Drastic changed ahead for Iraqi stock exchange

With the world’s eyes focused on the recent general elections in Iraq, little attention is being paid to the major changes taking place in Iraq's banking and finance industry.

As part of an effort to liberalize the economy, in the first three months of 2014, the Iraqi Central Bank granted approval of 15 Arab and international banks to open branches in Baghdad, with additional branches expected to open soon. There is also a notable drive to grow and promote the stock markets, with senior Iraqi government officials and representatives from the country's two stock exchanges hosting a two-day forum in Dubai May 14-15 in a bid to court regional investors.

The Iraq Stock Exchange (ISX) is currently in the process of upgrading to the latest Nasdaq trading platform after signing an agreement with Nasdaq OMX in June 2013. The new platform, currently used by more than 25 exchanges globally, is capable of supporting multiple asset classes, although the ISX concentrates mainly on cash equities.

Taha Ahmed al-Rubaye, chief executive of the ISX, said, “We will complete the implementation at the end of June, and it will go live at the beginning of July.” He also added, “We are working hard to modernize the exchange.”

The ISX is also assisting the Erbil Stock Exchange (ESX), the first exchange in Iraq’s semi-autonomous Kurdistan region, in setting up its Nasdaq trading system. It is due to be fully implemented in July, and the ESX hopes to see around five to 10 listings by the end of 2014, including a major telecom company. The ESX has $8 million in initial capitalization and 56 shareholders, primarily from the private sector.

Mr. Rbaya said, “We’re looking to have more than one financial center in Iraq. Maybe in the future we will also look at setting up an exchange in Basra.”
Rubaye is also preparing to tackle an issue that has dogged the ISX since its establishment in 2004. “Once we have gone live with our new Nasdaq trading platform in July, we’re going to invite foreign banks to submit their proposals to operate as a custodian.” The lack of a custodian is viewed as the biggest hurdle to expanding the exchange and attracting foreign investors. Aside from political risk, they are also concerned about third-party risk in the absence of custodian services.

“The biggest challenge is the custody issue,” says Sadeer Munir, managing director of the Baghdad-based financial advisory firm Melak Iraq. “I can’t remember the number of times we have had discussions with investors about custody. Big institutions are shying away from the market, as they don’t have a custodian they can work with. Resolving that issue will serve as a big catalyst to growing the market! If you compare the size of the ISX to that of surrounding countries, it’s easy to see that it should be a lot larger.”

With 84 listed companies, the ISX has a market capitalization of $9.5 billion to serve a population of 30 million, an amount substantially smaller than other oil-dependent markets in the Gulf Cooperation Council, which range in size from $208 billion in the United Arab Emirates to $479 billion in Saudi Arabia.

Toward the end of 2013, the ISX asked the Iraqi Securities Commission (ISC), which regulates the stock market, to ease the requirements for custodians.

In the past, industry insiders have complained that the proposed capital requirement set by the ISC was too onerous. “The original requirement was $50 million, which is a large amount for such a small market,” said a source who requested anonymity.

“My understanding is that some of the big banks are now looking at offering their services in this regard,” said Sanjay Motwani, president of Sansar Capital, which runs one of the largest equity funds in Iraq and has invested some $27 million since 2011. “Some of the major foreign banks have entered Iraq in the last couple of years, and they’ve said that custody is something on their template. So I’m hopeful that a custodian will be appointed and once it has, I wouldn't be surprised if it led to a 300% re-rating in the market, because there will be a huge wall of money hitting Iraq."