Microfinance in Iraq: Challenges and Recommendations

Key Challenges

The microfinance sector in Iraq faces several key challenges that hinder its development.

Regulatory Framework

• The regulatory framework is unclear and fragmented, with different rules applying to NGOs, SMEs, and commercial banks.
• This lack of clarity creates confusion and uncertainty for microfinance institutions (MFIs) operating in the country.

Consumer Protection

• There are no specific consumer protection regulations for financial services in Iraq.
• This leaves consumers vulnerable to exploitation and abuse by unscrupulous lenders.

Access to Funding

• NGO MFIs face challenges accessing broader funding sources due to their legal status.
• This limits the availability of credit for low-income households and MSMEs.

Recommendations

The report provides a range of recommendations to address these challenges and promote microfinance development in Iraq.

Short-Term Recommendations

• Harmonize rules applicable to NGO MFIs, including disclosure, loan provisioning, and governance requirements.
• Determine the appropriate government agency to regulate and supervise NGO MFIs (e.g., Central Bank of Iraq).
• Amend the SME Finance Companies Ordinance to relax capital requirements and limitations on bank debt.

Medium-Term Recommendations

• Conduct a study to assess current demand for services among poor and low-income populations.
• Clarify the legal process for transforming NGO MFIs into for-profit entities.
• Adopt financial consumer protection rules applicable to all financial service providers.
• Establish a comprehensive credit information sharing system (e.g., credit bureau).
• Encourage bank downscaling, particularly with respect to banks using agents (e.g., individuals, legal entities).
• Shift government from provider to facilitator through eliminating direct funding schemes that create market distortion.
• Permit MFIs to be agents of insurance companies.
• Establish a fast-track process for loan recovery.
• Adopt the appropriate legal framework for leasing and secured transactions.

Strategic Recommendations

• Address market and non-market bottlenecks (e.g., regulatory, enabling environment) to expand financial inclusion in Iraq.
• Develop a comprehensive strategy to promote microfinance development in Iraq.

Conclusion

The report highlights the need for a more coordinated and supportive regulatory framework, as well as investments in infrastructure and capacity building to promote financial inclusion and access to credit for low-income households and MSMEs in Iraq.