According to economist Dr. Salahaddin Osman, a developed banking system is one of the pillars of economic growth and bringing about an investment-friendly environment in any country in the world. However, Iraqi and Kurdish economies are suffering from the weakness of this sector.
Till now, in Kurdistan, majority of the people traditionally keep their savings in safes, or hide here and there at their homes as they don't have trust in the banks to deposit their savings in.
Kamaran Hassan, who has saved some USD 6,000, is not willing to put it in the bank because he has collected this money over years. "I am afraid to put it in a bank and never see that again, " he said.
Elsewhere in the world, banks are most crowded places where many people visit on a daily basis for their banking services. Banking system has gone into every aspect of life. Even when one goes shopping, he uses his bank account and credit cards to make payments. In Kurdistan, unlike other countries, banks are only crowded at the end of the month when employees and retired people go there to take withdraw their salaries.
Almost all daily transactions are made in cash and the large and unsuitability of the bank notes make it difficult for people to carry in their pockets and purses, and also makes the notes damage and tear very soon, and sometimes the damaged notes are not accepted for transactions.
Sabaha Mohammed, Director of Erbil Housing Bank, their job is to give out housing loans and implementing the regulations and procedures of the housing fund.
"We don't have any operation outside this framework," argued Mohammed.
Housing Bank is a government bank and has been established in Kurdistan in 2005 as an effort to solve the housing issue in Kurdistan.
Religion and lack of banking culture are two major factors why people do not use banking services. Some people avoid putting their savings in the bank fearing that this would be in violation of some Islamic rules.
Majority of Kurdistan's population are Muslims and according to Islam getting interest on money deposited in a bank is forbidden.
If one deposits an amount of IQD 100 million (approximately USD 83,000) at the Mansour Bank for instance, they would get and monthly interest of 5.5%, but if the amount is less than IQD 100 million, the interest rate is 5%.
However, if in the opposite, one gets a loan from the same bank, they will be charged a 12.5% monthly interest.
Mansour Bank is a private investment bank and has branches in all the Iraqi provinces. 51% of the shares of the bank belong to the National Bank of Qatar.
The interest rate charged by banks according to Osman is very high. He argues that the Central Bank of Iraq (CBI) should set new policies for the banks and supervise them directly.
"The CBI should set a lower interest rate for all the banks and force them to apply the rate," Osman told the Globe.
Sardar Sarspi, Director of the Erbil Branch of Mansour Bank, argues that the whole 12.5% interest does not go to the bank.
"We get 7.5% of the interest, and the other 5% goes to people who have deposited their monies in the bank," Sarspi said in an interview with the Globe.
Although the government banks are more active compared to a few years ago, but Osman describes them as the accounting departments for the ministries, and he thinks that they have left the other banking operations for the private banks, while the private banks are processing the operations of their companies.
"Instead of giving loans to investors, the banks invest the monies deposited with them by themselves," Osman argued. "There is no such thing in the whole world.'
The economist says that in other countries, if one wants to build a house, a hundred banks offer loans and compete on that, while in Kurdistan if one wants to borrow USD 100,000, he has to deposit a guarantee of USD 500,000 in the bank. Still the banks offer short-term loans, which are not of much use for investors.
Rashid and Rafidain Banks were the two main banks in Iraq with branches in Kurdistan as well. However, after the 1991 revolution, the connection between the main branch of the banks with their Kurdistan branches were cut, and the branches were connected with the Region's Central Bank and resumed operations independent of the main branches. However the civil war in the mid-1990s and the embargo on the country paralyzed those banks and the situation stayed the same till the fall of Saddam Hussein's Regime in 2003. After that a new era started for the banking sector in the region.
Kurdistan's economic growth and relative security and stability increased the demand for the banking system and this encouraged a number of local private banks to open there as well as a number of foreign banks to open branches in the region. However, those banks have not yet succeeded to attract the locals and their dead savings.
In June 2010, a group of armed insurgents attacked the CBI for robbery and during clashes with the Iraqi security forces a large number of documents and archives were burned. This and other such incidents and threats have negatively affected trust in Iraqi banks. And since the Iraqi banking system is a centralized one, such incidents would definitely affect Kurdistan Region as well.
Increasing number of exchange offices in the cities of Kurdistan and Iraq have long served as a hub for transferring money between the country and the outside world. This traditional way has eased part of the task of the banks in the country, and due to people's experience in them some still prefer using them rather than the banks for this purpose.
Various crises and changes in the past have resulted in a decreasing trust in the banks among the public, who still prefer to keep their savings either cash or gold at their homes. Besides as experts argue, neither the banks nor the government in Kurdistan have yet realized the significance of a viable and developed banking system in the growth and development of the economy.
The CBI is following various methods to return trust to the country's banking system, including holding the amounts deposited in the banks by the public at the end of each week to prevent any cheatings or accidents that may pose threats on the deposits. This might serve to regain the trust of Hassan to put his savings in a bank.