DINAR REVALUATION REPORT: Economic Analysis: Impact of Declining Private Sector Deposits on Iraq's Banking System, 19 SEPT

Economic Analysis: Impact of Declining Private Sector Deposits on Iraq's Banking System

An unofficial Iraqi financial report has revealed a significant decline in the acquisition of private sector deposits by 12 local banks compared to a significant increase in the share of banks that have banking relationships with American financial institutions. 2

Shift in Private Sector Deposits

A report by Iraq Future for Economic Studies and Consultations disclosed a shift in the distribution of private sector deposits among Iraqi banks during the first half of 2024. Three Iraqi banks that maintain correspondent relationships with US financial institutions controlled nearly half of all private sector deposits in the first six months of 2024, holding 47% of private deposits, an increase from their 34% share in 2019. 2

Meanwhile, the 12 banks capable of international financial transactions, but without US correspondent relationships, saw their share of private sector deposits drop to 36% by mid-2024, down from 42% in 2019.  2

Implications on the Iraqi Banking System

This shift in private sector deposits has profound implications for the Iraqi banking system. The Central Bank of Iraq has acknowledged that reliance on correspondent banks for external transfers plays a crucial role in this new distribution of deposit shares. 4 The rise of US-linked banks is expected to continue, with these banks accounting for more than 50% of private sector deposits by the end of 2024. 4

Impact on the Iraqi Economy

The decline in deposits in local banks that lack US correspondents is the result of several factors, including corruption and liquidity risks. Banking expert Abdulrahman Al-Shaikhli explained that corruption in the banking sector and the lack of confidence in local banks have contributed to this trend.  4

Conclusion

The significant decline in the acquisition of private sector deposits by local banks in Iraq and the increasing dominance of US-linked banks pose challenges to the country's banking system. This trend could potentially lead to an imbalance in the banking sector, impacting the financial stability and growth prospects of the Iraqi economy. Understanding and addressing the underlying issues, such as corruption and lack of confidence in local banks, is crucial for the sustainable development of Iraq's financial sector.