Iraq’s informal banking system threatens financial stability, warns economists

Shafaq News/ Iraq’s
informal “parallel banking system” threatens financial stability and hampers
regulatory oversight, the
Iraq Future Foundation for economic studies and consultancy warned on Saturday.

“Financial institutions
operating outside official supervision had grown significantly over the past
two decades, offering credit, deposit services, and cross-border money transfers,”
the foundation’s head, Manar Al-Obaidy, stated. “These entities range from
salary distributors and currency exchange shops to cooperatives and some
non-profit groups.”

The foundation’s head
attributed their growth to “a lack of regulatory enforcement and demand from
small and medium-sized enterprises (SMEs).”

“SMEs represent about 84% of
the informal economy in Iraq,” he added, highlighting that their exclusion from
formal financial services drives them toward these parallel institutions.

Al-Obaidy cautioned that the
parallel system “enables tax evasion, money laundering, and other illicit
practices, while restricting authorities’ ability to monitor financial
transactions.”

He called for stricter
regulations to integrate the informal sector into the formal system. Measures
could include banning unauthorized financial services, incentivizing SMEs to
enter the formal economy, and placing informal institutions under central bank
supervision.

“In severe cases, shutting
down unlicensed entities and mandating all financial operations through formal
institutions may be necessary,” Al-Obaidy said.

Iraq’s shadow economy has at
times outgrown the formal sector, posing a persistent challenge for authorities,
he noted, with past crackdowns often proving ineffective due to the system’s
adaptability.

Al-Obaidy urged a balanced
approach, combining legal enforcement with incentives to integrate informal
institutions into the formal economy, to mitigate broader economic risks.