Volume 1 Cedric - revised luca Final - RUIG-GIAN

The recessionary indication of business activities and declining sales can be explainedby the following:• exaggeration and shortcomings that characterize the estimation of market demand;• shut-down, suspension or withdrawal of many companies due to poor security and anadverse business environment;• slow process of governmental and international expenditure due to securityrestrictions, and non-materialization of pledges made by donor countries andinternational bodies;• prevalence of pessimistic expectations negatively overshadowing investmentincentives.There is a need today for positive measures aimed at revitalizing internal marketdemand and investments (particularly international and private pledges).7.1.2. Access to creditOne of the major barriers to business development is the underdeveloped, inadequateand underutilized banking system in Iraq. Access to credit and availability of capital are ofhigh concern to SMEs. 86 Findings from questionnaires and interviews show a very limiteduse of banking and financial services by SMEs and the self employed.Historically, the banking system in Iraq was unable to cater to the financial needs ofprivate sector development due to the inherent weak capital base of its constituents, andlimitations on the banking system’s capacity to meet market needs. Credit activities werelimited to traditional services such as short and medium term loans, credit letters and billdiscounting. Major factors behind this failure were the backward and limited legal andcommercial institutional framework and the exaggerated governmental constraintscontrolling banking activities.Finance and lending polices adopted by banks are still exclusively commercial,requesting high interest rates and remaining limited to short-term loans against exaggeratedguarantees. Security issues are currently exacerbating these limitations. Several cases ofkidnapping were reported among industrialists as a result of information leaks on theirenterprises’ financial capabilities: investors and entrepreneurs are forced to keep a lowprofile in their business activities and financial standing.The banking system and capital markets are witnessing major restructuring anddevelopment. Nineteen private banks have been founded since 2003, alongside newgovernmental, commercial and specialized banks (industrial, agricultural, socialist andhousing) and development funds. The latter include the economic -social fund of theMoPDC, the industrial development fund of the Ministry of Industry (MoI), and the exportsupport fund of the Ministry of Trade (MoT). Another critical development is theestablishment of the Iraq Securities Exchange (ISX), replacing the former Baghdad stockexchange. 8786 Professor Al Shamma, H "SMEs Finance in Iraq" working paper seminar, BERC, 9 June, 2004, www.berciraq.com87 Kubba, H, "Role of Iraq Securities Exchange –ISX- in Financing Private Sector Capital Accumulation"working paper seminar, BERC, 3 November, 2004, www.berc-iraq.com.76