The Impact of Financial Liberalization on Financial Development in Iraq (Growth Leadership Journal)

Summary

• Domestic credit to the private sector is only 9–10% of GDP in Iraq, and only 22.7% of adults have formal bank accounts.p.3
• The analysis uses annual data for 2003–2023, giving 21 observations.p.8
• In the short run, a change in capital account openness is positively correlated with a change in domestic credit to GDP (1.591, p = 0.009).p.17
• The Johansen test also finds no cointegrating vector, with an adjusted trace statistic of 20.37 against a 5% critical value of 29.80.p.18
• The NPL ratio decreased from 34.2 percent in 2004 to 13.1 percent in 2023.p.21
• The Banking Reform Index rose from 1.0 in 2003 to 3.0 in 2023.p.20

Key insights

1. Oil revenues accounted for more than 90% of government revenues during the study period.p.6
2. Two state-owned banks, Rafidain and Rasheed, hold the lion's share of the banking sector, alongside over 70 private banks.p.3
3. Total bank assets grew from 42.3% of GDP in 2004 to 95.8% in 2023.p.21
4. Private credit to total bank assets stayed low, at 4.9% in 2004 and 10.5% in 2023.p.21
5. The cost-to-income ratio improved from 72.1% to 59.1%.p.21
6. The banking reform index change is positively correlated with credit but not significant at the 10% level (0.617, p = 0.075).p.17
7. Toda–Yamamoto tests find no Granger causality, for example from KAOPEN to domestic credit (chi-square 0.18, p = 0.675).p.19
8. The 21 observations limit the power of cointegration and causality tests, so the absence of a long-run relationship may be partly due to low power.p.24