VZCZCXRO7853
RR RUEHBC RUEHDA RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHGB #2514 2601046
ZNR UUUUU ZZH
R 171046Z SEP 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 4751
INFO RUCNRAQ/IRAQ COLLECTIVE
RHEHNSC/NSC WASHDC

UNCLAS BAGHDAD 002514 
 
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: PRIVATE BANKS' LOANS SURPASS CAPITAL 
 
REF: BAGHDAD 1728 
 
¶1. (U) SUMMARY: For the first time since 1964, Iraqi private banks' 
total lending has surpassed their total capital.  The relationship 
between banks and their customers is maturing, with both sides 
gaining confidence in the financial system.  If private bank lending 
and deposits continue to grow at current rates, much of the cash 
held by Iraq's "mattress millionaires" may find its way into the 
economy and help spur private sector development.  END SUMMARY. 
 
LENDING SURPASSES CAPITAL 
------------------------- 
 
¶2. (U) Iraqi private banks hit a major milestone in June 2009, when 
total loans of IQD 1.71 trillion ($1.46 billion) surpassed bank 
capital, IQD 1.64 trillion ($1.40 billion), for the first time since 
¶1964.  (Note:  Capital refers to shareholder investments in the 
banks versus depositors' accounts at the bank. End note.)  Capital 
grew 28 percent while lending grew an impressive 83 percent over the 
past twelve months.  Private bank lending had accelerated previously 
(reftel), but banks had been reluctant to lend beyond their capital 
reserves given Iraq's lack of a money market, credit bureaus, 
deposit insurance, and a system for recording liens. 
 
MATTRESS MILLIONAIRES STARTING TO PUT MONEY IN BANK 
--------------------------------------------- ------ 
 
¶3. (U) Consumers are gaining confidence in the banking system, and 
especially in private competitors to the large state-owned banks. 
The rapid growth in bank deposits over the last year is a marked 
change from the centuries-old tradition of keeping currency at home. 
 The infusion of this cash into the larger economy through bank 
deposits will allow for more formal financial intermediation. 
 
BANKS BECOMING SLIGHTLY LESS CONSERVATIVE 
----------------------------------------- 
 
¶4. (U) The growth in private bank lending indicates a more mature 
relationship between banks and their customers, especially as banks 
gather more information about their depositors' income and spending 
habits.  That said, bank managers still demand excessive collateral, 
often up to five times the value of the loan.  Banks sometimes 
demand less if the collateral is possessory (e.g., depositing gold 
in the bank's safe until the loan is repaid). 
 
COMMENT 
------- 
 
¶5. Although Iraqi private banks are still largely risk averse, they 
are starting to conduct financial intermediation in Iraq (i.e., 
lending out a portion of consumer deposits).  Iraqi private banks' 
aggregate loan-to-deposit ratio has risen from 31 percent in March 
2009 to 36.6 percent in June.  (Note: In an emerging market economy, 
a loan-to-deposit ratio of 50 percent would provide a healthy 
balance of financial intermediation against risk mitigation for 
depositors.  End Note.)  As private banks develop a greater appetite 
for risk, they should develop the capacity for financial 
intermediation services (i.e., a wider variety of lending products) 
needed to modernize Iraq's economy and fuel private-sector 
expansion.  The GOI can help this effort by improving the legal 
infrastructure for lending, particularly related to moveable and 
real collateral, and establishing a system for recording liens, 
credit ratings, and deposit insurance.  END COMMENT. 
 
Note: Graph is available at: http://baghdad.state.gov/sites/ 
ECON/Shared%20Documents/ 
Private%20Bank%20Lending.pdf 
 
HILL