Cablegate: Prt Ninewa: Credit Crunch Stifles Economic

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PP RUEHBC RUEHDA RUEHDH RUEHKUK
DE RUEHGB #0455/01 0511358
ZNR UUUUU ZZH
P 201358Z FEB 10
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 6734
INFO RUCNRAQ/IRAQ COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 BAGHDAD 000455

SIPDIS

DEPARTMENT PASS TO NEA/I

E.O. 12958: N/A
TAGS: EFIN ECON EINV PREL PGOV IZ
SUBJECT: PRT NINEWA: CREDIT CRUNCH STIFLES ECONOMIC
DEVELOPMENT

1. This is a Ninewa Provincial Reconstruction Team (PRT)
message.

2. SUMMARY: Banking leaders in Ninewa province told PRT that
significant barriers to commercial and consumer lending in
Ninewa province continue to hamper economic development. The
precarious security situation, a paralyzed property deed
registration system, and the lending requirements of the
Central Bank of Iraq are all serious impediments to the
effective flow of capital, and the consensus among these
experienced bankers is that the only near-term growth in the
financial services industry in Ninewa will be in private
banking. New PRT-led efforts to capitalize small, credit
union-style financial institutions linked to agricultural
associations or women,s groups will fill a critical void
among existing groups who have a shared economic interest in
working together and are therefore more risk tolerant. END
SUMMARY.

RISK TO LIFE AND LOAN
- - - - - - - - - - -

2. At a bankers roundtable PRT Ninewa organized on February
4, bank managers from Ninewa branches of the Rafidain,
al-Warka, and Agriculture Banks, as well as the Central Bank
of Iraq commented that they worked in fear of their own
success. The bankers told PRToffs that a growth in deposits,
increased lending, improved technology, and new, successful
banking ideas could make them targets of criminal activity.
This fear serves as a chill on expansion of the financial
sector in the region, as there is limited incentive to grow
the profitability of the banking institution. In addition to
their vulnerability to criminal activity, the bankers also
told PRToffs that current security measures impede their
commercial activities. The representative from Rafidain
Bank, for example, complained that physical barriers erected
throughout the city of Mosul stifle trade activity by
limiting physical movement. He felt that the current
security and work environment had improved somewhat, but that
the barriers are excessive.

THE PROBLEM OF COLLATERAL
-------------------------

3. The bankers reported that Provincial Governor Atheel
al-Nujaifi's (al-Hadba) sudden and temporary of a land deed
registration office on the east side of Mosul caused lending
in much of the city to grind nearly to a halt, since most
lenders accept only land deeds as satisfactory collateral.
The registration office in western Mosul remains open,
however the numerous barriers and checkpoints around the city
make travel to this office difficult. (NOTE: Governor
al-Nujaifi claims he closed the office due to money
laundering, theft, and other criminal activity in the land
registration offices. END NOTE). The Central Bank of Iraq's
rather short list of acceptable forms of collateral, which
includes real estate deeds or the signature guarantee of a
GOI employee, reinforces the risk-averse mindset and serves
as a further limitation on lending.
An Agricultural Bank representative did report success with
a recent zero percent interest loan program in rural areas in
the province, but noted that the program served only
approximately 20 percent of prospective borrowers who
qualified. The bankers agreed the primary reason for the
success of this program was that the lending took place in
secure areas of the province.

PRIVATE FINANCIAL SECTOR STIRS
------------------------------

4. While branches of state-owned banks await instructions
from Baghdad to implement reforms and innovations, private
banks are beginning to act with increased independence. Al
Qbanks are beginning to act with increased independence. Al
Warka Investment Bank reports active and expanding Electronic
Funds Transfer systems, although these still represent less
than ten percent of total transactions. Al Warka's
representative also told us that it now has three functioning
Automatic Teller Machines operating in the province. Many
leading bankers expressed interest in implementing new
technologies, which could boost their lending capacity and
tolerance for risk, although the bulk of their current
lending portfolios consists of larger high-interest loans
(ranging from 17 to 22 percent) and not small, low-interest
loans to fund small business development.

COMMENT
-------

5. Microfinance activity in Ninewa illustrates signs of

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continued growth and bank savings rates increase nationwide,
but the barriers the bankers reported to us hamper an
industry that otherwise should be in high growth mode. When
the public either stores its savings under their mattresses
or deposits its savings in banks that store the capital under
their mattresses, such risk aversion in lending stifles job
creation and wealth building. In Ninewa, such barriers must
be addressed before there can be sustained capital flow and
economic growth impacting the diverse communities facing
abject poverty in the province. Increased independence from
banking regulations initiated in Baghdad may cause Ninewa's
banks to be more aggressive and innovative in overcoming
these barriers to feed small entrepreneurs with capital.
Depending on the degree to which such liberalization occurs,
U.S. efforts to stimulate economic growth through banking
more likely will find traction within the private banking
space, even though an extraordinarily large percentage of
Iraqi capital flows through state-owned banks. One key node
for this expansion is a nascent PRT effort to capitalize
small business development centers that link lending risk to
the established tradition of cooperation and shared economic
interest that thrives within agricultural associations,
women,s groups, and other trade groups across the province
(septel) END COMMENT.
FORD

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