Recent years have seen a notable expansion of the banking industry in Iraq, which is indicative of major initiatives to modernize the financial system and improve economic stability. This expansion demonstrates the strides Iraq has achieved in enhancing the banking system’s infrastructure and boosting public trust in it, both of which have led to a notable rise in bank assets. According to the most recent analysis of the growth of Iraqi banks’ assets over a five-year period, there is a difference in the growth rates of banks that conduct external financial transactions, concentrate on local or regional transactions, and have correspondent accounts with the United States.
In this context, this analysis looks at the challenges and drivers of this growth, as well as the potential economic opportunities that may come from this banking expansion, as mentioned in recent approved economic reports. Economic Analysis of the Development of Iraqi Banks’ Assets 1. Strong Growth in Banks with Accounts in US Correspondent Banks From 2019 to 2024, the assets of banks with accounts in US correspondent banks will rise by 2404.4%. In 2024, this category will account for 34.5% of all bank assets.
Iraqi banks’ growing integration into the global financial system, particularly with US financial institutions, is reflected in this expansion. Improved regulations, increased trust in Iraqi banking operations, or increased demand for international transactions made possible by correspondent banking relationships could all account for this.
Impact on the Economy: Trade and investment can be supported by strengthened international banking relationships, making it simpler for Iraqi businesses to carry out cross-border transactions. By making it easier to get goods and capital from other countries, this could increase FDI and encourage economic diversification.
2 Moderate growth of banks without US correspondent accounts Over the past six years, banks without US correspondent accounts have experienced steady growth of 78.7%, growing at a rate of 7.1% annually.
These banks’ reliance on local or regional clients rather than international partnerships is reflected in their steady growth. These banks might provide services to parts of the economy that are more concerned with the market in the local or regional area.
Impact on the economy: Even though these banks make a big contribution to the financial system, they may not be able to get foreign capital or grow as much because they don’t have much international exposure. However, they continue to be crucial in assisting Iraqi consumers and local businesses and fostering financial inclusion.
Offshore banks saw a significant increase in assets from 2019 to 2023, which slowed growth in offshore banks. However, in 2024, offshore banks saw a decline with a negative annual growth rate (-11.8%).
Impacts: These banks’ sudden slowdown in growth could be a sign of difficulties with regulations, shifts in geopolitical conditions, or a decline in offshore transactions. It could also indicate a cautious approach to offshore transactions in light of currency restrictions or international sanctions.
Impact on the economy: Iraq’s financial connectivity to the global market could be impacted by the decline in offshore transactions, which could have an impact on sectors that rely on imports or exports. The continuation of this pattern may indicate a tightening of capital flows, which may restrict access to international markets and impede economic expansion.
Overall expansion of the Iraqi banking industry: From IQD 15.6 trillion in 2019 to IQD 31.8 trillion in 2024, Iraqi banks’ total assets increased by 104.6 percent over six years and by 9.6 percent annually.
The overall growth may be driven by economic reforms, government support, and efforts to modernize the banking sector, all of which reflect increased financial activity. The broader economic objectives of diversifying Iraq’s economy and decreasing its reliance on oil revenues are met by this expansion.
One of the effects of a stronger banking sector on the economy is that it can help the economy grow by making it easier for businesses and consumers to get credit. This growth also shows that people are more confident in the banking system, which is important for the long-term stability of the economy. Iraq’s efforts to boost its non-oil sectors and attract foreign investment may also benefit from an increase in banking assets.
Key Monetary Contemplations and Future Viewpoint
- Infrastructure and regulatory support are required: To support this development, proceeded with progress in administrative systems, data security, and hostile to illegal tax avoidance measures is required. Regulations and transparency should be strengthened to boost investor confidence among international partners.
- Make External Relationships Stronger for Diversity: The significant increase in banks with US banking relationships suggests that the industry may benefit from expanding international partnerships. Diversifying economic risks and reducing dependence on a single market could result from strengthening relationships with banks in other regions, such as Europe or Asia.
- Geopolitical Tensions’ Potential Dangers: The banking industry in Iraq is still susceptible to regional upheaval and international sanctions. These risks could be reduced by taking a proactive approach to reducing exposure to high-risk areas and diversifying external partnerships.
- Concentrate on Financial Equality: Even though there has been significant growth, it is essential to ensure that banking services reach all segments of society, including rural areas that are underserved. Initiatives for financial inclusion can help small businesses, which are necessary for the creation of jobs and the diversification of the economy.
- How to deal with the decline of offshore banks: To determine the underlying causes of the negative growth trend in offshore banks in 2024, investigation is required. In order to effectively reintegrate these banks into the offshore financial network, policy modifications or strategic shifts may be required.
In conclusion, the expansion of the assets held by Iraqi banks is indicative of a positive trend in the country’s financial sector and is in favor of broader economic objectives. Iraq must strike a balance between fostering domestic financial inclusion and strengthening international relations in order to maintain this momentum. The banking industry has the potential to play a crucial role in Iraq’s journey toward a diversified and stable economy by overcoming geopolitical obstacles and developing a robust financial system.
Center for Research and Strategic Studies’ North America Office and Economic Studies Unit
