Prof. Dr. Nassif jassim Aljboory
These fluctuations, driven by factors like monetary policy, financial speculation, and external economic conditions, affect bank deposits, profitability, and overall stability. Depreciation of the dinar can lead to increased demand for foreign currency, potentially impacting the volume of deposits and creating instability in the local market. Conversely, a stable exchange rate can foster confidence and encourage banking activity.
Here's a more detailed look:-
1- Impact on Bank Deposits:
-Depreciation: A weakening dinar can lead to a decrease in bank deposits as individuals and businesses may seek to convert their dinar holdings into more stable currencies like the US dollar, especially during times of economic uncertainty.
-Appreciation: Conversely, a strengthening dinar can boost confidence in the local currency, potentially attracting more deposits into the banking system.
-Monetary Policy: The Central Bank of Iraq's monetary policies, including interest rate adjustments and foreign currency interventions, play a crucial role in managing exchange rate fluctuations and influencing deposit levels.
2- Impact on Banking Performance:-
- Profitability: Exchange rate volatility can create uncertainty and risks for banks, impacting their profitability. Banks face challenges like transaction risk, conversion risk, and credit risk due to fluctuating exchange rates.
-Loan Supply: Fluctuations can also affect the volume and terms of loans provided by banks. Increased risk associated with exchange rate volatility might lead banks to reduce lending or increase interest rates on loans.
-Non-Performing Loans: Depreciation can increase the risk of non-performing loans, particularly in sectors heavily reliant on imports or with significant foreign currency exposure.
-Liquidity: Banks' liquidity positions can be affected by exchange rate movements, as they may need to adjust their holdings of foreign currency to meet obligations or manage risks. Overall Stability: A stable exchange rate contributes to a more predictable and stable banking environment, fostering confidence and encouraging investment and economic growth.
3-Specific Considerations for Iraq:-
Parallel Market: The presence of a parallel market for foreign exchange in Iraq can exacerbate the impact of exchange rate fluctuations, as it can lead to discrepancies between the official and market exchange rates.
Central Bank Interventions: The Central Bank of Iraq actively manages the exchange rate through various measures, including interventions in the foreign exchange market, setting interest rates, and regulating the activities of commercial banks.
External Factors: External economic factors, such as global oil prices and regional instability, can also significantly influence the Iraqi dinar's exchange rate and its impact on the banking sector.