Central Bank of Iraq Statistics & Research Dept.

1. Central Bank of IraqStatistics & Research Dept. Study Entitled: Accelerate the Restructuring of the Two Biggest State-Owned Banks (Raffidain&Rashid) and the Settlement of their Balance sheets "A study prepared for the purposes of participation in the Second International Exhibition and Conference on Financial and Banking Business in Iraq 27-28 January 2014" Prepared by WaleedEidyAbdulNabi December 2014 D.G. of Statistics & Research Dept.

2. The Concept and Nature of Restructuring Restructuring operation is defined as a group of procedures targeting the financial, technical, and administrative structural reforms of the bank (company) to enable its continued success which can be achieved through making changes and developments in financial, technical, and administrative fields in a manner that leads to the increase of productivity and cost rationalization. The concept of restructuring is considered a comprehensive concept thatencompass the privatization idea, where the restructuring operation extends to capture all companies including the private or state-owned companies aiming at improving success opportunities in order to reach their goals in general .The restructuring operation for Companies is one way of privatization by allowing employees or private sector to own part of its capital aiming at their development and rationalize expenses and improve their products and services provided by them . Economic studies indicate that a company is sustainable when it has productive instruments, technical expertise, administrative skills, and trained human resources to produce and promote its production and services efficiently under appropriate economic circumstances. The company will be economically sustainable when achieving an appropriate economic return rate (profits) or (total assets) compared with what other operating companies achieve in this area or capital window of opportunity. A company is financially sustainable when the company capital structure is in balance, the liquidity stance is appropriate and the company is capable of servicing its debts realizing a suitable return on equity. Restructuring operation depends on the nature and the size of problems that the company encounter, the company might be technically and operationally sound while suffering at the same time from physical problems as a result of capital structure imbalances which will need an adjustment consequently, in addition to some other limited procedures to restore its ability to be economically and financially sustainable, this is called financially limited restructuring operations.

3. The most important features and problems both state owned and private banks face that affects their restructuring • State owned banks performance was among other things exposed to many problems especially (Rafidain bank) which incurred external debts as part of the Iraqi debt burden where it amounted to 23 billion dollar , with the accrued interests, those debts were many times larger than Rafidain bank's capital. Also 66% of Rafidain bank assets and 50% of Rashid bank assets is composed of treasury bills issued by the Iraqi government to finance the budget deficit and cover their losses providing subsidies and support to it . • 90% of the bank activity is allocated to finance public activity encumbered with inefficiency, disguised unemployment and accumulated losses where as private sector was deprived of the required finance for capital accumulation. In addition to the aforementioned 90% of the governmental banking system(Rafidain & Rashid) investments are, investments in treasury bills meaning that the investment base is narrow and still confined in governmental financial instruments . • Banking services available with the banking system in general is very limited in the scope of simple lending and financing operations. The governmental banking system does not have sufficient abilities to provide modern banking products due to the absence of a universal banking system. • Bankers lack of sufficient ability in assessing risks resulting from banking credit and the credit extended included big collaterals encumbering borrowers and investors • The incapability of the governmental banking system in providing advanced services requiring a developed payment systems or introducing developed payment methods individually (credit card)or on the level of large financial transactions payment • Most of the credit offered by governmental banks is considered short term for commercial and consumption purposes and they do not tend to offer long term credit to avoid risks. banking system focuses on real estate guarantees in granting credit paying little attention to real estate guarantees (project assets) • Banks suffer being burdened with non profitable business such as pension salary payment sand the lack of efficient administrative and technical staff with significant overstaffing

4. The composition of the board of directors in state-owned banks is determined according to article 20 of public company’s law No.22 of 1997 which consist of the chairman /director general, appointed by the Minister and four individuals although they are appointed by the Minister but they are bank employees, another two members elected by the company's staff in addition to two experienced and specialists members outside the company affecting all decisions submitted to the director general and chairman of the board or the Ministers a result to administrative successive order, thus most decisions issued are of administrative nature also politically and individually predominant and might be far from the banking nature which affects greatly the banking business results. • The method of distributing government banks profits pursuant to article11 paragraph 4 of company's law where distributable profit does not exceed 30% of current activity cost, the rest is to be transferred to the Ministry of Finance account. This profit is distributed at a rate of 45% to the treasury, 33% incentives to the board of directors and the company employees, 5% for research &development, 5% to social services and the rest 12% goes as reserve capital, this weakened capital base and prevented many government banks from reaching minimum capital requirements. These problems may be resolved by the issuance of government banks law which is prepared by this bank and approved by the Council of Ministers and was sent to the parliament for discussion and acknowledgment. • The absence of legal protection concerning the deposits of Iraqi governmental banks abroad to avoid their seizure by the creditors the external outstanding indebtness issue that is still owed to the governmental banks and has not been determined yet as a result to the issuance of letters of Guarantee and letters of credits on behalf of some companies and governmental agencies to clean the balance sheets of Rafidain and Rashid banks • The lack of accounting and legal documents to reevaluate governmental banks assets towards market rate and allocate part of reevaluation to improve their budgets positions • The problem of the social burden resulting from the rehabilitation process represented in the rights of excess employees of those banks

5. The lack of hard currency financial resources required by the rehabilitation process of specialized banks which should be offered by International Financial Institutions such as the World Bank and the International Monetary Fund • the delay of some private and governmental banks in purchasing a universal banking systems or connecting their branches in a communication network with their public administrations, they also did not take the appropriate procedures to implement electronic banking including e- checks in all their branches where 120 branch only of 350 operating branch of Rafidain and Rashid banks use those applications currently In order to treat the negative effects that governmental banks were exposed to as a result to economic sanctions and debts the banks endured on behalf of the state agencies and public sector companies which exceeds 23 billion dollar ,in addition to their withdrawal from accommodating with modern banking developments , the limited banking services they offer and the frail use of technology and modern communication systems in their business in addition to credit concentrations along with arrears without sufficient financial reserves to face their risks .Memorandum of understanding signed 6/12/2006 between the Central bank of Iraq ,Ministry of finance ,and International monetary Fund consisted of45 item included the action plan which consisted of 33 item entering into force 27/3/2007 after the approval of the Economic Committee at the Council of Ministers, then notifying both the Central Bank of Iraq and the Ministry of Finance

6. Executive measures for the Restructuring operation The Restructuring plan attached to the Memorandum of Understanding included preparing three plans The operating plan includes: • Introduce modern products and services • Review their services • Reduce administrative routine • Expand the responsibility of the authorized • Refrain from offering free services for the government and its agencies • Treat internal debts • Improve loan guarantees • extend safe credit and sound investment The financial plan; consist of: • Increase capital backed by reserves • Improve revenues and reduce expenses • Treat inherited foreign ineptness • clean the budget from inherited debts to be included with Iraq ineptness in addition to treating inherited losses , war damages and reevaluation differences Strategic plan: which was discussed and acknowledged in a workshop convened in Beirut for the period 21-27/11/2008 by experts from the International monetary Fund, members of the executive committee for restructuring, experts from the Ministry of Finance and Rafidain and Rashid banks, This was one of the items stated in the MOU related to the restructuring and the action plan attached to it and not as a substitute. This plan included the following: • organizational Structure • capacity building • Finance and accountability • Information technology infrastructure • Risk management • Compliance and internal audit • Enhance banking supervisory and regulation authority

7. 2006 budget was audited diagnostically by Ernest & Young and in consistence with duties of the Chamber of Supreme Audit, contracting with Ernest & young to audit the two bank accounts in 2006 according to item 21 of the MOU. In order to implement this memorandum it required the Ministry of Finance, being the owner of those banks, and the Central Bank as the banking supervisory party, to restructure governmental banks through: • The Central bank, Ministry of finance and the Chamber of Supreme Audit are to cooperate with the IMF and experts from the US Treasury to prepare a Memorandum of Understanding to restructure Rafidain and Rashid banks and the executive plan attached to it along with the approval of the Economic Committee at the Council of Ministers. • Form an executive committee for restructuring headed by the Governor and the membership of the Minister of Finance and the head of the Chamber of Supreme Audit, the Committee convened its meetings to determine the overall framework of their work establishing the procedural steps of restructuring. • Form an executive committee for restructuring headed by the deputy governor and a secretariat also form a structuring unit in 2009 to expedite and monitor the MOU and the strategic plan attached to it. • Form assistance committees inside those banks dedicated to implement the restructuring requirements.

8. 5- Rafidain and Rashid Banks signed a contract with Ernest & young to audit their accounts of 2006 and provide the company with the required statistics .The auditor started its business in early march 2008 and finalized their business on 30/8/2008. 6- The two banks carried on meetings with the US treasury representatives and the Chamber of Supreme Audit to liquidate debts and clean the budget. 7- Sub committees prepared meetings with the US treasury experts to discuss means assisting in the development of the two banks business accelerating the restructuring process of which is human resources. 8- Rafidain & Rashid Banks signed a contract with Beblan Company to execute the universal banking system to connect its branches with a unified communication network, but the project has malfunctioned in execution. Rashid bank analyzed the bids submitted to it to select the best bid for a universal banking system to develop its business and connect its branches with a developed unified communication network similar to Rafidain bank .

9. 9- The executive committee prepared and sent an information assessment form to Rafidain and Rashid banks' branches to be filled with the required data in order to assess the financial position of the branch and the level of employees performance through the assessment and analysis of their scientific qualifications and practical experience. 10- Follow up external debt liquidation owed to the two banks and transfer it to be included with Iraqi public debt and settle losses, war damages and follow up currency exchange differences along with the exchange rate change differences. 11- The two banks adopted in their business a new operational plan focusing on the necessary and fundamental banking activities according to a specified plan consistent with the general frame of restructuring and moving far from unsafe credit and investment

10. Emergency Project for restructuring state owned banks Rafidain and Rashid • This project was agreed upon with the Central Bank of Iraq in Iraq aiming at supporting the Iraqi authorities in building an efficient, sound banking system through a strategy for banking sector reform and an action plan approved by the Iraqi authorities in February 2009.This project was financed jointly according to a grant of 10 million dollar on 17/4/2009administered by the World Bank and implemented by the Central Bank of Iraq( in its capacity as the supervisory steering party according to the organizational structure of the project of which a copy is attached ).Through the (project management unit)that reports to the deputy governor of the Central Bank of Iraq with a staff seconded from financial and technical units working full time with close cooperation with both MOF and the Chamber of Supreme Audit , the project is to be implemented in phases of 20 months ,also an account was opened for this grant at the Trade Bank of Iraq that was exclusively used for the purposes payments related to the qualified expenses set forth in the attached statement by four sides:

11. The first side: institutional and operational restructuring of the two state owned banks (estimated cost 5 million dollar ) this side consists of two major cores ,consultation services for the two commercial state owned banks, the first core includes the organizational structure , capacity building ,in addition to internal audit and compliance and risk management units .As for the second core, it included training services for bankers .The project management unit convened many meetings with officials representing the two banks to discuss and determine training programs and training the banks' branches managers along with human resource management divisions , risk management ,internal audit, compliance officers at the two banks provided that the training is organized after the approval of World bank with the cooperation of Huran Consultation Group and the Arab Academy for banking and financial sciences in Amman • The second side: financial restructuring for the two commercial state-owned banks (at accost of 1 million dollar) this part included two cores also: the first restructuring and selecting a separate consultant for each bank and the second, training services concerning risk management , financial restructuring, compliance and internal audit.

12. The third side: strengthen supervisory and regulatory functions for the central bank of Iraq (estimated cost 2.75 million dollar) this part covers the consultative services for the Supervision and Credit Control Department at the Central Bank of Iraq.The plan included executing the supervisory and regulatory functions for the Central Bank as a single contract through selecting a consultant for banking restructuring for the supervision Department at the Bank where many meetings were convened on 15 July and August 2010 to analyze the supervision Dept. from its current position to the required one and agree on the strategic plan to modernize the Dept. in consistence with international standards , addressing the resource issues ,the drawbacks in information technology , determining training needs ,establish new procedures and treatments. On the Department level as a whole, implement a strategic plan through initiating training programs and strengthening cooperation links among other departments in the Bank.

13. Fourth Side: assess and monitor the project management (estimated cost 0.75 million Dollar)this side includes consultative services to manage and audit the project where an external auditor was assigned (International Audit Firm) to the project management unit ,as for the other side related to training ,it included minutes on procurement activities ,contract and financial management ; the training results were reflected in the improvement of the abilities of the new staff that helped the members realize their responsibilities .With respect to operational expenditure increase, it included 6 contracts 5 of which were implemented under purchasing procurement and deleting one of them . • Ernest& Young audited monetary returns statement and monetary distribution (statement included) for the emergency banking sector reform project for the year ending 31/12/2012the company prepared a brief on the important accounting policies and other explanatory information . the Firm concluded its report by mentioning that "the statement referred to is considered fair from all substantial sides, monetary returns statement and monetary distribution for the emergency banking sector reform project for the year ending 31/12/2012 and was consistent with the accounting basis stipulated in note No. 2 attached with the statement . it is noteworthy that the project management unit above has finalized its tasks in 30 June 2013.

14. The Supervisory Role of the Central Bank of Iraq during the Restructuring period Pursuant to paragraph 12 of the action plan of Restructuring Rafidain and Rashid banks and article 40 of the Central Bank of Iraq law, the prudential supervision performance of this bank during the restructuring period will be as follows: 1- carry on the offsite and on site inspection for the two banks business regularly in particular the commitment to the capital adequacy ratio determined in article 16 of the valid banking law . 2- The two banks commitment to increase their capital according to the economic committee resolution in increasing Rafidain bank capital to 500 billion Dinar and 400 billion Dinar for Rashid Bank . 3- monitor the two banks in establishing the operational and strategic plans to be submitted to the executive committee for consideration and then to the high committee for approval. 4- Follow up the establishment of a counter account for inherited foreign liabilities for settlement at the assets side as part of receivable accounts, also establishing a counter account for inherited losses.

15. 5- Find an accepted accounting method in coordination with the Chamber of Supreme Audit and Ernest& Young to reevaluate other assets and other liabilities ofthe afore mentioned banks. 6- Monitor and analyze income statements for the two banks making sure that there is a balance between current income and current expenditures, to identify the effects on them. 7- Monitor all bank activities regarding its business on behalf of the government which falls under the two banks activities and determine the cost with a reasonable profit spread to be collected from the state agencies and treated similar to the ordinary customers of the two banks. 8- Follow up the procedures taken by sub committees of the two banks restructuring to implement the MOU and its offered proposals to develop their business. 9- Emphasize on Ministry of Finance to expedite the increase in Rafidain and Rashid banks to become 500 billion dinar for Rafidain and 400 billion dinar for Rashid banks to enhance the financial soundness of the two banks allowing them to extend more credit and invest without exceeding the legal ratios determined in the banking law

16. 10-Treat the profit distribution method for the two banks through amending the provisions of article 11 of the company's law No.22 of 1997 which regulates profit distribution method through reducing the public treasury of the state and the employees share the Ministry of Finance determine annually and according to the company's need to support its capital, the ratio of profits that are transferred to it 11-Review the formation of the board of directors of the state owned banks by amending the provisions of article 20 of the public company's law No.22 of 1997 which includes 9 persons 7 of which are from the same bank, seeking to engage a number of specialized experts from outside the bank to develop and improve the board of directors decisions. 12- Encourage Rafidain and Rashid banks to make a twining process with Arab and foreign banks to exchange experiences and expertise to develop the two banks business entering into modern banking and international financial markets through the high committee of restructuring.

17. The operation of restructuring Rafidain and Rashid banks continued to execute the items set forth in the MOU and the action plan attached to it, the most notable procedures taken by the two banks by the supervision and the monitoring of the executive committee of restructuring were as follows: 1- Organizational structure: the Experts chosen by the World bank (Mohammed Shams, RameeshPandaand Sahel Al Anabi) reviewed the organizational structure of the two banks and established a new one, that took into consideration the comments of the international auditor (Ernest & Young)which audited the balance sheet of the two banks a diagnostic auditing for 2006, the general scope of the audit included the strategic planning for both Rafidain and Rashid banks and studying (the two banks structure , measure the budget and performance , information systems ,operation management, support automation and technology ,internal auditing ,analyze credit and risks , investment portfolio management ,assets and liabilities management ,study the market and improve the promotion of banking services , training and human resource management , evaluate the activity and legal division effectiveness and analyze equity ), the international auditor finished and submitted the report in September 2008 after extending the period for one month farther than the agreed upon date .the two banks budget audit operation cost 745000dollar paid to Ernest & Young from the two banks account in Amman. The audit firm proposals included developing the organizational structure of the bank by developing divisions for risk and assets and liabilities management , also updating information technology division in addition to developing a division for personnel management and improve it in consistent with the required developments in the two banks to improve performance and increase the administrative capability for both of them through :

18. a - Prepare a clear job description and consolidate the coordinated ones b- Increase the financial and administrative mandates for the division managers and determine their responsibilities c- Provide channels for efficient information technology 2- Develop the Internal audit system and transfer it from law and instruction-compliant audit to a protective prudential control through establishing work manuals and potential risks that the bank may encounter and methods for treatment. 3- Capacity building for the employees of the two banks benefiting from the optimal format of the operating staff through training, habilitation and engaging with training courses in and outside Iraq ,this included branch managers and employees including those working in information and technology division and from other fields of specialty , so the trainees number reached 682 person 4- Liquidate the two banks balance sheet from foreign debts , war losses and currency exchange differences .In this area , the following was performed :

19. a- The executive committee monitors the inherited foreign debts issue amounting to 23 billion dollar and war losses resulting from theft and destruction of 75branch in 2003 where the outstanding amounts in Rafidain and Rashid banks records related to the Central Bank of Iraq reached 2784698840 two trillion seven hundred eighty four billion six hundred eighty nine million and eight hundred and forty thousand Dinar. Also the other inherited assets of Rafidain bank amounted to 3.386trillion Dinar and Rashid bank 1430 trillion and four hundred and thirty billion Dinar that is; an amount totaling to 4.816 four trillion eight hundred sixteen billion Dinar. Two committees were formed for this purpose ,they submitted their reports and was studied in the executive committee addressing their letters No.9/5/3588 dated 30/6/2011to the Chamber of Supreme Audit asking the Chamber to assist the two banks in determining the required financial and accounting procedures to settle the inherited debts items according to the omission mandates in light of the familiar accounting contexts contributing in omitting 356 million dollar from Rashid Bank indebtness amounting to 1.13billion dollar and settle an amount of 12.85billion dollar of external indebtness of Rafidain bank amounting to 17.75 billion dollar as provided in the World Bank report after discounting the amounts waivered by creditors . b- Treat the outstanding accounts issue with Rafidain bank amounting to about 166 billion dollar at the debt account No. 165 and 160 billion dollar in the credit account No.265 equivalent to 60% of the budget in lesser amounts than Rashid bank.

20. 5- Restructuring executive committee studied in its meeting convened 19/12/2011 the issue of (liabilities settlement) with the above mentioned banks which is the expression provided for in article 25 of the MOU. The proposal of the Chamber of Supreme Audit was confirmed to treat these liabilities as follows : a- The Chamber asked the board of directors of the two banks to confirm the lost verification papers from the two banks' branches due to the last war, in relation with loans and cash pledged facilities offered by the two banks according to a schedule submitted by the Chamber to the high committee of restructuring, explaining the treatment method and giving the opinion before submission to the high committee for approval. b- Determine the inherited losses(losing credit)extended according to decisions from the bank itself amounting to about 100 billion Dinar with Rafidain bank, taking a consequent decision by the board of directors with the approval of the Ministry of Finance to omit them from the available bank reserves

21. c- Assets and liabilities: the two banks set a side the amounts belonging to the Ministry of Finance due to decision issued from high officials of the two banks to lend certain social trenches or open documentary credits and letters of guarantee as collateral and part of those amounts belonged to the bank itself, both Rafidain and Rashid banks set a side the amounts related to the previous evaluation at 1690Dinar per Dollar in addition to the amounts collected before the evaluation. d- Concerning the inherited losses the government is paying those losses for the two banks and there are other parties that owes debts to the two banks which the government is paying being incurred according to their decisions this will be in favor of the two banks on the accounting level because the paid amount by the government is considered as a reserve to strengthen the bank capital and is called (reserve capital) e- After the budget clearance from debts and establishing the accounting procedures , the two banks will prepare a clean budget setting a side the amounts undertaken by the government – ministry of finance where amounts will be provisioned for debts within the general federal budget

22. f- Currency exchange differences that occurred from 1/10/2003 till 1/4/2004 amounting to 33 billion dinar recorded as an obligation in the Central Bank of Iraq books and was also recorded as an obligation on Rafidain & Rashid banks , the two banks deducted those funds from the monthly salaries of tellers or their guarantors .As for the amounts having no evidence that it is an obligation on the tellers , it will be considered as a government commitment. g- War damages and stolen funds from Rafidain & Rashid banks , in this respect ,Ministry of planning formed a central committee to compute stolen money from banks and state agencies resulting from robbing branches or document loss or burn ,this committee asked for documents and agreed to omit the losses and war damages related to Rashid bank .Also Rafidain bank submitted a report with its losses to secure the approval to omit them from its budget. h- With respect to assets reevaluation, the Iraqi accounting system does not acknowledge assets reevaluation within domestic accounting standards; whereas International accounting standards allows that. There is a comment in case of approval on the reevaluation proposal; that is, this will lead to high depreciations in Rafidain bank assets, maybe reflecting a loss in those assets. The executive committee proposed setting a side reevaluating land from the building constructed on it in order to reduce the amount of depreciation i - Regarding the outstanding amounts between the Central bank of Iraq and Rashid bank, a task force was formed for this purpose and this group submitted their report to this committee and addressed Ministry of Finance in its letter No. 4/1/42 in 6/5/2013 in order to authorize this bank to record the amounts in favor of Rashid Bank in order to clear it from its records . Those procedures were important at this stage since it will enable the two banks to reach the real financial position of those banks, then acquiring a better evaluation on both levels domestic and external assisting them in realizing the best capital adequacy supporting ratio for each of them

23. Since there are amounts belonging to both Rafidain and Rashid banks and were transferred in 2003 to US treasury and the Development Fund of Iraq where the total amounts shown in Rafidain bank records transferred to the US treasury 234.707.7471 Dollar , also the total of transferred amounts from Rafidain bank in different currencies and transferred to the US treasury and the Development Fund of Iraq21.731350 Dollar according to the confirmations received from correspondents supported by the Central Bank of Iraq according to the assigned committee minute in 31/7/2013 , in addition the total of Rashid Bank deposits transferred to US treasury and the Development Fund of Iraq 264819680 dollar , this committee addressed Ministry of Finance in its letter No. 4/1/44 in 22/5/2013 in order to address the Ministry of Foreign Affairs to contact the US treasury and the Development Fund of Iraq to identify the outcome of those deposits so that the two banks can recover or secure a confirmation from the two parties that they cannot be recovered and then omitted and clean both balance sheets of the two banks ,also the executive committee for restructuring addressed its letter No.4/1/46 dated 28/5/2013 to the Ministry of foreign Affairs in order to address the US treasury and the Development Fund of Iraq to indentify the deposit balance transferred to them a confirmation letter was issued Ni.4/1/55 in 16/6/2013 in order to expedite addressing the said parties and inform us with the results which we did not receive yet.

24. The Impact of restructuring on the development of Rafidain & Rashid bank activity The impact of Rafidain & Rashid banks restructuring operation was positive in developing their activities in different areas and treat the inherited debts and war losses with the currency exchange differences and others. We State below the m9ost important indicators for Rafidain & Rashid banks for the years 2003 & 2012: 1- The balance with the Central Bank : Rafidain bank balance with the Central Bank increased to become 10 trillion Dinar in 2012b at a change ratio 920% where as Rashid Bank balance was 6 trillion dinar at a change ratio 2094% for the same period . 2- Monetary credit: The total extended monetary credit from Rafidain bank amounted to 13 trillion dinar at a change ratio 7814%,where as total extended credit from Rashid bank 5 trillion Dinar at a change ratio 3083%. 3- Investments :total investments amounted to 3 trillion Dinar at a change ratio 76% ,where as total investments for Rashid bank amounted to 2 trillion Dinar at a change ratio 212%.

25. 4- Assets :Assets balance for Rafidain bank amounted to 88 trillion Dinar where as the balance was 51 trillion dinar with Rashid bank at change ratio 1895% and 2507%respectively . 5- Deposits: Total deposits with Rafidain and Rashid banks30, 14 trillion at a change ratio 1171% and 877% respectively. 6- Profits and loss for the current year : the change ratio amounted to 746%for Rafidain bank and 399% for Rashid Bank . 7- Paid up Capital :paid up capital increased with Rafidain bank to become 25000million Dinar that is; a change ratio of 525% ,where as Rashid bank did not change its capital which amounts to 2000 million Dinar . 8- Reserves :the reserves with Rafidain bank amounted to 165 billion Dinar and a change ratio of 1438% , where as it amounted to 53 billion dinar at a change ratio 906% . 9- Past due debts: the debt balance with Rafdain bank amounted to140 billion Dinar at a change ratio of 540%, where as it amounted to 19 billion Dinar with Rashid bank at a change ratio of 28%. 10- Provisions :the provisions balance with Rafidain bank amounted to 621 billion Dinar at a change ratio of 3115% , where it amounted to 542 billion dinar at a change ratio of5201% with Rashid Bank . 11- Capital adequacy for Rafidain bank amounted to Zero% in 2007 and became 1% in 2012 ,as for Rashid bank 1% to become 18% in 2012. 12- Liquidity ratio for Rafidain bank amounted to 9% in 2007 and increased to 44%in 2012 , and it amounted to 65% for Rashid bank in 2007 then was reduced to 59%in 2012

26. The amounts and change ratios referred to above indicates the significant improvement both Rafidain and Rashid banks witnessed in the period between 2003 till the end of 2012 whether on total assets, deposits ,monetary and pledged credit, investment and reserves which was reflected in the realized profits. There remains the problem of capital increase where it requires allocating financial resources within the resources of the general federal budget of 2015 in the light of banking law prepared by the restructuring executive committee approves by the Council of Ministers in august 2013 submitted currently to the Parliament for discussion and acknowledgment where it included an increase in state owned Banks including Rafidain & Rashid banks to 750%billion for each of them.

27. Conclusions for the Restructuring operation After reviewing State owned banks restructuring project, it was noted that there are a number of conclusions: 1- The inability of Rafidain & Rashid banks to take the accounting procedures in order to prepare the annual report and final accounts according to international standards. 2- The incapability of the two banks to adopt financial disclosure principle on investments and their fair value along with the accrued returns for them. 3- The absence of a proper and active information system for risk management and analyze them and offer alternatives to take wise decisions. 4-State owned banks did not establish scientific indicators to measure the effectiveness of their branches and divide them to deposit attracting branches, also they were not profitable and others extend credit and are profitable. 5- Rafidain & Rashid banks did not establish a defined plan for small amount lending that are consistent with the overall frame for restructuring mentioned in item 14 of restructuring plan

28. 6- Rafidain & Rashid banks did not take measures to contain costs especially relating to excess employment developing a system for pricing banking services offered to the state agencies and public sector companies mentioned in item 22 of the restructuring action plan. 7- The diminution of State owned banks capital compared with their assets, investments and credit extended volume which is reflected on the legal and prudential ratios adopted in analyzing their monthly balance sheets such as capital adequacy ratio , credit to deposit , investment to capital ,,reserves ,credit to capital and reserves. 8- Rafidain & Rashid did not purchase universal banking systems in order to develop their services. 9- Follow up the measures taken by Rafidain & Rashid banks regarding the restructuring of the financial ,and internal audit divisions according to recommendations of experts that were contracted with ,for this purpose . 10- Indicate the last procedures taken by the two banks regarding the settlements of external indebtness that were actually settled and reflect that in the financial records for the two banks and submit them to the Chamber of Supreme Audit. 11- The delay of procedures taken to treat external indebtness that are not settled yet in order to avoid any legal proceedings by the creditors on the two banks

29. Recommendations on Iraqi banking System reform and Restructuring operation Acceleration Although all Iraqi banks share the same general appearance but each state owned and private banks has itsown privacy also each bank has its own features, however the following proposals may be offered as a recommendations to improve banks business in general: 1-Develop automation use in banks and the proper computer software also expands in offering new services. This could be possible gradually in the form of a plan connected to procedures and time lines and accelerating the cooperation between the central bank of Iraq and banks to implement fast communications programs. 2- Reorganize and habilitate the banking staff within a clear organizational chart establishing job description, determining duties , responsibilities and rights especially to section managers ,divisions and different administrations and branches encouraging early retirement distributing the excess staff on the Ministry of Finance agencies 3-Establish the right solutions to treat amounts emerging from war damages, taking the proper procedures to omit or reschedule also realizing balance with the ministry of Finance to treat the differences issue and counterfeit currency outstanding resulting from old currency exchange with the new currency.

30. 4-exmpt banks from the burden of paying pension salaries and transfer those tasks to private banks and credit card companies or through post boxes of the Ministry of communications 5-establish policies related to credit and investment and others and implement them according to the law and regulations requirements issued by the Central Bank of Iraq and implement internal control and compliance procedures. 6- Complete separation between the bank owners and the banking operations offered by state owned and private banks by reducing the approval of the ministry of finance on the board of directors decisions related to state owned banks. 7- Establish an integrated plan to use banking technology in their business which includes the following a- Connect branches with the general administration and among themselves b- Banking operations automations c-Introduce a modern products technology 8 - Perform legal reforms related to the banking business in order to provide more investment and lending opportunities 9 - Develop internal audit systems in banks and convert them from instruction and law complaint audit to a prudential audit 10- Merge the supervisory committees in banks such as accounts control committee ,credit committee ,compliance officer in one formation in order to activate supervision 11- Take fast procedures to train the Central Bank of Iraq staff and banks employees on executing the new banking instructions No. 4 of 2010 prepared by the Central bank and published in the official gazette ,edition No. 4172 issued 3/1/2011 12- Develop and expand banking services offered from banks amounting in average to 10 services reaching 51 service provided for in the provisions of article 27 of the banking law No.94 of 2004

31. 13-Encourage establishing banking system supportive institutions such as insurance company on large loans and a company for studying market and operational risks and deposit insurance company 14- Banks offer large loans in a joint manner which exceed the lending capacity for each of them contributing in meeting this kind of loans and intensifying supervision on them 15-Treat credit concentration and focus banks efforts in loan collection, past due debts and establish the proper financial reserves to face their risks 16- Implement transparency and disclosure criteria by banking financial institutions according to governance principles 17- Improve state owned banks performance through expediting the MOU implementation and the action plan attached to it 18- Establish policies related to credit , investment and others also implement it according to the valid banking law requirements 19- State owned banks adopted the new budget prepared according to the international accounting standards 20- Expedite the issuance of Islamic banking law and related instructions since they contribute in activating their supervision, stability and prevent work duplication 21- Consolidate and collect all valid and applicable instructions in a manual to be issued and provide it to operating banks in Iraq and all benefited parties and to be reviewed periodically in case there is any addition or omissions on those instructions as applied in Central banks in the region and other countries 22- Work on distracting Iraqi banks directions from banks depending in most of its revenues on the Central Bank to a development banks contributing effectively in developing the country in its different sectors.