International expansion has been the inclination of many of Lebanon’s banks in recent years, and being no strangers to unpredictable security conditions, frequent electrical outages and the slow crawl of legal modernization, the fledgling Iraqi market may well seem an attractive prospect.
“The local Lebanese market is saturated with banking services, which made [Lebanon’s Central Bank] eager to encourage banks, such as ourselves and others, to expand outside the local market,” said Chawki Badr, head of international expansion at BBAC, which at the beginning of 2010 began operating a branch in Erbil, Iraq’s third largest city and the capital of the autonomous northern region of Kurdistan.
Iraq was a natural location to broaden the reach of Lebanese banks due to the familiar conditions, preexisting trade relationships and the Iraqi government’s incentives to bring international investors in the country — including tax-free status for 10 years and guarantees that no industries will be nationalized.
While many, if not most, of Lebanon’s banks have representative offices in Iraq or partnerships with local banks, BBAC, Byblos Bank and Intercontinental Bank of Lebanon (IBL) are the only Lebanese banks with full branch operations in the country.
Walid Kazan, assistant general manager and head of the international network division at Byblos Bank, said that a representative office was not sufficient to fully service the bank’s clients.
“As a representative office you are limited as to the type of banking operations that you can do,” he said. “You cannot perform many of the banking operations such as taking deposits or actually giving a checkbook to clients or doing transfers. What you have to do is to channel those requests through the network of your bank.”
“Having a branch allows the bank to perform these banking operations instantly, and to better cater to the needs of its clients. There is a big difference,” he added.
Both IBL and BBAC have one branch office in Iraq, both located in Erbil.
Byblos has had a branch in Erbil since May 2007, and opened a second one in Baghdad in February of 2010. The branches offer bank accounts, loan services, letters of credit, fund transfer facilities, credit and debit cards, ATMs, online banking and currency exchange.
Crisis of confidence
With a new and relatively untapped market comes both ideological and regulatory challenges.
Private banks are a relatively new concept in Iraq, where the banking system was nationalized until 1992. The state still owns seven of some 45 banks in the country, though these account for a disproportional 80 percent of total deposits.
Even after privatization, banks in Iraq were not permitted to make international transfers or offer foreign currency letters of credit until October of 2003. Rudimentary service offerings have led to a lack of knowledge and even distrust in modern banking, especially in the northern region of Kurdistan.
“Through my experience I see that they still don’t have great confidence [in banks] and they prefer to keep their savings in cash,” said Ziad Hassan, manager of BBAC’s Erbil branch. “They don’t even use the bank on a daily basis. For example, merchants don’t post their selling amount everyday in the banks.”
Both BBAC and Byblos said that efforts were underway to encourage the use of modern banking services and educate the people about the benefits of moving away from a cash-only existence. But progress is slow.
Hassan said: “It’s a very tough and difficult market, its not easy.”
Baghdad is slightly more modern in its financial thinking. Badr said that writing checks is much more common in the capital and that the banking industry there is modernizing at a faster pace, due to the influx of foreign banks into the market.
“[With] the incorporation of Lebanese banks in the Iraqi market, the level of banking and financial services provided by local Iraqi banks has become noticeably better and more efficient. This is due to the increased competition in the banking sector,” said Badr. “Also, the injection of the Lebanese banks’ expertise into the market has led to the creation of a more mature banking culture.”
On top of the trust issues that some Iraqis have with commercial banks, archaic legislation restricts private banks from offering services that are commonplace to their operations in Lebanon.
“Law innovation is extremely slow, but it is important to note that every suggestion we’ve presented has landed on good soil and has always been taken into consideration,” said Badr.
The old ways of Iraqi banking have also not been completely shaken off by the country’s government, bringing further challenges for foreign banks entering the market.
One Lebanese banker in the country, who declined to be identified, said that the Iraqi government will often require companies working on government contracts to open letters of credit with certain Iraqi banks, hampering true competition in the market.
Erbil has enjoyed a fairly stable security situation for some time, which is why these banks chose to begin their Iraqi operations there. But, with Byblos Bank’s Baghdad branch in full operation, other Lebanese institutions are expected to follow suit. BBAC has obtained a license to begin operations in Baghdad, but Hassan said that the security situation will dictate when a branch will actually open.
Keeping safe the safe
“We are waiting for security to settle after the elections. After the new government [is installed] we will see how it goes,” said Hassan.
Security is a challenge which Byblos meets with caution.
“The priority for us is the security of our staff,” said Kazan. Byblos employees are restricted in their movements around the city, and Kazan added that security represents a major expenditure for the bank.
Although the branch office is located in what Kazan describes as one of the safer corners of Baghdad, Byblos gave its Baghdad employees the option of coming to Lebanon during the recent elections due to the increased possibility of a physical threat. None of the employees, however, chose to leave.
Along with personnel safety, ensuring security when transporting money, a common occurrence in a cash-inclined market, is also a real concern. For both issues, the banks employ private security companies.
Kazan said that, given the security situation: “We are very happy with the results we are achieving in Iraq. When we first entered the Iraqi market we didn’t have the expectations that a bank would [normally] have while stepping into a new market. The uncertainty of the situation made us very cautious in our business forecasts.”
But even with all of its challenges, Iraq’s redevelopment of its oil resources, massive reconstruction projects and competitive labor costs will likely bring more Lebanese banks to the table.
“It would be extremely wise to ‘book a seat’ right now in this market and take the risk of doing so,” said BBAC’s Badr, “as in time it will be an expensive and costly exercise to enter this market.”