Iraqis turn to real estate amid banking trust issues

Jenan Hussein, a 30-year-old resident of Babil Province, made a strategic investment move by purchasing land in the Tajiya area near the city of Hilla, the provincial capital. 

She and her brother joined forces in this venture, aiming to secure their finances for the future and mitigate the risks associated with other investment avenues. With a background in advertising design, Jenan diligently saved a significant portion of her earnings over five years, amassing 30 million dinars (approximately $19,000).

However, faced with the dilemma of finding a safe and profitable investment, she opted for real estate.

Jenan expressed concerns about keeping such a substantial sum at home due to the risk of theft, prompting her decision to invest in land.

“Reports of home burglaries always troubled me, so I sought a safer alternative,” she said.

Hence, she made the decision to partner with her brother in purchasing a plot of land on the outskirts of Hilla, situated approximately 100 kilometers south of Baghdad. Despite the area’s current lack of full development by the municipal authorities and its boundaries existing only in theory, Jenan remains optimistic. She hopes that the land’s value will appreciate over time, or at the very least, serve as a safeguard against the potential loss of their hard-earned money.

In a trend observed among many Iraqis, individuals such as Jenan and her brother are increasingly opting to invest in land and real estate as their primary avenue for guaranteed returns, given the current landscape devoid of viable alternatives.

Specialized experts in this domain suggest that the real estate market presents itself as a flourishing sector with minimal risk of loss. This sentiment is largely attributed to Iraq’s substantial demand for over three million housing units, a figure that continues to surge amidst the rapid population growth.

The move towards the real estate market reflects the constrained investment landscape stemming from the scarcity of industrial, agricultural, and commercial ventures.

Moreover, a lack of confidence in banks has exacerbated the situation. Many banks have struggled to reimburse depositors in dollars, while others grapple with operational hurdles amid volatile governmental policies and intermittent American sanctions targeting financial institutions.

Popular market

Abu Mohammed, aged 54, operates a real estate brokerage office in the capital, Baghdad. He characterized residential property acquisitions as “a safe haven for those with capital, with minimal risk. Regardless of how much their prices escalate; they continue to be sought after and in high demand.”

He highlighted that the real estate market in Iraq adheres to an open market policy, where prices are dictated by supply and demand, with minimal government intervention.

With substantial demand within urban areas, prices have steadily climbed over the past four years, “reaching unprecedented heights,” according to him.

“You will encounter exceedingly high real estate prices, particularly in Baghdad, the most expensive among Iraqi provinces, where prices per square meter can soar up to $15,000 in certain areas. Following closely are Karbala and Najaf due to their religious significance, followed by Basra and Anbar,” Abu Mohammed said.

Economic expert Jalil al-Lami attributed the surge in real estate prices nationwide to the government’s failure to regulate the real estate sector adequately. He also criticizes the tax laws, describing them as flawed and unable to hold real estate traders and speculators accountable for their pricing practices.

Furthermore, Lami elucidated that political figures have exacerbated real estate prices in various regions by leveraging the prevalent cash-based transactions in real estate to launder their funds. This involves transforming illicit funds into legal assets through property acquisitions.

Real estate prices in Baghdad have undergone substantial escalations, with increases ranging from 20 to 50 percent in certain areas and spikes of up to 100 percent in others over the past four years, coinciding with the surge in oil prices.

This surge occurs amidst significant misappropriation of public funds by officials aligned with influential parties and factions. In one particularly egregious case, dubbed the “theft of the century,” which targeted tax deposits, approximately $2.5 billion was involved.

The bulk of these funds found their way into the real estate market, with authorities unable to recover the money even after its discovery. Moreover, the Iraqi judiciary released the implicated individuals on bail.

Lami contended that the stagnation gripping most sectors of Iraq’s economy, alongside the persistent demand for housing units, has prompted traders and companies to channel their investments into the real estate sector, where they perceive assured profits.

Prices show nearly constant escalation owing to the scarcity of land available for sale in cities, particularly in larger urban centers.

Ahmed al-Tamimi, a 45-year-old foodstuff merchant from Diyala Province, echoes a comparable sentiment. Two years ago, he invested the majority of his funds in the real estate sector.

“The private sector is practically dormant; local industry and agriculture struggle to compete with imported goods in terms of quality and price, leaving little room for productive investments due to the substantial risks involved,” Tamimi said.

“I purchased multiple houses and leased them out. While I could have launched a contracting company and undertaken small-scale projects, I was apprehensive about the extortion schemes perpetrated by prevalent gangs. The larger your business expands, the greater the risk of becoming a target for these gangs,” he added.

Contracts for projects across various sectors, including municipalities, development, and construction, are governed by government laws and regulations aimed at ensuring fair competition in the bidding process.

However, a significant obstacle arises from the demands made by militias and political factions with armed factions that wield considerable influence over decision-making. Securing a contract often necessitates yielding to their demands for a portion of the allocated funds, making it challenging for businesses to succeed without compromising their integrity.

Security and uncontrolled arms

The term ‘loose arms’ is frequently used in Iraq to describe militias and tribes that carry weapons without oversight or accountability from the state. They wield significant influence in guiding and shaping investment choices for both ordinary citizens and major investors. Security expert Abdul Khaliq al-Shahir highlights this phenomenon.

“There are 65 armed factions operating outside the framework of the security state, beyond its jurisdiction. While not all of them receive funding from foreign sources, they often rely on wielding their weapons to intimidate, extort, and levy taxes to sustain themselves,” Shahir said.

Influential individuals are hesitant to invest their funds in various private sector activities such as industrial projects, primarily due to the stringent accounting requirements and the inherent risk of profit and loss associated with them. This reluctance stems partly from the history of armed religious groups like Al-Qaeda and ISIS, which, as Shahir highlighted, have created an atmosphere of uncertainty and caution among potential investors.

Industrial projects, whether small-scale or large, entail navigating through a maze of bureaucratic hurdles, including obtaining work approvals, grappling with fluctuating tax rates, managing fees for raw materials, meeting diverse production requirements, and contending with the looming specter of armed factions demanding their share amidst slim profit margins. Consequently, many opt to channel their investments into the real estate market, despite the escalating prices.

A trader from Baghdad, who chose to remain anonymous, corroborated that armed militias levy taxes on prominent merchants and affluent individuals in the city, naming specific groups.

“The Asaib and Kataib militias exert influence in certain districts, alongside the Sadr movement. Negotiation with them is often necessary to avoid their disruptive tactics,” he said.

He noted that currency exchange bureaus, gold vendors, and major retail establishments are primary targets, adding that “in government procurement processes, securing contracts often entails paying a percentage of the contract sum to representatives aligned with political parties or militias operating within government agencies, typically ranging from 10 to 20 percent.”

Mohammed Marwan, a 61-year-old poultry merchant from Nineveh Province, reflects on the challenging experiences endured by citizens in western areas. From April 2003 to June 2014, the region witnessed a relentless decline in security. During this time, ISIS seized control of four provinces, including Nineveh, which is home to over four million people.

“The organization used to extort money almost monthly from all segments of society. Anyone who seemed prosperous—contractors, merchants, doctors, small business owners—had to pay, and those who refused faced dire consequences,” he said. “This continued until mid-2014. After that, with its complete control over the province, it confiscated funds from banks, homes, and all non-transferrable assets such as machinery and vehicles. As a result, hundreds of individuals lost the majority of their capital.”

After the liberation of Nineveh from ISIS in the summer of 2017, people turned to investing in real estate, including residential and agricultural lands, as well as commercial and residential buildings.

This shift occurred because they became increasingly convinced that real estate offered the most secure option for preserving their wealth. Despite ISIS’s previous seizure of much property, it ultimately left it for its rightful owners to reclaim.

Insecure banking sector

Banks serve as the primary conduits for allocating resources across different sectors and fostering their development, relying significantly on deposits from citizens to fulfill this role. However, Iraqi banks face a lack of trust and acceptance from the majority of wealth holders, as noted by Lami.

He suggested that this factor contributed to the emergence and perpetuation of the liquidity crisis in the country.

“This became particularly apparent after the global decline in oil prices several years ago. Subsequently, the government resorted to both external and internal borrowing from banks to ensure salary payments, following Parliament’s approval of a law allowing such borrowing for a defined period,” he said.

Lami connected the erosion of trust in the banking sector among citizens to the inadequacy of banking infrastructures in all their aspects and their failure to adapt to electronic advancements in banking.

“Moreover, government and private banks’ limited involvement in constructing economic infrastructures exacerbates the issue, as the high interest rates they levy on loans fail to foster investment,” Sami said

Lami cited another factor driving many citizens away from depositing their money in government or private banks.

“The absence of legislation guaranteeing deposits in banks is a significant concern. Although a draft of this law was introduced during the previous parliamentary session from 2014 to 2018, it remained stagnant. Consequently, the banking sector will continue to struggle to earn the trust of citizens,” he said.

He further highlighted the proportion of funds deposited in Iraqi banks compared to the total cash liquidity as indicative of this trend, saying that “out of the 80 trillion Iraqi dinars in circulation, only 20 trillion dinars are held in government and private banks. The remaining 60 trillion dinars—about three-quarters of the total cash liquidity—are kept by traders and citizens in their homes.”

In 2019, the Central Bank of Iraq made an effort to tackle this challenge by supervising the formation of the Iraqi Deposit Guarantee Company under Company Law No. 21 of 1997.

Government banks provided 25 percent of the capital for this company, while private banks, foreign branches, the National Retirement Authority, and national insurance companies contributed 30 percent. The remaining 45% was made available for public subscription. 

Nonetheless, a multi-stakeholder company of this nature may struggle to instill confidence. Economic expert Alan Mumtaz asserted that deposit insurance companies ought to be fully government-owned, drawing credibility from the financial strength of the government itself.

“This move is essential to alter the conduct of commercial banks and curb their tendencies to monopolize and speculate with citizens’ deposits,” he said.

Instead, the Deposit Guarantee Company was established as a mixed-profit entity.

“With its current composition, government, local private, and foreign banks hold substantial stakes, affording them influence over its management,” he added.

“The Company, which is tasked with supervising banks, faces practical limitations since banks hold stakes in it. Moreover, being susceptible to poor management and bankruptcy like any other profit-oriented entity, how can it guarantee citizens’ deposits if it faces insolvency,” Mumtaz further said.

He highlighted that even in the United States, a staunch advocate of free-market ideology, the deposit insurance company is wholly state-owned. This setup ensures state control, enhancing economic security for depositors.

In the last two years, numerous Iraqi banks have faced US sanctions due to their “illicit” dealings, encompassing activities such as money laundering and the clandestine transfer of dollars to Iran, a nation subject to international sanctions.

Amidst US pressure, the Central Bank of Iraq made the decision to restrict 22 local banks from engaging in dollar transactions, citing “non-compliance with banking regulations” or the need to enhance their operational standards. Consequently, these banks were excluded from participating in the daily dollar auction overseen by the central bank, which serves as a primary avenue for acquiring foreign currency.

These sanctions, coupled with the escalation of the dollar exchange rate and the devaluation of the Iraqi currency, have resulted in the emergence of two distinct exchange rates for the Iraqi dinar. The official exchange rate stands at 1,320 dinars, whereas the dollar is traded at an average rate of 1,500 dinars per dollar.

This disruption in banking transactions, coupled with the substantial variance between the official and real exchange rates, has rendered most banks incapable of fulfilling their obligations to depositors in dollars, including financial transfers, due to a liquidity shortage. Consequently, thousands of depositors flocked to banks in search of their funds. Some banks, in contravention of central bank directives, opted to disburse these funds in dinars at the official rate, causing depositors to incur losses of approximately 15 percent of their deposited funds.

The fragility and antiquation of the banking system, coupled with frequent fluctuations in regulations and directives, as well as concerns about sanctions and insolvency, have prompted Iraqis to abstain from depositing their funds in banks.

Hassan Shafiq, a 27-year-old food sales representative from Baghdad, opts to store his money at home, citing his distrust in banks, which he fears could collapse suddenly.

He expressed this sentiment firmly, dismissing the notion of depositing his savings in any bank, irrespective of the incentives offered. He lacks faith in government banks due to the financial turmoil in a nation with an unstable and fragile economy. Regarding private banks, he perceives them as dependent on their individual financial standing, and he harbors doubts about the retrieval of his funds if the bank owner were to abscond with them.

He elaborated on his approach to managing his surplus income, saying, “once I have saved up enough to purchase a plot of land, an apartment, or a modest house, I will not hesitate. Real estate retains its value, and for me, it is the sole avenue to safeguard and potentially grow my savings.”