Critical Reforms for the Iraqi Banking Sector Iraq Finance 2014 Chris August, Director, Philadelphia Consulting Group

1. Critical Reforms for the Iraqi Banking Sector Iraq Finance 2014 Chris August, Director, Philadelphia Consulting Group

2. Agenda Items 1. Introduction 2. Recommendations from 2012 3. Importance of Banking 4. People 5. Systems 6. Laws and Regulations 7. Procedures 8. Decision-making 9. Areas to address 10. Reference Brief

3. PART ONE ---- 1. Introduction

4. 2. Recommendations from 2012

5. 2. Recommendations from Iraq Finance 2012 Welcomes the on-going reforms and restructuring of state-owned banks and turning them into independently capitalized corporations and urges a strong commitment to the operational independence of state-owned banks. Welcomes the removal of restrictions on government and government related entities in their dealings with private banks. Urges the reduction of delays in the registration of companies, unifying company laws, and reduces the complexity of corporate registration rules and requirements. Urges the development of the accounting and financial management sector and encourages increasing the number of trained accountants to International Financial Reporting Standards. Urges the Central Bank to look into the costs of financial transactions and intermediations by removing market distortions. Urges the formation of a national investment fund to support the financing of infrastructural projects in the regions and provinces and to support co-financing of Private-Public-Partnerships. The fund will issue development bonds to be placed with banks and the public. Urges the government to consider the establishment of regional and provincial development banks to support the financing of the private sector. Urges the government to establish the legislative and regulatory framework for Islamic banking in Iraq, so as to create a parallel banking and financial sector to the conventional model. 5

6. 3. Importance of Banking

7. 3. Importance of Banking • Economic development • Security • Trade • Anti-corruption (“The lack of a credible national banking system in Iraq is the single largest economic factor leading to corruption.” – Jeffrey Coonjohn) 7

8. 4.People

9. 4. People • Lack of skills • Lack of understanding of risk • Lack of initiative • Fear of failure • Reasons for the above (family banks, executives trained in government banks, etc) 9

10. 5. Systems

11. 5. Systems • Core banking • Retail payments system • Credit information bureau • Mobile banking • Automation • Deposit Insurance 11

12. 5. Systems …continued Advantage of a combined Credit Registry & Credit Bureau in new growing markets: • Central Bank: • Shortcut to statistical loan information which provides supervisors with control over the extension of lending to the retail and corporate sectors. • Justifies Interest Rate Policies and Risk Based Pricing • Banks: • Provides faster and more reliable lending decisions and reduces the dependency on Guarantors and Collateralised Lending. • Enables more time with Low Risk Customers for cross marketing or Banks products and services. • Customers: • Improved acceptances of Low Risk Customers; opens up business opportunities to Medium to High Risk Customers. • Credit Report provides single access to information which banks have provided thus creating opportunity to negotiate better terms. • RPSI and Mobile Banking solutions increases ability to pay.

13. 6. Laws and Regulations

14. 6. Laws and Regulations • Long delays in passage of legislation • Need to Fast Track some urgent laws • Replicate some laws from neighbour countries, e.g. deposit insurance • Guillotine process being used to eliminate unnecessary legislation 14

15. 7. Procedures

16. 7. Procedures • Unnecessary procedures resulting from vested interest (e.g. customs procedures, wasting US$ 10 billion per year from the Iraqi budget) • Lack of certain controls, e.g. good banking supervision, anti-money laundering and terrorism financing, compliance • Fear of change and making decisions 16

17. 8. Decision-making

18. Corporate governance: distinguishing between getting a decision wrong and doing wrong – a crucial distinction • You will never learn to ride a bike properly if you don’t fall off a few times • Making a decision is sometimes better than not, even if it is the wrong decision • Nothing changes if no-one makes decisions • Consult then act • 8. Decision-making 18

19. 9. Areas to address

20. 9. Areas to address • Reporting to international standards • Core banking systems • Deposit insurance • Reduction in Rafidain & Rasheed Banks hold on banking sector • Increasing use of banks in the economy • Increasing access of private banks to government-related business • Increased lending • Risk analysis (over-use of APGs, PB, etc) • Risk management • Structured revolving credit facilities rather than overdrafts • Credit analysis • Market conditions and pricing • Problem loan management • Provisioning policy • Collateral policy 20

21. 9. Areas to address • Ownership issues (family-owned banks), capitalisation, mergers • Corporate Governance • Balance sheet ratios • Asset/liability management • Interbank lending • FX Auction • Banking Code • Customer Service • Regional and provincial development banks • Islamic banking in parallel with conventional • Trade finance • Correspondent banking • Syndicated lending • Housing bank • Investment funds 21

22. PART ONE ---- 10. Reference Brief

23. 10. Reference Brief Bank of Jordan NCB NATIONAL COMMERCIAL BANK WAHDA Bank