Baghdad is considering leadership changes and mergers at Iraq's state banks as it confronts outdated systems, weak services and a $72 billion cash economy.

By Dr. Pshtiwan Faraj

Baghdad is preparing to confront one of the least visible but most consequential weaknesses in Iraq’s economy: the state banking sector.

The government is reportedly considering leadership changes at several state-owned banks amid concerns over weak services, slow modernization and the continued reliance on outdated administrative systems. Managers are expected to be judged not simply by financial performance, but by whether they can modernize institutions, expand digital services and make banking more accessible to ordinary Iraqis.

The potential shake-up is significant because Iraq's banking problem is no longer simply about inefficient banks.

It is about whether the country's financial system can support an economy that remains overwhelmingly dependent on cash.

Around 87 percent of Iraq's money supply—approximately 95 trillion Iraqi dinars, or about $72.5 billion—was reportedly outside the banking system as of June. That figure reveals the scale of the challenge facing Baghdad: Iraq has banks, but much of its economy still operates as though it does not.

Baghdad's Bank Leadership Test

The government's reported consideration of leadership changes suggests that Baghdad increasingly views management quality as part of the banking reform equation.

Managers at state-owned banks could face evaluation based on institutional development, service quality, digital transformation and their ability to expand lending.

That represents a potentially important shift.

For years, reform of Iraq's state banks has largely been discussed in terms of restructuring institutions and upgrading technology. But technology without managerial accountability can produce little more than expensive modernization projects.

The real question is whether bank leadership can turn state-owned institutions into functioning financial intermediaries.

Citizens need faster services. Businesses need accessible credit. Government employees need efficient salary and loan services. Small enterprises need financing without navigating an administrative maze.

If state banks cannot provide these services, Iraq's enormous financial resources will continue to circulate outside the formal banking system.

The Rafidain-Rasheed Question

The proposed leadership changes are part of a much broader restructuring agenda.

The Finance Ministry has reportedly been considering merging Rafidain Bank with Rasheed Bank, while also combining the Cooperative Agricultural Bank with the Industrial Bank.

Such mergers would represent a major restructuring of Iraq's state banking architecture.

But consolidation alone will not solve the problem.

Merging two inefficient institutions does not automatically create an efficient one.

The government would need to address staffing structures, branch networks, governance, technology, risk management and lending practices simultaneously.

Otherwise, Iraq could end up with fewer banks but the same weaknesses.

The reform challenge is therefore institutional rather than merely numerical.

Iraq Has Banks—But Not Enough Banking

Iraq reportedly has 81 banks and representative offices, placing it among the countries with the largest banking sectors in the Middle East.

Yet the size of the sector masks a fundamental contradiction.

Iraq has a large number of financial institutions but relatively weak financial intermediation.

The absence of fully integrated digital banks is particularly revealing.

In a modern economy, banking increasingly means mobile payments, digital transfers, online lending, automated compliance and instant access to financial services.

In Iraq, large parts of the financial system remain dependent on paper, physical branches and cash.

This creates friction throughout the economy.

Businesses spend more time processing transactions. Citizens have fewer options for managing money. Banks struggle to attract deposits. Credit remains limited. Informal financial activity expands.

The result is an economy with substantial liquidity but insufficient circulation through formal financial institutions.

The $72 Billion Problem

The most alarming figure may be the amount of money outside Iraq's banking system.

Approximately 95 trillion dinars reportedly remained outside banks as of June.

That is not simply a banking statistic.

It represents capital that could potentially support lending, investment and economic growth but instead remains outside the formal financial system.

The consequences are significant.

Banks cannot lend money they do not attract as deposits.

Businesses cannot easily access credit if financial institutions lack reliable deposits and risk-management systems.

The government cannot easily build a modern digital economy when citizens and companies continue to depend heavily on physical cash.

This creates a vicious cycle.

People use cash because banking services are weak.

Banks remain weak because deposits remain limited.

Businesses stay outside the formal system because digital financial infrastructure is inadequate.

And the continued use of cash reinforces the very conditions that make banking reform difficult.

Why Leadership Matters

This is why Baghdad's focus on bank managers could be more important than it initially appears.

Institutional reform ultimately depends on people.

A modern banking system requires managers capable of implementing digital transformation, improving customer service, managing credit risk and developing products that meet the needs of citizens and businesses.

State banks cannot remain primarily administrative institutions.

They need to become competitive financial organizations.

That does not necessarily mean abandoning their public-service role. It means using that role more effectively.

Salary advances, consumer loans, agricultural financing, industrial credit and small-business lending can all contribute to economic activity if they are managed transparently and sustainably.

The government therefore has an opportunity to turn state banks into engines of economic diversification.

But that requires ending the culture in which institutional performance is disconnected from management accountability.

The Shadow Credit Economy

Weak formal banking also creates space for informal lending.

When citizens and businesses cannot obtain loans easily from banks, they find alternative sources of credit.

This can produce a shadow financial system operating outside formal contracts, regulatory supervision and conventional consumer protections.

Such a system can be expensive and risky.

It also reduces the ability of the state to understand the true structure of credit and debt within the economy.

Banking reform is therefore not only about making transactions faster.

It is about bringing financial activity into a system where it can be monitored, regulated and connected to productive investment.

Digitalization Is the Real Battlefield

The government's emphasis on electronic infrastructure is consequently crucial.

Iraq does not need digital banking simply because other countries have it.

It needs digital banking because a cash-heavy economy is expensive, difficult to monitor and poorly suited to diversification.

Digital transactions create records.

Those records can improve transparency, strengthen tax administration, reduce transaction costs and make it easier for banks to evaluate borrowers.

They can also help bring previously informal businesses into the formal economy.

But digital transformation requires more than installing software.

Banks need cybersecurity, interoperable payment systems, reliable identification mechanisms, trained staff and regulatory frameworks capable of supervising increasingly digital financial activity.

If these components are absent, digitalization will remain superficial.

The Political Economy of State Banks

There is also a political dimension to the restructuring.

State-owned banks are not ordinary commercial institutions. Their branches, staffing structures, lending decisions and relationships with government agencies have historically been connected to the broader Iraqi state.

Any serious reform will therefore create winners and losers.

Mergers can mean fewer positions.

Branch restructuring can affect local political interests.

New lending rules can reduce discretionary influence.

Digital systems can make transactions more transparent and therefore more difficult to manipulate.

That is precisely why reform is necessary—and why it will be difficult.

The government is not simply modernizing banks.

It is potentially changing how economic influence operates inside the Iraqi state.

Iraq's Fiscal Pressure Is Making Reform More Urgent

The timing is also important.

Iraq remains heavily dependent on oil revenues, while government spending obligations remain substantial.

In such an environment, strengthening the financial sector is not optional.

A functioning banking system can mobilize domestic savings, expand private-sector credit and support investment outside the oil industry.

It can also reduce pressure on the government by enabling private financial institutions to play a larger role in economic activity.

If Iraq wants genuine diversification, its banks must become capable of financing it.

An industrial policy without industrial credit will remain largely theoretical.

Agricultural reform without agricultural finance will struggle.

Small-business development without accessible lending will remain limited.

The banking sector is therefore part of Iraq's economic infrastructure.

The Reform Test

Baghdad's proposed leadership changes could be the beginning of a much larger transformation.

But the government should avoid confusing personnel changes with institutional reform.

Replacing managers is easy.

Changing incentives is harder.

The real test will be whether new leadership is given measurable targets for digitalization, lending, customer service, transparency and financial performance—and whether managers who fail to meet those targets are actually held accountable.

The proposed mergers should be judged by the same standard.

Will they reduce duplication?

Will they improve services?

Will they expand access to credit?

Will they accelerate digital transformation?

Or will they simply create larger institutions with the same problems?

The answers will determine whether Iraq's banking reform is cosmetic or structural.

From Cash to Capital

Iraq's enormous cash economy represents both a weakness and an opportunity.

If even a fraction of the roughly 95 trillion dinars currently outside the banking system could be brought into formal institutions, the potential impact on lending and investment could be substantial.

But citizens will not move their money into banks simply because the government tells them to.

They will do so when banks become faster, safer, more accessible and more trustworthy than keeping cash outside the system.

That requires institutional credibility.

It requires modern technology.

It requires competitive financial products.

And above all, it requires banks that actually serve their customers.

Baghdad's consideration of leadership changes therefore comes at a critical moment.

The issue is not simply who runs Iraq's state-owned banks.

It is whether those institutions can finally become engines of economic modernization rather than symbols of an economy trapped between enormous financial resources and weak financial infrastructure.

Iraq has money.

What it lacks is an efficient system for turning that money into credit, investment and productive growth.

The battle over state-bank leadership may therefore be a much bigger battle over Iraq's economic future.

If Baghdad succeeds, cash can become capital. If it fails, Iraq's wealth will continue circulating outside the institutions designed to turn it into growth.

Dr. Pshtiwan Faraj is a Kurdish policy analyst, researcher and founder of Kurdish Policy Analysis, focusing on Kurdistan Region politics, Iraq, energy, economics, security and Middle Eastern geopolitics. He holds a PhD from Brunel University London and has extensive experience in political analysis, international relations, higher education and research.

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