Khaberni - facing the banking sector in Iraq a sensitive phase with the start of implementing the comprehensive reform plan set by the Central Bank, which could lead according to estimates to the exit of some private banks through mergers or exits from the market.
These developments come at a time where depositors' fears are escalating, especially after previous experiences of distress, which threatens confidence in the banking system. With the widening debate about the future of dozens of small or weak banks, the head of the Iraqi Private Banks League, Wadih Al-Hantal, stated that Arab and Gulf banks have shown a real and serious desire to enter Iraq. Al-Hantal added, in statements to journalists, that Iraq stands today before one of the most profound stages of banking reform, supported by a road map set by the Central Bank for restructuring the sector, a process that may lead to widespread mergers or exits to ensure compliance with international standards and to enhance the strength of the banking sector.
Al-Hantal revealed that the Iraqi banking sector may witness a significant wave of mergers or exits, noting that the number of banks currently at about 60 banks "may decrease to half or less", in response to the directions of the Central Bank which he described as "clear reform messages" although they have not been officially announced. He confirmed his support for this approach because it will lead to a stronger and more efficient banking sector.
This proposal aligns with the statement of the Central Bank of Iraq, which affirmed its commitment to pursuing comprehensive reform, and its focus on enhancing financial stability and focusing on structural reforms that maximize local revenues and support the government's aspirations to diversify the economy.
An Appropriate Environment for Reform
The advisor to the Iraqi Private Banks Association, Samir Al-Nusiri, confirmed that the Central Bank's measures and efforts, in partnership and consultation with private banks, have been fruitful in creating the appropriate environment to commence the implementation of the goals and programs of the banking reform project, being coordinated with the government and the global consulting firm Oliver Wyman.
Al-Nusiri explained, to "Al-Araby Al-Jadeed", that this project targets building a strong, modern, and flexible banking sector, capable of supporting rapid economic growth, contributing to increasing the gross domestic product, and enhancing the market value of the banking sector.
Al-Nusiri also confirmed that efforts are underway to empower and grow the private banking sector during the period 2025-2028, through developing the banking system and its compliance with international standards, building a resilient and modern sector, enhancing citizens' confidence and international recognition of its transparency.
Al-Nusiri emphasized on rehabilitating restricted and weak banks for full return to activity, transforming banks to their fundamental role in financing and lending to enhance financial inclusion, and driving the shift towards a digital economy and withdrawing funds outside the banking cycle. He noted that the reform will also involve restructuring the sector and merging banks that wish to create large banking entities capable of attracting institutional investors according to the ownership ratios adopted by the Central Bank.
Mergers of Banks
Financial and banking expert Mahmoud Dagher emphasized that the banking reform plan was designed to improve the performance of Iraqi banks and enhance their international rating. He explained that the consulting firm "Oliver Wyman", in cooperation with the Central Bank, outlined the plan and its stages without including any direction to reduce the number of banks.
Dagher, for "Al-Araby Al-Jadeed", said that the plan targeted one of the most important requisites for improving performance, which is increasing capital, in line with global practices, where international banking entities have large capitals. He added that the plan granted banks the option of merger as a tool to enhance capital, along with allowing capable banks to continue independently, stressing that it cannot be asserted that the number of banks will decrease "to half or to a quarter", because that was not the primary goal of the reform. He pointed out that one of the factors for improving bank performance globally is their merger to increase robustness and their ability to face risks. Dagher emphasized that reforming state-owned banks must precede reforms of private banks, given that state-owned banks dominate 85% of deposits in Iraq and 90% of banking assets, making them the larger and more influential party in the banking system.
Depositors' Concerns
Meanwhile, economic researcher Mustafa Al-Faraj emphasized that depositors' concerns represent the biggest challenge in the path of reform, especially after experiences of some banks failing to repay deposits, which has led to a rising crisis of confidence among the public. Al-Faraj stressed that protecting the funds of depositors has become a direct responsibility of the Central Bank of Iraq, as the licensing and supervisory authority over banks, and that it must ensure their rights fully during any merger or restructuring process.
Al-Faraj explained, to "Al-Araby Al-Jadeed", that the number of private banks exceeding 60 banks does not reflect the strength of the sector, but reveals a fragmentation and weakness in capital efficiency, as part of these banks do not provide actual banking services nor contribute to lending or real economic activity, and rely on limited activities or ineffective speculations.
Al-Faraj noted that mergers, despite some shareholders' reservations, represent a reform step that gives the banking sector higher competitiveness, raises public confidence level, and transforms banks into effective tools in supporting the economy rather than remaining merely nominal or inactive entities.
Endangered Banks
In this context, economic researcher Ahmad Sabah confirmed that the Central Bank's plan to restructure the banking sector will push a number of weak banks towards merger or exit, especially those that faced sanctions or restrictions from the U.S. Treasury Department or failed to meet compliance and capitalization requirements, making their continuance within the financial system subject to radical review.
Sabah explained, to "Al-Araby Al-Jadeed", that the danger of these banks does not only lie in their poor operational performance, but extends to their use in some cases as possible channels for money laundering and dollar smuggling, due to the absence of internal control, weak audit systems, and governance, which has led international authorities to be strict in dealing with them. Sabah stressed that the continuation of these banks poses a direct threat to market stability and depositor confidence, affirming that restructuring them or exiting them from the market is necessary to protect the financial system and enhance transparency, and ensure a stronger and more capable banking environment to support the national economy.
