The Kurdistan Region’s banking sector receives 16.67% of the economy’s overall capital investment. This constitutes roughly $2.3 billion in projects. These figures indicate that the cutting of significant red tape and the overall healthy investment climate have made getting involved in the banking sector a more feasible option for both local and multi-national banks.

Despite the involvement of foreign branches and the continued growth of local banks, the banking sector of the Kurdistan Region requires further modernization and development. People currently prefer to use cash rather than card, and wire transfers are generally slow and overregulated. Moreover, confusing banking regulations continue into the present. As a result, banks are generally involved in personal banking rather than providing loans or financing for long-term investment projects.

However, the KRG has shown its desire to support the development of this sector. The continued operation of local banks coupled with further involvement from established foreign banks is expected to force changes in the current banking regulations.

Foreign Banks in the Region

Bank NameOrigin
Byblos Bank
Credit Libanias
IBL Bank
Al-Baraka Bank
Bank Asya
Is Bank
Ziraat Bank
Standard CharteredUnited Kingdom

TOP 5 Foreign Banks

Bank NameTotal Capital
Byblos Bank19%
Bank Asya8%
IBL Bank7%

A Legacy of Doubt

Well-established foreign banks are flocking to the Kurdistan Region, new private banks are establishing themselves in the major cities of Kurdistan, and federal regulations seeking to stabilize the sector have helped improve overall bank performance. At present, the banking sector in Kurdistan consists of 3 state banks, 19 local private banks, 11 foreign private banks, and 6 local and 1 foreign Islamic banks.

Decades of statist inefficiency and instability in Iraq’s financial sector have created general distrust of the banking sector, a fact that the industry has yet to fully overcome. Under the previous regime in Baghdad, the banks were notoriously unreliable, with the regime regularly seizing bank assets, deleting accounts entirely, and frequently passing conflicting regulations. The people of Kurdistan were therefore historically weary of banks, a legacy that continues today. Thus, the residents of the Region felt it was safer to store their money and utilize cash whenever possible.

Kurdistan Region State Bank Assets

This remains largely the system presently in place in the Kurdistan Region. Indeed, with a majority of the public still unwilling to place their confidence in the industry, other sectors have stepped up to fill the void. According to reports from the Ministry of Planning (MOP), in the first six months of 2013, a total of 49.4 metric tons of gold were imported into Iraq via the two airports of the Region, Erbil International Airport and Slemani International Airport. This figure represents a 45.2% increase on the 34 metric tons imported over the same period in 2012. The majority of this gold is being purchased and then stored by the residents of the Kurdistan Region. According to Bakr Aziz, the Director of Quality Control for Gold at the MOP, “Given the weak banking sector in the Region, as well as the lack of a market for securities, stocks, and bonds, citizens have no options for storing and saving money other than buying gold and keeping it in their homes.”

Thus, the local population of the Region has been slow to embrace practices and services that are common across the rest of the world, such as the usage of Visa and Master Card. As a result, the installation of ATMs has been limited, with those that are in operation serviced only infrequently.

Regulation and Iraqi Finance

Unlike the many sectors in the Kurdistan Region that are regulated by ministries of the KRG, the Central Bank of Iraq (CBI) in Baghdad regulates the banking sector throughout the country, maintains price stability, decides monetary policy, manages foreign reserves, and issues and maintains currency. In addition, according to Article 114 of the Federal Constitution, banks operating in the Region must be licensed by the CBI, which is also responsible for instituting any and all reforms of the financial sector. The CBI has taken steps to innovate the sector, such as introducing electronic payments systems for the country, and has attempted to institute reform by providing more stringent banking regulations. However, there is still much to be done.

The Iraqi banking sector itself is composed of 7 state-owned banks, which are by far the most dominant actors in the sector, and 47 private banks, of which 15 are foreign and 9 are Islamic.

Despite the presence of a number of private banks, the Iraqi banking industry is dominated by the state-owned banks. Iraq’s three largest state banks (Rafidain Bank, Rasheed Bank, and the Trade Bank of Iraq) hold 87% of the entire banking sector’s assets.

Limitations on the Private Sector

At the moment, government agencies and state-owned companies (as well as all their employees) are prohibited from utilizing private banks. Given that over 50% of the Kurdistan Region’s workforce is employed in government positions, a major potential source of business for private sector banks is effectively cut off. Moreover, because state banks hold an implicit government guarantee on their deposits, many residents perceive state banks as healthier and more reliable than their private sector counterparts. According to a World Bank report, “Private banks operate on an uneven playing field.”

This inequality is perhaps most clearly seen in the CBI policy that requires, as of June 2013, all private banks to have a minimum equity capital of 250 billion IQD, an amount equal to roughly $215 million. It is believed that this policy is intended to force private sector banks to lend more funds and forcibly encourage smaller banks to merge in order to remain both competitive and operating at government standards.

Potential Reforms

For its part, the Kurdistan Region has attempted to implement change and modernization whenever possible. The KRG Ministry of Finance (MOF) has begun the process of reorganizing and updating the Region’s banking systems, so as to bring them more in line with modern practices. The primary motivation in these actions seems to be the push to reconnect Kurdistan with both international banks and the global financial system. In addition, there are currently initiatives in place in Baghdad to reform the major state banks and level the playing field for private banks. However, the institutional and political difficulties of reform and/or privatization, as well as the empirical lack of reform thus far, have led many to become cynical regarding meaningful reform of the state-centric banking sector. Nevertheless, this “uneven playing field” has not discouraged private banks from pursuing the numerous opportunities available in the Kurdistan Region.

Islamic Banking on the Rise

While some private sector banks have struggled to gain a foothold in the Kurdistan Region, Islamic banks have found success. The majority of the population of the Region is Muslim. As such, many individuals prefer to utilize Islamic banking practices.

According to a report completed by Sansar Capital Management, “Kurdistan International Bank (KIB) is the 4th largest bank in terms of deposits and the largest bank by market-cap. It is also the only bank among the five largest banks [in all of Iraq] that is an Islamic Bank.” Among other reasons, KIB has attained a great level of success by implementing some of the key strategies relating to Islamic banking. These include “Murabaha” (the bank finances an asset by buying it and then re-selling it to the end customer at a higher price), “Mudharaba” (a system of asset management in which profits and losses are split between the bank and the client), and “Musharaka” (a practice in which the bank finances a venture in return for an equity stake with pre-determined figures for losses and profits).

Since 2009, practices such as these have allowed KIB to grow before tax profits by 119%, with a compound annual growth rate of 29.8%. Moreover, KIB’s minimum equity capital has increased from $85.84 million in 2010 to $257.5 million in 2012. To continue this stellar growth pattern, KIB recently signed an agreement with SACE, Italy’s leading export credit agency, to support investments, develop trade relations, and strengthen cooperation in export credit.

Private Sector Development

The KRG is actively working to improve the Region’s financial infrastructure, and has dedicated approximately $2.3 billion to the banking sector. As a result of this renewed emphasis, local banks have already begun to further develop and evolve, most notably North Bank. The largest publicly traded bank in terms of size of deposits, North Bank had the highest profit ($90 million) of Iraq’s top 30 banks in 2012. In addition, the KRG has encouraged multiple foreign banks to establish their operations in the Region. The banks that have accepted that invitation (the majority of which are Lebanese or Turkish) have been highly motivated to enter an area considered to be a virgin territory. At present, roughly 80% of the Iraqi population does not have access to a bank account, and only 10% of Small-Medium Sized Enterprises (SMEs) in the formal sector have bank accounts. Iraq’s financial sector comprises roughly 10% of the country’s GDP, which is a very small number relative to most countries. The majority of that contribution is composed of home mortgage activities.

The presence of globally recognizable financial institutions, such as the UK’s Standard Chartered and Turkey’s Iþ Bank in the Kurdistan Region, should also promote greater consumer confidence. Indeed, in early 2013, the Erbil based branch of the Turkish banking and financial services giant authorized a four-year, $50 million loan to UB Holding, one of the largest local companies in the Kurdistan Region. The loan, which is the largest ever extended by Iþ Bank to a company operating outside of Turkey, will be utilized in the construction and energy sectors. Advances such as this will go a long way towards restoring the trust of the Kurdish people in financial institutions, as will the KRG’s efforts to reform and modernize the system to the extent possible.

Moreover, many of the private banks in Kurdistan are too small in both size and scope to finance the major projects taking place in the Region. As the Kurdistan Region develops economically, the demand for large, well-run banks will only continue increase. Thus, opportunities will continue to present themselves to banks willing to take the chance and establish a presence in the Region. In addition, increased involvement from foreign banks could facilitate competition and, as a result, broader innovation in the industry.

FOCUS: Stock Exchange

Erbil Stock Exchange, ESX

While Iraq’s banks dwarf Iraq’s stock exchange in terms of size and lending, there are reasons to be optimistic about Iraq’s capital market. Major businesses (including most of Iraq’s private banks) are listed on the Iraq Stock Exchange (ISX). The Exchange’s small size (its market capitalization is currently roughly $10 billion) and relatively low trading volumes have led some to worry about the liquidity of the market. However, the recent major $1.3 billion IPO of Asiacell demonstrated the quality of the Exchange, and mobile operators Zain Iraq and Korek are expected to have major listings on the exchange soon.

In addition to the ISX, the Erbil Stock Exchange (ESX) is expected to open and begin listing companies in 2014. While the exchange will start small (it is estimated to open with a market cap of roughly $8 million), it will provide alternate means of finance for companies and projects in the Region. As Erbil develops in to a major economic hub, and major, high-capital projects increasingly dominate the landscape, the ESX will provide an alternative to banks for financing, and opportunities for investors in the Kurdistan Region’s growth.