Why the banking crisis in the Suli area?

By Mufid Abdulla – Kurdistan Tribune – 30.3.2013 – For the last two weeks the Suli area of the Kurdistan Region has been suffering the effects of a major banking crisis.

The banks cannot pay customers – both individuals and small businesses – what is due to them. The state banks have been unable to pay the wages of civil servants or pay for the operations of small businesses. The syndicate of contractors in the Suli area, consisting of 1500 contractors, has told local news agencies that their payment instalments have dried up, resulting in the stoppage of most of their projects.

This problem is not a correction to the unhealthy growth we have in the housing and telecommunication sectors and it has nothing whatsoever to do with the international banking system. This is instead primarily a product of the crisis inside the PUK (Patriotic Union of Kurdistan), which is the ruling party in the Suli area.

Lord Turner in his comments on the key drivers of banking crises defines massive growth and increased complexity together with a reliance on liquidity through marketability as the reasons (1). Barrell et al argue that, in a banking crisis, consumers and firms are borrowing constrained, and therefore fiscal policy may be more effective (2). But none of these principles can cover our banking crisis in the Suli area. Why? Because the banking system in Kurdistan does not operate according to globally-prevalent rules and principles.

In Suli city, the banking system is controlled by the KRG (Kurdistan Regional Government) which plays an active role in controlling the mechanisms of the market economy. I can analyse different factors that have led to this crisis.

First, the banks have failed to win the trust of their customers. What has happened in the past is still in the back of their minds: for example, after the 1991 uprising and again during the Paul Bremer period, people lost much of the value of their money when the currency was changed.Second, the government has not supported the banking system and removed the barriers facing it. In most countries, the banks are independent but, in Kurdistan, politics has a great impact of the activity of the banks. For that reason most people prefer to keep their money at home rather than put it in the banks. For example, company ‘A’ recently went to the central bank in the city of Suli asking to withdraw $100,000, but the bank only allowed them to withdraw $8000. That is a just one example. At the moment individuals cannot cash cheques for more than $4,000.

Since the creation of the new Iraqi state in 2003, the whole banking system has been connected to Baghdad from where the Kurdistan Region gets 17% of its budget money.  However, one of the junior ministers working with the Iraqi money and finance department in Baghdad is a Kurd and a KDP member and he told a local news agency that the banking crises in Suli has nothing do to with Baghdad. I believe this is correct and that that problem lies not there, nor with the recent delay in formalising the Iraq budget. The responsibility instead lies with the KRG banking system in general and the set-up in Suli in particular.

Until now the two ruling political parties, the KDP (Kurdistan Democratic Party) and the PUK have operated as two different authorities dealing with money and finance, which has not been unified in one department. The PUK is dominant in the Suli area and its actions have triggered the current crisis.

Third – and crucially – according to reliable sources, since the incapacitation of Talibani, PUK leaders have withdrawn billions of dollars from banking deposits in the Suli area, transferring these funds to location unknown. No one expected the departure of Talabani to create such a problem. Political observers are asking why the PUK has done this.

Furthermore, it appears that PUK leaders have also withdrawn some of the funds that were deposited by the central government to back up the banks during periods of uncertainty. Additionally, sources within Suli banks have told me that some PUK politicians have ordered the banks not to touch some of their other deposits.

Policymakers in the Suli area must restore the people‘s confidence in the banking system. Economic advisors and professionals must work more closely with the KRG to make inflation a controllable element of economic policy and eliminate the banking crisis. People have lost confidence in state finance and this has had a very negative impact on the economy. The KRG must embark on structural reform aimed at unifying the two separate money and finance departments of the two political parties which control the bulk of the wealth of the people of the south of Kurdistan. It must also grant the banks independence in the hand of professionals.

References: 1. Turner Lord,(2012) The Turner Review, A regulation response to the global banking crises – 2. Liadze L, Fic T, Barrell R (2009), Fiscal policy effectiveness in the banking crises