In Iraq and need cash? It's not easy. All banking has to be done in person at the branch where you hold an account, your salary is paid in cash — not check — and a Visa card won't buy you anything at the market. It's almost not worth graduating from your childhood piggy bank.
But this month, people in Baghdad can begin to say goodbye to this antiquated and unwieldy system— thanks to banking monolith Rafidain's introduction of Iraq's first electronic clearing system.
This is good news for Iraqis because now they can have their paychecks directly deposited into their accounts instead of stashing their money at home. By September they will be able to choose from ATMs at 147 branch banks scattered around Baghdad — and count on them to be functional.
This step towards a modern banking system could help bring prosperity to Iraq. As the Economist noted optimistically, "Iraq’s overdue conversion to fully electronic banking should help woo investors from abroad and pep up the economy as a whole."
But some are worried this ATM hustle-and-bustle means a transition to modern finance that Iraq isn't ready to support. First, the use of ATMs and electronic banking may lead to other aspects of Western banking, such as loans and credit cards. This could prove problematic because Shariah (Islamic law) prohibits credit and "non-benevolent" loans that charge interest.
This isn't a new obstacle: Other developing Muslim countries have faced the transition to a modern financial system while still following Islamic banking standards. This form of finance is based on a common prudence among banks, lenders and individuals— because they all share the risks of investment, and divide any profits. It has already been successful in many Muslim countries — ranging from the strict model followed in Qatar, to a more relaxed one, as in Malaysia. It is even being implemented in secular countries with a Muslim minority population like the U.K., and in Western financial hubs like Switzerland.
What's more, some say the Islamic model is more insulated from the recent global financial crisis than conventional banking systems. This is because the theological framework of the system prevents excessive risk-taking — such as the use of unstable financial instruments like derivatives. Majed al-Refaie, the head of an Islamic investment bank in Bahrain, explains in the Washington Post:
The beauty of Islamic banking and the reason it can be used as a replacement for the current market is that you only promise what you own. Islamic banks are not protected if the economy goes down — they suffer — but you don't lose your shirt.
For these reasons, some say Iraq's potential for financial growth through Islamic banking is high, provided the country is stable enough to support stimulation.
But even Islamic finance is not recession-proof, as economists noted at the recent Islamic Banking and Finance Summit in Dubai. This model also requires stability and responsible management for success — which Iraq may not be ready for. Islamic finance may not be the best answer for impoverished Iraqis either: It is more difficult for poor people to get loans under this system than conventional ones. This is because borrowers need a higher income and more collateral to meet the stringent lending rules set by Islamic banks.
Opting to go the conventional banking route, on the other hand, could create another pitfall for Iraqis: credit cards — and more specifically, credit card debt. Ballooning credit card debt can easily lead to the entrenchment of poverty, not its alleviation.
The potential downfalls of either financial system — Islamic or conventional — could pose problems as Iraq modernizes. But for now, at least Iraqis can finally ditch those piggy banks and go to a working ATM instead.