Iraq’s banking sector stands at crossroads of digital transformation

As Iraq shifts toward financial modernization, the nation is currently navigating a critical transition in replacing legacy systems with a future-ready digital ecosystem. A white paper from Management Partners highlights that Iraq’s banking sector is at a pivotal juncture, driven by a youthful population and rising digital expectations.

Over 60% of the Iraqi population is under the age of 25, providing fertile ground for a modern financial system. What is needed now more than ever in Iraq are structural reforms, stakeholder alignment, and innovation that can build a resilient and inclusive financial ecosystem in Iraq.

While mobile penetration has reached nearly 100% and internet penetration among young people stands at 85%, the sector still faces significant structural friction. Although 49% of Iraqi adults now have a bank account, the majority of financial transactions still occur in cash. Experts suggest that the journey toward a digital-first economy is about more than technology; it requires reimagining how trust and inclusion are integrated into the financial architecture.

The thought leadership paper is grounded in an in-depth discussion with Ahmen Tareq Al-Hashimi, deputy executive director at the Iraqi Private Banks League and a leading voice on the financial modernization of Iraq. Al-Hashimi shared his thoughts on what it will take to unlock Iraq’s digital banking potential.

Informal economy the norm in Iraq

The informal economy is a major challenge to systemic progress in Iraq. Many businesses still operate mainly – or exclusively – with cash.

“For many years, merchants relied on informal banking – handwritten records, personal accountants, cash based and hawala transaction – often avoiding taxes and lacking the documentation needed for large transactions under today’s stricter rules,” said Al-Hashimi.

This reliance on informality weakens the credibility of the banking system and complicates efforts to mobilize domestic capital. Currently, only 11% of Iraqi companies and retailers own bank accounts, though the Central Bank of Iraq aims to increase this figure to 85% by 2030.

Iraq has the lowest density of bank branches in the Middle East, a short-coming that highlights the country’s limited banking penetration. However, this also presents an opportunity: Iraq may be able to avoid the sunk costs of physical branch expansion by jumping directly to a cost-effective digital banking model. Regional peers, like the UAE, have seen declining branch density amid growing digital adoption.

The Iraqi Private Banks League has been working with the government to address financial illiteracy and build trust. Recent initiatives have seen bank accounts grow to more than 17 million in 2024. However, gender disparities remain, as 38% of these accounts are owned by women compared to 62% for men.

Automating the foundation

Many financial institutions still rely on legacy infrastructure and manual processes. Without robust digitization of internal functions like customer onboarding and loan processing, customer-facing tools will fail to deliver long-term impact.

The paper points to the role of AI in transforming these operations. AI-driven credit scoring can use alternative data, such as mobile phone usage, to extend credit to borrowers without formal financial histories.

“We still have many people paying electronically but then having to withdraw cash or print receipts to complete their task. That is not transformation, it is digital window dressing,” said Al-Hashimi,

Strategic convergence

Beyond individual bank efforts, Al-Hashimi recommends establishing a dedicated, empowered Digital Transformation Authority to oversee national standards and coordinate across ministries.

Legal reforms are also necessary to move away from requirements for physical signatures and paper documentation. By modernizing the legal framework and adopting AI-powered compliance tools, Iraq can improve its ability to investigate money laundering and align with global standards.

Through coordinated action between the public and private sectors, Iraq is well-positioned to turn its current fragmentation into a resilient financial ecosystem. The report concludes that if stakeholders align their investments and execution, the country can lead the region in shaping the future of inclusive finance.

“Iraq’s opportunity is not merely to digitize banking, but to create a financial system that is integrated, adaptive, and trusted,” said Al-Hashimi. “It is about building a system anchored in platforms, powered by partnerships, and designed around people.”