HSBC and Standard Chartered Bank have told the Iraqi authorities they may not be able to meet a deadline to open branches in the country by the end of the year due to a lack of adequate security, according to Reuters.

"They informed the central bank it will be difficult to open as their licenses required with Iraq were still unstable," the news agency quotes a senior Iraqi finance official as saying.

Deadline

The now defunct US-led Coalition Provisional Authority (CPA) in January 2004 granted the two banks permission to open in Iraq provided they did so by the end of the same year.

The two banks each pledged a minimum capital investment of US$25 million after winning their licenses in a competition with 12 other foreign banks that also applied for permission to bank in Iraq. The National Bank of Kuwait also won a license.

No guarantees but...

An HSBC executive is quoted by Reuters as saying that the world's second largest bank was still working towards opening in Iraq "one way or another" by the end of the year. An HSBC spokesman in London said, "we remain committed to our original plan."

Standard Chartered withdrew two workers from Iraq for security reasons in May and said it would ask the central bank to extend the deadline. A spokeswoman in London said the bank still aimed to open a branch by the end of 2004 but "we can't say we will make that no matter what."

Domestic alliances

Central bank chief economist Mudhir Kasim told Reuters in May that HSBC and the National Bank of Kuwait were looking to enter Iraq through a tie up with a domestic bank.

Kasim also said the banking permits would be withdrawn if the banks did not meet the deadline but Iraqi banking sources are reported as saying that the central bank may not be in a position to insist on the original timetable because of an overriding political will to open financial flows to facilitate trade and investment.

Trade Bank of Iraq

Standard Chartered is involved in financing Iraqi public sector imports through the Trade Bank of Iraq (TBI), but establishing a physical presence in the country as its license depends on sufficient security for staff safety, the bank's spokeswoman said.

If the senior foreign banks fail to open, then trade financing of formal imports to Iraq by a bank with a physical presence in the country will remain firmly in the TBI's domain.

L/C reliance

The CPA established the TBI in 2003 specifically to provide letters of credit (L/Cs) for Iraqi purchases from foreign suppliers and has so far issued more than 400 L/Cs worth at least US$1.6 billion for purchases of essential goods, foodstuffs and equipment for the power and oil industries.

Iraqi imports since the toppling of Saddam Hussein have been financed for the most part by immediately payable, cash-collateralised L/Cs.

Lack of financing

Formal imports are likely to continue to be largely L/C financed for some time yet since conventional financiers and insurers providing alternatives are shying away from Iraqi business. "It is extremely difficult to get any cover - nobody is writing non-payment risks," one broker in the private London insurance market said.

Some insurers in the Lloyds of London market had provided cover for political violence against plant and equipment, but have pulled back as the recent escalation in violence has produced some claims. "The premiums charged were fairly sizeable but do not look so good now," one insurer said.

Company risks

A spokesman from one of the world's largest credit insurers said it would consider Iraqi deals but only "on an exceptional basis."

Apart from the risks associated with political violence, the lack of company information makes it extremely difficult for any qualifying Iraqi buyer to meet standard underwriting criteria he said.

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