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An economic welcome to the directions of establishing a loan guarantee company
Economical 2023/05/14
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Haider Fleeh Al-Rubaie
Specialists in economic and financial affairs welcomed the Central Bank's move towards establishing a loan guarantee company in cooperation with the International Finance Corporation, aimed at stimulating the lending process and reducing default rates, stressing that this step represents a "solid legal guarantor for lending."
The “loan default” process constitutes a real obstacle that many private and government banks suffer from, which cost them huge financial losses, which, according to the financial advisor to the Prime Minister, Dr. Mazhar Muhammad Salih, amounted to about 28 percent of the volume of loans granted after 2003, which is "Very dangerous" against the accepted global average of 3-6 percent maximum.
In order to eliminate this financial phenomenon that confused the work of many banks, the Governor of the Central Bank, Ali Mohsen Al-Alaq, discussed with a delegation of experts from the International Finance Corporation (IFC) affiliated with the World Bank, financial market projects in the Levant region, and during the meeting, according to a statement he issued. The Central Bank has drawn up a plan to establish a (loan guarantee company), which was proposed by the governor earlier as part of a comprehensive study he presented regarding building the bases for a national strategy for bank lending, while the staff of the Central Bank undertakes to build the national strategy for lending according to the rules stated therein.
The establishment of a loan guarantee company, according to the Central Bank statement, represents an important factor in stimulating lending, by reducing the rates of loan defaults that the banking sector in Iraq suffers from.
In turn, Counselor Saleh believes, during his interview with Al-Sabah, that “defaulting in loan recovery varies in our country between the years and the stages through which economic activity passed, in a period of banking turmoil for years after 2003, which involved expansion policies in granting loans or cash credits.” With weak guarantees, during which the government banking system was exposed to defaults in recovering cash loans granted, its defaults amounted to 28 percent, which is a very dangerous percentage compared to the acceptable global rate between 3-6 percent as a maximum, which is the rate that is accepted to face the risk of default in recovering cash loans in order for banks to hedge Reserves around capital, which is called the provision for non-performing loans.
Although bank collection mechanisms have mostly improved, Saleh believes that cases of failure to collect loans are still more than double the acceptable global rate of default within the scope of accepting emergency and rare cases. Despite the foregoing, the government financial advisor confirms that “loan or credit guarantee institutions in the world are considered today among the most effective means to help small and medium-sized companies access financial facilities, and this is what we are looking forward to today in providing flexible financing levers that help their flows to move effectively development activity that is directly linked to the labor market and addressing employment problems and the dilemma of unemployment.
For his part, the financial and banking expert, Dr. Mahmoud Dagher, pointed out during his interview with “Al-Sabah” that “the Central Bank’s initiative represents a step towards stimulating banks to grant soft loans to citizens in a larger and wider manner, which prompted the establishment of a guarantee company that bears an important part of the risks of those loans.” Which usually falls on the banks when the borrower fails to pay it.
Dagher explained, "Iraq owns a company to guarantee loans, but it has a low capital, so the Central Bank established a large guarantee company that is no less important than the Deposit Guarantee Company, which was established with a high capital and contributed by all Iraqi banks that guarantee an important part of citizens' deposits, in When the company to be established guarantees the risks of loans that banks pay to the public (companies and individuals) so that it makes the bank more able to grant additional loans.
Contrary to the previous opinion, the financial and banking expert, Abd al-Hussein al-Mandhari, expressed in his interview with "Al-Sabah" his surprise at the establishment of that company, indicating the existence of a Kafalat loan company that belongs to a number of banks that established it several years ago. Most of the banks contracted with government companies to insure their loans, and among them there were contracts several years ago, including loans from the Central Bank’s initiative.
The financial and banking expert, Abd al-Rahman al-Sheikhli, did not stray far from the previous opinion, when he explained to “Al-Sabah” that “there is a loan guarantee company that is working in real time at the present time, but in a less than required manner, and works to guarantee loans in return for a simple commission (not binding on the customer).” Considering the trend towards establishing a company for the same purpose as an "additional administrative circle".
In addition, a member of the Iraqi Economists Association, economic researcher Moqdam Al-Shaibani, counted the Central Bank of Iraq's move to establish a loan guarantee company in cooperation with the International Finance Corporation as a "step in the right direction," stressing that it will contribute to opening the door to the Iraqi economy and Iraqi banks by bringing in more international investments. Especially the investments directed towards the sustainable development goals and implemented by the sector.
Al-Shaibani indicated that one of the IFC's missions is to advance economic development and improve people's lives by encouraging the growth of the private sector in developing countries.
The researcher Al-Shaibani stressed that "the presence of a loan guarantee company, with the help of the International Finance Corporation, encourages many investors and international banks to finance projects inside Iraq, especially by the private sector."
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