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Financial Sector Banking Essay

3545 words - 15 pages




The link between sound and well-developed financial systems and economic growth is a fundamental one. Empirical evidence, both in developing and advanced economies, has shown that countries with developed financial systems grow at faster rates. Efficient and prudent allocations of resources by the financial system is crucial for increasing productivity, boosting economic development, enhancing equality of opportunity, and reducing poverty. Getting the financial systems of developing countries to function more effectively in providing the full range of financial services is thus a task that will be well rewarded with economic growth. This report ...view middle of the document...

Banking System The banking system is still by far the most important part of the financial system, accounting for more than 75 percent of the assets. Seven state banks dominate the banking system (in particular, Rafidain Bank, Trade Bank of Iraq (TBI), and Rasheed Bank). Private banks are generally quite small and many have been established relatively recently. Seven of the 36 private banks have foreign participation and eight operate according to Islamic principles. Official figures vastly overstate assets of Rafidain Bank and Rasheed Bank (because of carryover of valuation losses equivalent to the double of GDP); staff estimates indicate that state banks account for 86 percent of bank assets and 69 percent of credits. The banking system is small, with an adjusted asset to GDP ratio of 73 percent compared to 130 percent for the Middle East and North Africa (MENA) region. Although growing rapidly in 2010 credits to the economy only amount to 10 percent of GDP compared to 55 percent for the MENA region. As a corollary, banks are very liquid; foreign assets and deposits at the Central Bank of Iraq (CBI) amount to 63 percent of assets. The operations of Rafidain Bank and Rasheed Bank (the two large state banks with country wide branch network) are inefficient and the two banks suffer from the legacy of past losses as well as from carrying out of quasi fiscal operations. Reform of the two banks has been significantly delayed from what was envisaged in a 2006 Memorandum of Understanding (MOU) between the CBI and the Ministry of Finance. Several committees have been working but little progress has yet been achieved, including in the technical area of cleaning up the two banks’ balance sheets. A World Bank project has been supporting the reform process since 2009. The reform process for Rafidain Bank and Rasheed Bank needs to be accelerated, including through the carving out of disputed items from their balance sheets and their transfer to a new asset/liability management company. More fundamentally, the authorities need to consider the relative roles they wish to assign to state banks and private banks, including the role to be assigned to the TBI. The TBI was set up as a specialized trade bank, but now operates as a general commercial bank and has become an important player in the financial system. As part of this overall strategy, state banks must become subject to normal supervision by the CBI. Private banks operate on an uneven playing field. State banks benefit from the perception of a de facto deposit guarantee and from restrictions imposed on the operations of the private banks. Government, government agencies, and state



owned enterprises are not allowed to place deposits with private banks. Nor can state-owned enterprises receive loans from private banks. Moreover, payments to the government (taxes and other payments) cannot be effected by check drawn on a private bank. Discussions are under way among private...

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