Baghdad - Iraq's financial sector is facing a recession because of the war between the country's security forces and the Islamic State of Iraq and the Levant (ISIL), whose fighters have seized one-third of Iraq's territory and displaced up to two million Iraqis.
Experts say the massive deterioration in the country's overall security situation and ongoing instability in Baghdad have particularly impacted the country's financial sector. The sector is comprised of 55 banks, of which 32 are private-sector enterprises, 7 are government-owned and 16 are international players. An additional 49 separate investment and other financial firms round out the list.
"Iraq's financial sector was already structurally deformed," Salam Adel, a financial commentator, told Al Jazeera. "It is set to face serious repercussions after the refusal of thousands of Iraqi citizens to make debt payments this summer."
This spells imminent bankruptcy for several Iraqi banks, Adel said, noting loans taken out by displaced Iraqis have now been written off as bad debt. "It is now Baghdad's responsibility to compensate the banks given that the present state of affairs is the product of its public policies."
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Private-sector banks in Iraq are withholding consumer loans due to security concerns after approximately 600 million Iraqi dinars ($515,000) were stolen from both private and state banks in Nineveh, Salahuddin, and Anbar provinces.
ISIL denied that its fighters had robbed banks within the provinces it controlled, insisting fighters had shuttered those banks' doors and tapered their assets, bringing business to a halt.
But some beg to differ. Bassem Jameel Antoine, an Iraqi financial expert, says public confidence in Iraq's banks remains intact, but the sector as a whole is suffering because this fiscal year's budget has not yet been ratified.
In addition, the government in Baghdad has not deposited its funds in private Iraqi banks for seven years. "The end result of Baghdad's public policies is that government-owned banks in Iraq are flush with cash, while their private-sector counterparts are strapped," Antoine told Al Jazeera.
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Some analysts say it is only natural for the banking sector to suffer during wartime. "Prior to the conflict, Iraq's banking sector was already limited, carrying out only rudimentary functions such as buying and selling currency from the Central Bank of Iraq," explained economics expert Ali al-Sayhood al-Sudani. "The Iraqi central government should enact an expedited emergency action plan to save the country's economy."
Such a plan could include an agreement by Iraqi authorities to pay the debts owed by displaced persons. With buildings and farms being destroyed on a massive scale, agricultural and real-estate loans have become an unbearable burden for debtors, Sudani said. He described Iraq's banking sector as the "biggest loser" in the government's confrontation with ISIL.
The dire situation faced by the country's banks calls for an intervention on a scale familiar to Iraq observers. In 2007, US occupying forces set aside $9bn to rid Iraq of militiamen during a time when martial law was imposed in parts of the country.
The government's financial commitment to combatting the present crisis should be in proportion to the losses incurred by the citizens, Sudani said.
Officials from Iraq's central bank declined to speak to Al Jazeera.
Source: Al Jazeera