Iraq’s private banks: Capital Growth and the structural credit gap
Shafaq News
Despite a noticeable expansion in the number of private banks operating in Iraq and a steady rise in their capital over recent years, their contribution to credit activity remains modest compared with the size of the local economy and its financing needs. Private lenders also lag far behind government-owned banks and banking sectors in neighboring countries, exposing structural weaknesses in the credit system.
In theory, bank credit should act as a primary engine for economic growth, financing projects, supporting private enterprise, and generating employment. In practice, Iraq’s private banks remain concentrated in low-risk, fast-return activities, limiting their ability to act as development partners. Economists and financial experts told Shafaq News that this disconnect reflects deeper distortions in financial intermediation, state dominance over deposits, weak governance, and persistent trust deficits.
While capital growth can strengthen a bank’s standing, it does not automatically translate into expanded lending if deposits remain concentrated elsewhere, long-term risks stay elevated, and customer confidence remains fragile. As several experts emphasized, Iraq’s constraints are structural as much as they are financial, meaning more banks or higher capital, on their own, do not guarantee more credit to the real economy.
Read more: Lending freeze, cash hoarding expose fragility of Iraq’s banks
Financial expert Mahmoud Dagher, a former director general at the Central Bank of Iraq (CBI), described deposit concentration as a core structural problem.
“Government banks control around 85% of total deposits, while the remaining 15% is shared among roughly 60 private banks,” Dagher said. “Under these conditions, private banks are not playing their role properly in the banking process.”
He linked the imbalance to the nature of Iraq’s economy itself, noting that salaries, public spending, and the bulk of liquidity flow through state institutions. “Iraqi society and Iraqi money are mostly government-based, and this is a fundamental problem in the banking system.”
Dagher also pointed to a partial shift in recent performance, explaining that private banks extended more credit than government banks in 2025, while structural constraints —rather than capacity alone— continue to define their limited impact.
Official data shows Iraq’s banking sector includes 83 banks: 8 government banks, 24 commercial private banks, 31 Islamic banks, 17 foreign bank branches, and three foreign representative offices.
In this regard, economist Hilal Al-Taan argued that the private banks’ limited credit role cannot be separated from Iraq’s broader political and economic context, describing the fragile economic and investment environment as a central obstacle. “Political and security instability has prevented banks from entering long-term investments due to elevated financial risks,” he said.
Al-Taan added that limited capital bases among many private banks further constrain lending capacity, particularly when paired with the overwhelming presence of state-owned lenders, most notably Rafidain and Rasheed banks. Beyond capital, he pointed to weakness in Iraq’s legal and regulatory banking framework and fragile financial governance as factors that continue to undermine confidence and credit expansion.
Read more: Cash culture dominates Iraq, reform efforts stall
Another layer of distortion, economists say, stems from the origins of many private banks themselves. Economist Dhergham Mohammed Ali said a significant number of private banks were established primarily to participate in the currency auction mechanism rather than to perform full banking functions.
In his view, many private banks were created to access the currency window and secure a share of it, without engaging in broader banking activities. “This fragmented customer evaluation and weakened trust in much of the banking system,” he said.
That trust deficit deepened following regulatory actions taken against some private lenders. Ali noted that Central Bank guardianship over certain banks and the freezing of customer deposits heightened public fears about engaging with private institutions. Still, he pointed to limited signs of activation in parts of the market. “Expanding financial inclusion, linking housing purchases to bank financing, and cooperation between banks and real estate investors have activated some private banks and pushed them to participate more meaningfully in the credit market,” he said.
Financial expert Adnan Hatem said the imbalance becomes clearer through a regional lens, because in most countries, private banks form a backbone for reconstruction and investment across sectors. In Iraq, however, “banks remain far removed from these priorities.”
Despite Iraq having one of the highest ratios of private banks in the Middle East, Hatem described most of them as operationally weak, with activities heavily concentrated in currency sales and low-risk, quick-return transactions —patterns that deprive the economy of long-term financing and reinforce a cycle in which savings fail to translate into productive investment.
Acknowledging these challenges, Ammar Al-Ithawi, the CBI Deputy Governor, said authorities introduced a restructuring framework for private banks built around three pathways: compliance and continuation, merger, or exit from the market.
Most private banks, he said, committed to the first or second path —either continuing independently while meeting standards or merging— while only a very small number, “no more than five banks,” chose to exit voluntarily. Al-Ithawi also said financial inclusion in Iraq remains relatively low compared with neighboring countries, while cash usage continues to dominate daily transactions.
In April 2025, the Central Bank launched a private banking reform plan in cooperation with the US-based consulting firm Oliver Wyman. The initiative aims to expand financial inclusion, raise efficiency and productivity in private banks, foster fair competition, and enhance the sector’s resilience against financial shocks.
Experts broadly agree that restructuring and reform plans are necessary, but may not be sufficient on their own. As long as deposits remain concentrated in state banks, legal protections remain weak, and political uncertainty persists, private banks are likely to continue prioritizing safety over development.
The challenge, they argue, is not merely increasing the number of banks or their capital, but redefining incentives within the financial system itself, so that credit flows toward productive sectors rather than remaining trapped in low-risk channels.
Read more: Iraqi Banking reform: Between necessary change and crippling conditions
Written and edited by Shafaq News staff.
