Initial Thoughts on Banking in Samarra Introduction. These ideas derive from materials from the Sala-ad-Din PRT, BearingPoint, USAID, the U.S. Army and on the inter-net. While not exhaustive, this literature suggests points to consider when meeting with local officials. Some of these ideas, to move forward, require support from USAID et al. We also recognize that, per Major Stark’s investigations, Samarran officials and city leaders are setting up their own process for the restoration of a banking system. We have not gained visibility into these deliberations or efforts. Banking Function. The products and distribution provided by financial services tend to be sequential over time from simple intermediation to more complex consumer finance to merchant banking to risk management to trading-and-investments. Necessity tends to popularize new product areas to accommodate increases in disposable wealth, incorporate advances in the technology of cash substitutes and migrate beyond matured products. Banking in Iraq. Like other businesses in Iraq, financial services rely upon the stability of the larger society, the financial structure and economic growth to evolve. The following factors have retarded the modernization of Iraq’s banking system and gutted its infrastructure:

forty years of dominance by large state-owned banks – Rashid and Rafidain (roughly $2 billion in assets) – as disbursement centers for wages in a command economy;

thirteen years of sanctions isolating Iraq’s banking sectors from technical advances in currency substitutes and funds transfers; and,

the destruction and looting during the 2003 war and its aftermath. The two dominant state banks control two-thirds of the banking assets, while private banks account for 10-15%. Outside of improvements in banking regulation and capital adequacy mandated by the CPA, the sector appears to be stagnating with less than 20% of earning assets attributable to personal and commercial accounts. Direct foreign investments in the Iraqi financial services industry remain largely inert and await future prospects of prosperity. Banking in Samarra. As a quarantined city locked in a climate of fear, lawlessness as well as economic isolation and paralysis, Samarra’s financial services have reverted to the most basic level of cash transmission and, if available, a safe-haven for excess currency. We are aware of no banks or branches functioning in Samarra and yet the city’s economic life appears to be functioning if not growing. That is to say: money and goods are making their way through Samarra’s shattered streets. Cash transmission may conduct through a “hawala” system of underground transfers. To set attainable goals, we ought to support our Iraqi counterparts in their efforts to assure simple intermediation and safeguarding of excess cash balances. Higher level training functions for risk-management and asset-liability management should follow successful first steps. Such activity may be occurring already. The Middle East Bank, Iraq’s largest retail institution, reportedly has a branch in Samarra. Local post offices may still be distributing pension checks. Anecdotal evidence suggests that cash disbursement and limited investments in selected infrastructure and other projects may be handled informally by city officials and sheiks through the diversion of other GOI-allocated resources. Obstacles to Banking in Samarra. Given the inhospitable climate for banking in Samarra, several problems may need to be redressed before progress occurs. Besides those mentioned relating to security, other obstacles include, but are not limited to, the following:

discord among the local, provincial and national governments; distrust among citizens, city leaders, sheiks and the 1,800 national police deployed to

Samarra under MG Rashid; open questions relating to property titles and rights for designated sites; limited employment (i.e., 3-5% of the estimated work-force) by wealth-creating

manufacturers including the state-owned drug company and a meat-packing facility; the absence of local policing to prevent increasing lawlessness precipitated by AIF

forces pushed out by ISF and Coalition forces from Baghdad and elsewhere; and, the likely lack of trained financial service professionals.

Possible Insights. The following considerations – as subsequently modified by discussion and experience – may prove to be helpful in the Iraqi-led effort.

1. The USAID Izdihar program has specifically targeted financial skills as a core part of its vocational training initiative.

2. Higher-level banking skills can be taught through these jobs-training centers. 3. Direct deposits of Iraqi Dinar (IQD) can fund future vouchers substituted for

commodities-in-kind under the PDS system to establish a short-term deposit base. 4. IQD for salary, pension and other benefits can be distributed through banks instead of

post offices. 5. Local sheiks and tribally affiliated groups may provide better security for banks – as

they had for centuries for the Golden Mosque – than the national police. 6. Micro finance loans underwritten by NGOs affiliated with the Izdihar program can be

distributed through a local, admittedly rudimentary, banking system. Potential Resources. While aiding the current Samarran process toward re-instituting basic financial services will challenge us in the wider context of limited local resources and Samarra’s evident problems, the following resources may be available:

The Iraqi Company for Bank Guaranties (ICBG) pooling the resources of 11 member private-sector banks for 75% of the principal of small business loans;

The Islamic Development Bank (IDB) providing long-term capital support for a re-development bank in Samarra;

economic hubs – the area around the Golden Mosque, the market district and the drug manufacturing plant – as pivot points for future Rashid and Rafidain branches;

two domestic Islamic banks, one headquartered in Anbar, to service a holy city; USAID/NGO programs rebuilding business infrastructure and skills through training

centers, micro-loans, agri-business grants relieving shorter-term credit risks in favor of establishing longer term financing channels in a contested area;

the hawala system, recently recaptured from AQI, as a cash disbursement vehicle harnessed by returning banks;

new technologies (e.g., cash transfers via secure e-mail) obviating the requirement for expensive catch-up investments in bank technologies and physical infrastructure;

direct deposit of, for example, 50% of the monies paid to local sheiks for standing up concerned local citizens councils (CLCs) similar to the “gayaameen” traditionally manned by Samarra’s seven leading tribes to secure the Golden Mosque; and,

pension and other social security payments directed to banks from the postal system. Conclusion: Trial Scenario and Benefits. The first step, recommended by Major Stark, of one or both of the large State Banks establishing remote branches in Tikrit (45-60 minutes’ drive) to service Samarra makes sense to consider if it is consistent with what city leaders

have in mind. These remote branches could migrate down to Samarra’s economic hubs when security permitted and when the “hassle-factor” became unbearable for key stake-holders. Concurrently, Samarran leaders or outside Iraqi-domiciled banks could enter the city through a joint venture re-development bank supported by the ICBG, in turn backed by the IDB, to distribute micro-loans. When circumstances allowed, this joint-venture / re-construction bank could be sold off to Iraqi or even international banks, in whole or in pieces. The ultimate scenario, if any, that succeeds will almost certainly differ materially from this initial guess-work. The benefits of a roll-out encompassing multiple resources and accounting adequately for the several challenges would be longer-term in nature.

1. The gradual re-entry of financial services through remote branches would address the immediate skill deficit in Samarra while acquainting local citizens, if inconveniently at first, with the efficacy of a monetary versus barter economy.

2. Mandating the deposit if IQD of State-based payments and some portion of cash paid to the sheiks for CLCs into remote branches or a joint-venture bank in Samarra would create a durable deposit base over time and 'Dinarize' much of the local economy.

3. The security provided through the local CLCs, as new-and-improved “gayaameen”, would win the trust of the Samarrans and not inhibit use of local banking facilities.

4. With the distribution of the micro-loans underwritten by NGOs, local private sector banking, already facing significant security threats, could take hold while not having to manage credit risk in a battlefield atmosphere.

5. With such distribution of – and servicing income earned from – risk-free micro-loans, a pilot bank, backed by the IDB and ICBG, would have time to act as a training nucleus to equip Samarrans with the skills needed to sustain their banking system.

6. Finally, these micro-loans would provide rich lead generation for the future banking efforts of trained banking officers and risk managers.

Next Steps. This initial frame-work is only for discussion purposes to focus our investigation and thinking about the banking process and re-establishment in a ‘red zone’ city. The following next steps are submitted for now with additional comments from MAJ Stark at the appropriate time:

checking with the U.S. Embassy’s retail bank working group to clarify efforts taken to date, if any, to focus on restoring financial services in Samarra;

checking with provincial leaders and DGs as well as relevant national political agents on their programs, if any, with respect to Samarran banking;

meeting with local sheiks, government officials and business leaders to understand the progress to date made by the Samarran-led banking initiative;

determining if any banks currently operate in Samarra; inspecting unused banking facilities for suitability for future use; ascertain the presence of currency substitutes, if any, particularly cash-backed credit

cards or telephone calling cards; gaining visibility on underground banking functions provided by the traditional

hawala system (or, perhaps, a combination of the two); sounding out USAID on channeling micro-loans through local institutions; seeking out potential sources of credit, capital or investment support outside of

Samarra not associated with the U.S., the U.N. or the West; understanding requirements for attaining local “buy-in”; and, above all, listening to and encouraging Samarrans to take leadership of their financial services.