VZCZCXRO9843
RR RUEHBC RUEHDA RUEHDE RUEHDH RUEHKUK
DE RUEHIHL #0045/01 1771041
ZNR UUUUU ZZH
R 261041Z JUN 09
FM REO HILLAH
TO RUEHC/SECSTATE WASHDC 1202
INFO RUCNRAQ/IRAQ COLLECTIVE
RUEHIHL/REO HILLAH 1275

UNCLAS SECTION 01 OF 04 HILLAH 000045 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON PGOV EINV IZ
SUBJECT: BABIL PRT: BABIL'S BANKS STRUGGLE TO FOSTER PRIVATE SECTOR 
DEVELOPMENT 
 
HILLAH 00000045  001.2 OF 004 
 
 
¶1. (SBU) SUMMARY:  Babil's political, academic, and business 
leaders have repeatedly identified access to capital and the 
functionality of the banking sector as the top impediment to 
greater private sector development in the province.  While the 
number of private sector banks in Babil has increased and the 
ease of financial transactions has improved over the last few 
years, most banks struggle to fill the primary role of financial 
intermediaries: to attract deposits and lend funds to 
"credit-worthy" enterprises.  Many Babil residents polled by the 
PRT avoid putting their savings into local banks because of poor 
customer service, fears of publicizing their wealth, the 
proliferation of counterfeit money, and religious 
considerations.  Despite the widespread utilization of 
guarantees by the USAID-funded Iraqi Company for Bank 
Guarantees, private banks' archaic collateral requirements 
prohibit greater lending.  State-run banks offer less hope. 
Those that provide loans are rife with corruption, while others 
solely serve the role of a government cashier.  The PRT has 
launched a new program to develop linkages between banks and 
business incubators, such as the Small Business Development 
Centers in north and south Babil.  Still, national level 
constraints such as land titling and the classification of 
microfinance institutions as non-governmental organizations 
limit greater lending to Babil's credit-thirsty private sector. 
END SUMMARY. 
 
 
 
FEEBLE LENDING 
 
-------------- 
 
 
 
¶2. (SBU) State-run banks in Babil serve less as banks in the 
traditional sense than Sovietesque organs of the state that pay 
out government salaries and subsidize niche sectors.  Iraq's two 
largest banks, Rafidain and Rashid, maintain branches throughout 
the province.  They offer few loans other than to state-owned 
enterprises, but rather serve as cashiers for the state by 
paying government salaries and receiving payments to government 
entities, such as permits and fines.  Rafidain and Rashid, 
because they are involved only minimally lending, do not have 
widespread reputations for corruption, although Babil customers 
tell us that some baksheesh can facilitate what otherwise would 
be protracted routine transactions.  The other state-run banks 
operating in the province are widely believed to be rife with 
corruption.  These include the Mortgage Bank, Industry Bank, and 
the Agriculture Bank.  A group of Najaf farmers recently 
described to the PRT the manifold layers of "hidden official 
fees" within the Agriculture Bank.  Customers must pay off 
numerous officials at all stages of the lending process; these 
fees can add up to as much as 20 percent of the value of the 
nominally zero-percent loan.  The Mortgage Bank has a widespread 
reputation of being the most corrupt bank in the province, 
providing loans only to those with personal connections to its 
employees. 
 
 
 
¶3. (SBU) The number of private banks operating in the province 
has jumped from two in 2003 to nine today, not including 
microcredit organizations such as Izdaharona and CHF 
International.  Consistent with a 2007 USAID/Izdahar analysis of 
the national banking sector, Babil's private banks appear to 
maintain very low loan/deposit ratios.  The director of the Bank 
of Baghdad, which comes closest to resembling a modern bank, 
told us that loans account for about 80 percent of business. 
This appears, however, to be the outlier.  The office manager of 
Economy Bank said that 95 percent of its business is 
facilitating government-funded projects, mainly in the 
construction sector.  (Note: This may be explained by the fact 
that state-run Rafidain Bank is a 60 percent stakeholder in 
Economy.  End Note.)  The head of the Beirut-based Iraq Middle 
East Investment Bank touted the 4.5 billion Iraqi dinar (3.8 
million USD) of lending it had provided since opening its Hillah 
branch in the last four months, but conceded that lending only 
accounted for about 20 percent of its business.  Like other 
private sector banks, the director said its core operations were 
foreign exchange transactions; wire transfers; and current 
(checking) and savings accounts. 
 
 
 
¶4. (SBU) Microcredit organizations such as CHF International and 
Izdaharona provide some microcredit lending to small 
enterprises.  From our outreach to the business community and 
Babil, it appears CHF's loan programs are better known than 
those of Izdaharona and that "word of mouth" marketing is 
responsible for public awareness of the institutions' lending 
programs.  As of early 2009, CHF's portfolio in Babil was valued 
 
HILLAH 00000045  002.2 OF 004 
 
 
at USD 3.5 million, made up of around 2000 active clients. 
Terms range from one to two years with an effective interest 
rate of 25 percent.  Loans are generally guaranteed by one or 
two government employees and sometimes by collateral.  Repayment 
rates are 99 percent.  The local head of CHF's implementing 
partner told us CHF has used both the public Rafidain Bank and 
the private Al-Warka to process its loans, but has been 
generally unsatisfied with the Rafidain's untimely processing of 
statements. 
 
 
 
ARCHAIC COLLATERAL REQUIREMENTS 
 
------------------------------- 
 
 
 
¶5. (SBU) Despite the widespread utilization of guarantees by the 
USAID-funded Iraqi Company for Bank Guarantees (ICBG), which 
numerous banks throughout the province touted, archaic 
collateral requirements inhibit more robust lending.  Babil's 
business community complains that few potential borrowers have 
the necessary real estate collateral to secure a loan.  The 
government still owns 80 percent of the province's agricultural 
land, and much of the province's commercial real estate stock 
consists of long-term building leases to businesses on land 
owned by the government; such leases cannot be used as 
collateral for loans.  Although ICBG guarantees 75 percent of 
the value of all its loans, Bank of Baghdad also secures "most" 
of its loans with gold.  To demonstrate, Bank of Baghdad's 
manager showed us a burlap sack of gold jewelry recently given 
to the bank to secure a loan (for approximately 75 percent of 
the value of the gold, measured by weight).  Al-Warka Bank 
secures all of its loans by taking possession of deeded real 
estate.  Iraq Middle East Investment Bank uses ICBG to secure 
small loans, for which there must be two federal government 
employee cosigners; for large loans, the bank requires real 
estate as collateral.  The cosignatory requirement is intended 
as a means of recouping funds -- by docking the salary of the 
government employee -- should the loan not be repaid.  In 
practice, however, numerous private bankers told us, this is 
almost never done. 
 
 
 
FINANCIAL SERVICES EVOLVE... 
 
---------------------------- 
 
 
 
¶6. (SBU) Private sector banks offer an array of financial 
services and are showing increased technological sophistication. 
 Wire transfers, and letters of credit are widely available and 
the ease of conducting these transactions has greatly improved 
over the last few years.  Private banks in Hillah offer foreign 
exchange transactions, pending the availability of funds. 
During a recent visit to the Economy Bank, however, the bank 
manager told us that the bank had not had any US dollars in two 
months, which he claimed was due to security along the route 
from Hillah to Baghdad.  Some private banks, including Bank of 
Baghdad and al-Warka Bank, have ATMs, although there are no 
secure networks that might allow an ATM card at one bank to be 
used at a rival institution.  Bank of Baghdad recently launched 
a prepaid Visa card service that acts like a gift card.  While 
there are no outlets in Hillah that accept Visa, Bank of Baghdad 
told us they launched the product to tap into Iraqi demand for 
e-commerce.  Despite this range of technological innovations, 
however, many of these products are underutilized because of the 
requirement that customers be deposit holders.  A customer 
hoping to send a wire transfer, therefore, must already hold a 
current account at the bank. 
 
 
 
... BUT CUSTOMER CONFIDENCE LAGS 
 
-------------------------------- 
 
 
 
¶7. (SBU) Despite technological advances, customer confidence in 
the banking sector has lagged.  Nowhere do Babil's financial 
institutions showcase their statist legacy more than in the 
level of their customer service.  While Bank of Baghdad has 
automated customer tracking systems, other institutions rely on 
paper-based transactions.  Automated interbank systems are 
beginning to come on line, but in the meantime checks can take 
weeks to clear.  Recently, Bank of Baghdad, after opening a few 
hours late because of a power shortage, finally allowed the 
 
HILLAH 00000045  003.2 OF 004 
 
 
cluster of customers waiting outside the door in the mid-morning 
heat to enter the bank only after they had queued up 
alphabetically by last name.  Banks also face a great deal of 
micromanagement from their headquarters, which causes delays in 
loan processing.  Economy Bank only rarely has the discretion to 
award loans (requiring Baghdad's approval first), whereas 
al-Warka Bank said all decisions must come from its chairman in 
Amman.  When banking proves to be such a hassle, it is little 
surprise many choose to keep their money in their mattress or in 
gold.  Given the routine delays in accessing funds when the 
security situation is relatively good, many Babil residents have 
also voiced fear that their deposits might be inaccessible 
should violence spike, whether due to bank looting or a bank 
run. 
 
 
 
¶8. (SBU) Additionally, fears of publicizing one's wealth, the 
proliferation of counterfeit cash, and religious concerns about 
usury undercut demand for use of banking services.  Babil 
businessmen have told us that they fear depositing large sums of 
money in any bank lest their wealth be known, even by bank 
employees.  By some estimates, as much as 20 percent of the cash 
in circulation in Babil is counterfeit.  Customers fear bring 
their money to the bank, where counterfeit will be immediately 
seized and destroyed with no compensation to the customer; there 
is instead a better chance of being able to pass along fake 
currency, even if unwittingly acquired, in the marketplace. 
Finally, with only one Islamic finance institution operating in 
the province (the newly established Elaf Bank), the more 
religious elements in Babil tend to eschew financial 
institutions altogether. 
 
 
 
PRT BABIL'S SME-BANK LINKAGE PROGRAM 
 
------------------------------------ 
 
 
 
¶9. (SBU) Babil PRT's first business environment conference in 
February (reftel) revealed the mutual frustration felt by 
capital-laden banks and the Babil business community.  During 
the conference, four independent working groups representing a 
cross section of the Babil political, academic, and business 
elite identified access to capital as the top constraint to 
greater private sector development in the province.  In 
response, Babil PRT's economic development strategy reflects the 
imperative that we move out of the business of doling out grants 
and focus our efforts on building sustainable financial 
institutions.  We recently launched an initiative to facilitate 
greater linkages between financial institutions and potential 
borrowers through Babil's Small Business Development Centers. 
The goal of the linkage program is to better inform the business 
community, in particular SMEs, on each private bank's criteria 
for approving a business loan.  Since the terms and conditions, 
interest rates, and collateral requirements differ from one bank 
to another, an SME ought to be matched with the most appropriate 
loan portfolio as communicated through its local business 
association.  In order for this model to be successful, the 
business associations operating in Hillah need improved 
relations with the banks so they remain up-to-date on the loan 
programs offered.  This model builds bank-SME trust and 
intercommunication, increases the rate of SME loan approvals by 
training prospective SME borrowers on "bankability," and builds 
business sustainability with less reliance on business grants 
from foreign donors. 
 
 
 
COMMENT: NATIONAL LEVEL CONSTRAINTS ENDURE 
 
------------------------------------------ 
 
 
 
¶10. (SBU) Policy constraints at the national level undercut the 
best of efforts to bring together local financial institutions 
and potential borrowers at the provincial level.  The fact that 
real estate collateral is almost never seized and government 
salaries of loan cosigners never docked for nonperforming loans 
underscores the extreme institutional risk aversion to lending 
to anyone but those already deemed "rich"; doing so denies 
credit to scores of other potentially responsible borrowers. 
Development of a universally recognized credit rating and 
information system would obviate the need for archaic gold-based 
collateral requirements, civil servant cosignatories, and 
stringent real estate capital requirements.  It would also 
encourage lending based on technical loan criteria rather than 
personal connections.  Policy reforms that address Iraq's 
 
HILLAH 00000045  004.2 OF 004 
 
 
antiquated zoning and land titling system would expand the pool 
of potential borrowers.  The lack of deposit insurance makes 
banks further risk averse about lending out customers' deposits. 
 Finally, the current classification of microfinance 
organizations such as CHF and Izdaharona as non-governmental 
organizations, subjects them to overly burdensome oversight by 
the Prime Minister's office rather than an Iraqi entity well 
versed in financial regulation. 
HEATH