Despite Challenges, Banks Look to Set Up Branches in Iraq

by Hkp1 Thu 04 Apr 2013, 2:39 am

Hkp1: Interacting Investor; Posts : 3118
Join date : 2012-12-19

Post n°1

Despite Challenges, Banks Look to Set Up Branches in Iraq

by Hkp1 Thu 04 Apr 2013, 2:39 am

Despite Challenges, Banks Look to Set Up Branches in Iraq

By SARA HAMDAN
Published: April 3, 2013

DUBAI
— Iraq is still struggling to overcome an economic legacy of war,
insurgency, political rifts and fragile security. For its nascent
banking sector, the challenges do not stop there.

According to
the Web site of the Central Bank of Iraq, the country is served by 7
state-owned banks, 32 private banks and 15 foreign banks. But analysts
say that a handful of state-owned banks — and two in particular,
Rafidain Bank and Rasheed Bank — dominate 90 percent of the business.

“Because
the public banks were given the chance to utilize the massive funds of
the public sector, private Iraqi banks were naturally sidelined,” said
Bassem Khalil al-Salem, executive chairman of Capital Bank of Jordan,
which owns 72 percent of National Bank of Iraq, a private bank.

“There’s
a resulting lack of trust by consumers who fear that private banks
could collapse, which presents a huge challenge to the growth of private
banks,” Mr. Salem said.

In addition, “there’s no level playing
field in Iraq because most government agencies and state-owned companies
— and employees — are restricted from dealing with private banks, so
they only deal with public banks,” said Mouayed Makhlouf, regional
director in Dubai for the Middle East and North African operations of
the International Finance Corp., the World Bank unit that focuses on the
private sector.

As a result, he said, “the private sector, consisting of nearly 40 banks, is very small with very little lending activity.”

With
access to public funds drawn from the oil industry, public banks are
well capitalized. Private banks, on the other hand, must fight for deals
in the hotly competitive infrastructure, construction and manufacturing
sectors.

Making a tough environment tougher, the central bank
introduced a law two years ago setting a minimum capital requirement for
all Iraqi banks of $215 million, to be met by June this year.

“There’s
a big issue regarding adequacy of capital in small, private banks and
with the central bank asking to gradually increase capital, there’s
likely to be much consolidation among these banks,” said Tawfiq Tabbaa, a
managing partner at the international law firm Eversheds, based in Iraq
and Jordan. “Some banks will likely close down. Others will merge
together or be acquired by other banks.”

Add in high compliance
costs for risk management and measures to combat money laundering, and
the task of operating a private bank in Iraq could seem daunting. Yet
several more foreign banks have expressed interest in entering the
market recently, chasing opportunities in project finance in a country
that analysts say has untapped potential.

Among them is Standard
Chartered Bank, which generates 90 percent of its profit and revenue
from consumer and wholesale banking services across Asia, Africa and the
Middle East. In its latest move, the bank is planning to set up not
one, but three new offices in Iraq.

Standard Chartered already
has a representative office in Erbil, the chief city of the oil-rich
Kurdish autonomous region in northern Iraq.

To service the
expanding Iraqi activities of its clients, it is applying to the Iraqi
central bank for licenses to upgrade its Erbil office to full branch
status this year and to open a branch in Baghdad, to be followed by a
branch in the southern city of Basra in 2014. It also plans to appoint a
chief executive in Baghdad to focus on running its Iraqi business.

“A
lot more of our clients, whether it’s Western multinationals, Korean
construction firms or Saudi oil companies, are in advanced stages of
going into Iraq, and our move is about following them, not going in for
new clients,” Viswanathan Shankar, the bank’s chief executive for
Europe, the Middle East, Africa and the Americas, said during an
interview in his offices at the Dubai International Financial Center.

“Iraq
is a virgin market in the region that can’t be ignored because of its
rich economy and oil reserves,” said Mr. Makhlouf of the I.F.C.

“Government
policies, financial regulations and political stability are definitely
hurdles, but the strength of the economy and oil revenue to support
growth give Iraq the potential to be one of the best places to invest in
the region, and private banks see that,” he said.

The I.F.C.’s
investments in Iraq focus on developing the banking, logistics,
telecommunications and hospitality sectors through commitments that
reached $500 million from 2011 to 2012. This includes a $70 million loan
to help renovate a cement factory operated by an Iraqi subsidiary of
the French company Lafarge, to aid the country’s reconstruction.

The
I.F.C. plans to invest $100 million to $130 million a year in Iraq,
depending on the security situation, according to its Web site.

“There’s
a big increase of Asian companies coming to the market, particularly
Korean companies interested in project finance and, as a result,
welcoming the involvement of foreign banks,” said Mr. Tabbaa of
Eversheds, who is currently processing the legal paperwork for a couple
of banks based in Turkey and Abu Dhabi looking to register branches in
Iraq and two multinational companies seeking project finance to put
together Iraqi programs.

“There will be movement into the market,
and if Standard Chartered Bank is confident, that’s quite significant,”
Mr. Tabbaa said.

Korean companies like Hanwha have been active
in Iraq. The construction company signed a $7.75 billion deal last May
to build 100,000 housing units near Baghdad.

With deals like
these expected to grow in number and size, banks see plenty of incentive
to take on the hurdles, and the risks, of the Iraqi market: The profit
of National Bank of Iraq rose sixfold in 2012 alone, noted Mr. Salem, of
Capital Bank of Jordan.

“We were waiting for clarity on the
security issue and we think it’s improving, though not perfect,” said
Mr. Shankar, of Standard Chartered Bank. “We have been doing some
business in Iraq, enough to build a body of knowledge about what’s going
on, that we feel comfortable entering — with eyes wide open.”

[You must be registered and logged in to see this link.]