Banking System and Financial Crisis in the Iraqi Kurdistan Region – Op-ed
on April 30, 2014
Since early this year the Kurdistan region has been facing the most serious banking crisis since 1991, as a result of continuing differences between the Kurdistan Regional Government (KRG) and the federal government over budget allocations and oil revenues. The dispute started in 2012 when the KRG started building its own pipeline to transport oil and natural gas from the Kurdistan region to Turkey, as a first step towards economic independence from the federal government. But making this step is not easy without the strong banking sector which is essential to a successful economy.
The political change in Iraq after the 2003 invasion of Iraq led to the ratification of a new constitution of Iraq in 2005, in which Iraqi Kurdistan is defined as a federal entity of Iraq. As is the case for the Iraqi economy, the Kurdistan economy is an oil-dependent economy. Given the fact that the Kurdistan economy depends on a 17% share of Iraq’s total revenue, this means that more than 95% of the KRG’s budget is based only on one resource – its oil revenue. Although the KRG argues that higher levels of development and economic growth are being achieved compared to other parts of Iraq due to the region’s relative security and stability; in fact, despite their identification of the need for economic strategies to develop other economic sectors such as agriculture, tourism, and other industries; over the past ten years they have not been successful in implementing them. Instead of pursuing these strategies, the KRG started to build up the economy through the rapid development of the oil and gas industry in the Kurdistan region.
The recent oil dispute revealed KRG’s financial vulnerability, when the KRG banks’ lack of liquidity resulted in local government failing to pay employees’ salaries. Later, Adham Karim Darwish, the Director General of the Central Bank in the KRG, announced that the lack of liquidity was due to the federal government’s refusal to transfer the Kurdistan region’s share of national oil revenues.
Whether this dispute is deemed an economic, political or even constitutional crisis between the KRG and the federal government, there are still some questions which remain to be answered about the failure of the Kurdistan regional banking system to provide the liquidity necessary to avoid this crisis.
After all, a strong banking system will help the government to measure and quantify economic activity, as well as to support private sector growth by providing access to finance. However, the high economic growth in the Kurdistan region during the last 10 years has not been reflected in development of infrastructure, especially in the banking sector. As can be seen, there are more than 70 private banks in the Kurdistan region, however they have not engaged in market activities in an effective and efficient manner.
Dr. Latif (an economic expert) argues that although the current banking crisis in Kurdistan was more a political than an economic crisis, there were still mechanisms that the KRG could have developed which would have led to a more solid banking sector enjoying stronger financial capabilities. In his view there is no comparison between this crisis and the financial crisis in developed countries in terms of banking system and financial liquidity.
While banks in the developed countries are financing commercial projects and giving loans to governments to finance large infrastructure projects, in the Kurdistan region the banking sector plays a limited role in business transactions and is isolated from other activities such as loans and savings. Due to past decades of unstable politics and insecurity in the Kurdistan region, Kurdish people have a strong preference for holding cash at home. This has created a inherent lack of trust in the banking system, as the Kurdistan people still do not believe in banks, being more interested in trust than in interest rates. As a consequence of this long time habit and the lack of a banking culture, the mission of banks to date in the Kurdistan region is limited to the role of mediator between the government and the employees.
It is also important to mention that although the Kurdistan region has pursued its own successful policies for oil and investment over the last decade, for banking purposes it remains close to Baghdad. This is because the Iraqi constitution did not grant fiscal and financial regulatory independence to the Kurdistan region central bank. As a consequence, the Iraqi federal government controls KRG financial policy, and thus the KRG has no direct authority over the flow of money into the market. This absence of a private entity is the reason for the lack of coordination between Kurdistan region banks and world class financial institutions.
In order to overcome this crisis and prevent future financial problems with the federal government, the KRG needs to adopt prudent fiscal policies and to make major reforms in the banking sector, namely:
•Place fiscal planning as a top priority for the new KRG cabinet.
•Establish a modern banking sector as a key to a successful economy, thereby instilling the trust in the banking sector needed to create the public confidence for citizens to deposit their money in these banks and to promote savings and credits.
•Recognise and address the shortages of technology and skills in the banking sector.
•Develop and issue new regulations to support the activity of private banks.
[You must be registered and logged in to see this link.]
on April 30, 2014
Since early this year the Kurdistan region has been facing the most serious banking crisis since 1991, as a result of continuing differences between the Kurdistan Regional Government (KRG) and the federal government over budget allocations and oil revenues. The dispute started in 2012 when the KRG started building its own pipeline to transport oil and natural gas from the Kurdistan region to Turkey, as a first step towards economic independence from the federal government. But making this step is not easy without the strong banking sector which is essential to a successful economy.
The political change in Iraq after the 2003 invasion of Iraq led to the ratification of a new constitution of Iraq in 2005, in which Iraqi Kurdistan is defined as a federal entity of Iraq. As is the case for the Iraqi economy, the Kurdistan economy is an oil-dependent economy. Given the fact that the Kurdistan economy depends on a 17% share of Iraq’s total revenue, this means that more than 95% of the KRG’s budget is based only on one resource – its oil revenue. Although the KRG argues that higher levels of development and economic growth are being achieved compared to other parts of Iraq due to the region’s relative security and stability; in fact, despite their identification of the need for economic strategies to develop other economic sectors such as agriculture, tourism, and other industries; over the past ten years they have not been successful in implementing them. Instead of pursuing these strategies, the KRG started to build up the economy through the rapid development of the oil and gas industry in the Kurdistan region.
The recent oil dispute revealed KRG’s financial vulnerability, when the KRG banks’ lack of liquidity resulted in local government failing to pay employees’ salaries. Later, Adham Karim Darwish, the Director General of the Central Bank in the KRG, announced that the lack of liquidity was due to the federal government’s refusal to transfer the Kurdistan region’s share of national oil revenues.
Whether this dispute is deemed an economic, political or even constitutional crisis between the KRG and the federal government, there are still some questions which remain to be answered about the failure of the Kurdistan regional banking system to provide the liquidity necessary to avoid this crisis.
After all, a strong banking system will help the government to measure and quantify economic activity, as well as to support private sector growth by providing access to finance. However, the high economic growth in the Kurdistan region during the last 10 years has not been reflected in development of infrastructure, especially in the banking sector. As can be seen, there are more than 70 private banks in the Kurdistan region, however they have not engaged in market activities in an effective and efficient manner.
Dr. Latif (an economic expert) argues that although the current banking crisis in Kurdistan was more a political than an economic crisis, there were still mechanisms that the KRG could have developed which would have led to a more solid banking sector enjoying stronger financial capabilities. In his view there is no comparison between this crisis and the financial crisis in developed countries in terms of banking system and financial liquidity.
While banks in the developed countries are financing commercial projects and giving loans to governments to finance large infrastructure projects, in the Kurdistan region the banking sector plays a limited role in business transactions and is isolated from other activities such as loans and savings. Due to past decades of unstable politics and insecurity in the Kurdistan region, Kurdish people have a strong preference for holding cash at home. This has created a inherent lack of trust in the banking system, as the Kurdistan people still do not believe in banks, being more interested in trust than in interest rates. As a consequence of this long time habit and the lack of a banking culture, the mission of banks to date in the Kurdistan region is limited to the role of mediator between the government and the employees.
It is also important to mention that although the Kurdistan region has pursued its own successful policies for oil and investment over the last decade, for banking purposes it remains close to Baghdad. This is because the Iraqi constitution did not grant fiscal and financial regulatory independence to the Kurdistan region central bank. As a consequence, the Iraqi federal government controls KRG financial policy, and thus the KRG has no direct authority over the flow of money into the market. This absence of a private entity is the reason for the lack of coordination between Kurdistan region banks and world class financial institutions.
In order to overcome this crisis and prevent future financial problems with the federal government, the KRG needs to adopt prudent fiscal policies and to make major reforms in the banking sector, namely:
•Place fiscal planning as a top priority for the new KRG cabinet.
•Establish a modern banking sector as a key to a successful economy, thereby instilling the trust in the banking sector needed to create the public confidence for citizens to deposit their money in these banks and to promote savings and credits.
•Recognise and address the shortages of technology and skills in the banking sector.
•Develop and issue new regulations to support the activity of private banks.
[You must be registered and logged in to see this link.]
Today at 7:52 am by Rocky
» utube 3/28/24 MM&C Iraqi Dinar - IQD Update - SWIFT - Purchasing Power - Urban Renaissance - Releas
Today at 7:51 am by Rocky
» Al-Mandalawi: Iraq is witnessing competition between major companies...and the House of Representati
Today at 7:49 am by Rocky
» The President of the Republic stresses the importance of the role of programmers in developing the w
Today at 7:46 am by Rocky
» The Minister of Industry and Minerals follows up on the technical and production performance of the
Today at 7:45 am by Rocky
» The Minister of Finance is following up on the field the progress of the newly implemented ASYCUDA s
Today at 7:44 am by Rocky
» Statistics: There are more than 15 million bank accounts in Iraq
Today at 7:42 am by Rocky
» Representative: One paragraph hinders the passage of a general amnesty within the House of Represent
Today at 7:37 am by Rocky
» Parliamentary Finance: “The draft federal budget law will be devoid of new job grades.”
Today at 7:36 am by Rocky
» Parliamentary action to resolve the fate of “food security contracts” in 15 governorates
Today at 7:35 am by Rocky
» 300 factories turned into "iron scrap" in Diyala
Today at 7:34 am by Rocky
» A deputy expects the dollar exchange rate to reach 140 Iraqi dinars
Today at 7:32 am by Rocky
» Al-Yasiri: The American administration is working hard to destroy the Iraqi economy
Today at 7:31 am by Rocky
» Infographic: The highest annual salaries of leaders of Arab countries
Today at 7:30 am by Rocky
» Communications announces that the electronic signature project has reached advanced stages
Today at 7:29 am by Rocky
» Parliamentary Integrity presents a file related to Kuwaiti violations of Iraqi oil
Today at 7:27 am by Rocky
» Parliamentary move to include amendments to Parliament’s internal regulations on the agenda (documen
Today at 7:25 am by Rocky
» The Iraqi President urges the Minister of Finance to expedite the payment of salaries to the Kurdist
Today at 7:23 am by Rocky
» Central Bank of Iraq sales exceeded $251 million at today’s auction
Today at 7:21 am by Rocky
» The Foreign Minister questions the "Iraqi resistance" attacks against Israel: the other side did not
Today at 7:20 am by Rocky
» The Minister of Labor announces progress in the electronic payment system
Today at 7:17 am by Rocky
» Interior Ministry: For the first time, we controlled the smuggling of petroleum derivatives by 98 pe
Today at 7:16 am by Rocky
» International companies offer offers to invest in the Dhi Qar marshes.. What distinguishes them?
Today at 7:15 am by Rocky
» “Tough” comments on interest rates raise the dollar globally
Today at 7:14 am by Rocky
» Iraq is the fifth largest oil supplier to South Korea in a month
Today at 7:12 am by Rocky
» Recovering more than 100 billion as a result of more than 200,000 employees on social welfare
Today at 7:11 am by Rocky
» The Sudanese consultant announces the completion of Baghdad Metro track designs
Today at 7:08 am by Rocky
» Al-Sudani stresses ending the problem of triple-shift schools
Today at 7:07 am by Rocky
» Iraq begins building two new tankers to transport petroleum products
Today at 7:06 am by Rocky
» Forming a council for “competition and preventing monopoly”
Today at 7:04 am by Rocky
» Features of an Iraqi-Turkish agreement regarding the status of the Kurdistan Workers’ Party
Today at 7:02 am by Rocky
» {Al-Buzrajiya} between the hammer of fraud and the power of the owners
Today at 7:01 am by Rocky
» Ministry of Oil: The gas sector is witnessing great development
Today at 6:59 am by Rocky
» An agreement with Britain in the field of securities
Today at 6:58 am by Rocky
» Discussions between Baghdad and Ankara to open a new port
Today at 6:57 am by Rocky
» Trade: About 11 million citizens updated their new card information
Today at 6:56 am by Rocky
» Electronic payment is sustainable growth
Today at 6:55 am by Rocky
» Experts: Iraq qualifies to be an important tourist country
Today at 6:54 am by Rocky
» Amending the Health Professions Law “robs” scientists of the central appointment 3 years after it wa
Today at 5:20 am by Rocky
» Is the “blessings package” that Erbil paid to the citizens of Kurdistan related to the elections?
Today at 5:19 am by Rocky
» Exceeded 5,000 projects.. Allocating 10 trillion dinars to support governorate reconstruction plans
Today at 5:18 am by Rocky
» “His need no longer exists.” Parliamentary Finance confirms the necessity of returning the retiremen
Today at 5:17 am by Rocky
» To communicate with the bases... 12 directives from Al-Sadr, including blocking numbers for non-gove
Today at 5:15 am by Rocky
» In an interview with "Baghdad Today"... an Iranian researcher reveals the importance of Haniyeh's vi
Today at 5:14 am by Rocky
» After it was 63 trillion in 2023... the 2024 budget deficit will rise to 80 trillion dinars
Today at 5:13 am by Rocky
» Parliament reveals the date of the first evaluation of the governors and determines the party respon
Today at 5:11 am by Rocky
» The President of the Republic informs Al-Araji and Al-Basri: Momentum must be mobilized to eliminate
Today at 5:10 am by Rocky
» Can the Federal Court sue others? A legal clarification of its response mechanism to abuse
Today at 5:09 am by Rocky
» Despite promises to soon stop burning gas.. What is the secret behind Iraq renewing the Iranian gas
Today at 5:07 am by Rocky
» Advisor to Al-Sudani: The dollar is on the way to further decline, and 70% of Iraqi traders have ent
Today at 5:06 am by Rocky
» Iraq exported more than 99 million barrels of oil last February
Today at 5:04 am by Rocky
» Barzani “gives good news” to Kurdistan employees: salaries, land, and loan exemptions
Today at 5:03 am by Rocky
» Alia Nassif: Nour Zuhair returned to the port of Umm Qasr to make deals.. An influential Shiite forc
Today at 5:02 am by Rocky
» The Prime Minister announces the movement of nearly 500 stalled projects
Today at 5:00 am by Rocky
» A government strategy to enhance investments.. Iraq is on the verge of a new era of economic develop
Today at 4:59 am by Rocky
» Ranging between 20% and 50%.. The Kurdistan government decides to reduce service fees, customs dutie
Today at 4:58 am by Rocky
» Al-Sudani: The reform approach in the security services is an integral part of reform in other secto
Today at 4:56 am by Rocky
» Everyone in Iraq wants the Sudanese visit to Washington to be successful, even the factions!
Today at 4:55 am by Rocky
» Sources and experts expect the agenda.. in his bag is the Baghdad dollar and the factions’ truce, bu
Today at 4:54 am by Rocky
» The decision to raise gasoline prices arouses the ire of drivers...a reminder of the large demonstra
Today at 4:53 am by Rocky
» Parliamentary services: 3 important hospitals in Baghdad will enter service at the end of the year
Today at 4:52 am by Rocky
» Iraq signs a contract to supply Iranian gas for a period of five years
Today at 4:50 am by Rocky
» Parliament adds a voting paragraph on amending the Penal Code to its agenda
Today at 4:49 am by Rocky
» His political advisor: We are not afraid of Sudanese entering the elections alone
Today at 4:48 am by Rocky
» Parliamentary services explain the reasons for the rise in real estate prices in Baghdad
Today at 4:46 am by Rocky
» Attia, criticizing the government's decisions: "The citizen's feathers will be ruffled without servi
Today at 4:45 am by Rocky
» Parliamentary Communications: Zain Iraq and Asiacell did not pay their debts
Today at 4:44 am by Rocky
» The Governor of Karbala announces the imminent establishment of the largest industrial city in the c
Today at 4:43 am by Rocky
» A government determination to end the issue of displaced persons in the middle of this year
Today at 4:42 am by Rocky
» Iraq buys gas from Kurdistan to generate electricity
Today at 4:41 am by Rocky
» Parliamentary signatures to include an amendment to the internal regulations to decide the choice of
Today at 4:40 am by Rocky
» In Basra.. a demonstration against foreign workers in Iraqi companies (video)
Today at 4:38 am by Rocky
» Al-Samarrai: Presidency of Parliament is an entitlement to the constituents, and calling it a “frame
Today at 4:36 am by Rocky
» Electronic food supplies in 6 governorates... covering 11 million Iraqis and “writing off” about 700
Today at 4:34 am by Rocky
» Corruption of the Ministry of Transport.. Representatives express their surprise at the minister’s s
Today at 4:32 am by Rocky
» The biggest supporter of the invasion of Iraq.. The death of former US Senator Joe Lieberman
Today at 4:31 am by Rocky
» Iraq is ranked “late.” A list of the most and least safe Arab countries for women
Today at 4:30 am by Rocky
» The Council of Ministers exempts the Gulf Interconnection Authority from guarantee fees: it is a gov
Yesterday at 7:48 am by Rocky
» The Iraqi government raises the size of the 2024 budget, and Parliament is “surprised”
Yesterday at 7:46 am by Rocky
» Popular Movement: We have many economic options away from American hegemony
Yesterday at 7:42 am by Rocky
» The Oil Parliament stresses the need to transfer part of the revenues to the producing governorates
Yesterday at 7:41 am by Rocky
» It will cover 14 regions in eastern Iraq.. A deputy reveals the “border electricity” project
Yesterday at 7:40 am by Rocky
» Experts Warn Mass Migration Threatens US Food Security
Yesterday at 7:37 am by Bama Diva
» Al-Fateh: America occupies Iraq through agreements
Yesterday at 7:37 am by Rocky
» Anger in Iraq over a "sudden decision"... and a reminder of a "general strike" that paralyzed the co
Yesterday at 7:34 am by Rocky
» Parliamentary Committee: Parliament is discussing today a decision that “disturbed” the Iraqis
Yesterday at 7:33 am by Rocky
» Ministry of Electricity: Our production will reach 27 thousand megawatts by May
Yesterday at 7:31 am by Rocky
» Diagnosing the “most important” problems in the oil file between Baghdad and Erbil.. What is the rel
Yesterday at 7:30 am by Rocky
» The Iraqi Fiqh Academy and the Sunni Endowment issue a fatwa to pay Zakat al-Fitr
Yesterday at 7:28 am by Rocky
» The National Bank of Iraq continues its digital transformation by launching its new banking system a
Yesterday at 7:26 am by Rocky
» Parliamentary Investment and the Central Bank are discussing the housing initiative
Yesterday at 7:25 am by Rocky
» The Prime Minister announces the restart of 500 suspended projects
Yesterday at 7:23 am by Rocky
» Al-Barti assesses the region's employees: Your salaries are insured and will be paid after resettlem
Yesterday at 7:21 am by Rocky
» Iraqi-American discussions in anticipation of the Sudanese visit
Yesterday at 7:20 am by Rocky
» Iraq and Turkey hold meetings in Ankara to discuss technical issues related to the development road
Yesterday at 7:17 am by Rocky
» A government parliamentary agreement to support budget revenues and governorate allocations for inve
Yesterday at 7:16 am by Rocky
» Oil: The gas sector is witnessing great development
Yesterday at 7:15 am by Rocky
» A Kurdish-French agreement to develop trade and economic relations
Yesterday at 7:13 am by Rocky
» Exchange companies in Mosul demand that they be entered into the currency selling window
Yesterday at 7:12 am by Rocky