Within the financial economy: banking with the comprehensive reserve in light of the fact bitter cash
Author: translation and editorial section
Dr Marc de Weaver
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As in many economies are in a State of conflict or post conflict, Iraq's private sector is based primarily on monetary resources. And bank financing is not available for all but the largest companies limited bank financing her ob drawing facilities only.
While using checks often between companies within the same city, controlled by transferring money via a money transfer paper form or via money transfer companies on payments system.
Most Iraqi families have no bank account, people who possess financial savings kept mostly in cash packages American currency (dollar) in special cabinets.
That situation put huge restrictions on the financial system as they virtually exclude the role of partial reserve banking system.
The business model of Iraqi institutions are quite different from those in developed countries and banks normally reserved a small amount of deposit base with the money saved in the Bank or in the form of a reserve account at the Central Bank, and most of the money deposited is easy to withdraw, because depositors money is likely to withdraw small amounts of this money at any time.
Banks and money transfer companies that serve the cash economy in Iraq could not work the same way banks in developed countries.
Banks eligibility is subject to pull huge funds and unexpected amount of depositors either individually or collectively, money-transfer companies are not receiving financial deposits at all, as a result, the financial system in Iraq to achieve the Bank reserve schemes is miserable, those schemes proposed by the Austrian economists as a way to eliminate the investment cycles of boom and bust. "1..
That greatly resembles the "ideal model of financial system in free society" proposed by Huerta de Soto where support reserve deposits by 100%, and a free banking system (irregular) and free choice of currency.
While all privately owned Iraqi banks don't own proportion% percent of their deposits of cash and deposits listed Iraq stock exchange (ISX) cash deposit rate is 97% at the end of the old combined 2014, a figure very high compared to their counterparts.
At the system level, the total remittance companies and the money saved in special cupboards with comprehensive reserve banking system Parallels where different entities are responsible for booking and payment functions.
Money transfer companies constitute an example of ideal model (banking) and because of the lack of regulations intervene in their field and affected a "reputable" for their discipline at work significantly.
Finally, the dollarization (Iraqi currency conversion into us dollars) for micro economy allows for great freedom in Iraqi currency.
The semantics of assignment to reserve deposits 100 percent is that demand deposits are not available to finance loans, which must be covered by the Central Bank.
For the Austrians, this is desirable because it precludes the possibility that banks create money that investment boom fuelled by credit, and in fact this is not a problem in Iraq.
Events in Iraq that led to increase the investment ratio is a result of high oil prices and not the result of excess credit ".2.
In reality, it does not, as sometimes the Iraqis complained that the reserve accounts or their own lockers are not available to the "real" economy.
Regardless of the form it takes money it doesn't "flow" in material goods. As trade and investment are changing the way transfer money into commodities, they simply converted from buyers to sellers.
Cash plays the same role in the payments system, regardless if they are available or unavailable to be pulled. They don't just sit around.
What makes the reality of Iraq is not bitter monetary utopia policy proposed by Huerta de Soto and other Austrian economists but is the absence of the rule of law, the absence of effective control over the banks not make sure depositors money that their money in a safe place, which makes it difficult for banks to be garrison for cash customers. In a country where armed robbery is of daily events that has led to high transaction costs associated with guarding and transfer funds.
Without a reliable implementation of contracts it is impossible for financial intermediation that through consolidated investment funds which Austrian claims could be a substitute for bank loans in the system with reserve.
Instead, you must only medium and long term financing largely between the parties know each other personally, while the proposal of Huerta de Soto might be optimal visualization in a country that has a strong legal and regulatory institutions, the Iraqi version of the proposal is only a last resort.
The best that can be achieved is through "special orders" in the absence of a reliable Government Department.
Either for the remainder of this report, which demonstrates how the Bank works with the comprehensive reserve has become a fundamental base in the private sector in Iraq and explore some of the implications of the policy making process.
The first part shows the tendency of Iraqi private banks to hold higher levels of reserve deposits than their counterparts from developed countries, despite the absence of any formal requirements to support mass reserve.
The second part is the possibility to allow remittance for the private sector, which owns money controlling the role usually deposit the payments system, allowing those who keep money in special stores that serve as a kind of "domestic reserve."
The third part looks at the Central Bank and explains why traditional monetary policy ineffective and prudential oversight, and AML systems under the current conditions in Iraq. Finally, the fourth part concludes with the "second-best" proof "ideal model" of Austrian Huerta de Soto.
1. Bank works with the comprehensive reserve as a last resort. 3.
While asking the Central Bank (CIB) to control private banks on reserve deposits by 15%, most tightly controlled on their deposits by 50%. Unlike foreign banks, money, school, not loans, is one of the major assets of the Iraqi private banks as if that completion of private banks that it has become one of the most liquid financial institutions in the world.
The six banks standpoint in the Iraq stock exchange (ISX) where that leading shareholders were foreign banks until the end of 2014 (see Figure 1).
Cash deposit ratios ranged from 9% to 28% for Bank sponsor vs 49% up to 121% of the Bank's branches and financial assets covers 86% of deposits. As for the banks and the dominant locally, the figure was higher than that for up to 105%.
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Figure 1. Rates of cash deposits in banks listed in the Iraq market for securities to foreign banks sponsor at the end of 2014, from left to right:
Burgan (based in Kuwait),
Ahli United Bank) based in Bahrain
(, HSBC Bank,
Qatar National Bank, capital Bank) based in Jordan
(National Bank of Kuwait, and.
(Note that the HSBC Bank had sold the entire share later in favor of a Bank.
Iraq's banks managers will tell you they need funds to meet unexpected massive withdrawals by customers who placed money. But this applies to all banks in the world.
Why shouldn't Iraqis money lenders that have greater liquidity than their counterparts in other countries?
Doesn't seem to be a very strange behaviour when you consider the fact that Iraq lacked the interbank market.
Since banks can typically experiencing financial liquidity of borrowing from another bank has a surplus of money.
As long as the bonds from clients don't change, withdraw money from the Bank (a) turn into bank deposits (b) while ensuring that the amount requested from the Bank (a) can be easily available in the short term.
In Iraq, one of the banks lack liquidity will theoretically to borrow from the Central Bank.
This alternative is more disturbing than the possibility of borrowing from another commercial bank, however, it didn't happen to see reality.
When you feel the institutions in developed countries they would be in trouble, it would be still could reach the money in the interbank market, provided that they are ready for the return of such funds with a great interest rate.
However, the Central Bank is the lender and regulating the movement of other banks alike, as it would provide liquidity to pay higher amount regardless of the circumstances, and this is especially true of the Central Bank of Iraq, which lacks strong strong oversight of monetary authorities in other countries. This makes it easy to be exploited by commercial banks with good reputation.
And of course that all male begs the question: why is there no interbank market in the first place? Isn't that the Central Bank can put a system allows banks to provide short-term loans to each other. It seems that the problem is partly due to the dominant role of State-owned banks, which together represent the majority of deposits system-wide, without their participation, the interbank market idea would not apply.
There would be no guarantee that at the end of a day that private banks combined into financial deficit while the State banks may have a surplus of money. In a market where only private banks participating, there may be a Bank has excess funds but not enough to meet the demand of those banks that were exposed to the fiscal deficit.
Then why not share state banks in the market? Unfortunately, this will be a good thing, similar to state-owned companies in General, these banks could always count on to be saved if you have problems.
This means that lenders between banks is likely to act impulsively, making funds available to anyone willing to pay greater interest rate regardless of the risks facing its counterparty.
The inevitable result would be an increase in the proportion of non-performing loans in State-owned banks, which will hit the Government budget.
There could be a possibility that the amounts withdrawn in a given day would return to the banking system in the form of new deposits, and may save that money at home instead.
That may be true, for example, which happened during a crisis control Islamic State in northwestern Iraq in the summer of 2014. As long as the security situation is unstable, that banks should be prepared to meet sudden and unexpected withdrawals of money at any moment.
The need to keep money in the Bank vaults and Central Bank reserves refers of course to the main action in private banks lending money can't be average or long. Instead it confined its activities largely to foreign exchange trading and transfer of funds and provide an overdraft facility and letters of credit to importers, performance bonds for construction contractors. As Austrian economists imagine if banks with reserves, loans rarely exceed shareholder rights.
In most countries, the Bank that owns more than half of its deposits in the form of cash is a bank with very bad management. In Iraq it is opposite, banks that have little cash is at risk of failure.
Example Warka Bank is one of the worst cases of failed banks in Iraq in recent years.
Warka Bank occupied the formerly ranked first in terms of total assets, but the CBI had seized him and canceled from the list of banks involved in the stock market in 2011.
Cash deposits have dropped that reached 79% in 2009 to 12% at the end of the second quarter of 2010-it is not an alarming level in accordance with international standards but is fatal in Iraq-by the second quarter of 2011, when another bank financial statements, had fallen to only 1%.
2 – Money transfer companies and domestic reserve "
Play money-transfer companies, known as Arabic language transfers, a major role in the transfer of funds between Iraqi and international cities. Since their profits depend entirely through remittances and foreign exchange trading.
Rarely used by some banks and keep most or all of their money in the form of paper money. Others have more relationships with local financial institutions, as well as those who deal with major contributors who link them to personal links.
These companies tend to exist in popular markets, which often occupy a modest buildings and markets have offices on a table, and a machine for counting the money, and a couple of chairs and a table.
While those offices appear modestly, but they operate largely outside the formal financial system, and they are involved in a very complex global financial network similar to those used for commercial banking transaction processing.
For example, the average daily volume in mid-sized offices in Sulaymaniyah said that it costs more than a million dollars.
And contrary to what many people think, the process of converting money does not include transfer of money.
When the sender give money to funds transfer company (a), (a) send instructions to a company in another place, so call (b), which would ask them to give money to the recipient, who will have to carry some kind of ID and password.
So the money never moves it is a simple process that will end with that company a will have an increase in cash balance and company b would have a lack of balance.
The studies focused on international financial transfers offices such as basas (2003) and will Scheffer (2008) wemaimbo (2013) on the role of actual transfer of money or negotiable goods or transfer funds between bank deposits to affect the adjustments between funds transfer companies. Says our informants in popular markets in Sulaymaniyah, the majority of outstanding balances not resolved in this way, but through the book process.
In the simplest cases, the lack of balance between the sender and the receiver may be reflected by turning the money later from the company (b) to company (a).
If the company (b) to transfer funds to the company (a) the fiscal deficit (b) can be terminated when receiving money from the client, while the surplus (a) may disappear when you pay money for the person who will receive the money.
Of course the incoming and outgoing transfers rarely compensate each other this way. In the case of more realistic, the settlement between several parties include money transfer companies.
Suppose that (b) by Dean $25 (a) total net transfers from (b) to (a). At the same time, the company may (o) by Dean $15 (b) (r) by Dean $10 (b), and (o) by Dean 8 $ (r), and (a) by Dean coming $25 (s) (see Figure 2).
The settlement between these companies can be as follows:
1. company a $25 debt with (b).
2. company b deep debt $15 and $10 with (q) and (r).
3. cancel the company (r) of debt $8 with (q).
4. company (x) $25 debt with (a).
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Figure 2. Multilateral filter between money transfer companies
It is easy to see how this way if we take into account the impact on each company to transfer money:
1. no longer company a owes $ 25 $ for the firm (s) and no longer worth $ 25 $ from company b.
2. no longer company (b) owe $ 25 $ for company a and no longer worth a total of $ 15 + $ 10 = $ 25 each from the company (o) and (p).
3. no longer company (x) owes a total amount of $ 15 + $ 8 = $ 23 (b) and (r) is no longer worth the amount of $ 25 from company (a). So it will remain $ 25 $-23 $ = $ 2 as a credit company (x) in this system, which can be eliminated by payment by the company (r)
4. no longer company (r) owes $ 10 $ for company b and no longer worth $ 8 $ from the company (s) which remains in the balance of the debtor's (r) $ 10-$ 8 = $ 2, which can eliminate it by paying that amount for the company (s).
Through those processes, reduced system-wide commitments totalling $83 to $2 only residual value between the two (q) and (r).
Popular markets in Sulaymaniyah – presumably in other similar places in Iraq – that such measures are made directly by reporters or through mediators who settle accounts among money-transfer companies.
Does not handle these intermediaries to cash but they are seeking a percentage of commissions associated with the process of transferring funds that are trying to adjust. Never heard our informants about any company that uses its own capital in debt settlement money transfer company. 4.
For money transfer companies such as (a) and (b) that begins with the creditor and debtor balances are equal in magnitude, the settlement is just to appropriations for accounting entries. And as for physical adjustments occur only in cases such as those that occurred between the two (q) and (r) where there is a net nonzero balances my company money transfer from the beginning. Even in this case, the physical settlement would not be necessary.
Often a small stock money transfer companies have in common with each other which makes it possible to end accruals process over more than one period. To ensure that the process in time to develop a joint strategy for debit balances is to decrease or stop transfers fully to the opposite side, this can be achieved by raising the Commission rate on outbound transfers or reject them temporarily. Similarly, the relevant credit could reduce the interest rate or permanently ceded to stimulate outgoing funds transfers. And over time, it will reduce the imbalance to zero as the debtor will pay cash to the recipients of remittances to creditors.
Money transfer companies have the ability to control the volume of their transactions, this means that these companies have the ability to control cash flow more from banks that they must pay depositors funds while asking that regardless of the size of net withdrawals. The money transfer companies are not the same situation as in banks, the company did not have enough money, she could not accept transfers received unless do that it could lose its credibility and its result, but at least you won't run the risk of bankruptcy of banks.
Our informants stated that the settlement through intermediaries are usually daily in big cities and small towns a week in smaller transactions. A network of intermediaries constitute internationally, even financial settlements between local money transfer companies could be settled in regional centres such as Dubai and Istanbul or sometimes even in remote areas such as Shanghai and Beijing.
We can get an idea of the relative importance of networks of brokers outside of the annual report of the company United Arabic remittance (MTUA) and is the fourth largest of the fourteen company registered in Iraq stock exchange market in terms of revenue. Figure 3 shows the amounts owed from eight foreign correspondents and which represent the aggregate 39%. 5.
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Figure 3. Money transfer company United Arabic accounts receivable due from foreign correspondent at the end of the year 2014
As one might expect, the remittance companies in regional financial centres have contributed more after Western Union company with extensive operations work in Iraq.
Western Union location refers to a 75 cash Center in Iraq, and eight branches are United Arabic company to transfer money in Baghdad.
Money transfer companies like banks not only in their function as operators of the payments system but also as a short term loan providers.
It is not only effective loans to convert the corresponding money which it shares the credits due, but could also finance the outbound transfers to known customers a service that might resemble a bank overdraft withdrawal facilities.
One money transfer companies in popular markets in Sulaymaniyah he could cover from 10% to 100% of the transfer amount, without interest, for a period of up to ten days.
The main difference between money transfer companies and banks is that the former does not accept deposits and they also do not retain cash advance funding for expected future remittances.
The role of natural banks is keeping the client funds based on the desire of the customer himself, who may waive the Bank's role in controlling his money when the decision to transfer his money.
You may believe that all remittance agents possess a home deposit reserve 100%. We took it up with results of remittance services into account, this would be the simplest forms of the banking system.
Obviously this is not an optimal measure for most economies in the world, but one of the things successful in the private sector in Iraq to save the economy from collapse in an environment where little effective legal safeguards or Government regulations.
3- Implications for monetary policy and banking supervision
Banking businesses with comprehensive reserve important implications for the conduct of monetary policy and banking supervision. In Iraq, most of the tools available to central banks and regulators are inappropriate or ineffective in other countries and, in some cases, the application of such policies would be harmful.
For example, if we apply the policy interest rate in the country has a sophisticated banking sector, raising interest rates would slow the growth of the economy by creating an inhibiting factor for individuals and businesses.
And cut interest rates, it will have the opposite effect.
In Iraq, such measures would not cause much difference because of the low ratio of lending to the private sector.
It will not significantly affect the Government sector, the lack of hard budget constraints mean that the decisions of the lending process will depend on interest rates.
The same is true of the changes in the rate of required deposit reserves, which is one of the most successful weapons of the Central Bank in many developing countries. As for the fully-covered banks cash and deposit reserves, she acted in the same manner as the Central Bank of Iraq on the first of September 2010 at the reserve rate reduction from 20% to 15%, it happened.
In Iraq, the effective way to control the money supply is by controlling the exchange rate, because the money originate mainly from the Central Bank to transfer dollars from oil exports to local currency.
If raising the Central Bank of Iraq Dinar against the us dollar, it will add an extra dinars for every dollar purchased from the Government.
And if they devalue, the rate of growth of the money supply will slow down.
Since the stability of the exchange rate is one of the main objectives of the CBI, the exchange rate used for macroeconomic management was limited.
In addition, the oil price has become a major engine for the money supply.
When rising oil prices, the Finance Ministry will have more dollars to convert into Iraqi dinar with the Central Bank.
If the exchange rate is stable and not changed, more Iraqi dinars must be provided to pay for them which will lead to increased cash supply. In contrast, the fall in oil prices will have an opposite effect.
Prudential oversight based on bank capital ratios are not appropriate in the context of Iraq.
For the banks with huge loans, capital adequacy ratios (for example; basic capital to risky assets) is essential because it measures the proportion of losses from problem loans.
In Iraq, these percentages are not relevant and common characteristics may be non-existent.
Given that the liquidity risk and credit risk is a key issue, it is clear that the deposit money is the best indicator for regulators to control.
Based on the policy of the Central Bank of Iraq for the Bank and capital transfers capital levels.
For example, we've asked all private banks raise capital to 100 billion Iraqi dinar by mid-2011, and 150 billion Iraqi dinars by mid-2012, to 250 billion Iraqi dinars by mid-2013.
Similarly, the CBI has asked recently from money transfer companies to raise capital to 45 billion Iraqi dinars.
It is not clear whether those policies could be justified on prudential grounds. But it looks like an attempt to force the banks to increase lending rates, force small banks to merge with each other (which hasn't happened yet) as well as reduce the number of money transfer companies.
In some cases, the CBI's insistence on capital increase led to an increase in the amount of capital at the expense of quality.
Most shareholders are said to have used personal credit accounts from their banks to buy new shares of their own and the problem in this thread is failing enables customers to pay their debts to the Bank which will lead to the loss of the Bank which affects his capital.
Similarly, to counter money laundering policy at the Central Bank of Iraq (AML) have had unintended consequences sometimes.
For example, in 2012, the Central Bank introduced new regulations require anyone who wants to buy the u.s. currency on the official price to submit evidence showing the
purpose of using that currency. Instead of blocking the flow of money to Iran and Syria, the new regulations have created a market for issuing the cargo manifests for the Iraqi Government, which can be used as a document to prove a legitimate deal to transfer money.
This policy has led to an opportunity for government officials using official seals to make a quick buck by stamping false documents.
It is doubtful that the anti money laundering Committee would be effective in a cash economy, when asked the banks to take the best measures for combating money laundering when using wired networks between banking units, this does not only terrorists resort to using money transfer companies but will resort to ordinary people to use those companies.
Also, fill in the required documents by the Bank is just a waste of time. There can be meaningful to cancel the role of money transfer companies. They won't be able to apply the "know your customer" requirements for corporate clients who deal with cash only and therefore there will be no paper trail.
In developed countries, the use of cash in all transactions, and even the smallest matter of mistrust. In the United States, if someone tried to run huge purchase by using cash $ 100 worth of paper it is likely to be a criminal. Most media coverage focused on foreign money transfer companies as terrorism as suppliers. Recently featured increasing calls for the Elimination of $ 100 banknotes and 500 €) NYT 2016).
That realization actually bitter cash in Iraq allows us to see the positive side of cash, in the situation where the measures and Government regulations are ineffective, money-based economy would be an avenue for terrorists and drug traffickers in the first place. It is a preparation for the economic sector activity. This alternative would be a return to a barter economy.
The absence of a fractional reserve system in Iraqi banks is not the fault of the banks or money transfer companies or their clients. It is a natural consequence of the dominant role of banknotes as a means of Exchange.
Forcing companies to raise capital and insist that the money laundering procedures on Western way, and so on, to try to turn them into "real Bank" isn't going to change the way their dealings.
Without any improvement in the effectiveness of State institutions, private actors will rely primarily on cash. And to change the current system inevitably prove full saved it was illusory goal.
Of course, none of the above is a proof that the backup systems would be optimal in advanced economies, 100%.
The key point is that this system may be the only effective system in a country like Iraq.
The advantage of this system lies not only in improving the work cycle, as in the monetary policy of the Austrian utopian proposed Huerta de Soto, but private wealth protection in highly unstable environments, and often lawless.
1. see the book herto DeSoto, 2006, chapter IX, part I, to review these useful literature.
2. see previous report writer in altkariralarakih for regional and International Studies Institute (IIR), (de Weaver 2015) is similar to the consequences of the disaster that occurred in the Kurdistan region of Iraq
3. parts of this topic appeared in the posting on the website by the author about business news in Iraq on 27 February and 5 March 2014
4. seems like these wholesalers don't exist in other markets. Didn't show evidence of their presence in Dubai and the United Kingdom and the United States, Pakistan and India. See for example (on the basis of 2003, 50-51)
5. Unfortunately, this was the only annual report issued by the money transfer company that provided this information. Percentages contained in the figure is not a necessary to be typical for all of the listed companies or the public sector in General.
This translation according to the original article in the source below, and the Center is not responsible for the content, including labels and terms mentioned in the tenderloin.
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