Iraq’s Digital Banking Evolution: A Cashless Future in the Making

The concept of digital transformation began to gain significant traction in Iraq in 2017. During this period, discussions with international institutions on transforming the banking system started to grow among key players in this field, which led to organizing workshops and developing training sessions for the banking sector. This initiative, of course, was facilitated by the Central Bank of Iraq (CBI). The objective was clear: to promote widespread engagement in the digital transformation of Iraq's banking sector.

The Central Bank of Iraq is the official regulator and legislative authority that oversees the banking sector. Iraq's banking sector includes 72 banks, with 7 public banks and the remainder being private. In addition, there are 17 digital payment companies and 3 mobile wallets facilitating digital transactions for a growing user base.

The evolution of Iraq's banking sector has been guided by a series of key regulations and policies. For the past two decades, the banking sector has come a long way and experienced fundamental changes in regulations and infrastructure. Governed by the CBI, many important laws have been passed, including the Banking Law of 2004. This law laid the foundation for Iraq's modern banking system, while the Electronic Payment Services Regulatory Framework 10 years later marked a significant step toward digital financial services. The Salary Domiciliation Policy of 2016 was a stepping stone in moving Iraq towards digital transactions and reducing reliance on cash because it introduced a significant percentage of Iraqi employees to the digital world of electronic cards. This was further reinforced by the updated Electronic Payment Services Regulatory Framework in March 2024, which highlighted the CBI's commitment to promoting digital banks and support for Iraq's ongoing digital transformation. More recently, the CBI introduced the Digital Banks License Regulation in April 2024 to reorganize digital payment entities, paving the way for a more digitalized banking environment.

The shift towards digital payments in Iraq has been significantly driven by key players in the financial technology sectors, such as Qi, AsiaPay, ZainCash, FastPay, Amwal, Tabadul, Switch, Neo, Areeba, and several others. The CBI has led this revolution through effective regulations and policies. These companies have robust and well-established digital infrastructures and, therefore, they have played an important role in transforming the country's financial sector. Their early adoption of digital payment systems laid the foundation for a smooth transition when the Iraqi government in 2023 mandated that all tax collections in government institutions should be conducted through digital means rather than cash.

This mandate marked a crucial step towards modernizing Iraq's financial ecosystem, and the readiness of these companies to comply with the new regulations highlights the strength of Iraq's existing digital infrastructure. This also sheds light on the commitment to innovation and its crucial role in supporting the nation’s shift toward a cashless economy.

Of the 104 trillion dinars in printed currency, 94 trillion dinars circulate outside the banking system. This presents significant economic challenges. This money does not contribute to economic growth or effectively circulate within the economy, making it harder for the CBI to monitor the money supply and implement monetary policies effectively.

One solution to this issue is to promote electronic payments, thereby drawing money out of informal circulation. Encouraging professionals and retailers to adopt electronic payment tools can improve economic efficiency by reducing the costs associated with cash transactions, such as printing, storing, and transporting currency, while also increasing transparency in financial transactions, which aids in combating corruption and tax evasion.

Furthermore, Iraqi e-commerce companies such as Miswag, PurePlatform, Orderi, Orisdi, and Tamata are taking the lead in the e-commerce sector. Those companies have successfully secured domestic investments and have grown exponentially from startups to large companies leading the market. The emerging e-commerce sector has also attracted regional players into the market, such as OpenSooq. The continued growth and prosperity of the e-commerce sector are expected as these companies expand the scale of their operations coupled with the increased adoption of digital payments.

The impact of digital transformation on Iraq's banking sector is evident in the substantial growth observed from 2017 to 2023. The number of bank accounts surged by 878% during this period. Starting with 1.36 million accounts in 2017 and reaching 13.2 million accounts by 2023. This remarkable growth highlights the increasing financial inclusion across the country.

E-payment cards have similarly seen a significant rise, with a 210% increase from 2017 to 2023. In 2017, there were 6.37 million e-payment cards in circulation, which grew to 19.7 million by 2023. This growth underscores the rapid adoption of digital payment methods across Iraq.

The data on the adoption of digital payment infrastructure highlights Iraq's rapid growth over the past few years. The number of Point of Sale (POS) systems in Iraq grew from 1,000 in 2017 to 23,000 in 2023, which is a 2200% increase. The growth remained steady until 2020, when the number of POS increased to 7,000, then rising to 23,000 by 2023.

The volume of digital transactions in Iraq surged from 2.40 billion Iraqi dinars in 2017 to 1.44 trillion Iraqi dinars in 2020. It went up to 9.62 trillion digital interactions by 2023, marking a staggering 400,000% increase. This rapid growth highlights the country's swift adoption of digital transactions.

The implementation of digital payment solutions at Iraqi fuel stations has played a crucial role in the widespread adoption of e-payment cards. This initiative led to a significant increase in point-of-sale (POS) terminals across various markets. Furthermore, customers benefit from commission-free transactions, as mandated by the CBI, encouraging more people to embrace digital payment solutions due to the convenience they offer. This has also led people to use their cards in other daily transactions, such as in supermarkets, restaurants, and cafes.

The youth of Iraq are integral to the country's digital transformation, with key areas of focus including capacity building, spreading awareness, and building fintech products. Capacity building involves providing education in essential skills such as computer literacy, data analysis, programming, cybersecurity, and risk management. The goal is to equip the workforce with the necessary skills and prepare them for the job market, particularly the financial technology sector. Spreading awareness, on the other hand, requires collaboration among stakeholders, including the CBI, fintech companies, government bodies, and the youth themselves, to promote digital transformation and e-payment systems. The broader this transformation, the more robust Iraq's technological infrastructure will become. Additionally, supporting fintech companies and their innovations is crucial, as these entities play a vital role in shaping the future of Iraq's economy.

The Iraqi journey towards digital transformation, particularly in the banking sector, has been marked by significant milestones since 2004. Initiated by the Central Bank of Iraq, the nation has seen substantial growth in digital transactions, transaction volumes, and e-payment methods. This financial inclusion has been driven by regulatory reforms and the active involvement of both local and international fintech players. It is important to mention the need to build a generation of youth that has the digital knowledge and the capacity to navigate through the digital world. The evolution of the banking sector in Iraq showcases a positive indicator that oil has a new competitor now, which is technology. Therefore, we need to seize this opportunity to invest in technology and leverage its power to promote the economy.