VZCZCXRO0759
RR RUEHBC RUEHDA RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHGB #1728/01 1790815
ZNR UUUUU ZZH
R 280815Z JUN 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 3696
INFO RUCNRAQ/IRAQ COLLECTIVE
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BAGHDAD 001728 
 
SENSITIVE 
SIPDIS 
AIDAC 
 
DEPT PASS USTR 
STATE FOR NEA/I/ECON AND EEB/IFD/OMA 
 
E.O.12958: N/A 
TAGS: ECON EFIN EAID IZ
SUBJECT: IRAQ'S PRIVATE BANKS ACCELERATE LENDING 
 
¶1. SUMMARY: Iraq's private banks have dramatically accelerated 
lending since October 2008.  Their total lending is now growing at 
an annual nominal rate of 80%, twice as fast as one year ago. 
Increasing public confidence and a recent capital infusion in 
private banks appear to be the main forces behind this trend. 
However, private banks are still reluctant to lend beyond what they 
have in capital reserves because Iraq's banking system lacks the 
credit infrastructure to provide financial intermediation services. 
Iraq still lacks a money market, credit bureaus, deposit insurance, 
and a system for recording liens.  Left to their own devices, 
commercial banks will not create these institutions.  (Note: The 
state-owned banks do not figure into the analysis in this cable. 
End note.)  END SUMMARY. 
 
LENDING TAKES OFF 
----------------- 
 
¶2. Iraq's private banks have dramatically accelerated their lending 
since last fall.  According to Central Bank of Iraq (CBI) data, 
total lending by private banks grew at an annual nominal rate of 80% 
between October 2008 and March 2009.  This is more than twice as 
fast as that of the period from January through September 2008, when 
lending grew at an annualized rate of 38%.  As of March 2009, 
private banks held 27% of all loans in the banking system, worth 
approximately $1.18 billion.  Iraqi-owned private banks, which make 
up 82% of the private market, increased their lending by 49% since 
October 2008, which is particularly noteworthy.  In contrast, 
foreign-owned banks which hold the remaining 18% of the private 
market only increased their lending by 7%. 
 
INCREASED CONFIDENCE AND CAPITAL 
-------------------------------- 
 
¶3. Just like lending, deposits in private banks increased 
significantly.  Between January 2008 and March 2009, private banks' 
share of total deposits rose from 8% percent to 12% percent, or by 
$1.65 billion.  This indicates the Iraqi public is overcoming its 
mistrust of the private banks by opening new accounts and 
subsequently applying for new loans. 
 
¶4. Concurrent to this rise in confidence, private banks greatly 
increased their capital reserves during this same period.  From 
January 2008 through March 2009, private bank capital rose by 37%, 
or $368 million.  Because Iraq has no deposit insurance system, 
private banks in Iraq have prudently kept their loans to below 
capital levels, thereby minimizing risk for depositors.  These banks 
have an average return on equity of 44%, which primarily consists of 
earnings on fees and commissions rather than the interest margin. 
The impressive increase in capital during this period appears to 
underpin the growth in private bank lending. 
 
BUT BANKS ARE STILL CONSERVATIVE 
-------------------------------- 
 
¶5. As the dramatic lending increase chiefly came from banks' 
newfound capital during this period and not from new deposits, banks 
remain generally quite conservative in their lending policies.  In 
January 2008, the private bank ratio of loans to deposits was just 
32%, far below the typical ratio seen in a well developed banking 
system (over 90% in the United States).  In March 2009, the banks' 
loan-to-deposit ratio was 31%, effectively unchanged from the year 
before, despite the dramatic growth of lending during the same 
period.  Risk-adverse private banks are still not ready to provide 
the financial intermediation services needed to modernize Iraq's 
economy and fuel private-sector expansion. 
 
¶6. The banks' consistently low ratio of loans to deposits reflects 
that they have plenty of money to lend.  While many businesses in 
Qthat they have plenty of money to lend.  While many businesses in 
Iraq have excellent prospects for growth, it remains extremely 
difficult for bankers to differentiate between good and bad lending 
risks.  The banks also lack confidence in a given loan applicant 
repaying a loan.  Perceived risk, not the interest rate, is the 
fundamental impediment to lending.  The threadbare network of 
relationships between the banks and potentially eligible business 
borrowers is one of the most important constraints on the flow of 
credit within Iraq's economy. 
 
GAPS IN CREDIT INFRASTRUCTURE CONSTRAIN BANKS 
--------------------------------------------- 
 
¶7. Better business relationships are just one element of the remedy. 
 Equally urgent is building the credit infrastructure Iraq still 
lacks.  Six years into Iraq's post-Saddam history, the country still 
has no money market and therefore no public signals on the price of 
credit.  No credit bureau exists to give banks reliable information 
on the riskiness of individual borrowers.  Moreover, Iraq lacks a 
system for recording liens, leaving banks with few ways of securing 
 
BAGHDAD 00001728  002 OF 002 
 
 
claims against borrowers.  Banks have devised other ways to create 
security interests in collateral, but they are not practices used in 
modern bank lending.  To use real estate as security for a loan, a 
borrower must typically transfer formal ownership of the property to 
the bank.  But even this extreme practice leaves banks with 
significant risks because public records are incomplete or corrupted 
by Saddam-era illegal property transfers. 
 
COMMENT 
------- 
 
¶8. Although private banks are lending, the weak infrastructure for 
lending -- particularly related to collateral, a system for 
recording liens, credit ratings, and deposit insurance -- 
contributes to keeping them conservative.  The commercial banks 
cannot create these institutions.  These gaps in credit 
infrastructure are a problem not just for Iraqi entrepreneurs, but 
also impede foreign investment.  Foreign firms interested in doing 
business in Iraq may find that they cannot secure financing from 
their home-country banks because of the absence of legal means of 
mitigating risks inside Iraq.  END COMMENT. 
 
HILL