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By Tanya Goudsouzian

Kurdish banks brace themselves for long term impact of global crisis.

A dozen or so Kurdish businessmen in Slemani lost money when the global crisis caused markets to crash worldwide. But for the couple hundred bucks that they had each invested in the Amman Stock Exchange, the Kurdistan Regional Government (KRG) did not feel the need to intercede by appointing one of those special committees tasked with probing into the matter and coming up with recommendations.

“The sums that we are talking about, it was more like a lottery than a major investment,” said Dr Ali Mohammed Abdullah, Director of the Central Bank of Iraq in Slemani. “The most they might have put in was US$200. So their loss was negligible. They were just testing the waters anyway.”

It was significant that these would-be stock investors had more confidence in putting their money in a neighboring country rather than in the Iraq Stock Exchange in Baghdad. Then again, most Kurds harbor a mistrust of Baghdad-based financial institutions.

“People still remember what happened after the war with Kuwait and the Kurdish uprising in 1991,” said Dr. Abdullah. “People who had their money in the banks lost everything. It was the Kurdish Regional Government that paid people back.”

Iraq’s Kurdistan Region has yet to establish its own Stock Exchange. A project to set one up in Erbil has been in the works for two years, but this was before the crisis. They have since slowed down their pace in order to fine-tune the details.

Six years after the US-led invasion overthrew the Baathist regime, the financial infrastructure in the Kurdish region has yet to fall completely in line with the Iraqi Central Bank.

For the most part, the Kurdish financial infrastructure remains very basic in the services it provides, essentially serving as glorified ‘piggy banks’, and some banks even retain a measure of independence.

In the city of Slemani alone, there are nine governmental banks, 12 in surrounding districts and more than a dozen private banks, including a few Islamic banks.

The private banks reportedly derive a large portion of their profits through the discrepancy in interest rates - the Iraqi Central Bank offers a considerably higher interest rate than the private banks in the Kurdistan Region.

In 2007, for instance, the Central Bank in Baghdad gave an interest rate of 26 percent, while some banks in the Kurdish region were giving 11 percent. These are issues that are being ironed out, according to Dr Abdullah.

Small business loans or mortgages as they are known in the West are not available to start with. Following the crisis, the terms of whatever form of credit were on offer to the public have been revisited.

As such, while the global crisis has had some impact on the overall Iraqi economy – the fall in oil prices will likely reduce the annual budget – it has only dented the development process in the semi-autonomous north.

Local economists have been quick to say that it is the shortcomings of their financial system that have saved the region from utter ruin.

Saved from utter ruin

“It is true that we do not have the same attributes as the banks in countries that have been hit hard by the crisis, but we do have some legitimate fears for the long term, so we are taking precautions now,” said Dr Abdullah.

“Prior to the onset of this crisis, we gave out loans to investors for projects. We have reviewed the terms of this service now. For example, our overdraft policy has been reviewed on a case by case basis.”

Dr Abdullah also stressed that the function of the Central Bank in the Kurdistan Region is unlike their counterparts elsewhere in the world. They are not involved in setting monetary policy.

These days, they are affiliated with the Central Bank in Baghdad and mainly serve to enforce policy and process the region’s 17 percent share of the budget, doling out money to the regional ministries for salaries and what not.

“We don’t have the laws or the right elements to be like global banks, so our goal is to bring in foreign investors as well as banks to invest their money and implement projects here,” he said.

The fall in the price of oil has already taken its toll on the overall Iraqi budget, and there was talk over reducing the share of the Kurdistan Region from 17 percent.
“Indirectly, this will have an impact on the pace of the reconstruction in Kurdistan,” said Dr Abdullah.

“It risks slowing down as the government is more cautious now, and is focusing on completing old projects.”

As a sidenote, he added that the regional government has also put a stop on purchasing new furniture for the offices of all directorates.

According to Dilshad Abdulmajid Mustafa, Manager of the Kurdistan International Bank in Slemani, the crisis has already impacted the Kurdish economy in a manner that may not yet have been felt by the average citizen.

“It’s a market, and all depends on market prices. If the Central Bank reduces their interest rates, the income of those investing in projects here will be reduced,” he said.

“People are cautious now when they are making deals. It has had an effect and the decrease in oil prices did have an impact on the Iraqi economy as a whole.”

Source: SOMA: An Iraqi-Kurdish Digest, February 2009

Added: Monday, March 09, 2009
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