Institute for War and Peace Reporting | Giving Voice, Driving Change

Kurdish Banks Slowly Win Trust

In a cash-based society, convincing Kurds to trust their savings to banks is still an uphill battle.
By Mariwan Hama-Saeed
A new bank in Iraqi Kurdistan is trying to build confidence in the faltering banking system by bringing cash machines and wire transfer systems to the city of Erbil.

Kurdish officials are trying to promote their region to investors as a safer alternative to Baghdad, but a dearth of banks that can be trusted even for money transfers has been a frustration for residents and businesspeople.

A 2004 report by the government-run Kurdistan Corporation said that business executives were "unanimous that the lack of banking facilities is the biggest impediment to economic growth".

Two years on, however, Kurdistan’s banking system is growing, albeit slowly.

Erbil’s Kurdistan International Bank for Investment and Development - one of only three registered private banks in Erbil and Dohuk provinces - was established last year with 35 million US dollars in capital. According to Ibtisam Najim Aboud, the chief executive director, it is the biggest private bank in the country with about 2,000 customers.

He said the bank would open ATM cash machines in the region in a few weeks. The first ATM in Iraq opened in Baghdad in March.

Aboud said the bank is using the SWIFT system to wire money and charges only 0.4 per cent, significantly less than the five per cent charged under the “hawala” system, an informal network of agents who send and receive money.

Iraq is still a cash-based society, and businessmen and individuals are more likely to carry tens of thousands of dollars across borders rather than transfer money. Sending money using the honour-based hawala method involves a significant amount of trust, since there are no absolute guarantees that the money will arrive.

Khalil Abdulla Mirza, head of the Khalil-Goran company which sells electricity generators, said he used to be nervous about sending money abroad via the hawala network. He was wiring a substantial sum to Lebanon through the bank when he spoke to IWPR, and said he felt much more comfortable with the modern process.

For many in Iraq, even putting money into a bank is a leap of faith.

The Kurdish government provides insurance on accounts held in government-approved banks so that if a bank collapses, customers can get their money back. But few people know about the insurance, and most Iraqis do not keep their money in banks because they consider it riskier than putting cash under the mattress.

"The money I carry with me is my guarantee," said Ahmad Abdullah, 30, who he never uses banks because Iraq is still unstable.

Other Iraqis prefer to hold all of their money in cash in case circumstances change and they suddenly need to flee.

Nor do Kurdish banks offer the kind of services that might attract more customers, such as home and personal loans.

"We haven't been able to fulfil people's demands," admitted Adham Kareem Darwesh, director of Harem Central Bank, the main government bank in Iraqi Kurdistan, which handles the payroll for civil servants.

People still lack the basic confidence that banks will not take off with their money. Shamal Nuri, an economist and managing editor of the Political Economy magazine in Erbil, said people find it hard to trust the banks because "they lack transparency and guarantees".

Aboud, of the Kurdistan International Bank, said his institution is trying to win hearts and minds through transparent policies, and hopes to build up its capital to 150 million dollars within the next few years.

Aboud’s bank adheres to Islamic banking practice which prohibits the charging of interest. Instead, it uses a system where it shares in profits made from collateral put up by clients.

Darwesh said that whether banks offer interest-based accounts or favourable loan terms, they will still find it hard to get the average Iraqi to deposit his or her money in an account. He said people would much rather buy a piece of land and profit from Kurdistan's booming real estate market than earn a small income from a bank account over a longer period of time.

"People are after businesses in which they can turn a profit in a short space of time," he said.

Mariwan Hama-Saeed is Kurdish editor of the Iraqi Crisis Report.