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Iraq
BANKING AND FINANCE
When Iraq was part of the Ottoman Empire, a number of European
currencies circulated alongside the Turkish pound. With the establishment
of the British mandate after World War I, Iraq was incorporated
into the Indian monetary system, which was operated by the British,
and the rupee became the principal currency in circulation. In
1931, the Iraq Currency Board was established in London for note
issue and maintenance of reserves for the new Iraqi dinar (ID--for
value of the dinar--see Glossary). The currency board pursued
a conservative monetary policy, maintaining very high reserves
behind the dinar. The dinar was further strengthened by its link
to the British pound. In 1947 the government-owned National Bank
of Iraq was founded, and in 1949 the London-based currency board
was abolished as the new bank assumed responsibility for the issuing
of notes and the maintenance of reserves. The National Bank of
Iraq continued the currency board's conservative monetary policy,
maintaining 100 percent reserves behind outstanding domestic currency.
Initiated during the last years of Ottoman rule, commercial banking
became a significant factor in foreign trade during the British
mandate. British banks predominated, but traditional money dealers
continued to extend some domestic credit and to offer limited
banking services. The expansion of banking services was hampered
by the limited use of money, the small size of the economy, and
the small amount of savings; banks provided services for foreign
trade almost exclusively. In the mid-1930s, the Iraqi government
decided to establish banks in order to make credit available to
other sectors of the economy. In 1936, the government formed the
Agricultural and Industrial Bank. In 1940, this bank was divided
into the Agricultural Bank and the Industrial Bank, each with
substantially increased capital provided by the government. The
government established the Rafidayn Bank in 1941 as both the primary
commercial bank and the central bank, but the National Bank of
Iraq became the government's banker in 1947. The Real Estate Bank
was established in 1948, primarily to finance the purchase of
houses by individuals. The Mortgage Bank was established in 1951,
and the Cooperative Bank in 1956. In addition to these government-owned
institutions, branches of foreign banks and private Iraqi banks
were opened as the economy expanded.
In 1956 the National Bank of Iraq became the Central Bank of
Iraq. Its responsibilities included the issuing and the management
of currency, control over foreign exchange transactions, and the
regulation and supervision of the banking system. It kept accounts
for the government, and it handled government loans. Over the
years, legislation has considerably enlarged the Central Bank's
authority.
On July 14, 1964, all banks and insurance companies were nationalized,
and, during the next decade, banking was consolidated. By 1987
the banking system consisted of the Central Bank, the Rafidayn
Bank, and the Agricultural, Industrial, and Real Estate banks.
In the 1980s, the Rafidayn Bank was in the contradictory position
of trying to maintain its reputation as a viable commercial bank
while acting on behalf of the government as an intermediary in
securing loans from private foreign banks. With deposits of more
than US$17 billion in 1983, the Rafidayn was reportedly the largest
commercial bank in the Arab world. It managed to maintain a relatively
sound commercial reputation for the five years of the war, and
in 1985 its total assets stood at about ID10.4 billion and its
total deposits, at more than ID9.5 billion--both figures having
tripled since the Iran-Iraq War began in 1980. This huge increase
in deposits was attributed to increased saving by the public because
of the scarcity of consumer products. Profits of ID290 million
in 1985 represented an increase of nearly 50 percent over 1980
levels. By 1985 the Ralidayn had established 215 branches in Iraq,
104 of which were in Baghdad; according to the Iraqi government,
it also had seven branches abroad. In 1986, however, the bank
started to delay payment of letters of credit owed to foreign
exporters, and its failure to make installment payments on a syndicated
loan of 500 million Eurodollars, forced rescheduling of the debt
payments. In 1987, with the exception of the Baghdad office of
a Yugoslav bank, the Rafidayn was Iraq's only commercial bank.
In this same year, the government ordered the Rafidayn Bank to
double its capital to ID100 million. This increase was to enable
the bank to improve and to extend its commercial services, so
that it could tap the public for the increased deposits that would
enable the bank to offer more loans. To the extent that new loans
could bolster the emerging private sector, the move appeared consistent
with other government efforts to make state-run operations more
fiscally efficient.
The other three banks in Iraq were so-called special banks that
provided short- to long-term credit in their respective markets.
Since its establishment in 1936, the Agricultural Bank had grown
to forty-five branches, of which four were in Baghdad. In 1981,
its capital stood at ID150 million and its loans totaled ID175
million. The Agricultural Bank had also started a project whose
objective was to encourage rural citizens to establish savings
accounts. Meanwhile, the Industrial Bank had grown to nine branches
and offered loans both to private and to public sector industrial
and manufacturing companies. The Real Estate Bank was composed
of twenty-five branches and provided loans for construction of
housing and tourist facilities. The Iraq Life Insurance Company,
the Iraq Reinsurance Company, and the National Life Insurance
Company conducted the nation's insurance business. Post offices
maintained savings accounts for small depositors.
Data as of May 1988
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