Cash culture dominates Iraq, reform efforts stall

Shafaq News

4 days ago

Shafaq News – Baghdad
Officials estimated on Saturday that nearly 92 percent of Iraq's cash remains outside the banking system, making it one of the world's most cash-dependent economies.
Experts warn that widespread cash hoarding is draining liquidity, weakening institutions, and blocking long-delayed reforms of Iraq's fragile financial sector. Decades of political turmoil, international sanctions, and economic instability have also shaped this pattern. Repeated bank failures, asset seizures, and corruption scandals have left many Iraqis distrustful of formal financial institutions—especially in rural and underserved areas with limited access to banking services.
MP Mustafa al-Karaawi identified the erosion of public trust as the main reason citizens avoid depositing money. Although parliament has pushed to merge and modernize public banks, progress remains stalled due to entrenched inefficiencies and outdated digital infrastructure.
He called for mandatory digital transactions across government and private sectors to normalize banking use. However, poor internet coverage, limited online services, and cumbersome account procedures continue to deter users.
Public Reluctance
In the capital, Abdul Ali Alwan described to Shafaq News how opening an account took little effort, but withdrawing even a portion of his funds dragged on for more than a week—an experience that discourages further engagement with the system.
Frustrations also run high in the informal economy, where delays can prove even more disruptive. Contractor Abdul-Zahra Fadhel recounted frequent payment hold-ups and restricted access to his accounts, which often left him without the liquidity needed to cover operational expenses.
'When funds arrive in dollars, banks often refuse to disburse the money in the same currency. They require you to open another account in dinars, and they don't use the parallel exchange rate,' he explained. Instead, the conversion takes place at the official government rate, typically below the open market value—reducing the real worth of each payment received.
Adding to the distrust, Fadhel pointed to episodes where private banks faced temporary shutdowns due to external sanctions. These incidents, he noted, reinforce the perception that formal banking channels are unreliable.
Experts Call for Structural Overhaul
Economists link Iraq's heavy cash dependence to deep institutional weaknesses, stressing that decades of instability and limited financial education have entrenched hoarding habits.
The implications extend far beyond households and small businesses. Analysts warn that the Central Bank's ability to manage inflation is curtailed, and tools like interest rates lose their effectiveness. A shrinking pool of bank-held liquidity also constrains lending and investment. As a result, many investors bypass traditional banking entirely, opting instead for informal and often less regulated financing methods.
Unless sweeping reforms are enacted, Iraq's economy will continue to face exposure to inflationary swings, liquidity shortages, and capital flight. Restoring public confidence in the financial system, experts argue, remains essential for ensuring long-term stability and sustainable growth.