Last Sunday, the Central Bank of Iraq made an announcement regarding the use of dinars and dollars for internal and external transactions. Starting next year, all internal commercial and other transactions will be in dinars instead of dollars, with the exception of amounts delivered to travelers. This decision was made by Ali Mohsen Al-Alaq, the Governor of the Central Bank, and was reported by the official Iraqi News Agency. It is expected that this change will have a significant impact on the country’s economy and financial system.
During a meeting with council leaders and authorized bank directors in Iraq, it was confirmed that the bank plans to eliminate external transfers next year. Instead, local banks will use correspondent banks for external transfers. According to data from the Central Bank, 60% of transfers outside of their electronic platform were conducted through correspondent banks. The rate of verified transfers was over 95%.
This agreement was reached between the Central Bank of Iraq and the US Federal Reserve. As is the case in many countries, central banks are not responsible for executive duties; instead, their role is centered on supervision and control.
The Central Bank aimed to establish direct communication channels between Iraqi banks and foreign counterparts, including correspondence and commercial exchange, in multiple stages.
The restrictions imposed by the United States on Iraqi banks have caused several issues. As a result, the authorities are exploring other options such as searching for trade swaps in different currencies. Transfer channels are currently being opened in various currencies including the Emirati dirham, Turkish lira, Indian rupee, and the euro. Al-Alaqi has provided this information.
He indicated that when most merchants enter official transfer channels and provide the dollar at a rate of 1,320 dinars, it directly contributes to controlling the overall price level and reducing inflation. This is a crucial indicator of the effectiveness of monetary policy.
He emphasized that the black market price is not a reliable “indicator” for non-fundamental transactions and should not be used for legitimate trade.
It is believed by officials that the updated system for external transfer and sale of the dollar offers risk protection for all parties involved, has gained international recognition and approval, and is in compliance with laws aimed at preventing money laundering and terrorist financing. This approach also facilitates direct connections between Iraqi banks and their authorized international counterparts, representing a significant achievement. In April of last year, monetary authorities announced a plan to restructure the six government-run banks (consisting of commercial and specialized banks).
According to official data, Iraq has over 50 banks, but the majority of them have yet to implement any updates to their operations, particularly with regards to financial technology. This has become a crucial factor in measuring transparency and speed in facilitating payments and commercial deals.
Only three major banks, Al-Rafidain, Al-Rasheed, and Iraqi Trade Bank, hold 85% of the banking sector’s total assets based on official statistics.
Currently, there is only one major international bank operating in the country, Standard Chartered. It has a limited number of branches and mainly focuses on major government projects.
◙ Private banks will establish the new entity with support from both the Central Bank and the Iraqi Private Banks Association to provide services to small and medium-sized enterprises and people with limited income.
Since last summer, the government and monetary decision-makers have focused on achieving financial inclusion by upgrading the banking sector through structural reforms aimed at moving the economy forward.
Even though the Central Bank has taken measures that resulted in a rise of the financial inclusion rate to 33.5 percent in 2022, it still lags behind other Arab countries, particularly those in the Gulf region, that have set goals to match the level of emerging economies. The meeting focused on the creation of “Riyadah Bank” and its societal significance, which is in line with the Prime Minister’s directives and vision. The topic of establishing “Riyada” and the contributions of banks to this initiative have been discussed recently.
A new entity will be established by private banks, with the backing of the Central Bank and the Association of Iraqi Private Banks. This entity aims to provide services to small and medium-sized enterprises, as well as individuals with limited income and young people with innovative or conventional ideas and projects.
This new bank has been designed to support individuals who wish to open small productive and commercial projects that can help develop the local economy and reduce unemployment rates. It has received direct support from the Central Bank.
