CREATING A SOUND AND MODERN BANKING SYSTEM

• New Central Bank Law. A new Central Bank Law was enacted in March, which supercedes the Central Bank Law of 1976 and establishes a foundation for a strong and independent Central Bank. The primary goals of the new law are to achieve long-term growth and prosperity through measures designed to maintain domestic price stability and foster a stable and competitive market-based financial system.

• New Commercial Bank Law. A new Commercial Bank Law was enacted in September 2003, which creates the basis for a sound and modern banking sector. Supporting regulations will soon be issued by the Central Bank. They will impose minimum standards for capital adequacy, lending, loan classification, and directives to prevent money laundering.

• Modern Payment System. The Central Bank Law permits the CBI to establish and maintain an interbank payment system. A VisaNet system is being installed, which will provide an interim payment system until a more comprehensive payment system is established.

• Restarting the Banking Sector. Banking sector institutions in Iraq - Central Bank, Rafidain and Rasheed Banks (280 Branches), 4 Specialized Banks and 17 private banks – were quickly re-opened after the war. Banks have begun receiving deposits, making loans, clearing checks, making money transfers. Indeed, as a reflection of renewed public confidence in the banking system, deposits have grown rapidly since last summer.

• Strong Domestic Bank Interest. The Central Bank has received over thirty (30) domestic applications for licenses. These are being reviewed very carefully, and two domestic banks have received licenses since the first of 2004.

• Starting International Transfers. Ten of the nineteen private Iraqi banks have now been approved to provide remittance services and letters of credit. Several other private banks are currently seeking the same approval.

• Foreign Bank Entry. Understanding that foreign banks will help strengthen our banking sector and accelerate Iraq’s integration into the international financial community, the Central Bank conducted a Request For Application ( RFA) for foreign bank licenses. Three banks - HSBC, National Bank of Kuwait and Standard Chartered Bank – are being awarded licenses to operate in Iraq. The CBI will be inviting foreign banks to participate in another RFA round.

• Trade Finance. The Trade Bank of Iraq (TBI) was established in July 2003 to facilitate trade of goods and services to and from Iraq by providing irrevocable letters of credit. The TBI officially became fully operational in December 2003 and has a services contract with a multi-international banking consortium led by JP Morgan Chase. Since opening in December, the Trade Bank of Iraq has issued or has pending 183 letters of credit, totaling $708.9 million in imports from thirty-one countries. Letters of credit have been issued on behalf of Iraqi Ministries as well as several state-owned enterprises.
 

CREATING AN ENVIRONMENT FOR ECONOMIC GROWTH

Improvements in the banking sector are taking place against the backdrop of broader initiatives to create an environment for economic growth.

• New Iraqi Currency. One of the most notable achievements has been the adoption of a new, unified currency serving all of Iraq. The Iraqi public was able to swap its holdings of Saddam dinars, effectively having only two denominations, and Old Iraqi (Swiss) dinars, having only three denominations, for six denominations of New Iraqi dinars. The exchange took place over three months, starting on October 15, and went extremely well despite a challenging security environment. About 2 billion banknotes were successfully swapped.

This amounted to the equivalent of 27 747 Jumbo Jet loads of new currency. There were over 250 sites all over the country where the Iraqi public was able to exchange old dinars for the new currency.

• Currency Auctions. In October, the Central Bank of Iraq introduced daily currency auctions. The auctions have helped to unify currency trading throughout Iraq. The New Iraqi Dinar (NID) has been fairly stable over the past two months, trading in the NID1400 to 1450 per dollar range, which has been reassuring to the public at a time of a deteriorating security situation.

• Inflation Figures. Annual inflation for 2003 was reported to be just under 35 percent by the Central Statistical Office. Over the final months of 2003 and the first few months of this year, consumer prices have been roughly unchanged on balance. Establishing price stability is a key monetary policy objective of the Central Bank.

• Liberalizing Interest Rates. In late January, the Central Bank of Iraq announced that interest rates paid on deposits, loans, credits, securities and all other domestic financial instruments would be fully liberalized. This policy became effective on March 1.

• Tax Strategy for Individuals and Businesses. A new Tax Strategy to raise revenue, as well as stimulate economic activity, has been established for 2004. The new strategy sets out a tax regime that caps the highest individual and corporate marginal tax rate at 15%. A reconstruction levy of 5% on all imported goods, except humanitarian goods, was implemented on April 15.

• Conducive Market for Foreign Investment. A new Foreign Investment Law/Order 39 was enacted in September 2003, which permits foreign investors to acquire up to a one hundred percent ownership in almost all sectors of the economy and provides national treatment for foreign firms and provided equal treatment for domestic and foreign companies.

• Streamlined Law for Small Business Owners. A new Company Law/Order 64 has been adopted, which replaces Company Law Number 21 of 1997. The new law reduces the steps and time necessary to form companies, and provides for equal treatment for foreign and domestic firms.

• WTO Accession. Iraq has been granted observer status to the World Trade Organization.