Iraq’s banks refuse to ante up amid liquidity shortage

Private banks in Iraq are facing a liquidity crisis that has led to limiting allowed withdrawals, much to the dissatisfaction of citizens.

al-monitor Iraqi Finance Minister Hoshiyar Zebari speaks during a news conference in Baghdad, July 12, 2015.  Photo by REUTERS/Khalid al-Mousily.

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iraqi markets, iraqi central government, iraq crisis, iraq, banks, bankruptcy, banking & finance

Jul 16, 2015

BAGHDAD — Iraq’s private banking sector is having trouble meeting customers’ demands because of liquidity issues, leading to unrest and worry.

Some banks are limiting withdrawals to a specific percentage of deposited funds, while others have stopped allowing them altogether. In addition, even funds originally deposited in US dollars can only be withdrawn in Iraqi dinars, according to the Central Bank’s exchange rate.

Such procedures confused customers and angered many of those who deal with banks. Overall deposits in one Iraqi bank — whose name cannot be published for legal reasons — did not exceed 2.5 million Iraqi dinars (about $2,000) in an entire workweek, which is a relatively modest figure. When Al-Monitor visited this bank, its lobby was filled with scores of customers demanding their money, and the administration was refusing to allow customers to withdraw all of their funds at once.

Umm Ahmad, the mother of four grown children, travels more than 300 miles every Thursday from Basra governorate to Baghdad to make withdrawals from North Bank. She began doing this after the bank stopped allowing withdrawals from its branches in various provinces and limited such transactions to its main branch in the capital.

Umm Ahmad seemed stressed as she discussed her situation. She told Al-Monitor that her children need money to emigrate, so she decided to sell their house, give her children half of the proceeds and buy herself a smaller house with the remaining amount of money she had deposited in the bank’s branch in Basra. However, the bank refused to let her make the withdrawal. The person who bought her house is now demanding eviction in less than a month, while she is unable to pay for the new house because the bank limits withdrawals to $2,000 per week and sometimes only allows withdrawals every two weeks.

Many Iraqi citizens have with similar stories. During the aforementioned visit to the unnamed bank, Al-Monitor saw people shouting among themselves and fistfights broke out between the bank’s staff and the customers. An official at the bank said they had a rescue plan and had offered customers cars and real estate in place of their money.

Umm Ahmad said such offers gave her hope that she would see at least some return of her savings, even if not in cash, so she decided to buy a house. She and other interested customers were given a list of addresses for the houses they could purchase with deposited funds, yet they were shocked after those living in the homes threatened to kill the customers should they buy their houses. Umm Ahmad said it became clear that all of the listed properties were mortgaged to the bank and the owners had failed to pay the interest on their loans.

On March 19, Ihsan al-Yasiri, the director of issuance and reserves at the Central Bank, made press statements aimed at reassuring customers of national banks, explaining that the Central Bank can ensure the money through the legal reserves available at each bank.

Speaking to Al-Monitor, banking expert Inas Mohammed said that the government is responsible for a huge chunk of what the private banking sector is going through.

“The liquidity problem in private banks is linked to investment transactions and projects with the government. For example, the Ministry of Education owes one of the banks that are currently suffering from liquidity issues 100 billion dinars in dues, and the ministry has only paid back 8 billion dinars in a payment last week,” she said.

According to a source who requested anonymity for security concerns, Asia Cell, one of the largest communications companies in Iraq, withdrew deposited money from its account at that same bank. The source told Al-Monitor that the bank still owes Asia Cell 200 billion dinars, an amount it is unable to pay, putting the bank on the brink of bankruptcy

Awatef Jalloub, an economics professor at Baghdad University, told Al-Monitor that the solution lies in approving a new law that would help develop and support local banks, since current law does not allow them to be open to the international market. She pointed out the necessity of encouraging banks to pair with international banks in order to create major development banks that are able to finance large projects in the country.

Meanwhile, Safwan Qassi, an accounting professor at Baghdad University, believes the answer to saving these stumbling banks lies in merging them with bigger banks or government intervention, whereby the government buys out these banks or takes on a role in managing them. Speaking to Al-Monitor, Qassi noted that codifying customer payments, controlling withdrawals, imposing a certain exchange rate and forcing a change in currency are all factors that weaken the banks and undermine customers’ trust, which results in poor performance on the part of the bank.

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