The recent spate of fierce factional fighting and the kidnappings and killings of foreigners in Iraq will not have boosted the confidence of those trying to re-establish a workable trade finance sector in the country that is supposed to be self-governing on 1 July 2004.

Added to these security concerns are fears amongst those who govern Iraq now and those who are expected to hold power later this year that the banking system could provide channels for offshore Ba'ath party money to find its way back into the country, thus establishing again that party's financial supremacy.

Nevertheless, the trade finance sector in Iraq is taking shape.

Trade Bank of Iraq

The Trade Bank of Iraq (TBI) is seen as a crucial vehicle for enabling Iraqi imports of food, electrical equipment and oil-refining machinery that the country needs in order to rebuild.

The TBI's main objective is the facilitation of trade flows and the increase of imports by issuing and confirming letters of credit (L/Cs), thus essentially guaranteeing payments to foreign exporters.

Catalyst

In September 2003 a consortium of 13 banks led by JP Morgan was chosen to operate TBI for an initial life of 12 months with an option to extend its operations for an additional three years.

Another purpose of the TBI is to catalyse interest and confidence in Iraq's newly emerging private banking sector, and several regional and international banks are moving forward to stake their claims in this nascent market.

Regional banks from Kuwait, Bahrain, Jordan and Lebanon, as well as international banks are now showing significant interest to the Iraqi banking sector, either through acquisition or opening of branches.

International interest

National Bank of Kuwait, for instance, has recently acquired Credit Bank of Iraq, and along with HSBC and Standard Chartered Bank has been licensed to operate in Iraq by its central bank.

Around fifteen foreign banks have applied for similar licences, and foreign banks have asked to buy shares in Iraqi banks. There are 17 private banks in Iraq, all of which are authorised to deal in foreign exchange and open accounts with other banks.

Concerns

Several political concerns will impact on the way Iraq's banking sector develops and Coalition Provisional Authority (CPA) members have expressed real concerns that the emerging banking sector should not provide conduits for offshore Ba'ath party money to find its way back into the country and re-establish that party's financial dominance.

These concerns are shared by members of Iraq's interim government, some of whom are likely to form part of a new Iraqi government that is due to assume power on 1 July 2004.

Eastern European parallels

Those who hold these concerns argue that the financial supremacy of the ex-regime may be re-established if, in an attempt to attract the necessary funds for trade and investment in Iraq, an Iraqi administration inadvertently appoints the very same people that it is trying to eradicate.

Parallels in this respect have been drawn with Eastern European countries where the financial dominance of formerly communist leaders and their followers is reflected in the strength of the socialist parties that have substantially emerged out of communist parties and in the financial monopolies that they have apparently created throughout Eastern Europe.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.