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Complete Minutes of Shabbibi World Bank meeting
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Here is the entire document.

MRA 1901 - SEPTEMBER 24, 2011 - B&B Reporters
IRAQ BANKING SYSTEM REPORT LAUNCH
MR. KARASAPAN: Ladies and gentlemen--now you can hear me. Welcome to the launch of the Iraq Financial Sector Review. We have the Governor in the building and he's making his way over here, led by our Task Team Leader.
But because of time constraints, we will have Inger Andersen, our brand new Vice President for the Middle East and North Africa Region start with her remarks, and then we will move on to His Excellency, Dr. Rafi al-Issawi, and by then we should have His Excellency Sinan Al Shabibi, the Governor of the Central Bank here.
Inger?
MS. ANDERSEN: [Off microphone.]
MR. KARASAPAN: Whichever way, but it's better over here for the TVs, I think.
MS. ANDERSEN: Oh, I see. Well, first of all, my first comment is, of course, to welcome everyone who's here. It's a real, real pleasure to have so many people who are interested in this very important topic.
But most importantly, I'm particularly pleased to welcome Dr. Rafi al-Issawi. It's a real pleasure to have you here, Mr. Issawi. I know that you have led this work, you have provided guidance to this work, and it's under your personal leadership that we have reached where we are. So we are very privileged to have this launch in your presence. And we will look forward, also, to Governor Shabibi speaking to us today.
Your personal leadership and your personal endorsement of this financial sector review is after many consultations and much work. It's actually what will make the difference. This is not just a dry report that will sit on a shelf. This is something that is live, and that is something that I'm particularly very pleased about.
I'm also pleased that many of our partners who have worked with us on this, such as the IMF, such as the U.S. Treasury, IFC, and many other partners are here today and will accompany this process looking forward.

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We in the World Bank Group, we are here to provide support to the Iraqi Government, the Iraqi people in enhancing economic growth and in developing the financial sector to serve the nation and to serve the people at large. And we've learned from experience that attaining an inclusive system is essential for sustainable development.
And so, Mr. Minister, I'd like to recognize the Governor who has now arrived. Governor Shabibi, it's a pleasure to have you here.
We all agree that a very strong and vibrant financial sector is absolutely critical in promoting development in Iraq. And the launch of this report, therefore, comes at a very, very opportune time.
I'm also very glad that we've had a project that is supporting the restructuring of key state-owned banks, Raffidain Bank and Rasheed Bank, that account for 86 percent of the total system, and that that overall helps strengthen the supervisory framework for these banks.
Now, some progress has been made, but the speed is going a little slow, so we know that with your leadership, we will, together, accompany that reform that is in hand. And so, we very much appreciate that leadership and that specific focus that we see you giving to this sector.
Now, the report today--and you will hear from our brilliant Task Team Leader, Sahar Nasr who is sitting there, some issues on the report, but let me just say that there are six items, six sort of to-do items that I think actually that the team, together with our Iraqi friends, have identified.
And frankly, when I look at these six items, they are very relevant to many of the reform programs and projects that we deal with, with banks. So they are not unique to Iraq. But obviously, we can learn from each time and in country to see the uniqueness in each place. But there's much that is of general nature.
And these six areas, let me just mention them. First of all, the financial sector really can play that role of financial intermediation, but it's still a little weak, and the weak financial infrastructure is sort of preventing that from playing the full role, the full potential that it has.
Secondly, the story around finding a level playing field amongst all the banks is very important and something that the report highlights, and which I know is a desire of the Iraqi authorities to find between the private banks, the state-owned banks, et cetera. How can we get them in that level playing field?
Thirdly, financial restructuring, as I mentioned, on these two large state-owned banks. That's important because they do govern control by 80-plus percent of the market. And so, once that is brought in level and once we have that restructuring, then we will be able to see the leveling between public and private banks.
Fourthly, the whole issue around banking supervision. We know that if we ignore that, then the sector will be on a runaway track. So ensuring that we have solid supervision is absolutely key.
Five, we have to also find ways to develop non-bank financial institutions and markets because they have a potential to provide access of sources of finance, and that's a very key piece to the full array, the full rainbow of financial products that we want to be sure are available to the citizens of Iraq and to businesses and growth.
And finally, of course, to ensure that we have--and I think we do have in the spirit of the Governor and the Minister here--a strong politically supported effort to prevent any abuse and any undermining of these very efforts on reform that are underway through working on corruption issues and anti-money laundering, and issues around prudent fiscal and financial management of the banking sector.
So when we look at Iraq's banking and financial systems and the speed of these adjustments that need to happen, it's very clear that there are some--this is not an easy road to travel because there are political and many other issues that play, and that's where leadership comes in, the leadership that we see today and the leadership that we have seen in the preparation of the report.
So we know that there's still much to be done on the legacy of the prevailing state intervention of the past. With that said, I want to stress that we feel that in this partnership and with that leadership that we see today, we can see that the policies and the recommendations that are contained in this report, we are very optimistic that they will prevail and see the light of day as we roll out the program.
So I'm, therefore, very glad, Mr. Minister, that you've taken a personal interest. I want to thank you on behalf of the Bank for that leadership that you have shown. And I want to thank, also, the Governor, as well as yourself, Mr. Minister, for the excellent cooperation that we've had.
So with these words, let me hand over to you, Mr. Minister. Thank you.
[Applause.]
DR. AL-ISSAWI: Thank you very much. First of all, I would like to express my deepest congratulation for Mrs. Inger for being appointed as Vice President for the MENA Region, and looking forward to work directly with you and with your team.
And here I don't need to forget Mrs. Shamsehd [ph] who worked with Mr. Hedi Larbi and all the excellent team, and Maria, and everyone who worked and some of them are living in Iraq like Maria, or visiting. All of them are working very hard to support my ministry and my government.
Everyone around the table, maybe because of their different multiple meetings, is fully aware about the type of the problems of Iraq economy and Iraq financial sector.
But to me, maybe one of the most important reports or meetings or workshops that have been conducted in Istanbul that I already referred to in my meeting with Mrs. Inger this morning that are represented by your team, is what's called Solution Oriented or Problem Oriented Action Plan that focused on specific problem and the solution and the ministry or ministries in charge and time table.
To me this was really a new trend and new beginning, in fact. Just to focus on the different problems that diagnosed in the financial sector. And we in the Ministry of Finance, when we came back to Baghdad, me and Mr. Governor had a very extended meeting to put the time table for implementing that action plan.
So again, I would like to thank again Mr. Hedi Larbi and your team and especially because of the time short, very hard to present that action plan.
And again, I would like to stress the necessity of the partnership with the World Bank from the point of view of the government. And you have a very long way to work together, focusing on macro issues rather than the micro, despite the macros are also important as daily activities, but working on strategies and a comprehensive policies or strategies are very important to the ministries, not only to the Ministry of Finance.

Reform of the financial sector is definitely needs a very long time, not only our will or support of the government. We in the Ministry of Finance and the Governor of the Central Bank are definitely stand with you supporting all the reforms that are needed to update or to upgrade our financial sector.

Some other issues like capacity-building that I already stressed with Mrs. Inger this morning, and improvement of private sector participation in the Iraqi economy, diversification of Iraqi economy that already everyone knows very well that you depend on what's on the oil that make everything very volatile and very oscillating with the project of oil.
All these sectors or field responses have to be really--I cannot say very premature, but it leads off efforts to upgrade or to strengthen it.
Finally, I would like to present an open invitation for you, Mrs. Inger, to Baghdad and Shallah [ph], and I already discussed with you in the city of seeing your office completely in Baghdad despite the fact that they are doing very well from outside Baghdad. This is not for criticism, but this is only just to say that their presence in Baghdad will really open more opportunities to the ministries to work very close to them.
And thank you very much again for all the things that have been done by you and your team, Mrs. Inger. Thank you very much.
[Applause.]
MR. KARASAPAN: Now we will have opening remarks by Dr. Sinan Al Shabibi, the Governor of the Central Bank of Iraq.
HON. DR. AL SHABIBI: Thank you very much for giving me this opportunity, and I'd like to thank very much the team who is actually working on the financial sector review. This is very important.
And I thank the efforts of all the staff of the World Bank on this, and especially Ms. Andersen, and, of course, the team of Mr. Larbi and Sahar Nasr, which is really very important, very essential for the Iraqi economy.
The financial sector is a complement to the real sector and, of course, in this case, it's very difficult to talk about any kind of development in the real sector without having all the resources to be mobilized for that sector and to be--actually serve it through intermediation, because development of the financial sector will make all these things actually easy for the development and for the resources to go from different saver to different investors and all these things.
So I think it is very important and I would like to appreciate very much the efforts of all the people who are actually working on this project and, of course, His Excellency, the Minister, actually lent his utmost support to this activity and we, in the Central Bank, we are actually all ready to give all the support, because we think that a lot of this work is a complement to the work of the Central Bank in providing stability and the fact that actually--despite the fact that we had a lot of success in the Central Bank in the provision of stability and provision and laying the ground for intermediation and exchange its stability.
But, I mean, that's not enough because we have a banking sector which needs to be developed, which needs actually to--especially the state-owned banks and, of course, the whole private sector banks.
So you can actually count on our support on that, because, I mean, not only the support actually--it is a support actually which we are going to benefit from, eventually. So I'd like to thank you again and look forward actually to the discussion which is going to take place.
[Applause.]
MR. KARASAPAN: Well, then without further ado, we'll turn to Sahar Nasr, the Task Team Leader, who will introduce the team. We have 50 minutes until [inaudible]. We have good representation from the [inaudible], so time is of the essence. So, Sahar?
MS. NASR: I want to begin by thanking you all for being here today at the launch for the Iraq Financial Sector Report. I am especially honored to have His Excellency Dr. Rafi Al-Issawi, Minister of Finance, and, of course, His Excellent, the Governor, Dr. Sinan Al Shabibi, and our new Vice President, Ms. Inger Andersen. We are happy to have you here.
I would like to acknowledge that this is the first assessment of the Iraqi financial sector that took place over the case, so we're happy to be partners with you in this very key endeavor.
And as Ms. Inger indicated, it is a package of integrated work of support that the Bank has been providing the Iraqi authorities, and one of the key projects that we have is the banking sector reform project, and we are very happy to see, also, the new Minister of Finance with his leadership, because the Governor has been working on that project along with limited support from the government. So we are very proud to have you in moving especially the state-owned banks where we have issues.
And just quickly, the main objective of the report was to assess the soundness and stability of the financial sector, especially with the global crisis and what is happening in the Arab region, so we think it comes at an opportune time.
And we wanted also to assess the reform program, the gaps, the challenges, and also we wanted to make sure that the financial sector does play a key role in economic development in enhancing equal opportunities and poverty reduction for the Iraqis serving all citizens, and that is why we'll focus a little bit on the access issue.
One thing I want to highlight before the team takes over is it's a joint product. It's not the World Bank report. It's a product that was done in collaboration with the Iraqi government, and we did, as His Excellency, the Minister of Finance, mentioned, we did sit for three days, consecutive days, also with Hedi there, discussing.
And in many things that the team did put, we did reflect, we did make changes, we did discuss some laws we were not aware of, we reflected. So we had a lot of brainstorming and with the representation with the private sector, civil society, we had the banker's association, we had Islamic banks, state-owned banks, non-banks, stock market was there, and we were happy to see ownership and commitment.
And, of course, that was also due to your leadership, but also giving the opportunity for a transparent and solid discussion with everybody. So I want to thank you for that.
And Inger has already highlighted the key messages, but just very quickly I want to stress also that the level playing field, we think, is important. Enhancing the supervision of the Central Bank is one of the key issues. Reforming the banking sector, since it's dominant, so it plays an important role, but also developing non-banks to have a more diversified financial system and more competitive.
And very quickly, I will just take a look of the snapshot of the action plan that their Excellencies referred to where we clearly put time bound actions specified entities, whether they're mainstream or whether it's Central Bank, whether it's a greater role of the stock market, and we're all different players, market players. We're there and endorse the action plan.
I think that's documented now in Annex 18 and this is one that we've done in partnership that we are really, as a team, we're all very proud of. We understand that there are challenges. We had several missions in Baghdad and also the Istanbul event and many other missions in different parts of the region.
And we understand there is a security issue. We understand the political situation. We also understand there is a lot of challenges, but we see there is some progress made and there's more than can be done and we're happy to step in and provide any support through the current operation, but also moving forward.
Allow me now to introduce our new core team members and Sibel. So maybe we start with Sibel, who will give us a quick overview on the macro framework in which the financial sector operates and we think it's very important.
MS. ANDERSEN: I'm sorry. Before we do that, I'm afraid that His Excellency, the Governor, and I will need to leave because we have to be in the Development Committee. So I want to apologize for that, but you know, we are here for the annual meetings, and so--
DR. AL-ISSAWI: [Off microphone.]
MS. ANDERSEN: I expect that we will all have to go to the Development Committee so I hope that you will all understand, but this is the business of the Bank at this point. But thank you very much.
[Pause.]
MR. KARASAPAN: Okay, we will continue.
Yes, could everybody sit down, please? We have Sibel Kulaksiz was worried that everybody is leaving because she's starting to speak. I'm trying to reassure her.
Sibel, why don't you give us a picture?
MS. KULAKSIZ: Thank you, Omer.
I'll provide the macroeconomic background before Arne Petersen's presentation on financial sector.
As Mr. Minister mentioned, Iraq's economic and financial performance depends, to a significant extent, on the oil sector. We have the numbers here. In 2010, revenues from oil sector accounted for 62 percent of GDP, 87 percent of total revenues, and 99 percent of overall export revenues.
The lack of economic diversification makes Iraq's economic growth vulnerable to oil price and volume shocks. The financial sector's contribution to economic growth has been very low. The share of banking and insurance sector was only 1.9 percent of GDP in 2010. It starts from an average of 5.6 percent in 1980s.
Although credit to the economy has been on the rise in recent years, the level is still very low compared to other countries. It was around 9 percent of GDP in December 2010. Given the very, very low level of financial intermediation, the nominal exchange rate continues to be the main tool for conducting macroeconomic policy and maintaining price stability.
Also, international resources have played a critical role in helping ensure stabilizing Iraq. Gross international resources went up from $20 billion in 2006 to $51 billion at the end of 2010.
There have been a number of government post-interventions to encourage more lending to private sector, the Central Bank of Iraq lowered post-interest rate from 7 to 6 and the reserve requirements from 25 to 15 percent. This development is expected to encourage more lending to the private sector companies in Iraq.
Another encouraging status is that the Central Bank of Iraq remains committed to independence of the institute. Iraq's economic growth prospects are favorable. Real GDP growth decelerated in 2009 and in 2010, but it's expected to pick up this year and the coming year, mostly because international oil companies increased production while global oil prices have risen.
Although economic prospects are favorable, risks remain high. In addition to Iraq's vulnerability to oil price shocks, main risks include political factors, security issues, technical capability, and institutional capacity issues to implement reforms.
A deterioration in the political environment in the region might have a negative impact on implementation of reforms. And now I want to enlight Arne Petersen to talk about the financial sector.
[Applause.]
MR. PETERSEN: Thank you very much.
I see that we've already exceeded the time limit allowed for intervention, so I shall be very quick, or try to be very quick at least. And also, all the good parts have already been spoken by the Minister and Ms. Inger. So all I have for you is a little bit of background to put in relief what are the key findings that have been mentioned here already. And it's also mentioned in the news release that I'm sure you already have seen.
As mentioned, Iraq's financial sector is very much dominated by the banking sector which holds most of the assets. There is a sluggish change, but conversion is very low and very few instruments are traded. It needs to be revitalized.
The insurance sector is even smaller and is not at all effectively supervised. There's a supervisor, but not staffed. As others have alluded to, the SME and bank financing is not well developed and access to finance is very low.
As an example, a USAID study has indicated that less than 5 percent of SME, small and medium enterprises, actually receive loans from banks. Seen from the other side, household service shows that only 3 percent of households in Baghdad receive loans from banks. So there's a lot of work to be done.
Now, the banking sector, to look at that, as other people have noted, it is dominated by the state banks. We have nine--sorry--we have seven state-owned banks, two of which are the large banks that take both deposits and make loans. They're mostly focused on the state sector and on state enterprises.
We do now have a number of new commercial banks coming in. We have as many as 36 small, private banks, nine of which follow Islamic principles, and they are gaining importance, but as you can see from the chart there, still they account for a rather small share of assets.
The bank system is small. There are some questions of the numbers and we had to make adjustments to take into account the fact that a lot of the assets accounts in the banks are actually the recent losses linked to the sharp depreciation of the dinar.
So if you adjust for that, you will see that only about 73 percent of GDP in terms of assets, compared to 130 percent for the MENA Region as a whole, so about half the size in other countries in the Region, and 86 percent of banks.
You'll see that credit extension is very low. If you compare it to the MENA Region, which you'll see in this chart, only 10 percent GDP compared to 55 percent for the MENA Region. Now, it is growing fast, but for a low base. Also, for all MENA GDP is low. And importantly, half of the money supply is in cash, which indicates still a largely cash-based economy.
As mentioned, the reform efforts, it's safe to say, are the focus of Raffidain and Rasheed Banks, which have suffered from the legacy of past economic losses and also some poor fiscal operations. They are not very efficient, according to modern standards, and reform efforts are needed.
Some progress has been made as acknowledged. It has taken longer, as has been anticipated regionally. I take heart in the fact that the Minister now is committed to accelerate his efforts.
A new player has entered the market over the last couple of years, namely the Trade Bank of Iraq, or the TBI, an increasingly large institution, and has been--the government has not yet developed a very clear strategy for the future of state banks versus that assigned to private banks.
Looking at the private banks, the expertise is improving. There are still very--I'm not going to say many cases, and not all provide a full range of services. Many banks provide only limited services and a particular focus on wholesale and retail trade rather than on construction or industrial work in public places.
Now, if you look at the share of credit, then the private banks actually have a larger share in credit than they do in total assets. So as you can see they do have an important role already and is one that is likely to increase as we go along.
That, of course, presupposes that they are able to function effectively and in a prudent manner and that's why we speak of bank supervision must go hand in hand and you have to strengthen the banks in parallel with the increased role that will be assigned to them.
No less, as mentioned, the premier indicators are going to be good, and we do not think there's a systemic risk. A few are in difficulty.
We referred to the level playing field and that is a clear issue that the government will need to tackle. At the moment, government and state-owned enterprises are not allowed to bank with private banks. The private banks have a limited mission for granting lines of credit, and this is strictly controlled by CBI, which was created with the express purpose of trade financing for the public sector.
An interesting little tidbit is that you cannot pay your taxes to the government with a check drawn on a private bank. It has to be drawn on a state bank. On top of that, of course, is the perception of a de facto deposit guarantee for state-owned bank which tends to let customers prefer deposits there.
I apologize. I'm trying to be very fast here. But let me go quickly through bank's original regulation. You'll see what it does. Banking regulations are broadly appropriate, but they need to be fine-tuned, brought to international standards.
On top of that, many regulations have just recently been introduced, and therefore, the track record has not yet been fully established. And the Central Bank is fully aware of the need to strengthen further supervision, and they have indeed asked for assistance in this area.
One area that needs improvement is that effectively Central Bank is not able to fulfill its supervisor function over state banks, in part basically because the state banks have had the first position in the past and they have not really adjusted to the new system yet. So that is an area that needs to be addressed very urgently.
And as I mentioned, in tandem with giving a larger role to the private sector, we must ensure that their risk management skills are improved and that bank supervision is strengthened. If not, you risk getting into a shock situation in the asset quality and we want to avoid that.
Briefly on the capital market, everybody agrees that in a fair and efficient capital market, it's crucial for supporting economic growth. The Iraq stock exchange appears to provide a good foundation to build on, and as I mentioned earlier on, we do need to build on it.
For the moment, only about--market capitalization only amounts to about 3.5 percent of GDP compared to around 30 percent in Egypt, similar in Oman, and over 100 percent in Jordan. So there's a long way to go.
To do so, there are some legal and regulatory framework issues that must be addressed. And supervision of the market must also be enhanced. For example, the Iraqi Securities Commission still work under a temporary law. It is a draft law, but that needs to be adopted quickly, also to allow then the operation and more detailed regulations.
So we're still waiting for that. It is going to happen soon, we believe. But in general, many of the prior conditions for effectiveness of markets are weak.
I mentioned the insurance sector is small. It is also dominated by the state companies. There are 18 small private companies and, de facto, they're not regulated. As I mentioned, there is a supervisor, there is a law, there's no staff except for two or three people, and effectively, the activities of these companies are not being regulated.
There are no mandatory insurance products. As the Minister has pointed out, he would like to see also developed some regulations for shar'ia compliant insurance products which not yet they have.
The pension sector is an undergoing a transformation in part with the assistance from the World Bank.
There are a number of issues that cut across all the sectors, and I have listed some of them there, but they're very clearly related to transparency and to governance and to the rule of law. That is not unique for Iraq. We find that in all countries. But it is very clear, though, there are things that must be focused on immediately, but will take a long time, as the Minister mentioned.
We believe that the move to IFRS could be very helpful, in particular to banks and privately-owned companies. We need to raise the proficiency of the audit profession. We need to secure accountants and auditors, update bankruptcy law, improve the competency of fiduciary, strengthen the framework, set up a comprehensive credit registry, and improve the general frame of doing business.
And I should mention here that in a survey, unfortunately, Iraq ranked last in the framework for doing business in the MENA Region. So there's work still to be done. In a sense, we already have talked about the key findings and what needs to be done to move forward, so I don't know if I need to go into this now or shall we stop here?
MR. KARASAPAN: Maybe very quickly.
MR. PETERSEN: Yeah. As I mentioned, some of the issues, if they're begun now will take a long time, but there are some that can be done very, very quickly up front, and I think which will show a very good demonstration effect, and also demonstrate the government's conviction of moving towards a level playing field.
So that will include the clean-up of the balance sheet of Raffidain and Rasheed Bank, and the implementation of the reconstructuring. There are progress in both areas. I mentioned one. There was another company in Istanbul where the focus was on the reconstructing of the two state banks. So again, they are moving forward and that's good to see.
Combined with that, we'd like to see very early developing a vision for the role of state banks because as I mentioned, there's also ICB and we have four sectoral banks. We need to have a clear message from the government how they see that going forward. Will there be a further liberalization? Will there be a further increase, a further move towards private banking?
I mentioned the bank supervision. Again, some things were done immediately, but that's also a longer term project. We need the adoption of the permanent securities law to permit the public relations and securities markets. And, of course, we need to have a proper supervisor established for the insurance sector.
Underlying all this, we need to accelerate the transit to a market economy, a full functioning market economy so that we can actually have some more customers for the banks, good strong customers for the banks, and also if you start accelerating some of these state banks, you will, in a sense, bring life into the stock market as well.
So a lot of things to do, some things in front, but we are convinced it will work.
MR. KARASAPAN: Nicely done.
[Applause.]
MR. KARASAPAN: So we will now move to the open discussion. I will move to the mic and then we will move to the open discussion. But before the open discussion, let me also acknowledge some of our other partners who have joined us. Mr. Ron van Rooden, the Chief of Mission for the IMF in Iraq. He's there. Paul Leonovich, Associate Director, U.S. Treasury, is also here.
MR. THOMAS: I'm Bill Thomas sitting in for Paul. He was--
MR. KARASAPAN: That's what I meant actually. And Ziad Badr who used to be the Country Manager for Iraq and has now jumped ship to the IFC, but will continue to work closely with us.
So I open it up. Questions, comments?
Please.
MR. VAN ROODEN: If I may start, and I must say I very much support Arne Petersen's presentation. We have been working closely together on this. I think one of the issues that I see is that--I mean, we essentially all agree on what needs to be done and what the situation is.
What I see as a key constraint is capacity on the Iraqi side to implement these recommendations. And so, a question that I have is, how can we help the Iraqi authorities to implement some of these measures that they agree to that needs to be done? And also, to the extent that there is still a discussion ongoing in Iraq, for example, on what to do with the state-owned banks, how can we help as an international community in building support for these type of measures?
MR. KARASAPAN: Any other comments, questions?
Yes, please.
MR. THOMAS: I just want to reiterate, from the presentation, my observations--I've only been there once, but been looking at it pretty closely. They almost have no capacity to supervise banks.
They are struggling desperately, I think, and if this little 11 percent or 15 percent of the sector, they have two in serious difficulty and they, understanding how difficult it is in certain countries to live up and meet what their own law says, they've been unable to do that with these two banks.
They have no liquidity and they turn depositors away, and that's an unacceptable situation almost anywhere if you try to do it right. You have to have a level playing field toward depositors if they get their money or not.
So they're struggling with even implementing things the law allows them to do, and we're encouraging, as much as we can. I think those of us that have discussed this, this week, and are aware of the situation, they're trying--we're all trying to take the same basic position of what we think they need to do.
They have a short-term problem with these two banks, and then they have this much more difficult, ultimately long-term capacity-building problem. It's very difficult to help them when you can't travel freely and go to a bank with bank examiners and be there every day.
And I think there's a certain understanding how critical this is. They are going to get some help from Turkey, which was a big development. They had a meeting in Ankara with the Turkish bank supervision agency who's going to--I still think it's not ideal, but they will get some training from them. I think they'll be able to send people to Ankara to go through this Turkish examiner's training program.
There's still a possibility that they would contract help on their own that we could help facilitate and help them pick a good contractor and help oversee them, someone who could actually come in and go to the CBI every day and go out to banks. That's ultimately what they need. And until they get that, they're only going to get so far, I'm afraid.
So the real emphasis is they need that kind of assistance and it will take several years to build any real capacity. Maybe it's good that the private side is small, because I think it's one the sides--as the slide says, their capacity needs to grow with the sector as it develops. They can't get behind it.
Meanwhile, this new responsibility to oversee the state-owned banks, which we can wait and see how well they do that. Keep in mind, the state-owned banks are investing in the private banks, either through loans or equity positions and things like that. So it's getting pretty muddled to see how everything is working there.
MR. KARASAPAN: Thank you. Let's take one more comment.
[Off microphone.]
MR. KARASAPAN: Yes?
MR. BADR: Thank you.
Well, I just started my job in the field in Baghdad as the first representative for IFC, to find myself already under extreme pressure from the donors. They already have a trust fund with like $38 million.
And as you know, IFC has two arms. It has advisory services and investment services. So we will be happy to support the actual plan coming out of this review. As you know, we have the funding, so in all areas that IFC has comparative advantage, we will be happy to provide the support.
Also, we have a self-interest in the restructuring of commercial banks, to have a fair ground for commercial banks to operate. As Arne represented, 11 percent of the market is controlled by private banks. Half of that 11 percent is controlled by the Trade Bank of Iraq, which is not really a private bank. Okay?
So all commercial banks are competing in that whatever 5 percent that is left, and--
PARTICIPANT: TBI is a [off microphone].
MR. BADR: Okay. So it's not that 11 percent. Okay. So anyway, most banks, most commercial banks do not really operate as banks. We found out that some of them are selling cars, furniture, and so on. So, I mean, we have self-interest really to restructure the sector, because IFC is already an investor in two commercial banks.
One of the first foreign investment in Iraq was an IFC investment in the Credit Bank. It was the Kuwait National Bank where we have 10 percent equity. And IFC Board already approved recently another investment in the Commercial Bank of Iraq [Iraqi name] in partnership with the Ahli Bank of Bahrain with 7 percent equity.
So, you know, we would like to work in partnership with you and see whatever we could do to help in this sector. We already have some activities going on to support the Central Bank of Iraq in setting up a credit bureau.
And I would like to thank you for this opportunity to speak here today. Thanks.
MR. KARASAPAN: Thank you, Ziad.
Could you--the next speakers, we have one question and then one more. Could you identify yourself, please, and then we'll come to you.
QUESTION: Hi. I'm a reporter with Reuters. I just want--this question is for Mr. Leonovich. Do you think the banking, like this opaque banking sector, is Iraq's biggest roadblock to growing their economy?
MR. THOMAS: I can't say.
QUESTION: Can anyone answer that question?
MR. KARASAPAN: Why don't you--okay, one more, let's take one more question. Identify yourself, please.
QUESTION: Thank you.
This is Mohammad Wafir [ph] from Middle East Broadcast Network. Actually, I was very--I came to give the questions for the--to give the answers for the questions Mr. van Rooden had raised. And we all know that the Iraq, as other countries in the region, they need the capacity-building and the technical assistance now the IMF is really to introduce and help.
But at the same time, when we ask the IMF officials, they say, We are waiting for the request. And by experience, countries in the region, they don't ask for capacity-building. They don't ask for the technical assistance. Somewhat, they're pretty much interested in the financial thing.
So the questions you ask, we really need the answers. So if you can help with those answers, we will be very grateful.
Thank you.
MR. KARASAPAN: Let's take the questions in order. Sahar, the first question on the opaqueness of the system, and then we will let the IMF answer that one.
MS. NASR: Okay. I will comment on several things, also, that--
MR. KARASAPAN: Okay, sure.
MS. NASR: Because Ron raised the question of how can we help, and I think that's an important question. I think there are many ways that we can help, but it's the different issues. Some issues would require capacity-building. It's true that many of the implementing entities lack the capacity and skills, so that is one area.
But there are many issues that we have highlighted that requires political commitment and the decision to be taken. If we're talking about the cleaning of the financial statements, that requires more than capacity-building, a decision taken at the highest level.
We had many discussions with the banks. Chairmen of the banks don't feel they have the authority to take the decision. They need a higher level decision to do the write-offs, for example. So I think let's differentiate not only between the short-term and the long-term.
I think the political will and the commitment from the highest political level, and not necessarily the governors, but even beyond that, would be required because there is external debt. There are many issues. It's not only the regular non-performing loans.
We have a project, the World Bank has a project. It's not large, but it's reasonable, and I think we are slowly, but we are doing some progress there. Like I can give one example.
Two weeks ago we had a mission where we agreed on the new organization structure for the state-owned banks. It took us four days of discussion. We had to bring in like different organizational structure of different banks to convince them, because you need buy-in, because at the end of the day, they need to approve organization structure.
Even if we provide the best, they need to believe in it and really be committed to do it, and you have to make a good case by showing them what are other countries, especially in the region, are doing where they would reflect. So I think that's an area that I'd like to highlight.
Also, on supervision, things take time. I think banking reform takes time, and I think our expectations should be also very realistic on how much we can do.
And I want to, because we have this on-the-ground operation, and I have to highlight that it's sometimes very difficult to find the right competent consultants to go and work in Baghdad. That's a challenge we face. We have biddings with procurement like every week and we get sometimes consultants. Sometimes we turn them off and we have to find more. So that's a key challenge that we face and we have to acknowledge that.
Okay. And on the question regarding opaqueness, I think there are different challenges. I think Ron had raised one. The team has also brought it up. It's not only opaqueness, but I think lack of skills. They need skills. They need political commitment, a willingness--like we have seen a significant, and I'm sure IMF colleagues would agree--the appointment of the new Minister of Finance who was more committed, because the Governor of the Central Bank has the responsibility of capacity-building of the Central Bank itself, as a supervisor, regulator.
For example, you see the payment system is one of the good, main outcomes of the reforms that took place which has been supported by U.S. Treasury and it's there operating, all banks are connected. So when there is the right support, there is some positive outcome.
But like when you're talking about state-owned banks, the owner is not the Minister of Finance, because these state-owned banks are owned by Treasury. So that's where a lot of the decisions have to be taken. So it's important to identify and that different entities have the commitment to really do that.
And maybe I'll ask Ron or Sibel if they want to comment on anything.
MR. PETERSEN: I'm Arne. That's Ron over there.
MS. NASR: No, no, sorry. Maybe Arne would want to comment.
MR. PETERSEN: Yes. I have to be careful not to get into areas that really belongs to the IMF. So maybe I should let Ron speak first.
The banking system is not the only roadblock to have the growth in the non-oil sector we would like to see in Iraq. And I'm speaking from, for example, personal observation. It seems to me there is still a legacy from previous regime, whatever.
We have not resolved all the issues relating to state intervention in the economy. There's been a lot of discussion going on and there's been decision taken, but yet, it has not come to fruition and there's some things to be done to fully implement that.
You see it clearly in the size of the state's role in the banking sector, which is indeed large by any standards around the world. It's commonly accepted by most observers that a state-owned bank in general is not quite as efficient as a private bank.
So the Iraq authorities do need to decide how they would like to see the banks develop, along private lines or along state-controlled lines.
We believe that they wish to move to the private sector, but to do so we have to have a clean-up of the state banks, we have to have proper governance in those state banks, and at the same time, the government has to realize if you have a strong state bank, we cannot--government should not tell them what to do. Then they have to accept it, behave along commercial principles. So that must also change.
Now another thing. The culture is still influenced by the previous situation. It seems to me that bureaucrats or all technical level staff are very careful in doing their job or in over-doing their job or taking the initiative, because in the old days, if they did something and it turned out to be wrong, well, you might pay with your life.
We have again heard when we asked, How come you didn't have much profit, they say, Well, the minister didn't tell us what to do.
MS. NASR: In writing.
MR. PETERSEN: In writing, yes. And then a letter in writing.
MS. NASR: And then they stopped it or they didn't.
MR. PETERSEN: And as I keep telling them, Well, it is your job to tell the minister what it tells you to do. You have to bring up proposals and give the answers and then the minister will be able to act in a good manner. But that's not yet the way they quite see this.
There's a lot of work to be done to change the culture.
MR. KARASAPAN: Then, Sibel, very quickly to you.
MS. KULAKSIZ: Sure.
MR. KARASAPAN: And then over to the IMF and then we'll pass it on to Hedi for the closing remarks.
MS. KULAKSIZ: On capacity-building, Turkey is very much interested in providing support to Iraq's financial sector. In addition to banking, its Parisian agency, the Capital Board of Turkey is keen on providing capacity-building training. The Chairman was here wishing to gather with his team and he said he could team up with OECD and the U.S. SEC and could provide support to all Iraqis in their facilities in Ankara and Istanbul and they said they will be happy to provide that support.
MR. KARASAPAN: Sibel is also talking in her capacity as the former head of the Turkish Staff Association.
Yes, please go ahead, Ron.
MR. VAN ROODEN: If I may, indeed there is a need for capacity-building and authorities actually do request that and then the IMF is providing technical assistance in many areas, particularly also to the Central Bank.
But it's, to some extent, constrained, both by the security situation, and typically what the IMF does is provide missions. Short-term people are there for one week, two weeks, to help them develop and build capacity.
But what's the Central Bank and the banking system in general in Iraq needs is people there for a longer term, for a longer period. As Bill was saying, the capacity is weak at the Central Bank's supervision department, but also at Raffidain and Rasheed and the other banks.
So in that sense, I mean, it's very welcome, but the Bank of Turkey, Central Bank of Turkey, and the Turkish supervisory agency would be willing to provide that type of assistance, which we cannot do, unfortunately.
Sometimes we are able to put long-term advisors there, but for Iraq, it's very difficult as Sibel or Sahar is saying, to put people there for a long period, particularly into such difficult situations. And there, I think we need to do better to find that type of assistance, and also by approaching other central banks also in the region.
With regard to what is needed for private sector development, the financial sector is one aspect and it's a key aspect because the key role, essential role of the financial sector is financial intermediation, to mobilize savings and allocate that to investment in the private sector.
But it's only clearly one aspect. Another aspect is obviously security, which has improved an enormous, an enormous amount over the last few years, but it's still a risky environment.
You also need macroeconomic stability. And again, there are two--a lot has been achieved. Iraq has low inflation, has a stable exchange rate, government finances are doing reasonably well, largely supported by higher oil prices.
And then for private sector development, you also need the appropriate regulatory framework, what Arne was mentioning earlier. If you look at the rankings for--Iraq ranks, in terms of ease of doing business, they come in quite low. So last even.
So there is a huge effort that needs to be done there for the private sector to truly develop, and there's a lot of work still to be done. And, of course, I mean, the Iraqi government has a lot on its plate. It's still in a building capacity even inside the government having to invest in basic infrastructure, electricity, roads, health, education. So the agenda is enormous. So it's not easy.
MR. KARASAPAN: Thank you. Thank you very much.
I'll turn it over now to our Finance and Private Sector Development Director, Loic Chiquier, for a few minutes and then we will conclude with our Country Director, Mr. Hedi Larbi.
MR. CHIQUIER: Don't worry. I will not take a few minutes. One is enough, I think, not to repeat what have been already said or comments made by the team and the panelists.
Just two remarks briefly.
Number one now is we have to take into account the time of these projects, on these projects. It's really remarkable to have built a consensus with the different authorities and the different donors about this kind of not quite fair reflection of the situation. Some of these messages are strong messages.
It was remarkable to have built rather recently. The Istanbul meeting where this was presented and discussed in depth took place only a few days or few weeks ago. So this is for us a starting point and in completion phase and we're moving now to the phase of implementation. So let's keep in mind this consensus happened only very, very recently.
On the Minister this morning in the more global meeting, with the assistance of Sahar to pursue the same way of proceeding with other sectors. So he considers this as a pilot interesting to move forward to other sectors.
And the second thing is we have to look at the last slides. I agree with all the panelists' comments, we have eight major recommendations. Some of them we all agree will take time, because we're starting on building capacity. We spoke about Central Bank, but the insurance is even worse probably.
We'll take yours in the best case scenario. But I join the comment of Sahar, the TTL, that some other measures, it's not so much a matter of time, it's a matter of political will. It's a blank field starting with the private banks.
Adoption of the permanent securities law, it's not really so much a technical problem than a matter of a decision at the highest level and political will. So we hope in this scope of recommendation that some decision really be taken now and decision taken relatively fast. And we're giving a very important demonstration effect to the rest of the reforms.
MR. KARASAPAN: Thank you, Loic. Thank you.
Monsieur Larbi?
MR. LARBI: Thank you very much, Omer, and I would like for us, in abstentia, to thank their Excellencies, both the Governor of the Central Bank, Mr. Shabibi, and His Excellency, Mr. al-Issawi, the Minister of Finance who actually led this work from the very beginning, of course, and in cooperation with the World Bank team which was very heavy-handedly led by our colleague, Sahar.
But I would like also to thank you all because I think you probably have so many other things to do at the annual meeting, but the simple fact that you came here shows how much interest, not only to this work, but for me it's the interest in Iraq, which is even more important.
And finally, I would like to thank the team who organized this because, frankly, finding your spot at the annual meetings and finding the room, finding the logistics probably was certainly very, very challenging and I would like to thank the team, Sahar and Omer and Dale and the whole--maybe probably at least 10 or 15 people. Sorry?
PARTICIPANT: [Off microphone.]
MR. LARBI: And whoever participated, thank you very much.
Now, I hope that you are not expecting me to make a summary of whatever is in that report or of the debate, but I would like to leave you with a couple of thoughts on Iraq and this work and how we look at this work actually in terms of perspective.
One, we hear noise that Iraq is a fragile country. In my view, it is not a fragile country, it is a country in a transition, politically and economically. Politically, from that kind of dictatorship that we all know, to a democratic system that is being actually formed or shaped, and most recently, I see it even more shaped by the Arab Spring, and that is fundamental.
So the democratic process in Iraq is ongoing, but probably will take a little bit of different turns, and that's where the whole political will, whether we will build or the right governance where accountability, responsibility, and actually in a way accountability toward the people. Are we going to deliver services and are we going to deliver--and live up to the expectation of the people.
In transition economically, because this is a country which has been, for the last at least, let's say, 50 years, under a state-owner ran economy, how can you transit actually this economy to some sort of market-led type of economy. I hope it will not be a market--because in Iraq there are a number--I see the room for the government and if the government plays, there's a huge development and it has to play its role.
So that the transition is not easy at all when you have actually 15 years, when you spent 15 years of war, sanctions, and so on and so forth. We have to bear in mind what is Iraq and the challenges that Iraq is actually facing. So it is easy to say this is missing, the government denied this, they institution, et cetera, but this is Iraq and this is the exceptional innovation.
Now, how we see it in the perspective actually of the future, Iraq is a blessed country. I will tell you why it is blessed and it will succeed. One, this is the second, after Egypt, largest demographic country in the region. And therefore, its economy has no, in no way, in the future to look like any Gulf country.
It has to look like a well-developed and diversified economy because we have to provide the jobs for million and million of people because they have to provide services which the small Gulf countries can actually in a way subsidize that and they bring labor from other places.
Iraq cannot afford it if Iraq has to maintain some political stability and, hence, the need for diversification and so on and so forth, and I will come to this. So this is a big country in the region. It is not a small country and it has to be taken as it is.
The second why it's blessed, this is the second or maybe the third oil reserves and gas reserves which we have not yet put our hands on in the region--in the world, sorry. So this is a wealthy country. It is very, very important and hopefully those resources will be deployed in a very optimum way so that actually they develop their country and they use these resources appropriately.
Third, this is the only country in the world that has oil and gas. Big deal. And second, water. This is the only place in the Middle East after Lebanon where you have oil--sorry--water. And water, unfortunately, the day that Iraq will receive its fair share of water, everybody knows what I'm saying, then you will see that this country, its agriculture will thrive and will actually resume its export history in terms of foods, et cetera, et cetera. Today it's a net importer, and I'm sure that it will soon become a net exporter.
Now, it is also the first and unique country in the region that has some great actual potential for economic development. It is the next lion or tiger in the region, definitely before Saudi Arabia or any other country because why? They have all these endowments, but Iraq has the history for human capital.
Most of the writers, most of the philosophers, most of the scientists of the Arab world came from Iraq. So do you think that Iraq will not have it soon? Probably once they stabilize, probably once they redeploy these resources properly, this civilization is there. It's rooted there.
So this is the country where the potential is absolutely fantastic, it's huge, so up to us how to help Iraq today to mobilize their resources properly, to have the right strategies, the right vision so that they use these resources to build a thriving and a prosper country in the region, which will have a major, major impact on the rest of the region.
It can be the locomotive. We thought that at one time that Algeria could be the locomotive. Now we are looking for another locomotive and probably Iraq can be that locomotive. Just look back to its civilization. Let's look back to its history. And just the last few years, I started doing that. There is a wealth for human capital out there.
Now, what now Iraq has to do are three things, at least in my view. One is really to rebuild its social and economic infrastructure. It has been destroyed. It has been lagging behind for so many years, no help in this rehabilitation, and no actually additional investment for years. So rebuilding the social and economic infrastructure is fundamental.
And the second is really to rebuild, to re-establish, to restore the institutional, the institutions, the government institutions. This is what you are talking about, the capacity, the capacity is not there. But this is just the beginning. Institutions are fundamental for Iraq.
And third is really to work hard to stabilize its nascent political and democratic system. This is fundamental. Political stability and consolidation of its democracy are absolutely fundamental for Iraq to move forward on its economic development.
So it is under that actually pillar of institution and development of Iraq that this work has been designed, has been carried out, and has been achieved. So it is fundamental to see where we are when we have done this work.
Now, while I see that this work is unique based on what we have been doing in the country and in a number of sectors, this is particularly unique and this is what I wanted to leave you with a last thought.
One, it has been led in cooperation with Iraq from the very beginning. I don't recall one single sector, maybe the education started learning from the financial, where actually the Iraqis are in the driving seat. That's fundamental and I think we have to move forward to the future.
The second thing is the strong leadership and political engagement of both the Central Bank and the Minister of Finance, and here I want to highlight one thing.
I'm working in five countries. It is very hard to bring to the same table the Central Bank and the Minister of Finance and to get them agree to something.
Not only they agreed on how to lead the work, how to supervise it, but they sit with us, as you rightly mentioned, three days to come up with an action plan on which they agreed, both, and I signed it off. So, fundamental cooperation bringing probably the governing power playing a role in it.
Third is we don't have a strategy and this is exactly what we like. We have an action plan with the timing, with the possibility, and what needs to be done. This is the first, and I think in that mode, that we have to look at it as a model that we probably, hopefully, can replicate somewhere else.
But the most important thing, as I heard you all, is that action plan, embedded in that action plan, a capacity development of the financial institutions, including the Central Bank by the way manage their funds, but other, non-related--sorry--related financial institutions in terms of human capital, in terms of training, in terms of management system, capacity, financial system.
It is fundamental because I recall in the discussion, you said yes, the capacity is very low and anything that you want to implement in Iraq, we should first and foremost start by building the capacity. So this is a model that we really need to replicate in anything that we should do and we should help Iraq as the next tiger of the region. Thank you very much.
[Applause.]
MR. KARASAPAN: Ladies and gentlemen, before going, we should also thank our translators who unable to do have been working the whole time.
[Applause.]
MR. KARASAPAN: And also Halid Al-Awan, Sophie Cox and David Fann [ph]. Without them, none of this would have happened. And, of course, the MENA EXT team.
[Applause.]
MR. KARASAPAN: And Nalia, yes.
PARTICIPANT: [Off microphone.]
MR. KARASAPAN: Next time around we will have everybody here.
Thank you very much.
[Whereupon, at 3 p.m., the seminar concluded.]

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