Promise of growth draws international banks to Iraq

Published in Gulf States News, 19 September 2013 In the coming months, Lebanon’s Blom Bank will open its first branches in Iraq. According to the bank’s chairman, Saad Azhari, it has approval for branches in Baghdad and Erbil and expects to start business in both cities before the end of the year.

Iraq may be a new market for the Lebanese bank, but it will find plenty of familiar faces when it gets there. At least six other Lebanese banks are already active in the country, vying for business alongside dozens of other home-grown and foreign owned institutions, and more are coming all the time. According to recent media reports, the UK’s Standard Chartered has also gained approval to open branches in Baghdad, Basra and Erbil.

The Central Bank of Iraq says there are 15 foreign-owned banks in Iraq, alongside 23 privately owned, nine Islamic and seven state-owned institutions. Those numbers only tell half the story though, as many of the local banks have significant international shareholders.

There are some clear and powerful reasons underlying this interest in the Iraqi market. Despite the rising number of banks, the country remains under-banked. According to a report by Singapore-based Sansar Capital earlier this year, 80% of Iraqis do not have a bank account and domestic credit to the private sector is just 9% of GDP, compared to an average of 55% around the rest of the region. In addition, expectations for long-term economic growth are high as the country ramps up oil production.

“We try to go to under-banked countries,” explained Sami Haddad, general manager for international banking and investment at Lebanon’s Byblos Bank, which opened its first Iraqi branch in Erbil in 2007 and has since expanded to Baghdad and Basra. “The potential is high and the competition tends to be weaker [in those countries], so you have a first mover advantage.”

Many Gulf banks have identified the same opportunity. Qatar National Bank, which has been pursuing the most aggressive international expansion strategy of any regional bank over recent years, was a founding shareholder in Bank Mansour in 2006. It increased its stake to 51% via a capital increase in April last year. Among other Gulf Co-operation Council (GCC) investors, Bahrain’s Ahli United Bank has a 49% shareholding in Commercial Bank of Iraq, Kuwait’s Burgan Bank has a majority stake in Bank of Baghdad and National Bank of Kuwait owns 75% of Credit Bank of Iraq.

Most banks, however, enter the country by setting up new branches. Abu Dhabi Islamic Bank, Bahrain’s Arab Banking Corporation and Iran’s Bank Melli and Parsian Bank have all done so, as have five Turkish banks. Iraq is relatively unusual in being so open to foreign banks. “In most countries, central banks are not offering new licences and it is also not very common to allow foreign banks to open branches, so you end up having to buy a bank,” one banker said.

But Iraq remains a difficult place to do business, with poor infrastructure and high levels of violence and corruption. As a banker at one major US institution pointed out: “It is still a country with a lot of development needs, including in areas such as management of investment, registering companies and the tax regime. A lot of those things need to settle down.”

Adding to those problems are what Sansar Capital refers to as the uneven playing field of the banking sector. State-owned banks control around 90% of the market, not least because anyone writing a cheque to the government to settle their taxes or other bills has to do so from an account at one of the state banks, and all government entities have to put their deposits in those same institutions.

Not everyone finds the prospect of doing business in such an environment all that enticing. HSBC bought a 70% stake in Dar Es Salaam Bank in 2005 but, in June this year, said it was planning to sell its shares – though the sale has yet to be concluded.

For a lot of the Gulf banks though, Iraq is far larger than their often saturated home markets and so the potential is that much greater. “The rationale is to build and gain scale,” says one Gulf banker. “Our core market is small in size and hence growth is capped. Being in faster growing markets makes perfect sense.”