The “Iraq Future” Foundation for Economic Studies and Consultations has issued a warning regarding the serious implications of the parallel banking system in Iraq, which represents approximately 84% of the country’s “irregular” economy. This unregulated system hinders the ability of official authorities to effectively monitor financial transactions.
In the context of the Iraqi economy, the parallel banking system poses a significant challenge that directly impacts the stability of the financial system. This system comprises various financial institutions that operate outside the official regulatory framework, while nonetheless exerting considerable influence on the economic landscape.
The foundation explained that these institutions have gradually developed over the past two decades, evolving from basic financial operations into entities that offer services akin to those provided by official banks. This includes lending, credit facilities, deposit acceptance, and both domestic and international money transfers. Notable examples of these institutions include salary distribution outlets, banking shops, consumer cooperatives, and certain non-profit organizations.
Al-Ubaidi, the head of the Foundation, highlights that these institutions have gained widespread acceptance for several reasons. The primary factor is the lack of effective oversight, which simplifies operational procedures compared to traditional banks, thus attracting customers seeking flexible and rapid financial solutions. Additionally, there is significant demand from owners of small and medium enterprises, which further fuels the growth of this sector.
In Iraq, this subset of economic activity constitutes a striking 84% of the irregular economy, characterized by projects that remain unregistered and consequently lack access to conventional banking services. This situation drives businesses to rely on parallel financial institutions.
Al-Ubaidi cautioned that the coexistence of official and parallel banking systems presents a grave risk to the Iraqi economy by promoting the shadow economy and restricting the ability of official entities to track financial flows. This scenario potentially facilitates various illegal practices, including tax evasion and money laundering.
To address these challenges, a comprehensive set of solutions must be adopted to bridge the divide between the two banking systems. Preventing unauthorized banking activities and incentivizing small and medium enterprises to enter the formal sector through attractive programs are essential steps toward integrating these entities into the official economy.
Establishing regulatory frameworks that govern the operations of informal financial institutions under the supervision of the Central Bank can ensure at least minimal oversight. In more critical situations, the outright closure of unlicensed institutions might be necessary, necessitating a linkage of all banking transactions to official entities.
Al-Ubaidi reiterated that the Iraqi experience has demonstrated that the shadow economy can exceed the size of the formal economy, presenting a major challenge for regulatory authorities. Consequently, navigating this issue requires a balanced strategy that combines rigorous enforcement of laws with flexibility in providing legitimate pathways for these institutions to integrate into the official economic landscape, while safeguarding the economy from potential risks.
