Introduction The banking sector represents one of the fundamental pillars of any national economy, as it plays a vital role in mobilizing savings and directing them toward investment and financing various economic activities. In Iraq, state-owned banks occupy a dominant position in the banking system, accounting for the largest share of deposits and banking transactions compared to private banks. Among the most prominent of these banks are Rafidain Bank and Rasheed Bank, which constitute the backbone of the Iraqi banking system. Despite their significant role, these banks have faced numerous challenges in recent years, including liquidity constraints during certain periods and declining confidence among some customers in the banking sector. Iraqi state-owned banks have also been affected by a set of economic, administrative, and regulatory factors that contributed to what is often referred to as a cash liquidity crisis or banking liquidity shortage. Therefore, studying this crisis and analyzing its causes and consequences is essential, as well as reviewing the reform efforts undertaken by the Iraqi government to modernize the banking sector and enhance its stability. First: The Current Situation of State-Owned Banks in Iraq The Iraqi banking sector consists of state-owned, private, and foreign banks; however, state-owned banks continue to dominate the majority of banking activity in the country. At the forefront are Rafidain Bank and Rasheed Bank, which operate extensive branch networks and provide a wide range of banking services to individuals and government institutions. Many economic studies indicate that Iraqi state-owned banks hold the largest share of banking deposits in the country, giving them a direct influence on financial and economic stability. Nevertheless, these banks still face structural challenges related to limited capital, heavy reliance on traditional banking activities, and a relatively low level of adoption of modern banking technologies. In recent years, the Iraqi government has initiated reform measures to develop these banks by launching restructuring programs in cooperation with international consulting firms, aiming to improve operational efficiency and enhance their capacity to provide modern financial services. Second: Concept of the Banking Liquidity Crisis A banking liquidity crisis refers to a situation in which there is an imbalance between the available liquidity held by a bank and the increasing demand for cash withdrawals by depositors or customers. When a bank becomes unable to meet withdrawal demands promptly or regularly, indicators of a liquidity crisis emerge, which may lead to a decline in public confidence in the banking system. It is important to note that a liquidity crisis does not necessarily imply bank insolvency; rather, it may result from temporary factors such as a sudden increase in withdrawal demand, weak liquidity management, or unexpected economic fluctuations. In many cases, the central bank can intervene to support banks and maintain financial stability. Third: Indicators of the Liquidity Crisis in Iraqi Banks Recent years have witnessed several indicators reflecting liquidity challenges in the Iraqi banking sector. Recent banking data suggest that total deposits in Iraqi banks declined by approximately 10 trillion Iraqi dinars in 2024, decreasing from around 133.5 trillion dinars to approximately 123.5 trillion dinars, representing a decline of nearly 9 percent. Additionally, deposits from government institutions, public sector entities, and the private sector have declined, which may negatively affect the liquidity available to banks and their capacity to finance various economic activities. Despite these challenges, government sources indicate that state-owned banks still maintain significant reserves at the Central Bank of Iraq. Some official data suggest that the reserves of one of the major state-owned banks at the Central Bank exceed 8.5 trillion Iraqi dinars, providing substantial support for banking liquidity. Fourth: Causes of the Liquidity Crisis in Iraqi State-Owned Banks The liquidity crisis in Iraqi state-owned banks can be explained by several economic and institutional factors, including the following: 1. Weak Confidence in the Banking System Low public confidence is one of the most important factors affecting deposit levels, as many citizens prefer to keep their money outside the banking system rather than depositing it in banks. 2. High Level of Cash Circulating Outside Banks Economic estimates indicate that a large proportion of the money supply in Iraq circulates outside the formal banking sector, limiting banks’ ability to mobilize financial resources. 3. Weak Banking Infrastructure and Technology Many state-owned banks still rely on traditional operating systems, which limits their ability to provide modern services such as electronic banking and digital payment systems. 4. Heavy Dependence on the Government Sector The activities of state-owned banks are largely concentrated on financing government operations and paying public sector salaries, which reduces revenue diversification and exposes banks to fiscal fluctuations. 5. Regulatory and Economic Challenges Iraqi banks also face challenges related to compliance with international standards and anti–money laundering regulations, in addition to the structural nature of the Iraqi economy, which is heavily dependent on oil revenues. Fifth: Economic Implications of the Liquidity Crisis The liquidity crisis in state-owned banks has several negative effects on the national economy, including: 1. Decline in Confidence in the Banking System When depositors doubt the ability of banks to meet their withdrawal demands, public trust in financial institutions decreases. 2. Reduction in Bank Deposits Lower deposit levels limit banks’ capacity to provide loans and finance economic projects. 3. Expansion of the Cash-Based Economy Weak banking services encourage greater reliance on cash transactions outside the formal financial system. 4. Decline in Investment and Economic Activity Limited banking liquidity may reduce banks’ ability to finance investment projects, thereby slowing economic growth Sixth: Government Reforms to Develop the Iraqi Banking Sector In response to these challenges, the Iraqi government has initiated several reforms aimed at developing the state-owned banking sector. The most important of these reforms include: 1. Restructuring State-Owned Banks The Iraqi government is working in cooperation with international consulting firms to restructure state-owned banks, particularly Rafidain and Rasheed Banks, to improve their financial and administrative performance. 2. Enhancing Governance and Transparency The government is also seeking to strengthen governance and banking supervision standards to improve the performance of banks and increase the confidence of investors and depositors. 3. Transition Toward Digital Banking Services Reform plans include modernizing banking systems and introducing advanced technologies to provide more efficient digital banking services. 4. Potential Merger of Some State-Owned Banks The government has also considered merging certain large state-owned banks in order to enhance their financial strength and operational efficiency.