The Iraqi government is intensifying efforts to foster fintech innovation, introducing a series of regulatory initiatives aimed at expanding the country’s digital financial services ecosystem.

Earlier this month, Prime Minister Mohammed Shia Al-Sudani directed new measures to develop electronic payment systems and modernize Iraq’s financial infrastructure. A government source revealed to the Iraqi News Agency (INA) some these directives.

Among the priorities is a directive for the Ministry of Planning, in partnership with the Central Bank of Iraq (CBI) and the World Bank, to create a national budget to support and develop digital payment systems, the source said. In addition, all ministries, including the central bank, have been instructed to form partnerships with financial and technology institutions to foster cooperation and exchange expertise. Ministries have also been tasked with forming specialized teams to oversee daily electronic payment operations, leveraging training and system portals provided by payment companies.

Financial institutions, meanwhile, are being mandated to upgrade their digital and technical systems to meet international standards, especially for anti-money laundering and fraud prevention. These institutions must also implement advanced cybersecurity measures to safeguard banking systems from cyber threats, and ensure business continuity during crises.

This push follows the introductions of new regulations for digital banks in Iraq. In March 2024, the CBI issued guidelines outlining the requirements for establishing a digital bank in the country, defining the licensing mechanism and specifying compliance and security standards for digital financial institutions.

Global law practice Eversheds Sutherland, which has a presence in Iraq, provides analysis of these digital banking regulations. According to the firm, any financial institution looking to establish a digital bank in Iraq must apply to the relevant department at the CBI, submitting details such as the bank’s name, capital, ownership structure, and financial statements. In addition, a financial feasibility study must accompany the application, along with a non-refundable license fee.

Digital banks in Iraq must establish robust information security and technology infrastructure, develop comprehensive organizational structures, and implement policies and procedures in accordance with regulations issued by the CBI. Additionally, they must provide specialized systems for researching international sanctions lists, combating money laundering, and monitoring daily transactions.

About 70 entities have submitted license applications to the central bank, CBI Governor Ali Al-Alaq told the audience during an event earlier this month, reflecting growing interest from local and international players eager to tap into Iraq’s burgeoning market. He added that the central bank was currently reviewing the applications.

Cash remains king but digital payments are rising

Despite these developments, cash remains the dominant payment method in Iraq. A 2023 report by Rest of World revealed that the majority of Iraqis continue to rely on cash transactions, largely due to low trust in digital payments and limited access to global financial systems.

On Iraqi e-commerce platform Miswag, for example, online payments made up a mere 2% of the total transactions at the time. Ali Hilli, the company’s head of marketing and communications, told the media outlet that the remaining 98% were cash-on-delivery.

Many Iraqi entrepreneurs and businesses find it frustrating that digital payments are not more widely used and that access to foreign is still so limited, impeding the growth of their businesses and restricting their ability to engage with international markets. “There is demand from Iraqi business owners and entrepreneurs for payment platforms such as PayPal, but unfortunately, these platforms do not officially support accounts created in Iraq,” Adam Hasan, project development specialist at the Baghdad-headquartered co-working space The Station, told Rest of World.

One of the primary barriers preventing global payment service providers from entering the Iraqi market is the country’s outdated legal and financial framework, said Hilli. Hilli cited the example of California-based AlgoPay, which tried to enter Iraq in 2020. “The public reception [for AlgoPay] was great, but then the CBI banned its usage because it is not regulated and doesn’t have a local license to operate in Iraq,” he said.

Iraq’s cash-based economy is a legacy of decades of conflict, economic sanctions, and an over-reliance on oil exports. These factors, coupled with entrenched corruption, have consistently slowed efforts to modernize Iraq’s financial systems.

Today, less than 20% of Iraqis have a bank account, and most don’t have a payment card, according to the report, illustrating the overwhelming reliance on cash. This is despite the fact that, by early 2023, the CBI had granted licenses to 17 companies to operate digital wallets, including notable players like AsiaHawala, Zain Cash, NassWallet, and FastPay. Another 15 licenses had been issued for services related to e-payments.

However, while cash remains the dominant form of payment in Iraq, adoption of digital payments is on the rise. Earlier this month, financial expert Mustafa Hantoush revealed that e-payment transactions had reached 18 trillion Iraqi dinars (US$13.7 billion).

The trend is accelerating, with August 2024 alone seeing over two trillion Iraqi dinars (nearly US$1.52 billion) in e-payment transactions, according to Ali Tarek, Director of the Iraqi Private Banks League. Tarek expects this figure to increase in the coming months.

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