Digital Banking in Iraq and Investment Opportunities

Digital banking in Iraq. But first, what about the banking sector overall in Iraq? Currently, 54 banks operate in Iraq, of which 7 are state-owned, 15 are foreign and 11 are specialized in Islamic banking services. As for the branch network, Iraq currently has around 920 bank branches across different governorates. The Iraqi banking sector is significantly underpenetrated compared to MENA countries. The sector is mainly characterized by low penetration, high asset concentration, and small branch/ATM networks. Therefore, the banking sector has contributed to only 1.94% of the national GDP in 2021.

The majority of these actors rely heavily on the Central Bank of Iraq’s (CBI) foreign currency sales to secure a profitable balance sheet, rather than traditional investments.

Digital Banking in Iraq

Digital banking has transformed the way things are done. Now all you have to do to get cash is to get to the nearest ATM, use your card, and get cash in under a minute! Moreover, going digital allows you the perfect opportunity to enjoy a paperless banking experience, where you no longer need to keep track of your transactions or banking history through physical documents.

In 2014, regulations governing retail payments were introduced, followed by the implementation of the Iraq Retail Payment System Infrastructure by the CBI in 2016. Subsequently, mobile wallets such as ZainCash and AsiaHawala received authorization from the CBI in the same year. Their utility became particularly evident during the COVID-19 pandemic, facilitating the disbursement of government grants and stimulating online shopping and e-commerce platforms.

Electronic Cards

The number of issued electronic cards has grown since 2017. Prepaid cards, in particular, have grown exponentially in popularity, with over 9.7 million cards issued by the end of 2021. This seeming preference is due to the ease of their use and the simplicity. Because they can be obtained without the requirement to create a bank account.

In early 2021, the Central Bank of Iraq launched the Digital Banking Enrollment service. According to the CBI, the program is an “integrated digital financial system” that enhances independence from traditional systems. However, Iraq’s banking and financial legislation is outdated and cannot accommodate modern digital systems.

On March 28, 2024, the Central Bank of Iraq implemented regulations governing the licensing of Digital Banks within the country. The emergence of digital banking is reshaping Iraq’s financial landscape, presenting customers with increased convenience and innovation. Nevertheless, this evolution necessitates adept maneuvering through intricate regulatory frameworks. This briefing offers a succinct summary of the regulatory environment concerning digital banking in Iraq. These regulations also emphasize essential factors and repercussions for financial entities engaged in this domain.

Prospects for the rise of digital banking

Unlike traditional banks, digital banks do not have a store-front presence but use the Internet to serve clients through mobile phone applications and online platforms. It means the availability of all banking activities online.

Cash still is King. Cash’s dominance in Iraq’s economy hinders the growth of the banking system. It is also the biggest instrument of economic exchange. The importance of cash is tied to the stability of the economy due to its usefulness during crises and the need to withdraw it to support spending.  Iraq should think bigger and take steps towards establishing a vibrant digital banking system. This would provide consumers with better access to tools like e-payments and improve service provision. 

In Iraq, a transition to digital banking will alter the behavior of both companies and consumers holistically.

An indispensable component of any digital banking infrastructure is the capability to facilitate electronic payments. Currently, Iraqis predominantly encounter this through the government’s distribution of public sector salaries via smart cards. However, despite this method, a significant portion of individuals opt to withdraw their salaries as cash, effectively bypassing the digital banking system.

Moreover, while consumers around the world also use their devices for financial transactions, there is a limited opportunity for Iraqis to follow suit because banks and retailers do not yet use e-payments.

Kurdistan Region of Iraq

The banking sector in the Kurdistan Region of Iraq has a limited role in business transactions and, consequently, in economic development. This heavy reliance on cash limits opportunities for economic expansion. An efficient banking system needs interbank and government securities markets to provide liquid instruments for short-term investment. A lack of confidence in the banking sector is related to a loss of deposits under the former regime. While there is no short-term solution to reestablishing trust in the banking system, steps can be made to increase public confidence in the banking sector.