BAGHDAD — The shelves are packed with imported goods at Baghdad's thriving Warda supermarket, and customers can barely move their shopping carts in the narrow aisles without bumping one another.
If there were a bank to borrow from, owner Ammanuel Dankha al Tallani said, "I would ask for a loan to open a new market 10 times bigger than this one."
But there isn't. Three months ago, when he sought $2 million to build a new store elsewhere, the bank agreed to only $250,000, at high interest and collateral.
To understand the economic shambles that is Iraq, look no further than the banking sector. There are no electronic funds transfers for payroll or bills and almost no checking accounts or credit cards. ATMs are few and far between. There are no home improvement loans and few mortgages.
For most Iraqis, banks serve only as a safety deposit box.
With proven oil reserves third only to Saudi Arabia and Iran, Iraq could one day be one of the richest countries in the world. Oil is Iraq's sole export, accounting for two-thirds of gross domestic product. President Barack Obama this month cited estimates that in the coming years, Iraq's economy "will grow even faster than China's or India's."
But compared to pre-2003, industry and agriculture are moribund, and construction is frozen in Baghdad and many other parts of the country. Eighty percent of the economy is in government hands, according to the Central Bank of Iraq. Unemployment and under-employment are at 46 percent, the bank says.
What makes the outlook so bleak is that Iraq lacks the banking infrastructure to grow out of this mess and the political will to undertake dramatic economic reform. Dominating the financial scene are two bloated state banks with phony balance sheets, which are widely viewed as facilitating corruption.
"Iraq is a completely destroyed country. Nothing is working. All the sectors are obsolete, and we have to start from minus, not zero," said Ali al Dabbagh, a minister of state and the official government spokesman.
Many of Iraq's woes predate the U.S. invasion. The government nationalized banks in 1965, and dictator Saddam Hussein, who came to power in 1979, tightened the state economy to increase his political control. After Saddam launched a war with Iran from 1980 to 1988 and invaded Kuwait in 1991, the United Nations, with the U.S. playing a leading role, imposed more than a decade of harsh economic sanctions.
The 2003 U.S. invasion, which was ill-planned and based on flawed intelligence, touched off a sectarian war, in which 4,483 U.S. troops, more than 50,000 Iraqi security forces and more than 104,000 Iraqi civilians died, according to icasualties.org and iraqbodycount.org.
Yet it seems astonishing that after nearly nine years of U.S. occupation and military presence, Iraq is in so sorry a state. Many other basic services are missing in the fledgling democracy: Regular electricity supplies — most people get four to six hours at best — a postal service, public transport, a national airline and a judicial process to protect foreign investments and resolve claims, to name just a few.
Iraqis seem paralyzed about how to get out of the morass. On his recent visit to Washington, Prime Minister Nouri al Maliki promised new legislation to encourage foreign investment. But some of his own top aides disparage the role of the private sector and are perfectly happy to have the public sector crowd it out.
"Let me say in general we have deficient people here, sitting in certain high posts, who cannot create any economic vision," said Dabbagh.
To give but one example, half the public budget, including much of the oil revenues now starting to pour in, are going not to invest in future production or to capture the gas now being flared off — which could provide enough electricity to power the whole country. Instead it's going to a jobs program to put more Iraqis on the government payroll.
"The government cannot employ everyone. The private sector has to play its role," said Dabbagh.
The economy is only one of Iraq's social issues. Sectarian tensions still simmer after the internal war. Major constitutional disputes such as the political status of oil-rich Kirkuk could lead to violence. Neighbors like Iran, Saudi Arabia and Turkey and are all too willing to throw money into Iraqi politics.
There are 3 million internally displaced and refugees abroad, according to the United Nations. And it's possible that the uprising in Syria, Iraq's neighbor to the north, will spill over, inflaming sectarian tensions once again.
Yet a robust economy could solve many of the country's problems, creating a common ground to bridge those divisions, said the vice chairman of Iraq's Central Bank.
"The economy can build the nation and integrate the nation, even a nation with sectarian, religious and national divisions," Mudher M. Salih told McClatchy. "The market is the best thing to integrate every minority, to solve every problem and to create a great nation."
But that market doesn't exist.
There is no real estate market or property market. Almost all goods are imported, and almost nothing from Iraq is sold at the markets in Baghdad, other than dates and some produce.
"Everything you have for breakfast — yogurt, jam, fruit salad — is from Turkey, even bread sometimes," Salih said.
"Would you like some water?" he asked a visiting reporter, smiling as he passed a plastic bottle of water from Kuwait. "Turkey has water. But Kuwait is one of those countries without water. And here we are in Mesopotamia, a country with two great rivers, importing water from Kuwait."
"I think we need a new start," said Haider al Abadi, an economist who chairs the parliamentary finance committee and has set up a working group "to come up with new ideas and legislation." His biggest frustration: lack of interest at the top of government.
Banks may be the single biggest obstacle to creating a free-market economy. Iraq is one of the most "under-banked" countries in the Middle East and beyond — with only 450 bank branches in a country of 31 million. Saudi Arabia, by comparison, has 6,000 branches for 18 million citizens.
At the heart of the crisis are two debt-laden, state-owned banks, which are the depository for all government funds. Far from functioning as lending institutions to stimulate the economy, the Rafaidan and Rasheed banks are widely thought to facilitate the corruption that bogs the economy down.
Transparency International, which monitors corporate and political corruption in international development, rates Iraq as the eighth most corrupt country on the planet, tied with Haiti and only slightly less corrupt than Sudan, Afghanistan and North Korea.
Knowledgeable foreign experts say that the problems begin with government contracts, where bidders are chosen from pre-determined, closed lists, rather than an open competition. The rules of the game are anything but transparent.
"I tried to find out what actually qualified these firms to be on that list, but no one can tell me," said one foreign observer, who didn't want to be identified because of the sensitivity of the issue.
In one of the biggest recent procurement scandals, Electricity Minister Raad Shallal al Ani was forced to resign in August after signing contracts worth $1.3 billion with a firm in Canada that didn't exist and one in Germany that had gone bankrupt a month before the contract was signed.
The World Bank has proposed a new procurement law that would open up the bidding process, creating committees to select and evaluate the bids. To ensure that bidders are legitimate, it would require them to make deposits in advance, as in almost anywhere in the Western world. But Maliki's government is dragging its feet.
At the bank's annual meetings in Washington in September, Finance Minister Rafie al-Essawi tangled over the draft law with a top Maliki aide, Muhammed Fadel. Fadel, a suave English speaker, is Maliki's legal adviser, and Western diplomats say he's "the man you go to when you want to block something."
"I was against the law," said Fadel, complaining that it didn't allow enough flexibility to accommodate the needs of different federal agencies, according to a witness to the exchange. Essawi retorted that a law isn't supposed to be flexible and that "it only allows for flexibility in the (supporting) regulations." Fadel, a fixture in successive governments, wouldn't budge.
After the deal is made, the state banks come into play. A Western diplomat explained one way the banks can facilitate fraud.
"You buy something overseas, but the transaction never happens," said the diplomat, who could not be named because he was not authorized to speak to reporters. "Fake documents are sent, saying the goods were shipped, and the money is released to some seller offshore. The goods never show up. The money's gone. You throw up your hands. Gee, I don't know what happened to it."
Under a second scenario, a government agency buys a truckload of parts but what actually shows up is one small box, or a box of figs.
"There's a thousand ways you can do this, so long as you don't fear that the banks will go after you in a criminal sense, or in a civil sense," said the diplomat.
A third way the banks feed corruption is to loan funds to a prominent government official who has no intention of paying them back. "The bank will never get back to you. They will just write it off," the diplomat said.
The international observer added that Rafidain and Rasheed function "like a private banking system" and a "slush fund for oligarchs."
The World Bank, in a major review of the Iraqi financial sector, said in September that it was crucial to "clean up the balance sheet" of the two banks, noting that this had been under discussion since 2006.
These are not small banks. They have a monopoly on government deposits and control 90 percent of the bank assets in Iraq. The losses on their books are enormous, because of devaluations of the Iraqi dinar — in which government debt was denominated — as well as loans to defunct state enterprises, losses from the two Gulf wars, and "claims related to fraudulent currency exchange," the bank said.
The losses may be so great that the banks in fact have a negative worth of several billion dollars.
Moreover, of the Iraqi households that borrow money, 88.9 percent borrow from family and friends and only 3.4 percent from banks, the World Bank found.
"These banks are a payment system for the government, " said Salih, the Central Bank deputy director. "They have no capital, believe me. But if you look at liquidity, they are highly liquid with government money."
He didn't dispute the widely held belief that the banks function to funnel illegal payments to powerful politicians. "It's a black hole," he said.
"This may explain a lot of the difficulty in getting the government to focus on restructuring and privatizing Rafidain and Rasheed," added the Western diplomat. "Everyone agrees we have to do something about these dinosaurs, but when it comes to actually doing something, it seems to run into a wall of molasses."
Rafidain and Rasheed are not the only state banks. A third, the Trade Bank of Iraq, launched by the U.S. occupation authority in 2004 with guidance from Ahmed Chalabi, an Iraqi banker and controversial politician, started life as a bank issuing letters of credit for foreign trade, but then expanded into other fields of banking.
While the TBI bank is profitable and its books have been audited and published online, Maliki earlier this year demanded that it provide credit to the government to finance the purchase of electricity-generating equipment. When Hussein al Uzri, the chairman and a Chalabi relative, resisted the demand, Maliki replaced him with Hamdiya al Jaff, who worked for the Rafidain bank.
Moving an administrator who's worked at a failed bank to the most successful state bank would raise a ruckus almost anywhere else, but in Iraq, it seems like par for the course.
International bankers are still scratching their heads over the upheaval, wondering whether Jaff's mission is to bury the skeletons that may be in TBI's closet or to prepare the way for the government to grab the bank's assets.
Jaff told McClatchy that her appointment was an "administrative change" and that bank policies will not change.
It raises a question: Does anyone at the top of government understand the role of banks in stimulating free enterprise?
"I find that some people at the higher ranks believe in market economy," said Salih, the deputy director of the central bank.
Altogether there are seven state banks and 39 private banks in Iraq, but the private institutions, while growing rapidly, have but a tiny fraction of the bank assets in the country.
The implications for Iraqi business owners and consumers are all too clear.
At Baghdad's Al Sinobar furniture store, everything is cash and carry.
"All of our imports are self-financed," said Ali Adnan, 30, the store manager. "We have no relationship with banks."
Nearly every product on the floors is imported. Iraqi furniture builders, concentrated in the Salhiyah section of Baghdad, do fine custom work, according to Adnan, and the quality is superior to imports from China, Malaysia and Turkey, his main sources of supply. But it's also much more expensive.
"They're now producing at just 15 percent of their previous output," he said, but they could be revived. "Give me electricity, machinery, and allow me to import materials, and see what I can do."
When McClatchy paid the rent for its Baghdad bureau, which closes this month after nearly nine years in operation, a staffer had to hand over a bundle of U.S. currency to the landlord. For years, the bureau paid freelancers in far-flung provinces through Hawala, the informal Islamic money-transfer system, or via messenger.
If the Warda supermarket's Tallani went to one of the state banks, he probably wouldn't even be admitted, as he's not a state employee. But if he were, it would likely to take up to six months for the bank to approve a loan, and it would require collateral equal to 300 percent of the value of the loan, the Western diplomat said.
One reason for the high collateral is the difficulty in estimating the value of property, and this is because there is no property market and only a nascent real estate market. Even at a private bank, Tallani had to pledge the entire parcel of land as collateral and pay 11 percent interest.
This actually is modest. Other businessmen say they are quoted upward of 50 percent interest. Iraq even has a "usury market" where the interest rate is up to 80 percent.
"Since we opened our market in 1973, we never dealt with banks, because they were not at the level we needed. They are just safes to keep money in," Tallani said. "If the banks supported small business, the economy would improve and we could hire more people and decrease unemployment. But this doesn't happen in Iraq. In Iraq, it's zero."
(Special correspondents Laith Hammoudi and Sahar Issa contributed)