores a deeply-rooted aversion to 
credit risk.  The private-bank sector's specialized, low-risk 
business model incorporates a focus strategy that depends heavily on 
its ability to efficiently move funds and to exact transactions fees 
for money-transfer services rendered.  Service charges are typically 
levied to transfer customer funds within a branch, between branches 
of the same bank or between offices of different banks. 
 
¶6.  (SBU) Private banks further augment their fee-based income 
streams by providing international wire transfer services as well as 
by issuing letters of credit. Al Warka Bank has leveraged its 
growing ATM network to generate fees associated with cash 
withdrawals and with the use of its proprietary debit and credit 
cards.  The VISA cards issued by Al Warka Bank do not incorporate 
credit risk:  they are essentially cash-debit cards.  Credit risk is 
eliminated by requiring the card holder to fully fund the assigned 
credit limit prior to card issuance.  The final major source of 
fee-based income for private banks is derived from their 
currency-exchange activities. Not all of the currency-exchange 
transactions (mostly US Dollar - Iraqi Dinar) are associated with 
the needs of commerce.  For example, soon after the April opening of 
Al Warka's Tikrit office, the resident manager noticed significant 
currency speculation among his customers. At that time, these 
customers made non-consensus bets in favor of a relative 
strengthening of the US Dollar.  (Since May, the American currency 
has appreciated roughly 20 percent versus the Euro.) 
 
¶7. (SBU) Private-sector banks have invested heavily in technology 
platforms that facilitate money transfers and that support their 
fee-based business model. There is reason to believe that this 
focused investment has created a permanent fee-income-based service 
niche for the private-bank sector within the broader provincial 
banking market. Accordingly, it may already be too late for 
state-owned banks to mount a serious competitive challenge to the 
dominance of private-sector banks in the area of fee-based revenue 
generation. 
 
¶8.  (SBU) The following facts provide broad support to the notion 
that private banks have committed heavily to their technology 
platforms.  All Al Warka Bank provincial branches are EFT capable 
and are computer linked in real time by satellite linkage to this 
financial institution's other 120 offices in Iraq as well as to the 
outside banking world.  Within two months, Ashur Bank's new Tikrit 
office will adopt the British Core-Bank technology platform, which 
will link the Tikrit office in real time with Ashur's other offices 
in Sulaymaniah, Syria, Jordan, Kuwait, Turkey and Egypt. In a 
similar vein, when the new office of the Tigris Euphrates Bank opens 
in Bayji, it will be integrated into that institution's modern 
technological base. Only Mosul bank, among operating private-sector 
banks in Salah ad Din, does not offer EFT or a modern technological 
platform. 
 
OBSTACLES CONFRONTING PRIVATE-BANK SECTOR GROWTH 
--------------------------------------------- --- 
 
¶9.  (SBU) Private-bank sector growth within Salah ad Din has 
accelerated over the course of the last six months despite 
formidable obstacles: 
 
(A) Obstacles to orderly branch expansion: 
 
- Limited access to land:  Only three of the six Al Warka branches 
slated to open over the next three months in SaD had their site 
locations procured in the conventional way; two sites were provided 
by American military installations, while a third was provided by 
the Samarra Pharmaceutical Complex. Similarly, the Tigris Euphrates 
Bank secured for its future Bayji branch a site provided by the 
Bayji Oil Refinery.  The difficulty in acquiring branch locations is 
rooted in the more general problem associated with securing clear 
title to real estate. 
 
- Shortage of skilled workers:  The skilled-labor shortage which 
slows the pace of private-sector, bank-office expansion may seem odd 
against a backdrop of bloated employment roles among state-owned 
banks. However, the skill-set of state-owned bank employees is not 
transferable to a fee-based business model that is leveraged on a 
relatively sophisticated technology platform.  This reality has 
prompted Al Warka Bank to train its staff for up to 6 weeks before 
scheduled branch openings.  Smaller private banks like Ashur Bank 
and the Tigris Euphrates Bank will staff new branches by 
transferring key personnel from operating offices to form the 
critical employee core of new offices. 
 
(B) Obstacles to normal credit extension:  At the Central Office 
level in Baghdad, corporate directives to extend credit to 
private-sector borrowers in the provinces are all but non-existent. 
This is in part because the Central Bank of Iraq (CBI) has 
throughout the year pursued a tight, anti-inflation monetary policy 
in accordance with the Stand by Arrangement (SBA) which the GOI 
signed with the IMF. Accordingly, up to 35 percent of a 
private-bank's liquid assets can be invested with the CBI at a high, 
risk-free rate that has not been lower than 16 percent year-to-date. 
The appeal of extending provincial credit is low, because there is 
little demand for loans at a 22-25 percent risk-adjusted rate.  At 
the grass-roots level, there is a lack of a broad-based and varied 
institutional framework in support of credit extensions: 
 
- There is no credit bureau that provides the credit histories of 
prospective borrowers. 
 
- The insurance sector is not sufficiently developed to provide 
lenders the policies that can mitigate the risk attendant to the 
theft or destruction of tangible collateral. 
 
- There is no equivalent of the standard American Department of 
Motor Vehicles which can register/attach/ release and/or administer 
liens on vehicle titles. Accordingly, private banks do not believe 
that motor-vehicle titles have any intrinsic value in the 
credit-extension calculation. 
 
- Beyond the absence of important institutional pillars in support 
of loan generation, certain cultural conventions also impede credit 
growth: tribal customs militating against repossession of collateral 
are so well entrenched that loan officers rightly fear for their 
personal security in the event of collateral repossession. It goes 
without saying that there is no such thing as a "repo man" in this 
province. 
 
PRIVATE-BANK MANAGEMENT MINDSET AND POINT OF VIEW 
--------------------------------------------- ---- 
 
¶10.  (SBU) As a general rule, managers of the various private banks 
do not view each other as competitive threats. For example, the 
manager of Al Warka Bank's Tikrit office provided help and counsel 
to his nephew, the newly-designated manager of Ashur Bank, when the 
latter was mired in the logistics of establishing and opening that 
bank's Tikrit office.  Similarly, private-sector bankers generally 
do not view the established state-owned banks as adversaries. For 
instance, during a recent cash-shortage at state-owned Al Rafidain 
Bank, Al Warka Bank's Tikrit manager was proud to have helped his 
counterparts at the state-owned institution by cashing the checks of 
pensioners who could not access cash from the then liquidity-short 
Al Rafidain Bank. There also appears to a deeply-seated sense of 
patriotism and community among private-bank managers. For example, 
during a two-hour interview with Mosul Bank's Tikrit office manager, 
PRT staff were continually praised for their efforts "to help the 
Iraqi people." In a similar vein, Ashur Bank's young manager 
lamented the fact that he was not positioned to provide financing 
for all the motor vehicles "that the people wanted." 
 
¶11.  (SBU) Like much of Iraqi society, the private-banking sector 
appears to have a strong predisposition to accept, without 
significant challenge, the directives that emanate from central 
offices.  For instance, the manager of the Tikrit office of Al Warka 
took no action to leverage a national advertising campaign conducted 
by headquarters, and seemed surprised at the idea - suggesting that 
even local initiative in direct support of a central program might 
be viewed as disloyal. 
 
CROCKER