Strategic Approaches to Mitigating Credit Risk in Iraqi Commercial Banks: Evidence from 2010–2024

Abstract

The 21st century has been marked by significant financial transformations, including rapid growth, economic crises, and increasingly stringent regulatory frameworks. Among these changes, effective risk management has become crucial, with credit risk emerging as one of the most significant challenges for financial institutions globally. Credit risk refers to the potential for a borrower’s failure to meet their obligations, which can severely damage the financial health of banks, potentially triggering systemic crises as seen in the 2008 global financial meltdown (Acharya et al., 2010). For commercial banks, effective credit risk management is no longer just an optional best practice but a critical requirement for long-term sustainability and profitability (Basel Committee on Banking Supervision, 2011). This dissertation delves into credit risk management within the context of Iraqi commercial banks, covering the period between 2010 and 2024, with a focus on the challenges and strategies for improvement.

The Iraqi banking sector, still in its nascent stages compared to its regional counterparts, has undergone significant changes in the past few decades. After enduring years of conflict and economic sanctions, Iraq has been in a phase of reconstruction, which has paved the way for a more market-driven economy and the modernization of its financial infrastructure (World Bank, 2018). Despite these advancements, the sector remains vulnerable due to a host of issues, such as an oil-dependent economy, a weak regulatory environment, and insufficient risk management frameworks (International Monetary Fund, 2019). Political instability and security challenges further complicate the banking landscape, making it difficult for commercial banks to effectively manage credit risk. This complex environment suggests that international credit risk models may not be directly applicable to the Iraqi context and need significant adaptation.

The period from 2010 to 2024 is particularly important in the context of credit risk in Iraq, as it witnessed fluctuating lending practices, influenced by both global and local economic events. The post-2003 reconstruction period led to increased lending, buoyed by oil revenues and international aid, which brought both opportunities and greater exposure to credit risk (United Nations Development Programme, 2015). However, economic shocks, such as the decline in global oil prices and the rise of ISIS, had significant repercussions on the Iraqi economy, severely affecting banks’ profitability and asset quality (Cato Institute, 2016). More recently, the global COVID-19 pandemic added another layer of uncertainty, exacerbating the likelihood of loan defaults (Agarwal & Qian, 2021). Understanding how Iraqi banks navigated these challenges is critical to formulating more effective risk management strategies.