The banking landscape in Iraq faces significant challenges, particularly due to the prevalence of a parallel banking system that undermines the stability of the financial framework. This system includes a variety of financial institutions that operate independently of official regulations and oversight.
These institutions have emerged over the past two decades, offering services that traditionally belong to formal banks, such as credit lending, deposit acceptance, and money transfer capabilities both domestically and internationally.
Various entities comprise this parallel banking sector, including salary distribution outlets, banking stores, consumer cooperatives, and some non-profit organizations. Their expansion can be attributed to the lack of effective regulatory control, allowing for simplified operational processes that appeal to clients seeking more agile alternatives compared to established banks.
A significant driving force behind the proliferation of this system is the high demand from small and medium-sized enterprises (SMEs), which represent approximately 84% of Iraq’s informal economy. These entities often struggle to access conventional banking services due to their unofficial status, leading them to rely on parallel financial institutions.
The coexistence of official and parallel banking systems poses a dual threat to the Iraqi economy, as it fosters conditions for a shadow economy. This environment complicates the ability of regulatory authorities to monitor financial flows, thereby opening avenues for illegal practices, including tax evasion and money laundering.
Addressing these challenges requires decisive action, such as bridging the divide between the two banking systems. Strategies may include curtailing unauthorized banking activities and incentivizing SMEs to formalize their operations by offering attractive benefits. Additionally, legal frameworks can be established to govern the activities of informal financial institutions under the auspices of the Central Bank, ensuring necessary supervision is in place.
The Iraqi experience serves as a poignant reminder that shadow economies can surpass official economic structures, presenting a significant challenge for policymakers. This scenario calls for a balanced approach that enforces existing laws while also creating legal pathways for informal institutions to integrate formally into the economy, ultimately safeguarding economic stability from potential risks.
