The newcomers are expected to introduce new products and services, and provide competition for the local banks.
A Central Bank deputy governor Ahmad Salman Mohammed says foreign banks will bring in capital, train people, provide jobs, modernise banking services and finance trade, industry and construction.
The Central Bank is to award in December licenses allowing a maximum of six banks to operate in Iraq until December 31, 2008.
Other banks will be admitted after that date only, Mohammed said.
The invitation to foreign banks is the first since the banking sector was nationalised in 1964, four years before the former ruling Baath party’s rise to power.
The winners are expected to begin operations within six months of receiving the licence.
Mohammed said the foreign banks should staff all positions with Iraqis, with the possible exception of the top management. Each bank should also be required to open a total of five branches across the country.
Under the tender document, the minimum required capital for a foreign bank subsidiary to open in Iraq is 50 billion dinars, or $25 million.
This is five times more than the capital required from the local private banks that were allowed to open in the early 1990s to compensate for the devastating impact of UN sanctions imposed after Iraq’s 1990 invasion of neighbouring Kuwait.
The sanctions were lifted in May, one month after the US-led invasion ended Saddam Hussein’s 24 years in power.
But the sanctions and political tension crippled the ability of the 17 local private banks to provide services and products such as credit cards, ATMs and letters of credit, and hindered their development.
The domestic private banks are also dwarfed by the six state-owned banks that hold 82 percent of total deposits, including public sector accounts.
A government finance official said the forthcoming competition from the newcomers could prompt mergers between local anks to increase their size.
“Another scenario could be foreign subsidiaries buying local banks,” he said.
But the chairman of the Iraqi Bank Association, Saad Bunnia, said local banks stand a chance of competing in the new environment because of their knowledge of the country and people.
“The Iraqis like doing business with people they know,” he said.
Bunnia said local banks would seize this opportunity, as well as the recent stability of the dinar exchange rate, post-war business growth and renewed confidence in the banking system, in order to increase assets and income.
As a result of the economic crisis that hit Iraq in the last 13 years and the past instability of the dinar’s exchange rate, the population has avoided putting money in bank accounts, fearing restrictions on withdrawal.
“Most Iraqis hide their savings at home; deposits by individual customers are a tiny fraction of what they could be in a normal situation,” said Bunnia.
Money supply was a close kept secret under toppled president Saddam Hussein. But Bunnia estimated that as much as two thirds of the total volume in circulation was kept outside the banking system.