Central Bank of Iraq suggests delay to reform plan on pressure from private banks

Plan has been extended for two years

The Central Bank of Iraq has said restrictions placed on some banks, particularly related to dollar transactions, will be lifted once institutions comply with phased reforms. AFP

The Central Bank of Iraq has revised its road map for the highly anticipated reforms for the private banks, granting lenders two more years to meet tougher requirements, according to a document seen by The National.

The move comes after private lenders pushed back against the Central Bank of Iraq’s original plan set in co-ordination with the consultancy Oliver Wyman this month.

It marks a significant retreat by the regulator from an earlier, more aggressive plan, that demanded compliance by the end of 2025.

The Central Bank of Iraq had previously increased banks’ minimum issued and paid-up capital requirement to 400 billion Iraqi dinars ($306 million) at the end of 2024 from 250 billion at the end of the June 2023, with 50 billion increments every six months.

The banking regulator said at the time that lenders unable to achieve this would face the prospect of having to merge, be acquired or be liquidated.

A cornerstone of the revised plan is that the phased increase in banks’ minimum paid capital has now been pushed to the close of 2027, the Central Bank of Iraq said in the document sent to the Iraqi Private Banks League. Lenders must now add 50 billion dinars each year, starting from 2025, to reach the target.

The new approach is designed to alleviate pressure on private banks and “give them breathing space to strengthen their capital base, while ensuring stability across the financial system”, an official told The National.

The Central Bank of Iraq has also offered to pledge that restrictions placed on some banks, particularly related to dollar transactions, will be lifted once institutions comply with the phased reforms, according to the document.

This promise is “another key demand by the lenders and will be an incentive for them as they have been struggling to regain access to international markets”, the official added.

According to the document, the regulator is still adamant about the presence of qualified institutional investors in the market. The requirement is "considered essential, as it represents the strongest guarantee for establishing the credibility of the reform, particularly in front of international parties", it said.

To achieve this goal, the bank will work on "clearly promoting the reform path to potential investors and will also play an active role in establishing an Iraqi investment fund", it added.

There was no immediate comment from the Iraqi Private Banks League.

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Since late 2022, the Iraqi banking sector has come under heavy scrutiny from the US Treasury Department, which has accused it of money laundering and supporting Iran and other US-sanctioned countries to access dollars.

It has banned 32 banks from dealing in dollars, and has applied strict scrutiny measures and is closely examining requests for foreign transactions to cover imports. A total of 75 currency exchange and money transaction companies were banned.

Under pressure from Washington, Iraqi Prime Minister Mohammed Shia Al Sudani's government and the Central Bank of Iraq introduced a series of financial and economic reforms in early 2023.

These include strict measures on foreign transactions in US dollars, requesting traders to file all details regarding the goods they want to import and the final beneficiary. Others are activating the electronic payment system, encouraging banks to offer a variety of services and calling on the public and businesses to open accounts.