Trust in Iraqi banks is limited to say the least. During the war, banks were ransacked and even now, as international troops begin to withdraw from the country, Iraqis would still rather carry around large sums of cash than deposit funds in an account.

From the outside, few would consider Iraq as a viable investment option. Security issues, bureaucracy and a lack of infrastructure have deterred most.

However, interest in Iraq is warming up. The concept of what makes a good risk has been turned on its head in today’s market after the collapse of the US housing market, and the failings of highly rated CDOs. This places Iraq in a new and more flattering light.

Sir Claude Hankes, advisor to the major state-owned bank, Trade Bank of Iraq (TBI), comments: “Iraq has almost benefited from the economic downturn. In the past, investors didn’t need to focus on new markets with security issues, but they are now looking at the potential in Iraq compared to opportunities elsewhere.”

Sir Claude is speaking with experience, having worked with many supposed economic backwaters and seeing them develop into buoyant economies.

“I was involved in setting up the first trusts and investment companies in the Far East in the 1970s,” he remarks.

“I have not seen an economic opportunity that Iraq provides today since the Far East in the 1970s.”

As well as his work in Singapore and other Asian economies in the ‘70s, Sir Claude masterminded the resolution to the South African debt crisis in 1985.

He has over 30 years of experience in advising governments including several in the Middle East. He was also the chairman of the advisory committee to Jordan on strategic economic policy issues after the Gulf war.

Then in 2003, he agreed to become advisor to Iraq. In December that year, he played an instrumental role in bringing the Oil for Food programme to the attention of the world after urging the UN secretary to appoint an independent committee to look into the Oil for Food programme and testified to US Congress on the matter. He then went on to work with the nascent TBI.

Private sector growth
TBI was set up initially to replace the Oil for Food programme in July 2003, with a supporting foreign bank consortium headed up by JP Morgan.

It has been a successful venture, with the bank achieving record profits in 2008. Last year, its net profits increased by 41% from US$254.8mn to US$359.3mn.

The bank differentiates itself from the other Iraqi banks as it deals with international transactions as opposed to just working locally, and it boasts a long list of correspondent banks around the world, and according to Sir Claude, “There are plenty more knocking on the door.”

The bank is also playing an important role in encouraging the broader development of the private banking sector and helping banks work in international markets, although this was not its initial mandate.

Sir Claude explains: “The problem is Iraqi banks have not been dealing with international markets for a very long time and most haven’t implemented international accounting standards.

“TBI is helping any bank that wants to develop those skills. It has been setting up training schemes in places such as Istanbul. Key to the development of the economy is the development of the private banking sector.”

He adds: “Within this, trade finance plays an important role and TBI has significantly increased its business with and to the private sector.” As such, 30% of TBI’s business is now with the private sector.

Obstacles to development
Yet, one major hindrance to the development of the Iraqi banking sector is the lack of access to training in international standards. This is due to the fact that Iraqis find it extremely difficult to get the correct visa to cross into the US and UK.

“Training is absolutely vital and it is one of the problems that neither the UK nor US governments have properly addressed; a means of effectively providing a way for bona fide Iraqis to go to the US or UK for training.”

Referring to the ‘Invest in Iraq’ event held at the end of April in London, Sir Claude comments: “We had wonderful speeches by Mandelson [UK business secretary] about promoting investment in Iraq, but the problem is Iraqis can’t get visas in Iraq.

“Embassies don’t even provide them in Iraq. This is a major hindrance to trade.”

He explains that the British embassy has no visa department in Baghdad, and Iraqis usually have to go to Amman in Jordan, and then they only have a 50% chance of getting a visa.

“The British and US governments need to urgently address this issue.”

As GTR goes to press, both countries are now making tentative steps towards changing the situation.

There is also lot of catching up to do for the banking sector in terms of training and ensuring that the international banking community is satisfied that the Iraqi central bank provides the oversight necessary in today’s market. Presently, most Iraqi banks are not in the position to even open overseas bank accounts.

Yet, progress is being made. TBI is setting up a subsidiary in London that will provide a focus point for people in the UK wishing to export to Iraq or do project financing in the country. The bank will also have representation in the US.

Sector hotspots
With the fall in oil prices, there are further signs of a real push to develop the private sector. “The oil prices we have seen and the uncertainty that it has caused has resulted in a real recognition in the government for the need to develop the private sector,” explains Sir Claude.

With oil prices and oil exploration not developing as the government intended, it is very aware it has to support a market economy. The government cannot support the necessary infrastructure projects without the help of a strong private sector.

“I think it is absolutely going to be a market economy – no question of that,” Sir Claude asserts.

International oil companies are beginning to return to Iraq with companies such as BP, Shell and Total looking to bid for oil service contracts.
“But the opportunities are not just with the big oil companies upstream; the opportunities downstream are simply enormous,” Sir Claude says.
Another interesting development is the signing of a gas deal between the Austrian company OMV and Iraq, with Europe looking to reduce its dependency on Russia.
The demand for power is also huge. TBI has already been involved in the successful financing of a US$240mn power plant project in Erbil in Iraqi Kurdistan. Because of the plant, people living in the area can now get 24 hours of electricity everyday as opposed to the four hours they previously had.
Housing is another area of potential area of growth with around 2 million houses required in Iraq.
Iraq also used to be a major producer and exporter of cement, and there are signs the country is building up this sector again. A major cement group has signed an agreement with Iraq suppliers.
Other indicators of growing interest in Iraq include news that the German car manufacturer Daimler is returning to the country and setting up representative offices.
“I think we are seeing the beginning of a very important and exciting development,” Sir Claude notes.
Perhaps unexpectedly, tourism is a potential area of growth. “Hotels are being built as quickly as they can,” he adds.
He notes that Austrian airlines and Turkish airlines are all flying direct, daily to Iraq, one flying to Erbil and the other to Baghdad, but the UK is not.
Sir Claude sees this as another sign of the UK’s inability to make major changes that could dramatically increase investment in Iraq.
“It is all very well telling everyone of the great opportunities, but it is these countries that have not dealt with fundamental issues to make that happen.”
Interest from international banks
The international banking community is far from wholly adverse from Iraqi risk. TBI already works with a range of correspondent banks. In 2008, the bank saw a 36% increase in government sector letters of credit (LCs) issued via the bank, and a 47% increase in private sector LCs issued through TBI.
Accounting firms are already in the country providing training. Grant Thorton and Ernst and Young are there, with KPMG building up a presence.
Export credit agencies such as ECGD and US Ex-Im are also offering cover on Iraqi risk.
“In fact, US Ex-Im is ready to do a significant amount of business there,” remarks Sir Claude, but he adds that there needs to be the awareness among Iraqi banks and businesses of the services offered by US Ex-Im.
Developing market funds are also looking at Iraq, with TBI setting up a development fund in which investors can participate. Discussions between TBI and potential international banking partners are continuing as GTR goes to press.
It is aimed that the fund be around US$250mn, if not more, once established.
Changing attitudes
The potential for growth and development is there, and Sir Claude argues that the security issue “has improved significantly”.
He notes that the regional elections held earlier this year were an unqualified success.
“People are interested in voting for people that can deliver. National elections will take place at the end of January 2010 and will prove a major milestone.”
Iraq has massive oil reserves, a growing educated middle class and the potential to develop as a major cement and agri-exporter.
However, to ensure this potential is reached, Sir Claude notes that a change in business culture is needed.
“One of the challenges within Iraq is the development of transparent individual responsibility. In the past, the country relied on collective responsibility,” he explains.
This mentality led to increased bureaucracy and no one willing to take responsibility in the event of mistakes being made.
However, with the right management training, Sir Claude is confident strong leaders will emerge capable of driving forward economic development.
Referring to the achievements of the TBI and its chairman, Hussein Al-Uzri, he states: “Iraq has great potential for those that have a vision and determination – the success stories are already there.”