(Reuters) - Iraq's banking system is hurting the country's growth prospects and must be revamped in order to entice foreign investment and diversify the oil-producing economy, international lending bodies said on Saturday.
Seven state-owned banks dominate the banking system and hold 89 percent of the country's bank deposits, according to a report authored by the World Bank. Many of the banks provide limited services, most of the commercial banks do not operate as banks and some sell cars, experts said.
"Iraq has to look like a diversified economy because it has to provide jobs for millions of people," World Bank country director Hedi Larbi said on the sidelines of the International Monetary Fund and World Bank meetings in Washington.
"This is a country where the potential is huge. We need to help Iraq as the next tiger of the region," he said.
The World Bank said the Iraqi government had to clean up banks' balance sheets, boost supervision of the financial system and level the playing field for competition from the private sector.
"To better balance the economy, a deepening of the financial sector is needed to support growth of the non-oil sector," the poverty fighting institute said in its report.
Officials said Iraq's muddled financial sector was but one of the barriers to economic growth and said security and macro-economic stability was still needed.
"It has improved an enormous amount, but it is still a risky environment," said Ron Van Rooden, the IMF's mission chief for Iraq.
WEAKER OIL PRICES
The IMF expects Iraq's gross domestic product to expand 9.6 percent this year and 12.6 the following year. That is in sharp contrast to many other Middle Eastern and North African countries, which will see declines in growth in 2012 due to weakening oil prices and a global slowdown.
Iraq's finance minister said his country would be able to weather the downturn in oil prices with higher output.
"If we increase the production versus the changes in the prices this can make up the budget," Rafi El Essawi told reporters. "With the hope that we may add to the infrastructure of the export of oil at the end of this year, we will add a little bit to the Iraq economy."
The country is currently producing about 2.7 million barrels per day (bpd) and is trying to boost output capacity to 12 million bpd by 2017.