The central bank of Iraq (CBI) announced in early February that three foreign banks, HSBC Holdings, National Bank of Kuwait and Standard Chartered Bank, had been selected to proceed to the final stage of the foreign bank licensing process.

Licences are expected to be issued in March for the banks to be operational in Iraq by the end of the year. The CBI said: “The banks will be required to begin actual banking operations on-ground in Iraq no later than December 31, 2004. These banks will bring modern banking practices, capital and know-how to the Iraqi economy.” In tandem with a “liberalisation” of Iraqi interest rates, Paul Bremer, chief administrator of Iraq’s Coalition Provisional Authority, said the development represented “real benefits to Iraqi people”.

Fifteen banks applied for the foreign banking licences, the first to be issued in Iraq for four decades. While the three successful bids – two British, one regional – were widely predicted, it had been thought that six banks would be given preliminary approval.

Observers were surprised at the absence of a US bank, although JP Morgan was appointed in August last year to lead the consortium operating the Trade Bank of Iraq. Not all those that might have been expected applied for a foreign banking licence. Citigroup spokeswoman Andrea Hurst said: “Citigroup chose not to apply for a licence at this time.”

Central Bank governor Sinan Al-Shabibi has set the capital requirement for foreign banks at $35m. He hopes that their presence will stimulate competition and accelerate the introduction of modern retail banking services.

The three selected banks have yet to meet with the Central Bank to discuss the next stage of the licensing proceeds. A Standard Chartered spokesperson said: “We know that the Iraqi authorities are looking at an end of the year timetable. But until we’ve spoken to them, it would be premature to comment.”

The licences are part of a larger package of measures by the Central Bank, including liberalisation of interest rates, the expected creation of a market for Treasury bills, and the introduction of new banknotes. Recent changes made by the CPA to Iraq’s banking regulations already allow foreign banks to take a 50% stake in any of Iraq’s 17 existing banks without a foreign banking licence.

In addition, state-owned Al-Rafidain Bank, Iraq’s largest bank, is preparing for privatisation, possibly next year.

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