Shafaq News

When Iraq's formal banking system fails its poorest citizens, the market finds its own solution, and the credit it provides comes without contracts, consumer protection, or legal recourse.

In the Shorja and Jamila markets of Baghdad, the most efficient lending institution in Iraq operates without a license, a balance sheet, or a regulator. It requires no collateral form, no guarantor signature, and no waiting period. A phone call to the right intermediary, or a word from a trusted neighbor, is enough to access cash within hours. The interest rate is not disclosed upfront. It compounds monthly. And by the time the borrower understands what they have agreed to, the principal has often doubled.

This is Iraq's parallel credit market —what economic researcher Ahmed Eid, speaking to Shafaq News, calls the "popular credit market": an informal financial system that has grown not despite Iraq's formal banking sector but because of it. "The gap between what banks offer and what citizens need has become a business."

A Rate For Borrowers Already Trusted

Iraq's formal lending system offers rates that compare favorably across the region, but only to the borrowers it already knows. The Central Bank of Iraq reduced its benchmark rate from 7.5% to 5.5% in late 2024, a move the CBI Governor described as a response to declining inflation. The average weighted lending rate stood at 6.51% annually in Iraqi dinars as of the CBI's most recent monetary policy report, making Iraqi bank loans cheaper than Egypt's and comparable to Jordan's. Those rates reach borrowers' trusted banks.

The IMF's 2025 Article IV report explains why they have not reached anyone else: excess liquidity in Iraq's banking system stood at around 31% as of early 2025, a level the IMF said weakens the transmission of monetary policy, making interest rate adjustments less effective in influencing credit, as evidenced by the absence of reaction of deposit and lending rates to changes in the policy rate. Cutting the benchmark rate produces no corresponding reduction in borrowing costs for citizens outside the formal system.

Iraq's financial inclusion rate rose from less than 10% to over 40% within two years, according to the IMF's assessment, driven by the restructuring of state-owned banks and the expansion of digital payment systems. The gains, however, rest on a definitional distortion: progress is driven almost entirely by public sector payroll digitization rather than private sector credit access. A civil servant with a salary card is counted as financially included. A day laborer in Shorja who needs 500,000 dinars (approximately $381) to cover his child's surgery is not, and the metric does not register his absence.

In May 2025, the CBI launched Iraq's first National Financial Inclusion Strategy for 2025–2029, developed with the World Bank, Arab Monetary Fund, and Germany's GIZ, and established Masraf al-Riyada, a new development bank mandated to finance small and micro-enterprises. The institution represents a belated official acknowledgment that the formal system was not reaching the borrowers the informal market had been serving for years, but its mandate remains narrow, its capitalization unproven, and its reach untested against the scale of exclusion it is meant to address. The moneylenders of Shorja reached the same conclusion earlier and acted on it without waiting for a strategy document.

The Arithmetic Of Entrapment

The informal lenders of Baghdad's popular markets do not quote annual rates; they quote monthly ones. The going rate documented by social activists typically runs between 10 and 20% per month on the outstanding balance, meaning a citizen who borrows one million dinars in January will owe between 3.1 and 8.9 million dinars by the end of the year —the principal more than tripling at the lower end and nearly octupling at the higher.

Eid told Shafaq News that this market operates on networks of loans outside official oversight, offering fast cash against steep terms particularly in commercial districts, and that its danger extends beyond the economic dimension: debt has become in many cases a source of psychological pressure, family breakdown, and legal and tribal disputes, particularly when borrowers cannot repay because of falling incomes and the absence of legal protection.

Social researcher Ruqayya Salman, speaking to Shafaq News, frames the mechanism precisely: borrowers begin with a small loan to cover an emergency —a hospital bill, a rent payment, a wedding expense— and find themselves forced to borrow again to cover the accumulated interest, entering a cycle in which the original emergency is long resolved but the debt compounds. The debt becomes an emergency.

Designed Not To Reach Them

The Ministry of Planning placed it at 13% in May 2026; the World Bank records 13.5%, with labor force participation at 38% —well below the regional average. Neither figure captures what the informal economy actually contains. The day laborers, seasonal workers, and market vendors who form the primary clientele of Shorja's moneylenders appear in no official register as unemployed, because they are not: they work, intermittently, without contracts, protections, or the documented income that would make them legible to a bank. The barriers most cited by unbanked Iraqis are not interest rates but procedural guarantor requirements, administrative complexity, documentation demands, and institutional distrust built over decades of state failure. A system that requires a guarantor from someone with no formal employment, no documented income, and no prior banking relationship has not failed these borrowers. It was never designed to reach them.

The informal credit market did not create itself, it was assembled, borrower by borrower, in the space the formal system chose not to occupy, leaving millions to find their own terms in the markets of Shorja and Jamila, where the rates are always higher, the contracts are always absent, and the emergency that started the loan is rarely the last one.

Written and edited by Shafaq News staff.