BAGHDAD (AFP) – Interest by Citibank and Standard Chartered to expand into Iraq highlights the vast potential of the country's banking sector, but the experience of a global rival points to the many pitfalls they must navigate.
With tens of millions of potential customers, few of whom have bank accounts, the country could provide a windfall for firms that manage to grab a foothold.
Iraqis are on the hunt for a full range of services, from current accounts to insurance and mortgages, little of which is currently on offer.
But outdated regulations, a preponderance of state-owned banks, poor infrastructure, and a litany of other obstacles mean succeeding in Iraq's banking sector is no mean feat.
"This is potentially a very, very rich market to do banking in," said one Western diplomat, speaking on condition of anonymity.
The industry has come into the spotlight in recent weeks thanks to moves by banking giants Citibank and Standard Chartered to establish their presence in the country.
"We see Iraq as the next big thing," Mayank Malik, Citi's head for Jordan and Iraq, told AFP. "We see this as a giant which is waking up."
"We see ourselves as the front-runners. We want the first-mover advantage."
Citi will initially look to serve existing clients -- several international energy companies working in oil-rich south Iraq are customers.
But in the longer-term the multinational is looking to move into commercial and retail banking, though it has not publicly laid out a timeline.
It has high hopes for the country -- Citi economists project that Iraq will have 50 million people and a $2 trillion economy in 2050.
The latter figure represents a 15-fold increase on current output, and is roughly equivalent to the size of India's economy today.
And, as the sector develops, virtually the entire range of banking services are required -- at present, Iraqis have limited access to loans, insurance, credit cards, mortgages and a swathe of other financial products.
But while Malik voices optimism over the potential of Iraq's banking sector, major obstacles persist.
As Citi was opening an office in Iraq last month, HSBC announced shortly thereafter it would pull out of Dar Es Salaam, a local bank in which it holds a 70 percent stake.
Though HSBC has couched the sale as part of a global strategy, its then Middle East chief said in 2005 that Iraq was a "long-term prospect".
"At this stage, we will not be able to make further comments on the transaction structure and timing," an HSBC spokesman said.
Diplomats and analysts have pointed to a number of key difficulties, including a lack of modern regulations to give Iraqis confidence in finance.
The fact also remains that the two state-owned banks, Al-Rashid Bank and Al-Rafidain Bank, dwarf the competition and have little incentive to innovate.
The tiny minority of Iraqis who do have bank accounts have limited access to ATM machines, online banking, or even an ability to access their account from different branches of the same bank.
And while some credit cards are issued, virtually no shops accept them.
"The conditions are not here for you to engage in retail banking," the Western diplomat said.
Local businesses meanwhile often complain that banks are unwilling to lend or demand unreasonably high levels of collateral.
According to a World Bank estimate, Iraqi bank credit amounted to less than a tenth of gross domestic product in 2010. By comparison, the same figure was around 55 percent for the rest of the Middle East.
"They should avoid stockpiling the cash inside government banks, but rather use the cash to lend, to be part of the development of the private sector," said Thamir Ghadhban, the head of the Prime Minister's Advisory Commission, a group of experts.
Ghadhban said better technology was required, as well as reductions in processing times, paperwork and staffing levels.
But, crucially, he said, a change in attitude towards customers was also needed.
"They (bank staff) are not doing them a service ... it is the other way around."
"They should really pull in customers, and not push them out."