Further Reforms Needed in the Iraqi Financial Sector to Ensure Economic Growth

September 24, 2011

WASHINGTON, September 24, 2011 – A new World Bank report released today, Republic of Iraq Financial Sector Review, highlights that while reforms are ongoing in the financial sector, the country needs to push further to ensure that a system still characterized by state-domination and lack of transparency reaches its full potential.

The report stresses the critical importance of the financial sector in modernizing the Iraqi economy and allowing it to reach its full potential.

The link between sound and well-developed financial systems and rapid and sustained economic growth is clear and backed up by decades of empirical evidence in many developed and developing countries,” says Sahar Nasr, World Bank Finance Lead Economist in the Middle East and North Africa region and the report’s principal author. “Efficient and prudent allocation of resources by the financial system is absolutely critical for increasing productivity, enhancing equality of opportunity, and reducing poverty.”

The report assesses the impact of recent reforms introduced by the Iraqi Government and the Central Bank of Iraq on the performance and soundness of the financial sector, as well as the sector’s contribution to enhancing Iraq’s economic growth.

Its key findings about challenges facing the sector include:

  • Domination by the banking system, with most assets held by state-owned banks;
  • The need for further strengthening and consolidation even while many private banks are in the process of developing modern banking practices;
  • Concentration of other financial markets in the Iraqi Stock Exchange but capitalization is low, and few instruments are traded;
  • A small insurance sector, dominated by state-owned enterprises, and is not supervised;
  • Weak financial infrastructure a clear impediment to access to finance; and
  • SME and microfinance not yet well developed.

The report also emphasizes that while work should commence on a broad range of issues, some key decisions need to be taken immediately and others may be implemented over the medium term. Crucial issues to be addressed up front are the role of state banks and the creation of a level playing field for all banks. This will need to be followed by the early adoption of the proposed permanent Securities Law and steps to turn the insurance Diwan into an effective supervisor. Supporting ongoing efforts will be needed to address financial sector infrastructure, including supervision, credit registry, the collateral framework, judicial systems, and accounting and auditing frameworks.

The progress and pace of reforms have been commended by donors and the international community despite ongoing challenges on the security front and the predictable resistance to new ideas and reforms. “This is a fairly large agenda but ongoing reforms will facilitate the move forward with the Banking Sector Reform Strategy initiated by the Iraqi government in 2009,” says Hedi Larbi, World Bank Country Director for Iraq.

The Government of Iraq acknowledges that there is still work to be done to fully reform the sector and address its main challenges.

We are aware that we still have some way to go to achieve the reform we want and Iraq deserves and we will continue to foster efforts to enhance our financial system” says H. E. Dr. Rafie El Essawi, Republic of Iraq Minister of Finance This report and its recommendations will assist us in the ongoing efforts to meet this challenge”.

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