Moody's Investors Service considered that the macro profile of the Iraqi banking system is "very weak (-)". It indicated that banks in Iraq operate in an environment of "moderate" economic strength, "very weak" institutional and governance strength, and a "very weak" susceptibility to adverse events. It attributed its assessment to the prolonged armed conflict that weighed on the economy, to high political risks, as well as to systemic corruption, a lack of transparency and the poor provisioning of public services. It said that the unfavorable security conditions and the weak legal environment have constrained the development of the Iraqi banking sector. It pointed out that seven out of the 71 banks in Iraq are state-owned and account for about 77% of the sector's total assets. It added that state-owned banks are undercapitalized, have poor corporate governance, inadequate risk management practices, and benefit from preferential treatment. Also, it noted that the sector is highly fragmented, given the elevated number of private banks. As such, it considered that the strengthening of the legal governance framework and of the country's credit bureau will accelerate the sector's growth, as it will encourage banks to relax their high collateral requirements and reduce financing costs for borrowers, which, in turn, will increase demand for loans. It noted that lending to the private sector is equivalent to 8% of GDP and considered that it could expand significantly if the operating environment and legal conditions improve. It pointed out that the system's level of non-performing loans has recently increased due to the weak operating conditions. It added that the sector's funding conditions are still favorable, as banks rely mainly on domestic funding instead of market or external funding sources.
Source: Moody's Investors Service