UK banks in bid to rebuild Iraqi financial system

HSBC and Barclays are among a small group of banks in talks with the UK and US governments about rebuilding the Iraqi banking system.

The contracts could be worth hundreds of millions of pounds and would see the banks taking a lead role in the financial structure of what could prove to be a wealthy country in the future.

US estimates put the GDP of Iraq at around $29bn (£17.4bn) prior to the war and it is predicted that oil revenues alone could reach $18bn a year once the oil fields are back to full production.

However, the war, and the years of isolation that Iraq has suffered under Saddam Hussein's rule, have left the banking system in tatters.

The new administration in the country, called the Office of the Coalition Provisional Authority and headed by Paul Bremer, has set as an urgent task restoring normal banking and commerce.

It has opened talks with a small group of banks. These are understood to include three large US groups, JP Morgan Chase, Citigroup and Bank of America, and two of the UK's leading banks, HSBC and Barclays. A third UK bank, Standard Chartered, has expressed interest in getting involved, as it has an expertise in rebuilding damaged financial systems.

It is understood that the urgent needs are for a payments system, trade finance facilities and foreign exchange services. The country will need to rebuild its retail banking system, though this could take years of hard work.

The current financial system is in anarchy. The central bank in Baghdad was looted of hundred of millions of dollars shortly before the capital fell to US forces. It is believed that Saddam Hussein's sons may have been behind the looting.

Though the old Iraqi dinar is holding its value, the dollar has become a shadow currency, with US forces flying in pallets of bank notes to pay its soldiers.

Few of Iraq's banks are creditworthy and it is impossible to make transactions between Iraqi cities, never mind transfer money in or out of the country.

HSBC believes it is in a good position to take a lead role in the country because of its strong links in the region. It is the largest overseas bank in the Middle East and used to have an operation in Iraq, called the Imperial Bank of Persia, which operated in Baghdad from the 19th century until the 1980s.

Barclays is offering its expertise in trade finance and foreign exchange, while Standard Chartered has a highly successful business in Dubai that has become the hub of its Middle East operations.