Iraq imports approximately half of its consumable goods, making trade finance a must; and Iraqi companies, now that they have access to international commerce again after decades of isolation, are eager to get their goods out to market.  

In theory, all banks in Iraq provide trade services to companies wanting to trade internationally, including transfers, letters of credit (LCs) and letters of guarantee. In practice, however, it is more complicated.


Few banks in Iraq offer credit on an unsecured basis. The credit that is available is based on loan collateral, often secured by cash, gold or land (the latter of which involves a slightly complicated process of registering and pledging real estate to banks in order to obtain financing). There is little or no credit or cash-flow analysis. LCs can be hard to come by for many Iraqi companies, although they are more pervasive than in previous years. 

“Letters of credit are one of the most important issues for Iraq to deal with. In 2009, the Trade Bank of Iraq [TBI] issued more than $10bn in LCs. Other banks are doing the same,” says TBI chairman Hussein Al Uzri. “Back in 2003, the only way to finance trade was through the oil-for-food programme; now we see that we are backing LCs, except for oil. So that’s big progress.”

TBI dominates market

TBI, a state bank claiming total assets of more than $10bn, is the major player in providing trade finance services in Iraq – or, as one Iraqi financial player describes the bank, the market’s “400-pound gorilla”.

Established in 2003 to issue LCs and facilitate imports for the government of Iraq for an originally specified two-year period, TBI is now a fully functioning bank by any definition, having introduced ATMs to Iraq and now issuing credit cards; it has nine branches and is set to add another five this year. The bank recently implemented a multi-currency retail banking solution, Misys Equation, which it says will facilitate TBI transactions across the country and allow customers to access real-time information about their accounts. Previously, each branch used stand-alone offline systems, and daily transactions at branches were consolidated at the end of the day.

TBI has been raising its limits – now offering LCs of up to $2m to private banks – to increase the capacity of private banks to issue LCs. But many of these banks complain that the LC business is not trickling down and that they are in a sense competing, in vain, with the government. And some observers cast doubt on the creditworthiness of the Iraqi government itself as backer of the trade papers. “Because of the large size of many of the letters of credit that are going through the government, people are sometimes even worried about those getting paid, let alone everyone else’s LCs,” says a US official involved with trade issues.

In any case, not enough of Iraq’s banks possess the technical ability or correspondent-bank relationships to handle a great deal of LC business. As Iraqi private banks do not tend to have a lot of credit established with international banks, if one of them wants to facilitate an LC somewhere in the world, it may only have, for example, $200,000-worth of credit with whichever correspondent bank that LC has to go through. So if the bank puts out that $200,000, it cannot extend any more credit through that correspondent bank until the $200,000 LC is paid off; hence, a credit crunch ensues.

Even those Iraqi banks with solid international links, such as Dar Es Salaam Bank, of which HSBC is now a majority owner, say they cannot get their hands on enough paper. “LC volumes are not as high as we would like because the business is limited to private sector deals and because of the near monopoly of the government bank. We are seeing double-digit growth but in absolute size it is still very small,” says James Hogan, the Iraq CEO for HSBC Middle East.

US boost for imports

On the import side, at least, Iraqi buyers may soon find it a bit easier to procure goods from the US. In July the Export-Import Bank of the US (Ex-Im Bank), which had previously been closed to Iraqi businesses, announced that it would finance short-term and medium-term sales of US exports to Iraqi buyers in both the public and private sectors.

“Iraq’s economy is growing, offering specific opportunities for US exporters in a variety of industries. Ex-Im Bank can help by reducing the repayment risk, especially for small businesses,” says Ex-Im Bank board member Bijan R Kian.

Ex-Im Bank says it will provide export-credit insurance, loan guarantees and direct loans for creditworthy export sales to Iraq. Short-term insurance is available for transactions with repayment terms of 180 days or less, and up to 360 days for capital goods. Medium-term insurance, loan guarantees and loans are available for transactions with terms of up to seven years. The bank’s working capital guarantees (which help US exporters or their suppliers to obtain funds to produce or buy goods or services for export) are available to support exports to Iraq.

“The bank will consider providing long-term support where there are financing arrangements that eliminate or externalise country risks, such as asset-backed financings and structures that earn revenues offshore in a third country,” said Ex-Im Bank in announcing the development.

As it stands now, if a US company wants to sell something to an individual Iraqi company, it is nearly impossible without going through TBI. Most LCs have to be 100% collateralised, which greatly restricts the initial size of the LC that the Iraqi buyer can receive for the transaction. US exporters complain that trade transactions with Iraq often fall apart because of a catch-22 situation whereby the LC does not clear because it is extremely costly to get guarantees on the paper, and so the Iraqi company does not want to pay it and neither does the US firm.

Ex-Im Bank stepping into the breech is a development that could, at least in part, help unblock the logjam in US-Iraq trade. As for freeing up the market for Iraqi trade business to and from other countries, the request from many corners, realistic or not, is for the government to do the opposite and step aside.